Gulf Oil Corpn., Hyderabad V. ACIT, Hyderabad

ITA 649/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59296 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-03-2011
• Assessment Year: 1997-1998
• Appeal Filed On: 29-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Keywords: Capital asset; Depreciation; Business expenditure; Search and seizure; Bad and doubtful debts; Commercial expediency; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBE R. ITA NO.649/HYD/2010 : A SSESSMENT YEAR 1997-98 M/S. GULF OIL CORPORATION LTD., HYDERABAD (PAN - AABCG 8433 B ) V/S ASST COMMISSIONER OF INCOME - TAX CIRCLE 2(3) HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI Y.RATNAKAR RESPONDENT BY : SHRI V.S RINIVAS DATE OF HEARING 2 1.2012 DATE OF PRONOUNCEMENT 29.2.2012 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YE AR 1997- 98 IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONE R OF INCOME- TAX(APPEALS)-III, HYDERABAD DATED 15.3.2010. 2. ASSESSEE IS IN THE BUSINESS OF MANUFACTURE AND SUPP LY OF EXPLOSIVES AND DETONATORS. SINCE MOST OF THE COAL FIELDS ARE LOCATED AT WEST BENGAL AND AS THERE WAS HUGE DEMAND FOR EXPLOS IVES FOR COAL- MINING OPERATIONS IN THAT STATE, THE WEST BENGAL GO VERNMENT SHOWED KEEN INTEREST TO START AN EXPLOSIVE COMPANY LOCALLY TO GO INTO THIS BUSINESS. THE ASSESSEE COMPANY WAS INTERESTED IN NO T LOSING ITS EXISTING BUSINESS IN WEST BENGAL AND SO, FOR PROTE CTING AND RETAINING ITS EXISTING BUSINESS IN THE STATE OF WEST BENGAL. IT NEGOTIATED WITH THE STATE GOVERNMENT OF WEST BENGAL AND BECAME A CO -PROMOTER OF A NEW COMPANY TO BE INCORPORATED IN WEST BENGAL WITH THE ASSISTANCE OF THE WEST BENGAL INDUSTRIAL DEVELOPMENT CORPORATION LTD. ACCORDINGLY, A NEW JOINT VENTURE COMPANY, BY THE NAME, EASTERN E XPLOSIVES AND CHEMICALS LTD., WAS INCORPORATED. THE MAIN OBJECT IVE OF THE NEW COMPANY, EASTERN EXPLOSIVES AND CHEMICALS LTD.(EECL ), IS ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 2 MANUFACTURE OF DETONATORS, THE ASSESSEE SUBSCRIBED TO THE EXTENT OF RS.96 LAKHS TOWARDS SHARE CAPITAL OF THE NEW COMPA NY, WHICH IS EQUAL TO 48% OF THE EQUITY CAPITAL OF THAT COMPANY.. THE ECCL REQUIRED FUNDS PERIODICALLY AND THEREFORE, THE ASSESSEE WAS COMPELLED TO ADVANCE MONEY TO ECCL FOR LOOKING AFTER THE AFORESA ID COMPANY AND FOR RETAINING ITS EXISTING BUSINESS. 3. THE COMPANY, ECCL, COULD NOT RUN PROFITABLY AND BECAME SICK COMPANY, WHICH COULD NOT BE REHABILITATED AND FINALLY BIFR DIRECTED WINDING UP OF THE SAME, BY ITS ORDER DATE D 31.3.1997. THE INVESTMENT IN THE SHARES OF ECCL MADE BY THE ASSESS EE COMPANY IS AS FOLLOWS- F.Y. AMOUNT RS. 1981-82 24 1982 - 83 24 1983 - 84 48 TOTAL 96 4. THE DETAILS OF ADVANCES TO THE EXTENT OF RS .141.21 LAKHS ADVANCED BY THE ASSESSEE COMPANY TO ECCL ARE AS FOL LOWS- F.Y. AMOUNT RS. UPTO 1990-91 123.81 1991 - 92 6.05 1992 - 93 10.36 1993 - 94 0.93 1996-97 0.06 TOTAL 141.21 ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 3 THUS, THE TOTAL AMOUNT ADVANCED BY THE ASSESSEE COM PANY TO ECCL FROM TIME TO TIME TILL 31.3.1997 IS RS.141.21 LAKH S, BESIDES THE SUBSCRIPTION OF THE ASSESSEE TO THE SHARE CAPITAL OF ECCL OF RS.96 LAKHS. 5. ECCL WAS ASSESSED TO INCOME TAX BY THE DY. COMMISSIONER OF INCOME-TAX, SPECIAL RANGE, CALCUTTA . THE DATE OF ORDER OF THE BIFR DIRECTING LIQUIDATION OF ECCL WA S 31.3.1997 AND THE LIQUIDATOR TOOK CHARGE OF ITS ASSETS ON THE SAME DA Y. THE ASSESSEE DID NOT RECEIVE ANY COMMUNICATION FROM THE OFFICIAL LIQ UIDATOR THE ASSESSEE COMPANY ALSO DID NOT FILE ANY SUIT ON ECCL FOR RECOVERY OF ITS MONIES AND IT WAS CONTENDED BY THE ASSESSEE THAT RE COVERY 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 UNSECURE D LIABILITIES OF RS.233.89 LAKHS. THE ASSESSEE ALSO SUBMITTED THAT BASED ON BUSINESS EXIGENCIES, BUSINESS STRATEGIES AND COMMERCIAL CONS IDERATION AND ALSO WITH A VIEW TO RETAIN AND PRESERVE ITS EXISTING BUS INESS, THE SUBSCRIPTION TO THE SHARE CAPITAL OF ECCL OF RS.96 LAKHS AND ADVANCES OF RS.141.21 LAKHS WERE MADE BY THE ASSESSEE COMPA NY. 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 RETAIN ING ITS EXISTING BUSINESS INTERESTS AND HENCE, BOTH THESE AMOUNTS WH ICH 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 FU RTHER SUBMITTED THAT THESE AMOUNTS HAVE TO BE WRITTEN OFF, AS THESE MONI ES ARE NOT REALIZABLE BY THE ASSESSEE COMPANY. THE ASSESSING O FFICER DISALLOWED THE CLAIMS OF THE ASSESSEE WITH REGARD TO WRITTEN O FF AMOUNTS OF RS.141.21 BEING ADVANCES TO ECCL AND RS.96 LAKHS BE ING SUBSCRIPTION ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 4 TO SHARE CAPITAL MADE OF ECCL. HE MADE FURTHER DIS ALLOWANCE OF RS.79,04,376, CLAIMED BY THE ASSESSEE AS EXPENDITUR E ON R&D UNIT. 6. AGGRIEVED BY THE ASSESSMENT MADE AS ABOVE, ASS ESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A)-III HYDERABAD IN HER ORDER DATED 28.2.2004 CONFIRMED THE ORDER OF THE AS SESSING OFFICER. ON FURTHER APPEAL FILED BY THE ASSESSEE AGAINST THE SAID ORDER OF THE CIT(A), THE ABOVE ADDITIONS WERE SET ASIDE BY THE TRIBUNAL A BENCH, VIDE ORDER DATED 28.9.2007 IN ITA NO.351/HYD/2001, TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING THESE ISSUES AFRESH IN ACCORDANCE WITH LAW AND AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. IN PURSUANCE OF THE ABOVE ORDER OF THE TRIBUNA L, THE ASSESSING OFFICER TOOK UP THE ASSESSMENT PROCEEDING S AFRESH IN RELATION TO THE ABOVE ISSUES. THE ASSESSEE REITERATED THE SU BMISSIONS MADE EARLIER DURING THE ORIGINAL ASSESSMENT PROCEEDINGS UNDER S.143(3), BESIDES SUBMITTING FURTHER THAT THE SHARES WERE WRI TTEN OFF ON THE BASIS OF THE ORDER OF THE BIFR AND THE SAME AMOUNTS TO T RANSFER UNDER S.2(47) OF THE ACT, HOWEVER, THE ASSESSING OFFICE R REJECTED THE SAID CLAIM OF THE ASSESSEE HOLDING THAT THERE WAS NO TR ANSFER OF CAPITAL ASSET INVOLVED IN THE CASE OF THE ASSESSEE. THE A SSESSING OFFICER NOTED THAT EXCEPT FOR REITERATING THE SUBMISSIONS M ADE EARLIER, THE ASSESSEE HAD NOT PRODUCED ANY MATERIAL TO SHOW THA T THE SAID AMOUNTS WERE IRRECOVERABLE. HE OBSERVED THAT THERE IS NO MATERIAL CHANGE EITHER IN THE FACTS OF THE CASE OR IN THE SU BMISSIONS OF THE ASSESSEE, AND THEREFORE, RELYING ON THE REASONS ST ATED IN THE ORIGINAL ASSESSMENT ORDER, THE ASSESSING OFFICER DISALLOWED BOTH THE CLAIMS OF THE ASSESSEE WITH REGARD TO RS.96 LAKHS ON ACCOUNT OF SUBSCRIPTION TO SHARE CAPITAL WRITTEN OFF AND RS.141.21 LAKHS BEING ADVANCES WRITTEN OFF. ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 5 8. AS REGARDS THE ISSUE RELATING TO CAPITAL EXPEN DITURE OF RS.79,04,376 CLAIMED ON R&D UNIT, THE ASSESSING OF FICER NOTED THAT THE ASSESSEE COULD NOT PRODUCE LOG BOOKS, ETC. IN RESPECT OF THE TRUCKS. THE AUTHORISED REPRESENTATIVE FURTHER SUBM ITTED THAT THE BULK TRUCKS WOULD BE FULLY EQUIPPED WITH TO CARRY OUT RE SEARCH AND DEVELOPMENT WORKS AT THE OPEN CAST MINES. IT WAS SUBMITTED THAT THE BULK TRUCKS ARE EQUIPPED WITH FLOW INDICATORS AND R OTO PUMPS ETC. IT WAS FURTHER PLEADED THAT A FIRE BROKE OUT IN THE OF FICE OF RESEARCH AND DEVELOPMENT BUILDING ON 11.8.2004 AND THE LOG BOOKS OF THE TWO PUMP TRUCKS PERTAINING TO FINANCIAL YEAR 1996-97 CA NNOT BE TRACED OUT AS THE MATTER IS VERY OLD. THE ASSESSING OFFICER R EFERRED TO THE OBSERVATIONS MADE BY THE TRIBUNAL REGARDING INABILI TY OF THE ASSESSEE TO PRODUCE ANY CERTIFICATE GRANTED BY THE GOVERNMEN T OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, FOR THE ASSESSMEN T YEAR 1997-98, SO AS TO ENABLE THE ASSESSEE TO GET THE BENEFIT OF S.3 5B OF THE ACT. WITH THESE OBSERVATIONS AND FOR THE REASONS DISCUSSED IN THE ORIGINAL ASSESSMENT, THE ASSESSING OFFICER DISALLOWED THE CL AIM 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 DIS ALLOWANCES, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE L EARNED AUTHORIZED REPRESENTATIVE STATED THAT THE LOSS HAS BEEN CLAIME D UNDER S.28/29 OF THE ACT, AND PLACED RELIANCE ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF TURNER MORRISON & CO. LTD . V/S. CIT(245 ITR 725). 10, THE CIT(A) PASSED ELABORATE ORDER AND FOR THE DETAILED REASONS DISCUSSED IN PARAS 6 TO 10 OF HIS ORDER DAT ED 15.3.2010 ON PAGES 5 TO 11 THEREOF, CONFIRMED THE ORDER OF THE A SSESSING OFFICER ON ALL THE THREE ISSUES AND DISMISSED THE APPEAL OF TH E ASSESSEE. ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 6 11. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US . 12. WE HEARD THE PARTIES. THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE ARE AS FOLLOWS- THE ADMITTED FACTUAL POSITION, NOT DISPUTED BY THE ASSESSING OFFICER IS AS UNDER:: A) THE ASSESSEES MAIN BUSINESS IS MANUFACTURE OF DETO NATORS AND EXPLOSIVES; B) THERE IS A HUGE DEMANDED FOR THESE PRODUCTS FROM TH E COAL MINES LOCATED IN THE STATE OF WEST BENGAL; C) THE APPELLANT COMPANY IS SUPPLYING SUBSTANTIAL QUAN TITY TO COAL MINES IN WEST BENGAL OUT OF ITS PRODUCTION; D) THE PRESERVATION OF BUSINESS OF THE APPELLANT COMPA NY IN THE STATE OF WEST BENGAL WAS NECESSARY AS A PART OF ITS BUSINESS STRATEGY. IT CANNOT LOSE OUT ON THE BUSIN ESS IN THE SAID STATE; E) THE WEST BENGAL STATE GOVERNMENT ITSELF WANTED TO T AKE THE ADVANTAGE OF CONSUMPTION IN THE STATE OF DETONA TORS AND EXPLOSIVES BY SETTING UP A NEW COMPANY IN THE S TATE OR ENCOURAGING A LOCAL COMPANY; F) IT IS ONLY WITH AN INTENTION TO PRESERVE ITS EXISTI NG BUSINESS THAT THE APPELLANT HAD TO PARTICIPATE IN THE JOINT VENTURE COMPANY PROMOTED BY THE WET BENGAL INDUSTRIAL DEVELOPMENT CORPN; G) THE APPELLANT COMPANY WAS ALSO MANAGING THE JOINT VENTURE AS A PART OF ITS OVERALL BUSINESS STRATEGY TO PRESERVE AND RETAIN ITS EXISTING BUSINESS; ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 7 H) THE APPELLANT COMPANY WOULD NOT HAVE ADVANCED MONEY S OR SUBSCRIBE D IN THE SHARE CAPITAL IF THERE WAS NO BUSINESS CONSIDERATION; I) EECL WENT INTO LIQUIDATION ON 31-3-1997; J) EECLS BALANCE SHEET SHOWED THAT IT HAS HUGE LIABIL ITIES DISPROPORTIONATE TO THE ASSETS IT OWNED; K) THE SECURED LIABILITIES THEMSELVES ARE MUCH MORE TH AN ITS ASSETS; L) THE APPELLANTS ADVANCE OF MONEYS IS AN UNSECURED LIABILITY; M) MORE THAN 13 YEARS HAVE ELAPSED AND FROM 1997 TILL DATE, NOT A SINGLE RUPEE WAS RECOVERED; IN THE ABOVE CIRCUMSTANCES, WHETHER THE AMOUNT WRIT TEN OFF CONSTITUTE BUSINESS LOSS OR NOT, IS A MATTER WHICH HAS TO BE DECIDED ON THE ABOVE FACTUAL POSITION. ON THE ABOV E FACTUAL POSITION, THE LEARNED COUNSEL CONTENDED THAT THE A DVANCE WHICH WAS WRITTEN OFF AS WELL AS LOSS IN SHARES CAN ONLY BE A REVENUE LOSS. 13. THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI RA TNAKAR, RELIED ON THE FOLLOWING CASES IN SUPPORT OF ITS CLA IM THAT THE AMOUNTS ADVANCED TO EECL, WHICH IS WRITTEN OFF AS NOT RECOV ERABLE AGGREGATING TO RS.1,41,21,000/- AND THE AMOUNT SUBSCRIBED IN SH ARES 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 ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 8 (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)-B OM. 14. IT IS SUBMITTED THAT IN THE CASE OF BADRIDAS DAGA V/S.CIT (SUPRA), THE AMOUNT EMBEZZLED IS MONEY. IN THE C ASE OF RAMCHANDER SHIVNARAYAN V/S. CIT (SUPRA), THE ASSET STOLEN IS CASH. IN THE CASE OF JWALA PRASAD RADHA KISHAN V/S CIT (SUPR A), THE AMOUNT WRITTEN OFF AS IRRECOVERABLE IS DEPOSIT MADE IN CAS H. IN THE CASE OF TURNER MORRISON CO. VS. CIT (SUPRA), THE AMOUNT WRI TTEN OFF IS AN ADVANCE BY THE PARENT COMPANY TO ITS SUBSIDIARY. IN THE CASE OF IBM WORLD TRADE CORP. V/S. CIT (SUPRA), THE AMOUNT WRIT TEN OFF IS AN ADVANCE GIVEN TO THE LANDLORD FOR CONSTRUCTION OF F ACTORY. ALL THESE AMOUNTS WHICH WERE WRITTEN OFF AS IRRECOVERABLE WER E ALLOWED AS BUSINESS LOSS U/S. 28 OF THE INCOME-TAX ACT. IT CA NNOT BE DENIED THAT ALL THESE ITEMS WERE ASSETS OF ONE FORM OR THE OTHE R. THE TEST IS WHETHER THESE AMOUNTS ARE RELATED TO CARRYING ON BU SINESS AND WERE CLOSELY CONNECTED WITH THE BUSINESS OPERATIONS. THE TEST ADOPTED IN ALL THESE CASES IS EQUALLY APPLICABLE TO THE APPELLANT S CASE. 15. HENCE, FOR THE ABOVE REASONS, IT IS SUBMITTE D THAT THE AMOUNT ADVANCED TO EECL WHICH HAD TO BE WRITTEN OFF AND THE SHARES SUBSCRIBED IN EECL WHICH HAD TO BE WRITTEN OFF ARE ALLOWABLE AS BUSINESS LOSS U/S. 28/29 OF THE I.T. ACT. IN THE A LTERNATIVE, IT MAY BE ALLOWED AS BUSINESS EXPENDITURE U/S. 37 OF THE ACT. 16. THE LEARNED COUNSEL FOR THE ASSESSEE, WITH RE GARD TO DISALLOWANCE OF R& D EXPENSES SUBMITTED THAT THE R& D UNIT IS INSTALLED ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 9 IN THE TRUCK ITSELF AND OUT OF 13 TRUCKS, ONLY THRE E TRUCKS HAVE BEEN EQUIPPED WITH R&D FACILITY. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED FURTHER ON THIS ISSUE AS FOLLOWS- THE ALLOWANCE OF CAPITAL EXPENDITURE LAID OUT OR EX PENDED ON SCIENTIFIC RESEARCH IS ALLOWABLE U/S. 35(1)(I) OF T HE I.T. ACT. FOR EXPENDITURE FALLING UNDER CLAUSE (I) THERE IS NO AP PROVAL NECESSARY BY ANY PRESCRIBED AUTHORITY. SUCH APPROVA L IS ONLY REQUIRED FOR EXPENDITURE FALLING UNDER CLAUSES (II) AND (III) OF SUB- SECTION (1) TO SECTION 35 OF THE I.T. ACT. CLAUSE (II) REFERS TO PAYMENT TO SCIENTIFIC RESEARCH ASSOCIATION FOR UNDE RTAKING SCIENTIFIC RESEARCH OR UNIVERSITY, COLLEGE OR OTHER INSTITUTION FOR THE PURPOSE OF SCIENTIFIC RESEARCH AND CLAUSE (III) REFERS TO PAYMENT MADE TO INSTITUTIONS FOR RESEARCH IN SOCIAL SCIENCE OR STATISTICAL RESEARCH. IN THE PRESENT CASE, THE AMO UNT CLAIMED AS EXPENDITURE IS EXPENDED BY THE APPELLANT ITSELF BY WAY OF ACQUIRING MOBILE R& D UNITS AND IS NOT A PAYMENT MA DE TO ANY INSTITUTION FALLING UNDER CLAUSES (II) AND (III). E VEN ACCORDING TO CLAUSES (II) AND )(III) APPROVAL SHOULD BE AVAILABL E TO PAYEE ONLY WHICH IS WHOLLY INAPPLICABLE TO THE FACTS OF THE PR ESENT CASE. THE LEARNED CIT(A) MIXED UP VARIOUS CLAUSES AND ERR ONEOUSLY THOUGHT THAT APPROVAL CERTIFICATE FROM THE GOVERNME NT OF INDIA IS NECESSARY FOR ALLOWANCE OF DEDUCTION U/S. 35(1)(I) OF THE I.T. ACT. THEREFORE, THIS OBJECTION OF THE CIT(A) IS NOT TENA BLE. COMING TO THE CRITICISM THAT THE APPELLANT HAS NOT BEEN ABLE TO DEMONSTRATE HOW IT HAS BEEN ABLE TO DEVELOP DIFFERE NT TYPES OF EXPLOSIVES, THE APPELLANT CONTENDED THAT THIS CRITI CISM ALSO IS NOT TRUE. THE EXPLOSIVES ARE DEVELOPED FOR USE AT THE FOLLOWING SITES ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 10 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 S AME WAS NOT IN THE NATURE OF ANY TRADE ADVANCE. IT WAS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE DECISION OF TH E CALCUTTA HIGH COURT IN THE CASE OF TURNER MORRISON & CO. LTD. (SU PRA) IS NOT RELEVANT IN AS MUCH AS IN THAT CASE THE ISSUE WAS WITH RESPE CT TO ALLOWANCE OF BAD DEBTS UNDER S.36(1)(VIII) OF THE ACT, WHEREAS I N THE CASE OF THE ASSESSEE THE ISSUE RELATES TO THE CLAIM OF ADVANCES WRITTEN OFF. FURTHER, IT WAS ARGUED THAT FOR THE DEDUCTIBILITY O F LOSS UNDER S.28 OF THE ACT, THE SAME SHOULD BE ON REVENUE ACCOUNT AND SINCE THE MONEY LENDING WAS NOT PART OF THE ASSESSEES BUSINESS ACT IVITY, AND SUCH LOAN HAS BEEN ADVANCED IN RESPECT OF FIXED CAPITAL, THE WRITTEN OFF OF THE SAME BY THE ASSESSEE CANNOT BE TREATED AS BUSINESS LOSS DEDUCTIBLE UNDER S.28 OF THE ACT. WITH RESPECT TO THE ISSUE OF R&D EXPENDITURE UNDER S.35 OF THE ACT, THE LEARNED DEPARTMENTAL REP RESENTATIVE POINTED OUT THAT THE CLAIM OUGHT TO HAVE BEEN UNDER S.35(1)(IV) AND NOT UNDER S.35(1)(I). THE LEARNED DEPARTMENTAL REP RESENTATIVE ARGUED RELYING ON THE DECISION OF APEX COURT IN CIT V/S. BHARTI CELLULAR LTD. (330 ITR 239) THAT WHENEVER TECHNICAL DETAILS ARE INVOLVED, THE ASSESSEE HAS TO GO TO S.35(3)(B) OF THE ACT AND THE REFORE, IT IS NECESSARY THAT THE RECOGNITION CERTIFICATE FROM TH E GOVERNMENT IS OBTAINED ACCORDING TO S.35, WHICH THE ASSESSEE HAS MISERABLY FAILED. ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 11 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND OTHER MATERIAL ON RECORD. AS FOR THE FIRST ISSUE RELATING TO THE ALLOWABILITY OR OTHERWI SE OF THE ASSESSEES CLAIM FOR WRITE OFF RS.141.21 LAKHS, BEING ADVANCE S MADE BY IT TO EECL, AND WRITE OFF OF INVESTMENT OF RS.96 LAKHS IN THE SHARES OF EECL MADE BY THE ASSESSEE. WE FIND THAT IN THE EARLIER ROUND OF APPELLATE PROCEEDINGS BEFORE THIS TRIBUNAL, THE MATTER IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER, VIDE ORDER DATED 28.9.2007 I N ITA NO.351/HYD/2001, WITH THE FOLLOWING OBSERVATIONS- 7. .AFTER CONSIDERING THE FACTS OF THE CASE, WE N OTICE THAT ORIGINALLY LOSS WAS CLAIMED AS BUSINESS LOSS FALLIN G FOR ALLOWANCE OR DEDUCTION UNDER SEC.28 OF THE ACT. DUR ING THE ASSESSMENT PROCEEDINGS THE ASSESSEE CLAIMED LOSS A S CAPITAL LOSS. THE ASSESSEE COULD NOT SUBMIT THE NECESSARY D ETAILS REQUIRED BEFORE THE CIT(A). IT WAS CONTENDED BEFORE THE CIT(A) THAT THE AO WAS NOT CLEAR ABOUT THE NATURE OF SAID LOSS. THE CIT(A) OBSERVED THAT THE SUBMISSIONS OF THE ASSESSE E ARE VERY CASUAL AND WEAK ESPECIALLY WHEN THE ASSESSEE IS CLA IMING WRITE OFF OF VALUE OF SHARES AS WELL AS ADVANCES. THE AMO UNT CLAIM ED BY THE ASSESSEE AS BAD DEBTS WAS WITHOUT ANY SUPPOR TING DOCUMENTS. THE SUBM ISSION OF THE ASSESSEE MADE BEFORE THE LOWER AUTHORITIES HAVE BEEN REITERATED BY THE LEAR NED AR THAT THE INVESTMENT MADE BY THE ASSESSEE IN SHARES AND A DVANCES AND ADVANCES GIVEN TO EECL WERE ONLY FOR BUSINESS CONSIDERATION AND IN ACCORDANCE WITH COMMERCIAL EX PEDIENCY. THE CONTENTIONS OF LEARNED A.R. ARE SUBJECT TO VERI FICATION FROM THE RECORD. NECESSARY FACTS AND NATURE OF TRANSACT IONS ARE NOT ON RECORD AS NO SUCH PLEA WAS TAKEN BEFORE THE LOWE R AUTHORITIES. IN THE ABSENCE OF COMPLETE FACTS ON R ECORD, 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 ISS UE 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 O RDER 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 20.3.200 0, AGAIN MADE THE ADDITIONS MADE ON ACCOUNT OF WRITE OFF OF ADVANCES TO EECL OF ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 12 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 ALLOWABIL ITY OF DEDUCTION IN RESPECT OF WRITE OFF OF ADVANCES, THE FACTS OF T HE CASE HAVE TO BE ANALYSED. THE FACTS ARE THAT THE ASSESSEE WAS A CO- PROMOTER OF EECL ALONGWITH THE GOVERNMENT OF WEST BENGAL AND HAD 48% EQUITY STOCK INT HAT COMPANY. THE ASSESSEE HAD PARTICIPATED IN P ROMOTION OF EECL, IN ORDER TO SAFEGUARD ITS BUSINESS OF EXPLOSIVES AN D DETONATORS IN WEST BENGAL. THE ASSESSEE AND EECL ARE IN THE SAME LINE OF BUSINESS AND THEIR ACTIVITIES ARE INTER-CONNECTED, THE ASSESSEE BEING ONE OF THE PROMOTERS OF THE FORMER COMPANY. THE PURPOSE OF GIVING ADVANCES TO THIS RELATED COMPANY WAS IN THE COURSE OF AND FO R THE PURPOSE OF PROTECTING THE INTERESTS OF BUSINESS OF THE ASSESSE E. THE APEX COURT IN THE CASE OF S.A. BUILDERS (280 ITR 1) HAS HELD AS F OLLOWS- IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WA S NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT H AD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCER N. HOWEVER IN OUR OPINION THAT FACT IS NOT REALLY RELEVANT. WH AT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOUNT TO ITS SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON T HE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PHALTAN SU GAR WORKS LTD. V/S. CWT (208 ITR 987, IN WHICH IT WAS HELD THAT DE DUCTION UNDER S.36(1)(III) CAN ONLY BE ALLOWED ON THE INTEREST, I F THE ASSESSEE BORROWS CAPITAL FOR ITS OWN BUSINESS. HENCE, IT WA S HELD THAT THE INTEREST ON THE BORROWED AMOUNT SHOULD NOT BE ALLOW ED IF SUCH AMOUNT HAS BEEN ADVANCED TO A SUBSIDIARY COMPANY OF THE AS SESSEE. HOWEVER, THE HONBLE DELHI HIGH COURT IN THE CASE O F CIT V/S. DALMIA CEMENT (254 ITR 377) HELD THAT ONCE IT IS ESTABLISH ED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF TH E BUSINESS, WHICH ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 13 NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF, THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRE CTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITU RE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN C AN BE COMPELLED TO MAXIMIZE HIS PROFIT. THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LO OK AT THE MATTER FROM THEIR OWN VIEW POINT, BUT THAT OF A PRUDENT BU SINESSMAN. HENCE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS T O A SISTER CONCERN FROM THE POINT OF VIEW OF THE COMMERCIAL EXPEDIENCY , THE PRESENCE OF WHICH DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. IN THE FACTS OF THE PRESENT CASE, IT CANNOT BE DENI ED 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 ASSESSEES BUSINESS INTEREST ALSO STANDS SERVED, AND CONSEQUEN TLY 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 B USINESS BY THE ASSESSEE ITSELF AND CONSEQUENTLY, THE BORROWED MONE Y 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 OF F, HAVE TO BE HELD AS FALLING IN THE REVENUE FIELD, AND CONSEQUENTLY, SUCH AMOUNTS OF ADVANCES WRITTEN OFF, ARE ALLOWABLE AS DEDUCTION EI THER AS BAD DEBT OR AS BUSINESS LOSS, INCIDENTAL TO CARRYING ON THE BUS INESS 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 CLAIM ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 14 OF THE ASSESSEE FOR DEDUCTION OF RS.1,41,21,000 BEI NG ADVANCES GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY COMPANY, M/S. EEC L, SINCE THE SAME IS WRITTEN OFF AS IRRECOVERABLE, CONSEQUENT UPON TH E LATTER COMPANY HAVING BEEN ORDERED TO BE WOULD UP BY THE BIFR. ASS ESSEES GROUNDS ON THIS ISSUE ARE ALLOWED. 21. AS FOR THE NEXT ISSUE RELATING TO ASSESSEES C LAIM FOR DEDUCTION OF RS.96 LAKHS, BEING INVESTMENT IN THE S HARES OF EECL WRITTEN OFF BY THE ASSESSEE ON THE BASIS OF THE ORD ER OF THE BIFR DATED 31.3.1997, DIRECTING WINDING UP OF EECL, WE FIND TH AT THE INVESTMENT IN EECL HAVE BEEN CONSIDERED AS MADE FOR THE PURPO SES OF THE ASSESSEES BUSINESS, THEY WERE NOT HELD BY THE ASSE SSEE AS STOCK IN TRADE. EXCEPT IN THE CASE OF SHARES HELD AS STOCK IN TRADE, PROFIT OR LOSS ON THE SHARES WILL ARISE ONLY WHEN THE SHARES ARE TRANSFERRED OR THE RIGHTS OF THE SHAREHOLDERS IN THE SHARES ARE TO TALLY EXTINGUISHED. IN THE PRESENT CASE, AS ON 31.3.1997, THERE IS ONLY THE ORDER OF BIFR TO WIND UP THE EECL, BUT THE EECL HAS NOT BEEN ACTU ALLY WOULD UP BY THAT DATE. THEREFORE, LOSS ON ACCOUNT OF INVESTME NT IN THE SHARES OF EECL CANNOT BE CONSIDERED IN THE YEAR UNDER APPEAL, AND THE SAME CAN BE CONSIDERED ONLY IN THE YEAR IN WHICH THE EECL HA S ACTUALLY BEEN WOUND UP OR THE RIGHTS OF THE SHAREHOLDERS ARE EXTI NGUISHED. THEREFORE, WE UPHOLD THE ORDERS OF THE LOWER AUTHOR ITIES, REJECTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS.96 LAKHS, BEING COST OF INVESTMENT IN SHARES OF EECL WRITTEN OFF BY THE ASS ESSEE. 22. THE LAST ISSUE REMAINING TO BE CONSIDERED IN T HIS APPEAL RELATES TO DEDUCTION OF RS.79,04,376, BEING EXPENDI TURE IN R&D. THIS ISSUE HAS BEEN SET ASIDE BY THE TRIBUNAL IN THE EAR LIER ROUND OF APPELLATE PROCEEDINGS, VIDE ORDER DATED 28.9.2007, REFERRED TO ABOVE, WITH THE FOLLOWING OBSERVATIONS- ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 15 15. AFTER CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE WE FIND THAT THE LOWER AUTHORITIES HAS DECIDED THE MATTER W ITHOUT RECORDING COMPLETE FACTS AS CLEAR FROM THE FACTS NOTED BY THE CIT(A) THAT THE TECHNICAL CHIEF OF THE COMPANY HAD APPEARED BEFORE HIM AND EXPLAINED THAT THE TRUCK IS NOT AN ORDINARY TRUCK A ND IT FACILITATES THE MOVEMENT OF DETONATORS TO DIVERSE LOCATIONS. THE C OMPANY IS RECOGNIZED AS HAVING IN HOUSE R&D UNIT AS CERTIFIED BY THE GOVERNMENT OF INDIA, MINISTRY OF SCIENCE AND TECHNO LOGY. IN THIS REGARD, THE CIT(A) NOTED THAT THE CERTIFICATE DATED 14.9.2000 ISSUED BY THE GOVERNM ENT SHOWED THE R&D UNIT AS HAVING BEEN GRANTED RECOGNITION UP TO 31.3.2003. IN OTHER WORDS THE AS SESSEE HAS NOT PRODUCED THE FIRST CERTIFICATE COVERING THE PERIOD FROM ASSESSMENT YEAR 1996-97 ONWARDS. THE CERTIFICATE DOES NOT THRO W LIGHT WHETHER THE MOBILE TRUCKS ARE PART OF THE RESEARCH UNITS OF THE COMPANYS R&D. THE SUBMISSION OF THE LEARNED AR IS THAT THOU GH SUFFICIENT MATERIALS IN SUPPORT OF THE CLAIM HAVE BEEN FILED B Y ASSESSEE BEFORE THE LOWER AUTHORITIES THEY HAVE NOT BEEN CONSIDERED . IT HAS ALSO BEEN NOTICED THAT THE CIT(A) WAS NOT CLEAR ABOUT THE TYP E 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 SAM E 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 AL SO REQUIRES EXAMINATION FROM THE ORIGINAL RECORD WHICH IS NOT READILY AVAILABLE AT THIS STAGE. CONSIDERING THE TOTALITY OF THE FACTS O F THE CASE, WE FIND IT APPROPRIATE TO SEND BACK THIS MATTER TO THE FILE OF THE A.O. WITH DIRECTION TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. WHILE GIVING EFFECT TO THE ABOVE ORDER OF THE ITAT, THE ASSESSING OFFICER ONCE AGAIN DISALLOWED THE ASSESSEES CLAIM, WHICH H AS BEEN CONFIRMED BY THE CIT(A) AS WELL. 23. WHILE, WE HAVE DISCUSSED AT LENGTH, THE ARGUM ENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI RATNAKAR, IN PARA 16 HEREINABOVE, IT MAY BE NOTED THAT THE LEARNED COUNS EL FOR THE ASSESSEE, FURTHER, INVITING OUR ATTENTION TO THE VA RIOUS DOCUMENTS PAPERS, INCLUDING THE FOLLOWING, FILED BEFORE US IN THE PAPER-BOOK, AND SUBMITTED THAT THE CAPITAL EXPENDITURE OF RS.79,04, 376 IN RESPECT OF BULK TRUCKS USED FOR RESEARCH AND DEVELOPMENT IS AL LOWABLE EXPENDITURE UNDER S.35 OF THE ACT. ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 16 A) STATEMENT OF FACTS FILED BEFORE THE CIT(A) AT PAGES 103 AND 104 B) SUBMISSIONS AT PAGES 153 TO 157 IN THE LETTER DATED 19.3.2009 C) NOTE FILED BEFORE THE CIT(A) ALONGWITH TECHNICAL NO TE AT PAGES 120 TO 125 D) SUBMISSIONS AT PAGES 125 TO 128 E) DRAWINGS OF R&D TRUCKS AT PAGES 162 AND 163. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS, IN ALL, THIRTEEN TRUCKS DURING THE RELEVANT PERIOD, AND OUT OF THEM ONLY TH REE MOBILE TRUCKS ARE R &D UNITS AND FOR THE REMAINING TRUCKS, THERE IS NO R&D FACILITY. HE SUBMITTED THAT DEPRECATION AT THE NORMAL RATE IS USED ON THE TRUCKS WHICH DO NOT HAVE ANY R&D FACILITY AND THOSE TRUCKS MERELY CARRY OUT SERIAL PRODUCTION OF EXPLOSIVES AFTER THE SAME IS D EVELOPED IN THE R&D MOBILE UNITS. IT IS CLARIFIED THAT ONLY THE COST O F R&D MOBILE UNITS IS CLAIMED UNDER S.35 OF THE ACT, AND THERE ARE IN ALL THREE SUCH UNITS. IN RESPECT OF ONE UNIT, CAPITAL COST WAS CLAIMED AS DE DUCTION UNDER S.35 OF THE ACT FOR THE ASSESSMENT YEAR 1996-97 AND THE SAME WAS ALLOWED, AND IN RESPECT OF THE REMAINING TWO TRUCKS, THE DED UCTION WAS CLAIMED FOR THE ASSESSMENT YEAR 1997-98, WHICH IS THE YEAR UNDER APPEAL, UNDER S.35 OF THE ACT. 24. GIST OF THE WRITTEN SUBMISSIONS OF THE ASSESS EE ON THIS ASPECT, APPEARING AT PAGES 125 TO 128 OF THE PAPER- BOOK ARE AS FOLLOWS- (A) THERE IS NO SCOPE FOR EVEN AN IOTA OF DOUBT WITH RE GARD TO THE USER OF TRUCKS FOR SCIENTIFIC R&D WORK ONLY AND NO ONE COULD CLASSIFY THE TRUCKS AS MERE CARRIER TRUCKS, W ITH REFERENCE TO THE FUNCTIONS IT PERFORMS. (B) EVEN A CURSORY GLANCE OF THE OPERATIONS CARRIED ON IN THE TRUCK FOR DELIVERING THE PRODUCT WOULD LEAD TO THE ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 17 CONCLUSION THAT CONSIDERABLE RESEARCH AND DEVELOPM ENT IS DONE IN THESE TRUCKS WHICH ARE NOTHING BUT MOBILE U NITS FOR R&D PURPOSES. (C) THE ASSESSING OFFICER AS WELL AS CIT(A) WERE CARRIE D AWAY IN BELIEVING THAT THE DEDUCTION U/S. 35 IS CLAIMED ON TRUCKS AND IN THE PROCESS OMITTED TO CONSIDER THE FOLLOWIN G 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 TERRAI N WHERE IT HAS TO BE USED, DEVELOP THE EXPLOSIVE BY CONDUCTING RESEARCH OF THE INPUTS AND CONDUCTING FIELD TRIALS IF NECESSARY. THIS COULD BE DONE AT HYDERABAD OR IN THE ALTERNATIVE BY SHIFTING THE R&D EQUIPMENT TO THE SITE WHICH THE ASSESSEE COULD TO BE MORE ADVANTAGEOUS; ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 18 (VI) NOT ALL THE CARRIERS ARE USED FOR R&D OPERATIONS. IT IS ONLY ONE TO TWO TRUCKS WHICH ARE FITTED WITH THE R&D FACILITY THAT ARE USED FOR R&D OPERATIONS. (VII) FOR CONDUCTING THE RESEARCH AND DEVELOPMENT OF THE PRODUCT AT THE SITE, THE EQUIPMENT FOR R&D OPERATIONS HAD TO BE MOVED FROM THE SITE. HENCE, THIS EQUIPMENT IS MADE A PART OF THE TRUCK FOR MOVEMENT AND THE TRUCK WAS DESIGNED AND FABRICATED TO COMBINE THE FUNCTIONS OF DOING SCIENTIFIC RESEARCH, DEVELOP AND FABRICATE THE EXPLOSIVE. (VIII) ALL OTHER TRUCKS MERELY CARRY THE EXPLOSIVES MANUFACTURED ON THE BASIS OF PARAMETERS ARRIVED AT BY THE R&D DONE IN THE R&D TUCKS. (IX) THE REASONS FOR MAKING THE R&D A MOBILE UNIT WAS ONLY TO SAVE TIME AND CONDUCT THE RESEARCH FOR FABRICATING THE EXPLOSIVES AND DEVELOP THE SAME AT THE SITE ITSELF. ANY ECONOMY DERIVED IN TRANSPORT FOR CARRYING THE EXPLOSIVES IS MERELY INCIDENTAL. (X) WITHOUT THE R&D TRUCKS, THE EXPLOSIVES CANNOT BE MANUFACTURED BY THE OTHER TRUCKS BECAUSE THE PROCESS OF STUDY OF TERRAIN, THE NATURE OF OVERBURDEN, ITS PORUS NATURE, EXTENT OF LAMENTA BONDS, DENSITY OF SLEDGE AND WATER CANNOT BE STUDIED AND NO EXPLOSIVE CAN BE DEVELOPED TO SUIT THE TERRAIN. (XI) ALTERNATIVELY, THE ENTIRE OPERATION HAS TO BE CONDUCTED IN THE R&D LAB AT HYDERABAD, FIELD TRIALS DONE AND THE INFORMATION TO BE FED TO THE OTHER CARRIERS FOR MIXING AND DELIVERING THE ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 19 EXPLOSIVES AS PER THE PARAMETERS CARRIED AT DURING THE COURSE OF SCIENTIFIC RESEARCH AND DEVELOPMENT OF THE PRODUCT. (XII) THE WORK DONE IN R&D TRUCK IS TO INNOVATE AND DEVELOP THE REQUIRED EXPLOSIVES. ONCE THIS IS DONE, THE OTHER TRUCKS MERELY INDULGE IN THE SERIAL PRODUCTION BASED ON THE EXPLOSIVES DEVELOPED BY THE R&D TRUCKS EACH VARYING FROM TERRAIN TO TERRAIN. (XIII) THE WORK HAD TO BE DONE SIMULTANEOUSLY ON DIFFERENT LOCATIONS AT THE SAME TIME. HENCE THE COMPANY NEEDED MULTIPLE TRUCKS FOR CARRYING ON SCIENTIFIC RESEARCH AND DEVELOPMENT AT VARIOUS LOCATIONS AT THE SAME TIME. IT WAS NOT AS IF ONE TRUCK WAS ALONE ADEQUATE FOR THE SAID PURPOSE. (XIV) THE ASSESSING OFFICER HAS WRONGLY UNDERSTOOD THE R&D TRUCKS TO BE SIMILAR TO ANY OTHER TRUCK, E.G., TO CARRY CEMENT CONCRETE FOR DELIVERY. THE ENTIRE REASONING GIVEN BY THE ASSESSING OFFICER IS FALLACIOUS. 25. ON CAREFUL CONSIDERATION OF THE RIVAL SUBMIS SIONS IN THE LIGHT OF THE MATERIAL ON RECORD, INCLUDING THE IMPU GNED ORDERS OF THE LOWER AUTHORITIES, WE FIND THAT THE ASSESSEE HAD AN APPROVED R&D UNIT, APPROVED BY THE GOVERNMENT, EVEN THOUGH THE A PPROVAL FOR THE CURRENT YEAR WAS NOT PRODUCED. THEREFORE, THE QUEST ION WHETHER ANY PART OF THE EXPENDITURE CLAIMED, CONSTITUTED THE EX PENDITURE ON SCIENTIFIC RESEARCH OR NOT, HAS TO BE REFERRED TO T HE PRESCRIBED AUTHORITY, IN TERMS OF EXPLANATION BELOW THE PROVIS IONS OF S.35(1) OF THE ACT, WHICH READS AS FOLLOWS- ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 20 35 (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RE SEARCH, 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 L AID OUT OR EXPENDED BEFORE THE COMMENCEMENT OF THE BUSINESS (N OT BEING EXPENDITURE LAID OUT OR EXPENDED BEFORE THE 1 ST DAY OF APRIL, 1973) ON PAYMENT OF SALARY (AS DEFINED IN EXPLANATI ON 2 BELOW SUB-SECTION (5) OF SECTION 40A TO AN EMPLOYEE ENGAG ED IN SUCH SCIENTIFIC RESEARCH OR ON THE PURCHASE OF MATERIAL USED IN SUCH SCIENTIFIC RESEARCH, THE AGGREGATE OF THE EXPENDITU RE SO LAID OUT OR EXPENDED WITHIN THE THREE YEARS IMMEDIATELY PRE CEDING THE COMMENCEMENT OF THE BUSINESS SHALL, TO THE EXTENT I T IS CERTIFIED BY THE PRESCRIBED AUTHORITY TO HAVE BEEN LAID OUT OR EXPENDED ON SUCH SCIENTIFIC RESEARCH, BE DEEMED TO HAVE BEEN LAID OUT OR EXPENDED IN THE PREVIOUS YEAR IN WHICH THE BUSINESS IS COMMENCED. (2) THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V/S. FCS MARKETING (P) LTD., (283 ITR 32) SU PPORTS THE VIEW TAKEN BY US HEREIN ABOVE. WE ACCORDINGLY, HOLD THAT IF THE ASSESSING OFFICER WANTS TO DISALLOW ANY AMOUNT CLAIMED BY THE ASSESSEE TOWARDS THE R&D EXPENDITURE, THE MATTER IS REQUIRED TO BE R EFERRED BY HIM TO THE PRESCRIBED AUTHORITY, AND ONLY ON THE BASIS OF SUCH ORDER OF THE PRESCRIBED AUTHORITY, AS MAY BE PASSED, THAT THE AS SESSING OFFICER HAS TO MAKE ANY DISALLOWANCE. ACCORDINGLY , THIS ISSU E IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER, FOR ANY FURTHER ACTION, AS MAY BE DEEMED FIT, IN ACCORDANCE WITH LAW, TO MAKE ANY FRE SH DISALLOWANCE OUT OF THE R&D EXPENDITURE CLAIMED BY THE ASSESSEE. ITA NO649/HYD/2010 M/S. GULF OIL CORPORATION LTD., HYDERABAD 21 26. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE COURT ON 29.2.2012 SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER. JUDICIAL MEMBER. DT/- 29TH FEBRUARY, 2012 COPY FORWARDED TO: 1. M/S. GULF OIL CORPORATION LTD., SANATH NAGAR, HYDER ABAD 2. ASSTT COMMISSIONER OF INCOME - TAX, CIRCLE 2(3), HYDERABAD 3. COMMISSIONER OF INCOME - TAX(A) - III HYDERABAD 4. COMMISSIONER OF INCOME-TAX 2, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. B.V.S.