ACIT 6(3), MUMBAI V. GALA PRECISON TECHNOLOGY P. LTD, MUMBAI

ITA 5468/MUM/2011

• Counselvise Citation: 546819914 RSA 2011
• Duration Of Justice: 2 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 28-08-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 25-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K SAHU
• Keywords: Depreciation; Opportunity of being heard; Additional depreciation; Bad and doubtful debts; Capital expenditure
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI , BEFORE : SHRI H.L.KARWA, PRESIDENT AND SHRI R.C.SHARMA, AM ITA NO. 5511 / MUM/20 11 ( ASSESSMENT YEAR :200 5 - 0 6 ) GALA PRECISION TECHNOLOGY PRIVATE LIMITED, 116, NARAYAN DHURU STREET, MUMBAI - 400 003 VS. ACIT, RG.6(3), MUMBAI PAN/GIR NO. : A A A C G 1777 E ( APPELLANT ) .. ( RESPONDENT ) AND ITA NO. 5468/ MUM/20 11 ( ASSESSMENT YEAR :2005 - 06 ) ACIT, RG.6(3), MUMBAI VS. GALA PRECISION TECHNOLOGY PRIVATE LIMITED, 116, NARAYAN DHURU STREET, MUMBAI - 400 003 PAN/GIR NO. : AA ACG 1777 E ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI VIJAY MEHTA /REVENUE BY : SHRI R.K.SAHU DATE OF HEARING : 1 2 TH FEBRUARY , 201 4 DATE OF PRONOUNCEMENT : 21 ST FEBRUARY , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH ESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT - 12, MUMBAI, DATED 14 - 3 - 2011, FOR THE ASSESSMENT YEAR 200 5 - 0 6 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT . ITA NO S . 5511&5468 /20 1 1 2 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 3 . FACTS IN BRIEF ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN MANUFACTURING AND MARKETING OF ENGINEE RING GOODS. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO FOUND THAT THE ASSESSEE HAS DEBITED RS. 22 ,09,681/ - AS BAD DEBTS. THE AO ASKED FOR THE DETAILS, HOWEVER, THE ASSESSEE SUPPLIED DETAILS WITH REGARD TO SOME OF THE BAD DEBTS. ACCORDINGLY, THE AO DIS ALLOWED ASSESSES CLAIM OF BAD DEBTS OF RS. 2,95,317/ - . THE AO ALSO DISALLOWED CLAIM IN RESPECT OF BAD DEBTS OF RS. 16,93,442/ - UNDER SECTION 36(VII) ON THE PLEA THAT DETAILS WERE NOT FILED BY THE ASSESSEE. 4 . BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE DISALLOWANCE OF RS. 2,95,317/ - AND RS.2,20,966/ - , FOR WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US, WHEREAS IN RESPECT OF AMOUNT OF DISALLOWANCE DELETED BY THE CIT(A) IN REGARD TO BALANCE OF BAD DEBTS, THE REVENUE IS NOT IN APPEAL BEFORE US. 5 . WE HAVE CON SIDERED RIVAL CONTENTIONS AND FOUND THAT IN RESPECT OF BAD DEBTS OF RS. 2,95,317/ - , THE ASSESSEE HAS FILED PARTY - WISE DETAILS OF SALES MADE TO THESE PERSONS, INCOME ACCOUNTED FOR AND THE REASONS FOR THE AMOUNT WRITTEN OFF AS BAD DEBTS. AS PER THE CERTIFICAT E ENCLOSED WITH THE PAPER BOOK, THE ASSESSEE HAS FILED THESE DETAILS BEFORE THE LOWER AUTHORITIES. KEEPING IN VIEW THE NATURE OF THE ASSESSEES BUSINESS VIS - - VIS REASONS GIVEN FOR BAD DEBTS, WE CONSIDER IT APPROPRIATE TO RESTORE THE MATTER BACK TO THE FIL E OF AO FOR DECIDING AFRESH ALLOWABILITY OF ASSESSEES CLAIM OF BAD DEBTS OF RS. 2,95,317/ - BY ITA NO S . 5511&5468 /20 1 1 3 REFERRING TO THE REASONS GIVEN FOR THE DISAL LOWANCE. THE AO IS TO DECIDE THE MATTER AFRESH AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. 6 . DURING THE COURSE OF HEARING BEFORE US, LEARNED AR HAS ALSO DRAWN OUR ATTENTION TO THE COPY OF LEDGER ACCOUNT OF VARIOUS PARTIES TO WHOM ASSESSEE HAS EFFECTED SALES, BUT DUE TO NON - RECEIPT OF AMOUNT A DEBT OF RS. 2,20,966/ - WAS WRITTEN AS BAD DEBTS. THE GENUINENESS OF THE SALES SO MADE HAS NOT BEEN DOUBTED BY THE AO, THE ONLY REASON GIVEN BY THE AO WAS THAT THE ASSESSEE HAS NOT FURNISHED DETAILS. IT APPEARS THAT ASSESSEE HAS FILED DETAILS BEFORE THE CIT(A) , WHICH HAS NOT BEEN PROPERLY APPRECIATED. HENCE, IN THE INTER EST OF JUSTICE AND FAIR - PLAY, WE RESTORE THIS GROUND ALSO TO THE FILE OF THE AO FOR DECIDING AFRESH AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 7 . THE HON BLE SUPREME COURT IN THE CASE OF T.R.F LIMITED VS. CIT, REPORTED IN (2010) 323 ITR 397 (SC) HAS HELD THAT IN RESPECT OF BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNT AFTER 1 ST APRIL, 1989, IT IS NOT NECESSAR Y FOR THE ASSESSEE TO ESTABLISH THAT THE DEBTS, IN FACT, HAS BECOME THE IRRECOVERABLE. I T IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF A S IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE PROPOSITION OF LAW LAID DOWN BY THE HON BLE SUMMIT COURT, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR DECIDING AFRESH IN THE LIGHT OF THE DETAILS FURNISHED BY THE ASSESSEE WITH RESPECT TO EACH AND EVERY BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNTS. WE DIRECT ACCORDINGLY. ITA NO S . 5511&5468 /20 1 1 4 8 . THE NEXT GRIEVANCE OF THE ASSESSEE RELATES TO DISALLOWANCE OF CLAIM FOR ADDITIONAL DEPRECIATION OF RS. 36,96,726/ - . THE AO HAS DISALLOWED THE CLAIM OF ADDITIONAL DEPRECIATION ON THE PLEA THAT ASSESSEE HAS NOT GIVEN BILLS OF PLANT AND MACHINERY AND ITS INSTALLATION REPORT SO AS TO ESTABLISH THAT IT WAS NEW INDUSTRIAL UNDERTAKING AND THAT IT IS NOT FORMED BY SPLITTING UP OR RECONSTRUCTION OF A BUSINESS AL READY IN EXISTENCE. THE CIT(A) ALSO CONFIRMED THE ACTION OF THE AO. WE FOUND THAT EXACTLY SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004 - 05 VIDE ORDER DATED 30 - 7 - 2 010 PASSED IN ITA NO.1417/M/2008 AND ISSUE WAS RESTORED TO THE FILE OF AO WITH CERTAIN DIRECTIONS . F OLLOWING WAS THE PRECISE OBSERVATION AND THE CONCLUSION OF THE TRIBUNAL : - 6. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE US. WE FIND THAT T H E ASSESSEE WAS REQUIRED TO FURNISH THE DETAILS OF MACHINE RY OR PLANT AND INCREASE IN THE INSTALLED CAPACITY OF PRODUCTION TO CLAIM ADDITIONAL D EPRECIATION. THE ASSESSEE SHALL B E GIVEN ONE MORE OPPORTUNITY TO FUR NISH COMPLETE PARTICULARS INCLUD ING INSTALLED CAPACITY, DETAILS OF MACHINERY ETC. THE ASSESSEE SHALL A LSO SUBMIT A CERTIFICATE FROM TH E CHARTERED ENGINEER REGARDING THE INSTALLED CAPACITY SO THAT THE REQUIREMENT OF THE AO CAN BE SATISFIED IN THIS REGARD. ACCORDINGLY THIS GROUND IS SET ASIDE TO THE FILE OF THE A O TO DECIDE THE ISSUE AFRESH AFTE R GI VING PROP ER OPPORTUN ITY OF HEARING TO THE ASSESSEE. AS FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE PARI MATERIA , RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2004 - 05 (SUPRA), THIS GROUND OF THE ASSESSE ESS APPEAL IS RESTORED TO THE FILE OF THE AO FOR DECIDING AFRESH IN TERMS OF DIRECTION GIVEN BY THE TRIBUNAL AS QUOTED ABOVE. ITA NO S . 5511&5468 /20 1 1 5 9 . THE NEXT GRIEVANCE OF THE ASSESSEE RELATES TO ADDITION OF MODVAT OF RS. 32,43,539/ - UNDER SECTION 145A. WE FOUND THAT EXACTLY SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL IN AFOREMENTIONED ORDER DATED 30 - 7 - 2010, WHEREIN THE MATTER WAS RESTORED TO THE FILE OF AO WITH THE FOLLOWING OBSERVATIONS : - 7. THE NEXT GROUND WAS WITH RESPECT TO ADDITION OF CLOSING BALANCE OF MODVAT CREDIT OF RS. 4,78,362/ - AS A PART OF THE CLOSING STOCK THE LD. CIT(A) UPHELD THE CONTENTION OF THE AO BY ADDING CLOSING BALANCE OF MODVAT CREDIT OF RS. 4,78,362/ - TO THE CLOSING STOCK. 8. WE FIND THAT THE ISSUE IS COVERED IN ASSESSEE'S OWN CASE IN ITA NO 5760 /M/2 00 5 FOR THE A.Y. 2003 - 04 WHEREIN IT HAS BEEN HELD AS FOLLOWS : - 'SINCE THE ISSUE UNDER CONSIDE RATION IS IDENTICAL TO THAT OF HAWKINS COOKERS LTD. IN ITA NO. 505/ M /04 VIDE ORDER DTD. 11.8.2008, WE REMIT THE MATTER BAC K TO THE FILE OF THE AD WITH A DIRECTION TO DECIDE THE ISSUE BY FO LLOWING THE GUIDELINES GIVEN IN HAWKINS COOKERS' LTD. THUS THIS GROUND OF THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES' RESPECTFULLY FOLLOWING THE EARLIE R YEAR ORDER WE REMIT BACK THE ISSUE TO THE FILE OF THE A D AND REDO T HE WORKING IN THE LIGHT OF THE DECISION OF HAWKINS COOKERS LTD.(SUPRA). WE HAVE CONSIDERED RIVAL CONTENTIONS. AS FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE THE SAME AS DISCUSSED BY THE TRIBUNAL IN ITS ORDER DATED 30 - 7 - 20 10 , THEREFORE, WE RESTORE THIS GROUND WITH REGARD TO ADDITION ON ACCOUNT OF MODVAT TO THE FILE OF THE AO FOR DECIDING AFRESH IN TERMS OF DIRECTION GIVEN BY THE TRIBUNAL AS QUOTED ABOVE. 10 . THE AO HAS ALSO DISALLOWED ASSESSEES CLAIM OF DEDUCTION UNDER SE CTION 35(I)(IV) AMOUNTING TO RS. 44,75,136/ - ON ACCOUNT OF CAPITAL EXPENDITURE ON RESEARCH AND DEVELOPMENT. ITA NO S . 5511&5468 /20 1 1 6 11 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS. 44,75,136/ - UNDER SECTION 35(1)(IV) OF THE I NCOME TAX ACT, BEING CAPITAL EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT. THE ASSESSEE HAD INCURRED THIS EXPENDITURE ON CNC WIRE CUT MACHINE. VIDE ORDER SHEET DATED 17.12.07 THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY CNC WIRE CUT MACHINE SHOULD NO T BE CONSIDERED AS NORMAL PLANT AND MACHINERY AS THE SAME IS USED FOR WIRE CUTTING ONLY AND NOT FOR ANY R & D . IN RESPONSE, THE ASSESSEE VIDE THEIR L ETTER DATED 21ST DECEMBER, 2007 AS UNDER: NOTE ON RESEARCH & DEVELOPMENT EXPENSES U/S 35(1)(IV) DURING TH E YEAR THE ASSESSEE HAS CLAIMED DEDUCTION U/S. 35(1)(IV) AMOUNTING TO RS. 44,75,136/ - IN RESPECT OF WIRE CUT MACHINE WHICH IS USED FOR RESEARCH & DEVELOPMENT. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF REEDS. 'REED' IS ONE OF THE MOST CRITICAL COMPONE NTS IN A COMPRESSOR USED IN AIR CONDITIONERS, CAR AIR CONDITIONERS, HYDRAULIC PRESSES & IT REGULATES THE FLOW OF AIR/GAS IN THE COMPRESSOR. IN MOST COMPRESSORS THAT ARE HERMETICALLY SEALED, THE COMPRESSOR CANNOT BE REOPENED DURING THE LIFETIME; THEREFORE T HE REED THAT IS THE MOST CRITICAL COMPONENT HAS TO BE OF THE HIGHEST DEGREE OF ACCURACY AND QUALITY. EACH REED HAS TO BE CAPABLE OF PERFORMING MILLIONS OF OPERATIONS IN THE COMPRESSOR. WE ENCLOSE HEREWITH FEW PHOTOCOPIES/ BROCHURES SHOWING THE NATURE OF 'REED'. REED IS AN IMPORT SUBSTITUTE PRODUCT AND THE ASSESSEE HAS BEEN ONE OF THE PIONEERS IN DEVELOPING IT IN INDIA. IT HAS SOME VERY LARGE MULTINATIONALS AS ITS CUSTOMERS THE REED IS MANUFACTURED OUT OF SPECIAL STEEL IMPORTED FROM SANDVICK. THE REEDS ARE MANUFACTURED BY A PROCESS OF BLANKING THE SPECIAL STEEL. FOR BLANKING THE ASSESSEE NEEDS HIGH QUALITY BLANKING TOOLS. BLANKING TOOLS ARE LIKE CONSUMABLES, WHICH WEAR OUT AFTER SOME TIME & HAVE TO BE REPORTED THROUGH DEVELOPMENT OF NEW TOOLS. FOR MANUFA CTURING OF HIGH QUALITY REEDS, IT IS NECESSARY THAT THE BLANKING TOOLS ARE ABLE TO CUT VERY SHARP EDGES SO THAT THERE ARE NO NOTCHES OF DEFECTS IN THE REED. DURING THE YEAR THE ASSESSEE PURCHASED THIS WIRE - CUTTING MACHINE, WHICH USES A SPECIAL TECHNIQUE OF USE OF A COPPER WIRE TO CUT VERY SHARP EDGES. EARLIER THE ASSESSEE WAS MANUFACTURING REEDS THROUGH A COMBINED TOOLS. THROUGH THE USE OF WIRE CUT MACHINE AND CONSTANT TRIAL & ERROR THE ASSESSEE HAS BEEN ABLE TO DEVELOP DIFFERENT TYPES OF NEW TOOLS LIKE PRO GRESSIVE TOOL, MULTISTAGE TOOL, QUICK TOOL ETC. THESE TOOLS HAVE ITA NO S . 5511&5468 /20 1 1 7 ENABLED THE ASSESSEE TO PRODUCE HIGH QUALITY BLANKING TOOLS THAT HAVE RESULTED IN PRODUCTION OF BETTER QUALITY AND NEWER & NEWER VARIETIES OF REEDS. AS SUBMITTED EARLIER THE WIRE CUT MACHIN E WAS INITIALLY USED FOR R & 0 FOR DEVELOPING NEW TOOLS & BETTER QUALITY REEDS. AFTER THE PROCESS WAS SUCCESSFUL THE ASSESSEE IN THE SUBSEQUENT YEARS PURCHASED 3 WIRE CUT MACHINES THAT WERE USED FOR REGULAR PRODUCTION OF BLANKING TOOLS. WE INVITE REFERENCE TO PROVISIONS OF SECTION 43(4) WHICH HAVE DEFINED SCIENTIFIC RESEARCH AS UNDER: - '(III) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESS INCLUDE (A) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FACILITATE AN EXTENSION OF TH AT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSES OF THAT CLASS. IN THE PRESENT CASE THROUGH THE R & D USING THE WIRE CUT MACHINE THE ASSESSEE HAS BEEN ABLE TO SUBSTANTIALLY UPGRADE ITS REED MANUFACTURING QUALITY. BASED ON THE ABOVE THERE WOULD BE ABSO LUTELY NO DOUBT THAT THE WIRE CUT MACHINE WAS USED FOR R & D ONLY. ANY QUESTION ON RESEARCH & DEVELOPMENT TO BE REFERRED TO THE BOARD WITHOUT PREJUDICE TO THE ABOVE, WE INVITE REFERENCE TO SECTION 35(3) UNDER WHICH ANY QUESTION WHETHER AN ASSET WAS USE D FOR R&D ETC. IS TO BE REFERRED BY THE BOARD TO THE PRESCRIBED AUTHORITY BEING THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH. WE INVITE REFERENCE TO THE FOLLOWING DECISIONS IN WHICH IT HAS BEEN HELD THAT IF ANY ISSUE ARISES WITH REGARDS TO A CLAIM UNDER SECTION 35(1)(IV) THEN THE ASSESSING OFFICER IS REQUIRED TO MAKE REFERENCES TO THE BOARD. WE HAVE ABSOLUTELY NO DOUBT THAT WE WILL BE FULLY ABLE TO SATISFY THE PRESCRIBED A UTHORIT Y IN THIS REGARD. HOWEVER, THE AO DID NOT CONVINCE WITH THE ASSESSEE S EXPLANATION AND WITHOUT REFERRING THE MATTER TO THE PRESCRIBED AUTHORITY BEING THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, DECLINED THE ASSESSEES CLAIM AT ITS OWN. BY THE IMPUGNED ORDER, THE CIT(A) ALLOWED ASSESSEES CLAIM AFTER HAVING FOLLOW ING OBSERVATIONS : - 8.2. I HAVE CAREFULLY CONSIDERED THE ABOVE ISSUE AND I FIND THERE IS DEPTH IN THE STATEMENT OF THE APPELLANT WHEREIN IT HAS BEEN STATED THAT A TECHNICAL ISSUE CANNOT BE DECIDED BY THE AO SIMPLY BY DISREGARDING THE DETAILS THAT HAVE BEE N PRODUCED B/ THE; APPELLANT CARRIES WEIGHT. THE INCOME TAX ACT PROVIDES SECTION 35 (3) TO DEAL WITH ANY DOUBTS THAT MAY BE ENTERTAINED BY THE ITA NO S . 5511&5468 /20 1 1 8 ASSESSING OFFICE R WHILE DEALING WITH THE CLAIM MADE UNDER THE SAID SECTION. IN THIS CASE THE PROVISIONS OF THIS S ECTION HAVE NO T BEEN FOLLOWED BY THE AO AT ALL. THE ASSESSING OFFICER HAS DISMISSED THE CLAIM OF APPELLANT IN A SUMMARY MANNER BASING HIS ARGUMENT ON A PRESUMPTION THAT THE WIRE CUTTING MACHINE WAS USED IN THE MANUFACTURING PROCESS OF THE APPELLANT AND THE RE FORE IS A NORMAL PLANT AND MACHINE. I FIND THAT THE A O HAS NOT DISCUSSED THE ISSUES RAISED BY THE APPELLANT REGARDING JOB WORK, PRODUCTION, INCREASE IN QUALITY OF PRODUCT LEADING TO NEW CUSTOMERS ETC. AT ALL. THE STATEMENT TAKEN OF THE TECHNICAL PERSON ALSO FINDS NO MENTION I FIND THAT THE AO HAS BASED HI S ARGUMENT ON SUSPICION EVEN WHEN HE HAD ,THE OPPORTUNITY TO TAKE RECOURSE OF A SPECIFIC SECTION TO ESTABLISH THE DOUBTS THAT HE ENTERTAINED. IN FACT AS PER THE PROVISIONS OF SEE. 35(3), THE AO HAD NO DI SCRETION BUT TO COMPLY WITH THE SAID SECTION. UNDER THE CIRCUMSTANCES, I FIND THAT THE DISALLOWANCE MADE BY THE AO ON THIS GROUND CANNOT BE SUSTAINED. THE ASSESSING OFFICER HAD NO JURISDICTION TO DISMISS A TECHNICAL MATTER WITHOUT TAKING THE OPINION OF THE COMPETENT BODY AS CLEARLY STATED IN SECTION 35 (3) OF THE INCOME TAX ACT. I FIND THAT THE CASE LAWS RELIED UPON BY THE APPELLANT SUPPORT ITS CASE. UNDER THE CIRCUMSTANCES' THE APPEAL OF THE APPELLANT IS ALLOWED AND THE ADDITION MADE DELETED. 12 . AGAINST THE ABOVE ORDER, REVENUE IS IN APPEAL BEFORE US. 1 3 . RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECORD PERUSED . DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS PURCHASED CNC WIRE CUTTING MACHINE FOR WHICH DEDUCTION WAS CLAIMED UNDER SECTION 35(1)(I V) BEING THE EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT. DURING THE COURSE OF HEARING, THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THIS MACHINE SHOULD NOT BE CONSIDERED AS NORMAL PLANT AND MACHINERY. THE ASSESSEE SUBMITTED DETAILED REPLY, ACCORDIN G TO WHICH ASSESSEE WAS ENGAGED IN MANUFACTURING OF REEDS, WHICH IS MANUFACTURED OUT OF SPECIAL STEEL BY BLANKING THE STEEL. FOR DOING THE SAME ASSESSEE NEED TO CUT THE STEEL IN SPECIFIC SIZE AND SHAPE, THEREFORE, THE ASSESSEE ACQUIRED CNC WIRE CUTTING M ACHINE, WHICH HAS BEEN USED BY IT TO RESEARCH AND DEVELOPMENT OF BETTER TOOLS ITA NO S . 5511&5468 /20 1 1 9 TO HELP IN PRODUCTION. THE AO ALSO TAKEN STATEMENT OF TECHNICAL PERSONS OF THE ASSESSEE COMPANY, WHO DESCRIBED COMPLETE MANUFACTURING PROCESS. HOWEVER, THE AO DECLINED ASSESSEES CLAIM U/S.35(1)(IV). AS PER THE PROVISIONS OF SECTION 35(1)(IV) , AN ASSESSEE IS ENTITLED FOR DEDUCTION IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. SUB - SECTION ( 3 ) OF SECTION 35 PROVIDES THAT, IF ANY QUESTION ARISES UNDER THIS SECTION AS TO WHETHER, AND IF SO, TO WHAT EXTENT, ANY ACTIVITY CONSTITUTES OR ANY ASSET BEING USED FOR SCIENTIFIC RESEARCH, THE AO SHALL MAKE A REFERENCE TO THE BOARD, IN TURN, REFER THE QUESTION TO THE PRESCRIBED AUTHORITY, WHICH IS DEPARTMENT OF SCIENCE AND INDUSTRIAL RESEARCH, WHOSE DECISION SHALL BE FINAL. THUS, THE DISALLOWANCE CAN BE MADE BY THE AO AS PER PROVISIONS CONTAINED UNDER SECTION 35(3) BY REFERRING THE MATTER TO THE DEPARTMENT OF SCIENCE AND INDUSTRIAL RESEARCH. IN THE INSTANT CASE BEFORE US, THE AO HAS NOT ACCEPTED ASSESSEES CONTENTION REGARDING USE OF CNC WIRE CUTTING MACHINE IN RESEARCH AND DEVELOPMENT, SO AS TO ALLOW ITS CLAIM UNDER SECTION 35(IV) . BEFORE THE AO, THE ASSESSEE HAS MADE A SPE CIFIC REQUEST VIDE LETTER DATED 31 - 12 - 2007 FOR MAKING REFERENCE TO THE DEPARTMENT OF SCIENCE AND INDUSTRIAL RESEARCH. HOWEVER, WITHOUT MAKING ANY SUCH REFERENCE THE AO HAS DECLINED ASSESSEES CLAIM UNDER SECTION 35(1)(IV) AT HIS OWN. THE CIT(A) ALLOW ED ASSESSEES CLAIM BY OBSERVING THAT THE AO HAS NO DISCRETION UNDER SECTION 35(3), BUT TO COMPLY WITH THE SAID SECTION IN CASE OF ANY DOUBT REGARDING ALLOWABILITY OF CLAIM OF ITA NO S . 5511&5468 /20 1 1 10 DEDUCTION UNDER SECTION 35(1)(IV). THE CIT(A) FURTHER OBSERVED THAT THE AO HAD N O JURISDICTION TO DISMISS A TECHNICAL MATTER WITHOUT TAKING THE OPINION OF THE COMPETENT BODY AS CLEARLY STATED IN SECTI O N 35(3) OF THE INCOME TAX ACT. UNDER THESE CIRCUMSTANCES, IF WE ANALYSE THE ACTION OF CIT(A) , WE FIND THAT THE ISSUE IN QUESTION IS DIR ECTLY COVERED BY THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DELTRON LTD., REPORTED IN (2008) 218 CTR 183 , WHEREIN IT WAS HELD THAT WHILE CONSIDERING THE ASSESSEES CLAIM FOR DEDUCTION UNDER SECTION 35(1) ON ACCOUNT OF EXPENDITURE O N SCIENTIFIC RESEARCH, THE AO IS NOT THE PRESCRIBED AUTHORITY IN THIS MATTER AND IS NOT COMPETENT TO DETERMINE AS TO WHETHER THE MACHINERY WAS FOR RESEARCH AND DEVELOPMENT PURPOSES OR NOT. IT WAS, THEREFORE, HELD BY THE HONBLE HIGH COURT THAT THE CIT(A) W AS JUSTIFIED IN HOLDING THAT THE AO COULD NOT HAVE DISALLOWED THE EXPENDITURE WITHOUT FOLLOWING THE PROCEDURE LAID DOWN UNDER SECTION 35( 3 ) . A PPLYING THE PROPOSITION OF LAW LAID DOWN BY THE HON BLE DELHI HIGH COURT IN THE CASE OF DELTRON LTD. (SUPRA) TO TH E FACTS OF THE INSTANT CASE, WHEREIN THE AO HAS NOT REFERRED THE MATTER TO THE PRESCRIBED AUTHORITY BEING DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH IN SPITE OF SPECIFIC REQUEST BY THE ASSESSEE, UNDER THESE CIRCUMSTANCES THE CIT(A) ALLOW ED ASSESSEES CLAIM AFTER RECODING THE FINDING AS NARRATED ABOVE, WHICH HAS NOT BEEN CONTROVERTED BY THE LEARNED DR. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT, W E DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) FOR ALLOWING ASSESSEES C LAIM OF DEDUCTION U/S35(1)(IV) . ITA NO S . 5511&5468 /20 1 1 11 1 4 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE (I.E. ITA NO. 5511 /M/1 1 ) IS PARTLY ALLOWED FOR STATISTICAL PURPOSES WHEREAS APPEAL OF THE REVENUE (I.E. ITA NO. 5468 /M/1 1 ) IS DISMISSED. (I.E. ITA NO. 5511/M/11) (I.E. ITA NO. 5468/M/11 ) ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST FEB . 201 4 . 21 ST FEB,2014 SD/ - SD/ - ( ) ( H.L.KARWA ) ( ) ( R.C.SHARMA ) / PRESIDENT / ACCOUNTANT MEMBER MUMBAI ; DATED 21 / 02/ 2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBA I 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//