Income Tax Appellate Tribunal Mumbai Situ Electro Instruments (P.) Ltd. vs Ito on 18 September, 2007 ORDER J. Sudhakar Reddy, A.M. 1. This is an appeal filed by the assessee and is directed against the order of the Commissioner (Appeals)X, Mumbai 1562004 for the assessment year 200102 on the following grounds: 1. In the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not accepting plea and prayer that inasmuch as sum of Rs. 55,98,988 constituted expenditure of a revenue nature expended by the appellant during the impugned previous year in connection with the business of your appellant, the same was fully deductible in the computation of total income under Sections 28, 35, 37 and/or any other applicable provisions of the Act. The Commissioner (Appeals) erred in adverting to irrelevant considerations and/or in not referring to the submissions made before him. 2. In the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming levy of interest under Section 234B of the Act. 3. In the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming levy of interest under Section 234D of the Act. 2. The facts as submitted by the assessee before the assessing officer are extracted, for convenience: The assesseecompany is engaged in the business of manufacturing specialised engineering goods. In the regular course of our business, we supply goods to customers such as Electricity Boards BEST Undertaking, Nuclear Power Projects for their highly specialised applications. Each plant of our customer is ordinarily unique tailormade plant in terms of infrastructure and desired applications. This poses challenges for us inasmuch that the goods which are supplied to them should match their plant and other intended requirements with precision to that extent none of the items that we supply is a standardised item. Development of a nonstandardised item to suit such requirement of a customer necessarily involves substantial study of client requirement conceptual thinking on our part experimentation, model testing, etc. before we are in a position to satisfy ourselves that we can make offer to the client or give any contractual commitment to our client. Any adventurous commitment to the client without ourselves being confident has the potential risk of embarrassment litigation and damages. Exposure of faulty thoughts to the client would mean loss of reputation and goodwill. It is hence that we need to be extremely careful in our homework even before we approach the client with any proposal or offer. After all we have to compete against multinationals like Siemens, ABB, Alstom, etc. The process of development begins either after the tender is floated by a client or when we hear the news from company announcements or other sources that a particular customer is thinking of setting up a plant for which he is likely to source certain engineering products belonging to our field. We do, therefore, star upon conceiving the probably requirements intricacies that the application is likely to involve the level of standards which the product may need to meet in different contingencies when it is interfaced with other components of the plant etc. One alternative for us may be to make matter little easy may be to approach some overseas consultants but that would be firstly expensive secondly uncertain of result thirdly some of them themselves may be our competitors at the bid. In this background we ourselves on inhouse basis do study the details; apply our mind and carry on with the experimentations. Our research team comprises of 25 people (like qualified electronic engineers, software developers) who are constantly working on such jobs. They do travel for seeking advice for collecting information for requesting companies to share some details about what they want to achieve in terms of application, etc. The major components of development expense comprise of expenditure on personnel, their travel expenses, expenditure on items purchased for developing the models, prototypes or demo units for experimentation and testing. The expenses would be on a regular basis for one or the other engineering product. Kindly note that at this stage of development we neither have any assurance nor any commitment from any one. It is not as if that we have secured any order and the client has agreed to fund the expenditure. Ironically, it is only if we are ready ourselves that we can expect to receive the order. There is no guarantee that the product on which we have readied ourselves will result in our being able to procure the order. The order may eventually be awarded to some other competitor, the client may withdraw the tender, he may alter the design. In all such situations, the expense incurred by us would end up in a total loss. The product developed by us will al