Income Tax Appellate Tribunal - Mumbai
Ethypharmall P.Ltd, Mumbai vs Assessee on 22 February, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "J",MUMBAI BEFORE SHRI P.M. JAGTAP (AM) & SHRI S.S. GODARA (JM) I.T.A.No. 3496/Mum/2010 (A.Y. 200506) Asst. Commr. of Income‐tax‐10(1), M/s. Athena Drug Delivery Solutions R.No.455, Aaykar Bhavan, M.K. Road, Pvt. Ltd. (Formerly known as Mumbai‐400 020. Ethypharma LL Pvt. Ltd.), Vs. Fortune‐2000, C‐1, 2nd floor, Bandra Kurla Complex, Bandra (E), Mumbai‐ 400 051.
PAN: AAACE8984R
Appellant Respondent
I.T.A. No. 3623/Mum/2010
(A.Y. 200506)
M/s. Athena Drug Delivery Solutions Pvt. Asst. Commr. of Income‐tax‐10(1),
Ltd. (Formerly known as Ethypharma LL R.No.455, Aaykar Bhavan, M.K. Road,
Pvt. Ltd.), Mumbai‐400 020.
Fortune‐2000, C‐1, 2nd floor, Bandra Kurla Vs.
Complex, Bandra (E), Mumbai‐400 051.
PAN: AAACE8984R
Appellant Respondent
Assessee by Shri Vishwas V. Mehendale.
Department by Shri D.S. Sunder Singh.
Date of hearing 28‐02‐2012
Date of pronouncement 04‐03‐2012
O R D E R
PER S.S. GODARA, JM :
In both these appeals, respective appellants have filed amended form No.36 regarding the change of assessee's name. We take on record both amended forms. 2 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
2. In ITA No. 3496/Mum/2010 by the Revenue , the order passed by the ld. CIT(A) dated 22‐2‐2010 has been challenged.
3. In its appeal, the Revenue has raised 5 grounds. Out of these 5 grounds, ground nos.4 & 5 are general in nature. Therefore, neither the same are adjudicated upon nor reproduced hereunder.
Ground nos. 1 to 3 raised by the Revenue are as under :
1. On the facts and circumstance of the case as well as in law, the learned CIT(A) has erred in directing to allow the claim of bad debts without appreciating that the document was not written off in the books but was carried to provision for bad debts which stood in the balance sheet below the debtors.
2. On the facts and circumstance of the case as well as in law, the learned CIT(A) has erred in directing to delete the disallowance of donation of Rs.2,00,300/ without appreciating that vide letter dtd. 08.10.2008 submitted during the course of assessment proceedings, the assessee itself had stated that the said amount was donation.
3. On the facts and circumstance of the case as well as in law, the learned CIT(A) has erred in deleting the disallowance of clinical and investigation payments u/s. 409a)(ia) without appreciating that the name of M/s. Phonix Biopharm, to whom payment of Rs.3,25,000/ was made did not appear in the details of TDS on expenses submitted by the assessee vide its letter dtd. 08.10.2008."
Facts giving rise to filing of the instant appeal are that the assessee is a company engaged in the business of manufacturing & selling pharmaceutical formulations. Ground no. 1:
4. Regarding the assessment year in question, the assessee filed its return on 25‐10‐2005. Declared loss of Rs.1,19,64,035/‐. Along with the said return, balance‐sheet, P & L account, tax audit report, etc. had also been filed. This ultimately led to processing. Thereafter, the matter was also sent to the Transfer Pricing Officer of Mumbai. However, the said reference was returned by the TPO by holding that the international transactions of the assessee herein appeared to be at arm's length price.
3 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
In the P & L a/c. of the assessee, an amount of Rs.46,94,759/‐ was claimed as capital expenditure on account of loss on sale of fixed assets and writing off of fixed assets etc. But, AO came to the conclusion a provision had been made in P & L Account for the all debts. Hence debts had not been written off as per the provisions of Income‐tax Act, 1961 (hereinafter to be referred as the "Act"). Therefore, the amount of Rs.10,16,513/‐ was added is the total income of the company by order dated 2‐12‐2008.
Aggrieved by the said order, the assessee preferred appeal before the ld. CIT(A). After hearing the assessee, the ld. CIT(A) held that although the assessee had inserted a provision in the P & L a/c., but during the assessment proceedings, it had been explained to the AO that this was not a provision but a claim for bad debts against the amounts receivable from a particular party. In the opinion of ld. CIT(A), the conditions of sec. 36(1)(vii) had been duly complied with. Bad debts had been written off. Accordingly, this ground was accepted by the ld. CIT(A). Therefore, the Revenue has raised the instant ground in the present appeal. The ld. DR, by relying on the order of the ld. AO, during his arguments, submitted that the ld. CIT(A) has committed an illegality in accepting the plea of the assessee claiming allowance of bad debt. Referring to the paper book available on the case file, the ld. DR submitted that merely by making a provision in the P & L account, does not amount to writing off of bad debt. In support of the same, he also relied on sec. 36(1)(vii). Further stressed that in view of the said law, since the assessee itself has included a provision for bad and doubtful debts by way of sundry allowance etc., therefore, as per the ld. DR, the said alleged bad debt cannot be allowed as the same does not amount to writing off.
On the other hand, the ld. AR appearing for the assessee has drawn out attention towards pages 12‐14 of the paper book. Referred to pages 8‐10 of the balance‐sheet to contend that even in the said documents, the debts had been dully declared as doubtful. Although clarified that the said amount appeared in he P & L a/c. only for the purpose of reference and it was as good as debts written off. He also took the alternative plea of writing off the debts in hand. 4 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
5. We have heard both the ld. Representatives. Paper book has also been perused. A bare perusal of the said record makes it amply clear that in the P & L account, there is a provision of the amount in question . In view of the Explanation to sec. 36(1)(vii), it is clear that in case there is a provision made in the P & L account, then the same would not amount to writing off. In this regard, our view also finds support from the judgment of Hon'ble Supreme Court in Vijaya Bank vs. CIT & Anr. (2010) 323 ITR 166 (SC). The relevant portion of the said judgment reads as under:
"After April 1, 1989, a mere provision for bad debt will not be entitled to deduction under section 36(1)(vii). If an assessee debits an amount of doubtful debt to the profit and loss account and credits the assets account like sundry debtors account, that would constitute a write off of an actual debt. However, if an assessee debits provision for doubtful debts to the profit and loss account and makes a corresponding credit to the "current liabilities and provisions" on the liabilities side of the balancesheet, then it would constitute a provision for doubtful debt. In the instant case, the assessee would not be entitled to deduction after April 1, 1989."
Accordingly, we are also of the opinion that since there is a provision of doubtful debts in the profit & loss account, the reasonable inference which can be drawn is that the same had not been written off. Once that is so, we have no hesitation in holding that the ld. CIT(A) has committed an illegality in accepting this ground of the assessee thereby setting aside the finding of ld. AO. Consequently, ground no. 1 is allowed in favour of the Revenue. Ground no. 2:
6. In this ground, the Revenue has challenged the order of ld. CIT(A) whereby the order of ld. AO disallowing donation of Rs.2,00,300/‐ was set aside. Regarding this ground involving misc. expenses debited to P & L account including alleged donation of Rs.2,00,300/‐ claimed as business expenditure, the ld. AO disallowed the same thereby adding the amount to the total income of the company. In appeal filed by the assessee against the said disallowance, the ld. CIT(A) came to the conclusion that the assessee had explained that the said amount pertained to 5 ITA Nos.3623 & 3496/Mum/2010 Athena Drug Delivery Solutions P.Ltd.
club membership subscription. The said explanation was accepted by the ld. CIT(A). Hence, the Revenue in the instant appeal has raised the said ground.
In support of the ground raised, the ld. DR has vehemently contended that by no stretch of imagination the donation in question can be held to be a business expenditure. More so when it had been made to a sport club which has nothing to do with the business. In this regard, the ld. DR also referred to the paper book available as well as findings in para 7 of the ld. AO's order.
On the other hand the ld. AR has submitted that a perusal of pages 12‐14 of the paper book makes amply it clear that it is not a donation but a case of sport club membership subscription wherein the assessee has been paying the amount to Matoshri Arts & Sports Trust. The said mount has been entered in the ledger account of the assessee as club & other expenses. By referring to the provisions of the Act, he submitted that the same are allowable expenses.
7. We have heard both the ld. Representatives. After carefully perusing the paper book, we are of the opinion that ends of justice would be met if the AO is directed to verify the claim of the assessee afresh after getting all the details of payments. Accordingly, the case is restored back to the AO to take decision in accordance with law after hearing the assessee. Ground no.3:
8. So far as this ground is concerned, the Revenue has filed the instant appeal against the order of ld. CIT(A) allowing TDS claim raised by assessee.
Before the AO, the assessee company claimed that it had paid an amount of Rs.36,48,800/‐ to various firms/parties for rendering technical/professional fees for clinical study. However, after perusing the details, the AO found that the provisions of Chapter XVIIB of the Act regarding TDS provisions had not been complied with by the assessee. Accordingly, he the ld. AO added the said expenses in total income.
However, in appeal preferred by the assessee, the ld. CIT(A) came to the conclusion that assessee's auditors had reported that on professional fees of Rs.3,43,800/‐ TDS had not been 6 ITA Nos.3623 & 3496/Mum/2010 Athena Drug Delivery Solutions P.Ltd.
paid. The assessee during the appellate proceedings explained that this amount of professional fee on which TDS was not deducted had already been added in the total income. Further stated that the said details had already been furnished to the ld. AO vide letter dated 8‐10‐2008. It was after the said explanation that the ld. CIT(A) came to the conclusion that regarding the amount of Rs.3,43,800/‐, although no TDS had been deducted, but under the provisions of sec. 40(a)(ia), it had already been added back in computing income. Accordingly, the ld. CIT(A) deleted the said addition.
In support of this ground, the ld. DR again referred to the order of ld. AO and contended that the assessee had violated the TDS provisions contained in the Act which are mandatory in nature. Further assailed the order of ld. CIT(A) on the ground that he had illegally set aside the findings of the ld. AO.
On the other hand, the ld. AR appearing for the assessee has supported the findings of the ld. CIT(A) on the ground that TDS provisions had been duly complied with. He also referred to the record available at pages 22‐23 of the paper book to contend that there has been due compliance of the TDS provisions. Therefore, he prayed that the order of ld. CIT(A) be upheld.
9. We have heard both the ld. Representatives. Although in the instant case the ld. AO has held that the assessee had violated the TDS provisions, but the ld. CIT(A) has given a finding of fact that there has not been any such violation of TDS provisions. Since, the dispute only remains to be settled is only of verification, so, we deem it appropriate that the AO would decide the issue afresh and verify the compliance.
10. In the light of our above observations, ground no. 1 of the instant appeal is allowed. Ground No. 2 and 3 allowed for statistical purpose.
11. Similarly, the assessee in its appeal bearing ITA No.3623/Mum/2010 has challenged the said order passed by the ld. CIT(A) on the following grounds :
7 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
"1. The learned Commissioner of Incometax (Appeals) accepting the fact that the deficiency was actually written off in the books, erred in confirming the disallowance of the claim of deduction allowable under section 32(1)(iii) of Rs.46,94,759/, on the ground that in the Depreciation Chart as per the Income Tax Rules, the Opening Written Down value in the Block of Assets was not correspondingly reduced and that depreciation on the same was allowed.
2. The learned Commissioner of Income Tax (Appeals) erred in confirming the charge of Interest Income Rs.37,64,820/ under the head "Income From Other Sources" instead of as part of he Business profit, though such interest arose in the prudent conduct of the business on funds transferred temporarily to the Parallel Flexible Deposit Sweet Take Account to be held in Deposit for a minimum of 15 days with provision for retransfer to meet contingencies in the operation of the current account."
Ground no. 1:
12. The backdrop of the Ground is that in the return filed, Capital expenditure of Rs.46,94,759 on account of sale of fixed assests & assets writing off had been debited P & L Account. However, the AO disallowed the same for want of proper explanation. In the appellate proceedings, the ld. CIT(A) duly considered the explanation of the assessee company that the said depreciable assets were damaged, lost and destructed during the flooding of business premises. However, the ld. CIT(A) held that in the depreciation chart of the assessee prepared under the I.T. Rules, depreciation of Rs.1,31,38,883/‐ had already been worked out without reducing the claim in hand. Further, as per the ld. CIT(A), the said claim of Rs.1,31,38,883/‐ had already been allowed by the ld. AO. Therefore, treating it as a case of double deduction i.e. u/s. 32(1)(iii) as well as depreciation claimed under the I. T. Rules, the same was held by the ld. CIT(A) to be impermissible as a case of double deduction. In this view of the matter that the assessee has raised the instant ground.
13. We have heard the ld. AR as well as the ld. DR.
The ld. AR appearing for the assessee has vehemently contended that since the claim in hand related to deduction admissible u/s.32(1)(iii) of the Act as a result of loss, damage and 8 ITA Nos.3623 & 3496/Mum/2010 Athena Drug Delivery Solutions P.Ltd.
destruction of the assets, therefore, authorities below should have entertained the claim. Therefore, he prayed that impugned order be set aside.
On the other hand, the ld. DR appearing for the Revenue has vehemently contended that double deduction is not admissible under the provisions of the Act as well as the Rules. Once the AO has already accepted the claim under the I.T. Rules treating the assets as a block, the claim regarding the same very assets under a different head is not allowable. Therefore, he defended the action of the lower authorities.
14. After hearing both the ld. AR as well as the ld. DR qua the instant issue, we are of the opinion that once the assessee itself has been successful in raising depreciation claim under the Rules, by resorting to written down value of the assets in block in the relevant period, it cannot be allowed to turn around and raise the ground of damage, loss of same very assets. The ld. lower authorities have already entertained the claim of the assessee in claiming depreciation. Before us, the ld. AR. has not been able to point out any illegality or infirmity in the impugned findings. So we reject this ground.
Ground no.2:
15. The assessee had earned Rs.37,64,820/‐ by way of interest accrued on surplus business funds transferred to Parallel Flexible Deposit Sweet take Account. However, the ld. AO treated the said amount as 'income from other sources' as the assessee had credited in P & L account. The ld. AO held that the said amount is not part of the business income because earning interest from the surplus funds is not the assessee's business.
Similarly, in appeal preferred by the assessee, the ld. CIT(A) in para 6.3 of the impugned order held that interest in hand earned from deployment of surplus fund not required for running the business is not 'business income' as there exists no nexus between the 'business' and the amount claimed because the amount in hand had not accrued from business. Therefore, the assessee has raised the instant ground.
9 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
In support of the ground, the ld. AR submitted that the said amount is not in the nature of fixed deposits but it is parallel flexible deposit sweet take account. Since the interest from the said amount could not have been utilized, therefore, the amount in question was kept in the said account. In his opinion, as it is suggested by the name itself, 'flexible' does not mean 'fixed'. In support of the abovesaid submission, he also relied on 308 ITR 356. He prayed for acceptance of ground.
On the other hand, the ld. DR defended the orders of the ld. lower authorities. As per his submission, since the assessee has earned interest which is not on account of business activity, therefore, in his opinion, the said amount does not form part of the business income. Hence rightly treated as 'income from other sources' by lower authorities.
16. After haring both the ld. Representatives, we are of the opinion that admittedly the assessee has invested surplus business funds in account which is named as 'parallel flexible deposit sweet take account'. The same has resulted in accrual of interest. Going by the intention of the assessee, it is clear that while depositing the said amount, earning of interest income in hand was also a consideration. Had it been otherwise, the assessee would have deposited the amount in the current account scheme of Bank which would result in interest income to the extent that the abovesaid account has resulted. Once from the intention of the assessee it is clear that it has planned to earn interest which ultimately resulted in interest income, we are unable to accept the contention of the ld. AR. Although as far as case law is concerned, we are in agreement with the ruling cited by the ld. AR. However, in our considered opinion, the same is not applicable qua the peculiar facts and circumstances of the instant case. Hence, this ground of the assessee also fails. Rejected.
17. Accordingly, so far as the appeal bearing ITA No.3496/Mum/2010 filed by the Revenue is concerned, ground no. 1 is allowed. Ground nos.2 & 3 are allowed for statistical purposes. Further, in view of our above discussion, appeal bearing ITA No.3623/Mum/2010 preferred by the assessee is hereby dismissed.
10 ITA Nos.3623 & 3496/Mum/2010
Athena Drug Delivery Solutions P.Ltd.
Order pronounced on the 4th day of April, 2012.
Sd/‐ Sd/‐ (P.M. JAGTAP) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: 4th April, 2012. Rasika Copy to : 1. Department. 2.Assessee. 3 CIT(A)‐21,Mumbai. 4 CIT, MC‐X,Mumbai. 5.DR,"J" Bench,Mumbai. 6.Master file. (TRUE COPY) BY ORDER, Asst. Registrar, ITAT, Mumbai.