Income Tax Appellate Tribunal - Ahmedabad
Sun Pharmacauticals Industries Ltd, ... vs Department Of Income Tax on 4 March, 2015
आयकर अपीलीय अिधकरण, ड '
ड , अहमदाबाद ।
अिधकरण अहमदाबाद यायपीठ 'ड
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
BEFORE SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER AND SHRI
ANIL CHATURVEDI ACCOUNTANT MEMBER
ITA No.3047/Ahd/2002
A.Y.1999-2000
Sun Pharmaceuticals Vs ITO Ward-3(1), Surat.
Industries Ltd.,
SPARC, Akota Road,
Akota, Baroda-20.
PAN: AADCS 3124K
(Appellant) (Respondent)
ITA No.3273/Ahd/2002
A.Y.1999-2000
ITO Ward-3(1), Surat. Vs Sun Pharmaceuticals
Industries Ltd.,
SPARC, Akota Road,
Akota, Baroda-20.
PAN: AADCS 3124K
(Appellant) (Respondent)
Revenue by : Shri Vimalendu Verma, Sr.D.R.
Assessee(s) by : Shri S.N. Soparkar, A.R.
सुनवाई क तार ख/ Date of Hea ring : 30/01/2015
घोषणा क तार ख /Date of Pronounce ment: 0 4/03/2015
ITA Nos. 3047 & 3273/Ahd/2002
Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000
2
आदे श/O RDER
PER MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER
These are cross appeals arising from the order of Ld. CIT(A)-IV, Ahmedabad, order dated 5th July, 2002. Since these are connected appeals; hence hereinbelow decided by this common order.
A. Assessee's Appeal (ITA No. 3047/ Ahd/2002 )
1. Ground No. 1 is reproduced below:
"Re: Reduction of amount of profits eligible for deduction u/s. 80HHC from the book profits u/s. 115JA.
1.1 On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [hereinafter referred to as 'the learned CIT(A)] erred in upholding the computation carried out by the Assessing Officer of the amount deductible u/s. 80HHC for the purpose of computation of book profits under explanation to sec. 115JA (1) on the basis of taxable profits as per Income Tax Act, 1961 and not as per Book Profits as claimed by the Appellant.
1.2 The CIT (A) ought to have appreciated that Sec. 115JA seeks to levy a minimum tax on the basis of the book profits. Accordingly, while computing the book profits under Explanation to Sec. 115JA (1), the profits eligible for deduction u/s. 80HHC ought to be computed on the basis of Book Profits and not taxable profits as claimed by the Assessing Officer."
1.1 An Assessment order has been passed by the A.O. u/s 143(3) dated 28.3.2002. The appellant company is a manufacturer of pharmaceuticals products. A return of income was filed declaring total income U/s 115JA at Rs. 3,63,23,970/-, whereas, the total income U/s 115JA was assessed at Rs. 17,00,06,767/. There was a computation of assessed income under the normal provisions of the Act totalling Rs. 4,11,86,495/-. In respect of this Ground it is informed that the Assessee had claimed the deduction U/s 80HHC of Rs. 7,96,93,199/-, whereas the A.O. has allowed the deduction only of Rs.4,62,87,167/- on the ground that only the eligible profit of Sec. 80HHC is to be deducted for computing the income u/s 115JA.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 3 1.2 When this issue was carried before the Ld. CIT(A), he has held that there could not be two different figures of 80HHC working, one normal business profit and another book profit. So he has held that for Sec. 115 JA only the profits eligible for deduction U/s 80HHC was to be considered. Since the ground of the assessee was dismissed hence further in appeal.
1.3 Having heard the submissions of both the sides and after reading the cited decisions viz. Ajanta Pharma Ltd. 327 ITR 305 (S.C.) and Bhari Information Tech.Sys.P.Ltd. 340 ITR 593 ( S.C.) in the background of the facts of this case we are of the view that the decision of Syncome Formulations (I) Ltd. 292 ITR 144 (AT)(Mum.)(SB) has been approved by the Hon'ble Supreme Court in the case of Bhari Information Tech.Sys.P.Ltd.(supra). Therein it was held that the deduction u/s.80HHE of the Act in the case of Export of Computer Software has got to be worked out on the basis of adjusted book profits u/s.115JA of the Act and not on the basis computed under the regular provisions of law applicable to the computation of profits and gains of business. Further, an observation was made by the Hon'ble Court that once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds in a case where section 80HHC/80HHE of the Act is operations, it becomes clear that computation for the deduction under those sections need to be worked out on the basis of adjusted book profit. In the case of Syncome Formulations (I) Ltd. (supra), the Special Bench of the Tribunal came to the conclusion that deduction claimed by the assessee u/s.80HHC has to be worked out on the basis of adjusted book profit u/s.115JA of the Act and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. The view taken by the Special Bench was accordingly affirmed and the Special Leave Petition filed by the Revenue Department was dismissed.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 4 We have also noted that a decision of Hon'ble Bombay High Court in the case of Ajanta Pharma Ltd. 318 ITR 252 (Bom.) was in favour of the Revenue Department, however, that decision of the Bombay High Court was, later on, reversed by the Hon'ble Supreme Court cited as "327 ITR 305", wherein the Department has argued that both the "eligibility" as well as "deductibility" of the profit have got to be considered together for working out the deduction as mentioned in clause-(iv) of the Explanation to section 115JB of the Act. The Hon'ble Court has said that there was no merit in the said argument of the Revenue Department. The Court has made an observation as under:-
"10. ........... . If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then s. 115JB will cease to be a self- contained code. In s. 115JB, as in s. 115JA, it has been clearly stated that the relief will be computed under s. 80HHC(3)/(3A), subject to the conditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB [subject to the conditions specified in sub-cls. (4) and (4A) of that section] to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department.
11. For the above reasons, we set aside the impugned judgment of the High Court and restore the judgment of the Tribunal. Accordingly, the civil appeal of the assessee is allowed with no order as to costs."
1.4. Therefore, respectfully following the above precedents, we hereby hold that the AO is required to re-compute the taxable profit for the purpose of computation of book profit u/s.115JA of the Act in the light of the guide lines laid down by the Hon Courts as cited above. Thus, ground raised by the assessee is, therefore, allowed.
2) Ground No 2 is reproduced below:
"Re: Reduction of amount of profits derived by eligible industrial undertaking referred in s. 80IA from the book profits u/s. 115JA.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 5
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not deciding the ground of the Appellant relating to the deduction in the computation of Book Profits u/s. 115JA in respect of profits of the eligible industrial undertaking as defined u/s. 80IA.
The learned CIT(A) ought to have appreciated that there is no change in the wording in sec. 115J and sec. 115JA with regard to deductions under chapter VI-A which ought to have been computed based on the Book Profits in line with the CBDT circular 680 dated 21.02.1994"
3.1. As per the Appellant the deduction U/s 80IA was at Rs. 40,13,40,021/-on Silvasa Unit, however the A.O. had allocated certain expenses and reduced the Profit to compute the deduction U/s 80IA at Rs. 38,23,04,924/-. Before us it is pleaded that this issue was not decided by Ld. CIT(A). We have also been informed that in the past for A.Y. 1998-99 this very issue was restored back to the file of Ld. CIT (A) in assessee's own case in ITA No. 363 & 692/Ahd/2002 vide order dated 7.1.2011.( ref. para 20 page 15 & para 22 page 16) Naturally, if the first Appellate Authority has not expressed a view how the Tribunal can comment on the correctness of the same, therefore, for this year as well this issue is restored back to be decided by Ld. CIT(A) as per law. This ground may be treated as allowed but for statistical purpose only.
3. Ground No 3 is reproduced below:
"Re: Inclusion of Exchange Rate Fluctuation/Difference of Rs. 27,35,525/- in respect of balances under the Exchange Earners Foreign Currency Account (EEFC Account) in total turnover for the purpose of deduction u/s. 80HHC. 3.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that Exchange Rate Fluctuation/Difference of Rs. 27,35,525/- in respect of balances under EEFC Account is miscellaneous trading receipt forming part of 'total turnover' for the purpose of calculating the deduction u/s. 80HHC of the Act. 3.2 Without prejudice to the above, if the Exchange Rate Fluctuation/Difference in respect of balances under EEFC Account is treated as part of total turnover then the learned CIT(A) ought to have directed the Assessing Officer to treat the said receipts as part of export turnover as it is inextricably linked and forms part of the export sales proceeds."
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 6 3.1. On perusal of details of expenses debited to P&L A/c it was noted by the A.O. that the assessee company had reduced the expenses by a sum of Rs. 27,35,525/- stated to be income on account of ' exchange rate difference'. According to A.O. by this method on one hand the 'miscellaneous expenses' were reduced but on the other hand claimed excess deduction under Sec. 80HHC & 80 IA. Further he has observed that the receipt being in the nature of ' misc. trading receipt' then it should be treated as part of the 'Total Turn Over' and 90% should be reduced while working eligible profits of deduction U/s 80 HHC. He has concluded that there shall be no effect on the profits declared but working of the deductions of 80HHC & 80IA was required to be recalculated. Being aggrieved the matter was carried to the first appellate authority.
3.2. The explanation of the assessee was that the sales proceeds received from the customers were credited to Exchange Earners Foreign Currency Account (EEFC) in foreign exchange. As per RBI guide lines 50% of export proceeds are allowed to be kept in this account. In this EEFC a/c the foreign currency is credited as per the prevailing rate of exchange. But as on 31st March when the annual accounts are drawn the balance in EEFC account is re-valued at the prevailing exchange rate as on 31st March. The difference arising from this account due to foreign currency exchange rate fluctuation is part of the income. So the argument was that if it was added in the Total Turn Over then it should have also been added to the Export Turn Over. Ld CIT(A) was not convinced and held that such receipt was not part of the 'business profit' as defined in Sec 80HHC being not profit from export turn over. He has concluded that the gain from the foreign exchange kept in EEFC account was like interest on the deposit thus not eligible for deduction. For this view reliance was placed on few High Courts decisions viz. S.G. JhaveriConsultancyLtd.245ITR 854 (Bom) ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 7 & K.K.Doshi 245 ITR 849 (Bom).Ground being rejected; now the assessee is further in appeal.
3.3. With this factual back ground we have heard both the sides. At the outset we have been informed that now this issue is directly covered in favour of the assessee by an order of Honble Gujarat High Court in the case of CIT vs, Alps Chemicals Pvt Ltd 367 ITR 594. The Hon'ble Court has discussed decisions namely Sterling Foods 237 ITR 579 ( S.C.), wherein the legal proposition was that the source of the income was the export and earned the said income merely on account of fluctuation in foreign exchange. Also cited a decision of Shah Originals 327 ITR 19 ( Bom.) wherein as well held that an exporter had an option to keep certain percentage of export receipts in EEFC a/c. The assessee received higher amount in Indian rupees on such amount due to fluctuation in the foreign exchange rate. Conscious of the fact that the assessee had received the proceeds of the export transaction and gained due to fluctuation the court held that such gain cannot only be said to have been 'derived' from export business but the fluctuation gain arose subsequent to receiving the sale consideration hence part of the export sales . The gain was not due to delayed realization of export proceeds. The issue was decided in favour of the assessee. Respectfully following the above cited precedents we hereby hold that the assessee is entitled to the claimed deduction. Ground allowed.
4) Ground No 4 is reproduced below:
"Re: Inclusion of Sale of scrap of Rs.15,75,932/- in total turnover for the purpose of deduction u/s. 80HHC.
4.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that scrap sales of Rs. 15,75,932/- formed part of total turnover for computing the deduction u/s. 80HHC.
4.2 The CIT (A) ought to have appreciated that sale of scrap represented a recovery of process loss and cannot be regarded as trading receipts."
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 8 4.1. On perusal of P & L A/c it was noted by the A.O. that a sum of Rs. 15,75,932/- was received on account of sale of scrap generated from business. The appellant's argument was that the receipt was not a trading receipt hence not a part of the turnover. But that was rejected and held that scrap sales were directly received in its business exercise, hence held as part of the ' total turnover'. A.O.'s view was challenged before C.I.T (A), but rejected. Now further challenged before us.
4.2. Having heard the submissions of both the sides and after considering the case law cited of Punjab Stainless Ltd. 364 ITR 144 (S.C.), wherein the assessee was claiming deduction u/s.80HHC of the Act and the issue was to decide the meaning of word "total turnover". That assessee was a manufacturer and exporter of Stainless Steel Utensils. In the process of manufacturing, some portion of the Steel could not be used and it was treated as scrap. The assessee sold this scrap in the local market and income arising from sale was reflected in the Profit & Loss account. For the purpose of availing deduction u/s.80HHC, income from sale proceeds of sale scrap was not included in the "total turnover"
but it was shown separately. The Revenue Department has accounted the sale proceeds from scrap in the "total turnover". The Hon'ble High Court was of the view that the proceeds generated from the sale of scrap would not be included in the "total turnover". On further appeal, The Hon'ble Supreme Court has expressed that the term "turnover" has not been defined in the Income Tax Act. According to the Hon'ble Court, a meaning of this term was given by ICAI which denotes that in normal parlance the word "turnover" would be total sales, and according to the Hon'ble Court said sales would not include scrap material. According to the Hon'ble Court, intention behind enactment of section 80HHC of the Act is to encourage export to earn Foreign Exchange. It was finally ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 9 concluded that the proceeds generated from the sale of scrap would not be included in the "total turnover".
4.3. Respectfully following the aforesaid view expressed by the Hon'ble Supreme Court, we hereby direct to re-compute the turnover after excluding the sale amount of scrap. Resultantly, this ground is allowed.
5. Ground No. 5 is reproduced below:
"Re: Reduction of unrealised export proceeds of Rs. 1,94,65,349/- from export turnover for the purpose of deduction u/s. 80HHC.
5.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding the reduction of unrealised export turnover of Rs. 1,94,6 5,349/-out of total export turnover for computing the deduction u/s. 80HHC. 5.2 The CIT (A) ought to have appreciated the fact that the appellant had duly filed an application for extension of time with the prescribed authority being Reserve Bank of India and since the same was not rejected it ought to have been construed as approved. 5.3 In respect of export proceeds realised subsequently amounting to Rs. 1,63,11,271/- the learned GIT (A) ought to have directed that the same be considered as export turnover and accordingly be considered for the purpose of computing the 80 HHC deduction.
5.4 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not deciding the ground of the Appellant relating to the reduction of direct costs being purchases of the trading goods and other direct expenses attributable to unrealised export proceeds while computing the trading export profits."
5.1. Ld Counsel appearing on behalf of the Assessee has stated at Bar not to press this ground, hence dismissed being not pressed.
6) Ground No. 6 is reproduced below:
"Re: Disallowance u/s. 14A
6.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance of interest expense of Rs. 3,86,765/- on the ground that the interest was allocable for earning the share of profit from partnership firm being exempt income u/s. 10(2A) ) u/s. 14A of the Act.
6.2 The CIT(A) ought to have appreciated the fact that the capital invested in the partnership firm represented the accumulated profits ploughed back and that there was no component of any borrowed funds in capital invested."
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 10 6.1) The A.O. has mentioned that the assessee had earned share of profit of Rs. 116.98 lac from a Partnership Firm which was exempt, stated to be U/s 10 Of the Act, therefore the expenses attributable were proposed to be disallowed under the provisions of Sec. 14A of the Act. Assessee had furnished a reply, only relevant portion is reproduced below:-
"The total amount invested by the assessee in M/s. Sun Pharma Exports amounted to Rs.16.25 crores as at 1.4.1998. This capital balance represented the profits ploughed back. During the last 3 years the share of profit derived by the assessee from M/s. Sun Pharma Exports are as follows:
31.03.1998 102825644/-
31.03.1997 105112010/-
31.03.1996 102322321/-
Total 310259975/-
6.2. But the A.O. was not convinced and calculated the disallowance as under:-
"In view of the above expenses attributable to and is relation to exempted income are worked out as under and disallowed u/s.14A of the Act.
1. Interest expenses of following a. Total income/receipts as per income Rs.36129.43 lac b. Interest expenses Rs. 1194.53 lac c. Share of profit from p. Firm Rs. 116.98 lac 116.98 x 1194.53 36129.43 = 3.86 lac Accordingly Rs.3,86,765/- is added to the total income of the assessee firm u/s.14A of the Act. This amount is also added to book profits u/s.115JA as per explanation to said section."
6.3. According to Ld. CIT(A) if expenditure is incurred in order to earn exempted income, the same is not allowable. The action of the A.O. was upheld.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 11 6.4. Argument of Ld. AR is that the assessee had sufficient non-interest bearing funds for making investment in the firm and not used the borrowed funds therefore no disallowance could be made. Case law relied upon is CIT vs. Torrent Power Ltd. 44 taxmann.com 441 ( Guj.), Hitachi Home and Life Solutions 41 taxmann.com 540 ( Guj.), also for the legal proposition that where assessee's interest free funds far exceeded investments made for earning exempted income and A.O. has also failed to establish nexus between borrowed funds and investment made, no disallowance could be made u/s Sec. 14A.
6.5. Having heard the submissions of both the sides we are of the view that the basic information about the availability of the interest free funds can only be furnished by the assessee. Reply before the A.O. only suggested that the profit was ploughed back but the amount, stated to be Rs. 16.25 Crores invested in the firm, actually invested out of the said interest free fund is to be established. Certain basic information such as fund flow statement is not available before us. Side by side, A.O. has simply applied a formula which was only giving the figures of the total income verses exempted income, however, before applying the said formula it is also a requirement to establish that the interest bearing borrowed funds have actually been applied to earn the exempted income and then if such expenditure is not separately identifiable then on prorate basis disallowance can be calculated. Moreover this is A.Y 1999-2000, which is before the introduction of Rule 8D. We therefore direct that if the assessee is placing reliance on the above cited decisions then the connected information should be placed before the A.O. and to accomplish it, we hereby restore this ground back to AO to decide as per law accordingly. This ground may therefore be treated as allowed for statistical purpose.
7) Ground No.7 is reproduced below:
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 12
"7. Re: Addition of expenses attributable to earning exempt income for the purpose of computation of book profits u/s. 115JA 7.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in not deciding the ground of the Appellant relating to the addition of a sum of Rs. 3,86,765/- to the Book Profits being expenses treated as attributable to earning exempt income for the purpose of computation of book profits u/s. 115]A 7.2 The CIT (A) ought to have appreciated that the said expenses are not directly relatable to earning exempt income being share of profit from partnership firm."
7.1) It is pointed out that in the Assessment Order, this issue was not discussed in detail and opined in one line that the said amount of Rs. 3,86,765/- was to be added to book profit u/s 115JA . And when the matter was before the Ld. CIT(A) no finding was given by him, as is evident from the ground itself. The basic question is that whether such a disallowance is warranted at all or not. There is a latest decision CIT vs. Gujarat State Fertilizers and Chemicals 358 ITR 323 ( Guj.) wherein it was held that the A.O. had added the amount of estimated expenditure on earning of dividend income u/s 14A. So by referring sec. 115JB(2) it was held by the A.O. that it was required to be added in the profit shown in the P&L A/c. Commissioner of Appeals had deleted the addition in the normal computation, consequently deleted such addition under sec 115JB on the ground that this would not serve any purpose. The Tribunal affirmed this . In the High Court it was held that when the said sum was added as an expenditure estimated on earning of dividend income U/s 14A had been deleted , the said deletion for the purpose of Sec. 115JB required to be confirmed . For that reason we hereby restore this issue back to the file of A.O. Therefore we hold that the issue as raised in this ground is consequential depending upon the outcome of the main issue as referred hereinabove. Likewise this ground may be treated as allowed but for statistical purpose only.
8. Ground No. 8 is reproduced below:
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 13 "8. Re: Disallowance of deduction u/s. 80IA in respect of sale of import licenses of Rs.3,72,797/-:
8.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance of deduction u/s. 80-IA in respect of sale of import licenses holding that the same were not derived from the eligible industrial undertaking. 8.2 The CIT( A) ought to have appreciated the fact that the said licenses were received in respect of the exports made by the Silvassa Unit (eligible undertaking for sec. 80-,IA) of the Appellant."
8.1 Ld Senior Advocate, Mr. Soparkar has expressed that the appellant is not willing to contest this ground hence hereby dismissed being not pressed.
9. Ground No. 9 is reproduced below:
9. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred not deciding on the ground of the Appellant relating to allocation of expenses to Silvassa unit eligible for deduction u/s. 80IA on account of exchange rate difference reduced from Miscellaneous Expenses."
9.1. The observation of the A.O. was that the assessee had claimed deduction u/s 80IA at Rs. 40,13,40,021/- pertaining to the profits of Silvasa old unit as well as Silvasa -1 unit. The assessee had filed the unit-wise profit & loss a/c, in which profit from both the Silvasa Units was the said amount for the purpose of claim of deduction 80IA. However it was commented by the A.O. that the assessee had not allocated certain expenses to both Silvasa Units, such as R&D expenses, depreciation and exchange rate difference etc. This ground is only in respect of Exchange Rate Difference stated to be Rs. 4,46,438/- which was to be reduced from the profit computed for 80IA deduction. This view of the A.O. was challenged. However Ld. CIT(A) had inadvertently not decided/ discussed in the impugned order. Therefore it was pleaded before us that the matter may go back to CIT(A). We hold accordingly. This ground may be treated as allowed but for statistical purpose.
10. Ground No. 10 is reproduced below:
"10. Re: Disallowance of expenses for increase in share capital.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 14 10.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding the disallowance of expenses for increase in share capital on account of raising funds in form of issue of redeemable preference shares. 10.2 The CIT (A) ought to have appreciated the fact that the expenditure for increase in share capital represented filing fees paid to Registrar of Companies and stamp duties payable on issue of Preference shares and the same was fully allowable. 10.3 Without prejudice to the above, The CIT (A) ought to have appreciate the fact that deduction should be allowed over a period of 3 years being the term of the redeemable preference shares."
10.1 An expenditure under the head 'share issue expenses' of Rs. 22,70,000/- was debited to P&L A/c. This amount was added-back, but 1/5th only of Rs.4,54,000/- was deducted as current year's claim of expenditure. It was informed to A.O. that in connection of 'preference share issue' redeemable after 3 yrs of Rs. 5017.50 lacs to increase the capital the impugned expenditure towards filing fees , stamp duty etc. was incurred. The argument was that the preference share being redeemable after a period of 3 yrs hence the expenditure was not for permanent increase of capital, rather there was no advantage of enduring nature. According to Assessee only 1/5th was claimed this year and rest was claimed over next four years in instalments. However as per A.O. the expenditure could not be amortised u/s 35D of the Act. He has held that the expenditure was not at all an allowable expenditure as held in the case of Brookebond India Ltd. 225 ITR 798 ( SC) and Mihir Textiles 225 ITR 327 (Guj.). Resultantly disallowance of Rs. 4,54,000/- was made. That action of the A.O. was challenged.
10.2 When the matter was carried before the First Appellate Authority, the action of the A.O. was confirmed.
10.3 Heard both the sides at some length. Sec. 35 D grants a deduction in respect of expenditure which may otherwise be disallowable on the ground that it is a 'capital expenditure' or is incurred prior to the setting up of the business, ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 15 but in instalments in number of assessment years. This can also be interpreted, and naturally so, that an expenditure which is otherwise allowable as revenue expenditure cannot be brought within the purview of this section. Certain fine distinction had been made by Honble courts in respect of the Sub-sections of this section 35D, such as, that the fees paid for registration of the amendment of the memorandum of association for enhancement of authorised capital is held to be covered by sec. 35D (2) (c) (iv) . But expenditure on registration of a company is not covered as per sec 35D(2)(c)(iii). The undisputed factual position is that the filing fees to ROC and stamp duty, etc. was paid in connection of "preferential issue" which were redeemable after three years.
10.4) As per the argument Ld CIT DR, this issue has been dealt with in the case cited as Brooke Bond India Ltd. 225 ITR 798 (SC). However in this case the provisions of Sec 35D were not under consideration. The only point to decide was whether a particular expenditure incurred was in the nature of capital expenditure or not. So it was held that the expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, hence a capital expenditure. Likewise the other decision of Mihir Textiles Ltd.225 ITR 327 (Guj.) was dealing with issue in respect of the expenditure incurred by way of filing fees for increasing the authorised capital of the company, and it was held as capital expenditure. Both these decisions are not dealing the applicability of the provisions of Sec 35D.
10.5) As already mentioned above Sec. 35D would apply only in respect of expenditure which is otherwise not allowable under the law being a capital expenditure. This section subscribed or listed certain types of capital expenditure which can be amortised. But if those are not capital expenditure then the view is that after examining the nature and genuineness of the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 16 expenditure the same can be considered as Revenue Expenditure. To elaborate it further it can be said that after the insertion of Sec. 35D; the Act has not denied the allowability of Revenue Expenditure. There are few examples such as payment of stamp duty for issue of public subscription of debentures which was held as revenue expenditure U/s 37(1); even though after the insertion of Sec. 35D. Likewise other expenditure pertaining to issue of debenture is entitled U/s 37(1) and the provision of Sec. 35D are not going to effect such deduction. So the outcome of the above discussion is that the provision of amortisation is not intended to supersede any other provision of the income tax act under which such expenditure is otherwise admissible as a deduction . Under the fitness of circumstances it is therefore required to restore this issue back to A.O. to examine both the aspects i.e. Revenue Expenditure or Capital Expenditure and then decide the question of disallowance. Resultantly this ground is restored back for denovo adjudication hence to be treated as allowed for statistical purpose only.
10.4. In the result, appeal of the assessee is partly allowed protanto.
B. Revenue's Appeal (ITA No. 3273/Ahd/ 2002) 11 Revenue's Ground No. 1 is reproduced below:
"1. The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.50,00,000/- made on account of payment made to Synergy Research Centre Pvt. Ltd.
11.1. It was noted by the A.O. that a sum of Rs 40,00,000/- was paid to Synergy Research Centre P.Ltd. On query the explanation of the assessee was as under, only relevant portion reproduced:-
"1. It is once again repeated that Sun Pharmaceutical Industries Limited (SPIL) never acquired the shares of TDPL. The amalgamation of TDPL with SPIL was not a cover up for any acquisition of shares but an actual amalgamation as is evident from various ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 17 events post amalgamation also. In fact one of the major purposes of the amalgamation/alliance with TDPL was to leverage the technical expertise of Dadhas in areas relating to oncology etc. where SPILS existing research was not fully developed.
After careful perusal of detailed submissions made by us before the Honourable CIT(A), the Honourable CIT(Appeals) has concluded that the assessee did not acquire the shares of TDPL and that the Amalgamation of TDPL with SPIL was genuine and proper.
In the light of our detailed submissions made earlier in this regard and the order of the CIT(A), it is grossly erroneous to continue to link genuine payments made to SRCL towards the alleged acquisition of TDPL shares.
2. As regards the payments for research work carried out by SRCL we have to submit that:
1. Synergy is an approved research center by the department of scientific and Industrial Research, Ministry of Science and Technology, Government of India for the purposes of S. 80IA(4B).
2. They have complete infrastructure and manpower for carrying out the research activity. A brief overview of the infrastructure of SRCL is enclosed herewith.
3. The total payment to SRCL was in respect of development of products. Out of these products, 1 product was developed during the year 1997-98. A further product was developed during the current year and accordingly payment of Rs.40,00,000/- is adjusted against the advance paid to them. Out of the original amount paid to SRCL, the balance amount of Rs.264.20 lakhs has been duly refunded by them.
4. The product namely Meloxicam in respect of which the research was successful has been manufactured and marketed during the years 1999-00 and subsequently. The total quantity produced of "Meloxicam" and the value of sale is a below:
Year Quantity Produced Location Value
(Rs. In Lacs)
1999-00 401.62 kg Panoli 61.90
5. During this period, various scientist and technical personnel from SPIL had visited SRCL for technical discussion in connection with the research. The evidence is produced herewith for your perusal."
11.2. The A.O. was not convinced and held as under : -
"SPIL in order to acquire M/s. TDPL entered into a clandestine agreement with one of company promoters of M/s. TDPL. namely a collection of entities and concerns collectively referred to as 'Dadhas" as per this agreement SPIL was to get controlling stock in M/s. TOPL share price was fixed @ 290/- out of which Rs. 90/- was to be paid officially whereas Rs.200/- was to be paid as premium outside books of accounts.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 18 Further, if by any mechanism assessee company could transfer consideration to Dadhas by cheque but at same time the same is tax free Dadhas would give discount & 20%. It is her that role of SRCL comes into picture this entity not having any prior role is brought into existence and part of consideration is passed on to said concern in garb of purchasing / advance towards research and knowhow. This amount is utilised by Dadhas and is recovered by them as tax free because SRCL gets exemption u/s. 80IA (4A) on whole of this amount received as consideration / additional advance. ..........
As discussed in block assessment order there is no evidence to prove that the technical knowhow claimed to have been purchased from SRCL was infact developed there and simultaneously could not have been developed at Research Facilities available in assessee's own entities which are having world class research facilities with advanced capabilities.
Keeping in view this background, it is clear that the payment to SRCL was not for purpose of scientific research etc. but for a different purpose. Accordingly Rs.40 lac paid is held for non-genuine purposes and is disallowed. Since assessee had claimed weighted deduction @ 125% on same. Accordingly Rs.50,00,000/- is disallowed and added to total income."
11.3. First Appellate Authority has opined that once the Honble Madras High Court has approved the amalgamation so it was not proper for the A.O. to hold that the said amalgamation was merely on paper. Ld CIT (A) was of the view that the A.O. merely on presumption had held that the payment of Rs. 40 lac was made against the sale proceeds of shares and not against the research work carried out by the SRCL . In the opinion of Ld CIT(A) there were sufficient evidences that the payment was for specific research work and those evidence were not rebutted by the A.O. It was also mentioned that a view had already been taken by his predecessor so there was no reason to take any different view. It was directed to delete the addition. Therefore now the Revenue is in appeal.
11.4. From the side of the Revenue. Ld. CIT-DR, Mr. Vimalendu Verma appeared and placed reliance on the order of A.O. According to him, it was a colourable device adopted by this assessee. The payment was nothing but towards acquisition of shares, rather than for scientific research. On one hand capital expenditure was incurred for acquisition of shares but through the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 19 colourable device it was wrongly claimed as deduction u/s 35(2AB), he has concluded.
11.5. From the side of the respondent-assessee, Ld. A.R., Mr. S.N. Soparkar has pleaded that there are several connected decisions by the Tribunal wherein the view taken by the Revenue was not accepted. Even in the search matter it was held that there was no material found to substantiate the alleged presumption of the A.O. He has mentioned that ITAT "D" Bench Ahmedabad in Sun Pharmaceuticals Industries IT(ss)A No.70/Ahd/2001 vide order dated 25/09/2009 has held that in view of the fact that the assessment framed after the service of notice u/s.143(2) of the Act after the expiry of 12 months was void ab initio and the said assessment order was quashed. Therefore, the ld.AR has pleaded that since the entire proceedings of block assessment have been quashed in assessee's own case, therefore the consequential addition made in the regular assessment did not survive. However, in respect of the impugned amount pertaining to payment made to Synergy Research Centre P.Ltd.(SRCL), the ld.AR has quoted the decision of ITAT "A" Bench Chennai pronounced in the case of DCIT vs. Shri Mohanchand Dadha (Indl.) bearing IT(ss)A No.180/Mds/2002 for the Block Period 01/04/1986 to 15/12/1998, order dated 16/11/2007, wherein the core issue was decided in favour of the assessee on the ground that the amalgamation being approved by the Hon'ble High Court, hence that process was not a colourable device. The ld.AR has placed reliance on the decision of ITAT "B" Bench Ahmedabad pronounced in the case of DCIT vs. Aditya Medisales Ltd. Bearing IT(SS) 95/AHD/2011 for the Block period AY 1988-89 to 7/12/1998, order dated 31/05/2007, wherein facts were narrated as under:-
"16. The facts relating to ground No.2, and Ground No.3 are that Tamilnadu Dadha Pharmaceuticals Ltd. (TDPL) had amalgamated with ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 20 Sun Pharmaceutical Industries Limited (SPIL). TDPL was jointly promoted by DADHA family of Chennai and Tamilnadu Industrial Development Corporation Ltd. (TIDCO) with equity holdings of 25% and 26% respectively. In the beginning, it was proposed that SPIL would purchase the shares in TDPL from the Dadhas. The Dadhas would also purchase the shares held by TIDCO in TDPL and the same would be sold to SPIL. However, the plan of purchasing the shares from Dadhas was later rejected. SPIL and the assessee company submitted that the purchase transaction was not carried out and TDPL amalgamated with SPIL. However, on the basis of certain papers seized both from the office of SPIL and Dadha's it was contended by the Department that the original agreement of purchase of shares was actually implemented though on paper the scheme of amalgamation was reflected."
11.6 With this background, we have noted that the ld.CIT(A) has referred an earlier order of his predecessor which was connected with the block assessment period. A finding was given that, in a situation, when the Hon'ble High Court has approved the amalgamation, then it was wrong on the part of the AO to presume the amalgamation was merely on papers. It was also noted that initially there was an arrangement to purchase the shares of TDPL from Dadhas, however, subsequently the said arrangement was modified and it was decided to apply for the amalgamation which was found to be a more appropriate recourse. In respect of the payment made to SRCL, a finding was given that the said payment was not for the acquisition of shares, but for the scientific research. The ld.CIT(A) has held that the AO's conclusion that the payment of Rs.40 lacs was made against the sale proceeds of shares and not against research was merely on presumption. There was no material on record to justify such presumption. Side by side, the assessee had brought on record the evidence about the payment of Rs.40 lacs against scientific research were carried out by SRCL. The ld.CIT(A) has, therefore, placed reliance on the facts as already considered by his predecessor and the view taken by the AO was ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 21 reversed. In the background of above facts and considering the totality of the circumstances of the case, by placing reliance on the orders of the respected coordinate benches, we are also of the view that there is no judicial requirement to interfere with the findings of ld.CIT(A), same is hereby confirmed and this ground of the Revenue is, therefore, dismissed.
12. Revenue's Ground No. 2 is reproduced below:
"2. The Ld. CIT(A) has erred in law and on facts in allowing discount paid to M/s. Antrish and M/s. Dukan for Rs.13,88,590/-."
12.1. At the outset the observation of the A.O. was that the assessee had created various devices to transfer 'sale consideration' and particularly the premium amount of Rs. 200/- per share to the promoters of M/s TDPL , the company which later on amalgamated with the assessee company. According to A.O. the modus operandi was as under:-
"During the course of search as discussed earlier various evidences were found which revealed that the assessee company individually and as a group had created various devices by virtue of which they had transferred sale consideration particularly the premium amount of Rs.200/- per share to the promoters of M/s. TDPL the company which was later amalgamated with the Assessee company. One of the devices used by the assessee to move consideration from the books of assessee company to Dadha Group was through creation of two entities namely M/s. Antriksh and Dukan. These two entities controlled by Dadha Group where an additional level of agency created for the territories of Tamilnadu and Karnataka. Instead of earlier movement of goods which was being followed for all the years, goods being sold by SPIL to Aditya Medisales and thereafter distributed. Through these fictitious entities another level was created thereby the goods were claimed to have been transferred from SPIL to AML through these entities. In consideration of which it was claimed that these entities were being paid discount @ 5% of sales. In block assessment order the whole scenarios has been discussed in detail and from above it could be clear that these two entities was merely created not to offer any services (no evidence of them offering any) but simply created so that agreed consideration could be transferred to Dadha Group with no eyebrows being raised. In the block assessment order discount and commission paid to these concerns were disallowed and addition was made upto 7.12.1998. In the present assessment assessee was asked to explain as to why the same logic should not be applied and for the remaining period commission paid should not be disallowed."
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 22 12.2. The assessee's explanation was that the appointment of M/s Antariksh Pharma and M/s Dukan as a distributor was a commercial decision because Dadhas had very good network of loyal dealers in the South. The assessee wanted to encash that net- work of dealership. Those two dealers were registered dealers under the sales tax and drug licence departments. They had the facility of godown etc. Total discount provided during the period 8.12.1998 to 31.03.1999 amounted to Rs. 23,14,317/- which was too small comparing the overall benefits accrued to the assessee. It was strongly objected that the allegation was not proper that the discount payment was towards consideration to Dadhas. However the A.O. was not convinced and disallowed the claim as under, only relevant portion reproduced :-
(i) The sezied papers itself reveals that these entities were created for the sole purpose of somehow transferring the consideration from the assessee group to Dadhas.
(ii) The assessee has unable to show whether the actual storage facility were utilsed from any primary records of material movement etc.
(iii) The fact of these concerns, having drug license etc. is immaterial as mere possession of these document does not mean that these concerns did offer any services was available with these concerns and whether the same was utilised and was infact needed. There are no primary material records produced which can evidence movement etc.
(iv) Regarding the installation of various system which the assessee had referred to are in fact part of the cover up and are revealing that only paper adjustment were created to show that the goods moved from SPIL to Antrish and Dukan thereafter to AML. Fact of the matter is that there was no physical movement.
(v) The assessee has no explanation as to why against normal commission rate of 2% these two concerns were paid 5%. In fact as an afterthought and to somehow coverup the issue as is clear from the above reply assessee had itself stated that they have reduced the rate from 5% to 2% in F.Y 99-2000. This is an indicator that there is no basis and logic for even paying the commission rate and it was for the sole purpose of transferring the consideration with no services being offered.
In view of above the discount paid to these concerns in post search period is disallowed and added to the total income of the assessee. Accordingly a sum of Rs. 13,88,590/- is added to the total income."
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 23 12.3. Ld. CIT(A) has accepted the explanation of the assessee especially under the circumstance when his predecessor had accepted the genuineness of the claim. He has directed to delete the addition of Rs.13,88,590/-. Now the Revenue is in appeal.
12.4 Heard both the sides. Case record perused. Ld DR has placed reliance on the order of the A.O., while Ld AR has supported the view taken by Ld. CIT(A). Few decisions of the Tribunal have also been referred, namely; Aditya Medisales Ltd. (ITAT "B" Bench Ahmedabad) bearing IT(ss) 95/Ahd/2001, order dated 31/5/2007(supra), Shri S.Mahanchand Dadha (Indl.) [ITAT "A" Bench Chennai] bearing IT(ss)A No.180/Mds/2002, order dated 16/11/2007 and decision of Shri S.Mohanchand Dadha (HUF) [ITAT Bench "A" Chennai] bearing IT(ss)A No.178/Mds/2005 for the Block period 1.4.19988 to 15.12.1998, order dated 16/11/2007.
12.5. Facts have revealed that the appointment of M/s.Antariksh Pharma and M/s.Dukan have provided certain facilities to the assessee related to administrative as well as business services. Dadhas had a very good network of committed dealers, who have managed the business. Both those entities were otherwise registered with Sales Tax Department as Registered Dealers. Even during the course of search, certain correspondences relating to installation of various systems at M/s.Dukan was seized and since the activities was not merely on paper, therefore it was held that the payment was reasonable and the addition was directed to be deleted. We hereby endorse the view taken by the First Appellate Authority primarily on the ground that in a situation when a search was conducted and no material was found, then according to us, the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 24 amount was rightly directed to be deleted. Further by placing reliance on the orders of the respected coordinate benches, this ground of the Revenue is, therefore, dismissed.
13. Revenue's Ground No. 3 is reproduced below:
"3. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.16,37,248/- made on account of interest payment."
13.1. A.O. has taken a view in this assessment consequent upon the search conducted on the group. According to him there was a provision in an agreement of charging of interest from 12% to 13.5%. Therefore, On the basis of the Block Assessment he has held as under :-
"This fact is however very clear even in search proceedings evidences showed that assessee group had constantly being moving entries in books of various concerns so as to coverup the schedule but quantum of consideration was adhere to the schedule. Infact net effect of the payments and receipts can only be seen in consolidated account of each individual representing one branch of Dadha Family. Because the assessee group had used so many different pretexts of transferring funds and then moving entries from books of one concern to another not only in their group but also in Dadha Group that if any single transaction eq. interest recovery by M/s. AML is seen it would give distored picture. Accordingly assessee consolidated account is prepared after 7-12-98. In case of these individuals representing sum total of transaction which assessee group had with Dadha Group from and applying agreement condition following situation of interest payable as on 31-3-99 emerges Interest payable for post search period.
S. Mohanchand Dadha Rs. 9,64,841/- M. Mahendra Dadha Rs. 4,325/- M. Maherchand Dadha Rs. 6,68,074/-"
13.2. When the matter was carried before the First Appellate Authority it was noted that there was no evidence which would indicate that Interest was to be paid to Dadhas for post search period. The addition was deleted as under:
22. The Assessing Officer has not been able to bring to light any evidence or support which would indicate that the interest was paid to Dadhas in post search period. An addition can be made only on the basis of specific finding supporting such addition. Any addition made on the basis of any presumption cannot stand the test of law. To me the finding of the Assessing officer that the original agreement for acquisition of shares was ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 25 in fact carried out does not seem acceptable in light of the submissions of the Appellant and the appeal order against the book assessment order. Any further presumption that such interest would also have been paid during the post search period cannot stand in absence of any specific finding or material brought on record by the Assessing Officer. Accordingly, I direct that the addition on account of notional interest amounting to Rs.16,37,248/- be deleted.
13.3. With this back ground we have heard both the sides. The issue is resolved vide a consolidated order for A.Y. 99-00,2000-2001, 01-02, 02-03 & 03-04 of Aditya Medisales bearing ITA No. 3272/Ahd/2002 , ITA 1623/Ahd/2003, ITA 1353 & 2180/Ahd/2005 & ITA no. 08/Ahd/2007 dated 30/09/2010. In that order there was a reference of an another order of the Tribunal pertaining to Block Assessment of Aditya Medisales bearing IT(SS)A No.95/Ahd/2001 dated 31/05/2007 wherein vide paragraph no 28 (reproduced by the Tribunal) it was held as under:
"28. We have carefully considered the rival submissions. We find that the main reason for disallowance is that while interest was paid by the Assessee to its suppliers, the Assessee did not charge interest to the two parties. We find force in the contention of the Assessee that on account of amalgamation of TDPL with SPIL the Assessee would experience growth in its turnover and operations. Subsequent events and the figures of turnover of the Assessee vindicate this point in favour of the Assessee. On any such acquisition of business / amalgamation the acquirer would be keen to ensure that there is smooth integration of business across the entire line which include distribution channel also. In such circumstances as the sole distributor of SPIL the action of the Assessee in appointing the said firms as its distributor for the southern regions, at the behest of SPIL would be governed by business expediency. The Assessee has also demonstrated by documentary evidence before the lower authorities that the distribution had in fact happened through the said firms. The said firms had the necessary trade and other registrations for carrying on the said activity. The Assessing Officer has also acknowledged that there was savings in turnover tax in the state of TamilNadu as a result of the appointment by the said firms. The Assessing Officer having accepted in part the business benefit of the appointment of the said firms, as distributors cannot in the same breadth question the other part Even otherwise, it is seen that the Assessing Officer has considered trade advances given by the Assessee to the individual members of the Dadha family as advances in the ordinary course of business. Thus, even if the advances were given in the guise of a trade advance, the same would still be considered as for the purpose of business. Further we noted that the decision of the Supreme Court in the case of S.A. Builders (supra) has clearly stated that if the business considerations require, interest free funds can be advanced. Since the commercial expediency cannot be doubted in the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 26 case of the Assessee. We find no reason to interfere with the order of the CIT(A) and accordingly we confirm the order of the CIT(A) on this ground."
13.4. Since in the past a consistent view had been taken that once the Revenue had accepted the business decision of appointment of the said firms then in the same breath could not question the assessee's other decision taken in the ordinary course of business. We therefore follow the view already taken by the respected coordinate benches and affirm the decision of CIT(A), hence this ground of the Revenue is dismissed.
14. Revenue's Ground No. 4 is reproduced below:
"4. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.4,98,884/- made on account of unaccounted sale of spent solvent."
14.1 The observation of the A.O. was that during the course of Search it was found that the assessee had recovered certain solvent and sold at reduced price and the extra amount was received in cash. The explanation of the assessee was that the selling price of the solvent was dependent of various factors such as purity etc. It was informed that CIT(A) had deleted the addition. Relevant portion of assessee's reply was as under:
"3. The Honourable CIT(A) while disposing off the block appeal has deleted the addition made on account of presumption by extrapolating the items based on the rate of Rs.1.63. The CIT(A) has held that merely because some items are sold at the rate of Rs.1.63 it cannot be presumed that the level of purity and the quality were same. In absence of any specific finding, the addition would become an item of presumption and estimation."
14.2. However the A.O. was not satisfied and held that the assessee had suppressed the actual rate and failed to establish that why differential treatment of rate was adopted. Applying the same rate for the post search period an addition of Rs. 4,98,884/- was made.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 27 14.3. Ld CIT(A) was of the view that by applying a notional rate for the post search period that too merely on presumption and without any evidence, was not justified. There was also a reference of an order passed by his predecessor in the Block Assessment wherein such addition was deleted. He has, therefore, directed to delete the addition.
14.4 Heard both the sides. First point from the side of the assessee is that the said Block Assessment had already been quashed by the Tribunal 'D' Bench in IT(SS) No.70/Ahd/2001 in assessee's own case vide order dated 25/09/2009 (supra) hence the impugned addition by that very reason did not survive. The second point of the assessee was that while deciding assessee's appeal in respect of Block Period 1988-1989 to 7.12.1998 by CIT(A) Baroda vide order dated 01/06/2001 (Appeal No. CAB/IV-166/2000-01) had not upheld such additions being not based upon some incriminating evidence. The third point for our consideration was that it was merely presumed by the A.O. that even for the post search period the Solvent might have been sold on the same rates. But the basic question is that when even for search period the impugned addition did not survive on account of lack of evidence then how such presumption could be approved for the post search period. The reasoning appears to be convincing especially when no contrary material is available on record form the side of the Revenue. This ground of the Revenue is therefore dismissed.
15. Revenue's Ground No.5 reads as under:-
"5. The Ld.CIT(A) has erred in law and on facts in deleting the addition made on account of DEPB sale for 80IA deduction."
15.1 It was noted by the A.O. that the sale/purchase of DEPB licenses was carried out at Mumbai but transferred the profit to the accounts of Silvasa Unit with the purpose to claim higher deduction. It was also observed that such profit was not 'derived' from the manufacturing activity. Hence the amount of ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 28 Rs. 9,95,000/- credited to the Silavasa Unit had been disallowed from the claim of deduction U/s 80IA and also the necessary adjustment has been made in Sec. 80HHC benefits.
15.2 When the matter was carried before the First Appellate Authority it was argued that the exports were made from the Silvasa Unit , against that export those licenses were received. Only the sales were managed from the Bombay office. So it was the profit 'derived' from the business of an industrial undertaking. An alternate submission was that in Block assessment addition on account of sale of license amounting to Rs.6,22,203/- was already made. Relying on the decision of N.R.Paper & Board 234 ITR 733 ( Guj.) it was held by Ld. CIT(A) that an addition made in the block assessment can not be made again in the regular assessment proceedings, therefore, out of the total addition of Rs.9,95,000/-, the amount of addition already made in the block assessment of Rs.6,22,203/-was directed to be adjusted.
15.3 With this back ground, we heard both the sides. We are not in agreement with the view taken by Ld. CIT(A), primarily because of the reason that now this issue is well settled by the Hon'ble S.C. in the case of Liberty India 317 ITR 218 wherein it was held that Duty Drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of deduction U/s 80I / 80IA / 80IB. It was commented by S.C. that Sec. 80IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words 'derived from' is narrower as compared to that of the words ' attributable to.' By using the expression ' derived from' Parliament intended to cover sources not beyond the first degree. Further Ld CIT(A) has also held that only the balance amount available after the amount taxed in the Block Assessment is to be to be taken into account. This finding is not required to be disturbed being covered by the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 29 decision of the jurisdictional high court. In the result this ground of the Revenue is allowed.
16. Revenue's Ground No.6 reads as under:-
"The Ld.CIT(A) has erred in law and on facts in deleting the depreciation allowance of Rs.1,26,50,718/-."
16.1. On perusal of Depreciation chart, it was noted by the A.O. that the assessee had not claimed depreciation in respect of Plant & Machinery and Data Processing Equipments of Silvasa Unit. However in respect of other assets depreciation was claimed. So the A.O. had commented that the purpose was to retain higher WDV as long as the Silvasa Unit was enjoying tax holiday u/s 80-IA. Through this method on one hand a higher claim of deduction u/s 80IA was made and on the other hand retained higher WDV to get large depreciation when the tax holiday period got over and the assessee started enjoying taxable income. Then the A.O. had discussed the legal position by comparing the old and new provisions of Sec. 32 vis-a-vis amendment introduced in the Finance Act 2001 providing for compulsory allowance of depreciation w.e.f. 1.4.2002. Finally it was concluded that the depreciation was to be allowed of Rs. 1,26,50,718/- in respect of Silvasa Unit and to be deducted from the business profit.
16.2. On this issue Ld. CIT(A) has held that the provision of compulsory allowance of depreciation is applicable w.e.f. 1.4.2002 by making it mandatory u/s 32 of the Act. Reliance was placed on Mahindra Mills 243 ITR 56 (SC) and held that the A.O. was not justified in compulsorily granting depreciation.
16.3. Heard both the sides. The assessment Year under consideration is A.Y. 1999-2000. On this issue that whether the depreciation can be compulsorily foisted upon the assessee, an order of the Hon. Gujarat High Court pronounced ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 30 in Assessee's own case bearing Tax Appeal No. 93 of 2000 dated 17.12.2014 titled as Dy.CIT vs Sun Pharmaceuticals Ind. Ltd. is cited wherein it was held that the Tribunal was right in law in holding that depreciation not claimed by the assessee could be deducted despite the introduction of the block-assets concept. One more order of Hon Guj. High Court is referred as Sakun Polymers Ltd. ( Tax Appeal No. 41 of 2007 with others order dated 23.12.2014) wherein for A.Y. 1995-96 it was held that the Tribunal was not right in law in holding that depreciation , whether claimed or not, has to be foisted upon the assessee even prior to insertion of Explanation 5 to Sec. 32(1) of the Act. Respectfully following these decisions, we hereby affirm the findings of Ld. CIT(A). This ground of the Revenue is dismissed.
17. Revenue's Ground No.7 reads as under:-
"The ld.CIT(A) has erred in law and on facts in directing to exclude the sales-tax & Excise Duty from the total turnover and to compute the deduction under section 80HHC.
The CIT(A) has failed to appreciate that the ITAT Bench C Ahmedabad in Gujarat Alkali V/s. Jt.CIT., Sp.Range, Baroda in ITA No.488/AHD/2000 for AY 1996-97 have distinguished the case of Bombay High Court (254 ITR 769 CIT V/s.Sudarshan Chemicals) and held the issue in favour of the Department. In the case of Sudarshan Chemicals the assessment year involved was 1986-87 then there was a different law. In the instant case, the assessment involved is for AY 1999-2000."
17.1 The observation of the A.O. was that in the Total Turnover the assessee has not included the amount of Sales Tax and Excise Duty collected during the year. According to A.O. it was part and parcel of the 'Turnover'. When this was carried before CIT(A), a decision of Sudarshan Chemicals Industries Ltd. 245 ITR 769 ( Bom.) was followed and directed the A.O. to exclude Sales Tax & Excise Duty from the total turnover.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 31 17.2. Now before us an order of Hon S.C. is cited, namely, Laxmi Machine Works 290 ITR 667 for the legal proposition that Excise Duty & Sales Tax are indirect taxes so do not involve any element of 'Turnover'. Respectfully following this precedent we hereby affirm the findings of CIT(A) and dismiss this ground of the Revenue.
18. Revenue's Ground Nos.8, 9 & 10 read as under:-
Ground No.8:-
The Ld.CIT(A) has erred in law and on facts in allowing consideration of gross interest for computing profit of business for working of deduction under section 80HHC.
Ground No.9:-
The Ld.CIT(A) has erred in law and on facts in allowing consideration of gross lease rent for computing profit of business for working of deduction under section 80HHC.
Ground No.10 :-
The Ld.CIT(A) has erred in law and on facts in allowing consideration of gross operational charges covered for computing profit of the business for working of deduction under section 80HHC.
18.1. All these three grounds are inter-connected and covered by a decision of Hon'ble Supreme Court in the case of ACG Associated Capsules Pvt.Ltd.
reported at 343 ITR 89(SC). In respect of the computation of the interest for the purpose of deduction u/s.80HHC of the Act, the AO has reduced 90% of the gross interest for claiming the deduction. According to AO, the legal requirement of section 80HHC is to deduct 90% of gross receipt. However, ld.CIT(A) was of the view that the net interest income was to be taken into account for reducing 90% to arrive at the figure of profits of the business for computing the deduction u/s.80HHC of the Act. In respect of lease rent as ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 32 raised in ground No.9, the assessee has considered the net lease rent income, but the AO had considered gross lease rent income for reducing 90% of the same. When it was challenged before the ld.CIT(A), he has directed the AO that 90% of the net lease rent should be reduced for the purpose of computation of "profits of the business" u/s.80HHC of the Act. Likewise, ground No.10, is in respect of operational charges and the AO has reduced 90% of the gross operational charges, but when the matter was challenged before the first appellate authority, it was held that the entire part of the operational charges recovered is nothing but the business income, hence nothing is deductible from the profits of the business for the purpose of computing deduction u/s.80HHC of the Act. However, in the case of ACG Associated Capsules Pvt.Ltd.(supra), it was held that 90% of the net interest or net rent which had been included in the profits of the business as computed under the head "profits and gains of business or profession" was to be deducted under clause(i) of Explanation(baa) to section 80HHC of the Act for determining the profits of the business. The Hon'ble Court has followed Topman Exports 342 ITR 49 (SC) for the legal proposition that under the clause(i) of Explanation(baa) to section 80HHC, 90% of any receipts by way of brokerage, commission, interest, rent or any other receipt of a similar nature included in the profit are to be deducted from the profits of the business, as computed under the head "profits and gains of business or profession". The Explanation "included any such profits" would mean only such receipts by way of brokerage, commission, interest, rent, etc. which are included in the profits of the business as computed under the head "profits and gains of business or profession". Therefore, any quantum of the receipts by way of interest, rent, etc. of a similar nature is allowed as expenses u/s.30 to 44D of the Act and is not included in the profits of business as computed under the head "profits and gains of business or profession", 90% of ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 33 such quantum of receipts cannot be reduced from the profits of the business. We, therefore, hold that all three grounds now stood covered by these decisions of the Hon'ble Supreme Court, hence the view taken by the ld.CIT(A) is hereby endorsed and the grounds raised by the Revenue are dismissed.
19. Revenue's Ground No.11 reads as under:-
The Ld.CIT(A) has erred in law and on facts in allowing adjustment to trading export profit on account of export promotion expenses of Rs.17,40,000/-.
19.1. The assessee had incurred export promotion expenses both for its own products and the products which were traded. It was noted by the AO that while working the computation u/s.80HHC, the assessee had allocated an amount of Rs.15.81 lacs from "other export promotional expenses". The AO was not convinced and bifurcated the same by assigning the following reason:-
(iii) Adjustments to trading export profits:
Assessee company had incurred export promotion expenses both for its own products and that in which it has traded. In working of 80HHC it is seen that assessee had allocated an amount of Rs.15.81 lac from other export promotional expenses. This has been done by the assessee on the basis of clear-cut identifiable expenses relating to trading which as per assessee was primarily in only two products namely Cephalexin Cefadroxil. In fact perusal of ledger account and vouchers of other export expenses indicated that majority of expenses are product specific and also territory specific and are relatable to exports of product other than trading export. Like formation, sun products, other bulk drugs manufactured by assessee company. However, there still remains expenses of nature which have across the spectrum benefit and can be attributed to trading also. These are expenses of the nature entertainment of foreign guest, hotel bills, conference expenses and product expenses, general cartons and papers for export etc. assessee company cannot deny the fact that these expenses go on to further its market for trading export also. In the circumstances it is seen that these expenses are of approx.Rs.30 lac. Since trading export turnover is approx.58% of total export turnover. This amount is bifurcated and 58% ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 34 of the same i.e. Rs.17,40,000/- is allocated as direct expenses related to trading export activity in addition to that already allocated." 19.2. The matter was carried before the first appellate authority, who has held that there was no denial of the fact that the assessee-company has exported the goods manufactured as well as undertaken the export of "trading goods". In his opinion, the AO was not correct in stating that the assessee has arbitrarily located the direct expenses of overseas export promotion between export manufacturing activity and export trading activity. The ld.CIT(A) has held that the assessee has maintained the details which show that the export promotional expenses are directly identifiable and attributable to different products. Rather he has noted that the assessee had furnished précised details of direct expenses attributable to certain product's turnover including the overseas sales promotion expenses. He has directed the AO not to make such adjustment to trading export profit.
19.3. Having heard the submissions of both the sides, we are of the view that the ld.CIT(A) has given certain findings on facts which were not confronted to the AO. The ld.CIT(A) has noted that the assessee had maintained the details about export promotional expenses which were stated to be identifiable. It was also noted by him that those expenditure were attributable to different products.
Further, he has noted that the assessee has furnished accurate details of the direct expenses attributable to turnover of the products including the overseas sales promotional expenses. Since those were new evidences, which were entertained by the ld.CIT(A), therefore it is demanded by the ld.CIT-DR to give an opportunity to examine those evidences which were entertained by the ld.CIT(A) at the back of the AO. Considering the said preliminary technical objection of the assessee, we hereby restore this ground to the file of ld.CIT(A) with the direction to give opportunity to both the sides and then decide as per ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 35 law. In the result, this ground of the Revenue may be treated as allowed for statistical purposes.
20. Revenue's Ground No.12 reads as under:-
The Ld.CIT(A) has erred in law and on facts in reducing deduction under section 80-IA.
20.1. The assessee had claimed deduction u/s.80IA of the Act of Rs.40,13,40,021/- in respect of profits of Silvassa Units. It was noted by the AO that the assessee had not allocated certain expenses. After assigning few reasons, he has recomputed the eligible profit for the deduction u/s.80-IA and reduced the same to Rs.38,23,04,924/-. The expenses which were allocated were R&D expenses of Rs.50,17,034/-, depreciation of Rs.1,26,50,718/- and DEPB sale of Rs.9,95,000/-.
20.2. When the matter was carried before the first appellate authority, the assessee has not contested the allocation of expenses pertaining to R&D expenses. In respect of claim of depreciation, we have already discussed at length hereinabove while dealing ground No.6 of the Revenue's appeal and held that the depreciation could not be foisted upon the assessee compulsorily.
Therefore, the relief given by the ld.CIT(A) upto this extent is affirmed. Next is the question of DEPB sale which has already been held against the assessee, therefore in consequence thereof, we hereby hold that the relief was wrongly granted by the ld.CIT(A). In respect of rest of the allocation, the verdict of ld.CIT(A) was silent and it appears that the assessee has not contested. In the result, we hereby hold that the issue raised by the Revenue Department is partly allowed.
ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 36
21. Revenue's Ground No.13 reads as under:-
The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.27,04,047/- made out of interest payment on account of transactions with Virtous Finance Ltd.
21.1. The AO has noted that the assessee had charged interest @ 12% from associate-concerns, but paying more rate of interest on the borrowings. The allegation of the AO was that the assessee has charged lower rate of interest from its associate-concerns, but on the other hand, the assessee was paying higher rate of interest on the borrowings. It was noted that the assessee has earned interest @12%, but paying interest at the average rate of 13.81%. The difference between the two; i.e. 1.81% was added amounting to Rs.27,04,047/-.
21.2. Before the ld.CIT(A), it was contested that the assessee was having huge interest-free funds and that the AO has not established that borrowed capital was advanced as interest-free or lower rate of interest to associate-concerns.
The disallowance was deleted.
21.3. Now, before us, reliance has been placed on the decision of Aditya Medisales Limited bearing ITA No.3272/Ahd/2002 (ITAT "D" Bench Ahmedabad), order dated 30/09/2010, wherein an another order of the Tribunal decided in assessee's own case for AY 1998-99 dated 30/06/2006 was discussed and held that in a situation when a finding on facts have been given that the assessee was having substantial interest-free own funds out of which the advances to associate-concerns were given and that there was no nexus that the interest-free borrowed funds have been diverted, then there was no reason for an estimated proportionate disallowance of interest. Respectfully following the ITA Nos. 3047 & 3273/Ahd/2002 Sun Pharmaceutical Industries Ltd.
A.Ys.1999-2000 37 past history of this case, we hereby confirm the findings of ld.CIT(A) and dismiss this ground of the Revenue.
22. Ground Nos.14 & 15 are general in nature need no independent adjudication.
23. In the result, appeal of the Assessee and appeal of the Revenue both are partly allowed.
Sd/- Sd/-
(ANIL CHATURVEDI) (MUKUL Kr. SHRAWAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 04/03/2015
Prabhat Kr. Kesarwani/TC Nair, Sr. P.S.
आदे श क ूितिल$प अमे$षत/Copy
षत of the Order forwarded to :
1. अपीलाथ' / The Appellant
2. ू(यथ' / The Respondent.
3. संबंिधत आयकर आयु* / Concerned CIT
4. आयकर आयु*(अपील) / The CIT(A)-III, Ahmedabad
5. $वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड- फाईल / Guard file.
आदे शानुसार/ BY ORDER, TRUE COPY उप सहायक पंजीकार (Dy./Asstt.Registrar) उप/सहायक आयकर अपीलीय अिधकरण, अिधकरण अहमदाबाद / ITAT, Ahmedabad