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TMI Blog2012 (8) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... an be considered only in the year in which the EECL has actually been wound up or the rights of the shareholders are extinguished Expenditure in R&D - assessee had an approved R&D Unit, approved by the Government, even though the approval for the current year was not produced – Held that:- question whether any part of the expenditure claimed, constituted the expenditure on scientific research or not, has to be referred to the prescribed authority, in terms of Explanation below the provisions of S.35(1) of the Act - issue is remitted back to the file of the assessing officer - assessee’s appeal is partly allowed. - ITA No.649/Hyd/2010 - - - Dated:- 29-2-2012 - Chandra Poojari, Asha Vijayaraghavan, JJ. For Appellant: Shri Y Ratnakar For Respondent: Shri V Srinivas ORDER Per: Asha Vijayaraghavan: This appeal by the assessee for the assessment year 1997- 98 is directed against the order of the Commissioner of Incometax(Appeals)-III, Hyderabad dated 15.3.2010. 2. Assessee is in the business of manufacture and supply of explosives and detonators. Since most of the coal fields are located at West Bengal and as there was huge demand for explosives for coalmining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t file any suit on ECCL for recovery of its monies and it was contended by the assessee that recovery proceedings were not taken up because the assessee was aware that nothing is realizable since, as on 31.3.1995, the secured liabilities of the ECCL were Rs.543.68 lakhs, as against unsecured liabilities of Rs.233.89 lakhs. The assessee also submitted that based on business exigencies, business strategies and commercial consideration and also with a view to retain and preserve its existing business, the subscription to the share capital of ECCL of Rs.96 lakhs and advances of Rs.141.21 lakhs were made by the assessee company. It was contended that any expenditure incurred to preserve and retain its existing business is always on the revenue account. Advancing of money to ECCL and subscription to its share capital of ECCL by the assessee company are only for the purpose of retaining its existing business interests and hence, both these amounts which are written off during the year under consideration, are to be allowed as business loss under S.28/29 of the Income-tax Act. It is further submitted that these amounts have to be written off, as these monies are not realizable by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equipped with flow indicators and Roto Pumps etc. It was further pleaded that a fire broke out in the office of Research and Development Building on 11.8.2004 and the log books of the two pump trucks pertaining to financial year 1996-97 cannot be traced out as the matter is very old. The assessing officer referred to the observations made by the Tribunal regarding inability of the assessee to produce any certificate granted by the Government of India, Ministry of Science Technology, for the assessment year 1997-98, so as to enable the assessee to get the benefit of S.35B of the Act. With these observations and for the reasons discussed in the original assessment, the assessing officer disallowed the claim of the assessee for deduction of Rs.79,04,376. 9. Aggrieved by the assessment order framed under S.143(3) read withS.254 of the Act, with the above three disallowances, assessee preferred appeal before the CIT(A). The learned Authorized Representative stated that the loss has been claimed under S.28/29 of the Act, and placed reliance on the decision of the Hon ble Calcutta High Court in the case of Turner Morrison Co. Ltd. V/s. CIT(245 ITR 725) . 10, The CIT(A) passed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , relied on the following cases in support of its claim that the amounts advanced to EECL, which is written off as not recoverable aggregating to Rs.1,41,21,000/- and the amount subscribed in shares of EECL aggregating to Rs 96 lakhs written off is allowable as business loss u/s. 28/29 of the I.T. Act. (a) Badraidas Daga vs. CIT(32 ITR 10) -SC (at pages 14 15) (b) Mahadeva Upendra Sinai V/s. Union of India (98 ITR 209) -SC (c) Ramchander Shivnarayan V/s. CIT (111 ITR 263)-SC (at pp..269 to 271) (d) Jwala Prasad Radha Kishan V/s. CIT (79 ITR 530)-All. (e) Turner Morrison Co. Vs. CIT (245 ITR 725) -Cal (at pp.725- 726) (f) IBM World Trade Corpn. V/s. CIT (186 ITR 412)-Bom. 14. It is submitted that in the Case of Badridas Daga V/s.CIT (supra), the amount embezzled is money. In the case of Ramchander Shivnarayan V/s. CIT (supra), the asset stolen is cash. In the case of Jwala Prasad Radha Kishan V/s CIT (supra), the amount written off as irrecoverable is deposit made in cash. In the case of Turner Morrison Co. Vs. CIT (supra), the amount written off is an advance by the parent company to its subsidiary. In the case of IBM World Trade Corp. V/s. CIT (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the criticism that the appellant has not been able to demonstrate how it has been able to develop different types of explosives, the appellant contended that this criticism also is not true. The explosives are developed for use at the following sites Sl. No. Pump truck No Site 1. 13 M/s. Central Coal Fields Ltd., Rajarappa, Bihar 2. 14 M/s. Northrn Coal Fields Ltd., Singrauli, M.P. 17. The Learned Departmental Representative, Shri V.Srinivas, on the other hand, relied on the order of the CIT(A) and argued that the loss is to be held on capital account as the same was not in the nature of any trade advance. It was pointed out by the Learned Departmental Representative that the decision of the Calcutta High court in the case of Turner Morrison Co. Ltd. (supra) is not relevant in as much as in that case the issue was with respect to allowance of bad debts under S.36(1)(viii) of the Act, whereas in the case of the assessee the issue relates to the claim of advances written off. Further, it was argued that for the deductibility of loss under S.28 of the Act, the same should be on Revenue account and since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R. are subject to verification from the record. Necessary facts and nature of transactions are not on record as no such plea was taken before the lower authorities. In the absence of complete facts on record, the matter cannot be decided at this stage. Under the circumstances, we think it appropriate to send the matter to the file of the AO with direction to decide the issue afresh in accordance with law after recording complete facts and after providing reasonable opportunity of hearing to the assessee. The assessing officer, while giving effect to the order of the Tribunal, held that there is no material change either on the facts or in the submissions of the assessee on this issue and hence for the reasons discussed in the order of assessment dated 20.3.2000, again made the additions made on account of write off of advances to EECL of Rs.141.21 lakhs and investment in the shares of M/s. EECL made by the assessee of Rs.96 lakhs. 19. As for the question relating to the allowability of deduction in respect of write off of advances, the facts of the case have to be analysed. The facts are that the assessee was a co-promoter of EECL alongwith the Government of West Bengal an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts of the present case, it cannot be denied that a holding company has deep interest in subsidiary and hence, if the sum is used by the subsidiary company for its business purpose, the assessee s business interest also stands served, and consequently the assessee would be entitled to deduction of interest on the borrowed amount. Under the circumstances, we hold that the advances made by the assessee to EECL is incidental to carrying on the business by the assessee itself and consequently, the borrowed money should be considered as having been utilized for the purpose of business of the assessee. The advances, thus, having been made in the normal course of business of the assessee, when written off, have to be held as falling in the revenue field, and consequently, such amounts of advances written off, are allowable as deduction either as bad debt or as business loss, incidental to carrying on the business by the assessee. We are supported in this behalf, by the case-law relied upon by the learned counsel for the assessee, discussed above. 20. In the light of the above discussion, applying the ratio of the Apex Court in the case of S.A. Builders (supra), we allow the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the Government showed the R D unit as having been granted recognition up to 31.3.2003. In other words the assessee has not produced the first certificate covering the period from assessment year 1996-97 onwards. The certificate does not throw light whether the mobile trucks are part of the research units of the company s R D. The submission of the learned AR is that though sufficient materials in support of the claim have been filed by assessee before the lower authorities they have not been considered. It has also been noticed that the CIT(A) was not clear about the type of trucks and at page 27 of his order directed the AO to verify the depreciation claimed by the assessee as to whether they are same trucks on which the assessee made claim under section 335. It has also been noticed that the finding of the CIT(A) on the issue is not clear. As complete facts after examination of record are not available on record, the issue cannot be decided at this stage. The mater also requires examination from the original record which is not readily available at this stage. Considering the totality of the facts of the case, we find it appropriate to send back this matter to the file of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the product would lead to the conclusion that considerable research and development is done in these trucks which are nothing but mobile units for R D purposes. (c) The assessing officer as well as CIT(A) were carried away in believing that the deduction u/s. 35 is claimed on trucks and in the process omitted to consider the following important aspects- (i) They failed to consider that a R D Unit could also be a mobile unit for scientific research and need not be a stationery one, functioning at one place. (ii) They did not consider that the assessee has other trucks for transporting the explosives without performing any R D operations on which merely depreciation was claimed. (iii) Deprecation was claimed on such transport trucks only at the normal rate treating them as trucks. (iv) Designing and fabrication of the explosives depends on the strata of earth which differs from place to place and the explosive is not a commodity available in the shelf for ready sale. (v) The explosives for open cast mine could be derived only by taking all the inputs of the terrain where it has to be used, develop the explosive by conducting research of the inputs and conducting field tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer is fallacious. 25. On careful consideration of the rival submissions in the light of the material on record, including the impugned orders of the lower authorities, we find that the assessee had an approved R D Unit, approved by the Government, even though the approval for the current year was not produced. Therefore, the question whether any part of the expenditure claimed, constituted the expenditure on scientific research or not, has to be referred to the prescribed authority, in terms of Explanation below the provisions of S.35(1) of the Act, which reads as follows- 35 (1) In respect of expenditure on scientific research, the following deductions shall be allowed. (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Explanation - Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of salary (as defined in Explanation 2 below sub-section (5) of section 40A to an employee engaged in such scientific research or on the purchase of material use ..... X X X X Extracts X X X X X X X X Extracts X X X X
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