TaxTMI 
TaxTMI 
2012 (8) TMI 82
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....West Bengal with the assistance of the West Bengal Industrial Development Corporation Ltd. Accordingly, a new joint venture company, by the name, Eastern Explosives and Chemicals Ltd., was incorporated. The main objective of the new company, Eastern Explosives and Chemicals Ltd.(EECL), is manufacture of detonators, The assessee subscribed to the extent of Rs.96 lakhs towards share capital of the new company, 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 aforesaid 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 dated 31.3.1997. The investment in the shares of ECCL made by the assessee 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 follows- F.Y. Amount Rs. Upto 1990-91 123.81 1991-92 6.....
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....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 Tribunal, the assessing officer took up the assessment proceedings afresh in relation to the above issues. The assessee reiterated the submissions made earlier during the original assessment proceedings under S.143(3), besides submitting further that the shares were written off on the basis of the order of the BIFR and the same amounts to transfer under S.2(47) of the Act, However, the assessing officer rejected the said claim of the assessee holding that there was no transfer of capital asset involved in the case of the assessee. The assessing officer noted that except for reiterating the submissions made earlier, the assessee had not produced any material to show that the said amounts were irrecoverable. He observed that there is no material change either in the facts of the case or in the submissions of the assessee, and therefore, relying on the reasons stated in ....
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....here is a huge demanded for these products from the coal mines located in the State of West Bengal; c) The appellant company is supplying substantial quantity to coal mines in West Bengal out of its production; d) The preservation of business of the appellant company in the State of West Bengal was necessary as a part of its business strategy. It cannot lose out on the business in the said State; e) The West Bengal State Government itself wanted to take the advantage of consumption in the State of detonators and explosives by setting up a new company in the State or encouraging a local company; f) It is only with an intention to preserve its existing 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; h) The appellant company would not have advanced moneys or subscribe d in the share capital if there was no business consideration; i) EECL went into liquidation on 31-3-1997; j) EECL's balance sheet showed that it has huge liabilitie....
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....t 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 alternative, it may be allowed as business expenditure u/s. 37 of the Act. 16. The learned counsel for the assessee, with regard to disallowance of R& D expenses submitted that the R&D unit is installed in the truck itself and out of 13 trucks, only three 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 expended on scientific research is allowable u/s. 35(1)(i) of the I.T. Act. For expenditure falling under clause (i) there is no approval necessary by any prescribed authority. Such approval is only required for expenditure falling under clauses (ii) and (iii) of subsection (1) to section 35 of the I.T. Act. Clause (ii) refers to payment to scientific research association for undertaking 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 Scie....
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.... details are involved, the assessee has to go to S.35(3)(b) of the Act and therefore, it is necessary that the recognition certificate from the Government is obtained according to S.35, which the assessee has miserably failed. 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 otherwise of the assessee's claim for write off Rs.141.21 lakhs, being advances 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 in ITA No.351/Hyd/2001, with the following observations- "7. ....After considering the facts of the case, we notice that originally loss was claimed as business loss falling for allowance or deduction under sec.28 of the Act. During the assessment proceedings the assessee claimed loss as capital loss. The assessee could not submit the necessary details required before the CIT(A). It was contended before the CIT(A) that the AO wa....
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....d amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However in our opinion that fact is not really relevant. What 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 the decision of the Hon'ble Bombay High Court in the case of Phaltan Sugar Works Ltd. V/s. CWT (208 ITR 987, in which it was held that deduction under S.36(1)(iii) can only be allowed on the interest, if the assessee borrows capital for its own business. Hence, it was held that the interest on the borrowed amount should not be allowed if such amount has been advanced to a subsidiary company of the assessee. However, the Hon'ble Delhi High Court in the case of CIT V/s. Dalmia Cement (254 ITR 377) held that once it is established that there was nexus between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume th....
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....s made for the purposes of the assessee's business, they were not held by the assessee 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 totally 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 actually would up by that date. Therefore, loss on account of investment 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 has actually been wound up or the rights of the shareholders are extinguished. Therefore, we uphold the orders of the lower authorities, rejecting the claim of the assessee for deduction of Rs.96 lakhs, being cost of investment in shares of EECL written off by the assessee. 22. The last issue remaining to be considered in this appeal relates to deduction of Rs.79,04,376, being expenditure in R&D. This issue has been set aside by the Tribunal in the earlier round of appellate proceedings, vide order dated 28.9.2007, referred to above, with the following obs....
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....g, 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 allowable expenditure under S.35 of the Act. 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 note 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 three 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 developed in the R&D mobile units. It is clarified that only the cost of 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 deduction under S.35 of the Act for the assessment year 1996-97 and the ....
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....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 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,....