Income Tax Appellate Tribunal - Chennai
Ttk Health Care Limited, Chennai vs Department Of Income Tax on 8 June, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'C' : CHENNAI
[BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND
SHRI HARI OM MARATHA, JUDICIAL MEMBER]
I.T.A Nos. 1388 & 1389/Mds/2009
Assessment years : 2001-02 and 2002-03
The Dy. CIT vs M/s TTK Health Care Ltd
Company Circle III(4) 6, Cathedral Road
Chennai Chennai 600 086
[PAN - AABCIT3312J]
(Appellant) (Respondent)
Appellant by : Shri Tapas Kumar Dutta
Respondent by : Shri R.Vijayaraghavan
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
These are two appeals by the Revenue, for assessment years 2001-02 and 2002-03. For the sake of convenience and brevity, we proceed to decide them by a common order.
I.T.A.No. 1388/Mds/2009 A.Y 2001-02
2. In this appeal filed by the Revenue against the order of the ld. CIT(A) dated 8.6.2009, two issues have been raised. The first issue relates to deletion of disallowance of advertisement expenses of `1,13,79,438/-.
:- 2 -: ITA 1388&1389/09
3. The facts of the case are that the Assessing Officer has disallowed advertisement expenditure of `1,13,79,438/-. In the computation statement of returned of income, the assessee has added ` 12,64,381/-, being the advertisement expenditure claimed fully in the previous year, but debited in the books of account in the current year which has now been reversed. It was verified from ITMR 2000-01 that the amount claimed as advertisement expenditure was `1,26,43,819/- and not ` 12,64,381/- as stated by the assessee. In view of the above position, the amount to be added to the total income on account of this reason, worked to `1,13,79,438/-. Against this proposed addition, the assessee has made the following submission:
( ` in lakhs) Actual expenses Treatment in Books of A/cs Advertisement 189.66 63.22 expenses treated as expenditure (in books A.Y 2000-
01)
Treated as 126.44
deferred revenue
(in the books of
account for A.Y
2000-01)
Amount claimed in 126.44
income tax
memo(189.66 -
63.22 lakhs)
(Pertaining to A.Y
2000-01
expenses)
:- 3 -: ITA 1388&1389/09
Deferred revenue 12.64
expenses
considered in
books
(18.66/5x(75.86-
63.33)
Amount reversed 12.64
in income tax
memo
4.3 In response to the assessee's reply the Assessing Officer has stated that "However the issues has been examined with the details furnished by the assessee. The assessee claimed advertisement expenses in dual manner. Some expenditure have been claimed for the purpose of maintaining books and entirely different amount of expenditure was claimed for the purpose of income tax. There is no basis for treating some of the advertisement expenditure as deferred revenue expenditure. The assessee states that deferred revenue expenses considered in books (189.66/5 x 2 (75.86-63.22) being ` 12. 64 Lakhs. This has been stated as treatment in books of accounts and it was reversed in income tax Memo. The assessee could not provide any rationale for adopting the above ratio. In view of the above position the contention of the assessee does not deserve acceptance. As the asssessee has not explained its claim fully amount to be added to the total income of the assessee on account of the above is `1,26,43,819/-. But the assessee has added back only ` 12,64,381/-. Hence the difference amount of `1,13,79,438/- is added to the income. "
4. The ld. CIT(A) has deleted this entire amount. Now, the Revenue is in appeal.
5. We have heard the rival submissions and have carefully perused the entire evidence available on record. It was argued by the ld.DR that for giving relief of ` 1,13,79,438/-, the ld. CIT(A) has relied on additional evidence submitted for the first time before him. The ld. CIT(A) has not given opportunity of hearing to the Assessing Officer against this additional evidence. A ground has been taken that these :- 4 -: ITA 1388&1389/09 evidences cannot be relied unless the procedure provided under Rule 46A of the Income-tax Rules is followed. In our considered opinion, when additional evidence has to be relied to while giving relief to a party, the other party has a right to confront the additional evidence. The ld. CIT(A) has not followed the procedure as laid down in Rule 46A whereby the other party has to be given opportunity of hearing. Hence, we restore this issue to the file of the Assessing Officer so that he may verify the same before coming to any conclusion.
6. The second issue of this appeal relates to setting off of carry forward loss and depreciation. The ld. CIT(A) has restored this issue to the file of the Assessing Officer to determine the correct quantum of brought forward loss and allow the same as per law. We do not find that this issue can give grievance to the Department. The first appellate authority as only set aside the issue to the file of the Assessing Officer to determine the correct quantum of carry forward loss and has also directed to allow the same. In that way of the matter, the Revenue cannot be said to be aggrieved. Hence, we do not find any reason to interfere in this finding of the ld. CIT(A).
7. In the result, the appeal of the Revenue for assessment year 20001-02 is partly allowed for statistical purposes. :- 5 -: ITA 1388&1389/09 I.T.A.No. 1389/Mds/2009 A.Y 2002-03
8. This appeal is directed against the order of the ld. CIT(A) dated 9.6.2009.
9. The first issue taken vide ground No.2 of this appeal is regarding bad debt written off amounting to `5,69,40,649/-. In the statement filed alongwith the return of income, the assessee has claimed this amount as bad debt. The Assessing Officer wanted the assessee to show that the debt has really become bad and any action taken on the part of the assessee to make recoveries of these debts but it is a fact that the amount has been written off as per the requirement of law. The ld. CIT(A) has agreed with the claim of the assessee because the assessee has written off the bad debt in its books of account as per the requirement of law and the issue now stands covered in favour of the assessee by the decision of Hon'ble Supreme Court rendered in the case of CIT vs TRF Ltd, 323 ITR 397. We have examined the records and have gone through this decision. The Hon'ble Apex Court has held in this case as under:
"This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt :- 6 -: ITA 1388&1389/09 has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaking by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above mentioned aspect only and that too only to the extent of the write off."
10. Therefore, in view of the above decision of Hon'ble Supreme Court, no such addition can be made by the Assessing Officer and the same has been correctly deleted by the ld. CIT(A).
11. The next issue raised in this assessment year vide Ground No.3 is regarding carry forward of losses and depreciation consequent to the merger of M/s TTK Medical Devices Ltd with the assessee. The case of the assessee in this regard is as under:
"TTK Medical Devices got merged with TTK Healthcare Ltd with effect from 1.10.2001 based on the approval by the Hon'ble High Courts of Mumbai & Chennai.
Pursuant to merger, the Carry Forward benefits amounting to `22.25 Crores pertaining to TTK Medical Devices Ltd have been taken over by TTK Healthcare Limited (appellant company).
The following conditions have to be fulfilled by the amalgamated company u/s. 72A read with Rule 9C to avail the above Carry Forward Losses:-:- 7 -: ITA 1388&1389/09
Conditions under section.72A(2):
Y-1 Y-2 Y-3 Y-4 Y-5
i) Holds continuously for Fulfilled Fulfilled Fulfilled Fulfilled Fulfilled
a minimum period of
five years from the date
of amalgamation at
least three-fourths in
the value of assets of
the amalgamating
company acquired in a
scheme of
amalgamation;
ii) Continues the business Fulfilled Fulfilled Fulfilled Fulfilled Fulfilled
of the amalgamating
company for a
minimum period of five
years from the date of
amalgamation.
iii) Fulfills such other Refer conditions under Rule 9C
conditions as may be
prescribed to ensure
the revival of the
business of the
amalgamating
company or to ensure
that the amalgamation
is for genuine business
purpose.
Conditions under Rule 9C:
Y1 Y2 Y3 Y4 Y5
a) The amalgamated 50% level of production to be Fulfilled for Production
th
company, owning an achieved before the end of 4 some of of 50% of
industrial undertaking of year. No mandatory the the
the amalgamating requirement for achieving the products installed
level of production in the first capacity
company by way of
three years could not
amalgation, shall achieve be
the level of production of maintained
atleast fifty percent of the
installed capacity of the
said undertaking before
the end of four years
from the date of
amalgamating and
continue to maintain the
said minimum level of
production till the end of
five years from the date
:- 8 -: ITA 1388&1389/09
of amalgamation;
Provided that the Central Application made to CBDT Government, on an application made by the amalgamated company, may relax the condition of achieving the level of production or the period during which the same is to be achieved or both in suitable cases having regard to the genuine efforts made by the amalgamated company to attain the prescribed level of production and the circumstances prevailing such efforts from achieving the same.
b) The amalgamated Fulfilled. Copy of Form 62 company shall furnish to filed the Assessing Officer a certificate Form No.62, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, along with the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within five years from the date of amalgamation.
Production details:
PRODUCTION Product Installed 2001-02 2002-03 2003-04 2004-05 2005-06 Capacity Blood 9 22.32 31.96 1601 5.07 -
Million Million Million Million Million Lancets Pieces Pieces Pieces Pieces pieces Foley 900000 876649 1491613 842869 665505 -
Units Units Units Units Units
:- 9 -: ITA 1388&1389/09
Catheters
Urine
Bags 600000 87190 474970 88740 105211 -
Units Units Units Units Units
Blood
Bags 480000 - - - - -
Units
Sutures 165000 47931 23368 - - -
Dozens Dozens Dozens
As per Rule 9C Clause(a) the amalgamating company by way of amalgamation shall achieve atleast 50% level of production of installed capacity before the end of 4th year and maintain the same till the end of 5th year.
As per this clause, the amalgamated company is required to achieve 50% level of production only by the end of 4th year and is required to maintain this level of production till the end of 5th year. Further, as per this clause, there is no requirement for achieving 50% level of production during the first three years.
As per section 72A(3) In a case where any of the conditions laid down in sub- section(2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.
From the above, it is clear that there is no mandatory requirement for achieving the level of production in the first year itself and the test starts only in the fourth year.
As the assessee could not fulfill one of the condition under Rule 9C i.e. maintaining 50% level of production during the 5th year, the assessee has made an application to CBDT. Subsequently a Review Petition has been filed with CBDT. The matter is pending at their end.
Thus for the Assessment Year in appeal (2002-2003) the appellant has satisfied all the requirements of Sec. 72A and Rule 9C and therefore the Carry Forward Loss/ Unabsorbed Depreciation of the amalgamating company should be allowed to be taken over by the amalgamated company.
As per Sec. 72A(3) the compliance/ non compliance of the conditions have to I be seen every year and only in the year in which the conditions are not I complied with the Carry Forward Loss/ Unabsorbed Depreciation already set off earlier will be treated as income.:- 10 -: ITA 1388&1389/09
Further in a similar case in the previous year CIT (A) vide his order dated 25.11.2008 has allowed such Carry Forward Losses pertaining to the amalgamating company TTK Biomed Ltd in the hands of the amalgamated company TTKHCL. "
12. Admittedly, this issue has been decided by the Tribunal in the assessee's own case vide its order dated 16.7.2010 passed in I.T.A.No. 369/Mds/09 for assessment year 2000-01 on the basis of which the ld. CIT(A) has granted relief to the assessee. In this regard, para 22 and 23 of the Tribunal's order are being extracted herein below for ready reference:
"22. Coming to the fourth issue being against the set off of the unabsorbed business loss and carry forward of depreciation relating to the business of TTK Biomed Ltd. it is noticed that the assessee has challenged that section 72 has been considered and section72A has not been invoked by the AO. A perusal of the issues raised by the AO does not show that the AO has considered only section 72 and not 72A. However, when deciding the issue in page 6 the AO has considered only section
72. Further the CIT(A) has considered section72A. Undisputably, the amalgamation of TTK Biomed Ltd. with the assessee company has taken place on 1.7.1999. In 2000 the assessee along with M/s. TTK Biomed and London International Group (LIG) has entered into non-compete agreement whereby both TTK Biomed Ltd. and the assessee has agreed to discontinue the business of manufacture and marketing of rubber contraceptives. This information has not been brought to the attention of the AO while filing its returns. In these circumstances can it be said that the assessee has truly and fully disclosed all material facts necessary for its assessment? The answer would an emphatic "No". Entering into an agreement for non-compete business is in the realm of knowledge of the assessee. The assessee very well knew that after amalgamation the assessee would not be continuing the business of TTK Biomed Ltd. that is being taken over. The intention of the assessee to discontinue the business of manufacture of rubber contraceptives which was being done by TTK Biomed is very clear from the agreement itself. Thus at the time of amalgamation itself the assessee knew that it would be :- 11 -: ITA 1388&1389/09 violating the provisions of Rule 9C of the Income-tax Rules, 1962 which would disentitle the assessee for the carried forward and set off of the business loss in respect of TTKL Biomed Ltd. due to the applicability of section 72A. The assessee also very well knew that it has violated the provisions of Rule 9C of the I.T. Rules insofar as on 29-03-2005 the assessee has approached the CBDT with the request for waiver of the conditions under Rule 9C of the I.T.Rules/72A of the I.T.Act and this was also rejected by the CBDT. After the issue of notice u/s.148 on 29.3.2007 the assessee had requested that the return originally filed may be considered as the return in response to the 148 notice after knowing fully well that it had made the request to the CBDT for the waiver of the condition imposed under Rule 9C of the I.T. Rules read with section 72A of the I.T.Act. The fact that the assessee has made the application to the CBDT for the waiver clearly shows that all the material facts necessary for the assessment were not truly and fully placed before the AO in the course of original assessment or in the return originally filed. In the circumstances, the reopening on this count would be valid even though 4 year period has expired on account of the applicability of the proviso to section147. A perusal of the chart as extracted in the order of the learned CIT(A) in page 18 shows as under :
____________________________________________________ "Production Details - Surgeons Gloves:
Period Installed capacity Actual Prodn. Capacity
In Million Pcs In Million Pcs
July-99 to June-00 30.00 10.14
July-00 to June-01 30.00 14.87
July-01 to June-02 30.00 17.85
July-02 to June-03 30.00 19.96
July-03 to June-04 30.00 2.54"
____________________________________________________ A perusal of the provisions of section 72A read with Rule 9C clearly shows that the 5 years from the date of amalgamation as mentioned in section 72A(2)(iii) is the assessment years. This is because Rule 9C(b) specifies that the amalgamated company shall furnish to the AO a certificate in Form No. 62 duly verified by an Accountant with reference to the books of accounts and other documents showing particulars of production along with the return of income for the assessment years relevant to the previous years during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within 5 years from the date of amalgamation. Thus the chart as produced before the CIT(A) itself is not correct. Even according to the chart as produced before the learned CIT(A) in the years 1,2 and 5 the assessee has failed to attain the necessary 50% level of production and :- 12 -: ITA 1388&1389/09 only for the years 3 and 4 the assessee has attained such level of production. However, if the chart is prepared considering each of the assessment years as provided in Rule 9C there would be a failure in all 5 years. Coming to the argument that the set off should be allowed in the first year and only if there is a failure at the end of the 5 years, the set off should be reversed, we feel that such a view is not possible insofar as the Act has not provided that the 50% production is to be attained within 5 years. It provides that it should have attained the 50% minimum production for every year for 5 years. In any case, this need not be looked at here in this case insofar as, as mentioned earlier, the assessee has expressed its intention to discontinue the business conducted by TTK Biomed Ltd. in the initial years itself by entering into the agreement with LIG. Further it is in any case noticed that in the first year the assessee has failed to attain the requisite 50% production and the assessee has failed to comply with the provisions of section 72A of the I.T.Act read with Rule 9C of the I.T. Rules and consequently the assessee would not be entitled to the carried forward and set off of the depreciation and business losses. In the circumstances, the finding of the learned CIT(A) on this issue stands reversed and that of the AO restored. Thus ground Nos. 2.1, 2.2 and 3.3 of the Revenue's appeal stand allowed.
23. In regard to the submission that the unabsorbed depreciation was liable to be added to the written down value and depreciation granted thereon by following the decision of the Madras High Court in the case of CIT v.
Silical Metallurgic Ltd., referred to supra, it is noticed from the agreement entered into by the assessee with London International Group (LIG) that the assessee has agreed in para 6 of the said agreement that the equipment relating to the manufacture of the rubber contraceptives lying with TTK Biomed Ltd. shall be dismantled and rendered unsuable for manufacture of rubber contraceptives and at the option of LIG the equipment may be sold/transferred to LIG or any of their associates at the valuation which will not exceed inter company debt between TTK-LIG and BIOMED at the date of the agreement and which debt shall be extinguished to that extent. Thus the assessee has not used any of the equipment in respect of the rubber contraceptives manufacturing process of TTK Biomed Ltd. The assessee has also not placed before us any evidence to show that such machinery had continued to be used in respect of the manufacture of rubber contraceptives. Here it may also be mentioned that the chart, which has been referred to earlier and which has been extracted from the :- 13 -: ITA 1388&1389/09 order of the learned CIT(A) from page 18 of his order, is in respect of the production details of surgeons gloves and not in respect of rubber contraceptives. Thus the assessee has practically stopped the production of rubber contraceptives and has failed to attain the requisite minimum production of surgeons gloves also. In these circumstances it is found that the said decision would not be applicable."
13. By respectfully following the above order of the Tribunal, we cannot allow this ground of the Revenue.
14. In the result, the appeal of the Revenue for assessment year 2002-03 is partly allowed.
15. To summarize the result, the appeal of the Revenue for assessment year 2001-02 is partly allowed for statistical purposes and that of assessment year 2002-03 is partly allowed.
Order pronounced in the open court on 5.5.2011.
Sd/- Sd/-
(DR. O.K. NARAYANAN) (HARI OM MARATHA)
VICE-PRESIDENT JUDICIAL MEMBER
Dated: 5th May, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR