2012 (8) TMI 82 - AT - Income Tax

Tribunal Decision: Deductions allowed for business loss, investment disallowed, R&D expenditure remitted. &D

The Tribunal allowed the deduction of Rs.141.21 lakhs for advances written off as a business loss, disallowed the deduction for investment in shares ... Deductibility of advances written off as business loss - advances to related/sister concern - commercial expediency - loss on investment in shares on winding up - timing of recognition of capital loss - deduction for capital expenditure on in-house mobile R&D unit under section 35 - reference to prescribed authority for certification under section 35Deductibility of advances written off as business loss - advances to related/sister concern - commercial expediency - Allowability of Rs.1,41,21,000 written off as advances to M/s. EECL as deduction as business loss. - HELD THAT: - The Tribunal examined the factual matrix that the assessee was a co-promoter holding 48% equity in EECL and advanced funds to EECL to protect and preserve its own explosives business in West Bengal. Applying the commercial expediency test and the ratio of S.A. Builders, the Tribunal held that borrowed funds advanced to a sister concern for safeguarding the assessee's business interest are incidental to the assessee's business. Consequently, advances made in the normal course of the assessee's business when written off fall in the revenue field and are allowable as a deduction either as bad debt or as business loss. The assessing officer's contrary conclusion, based on absence of new material, was rejected on these findings of nexus and commercial expediency. [Paras 19, 20]Claim of Rs.1,41,21,000 advances written off is allowed as business loss.Loss on investment in shares on winding up - timing of recognition of capital loss - Allowability in AY 1997-98 of Rs.96,00,000 written off as investment in shares of EECL. - HELD THAT: - The Tribunal found that the assessee's investment in EECL shares was not held as stock-in-trade but as an investment made for business purposes. Except where shares are stock-in-trade, profit or loss on shares crystallises only on transfer or when shareholders' rights are extinguished. As on 31.3.1997 there was only a BIFR order for winding up and the company had not been actually wound up by that date; therefore the rights of shareholders were not yet extinguished. Consequently the loss could not be recognised in the year under appeal and can be considered only in the year in which EECL is actually wound up or shareholders' rights are extinguished. [Paras 21]Claim of Rs.96 lakhs as deduction for AY 1997-98 is rejected.Deduction for capital expenditure on in-house mobile R&D unit under section 35 - reference to prescribed authority for certification under section 35 - Deductibility of Rs.79,04,376 capital expenditure claimed for mobile R&D trucks and whether the assessing officer must refer the question to the prescribed authority under section 35. - HELD THAT: - The Tribunal noted that the assessee had an R&D unit recognised by the Government (though the certificate for the year in question was not produced before lower authorities) and that the question whether claimed expenditure constituted expenditure on scientific research falls within the Explanation to section 35(1). Reliance was placed on authority requiring reference to the prescribed authority for certification. In view of incomplete examination of original records below and the statutory role of the prescribed authority in certifying scientific research expenditure, the Tribunal held that the matter requires referral and fresh consideration by the assessing officer after seeking the prescribed authority's certification and after giving the assessee opportunity of hearing. [Paras 22, 25]Issue remitted to the assessing officer to proceed in accordance with law, including referral to the prescribed authority under section 35 where required.Final Conclusion: Appeal partly allowed: deduction of advances written off (Rs.1,41,21,000) allowed as business loss; deduction of investment in shares written off (Rs.96 lakhs) rejected for AY 1997-98 as loss not yet crystallised; claim for R&D expenditure (Rs.79,04,376) remanded to assessing officer for onward action including reference to the prescribed authority under section 35. Issues Involved:1. Allowability of deduction for advances written off.2. Allowability of deduction for investment in shares written off.3. Allowability of deduction for R&D expenditure.Detailed Analysis:1. Allowability of Deduction for Advances Written Off:The assessee, involved in the manufacture and supply of explosives and detonators, advanced money to Eastern Explosives and Chemicals Ltd. (EECL) to retain its business in West Bengal. The advances totaled Rs.141.21 lakhs. EECL became a sick company and was ordered to be wound up by the BIFR on 31.3.1997. The assessee claimed the advances as a business loss under Sections 28/29 of the Income-tax Act, arguing that the advances were made to protect its business interests. The assessing officer disallowed this claim, but the Tribunal, applying the principle from S.A. Builders (280 ITR 1), held that the advances were made for commercial expediency and were incidental to the assessee's business. Consequently, the Tribunal allowed the deduction of Rs.141.21 lakhs as a business loss.2. Allowability of Deduction for Investment in Shares Written Off:The assessee also invested Rs.96 lakhs in the share capital of EECL, which was written off following the BIFR's order. The Tribunal noted that the investment was made for business purposes but was not held as stock in trade. Since the EECL had not been actually wound up by 31.3.1997, the Tribunal upheld the lower authorities' decision to disallow the deduction for the investment in the year under appeal. The loss could only be considered in the year when EECL was actually wound up or the shareholders' rights were extinguished.3. Allowability of Deduction for R&D Expenditure:The assessee claimed Rs.79,04,376 as R&D expenditure for mobile R&D units installed in trucks. The assessing officer disallowed this claim, noting the absence of log books and a recognition certificate from the Government of India for the relevant period. The Tribunal observed that the assessee had an approved R&D unit and clarified that the expenditure on scientific research must be referred to the prescribed authority under Section 35(1) of the Act. The Tribunal remitted the issue back to the assessing officer to refer the matter to the prescribed authority and make any disallowance based on their certification.Conclusion:The Tribunal allowed the deduction for advances written off, disallowed the deduction for investment in shares written off for the year under appeal, and remitted the issue of R&D expenditure back to the assessing officer for further action. The appeal was partly allowed.