Income Tax Appellate Tribunal - Ahmedabad
Torrent Pharmaceuticals Ltd.,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A "
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER And
SHRI MAHAVIR SINGH, JUDICIAL MEMBER
Date of hearing: 10.05.10 Drafted on: 10.05.10
ITA No.970/AHD/2007
Assessment Year : 2003-2004
Torrent Vs. ACIT,
Pharmaceuticals Ltd., Circle-8,
Torrent House, Nr. Ahmedabad.
Dinesh Hall, Ashram
Road, Ahmedabad.
PAN/GIR No. : AAACT5456A
(APPELLANT) .. (RESPONDENT)
ITA No.1347/AHD/2007
Assessment Year : 2003-2004
DCIT, Vs. Torrent Pharmaceuticals
Circle-8, Ltd.,
Ahmedabad. Torrent House, Nr. Dinesh
Hall, Ashram Road,
Ahmedabad.
PAN/GIR No. : AAACT5456A
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri S.N.Soparkar &
P.M.Mehta Adv.
Respondent by: Shri Rajeev Agarwal CIT
D.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
These are the Cross appeals filed by the Assessee and revenue against the order of the Learned Commissioner of Income Tax(Appeals)-XIV, Ahmedabad, dated 22.12.2006.
-2- ITA No.970/Ahd/2007 Appeal of the assessee2. Ground No.1 of the appeal of the assessee and ground no.2 of the appeal of the revenue reads as under:-
1. In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has grossly erred in upholding disallowance of component of weighted deduction u/s. 35(2AB) of Rs.79.34 lacs for professional fees.
The Hon. Tribunal may, therefore, be pleased to hold that there is no justification in holding that the professional fees and other expenses would not be eligible for weighted deduction u/s.35(2AB) and direct the Assessing Officer accordingly to delete such disallowance.
2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of weighted deduction u/s.35(2AB) of the Act in respect of Municipal taxes (Rs.2.25 lakhs) and Salary to Dr. Dutt. (Rs.77.74 lakhs) (Relief Rs.39,99,500/-"
3. The brief facts of the case are that the Learned Assessing Officer disallowed weighted deduction on R & D expenditure of Rs.1,03,35,000/- on the ground that the prescribed authority has not considered the following items to be eligible for weighted deduction:
Rs. In lac
1. Recurring Expenditure 46.64 (Building related)
2. Recurring Expenditure (Other than building)
i) Municipal Taxes 2.25
ii) Professional fees 79.34
iii) Salary to Dr. C.Dutt 77.74
iv) Unexplained 0.42 160.05 He therefore, following the same added back Rs.103.05 lacs being weighted components of the said expenditure.-3-
4. In appeal, the Learned Commissioner of Income Tax(Appeals) following its order for Assessment Year 2001-02 dated 28.09.2004 granted relief of weighted deduction for municipal taxes, salary of Dr. C.Dutta and recurring expenditure on building but did not allow weighted deduction on professional fees of Rs.79.34 lacs observing that the same is not eligible to weighted deduction.
5. The Learned Authorised Representative of the assessee by filing copy of order of the Tribunal in assessee's own case for Assessment Year 2001-02 in ITA No.3569/Ahd/2004 submitted that the issue is now covered in favour of the assessee by said order of the Tribunal.
6. The Learned Departmental Representative also agreed with this submission of the Learned Authorised Representative of the assessee.
7. We have heard the rival submissions and perused the materials available on record. We find that similar issue of disallowance of weighting deduction on professional fee under section 35(2AB) was considered by the Tribunal in the assessee's own case in Assessment Year 2001-02 wherein the Tribunal allowed weighted deduction on professional fees by observing as under:-
"6. The Revenue has raised the following ground No.2:-
". The Ld. CIT(A) has erred in law and on facts in directing to exclude only Rs.48 lacs for professional fees and garden expenses of Rs.6.93 lacs for the computation of deduction u/s.235(2AB) instead of Rs.1,71,47,000/- as done by the A.O."-4-
Whereas the assessee has raised the following ground No.1 in C.O.:-
"1. In law and in the fats as well as circumstances of the respondent's case the learned CIT(A) has grossly erred in holding while disposing of the ground regarding the disallowance of Rs.85,73,500 as inadmissible weighted deduction u/s.35(2AB) that the expenditure of Rs.48,00,000 being professional fees and Rs.6,93,000 (the correct figure should be Rs.9,44,000) being garden expenses are not related to the research activity and, therefore, the respondent would not be entitled to a further deduction of 50% thereon u/s.35(2AB) of the I.T. Act when he ought to have held that the respondent is entitled to such deduction even on the aforesaid expenses. The Hon'ble Tribunal may, therefore, be pleased to hold that there is no justification in holding that the professional expenses and garden expenses would not be covered for the purpose of weighted deduction u/s.35(2AB) of the I.T. Act and direct the Assessing Officer to delete the disallowance referable to such expenses."
7. The brief facts leading to the above common issue are that the assessee claimed weighted deduction u/s.35(2AB) of the Act amounting to Rs.31,86,54,942/-. The Assessing Officer stated that for this deduction, the approval in Form No CM is required from Secretary Department of Science and Industrial Research (DSIR in short). Before the Assessing Officer the assessee submitted the agreement for research in Form No.3CL and filed the approval for the facility of in-house research in Form No.3CL. The assessee also filed the approval in Form No. 3CL giving the details of expenditure to be allowed for the purpose of deduction u/s.35(2AB) of the Act for the relevant assessment year. According to the Assessing Officer, the date of approval in Form No.3CL is 23-01-2004 and the assessee has filed its copy of letter sent by DSIR to DG (Income-tax Exempt) Kolkata, dated 27-01-2004. The assessee submitted the total break up of expenditure allowed as per Form No.3CL as under:-
(Rs. in lacs) A.Y. 2001-02
i) Capital Expenditure Land: Nil -5- Building 4 9.92
ii) Capital Expenditure Other than Land & Building 178.61
iii) Recurring Expenditure (Building related) 37.55
iv) Recurring Expenditure (Other than building) 1723.02
v) Total cost of In-house research facility excluding land & Building 1901.63
vi) Total cost of In-house research facility including land & Building 1989.10
vii) Expenses related to clinical trials outside the approved facility not 51.26 included in the above According to the Assessing Officer the assessee claimed expenditure for R & D as under:-
"(1) Revenue expenses Rs.19,45,75,518/- (2) Capital expenditure (Other than bldg.) Rs. 1,78,61,110/-
Rs.21,24,36,628/-
"But DSIR in Form No.3CL allowed as under:-
"(1) Revenue expenses Rs.19,45,75,518/-
Less: Disallowed by DSIR
(1) Bldg. repairs Rs. 37,55,000/-
(2) Other revenue exp. Rs.1,33,92,000/-
Rs. 1,71,47,000/-
Rs.17,74,28,518/-
(2) Capital expenditure (Other than bldg.) Rs. 1,78,61,110/-
Rs.19,52,89,628/-
"Whereas the Assessing Officer finally disallowed as under:-
(1) Allowable @ 150% on Rs.19,52,89,628/- Rs.29,29,34,442/-
Allowable @ 100% on Rs.1,71,47,000/- Rs. 1,71,47,000/-
Rs.31,00,81,442/-
(2) Claimed Rs.31,86,54,942/-
Rs. 85,73,500/-
(Addition of Rs.86,73,500/-)"
Aggrieved, the assessee preferred appeal before CIT(A), who confirmed the exclusion of Rs.48 lakhs on account of -6- professional fee paid to Dr. C Dutt as well as garden expenses of Rs.6.93 lakhs and allowed the balance deduction by holding in para-5.3 of his appellate order as under:-
"5.3 I have considered the above submissions and the assessment order. On perusal of the nature of expenditure is on market research, sales promotion quality control testing commercial production style change or routine data collection. Therefore the disallowance of the above expenditure made by the assessing officer only on the basis of the report of the prescribed authority was not justified. What is to be seen by the AO is the nature of expenditure. Therefore I consider this ground for disposal on merits. On perusal of the nature of expenditure it is seen that except for professional fees of Rs.48 lacs - and garden expense of Rs.6.93 lacs the other expense are not of the nature referred to above or like. The professional fees are in connection with patent to be registered overseas and hence it would be covered by the nature of expenses covered above. Garden expense has no relation with the research activity. Therefore, I hold that the A.O was justified in excluding these two expenses in granting deduction u/s.35(AB). However, he is directed to allow deduction in respect of the other deductions. This ground is accordingly partly allowed."
8. Before us Ld. CIT Departmental Representative relied on the assessment order and stated that the Assessing Officer has rightly allowed the weighted deduction at 100% on 1,71,47,000/- on the amount of building repairs and other revenue expenses. Accordingly, he supported the orders of the Assessing Officer. On the other hand Ld. Counsel for the assessee carried us to assessee's paper book at page 127 and 128 and narrated the facts as given as under:-
Financial Year - 2001-02 (Rs.In lac) Sr. Claimed Granted Disallowed
(i) Capital Expenditure: NIL NIL 0.00 Land:- 49.92 49.92 0.00 Building -7-
(ii) Capital Expenditure 178.61 178.61 00 (other than land & building)
(iii) Recurring Expenditure 37.55 -- 37.55 (other than building)
(iv) Recurring Expenditure (other 1856.94 1723.02 133.92 than building)
(v) Total cost of In-
house research 2073.10 1901.63 --
facility excluding
land & building
(vi) Total cost of In-
house 2123.02 1989.10 --
Research facility
including land &
building
(vii) Expenses related
to clinical trials
outside the 51.26 51.26 --
approved facility
not included in the
above
The Ld. counsel for the assessee also co-relate the expenditure disallowed as under:-
Rs.in Lac.
1. Recurring Expenditure - 37.55 (Building related)
2. Recurring Expenditure:
(other than building)
i) Security expenses 11.01
ii) Gardening expenses 9.44
iii) Municipal Tax 6.93
iv) Professional Fees 48.00
v) Salary to Dr. C. Dutt 58.54 133.92 133.92 171.47 -8- And further stated that as per provisions of section 35(2AB) the assessee is entitled to weighted deduction for the following expenditure:-
Rs. In lac
i) Capital expenditure (other than land & building) 178.61
ii) Revenue expenditure relating to 37.55 building
iii) Recurring expenditure i.e. revenue expenditu9re (other than 1856.94 building)
iv) Expenses related to clinical trials outside the approved facility not 51.26 included in the above expenditure.
2124.36
v) Actual weighted deduction at 1.1/2 times of the eligible 3186.54 expenditure above referred to of Rs.2124.36 lacs.
In view of the above facts and figure, the Ld. counsel for the assessee stated that the weighted deduction should be allowed to the assessee as per the provisions of Section 35(2AB) of the Act.
9. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the prescribed authority has separately indicated Rs.51.26 lacs for the clinical trials and as per the explanation to the sec. 35(2AB) the assessee incurring expenditure on scientific research & development in relation to drugs and pharmaceuticals, shall be granted expenditure incurred on clinical drug trials. Accordingly, we find that the sum of Rs.51.26 lacs in eligible expenditure as the prescribed authority has disallowed sum of Rs.37.55 lacs revenue expenditure relating to Building and sum of Rs.133.92 lacs from the revenue expenditure other than Building. As per the break up given above we find that the assessee is entitled to weighted deduction of sum of Rs.37.55 lacs and Rs.133.92 lacs -9- in view of the following explanations submitted before the lower authorities :-
"Section 35(2AB) grants weighted deduction for any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research & development facility as approved by the prescribed authority. What is excluded is cost of land & building and not the recurring expenditure related to building that is repairs and renovation of buildings, therefore, assessee is entitled to weighted deduction for repairs of Rs.37.55 lacs related to buildings. Similarly, Municipal Tax paid of Rs.6.93 lacs is entirely related to Buildings wherein in-house research activity is carried on. It is only municipal tax of R & D Centre, Bhatt, hence like current repairs, it is eligible for weighted deduction u/s.35(2AB). So far as security expenses of Rs.11.01 lacs is concerned, it is submitted that in-house research activity requires proper tight security to avoid leakage through visitors, and only in-house staff will have access to the said Building and no others, and to preserve research which is completed but its clinical trial is pending. Considering all these factors, security expenses of Rs.11.01 lacs is eligible for weighted deduction u/s.35(2AB).
So far as gardening expenses of Rs.9.44 lacs, it is submitted as under:-
The company has a dedicated research centre where extensive research is carried out. The company has a very composite R & D facility. The company is conscious of the environmental issues and has put up effluent treatment plant (costs approx. Rs.36 lacs.). As is widely accepted the vegetation particularly the trees help contain the pollution resulting from the release of pollutants (including gases). So the trees and plants become an integral part of the research centre. Once having accepted this position any expenditure incurred on gardening should be fully allowed under the provisions of section 35(2AB) of the Income Tax Act. In this connection, we would like to add that the Gujarat Pollution Control Board has also directed that such trees and gardens should be developed and watered treated by the ETP should be utilized for a forestation purposes. Over and above this, good laboratory practices require that research centers should have green cover so that
- 10 -
pollution levels (including dust) are eliminated. Since the object of the assessee company is to have a world class R & D center such gardens (and therefore the gardening expenses) become a necessary.
In respect of salary of Rs.58.54 lacs paid to Dr. C. Dutt, he is in-Charge of Research & Development Centre at Bhatt. Through him only, entire in-house research activity is carried on by the assessee. He is the person through whom all co- ordination of the technical scientists and other technical persons is carried out and smooth functioning is carried out in various research activities. To convey and for reporting of entire research activity to the management he has been taken to the Board of Directors by the assessee-company. Therefore, salary paid to Dr. C. Dutt is eligible for weighted deduction u/s.35(2AB). When section speaks of any expenditure, there is no justification to exclude the expenditure of Rs.133.92 lacs as done by the prescribed authority. The assessee is eligible for weighted deduction on the entire expenditure of Rs.2124.36 lac, as claimed above."
10. In view of the above facts and circumstances, we are of the view that it is only the expenditure which will only be allowed, whereas the assessee vide the copy of the letter reproduced hereinabove has very clearly explained as to how the entire expenditure claimed by the assessee is allowable. Thus there was no justification in harping upon the figure contained in Form No.3CL as is done by the Assessing Officer. The provisions of the Act it does not contain any specific conditions for the allowance of expenditure to the effect that it will be restricted that contained in Form No.3CL. Needless to point out that such allowable expenditure etc. is reported by the DSIR to DG (Income-tax Exemption), Kolkata without giving an opportunity of being heard to the assessee wherever he quantifies the expenditure which is less than that claimed by the assessee. We further find that the assessee has included a sum of Rs.51.26 lakhs as eligible expenditure being Revenue expenditure relating to building and another sum of Rs.133.92 lakhs being revenue expenditure other than building, which was considered as revenue by the assessing officer himself. These items clearly are within the purview of allowable u/s 35(2AB) of the Act as weighted deduction. The security
- 11 -
expenses are also directly related to in-house research as proper security is required to avoid leakage and only in-house staff will have assessed to building. Accordingly, this expenditure are for preserving the research which is completed and its clinical trial is pending. As regards to the environmental issue, the assessee-company has set up an affluent plant and as is widely accepted the vegetation, i.e. trees have contained the pollution. This expenditure of gardening and plantation have been done for the perseverance of environment and this is directly related to R & D facilities. As regards to salary paid to Dr. C.Dutt amounting to Rs.58.54 lakhs, he is in-charge of R & D Centre at Bhatt. He is the person through whom all co- ordination of technical scientists and other technical persons are carried out. The entire reporting of the research activity to the management has been taken to the Board of Directors through him only and for this the salary is paid. Accordingly, the assessee has rightly paid the entire expenditure of Rs.133.92 lakhs and building repairs Rs.37.55 lakhas on which weighted deduction u/s.35(2AB) of the Act is allowable. In view of the above discussion, we allow the claim of the assessee and this issue of the Revenue's appeal is dismissed and that of the assessee's CO is allowed."
8. Facts being identical to the facts of the assessee in Assessment Year 2001-02 and in absence of any distinguishing features, pointed out by the revenue, respectfully following the above quoted decision, we allow the ground of appeal of the assessee and dismiss the ground of appeal of the revenue.
9. Ground no.2 of the appeal of the assessee and ground no.6 of the appeal of the revenue reads as under:-
"2. In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has grossly erred in not accepting the erroneous contention that for quantification of deduction u/s. 80HHC, sales tax was not to be treated as part of total turnover."
6. The Ld. CIT(A) has further erred in law and on facts in directing to exclude the component of excise
- 12 -
duty from the total turnover for the purpose of computation of deduction u/s.80HHC."
10. Both the parties before us agreed that the issue is now covered against the assessee by the decision of Hon'ble Supreme court in the case of CIT Vs. Laxmi Machine Works (2007) 290 ITR 667(SC), wherein it was held that the excise duty and sales tax are not includible in "total turnover" in the formula contained in section 80HHC(3). Therefore, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed.
11. Ground no.3 of the appeal of the assessee reads as under:-
"3(a) In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has grossly erred u/s.80HHC by disallowing a sum of Rs.4,22,85,605 being income of DEPB licences during the relevant assessment year, treating it not as the income from business under the provisions of section 28(iiia), 28(iiib) and 28(iiic) of the Income Tax Act.
The Hon. Tribunal may, therefore, be pleased to hold and direct the Assessing Officer to allow deduction u/s.80HHC in respect of profit on sale of DEBP licneces.
(b) Without prejudice to the above, the Ld. CIT(A) has erred in fact, in law and in the circumstances of the case by holding that the appellant is not entitled to claim deduction u/s.
80HHC and DEPB income of Rs.4,22,85,605 by virtue of Taxation Laws (Amendment) Act, 2005, when no such disallowance is called for. It may kindly be deleted.
(c) Without prejudice to the above, the Ld.CIT(A) has erred to appreciate that as per the New Tax Laws (Amendment) Act, 2005 only profit on sale/transfer of DEPB licences are covered u/s.28(iiid) of the Act and not the amounts credited for such entitlements. The Ld.CIT(A) ought to have allowed
- 13 -
deduction u/s.80HHC for some of Rs.4,22,85,605 considering such fact."
12. The Learned Commissioner of Income Tax(Appeals) has decided this issue as under:-
"10. Ground no.8 is regarding not allowing deduction u/s 80HHC of the Act with reference to the DEPB income of Rs.4,22,85,605/-. The AO has not allowed deduction in respect of this item, whereas the appellant has submitted the deduction u/s.80HHC should allowed on DEPB receipt. I have considered the facts and I don't agree with the views of the appellant. As per the amended provisions of sec.80HHC, when the turnover exceeds Rs.10 Cr., deduction u/s.80HHC receipt is not available, unless the appellant fulfills the conditions specified therein. The appellant has not furnished any evidence, which shows that it satisfies all the conditions. Hence, the action of the A.O. is justified and the same is hereby upheld."
13. The Learned Authorised Representative of the assessee submitted that in view of the decision of the Special Bench of the Tribunal in the case of Topman Exports Vs. ITO (2009) 125 TTJ (Mumbai) (SB) 289, the matter should be restored back to the file of the Learned Assessing Officer to allow deduction under section 80HHC on profit from sale of DEBP.
14. The Learned Departmental Representative supported the order of the Learned Commissioner of Income Tax(Appeals).
15. We have heard the rival submissions and perused the materials available on record. The claim of disallowance under section 80HHC in respect of income from DEBP of Rs.4,22,85,605/-, was denied by the lower authorities to the assessee on the ground that
- 14 -
the additional conditions envisaged in the third proviso to section 80HHC(3) was not satisfied in the instant case.
16. The Learned Authorised Representative of the assessee before us, submitted that the issue is to be decided in accordance with the decision of the Mumbai Special Bench of the Tribunal in the case of Topman Exports (Supra).
17. We find that in the case of Topman Exports (Supra) it was held that income by way of receipt of DEBP and income by way of profit on sale of DEBP are two distinct and separate income. While income in respect of DEBP is the face value of the DEBP and the same is covered by clause (iiib) of section 28 whereas profit on sale of DEBP is only the element of profit i.e. sale price minus face value of DEBP and the same is covered by clause (iiid) of section 28 of the Act. On a reading of third proviso to sub-section (3) of section 80HHC, it is observed that the additional condition envisaged therein governs the income covered by clause (iiid) of section 28 and do not effect the income covered by clause (iiib) of section 28. It is also observed that no material could be brought before us by the assessee to show that it satisfied the conditions enumerated in the third proviso to section 80HHC (3) of the Act. On the above circumstances, in our considered view, the lower authorities were justified in denying the claim in respect of profit on sale of DEBP covered by clause (iiid) of section 28 of the Act. But in the instant case, from the materials available on record, it is not clear whether the whole amount of Rs.4,22,85,605/- is covered by clause (iiid) of section 28 or it also includes the amount which is covered by clause (iiib) of section 28
- 15 -
also. In the circumstances, in our considered opinion, it shall be in the interest of the justice to restore the issue back to the file of the Learned Assessing Officer for proper verification and thereafter, adjudicate the issue afresh in light of the observations made hereinabove after allowing sufficient opportunity of hearing to the assessee. We order accordingly. Thus, the ground of appeal of the assessee is allowed for statistical purposes.
18. Ground no.4 and 5 of the appeal reads as under:-
"4. In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has grossly erred in charging interest u/s. 234A, 234B and234CoftheAct. It may be deleted.
5. Without prejudice to ground No. 3 above, the CIT(A) has failed to appreciate that in view of the Circular issued by the CBDT while making amendment in section 28 and 80HHC(3) vide Tax Law Amendment Act, 2005 directed that no interest be charged u/s. 234A, 234B, etc on the demand on account of any disallowance made with reference to income of DEPB license."
19. We have heard the rival submissions and perused the materials available on record. In the instant case, the deduction claimed under section 80HHC was restricted to a lesser amount on account of profit on sale of DEBP by applying the law which was retrospectively amended by the Taxation Laws (Amendment) Act, 2005. As a consequence of the above demand was raised against the assessee and interest under section 234A, 234B and 234C was levied on the assessee by the Learned Assessing Officer.
20. On appeal, the Learned Commissioner of Income Tax(Appeals) has not allowed the claim of the assessee that interest
- 16 -
under section 234A, 234B and 234C should not be charged in respect of demand which was created as a consequence of retrospective amendment of law. We find that the issue is squarely covered by the decision of the Delhi Bench of the Tribunal in the case of Eastman Industries Ltd. Vs. DCIT (2007) 110 TTJ (Del) 798, wherein on the similar facts, the Tribunal by relying on the CBDT Circular No.2 of 2006 dated 17.01.2006 has held that the Learned Assessing Officer was not justified in charging interest under section 234B and 234D as a consequence of reduction in the claim of deduction under section 80HHC in view of the retrospective amendment of law by the Taxation Laws (Amendment) Act, 2005 with effect from 1.04.1998. We therefore, allow these grounds of appeals of the assessee and direct the Learned Assessing Officer not to charge interest in respect of the income which relates to the lesser grant of deduction under section 80HHC as a consequence to retrospective amendment brought by the Taxation Laws (Amendment) Act, 2005.
21. Ground no.6 of the appeal of the assessee reads as under:-
"6. In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has grossly erred in withdrawing interest U/S.244A amounting to Rs.28,18,963 in the notice of demand."
22. At the time of hearing, the Learned Authorised Representative of the assessee submitted that this ground of appeal of the assessee is not pressed as withdrawal of interest under section 244A would be consequential. Therefore, this ground of appeal is dismissed.
- 17 -
ITA No.1347/Ahd/2007 Revenue's appeal23. Ground no.1 of the appeal of the revenue reads as under:-
"1. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance out of selling, publicity and Medical literature Rs.10,11,85,625/-."
24. At the outset, we find that the Learned Assessing Officer made disallowance of Rs.19,11,85,625/- on account of selling publicity and medical literature which was deleted by the Learned Commissioner of Income Tax(Appeals). Thus, it is observed that the figure mentioned in the ground of appeal of the revenue is incorrect and the same should read as Rs.19,11,85,625/- .
25 The brief facts of the case are that the Learned Assessing Officer disallowed Rs.19,11,85,625/- on account of expenses on selling publicity and medical literature claimed by the assessee. On appeal, the Learned Commissioner of Income Tax (Appeals) following the order of the Tribunal in assessee's own case for Assessment Year 1990-91 and 1991-92 deleted the disallowance observing that the Ahmedabad Bench of the Tribunal in assessee's own case in Assessment Year 1990-91 and 1991-92 had decided this point in favour of the assessee. In subsequent years, including up to 2002-03, the Learned Commissioner of Income Tax(Appeals) has deleted the similar disallowance made from year to year. The Learned Assessing Officer has noted that in Assessment Year 1995- 96 on similar issue, the Department's appeal has not been allowed.
- 18 -
26. After hearing the rival submissions and perusing the orders of the lower authorities and the material available on record, we find that the disallowance made by the Learned Assessing Officer from out of expenditure on selling publicity and medical literature was deleted by the Learned Commissioner of Income Tax(Appeals) following the order of the Tribunal in assessee's own case for Assessment Years 1990-91 and 1991-92. The Learned Departmental Representative merely relied upon the order of the Learned Assessing Officer. He could not point out why the order of the Tribunal for Assessment Year 1990-91 and 1991-92 should not be followed in the present year of appeal. Hence, we do not find any good and justifiable reason to interfere with the order of the Learned Commissioner of Income Tax(Appeals) which is confirmed and the ground of appeal of the revenue is dismissed.
27. Ground no.3 of the appeal of the revenue reads as under:-
"3. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of garden expenses Rs.13,67,730/-."
28. The brief facts of the case are that the Learned Assessing Officer disallowed the expenses on garden on the ground that it was not related to manufacturing process. The assessee submitted that garden expenses were incurred for maintaining good atmosphere within the factory premises. It was helpful in controlling pollution arising from chemical process. Further, garden expenses improve the working condition and thus, this is for the purpose of business and the Learned Assessing Officer wrongly tried to link it with process of production. It was further submitted that it has been held in the case
- 19 -
of Steel Tubes India Pvt. Ltd. Vs. CIT (1996) 130 CTR (MP) 547, expenditure incurred in developing garden in front of factory in the process of erection of factory is revenue expenditure. The Learned Commissioner of Income Tax(Appeals) agreeing with the submission with the assessee, deleted the disallowance.
29. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of manufacturing of pharmaceuticals items. In the production, the assessee uses various types of chemicals. In order to control the pollution arising out of chemical process, the assessee has incurred expenditure for the purpose of maintaining garden in factory premises. This expenditure has been claimed deduction by the assessee has been disallowed by the Learned Assessing Officer and allowed by the CIT(A) on appeal by the assessee. The Learned Assessing Officer made the disallowance for the reason that it is not incurred for the process of production. The Learned Commissioner of Income Tax(Appeals) allowed the deduction to the assessee following the decision of Madhya Pradesh High Court in the case of Steel Tubes Pvt. Ltd. (Supra) for the reasons that garden expenses improves the working conditions of the workers in the factory and hence, it was an expenditure incurred for the business of the assessee. In the above circumstances, in our considered opinion, the manufacturing process of the assessee being such that it involves use of hazardous chemicals which affect the health of the workers. Thus, it is the duty of the assessee to make good the loss caused to nature and to prevent the health of the workers engaged in production. Therefore, the assessee maintained the garden for maintaining better
- 20 -
environment in the factory and the expenditure incurred in the process was therefore, for the purposes of the business of the assessee and was rightly allowed by the Learned Commissioner of Income Tax(Appeals). We therefore, confirm the order of the Learned Commissioner of Income Tax(Appeals) and dismiss the ground of appeal of the revenue.
30. Ground no.4 of the appeal of the revenue reads as under:-
"4. The Ld. CIT(A) has erred in law and on facts in deleting the addition made under transfer pricing u/s.92CA(3) of the Act Rs.1,63,887/-."
31. The Learned Commissioner of Income Tax(Appeals) has decided as under:-
"7.1 The fifth ground of appeal relates to addition of Rs.1,63,887/- by applying the provisions of Sec. 92CA(3) of the Act. The AO has made addition on this point by applying the provisions of Sec. 92CA(93) of the Act. The appellant has invited reference to circular No. 12 dated 23.08.2001, wherein it is stated as under:
"However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arms length price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations.
In this background the Board have decided the following:
(i) The Assessing Officer shall not make any adjustment to the arms length price determined by the taxpayer, if such price is up to 5 per cent. Less or up to 5 per cent more than the price determined by the
- 21 -
Assessing Officer. In such cases the price declared by the taxpayer may be accepted.
(ii) The provisions of sections 92 and 92A to 92F come into force with effect from 1st April, 2002, and are accordingly applicable to the assessment year 2002-03 and subsequent years. The law requires the associated enterprises to maintain such documents and information relating to international transactions as may be prescribed. However, the necessary rules could be framed by the Board only after the Finance Bill received the assessee of the President and have just been notified.
Therefore, where an assessee has failed to maintain the prescribed information or documents in respect of transactions entered into during the period 01.04.2001 to 31.08.2001 the provisions of section 92C(3) should not be invoked for such failure.
Penalty proceedings under section 271AA or 271G should also not be initiated for such default.
(iii) It should be made clear to the concerned Assessing Officer that where an international transaction has been put to a scrutiny, the Assessing Officer can have recourse to sub- section (3) of section 92C only under the circumstances enumerated in clauses (a) to
(d) of that sub-section and in the event of material information or documents in his possession on the basis of which an opinion can be formed that any such circumstances exists. In all other cases, the value of the international transaction should be accepted without further scrutiny."
In view of para (i) above, from said circular, there is no justification for the disallowance made by the TPO, particularly when difference between commission paid at 12.5% and Arm's length price adopted at 12% is marginal and is less than 5%. It is submitted that such
- 22 -
beneficial circulars are binding of department's officers and it should be followed, as held in various cases.
7.2 I have considered the facts and the submissions given by the appellant. I am inclined to agree with the appellant's views. As per Board's Circular, supra, if the variation is less than 5%, no adjustment has to be made. Hence, following the said circular, the appellant is allowed relief on this point."
32. We have heard the rival submissions and perused the materials available on record. In the instant case, the difference in the Arm's length price as taken by the assessee and as applied by the Learned Assessing Officer was less than 5% of the price taken by the assessee is not in doubt or debate. Therefore, the Learned Commissioner of Income Tax(Appeals) following CBDT Circular No.12/2001 dated 23.08.2001 has held that the Addition made by the Learned Assessing Officer is not tenable. Learned Departmental Representative could not point out any error in the order of the Learned Commissioner of Income Tax(Appeals) which was passed following the CBDT Circular. Thus, we do not find any merit in the ground of appeal of the revenue. Therefore, this ground of appeal of the revenue is dismissed.
33. Ground no.5 of the appeal reads as under:-
"5. The Ld. CIT(A) has erred in law and on facts in directing to adopt net interest income for the purpose of deduction u/s.80HHC as against gross interest income of Rs.2,77,73,000/-."
34. The Learned Commissioner of Income Tax(Appeals) has decided as under:-
- 23 -
"11.1 Ground No. 9 is against AO's finding that interest income is income from other sources and it is not a part of business income and additional ground against taking gross interest income in place of net interest. The AO has found that the assessee has earned gross interest of Rs.2,77,73,000/- and he treated the same as income from other sources, by following the decisions of various High Courts, including the decision in the case of Southern Cashew Exporters Vs. DCIT SLP (C) No. 15119-20 of 2003. (264 ITR 142), wherein it was held that income derived from deposit made with the bank was not entitled to the relief u/s. 80HHC of the Act, The appellant has claimed that against gross interest of Rs.2,77,73,000/-, it has incurred the interest expenditure and the net interest comes to Rs.1,53,I7,984/-. Therefore, the assessee has reduced the 90% of net interest from the business profit for calculating the deduction u/s. 80HHC of the Act. The AO did not accept this calculation and calculated the deduction by excluding 90% of the gross interest instead of net interest.
11.2 The appellant has submitted that interest income should be treated as part of business income, as the income has been generated from the business funds. Further, the appellant submitted that for the purpose of deduction u/s. 80HHC, net interest should be taken out in place of 90% of gross interest. Similar issue arose which was decided in appellant's favour for the A.Y. 1999-2000 and 2001-02 by the CIT (Appeals), who held that 90% of net interest should be excluded from the business profit. After considering the facts and the submission of the appellant, I hold that for calculation of deduction u/s, 80HHC of the Act, 90% of net interest should be taken out from the business profit. I also hold that interest income is also part of the business income and not assessable as income from other sources."
35. We have heard the rival submissions and perused the materials available on record. We find that the undisputed facts of the case are that the assessee has received interest of Rs.2,77,73,000/- on
- 24 -
investment of surplus funds of business. To adjudicate the issue before us, the first question which is to be decided is that the head under which such interest income is assessable to tax. On the above facts, the contention of the assessee is that the same is to be assessed under the head business income whereas as per the Learned Assessing Officer the same is assessable under the head income from other sources. We find that the issue is covered by the decision of Mumbai Special Bench of the Tribunal in the case of Topman Exports (Supra). The Hon'ble Special Bench has held that to decide the head under which interest income is assessable, it is not relevant whether it is deployment of business fund but the issue is to be decided by looking at the nature of activity, which results into such income. If the funds of the business are parked for safe keeping or with a view to earn interest income dehors the main business activity, the interest resulting therefrom cannot assume the character of business income and hence will resultantly fall under the head income from other sources. In the instant case, we find that the assessee has brought no material either before any of the lower authorities or before us to show that there was some business exigency necessitating the deployment of funds which resulted in the yield of interest to it. The only contention of the assessee is that as business funds were deployed for earning interest income therefore, interest should be held as assessable under the head business income. In our considered opinion, in view of the above cited decision of Hon'ble Mumbai Special Bench in the case of Topman Exports (Supra), the above contention of the assessee is not tenable and such interest income is assessable only under the head income from other sources. As a consequence of it, the assessee cannot claim any
- 25 -
deduction under section 80HHC in respect of such interest income which does not form the part of business income. Therefore, the Learned Commissioner of Income Tax(Appeals) was not justified in allowing netting off of such interest income against interest expenditure and holding that only 90% of the net interest income is to be excluded for the purposes of computing deduction under section 80HHC of the Act. We therefore, set aside the order of the Learned Commissioner of Income Tax(Appeals) on this issue and restore that of the Learned Assessing Officer. Thus, this ground of appeal of the revenue is allowed.
36. In the result, the appeal of the assessee and of the revenue both are partly allowed as above.
Order signed, dated and pronounced in the Court on 21st day of May 2010.
Sd/- sd/-
( MAHAVIR SINGH) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
st
Ahmedabad; On this 21 day of May, 2010
Paras
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-XIV, Ahmedabad.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER, स᭜यािपत ᮧित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad
- 26 -
Date Initials 1. Draft dictated on 10.05.2010 ------------------- 2. Draft Placed before authority 17.05.2010 ------------------- 3. Draft proposed & placed 18.05.2010 ------------------- JM Before the Second Member 4. Draft discussed/approved 18.05.2010 ------------------- JM By Second Member 5. Approved Draft comes to P.S 19.05.2010 -------------------- 6. Kept for pronouncement on 21.05.2010 -------------------- 7. File sent to the Bench Clerk 21.05.2010 -------------------- 8. Date on which file goes to the ---------------- -------------------- 9. Date of dispatch of Order ---------------- ---------------------