IN THE ITAT HYDERABAD BENCH ‘A’
Gulf Oil Corpn. Ltd.
Assistant Commissioner of Income-tax
IT APPEAL NO. 649 (HYD.) OF 2010
[ASSESSMENT YEAR 1997-98]
FEBRUARY 29, 2012
Smt. Asha Vijayaraghavan, Judicial Member – This appeal by the assessee for the assessment year 1997-98 is directed against the order of the Commissioner of Income-tax(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 coal-mining operations in that state, the West Bengal Government showed keen interest to start an explosive company locally to go into this business. The assessee company was interested in not losing its existing business in West Bengal and so, for protecting 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 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-
4. The details of advances to the extent of Rs.141.21 lakhs advanced by the assessee company to ECCL are as follows-
Thus, the total amount advanced by the assessee company to ECCL from time to time till 31.3.1997 is Rs.141.21 lakhs, 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 was 31.3.1997 and the liquidator took charge of its assets on the same day. The assessee did not receive any communication from the official liquidator. The assessee company also did not 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 assessee company. The assessing officer disallowed the claims of the assessee with regard to written off amounts of Rs.141.21 being advances to ECCL and Rs.96 lakhs being subscription to share capital made of ECCL. He made further disallowance of Rs.79,04,376, claimed by the assessee as expenditure on R&D Unit.
6. Aggrieved by the assessment made as above, assessee preferred appeal before the CIT(A). The CIT(A)-III Hyderabad in her order dated 28.2.2004 confirmed the order of the assessing 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 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 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.
8. As regards the issue relating to capital expenditure of Rs.79,04,376 claimed on R&D Unit, the assessing officer noted that the assessee could not produce log books, etc. in respect of the trucks. The authorised representative further submitted that the bulk trucks would be fully equipped with to carry out research and development works at the open cast mines. It was submitted that the bulk trucks are 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 with S. 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. CIT  245 ITR 724.
10. The CIT(A) passed elaborate order and for the detailed reasons discussed in paras 6 to 10 of his order dated 15.3.2010 on pages 5 to 11 thereof, confirmed the order of the assessing officer on all the three issues and dismissed the appeal of the assessee.
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 assessee’s main business is manufacture of detonators and explosives;
(b) There 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 liabilities disproportionate to the assets it owned;
(k) The secured liabilities themselves are much more than its assets;
(l) The appellant’s 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 written off constitute business loss or not, is a matter which has to be decided on the above factual position. On the above factual position, the learned counsel contended that the advance which was written off as well as loss in shares can only be a revenue loss.
13. The learned counsel for the assessee, Shri Ratnakar, 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) Badridas Daga v. CIT  34 ITR 10 (SC) (at pages 14 & 15)
(b) Madeva Upendra Sinai v. Union of India  98 ITR 209 (SC)
(c) Ramchandar Shivnarayan v. CIT  111 ITR 263 (SC) (at pp. 269 to 271)
(d) Jwala Prasad Radha Kishan v. CIT  79 ITR 530 (All.)
(e) Turner Morrison & Co. Ltd.’s case (supra)
(f) I.B.M. World Trade Corpn. v. CIT  186 ITR 412
14. It is submitted that in the Case of Badridas Daga (supra), the amount embezzled is money. In the case of Ramchandar Shivnarayan (supra), the asset stolen is cash. In the case of Jwala Prasad Radha Kishan (supra), the amount written off as irrecoverable is deposit made in cash. In the case of Turner Morrison & Co. Ltd. (supra), the amount written off is an advance by the parent company to its subsidiary. In the case of I.B.M. World Trade Corpn. (supra), the amount written off is an advance given to the landlord for construction of factory. All these amounts which were written off as irrecoverable were allowed as business loss u/s. 28 of the Income-tax Act. It cannot be denied that all these items were assets of one form or the other. The test is whether these amounts are related to carrying on business 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 submitted 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 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 sub-section (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 Science or Statistical Research. In the present case, the amount claimed as expenditure is expended by the appellant itself by way of acquiring mobile R& D units and is not a payment made to any institution falling under clauses (ii) and (iii). Even according to clauses (ii) and )(iii) approval should be available to payee only which is wholly inapplicable to the facts of the present case.
The learned CIT(A) mixed up various clauses and erroneously thought that approval certificate from the Government 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 tenable.
Coming to 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 :
Pump truck No
|M/s. Central Coal Fields Ltd., Rajarappa, Bihar|
|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 the money lending was not part of the assessee’s business activity, 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 Representative pointed out that the claim ought to have been under S.35(1)(iv) and not under S.35(1)(i). The Learned Departmental Representative argued relying on the decision of Apex Court in CIT v. 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 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 was not clear about the nature of said loss. The CIT(A) observed that the submissions of the assessee are very casual and weak especially when the assessee is claiming write off of value of shares as well as advances. The amount claimed by the assessee as bad debts was without any supporting documents. The submission of the assessee made before the lower authorities have been reiterated by the learned AR that the investment made by the assessee in shares and advances and advances given to EECL were only for business consideration and in accordance with commercial expediency. The contentions of learned 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 and had 48% equity stock in that company. The assessee had participated in promotion of EECL, in order to safeguard its business of explosives and 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 for the purpose of protecting the interests of business of the assessee. The Apex Court in the case of S.A. Builders Ltd. v. CIT (Appeals)  288 ITR 1 has held as follows-
“It is true that the borrowed 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. CWT  208 ITR 989 , 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. Dalmia Cement (P.) Ltd.  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 the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can 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 look at the matter from their own view point, but that of a prudent businessman. Hence, we have to see the transfer of the borrowed funds to 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 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 Ltd. (supra), we allow the claim of the assessee for deduction of Rs.1,41,21,000 being advances given by the assessee to its subsidiary company, M/s. EECL, since the same is written off as irrecoverable, consequent upon the latter company having been ordered to be would up by the BIFR. Assessee’s grounds on this issue are allowed.
21. As for the next issue relating to assessee’s claim for deduction of Rs.96 lakhs, being investment in the shares of EECL written off by the assessee on the basis of the order of the BIFR dated 31.3.1997, directing winding up of EECL, we find that the investment in EECL have been considered as 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 observations-
“15. ……After considering the totality of the facts of the case we find that the lower authorities has decided the matter without 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 and it facilitates the movement of detonators to diverse locations. The company is recognized as having in house R&D unit as certified by the Government of India, Ministry of Science and Technology. In this regard, the CIT(A) noted that the certificate dated 14.9.2000 issued 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 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 assessee’s claim, which has been confirmed by the CIT(A) as well.
23. While, we have discussed at length, the arguments of the learned counsel for the assessee, Shri Ratnakar, in para 16 hereinabove, it may be noted that the learned counsel for the assessee, further, inviting our attention to the various 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 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 same was allowed, and in respect of the remaining two trucks, the deduction 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 assessee 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 regard to the user of trucks for scientific R&D work only and no one could classify the trucks as mere carrier trucks, with 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 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) Depreciation 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 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;
(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 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 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 used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it 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.
The decision of the Hon’ble Punjab and Haryana High Court in the case of CIT v. F.C.S. International Marketing (P) Ltd.,  283 ITR 32 supports 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 referred by him to the prescribed authority, and only on the basis of such order of the prescribed authority, as may be passed, that the assessing officer has to make any disallowance. Accordingly, this issue 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 fresh disallowance out of the R&D expenditure claimed by the assessee.
26. In the result, assessee’s appeal is partly allowed.