Income Tax Appellate Tribunal - Hyderabad
M/S Vivimed Labs Limited,, Hyderabad vs Assessee on 31 May, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 508/Hyd/2012
Assessment Year: 2008-09
M/s Vivimed Labs Ltd., vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 3(3), Hyderabad.
PAN - AACCV6060A
(Appellant) (Respondent)
ITA No. 1041/Hyd/2013
Assessment Year: 2008-09
M/s Vivimed Labs Ltd., vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 3(3), Hyderabad.
PAN - AACCV6060A
(Appellant) (Respondent)
Assessee by : Shri P. Murali Mohan Rao
Revenue by : Shri R.B. Naik
Date of hearing 07-04-2016
Date of pronouncement 31-05-2016
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
ITA No. 508/Hyd/2012 by the assessee
This appeal is preferred by the assessee against the order of CIT(A)-IV, Hyderabad dated 29/02/2012 for AY 2008-09.
2. The assessee-company is engaged in the business of R&D - Manufacturing of specialized chemicals and pharmaceuticals. The 2 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
assessee filed return of income on 26/09/2008, declaring total income of Rs. 5,41,18,320/-. The case was selected for scrutiny and the total income of the assessee was determined at Rs. 7,63,19,512/- u/s 143(3) of the Income-tax Act, 1961 ( in short 'Act') by making following disallowances:
a) Disallowance of claim of interest of Rs. 57,98,000/- on foreign currency convertible bonds (FCCB).
b) Restriction of claim of Bank interest and finance charges by Rs. 30,10,000/-
c) Disallowance of depreciation u/s 32(1) of Rs. 4,46,501/-.
d) Addition for delayed remittance of ESI Rs. 42,086/-.
e) Disallowance of scientific research expenditure claimed u/s 35(2AB) of Rs. 89,86,705/-.
f) Disallowance u/s 40(a)(ia), Rs. 1,00,000/-.
g) Disallowance of provisions towards gratuity and leave encashment of Rs. 16,62,000/-.
h) Disallowance of claim of "Fluctuation in Foreign Exchange"
Rs. 21,48,000/-.
3. Aggrieved with the above order, assessee preferred appeal before the CIT(A). The CIT(A) had confirmed the disallowance made by the AO except giving direction to AO to verify and allow the payments made by the assessee before due date of filing of return of income in respect of ESI payments by relying on the Hon'ble Delhi High Court's decision in the case of CIT Vs. AIMIL Ltd., 321 ITR 508.
4. Aggrieved with the above order, assessee is in appeal before us and has raised the following grounds of appeal:
3ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
The Honourable Commissioner of Income Tax(Appeals) - IV, Hyderabad erred while passing the order in respect of MIS. VIVIMED LABS LIMITED, for the Assessment Year 2008-09 where in, it was held that the assessment order passed by the assessing officer u/s 143(3) dated 30/12/2010 The following are the Grounds of Appeal which may please be considered in favour of the assessee.
1. The Assessee, M/s. Vivimed Labs Ltd. has filed its return of income declaring a total income of Rs. 5,41,18,320/-.
2. Disallowance of the claim of Interest on Foreign Currency Convertible Bonds:
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer towards disallowance of interest on Foreign Currency Convertible Bonds Rs. 57,98,000/- with the contention that, TDS has not been deducted for the said interest.
The Assessing Officer, while passing the Order, disallowed the claim of interest on Foreign Currency Convertible Bonds of Rs. 57,98,000/- on the contention that TDS required u/s. 195 of the Income Tax Act, 1961 has not been deducted.
We would like to submit that, Citi Bank Singapore had debited ale with interest, Bank Charges during the year and the same were accounted under "Interest & Financial Charges" and the question of this does not arise on Bank Interest.
Further, the assessee also submitted a copy of the FCCB loan account and also the interest on FCCB account. A copy of the letter from the Reserve Bank Of India dated.31.05.2007 was addressed to the manager, Citi Bank, Secunderabad was also submitted.
In view of the above explanation, the disallowance of Rs. 57,98,000/- towards claim of interest on Foreign Currency Convertible Bonds is not correct.
3. Disallowance of the claim 'Bank Interest & Financial Charges' u/s. 36(l)(iii):
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer with the contention that, charging interest @ 12% BPLR on the investment shown at Rs. 2,50,51,000/- which works out to Rs. 30,18,000/-. The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer towards addition o fRs. 30,18,000/- as the claim of Bank interest & Financial 4 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
charges proportionate to investments made in Creative Care Health Care Private Limited (Rs. 2,50,00,000) and Vivimed Holdings Limited, Hong Kong(Rs. 51,000). The Assessee claim of expenditure included claim of bank interest & financial charges at Rs. 5,75,56,000/- and secured loans and unsecured loans have been reported at Rs. 48,30,78,888/- and Rs. 61,15,61,000/- respectively.
We would like to submit that this amount represents investment made by the Assessee Company into the Equity Share Capital of its 100% Subsidiary Company. This investment is out of the accruals of the Company.
In view of the above explanation, the charging of interest is not in order and invalid.
4. Disallowance of depreciation u/s. 32 on the amount received as Central Investment Subsidy:
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer, while reducing the amount of subsidy while allowance of depreciation which is not correct and justified in law. As the amount has already been included in Block of Assets being Gross Value of Assets received I purchased by the company and entered into block as per sec 43(6) being block of assets concept and once the amount is entered into the Block of assets the depreciation on the same has to be allowed till the machinery is disposed and hence the depreciation should be allowed to the Assessee Company.
5. Disallowance of expenditure on scientific research:
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer while disallowing total claim of Rs. 89,86,705/- towards expenditure on scientific research.
The Assessing Officer, while passing the Order, disallowed the claim of expenditure on scientific research of Rs.89,86, 705/-. The Assessing Officer contended that during the course of scrutiny proceedings, the Assessee Company has been required to furnish the quantum of expenditure approved by the prescribed authority for the assessment year under consideration for the allowance of its claim.
We would like to submit that, the assessee company has already complied with all the necessary requirement/Conditions for the allowance of claim u/s 35(2AB) and got the approval from the competent authority.5
ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
In view of that, the expenditure may please be allowed to the assessee.
6. Disallowance of expenditure u/s. 40(a)(ia):
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer has erred while disallowing remuneration paid to auditors at Rs. 1,00,000/-. The Assessing Officer, while passing the Order, disallowed remuneration paid to auditors Rs. 1,00,000/- contending that expenditure claimed towards auditors remuneration paid is without deducting TDS.
We would like to submit that, TDS is deducted from the remuneration paid to the auditors and detail of the amount of TDS deducted and other details are also submitted.
7. Disallowance of the provision made towards liability Viz.
(i) Gratuity and (ii) Leave Encashment:
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer has erred while disallowing provisions made towards gratuity and leave encashment at Rs. 7,47,000/-.
The Assessing Officer, while passing the Order, disallowed the provisions made towards gratuity and leave encashment. The Assessing Officer contended that provision made to be disallowed as evidence regarding the payment is not submitted by the Assessee.
We would like to submit that, though the provisions are made by the assessee, the actual payment is also made in the same year. The details of payments are also enclosed.
In view of the above explanation, the provision made during the year is though is allowed u/s. 40A(7), if same is paid during the year the amount is not allowed as expenditure deductible as expenses.
8. Disallowance of the claim of "Fluctuation in Foreign Exchange"
The CIT(Appeal)-IV erred while passing order, where in confirmed the order of the assessing officer while disallowing claim of "Fluctuation of Foreign Exchange" of Rs.21,48,000/-. The Assessing Officer, while passing the Order, contended that the Assessee debited to Profit & Loss account an amount of Rs. 21,48,000/- towards 'Fluctuation in Foreign Exchange'. The Assessing Officer contended that assessee has been required to 6 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
explain as to how the claim of "Fluctuation of Foreign Exchange"
is allowable u/s. 37(1) of the Act.
The The CIT(Appeal)-IV erred while passing order, where in confirmed the contention of the assessing officer that the assessee should furnish details as to whether the forex loss is on account of revenue or capital.
We would like to submit that the amount of Rs. 21,48,000/- is allowed u/s. 37(1) as amount is related to the payment made to the creditors and thus be allowed on revenue account and is not related to purchase of machinery etc., which could be disallowed on capital account.
In view of the above explanation, the "Fluctuation in Foreign Exchange is allowed u/s. 37(1) as amount is related to the payment made to the creditors and thus he allowed on revenue account and is not related to purchase of machinery etc which could be disallowed on capital account."
5. We will adjudicate the appeal, issue-wise as under:
A) Disallowance of claim of interest paid on Foreign Currency Convertible Bonds (FCCB):
i) AO disallowed the interest paid on FCCB as the assessee has not deducted TDS as required u/s 195 of the Act.
ii) Ld. AR submitted that similar addition was made in AY 2009-10 in assessee's own case. The coordinate bench of this Tribunal has deleted the addition made. He has submitted the relevant decision in his paper book. He prayed that the disallowance made in the AY under consideration should also be deleted by following the above decision.
iii) Ld. DR relied on the orders of AO & CIT(A) and submitted that it may be remitted back to the file of the AO to re-examine the loan agreement and terms of sanction of the FCCB.
iv) Considering the submissions of both the counsels and material facts on record, we find that the facts are similar to the facts of AY 2009-10 and the coordinate bench of this Tribunal has given clear findings on this issue, which are extracted below:7
ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
"28. We have considered the submissions of the parties and perused the material on record. As could be seen, the assessee has raised long term bonds from the international market by issuing FCCBs of US $ 50 Million, with option to convert into equity shares or claim repayment after five years. The bonds were raised in the financial year 2007-08 with interest rate of 1% per annum. It is the claim of the assessee that not only the bonds were raised from international market, but the payments were also sourced from assessee's bank account abroad. Therefore, the provisions of S.195 could not be applied. On a perusal of the assessment order and the order of the first appellate authority, it is seen that the only reason on which the departmental authorities disallowed the expenditure is, assessee has not deducted tax at source in terms of S.195 of the Act. However, it is well settled principle of law that if the payments on which tax is sought to be M/s. Vivimend Labs Limited, Hyderabad 11 deducted is not chargeable to tax in India, provisions of S.195 would not apply. In the present case, it is not controverted by the Learned Departmental Representative with cogent evidence that not only the bonds were raised outside India, but the interest payments were also made to non-resident Indians outside India from a bank account held by the assessee outside India. Therefore, since no part of the transaction relating to payment of interest has taken place in India, it cannot be said that interest payment made to non-residents has accrued or arisen in India in terms of S.9 of the Act. In our view, therefore, the provisions of S.195 would not apply to such payments, thereby requiring the assessee to deduct tax at source. We are supported in our view by the decisions cited by the learned counsel for the assessee. Accordingly, we direct the Assessing Officer to delete the disallowance made in this behalf, and allow this ground of the assessee."
v) Respectfully following the decision of the coordinate bench, we delete the addition made on this count.
B) Restriction of claim of Bank interest and financial charges:
i) During the assessment proceedings, AO found that the assessee made investments in equity share capital and the income derived therefrom is exempt from tax. At the same time, assessee claims expenditure of bank interest and financial charges, but, no explanation was offered as to the investments were out of commercial expediency. AO opined that assessee has secured loans and unsecured loans, had the monies invested in equities been utilized for business purposes, assessee's burden of bank interest should have been reduced to that extent. Accordingly, he had restricted by an amount of Rs. 30,18,000/- u/s 36(1)(iii) of the Act.
ii) Ld. AR submitted that similar addition was made in AY 2009-10 in assessee's own case and the coordinate bench of this Tribunal has deleted the addition made. He prayed that this addition also should be 8 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
deleted by following the above decision. He also submitted that the assessee is having sufficient interest free funds in the business by way of reserves and funds generation in the business. He brought to our notice the balance sheet of this FY (Refer page 43 of paper book).
iii) Ld. DR relied on the orders of the lower authorities.
iv) Considering the submissions of both the counsels and material facts on record and relevant decision of this Tribunal, we find that the coordinate bench has given clear findings on this issue, for the sake of clarity, we reproduce the same below:
"18. We have considered the submissions of the parties and perused the material on record. It is relevant to note that right from the assessment stage, it is the plea of the assessee that investment in equity shares of the two companies was made from out of internal accruals and no interest bearing fund was utilised. In fact, during the appellate proceedings before the CIT(A), a remand report was called from the M/s. Vivimend Labs Limited, Hyderabad 8 Assessing Officer, wherein the Assessing Officer accepted the payments made through Axis Bank as from internal accruals of the company. Further, the financial statement submitted by the assessee also demonstrates that sufficient interest free fund was available with the assessee to make the investment in equity shares of the two companies. Hon'ble Bombay High Court in the case of C.I.T. vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340 (Bom.) has held that when the assessee has mixed funds, i.e. both interest free and interest bearing funds, presumption would be interest free advances are from interest free funds available with the assessee. Applying the same principle, it has to be held that the investment in equity shares were made from out of surplus interest free funds available with the assessee. Further, it is a fact on record that investments in equity shares have been made during the period from 8.10.2005 to 21.1.2007 and not in the previous year relevant to the assessment year under dispute. The Department also has not controverted the contention of the assessee that no disallowance out of interest expenditure was made during the assessment year in which the investment was actually made. In view of the aforesaid factual position, we hold that the disallowance of interest expenditure amounting to Rs.17,85,000/- is not sustainable. Accordingly, we delete the same, allowing the grounds of the assessee on this issue."
Respectfully following the decision of the coordinate bench, we delete the addition made.
C) Restriction on claim of depreciation u/s 32:
i) The AO noted that the assessee company was sanctioned a subsidy of Rs. 29,76,676/- under the "15 percent central investment subsidy 9 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
scheme" by the Directorate of Industries, Uttarakhand, Patel Nagar, Dehradun for investment in plant & machinery of Rs. 1,98,44,507. The AO observed that the Hon'ble Apex court in the case of Ponni Sugar & Chemicals Ltd., 306 ITR 392, held that if the object of the assistance under subsidy scheme was to enable assessee to set up a new unit or to expand the existing unit then the receipt for the subsidy was on capital account. He opined that the subsidy/grant-in-aid so allowed will go on to reduce the cost of acquisition of the assets for the purpose of claiming depreciation u/s 32 of the IT Act. The assessee, however, did not reduce the investment subsidy from the cost of the relevant assets, before claiming depreciation for the AY 2008-09. The subsidy of Rs. 29,76,676/- is to be rightly treated on capital account and hence, the same is reduced from the value of additions to assets during the year to determine the depreciation allowable. Accordingly, the AO reduced an amount of Rs. 4,46,501/- being depreciation @ 15% on Rs. 29,76,676/- from the depreciation on block of assets - plant & machinery. Therefore, the total claim of depreciation restricted by an amount of Rs. 4,46,501/-.
ii) Ld. AR submitted that the govt. subsidy is in the nature of capital receipt and cannot be reduced from cost of assets. He relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. P.J. Chemicals Ltd., 210 ITR 830 (SC) and Hon'ble AP High Court in the case of CIT Vs. Godavari Plywoods Ltd., 168 ITR 632 (A).
iii) Ld. DR relied on the orders of the lower authorities.
iv) Considering the submissions and material facts on record as well as perusing the Hon'ble Supreme Court's decision in the case of P.J. Chemicals, it had accepted the majority views of the different High Courts, in particular, the views of Hon'ble High Court of P&H in the case of CIT Vs. Jindal Bros. Rice Mills, [1989] 179 ITR 470. The respective ratio of the decision is reproduced for convenience:
10ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
"13. The question in the present context is not whether if a portion of the costs is met directly or indirectly by any other person or authority, it should be deducted or not. Quite obviously, the plain meaning of the section is that it shall be. But the real question is as to the character and nature of a subsidy whether it was really intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid. The contention is that it is not a payment, directly or indirectly, to meet any portion of the "actual cost" but intended as an incentive to entrepreneurs, its quantification determined at a percentage of the fixed capital cost.
In Godavary Plywoods' case (supra), the Andhra Pradesh High Court, adopting this view, observed :
"Nowhere had the scheme provided as to how the subsidy should be utilised and for which assets. It was open to the assessee to legitimately reduce the cost of land in its books of account to the full extent of the subsidy, in which case the cost of plant and machinery would remain at invoice price uninfluenced by the amount of subsidy. The amount received by way of subsidy could be utilised for any purpose such as acquiring land on which no depreciation was admissible or on plant and machinery or for erection of buildings or for working capital or for repaying the loans already borrowed. Hence, unless the subsidy received had a nexus, direct or indirect, to meet a portion of the actual cost of any specific capital asset. it could not be brought within the purview of s. 43(1) of the Act. Therefore, the subsidy could not be deducted from the actual cost of the assets to the assessee and depreciation should be allowed without reducing the same by the amount of subsidy granted."
In CIT vs. Grace Paper Industries Pvt. Ltd. (supra), the Gujarat High Court said :
"The dictionary meaning of `subsidy' is `a grant of money from a Government to a private enterprise considered as beneficial to the public'. The Government, in order to determine the amount of cash subsidy, decided to follow one of the recognised methods of working it out on the basis of the amount invested by an entrepreneur in acquiring capital assets and specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and the subsidy was not given for the specific purpose of meeting any portion of the cost of the fixed assets. Consequently, the subsidy did not form part of the actual cost of plant and machinery within the meaning of s. 43 of the IT Act, 1961. It cannot be deducted from the cost of assets in computing depreciation, development rebate and investment allowance."
14. On the contrary in CIT vs. Jindal Bros. Rice Mills (1989) 79 CTR (P&H) 235 : (1989) 179 ITR 470 (P&H), the Punjab & Haryana High Court has said :
"When it is specified in the incentive policy that 15 per cent of the cost of plant, machinery and building would be provided by the State Government, the underlying object is to reduce the value of the plant, machinery and building by 15 per cent of the actual cost. The actual cost would so stand 11 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
reduced within the meaning of s. 43(1) of the Act.... We are equally not impressed by the reasoning that the basis adopted for determining the cash subsidy with reference to the fixed capital cost is only a measure adopted and cannot make the subsidy as given only for the specific purpose of meeting any portion of the fixed capital cost.....
The incentive by way of subsidy is given for each item separately and it would not be open to the assessee to appropriate the subsidy for a purpose other than that for which it was given to him. Even if the assessee wrongly maintains the account books and utilises the entire subsidy against the value of the land to reduce its cost, the ITO would not overlook the matter and would appropriate the subsidy in reducing the cost of the machinery, plant and building for which the subsidy was specifically granted. There is a nexus between the cost of each item and the subsidy under each head."
15. On a consideration of the matter the view that commends itself as acceptable is the one which has commended itself to the majority of the High Courts. It is, of course, not the numerical strength that prevails --- though the fact that a particular view has commended itself to a majority of the High Courts in the country is a matter for consideration --- but the tensile strength of the acceptable logic in those decisions. It is aptly said that "a Judge who announces a decision must be able to demonstrate that he began from recognized legal principles and reasoned in an intellectually coherent and politically neutral way to his result". In the present case the reasoning underlying, and implicit in, the conclusion reached by the majority of the High Courts cannot be said to be an unreasonable view and on a preponderance of preferability that view commends itself particularly in the context of a taxing statute. The expression "actual cost" needs to be interpreted liberally. The subsidy of the nature, we are concerned with, does not partake of the incidents which attract the conditions for their deductibility from "actual cost".
Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the "actual cost". We should prefer the reasoning of the majority of the High Courts to the one found acceptable by the High Court of Punjab and Haryana.
16. In the result, we affirm the judgments of the High Courts which have answered the question against the Revenue and dismiss the first batch of appeals and allow the second batch preferred by the assessee and in reversal of the opinion of the High Court, answer the question referred against the Revenue."
The Hon'ble Supreme Court had dismissed the appeal of the revenue and upheld that the determination of the subsidy is linked to the specific assets but subsidy issued for the overall benefit of the business. In the present case, the subsidy was issued in reference to the machinery. But, the assessee had submitted the letter of approval of subsidy but from that letter it could not be established whether the subsidy was issued for the benefit of the business or for the expansion of the business. Moreover, the 12 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
letter of approval was addressed to VVS Pharmaceuticals & Chemicals Pvt. Ltd., which is the previous name of the assessee, as claimed by the AR. W e, therefore, remit the matter back to the file of the AO to check the above deficiencies. AO may check the type of subsidy from the policy of the Central Government on investment subsidy scheme and how the subsidy was received by the assessee when the same was addressed to old name of the assessee. Assessee may be given proper opportunity of being heard. In the result, this ground is allowed for statistical purposes.
D) Addition on account of delay in payment of PF & ESI:
i) AO disallowed the PF & ESI as the assessee made remittance of the amounts after due date, by virtue of insertion of clause (i) of sub-
section(24) of section 2 by Finance Act, 1987, even the employees contribution to PF and subscription to insurance etc., are required to be included within the income of the assessee.
ii) Ld. AR submitted that all the remittances were made before filing of return of income. He submitted that various Hon'ble Courts has held that PF & ESI remittances made before filing of return of income is deductible as expenditure.
iii) Ld. DR relied on the orders of lower authorities.
iv) Considered the submissions of the parties and material facts on record. It is a fact that the remittance of PF & ESI were made before filing of return of income. The Hon'ble Supreme Court in the case of CIT Vs. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) held that the amendments to section 43B brought out by the Finance Act, 2003 with effect from 01/04/2004 are retrospective in nature and would operate from 01/04/1988. Various benches of ITAT and coordinate benches of this Tribunal have followed the above decision and held that the amendment to section 43B brought out by the Finance Act, 2003 is retrospective in nature and justified in deleting the additions made on account of delayed payment of Provident Fund of employees contribution. Since, PF & ESI are same, respectfully following the 13 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
decisions of coordinate benches of this Tribunal we direct the AO to delete the addition made on account of PF & ESI Payments.
E) Disallowance of claim of deduction u/s 35(2AB):
i) During the course of assessment proceedings, the assessee company have been required to furnish the quantum of expenditure approved by the prescribed authority for the AY under consideration for the allowance of its claim. The assessee company filed letter No. TU/IV-RD/2509/2005, dt. 27/06/2006 wherein the recognition of In-
house R&D unit of the assessee company was confirmed by the Department of Science and Industrial Research (DSIR), Ministry of Science and Technology, Govt. of India. However, the assessee furnished no order of approval issued by DSIR containing the quantum of expenditure approved, eligible for deduction.
ii) The AO noted that as per clause (3) of sub-section (2AB) of section 35, the assessee shall be entitled for deduction under clause (1) only when it enters into an agreement with the prescribed authority for cooperation in such research and development facility and for audit of the accounts maintained for that facility. He observed that the prescribed authority is the DISR, Govt. of India. Since the assessee has not furnished order of approval of DSIR containing the quantification of the expenditure entitled for deduction u/s 35(2AB) of the IT Act, the AO held that the assessee is not entitled for the weighted deduction claimed at Rs. 89,86,705/-.
iii) Ld. AR submitted that assessee is having necessary approval from DSIR and addition cannot be sustained. He also submitted that similar disallowance was made in AY 2009-10 and the coordinate bench has remitted back the issue to the file of the AO to verify the approval and allow the deduction found correct.
iv) He also submitted that DSIR has accorded approval vide in its letter received (refer pages 7-8 of paper book) and he also submitted the details of expenditures incurred and submission.
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v) Ld. DR relied on the orders of the authorities below.
vi) Considering the submissions of the parties and material facts on record, we are of the view that assessee had submitted the letter of approval from DSIR, but, the AO had disallowed the expenditure mainly due to no order of approval of DSIR containing the quantification of the expenditure entitled for deduction u/s 35(2AB) of the Act, has been submitted by the assessee. Even before us, assessee had not submitted any records, which is required as per sub-section (3) of section 35(2AB) of the Act but contested that all the relevant approvals were submitted. We remit the issue back to the file of the AO to verify the approval of quantification by the DSIR along with the audited financial records. Assessee may be given proper opportunity of being heard.
vii) In the result, this ground of assessee is allowed for statistical purposes.
F) Disallowance u/s 40(a)(ia)
i) Since the assessee has not deducted tax at source on the remuneration paid to auditors at Rs. 1,00,000/-, the AO disallowed the expenditure claimed towards auditors remuneration.
ii) Ld. AR submitted that if there is no default u/s 201(1) by the assessee, no disallowance u/s 40(a)(ia) can be made. He relied on the decision of this Tribunal in the case of Visu International Ltd., ITA Nos. 488 & 621/Hyd/2013.
iii) Ld. DR submitted that the proceedings u/s 201(1) is separate and assessment is itself different from regular assessment u/s 143(3) of the Act. It is not practicable to initiate proceedings u/s 201(1). If the assessee fails to deduct tax, particular expenditure has to be disallowed u/s 40(a)(ia). He insisted that this issue may be remitted back to the file of the AO for verification.
15ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
iv) Considering the submissions of the parties and material facts on record, we find that the coordinate bench of this Tribunal has remitted similar issue back to the file of the AO to verify as to whether the Assessee company is treated as an assessee in default u/s 201(1) of the Act for its failure to deduct tax at source from payment made on account of audit fee. As per the provisions of section 201(1), the assessee will be treated in default only when the provisions of section 201(1) is violated. As rightly, the coordinate bench has remitted the matter to the file of the AO to determine whether assessee is in default. Similarly, we also find it proper to remit this matter back to the file of the AO to verify as to whether the assessee is treated as an assessee in default u/s 201(1) of the Act with regard to payment of audit fees. If it is found on such verification that the assessee is not in default, AO is directed to delete the disallowance made u/s 40(a)(ia) on account of audit fees. In the result, this ground of appeal is allowed for statistical purposes.
G) Disallowance of provision of Gratuity:
i) The assessee made provisions towards payment of gratuity and leave encashment at Rs. 7,47,000/- and Rs. 9,15,000/- respectively.
As the assessee failed to furnish evidence in support of payment of gratuity and leave encashment, the AO considered the same for disallowance and made addition to the total income.
ii) Ld. AR submitted that actual payment was made during the year, therefore, AO cannot make disallowance. He relied on the decision of this Tribunal in the case of Sri Krishna Pharmaceuticals.
iii) Ld. DR relied on the orders of lower authorities.
iv) Considering the submissions of the parties and material facts on record, we find that the AO had made addition due to non-submission of proof for payment made on gratuity and leave encashment. Ld. AR submits that the payments were made. Ld. AR relied on the case of Sri Krishna Pharmaceuticals. On perusal of order, we find that the 16 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
facts of this case are different. The disallowance was made due to creation of unrecognized gratuity fund, which was allowed u/s 37 as deduction. But, in the present case, disallowance was made due to non filing of proof of payment. We remit this issue back to the file of the AO to verify the proof of payment as claimed by the assessee on payment of gratuity and leave encashment. If found proper, he may allow this expenditure, otherwise, the disallowance may be sustained. Assessee may be given proper opportunity of being heard. Accordingly, this ground is allowed for statistical purposes.
H) Disallowance of the claim of Foreign exchange fluctuation:
i) The assessee debited to profit & loss account an amount of Rs.
21,48,000/- towards fluctuation in foreign exchange. When AO asked to explain as to how the claim of fluctuation in foreign exchange is allowable u/s 37(1) of the Act, the assessee has not furnished any details as to whether the forex loss is on revenue account or capital account or deferment of repayment of loan.
ii) The AO observed that the IT Act contemplates taxing only real income and real losses and no notional income and notional losses are subjected to tax. The assessee is claiming the deduction of exchange rate fluctuation loss u/s 37 which is a residuary provision, as there is no specific provision dealing with adjustment based on foreign exchange fluctuation. The AO opined that the essence of deductibility u/s 37 is that the increase in liability due to foreign exchange fluctuation must fulfill the twin requirements of expenditure and the factum of such expenditure having been 'laid out or expended. The expression expenditure is what is paid out and something which is gone irretrievable. AO noted that increase in liability at any point of time prior to payment cannot fall within the meaning of the word 'expenditure' in section 37(1). He observed that the requirement of expenditure is not met and similarly the requirement of money being expended or laid out is also not satisfied. AO, therefore, disallowed the assessee's claim of fluctuation in 17 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
foreign exchange at Rs. 21,48,000/- and added the same to the income of assessee.
iii) Ld. AR submitted that the foreign exchange fluctuation is on creditors, which is revenue in nature. It is allowable as expenditure. He relied on the decision of the Tribunal in the case of Ybrant Digital Ltd. in ITA No. 1769/Hyd/2012.
iv) Ld. DR placed reliance on the orders of lower authorities.
v) We have considered the submissions of the parties and perused the material facts on record. The issue is squarely covered by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Woodword Governer India Pvt. Ltd, 312 ITR 254(SC) where it is held as under:-
"Where it has been held that loss suffered by the assessee in respect of revenue liability on account of exchange difference as on the date of the Balance Sheet is an item of expenditure allowable under section 37(1). As per AS 11, exchange difference arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise. An enterprise has to report the outstanding liability relating to import of raw-material using closing rate or exchange and the same has to be recognized in the prof it & loss account for the reporting period. Hence, the same may be allowed."
Respectfully following the decision of the Hon'ble Supreme Court in the said case, we direct the AO to delete the addition made on this count.
6. In the result, appeal of the assessee is partly allowed for statistical purposes.
ITA No. 1041/Hyd/2013 by assessee7. The assessee company has filed its return of income for AY 2008-09 electronically on 26.09.2008 admitting total income of Rs.5,41,18,320/-. The case was selected for regular assessment and AO completed the assessment u/s 143(3) and determined the taxable income at Rs. 7,63,19,612/- The CIT-III by virtue of power vested on 18 ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
him u/s 263 has called for and examined the assessment records and found that following issues were not examined by the AO in the assessment proceedings:
i) Sales Tax penalty of Rs. 12,98,812/-
ii) Depreciation on Lift installed in the residence of Director
iii) Claimed 100% depreciation on Water Pollution control of Rs.
7,59,65,617/-.
8. The AR of the assessee represented and stated that the assessee preferred appeal against the assessment order u/s143(3) and CIT(A) has given some relief. Still Assessee filed further appeal before hon'ble tribunal and it is pending for adjudication.
9. CIT-III did not accepted the above representation and opined that the issue raised by him is not sub-judice before hon'ble ITAT. He also noticed that AO has while completing the assessment u/s 143(3) has erroneously failed to examine the above said issues and its tax implications. Therefore, the above issues were not on the record and not placed in the assessment order. Hence, CIT has power to revise the assessment u/s 263 of the Act. He considered the assessment passed u/s 143(3) of the Act as erroneous and so far as it is prejudicial to the interest of revenue.
10. Ld AR submitted before CIT that all the issues raised by him were already dealt by AO during assessment proceedings and queries raised by AO were already placed on record,
11. CIT did not accept the contention of the assessee and confirmed the revision order u/s 263.
12. Aggrieved with above order, assessee is in appeal before us, raised following grounds of appeal.
"1. The order of the Ld. CIT-III, Hyderabad is erroneous both on facts and in law.19
ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
2. The Ld. CIT-III, Hyderabad has erred in passing the order u/s 263 observing that the assessment order passed u/s.143(3) by the DCIT, Circle-3(3), Hyderabad is erroneous and prejudicial to the interests of revenue.
3. The Ld. CIT-III, Hyderabad erred in passing the order U/s.263 by forming mere change of opinion and without considering the fact that the original assessment had been completed u/s 143(3) of the IT Act, 1961 after careful verification of all the information furnished.
4. The Ld. CIT-III, Hyderabad ought to have appreciated the judgment of Honorable Supreme Court of India in the case of MALABAR INDUSTRIAL CO. LTD. v. COMMISSIONER OF INCOME TAX (2000)-243-ITR-0083 (SC)
5. The Ld. CIT-III, Hyderabad has erred in holding that the amount of Rs.12,98,812/- is not to be allowed u/s 37(1).
6. The Ld. CIT-III, Hyderabad ought to have appreciated the fact that, lift installation expenditure incurred for welfare of director is allowable u/s 37 of the IT Act,1961.
7. The Ld. CIT-III, Hyderabad has erred in directing the AO to disa1Jow the depreciation of Rs.7,59,65,617/- on pollution control equipment.
8. The Ld. CIT-III, Hyderabad erred in directing the AO to disallow deprecation on pollution control equipment which was already examined and allowed by the AO u/s143(3) of the IT Act,1961. "
13. Ld AR Submitted before us the correspondence exchanged with AO during assessment proceedings, which are submitted along with the paper book, refer pages 30 to 59 of the paper book. He submitted that AO had already considered the issues which are under consideration by CIT-III. He also submitted before us the questionnaires, which were asked to submit to complete the assessment by AO, which are part of paper book, refer page 70 of the paper book. Ld AR also submitted that it is not necessary that all the issues to be placed on record by AO, it is enough that he verifies the issues and form necessary opinion on these issues and pass the assessment order , relies on the decision of jurisdictional high court in Spectre holdings case.
14. Ld DR relies on the order of CIT.
20ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
15. Considered the submissions of both counsels and material facts on record. We are of the view that CIT-III re-examined the issues which are already considered by AO during the assessment proceedings. Since AO already considered and taken a stand and formed an opinion, may be a possible view at that point of time, passed the assessment order based on the above opinion. The CIT-III cannot exercise the revisional jurisdictional power on the same issue again and take different view. The co-ordinate bench of this tribunal has taken a stand that the re-examination of assessment orders on the same set of facts is against the law and even the honorable jurisdictional high court and honorable apex court has opined that this is against law and as per accepted principle of assessments. Even in the case of Spectra Shares and Scrips Pvt. Ltd. Vs. CIT, 354 ITR 35(AP) case, the hon'ble court has opined as below:
"It was held that the AO had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the revenue warranting exercise of revisional jurisdiction u/s.263 by the CIT (A). The CIT (A) had no different or new material to take different view from the one taken by the AO and the reasons given by him to reopen the assessment and sustain the revision were totally unacceptable. The CIT (A) was not vested with any power u/s.263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. It was further held that the Tribunal had grossly erred in agreeing with the order of the CIT (A) and in upholding it on grounds which had not been found in the show cause notice of the CIT (A), that too without considering the several issues of fact and law raised by the assessee in his written submissions and grounds of appeal. Both the CIT (A) and the Tribunal based their orders on preconceived notions, conjunctures and surmises, manifestly misread the facts and twisted them to justify their conclusions."
In line with the above discussion, we are of the opinion that CIT cannot review the order of AO, who has applied his mind on the issues which are subject matter of dispute now. Hence we quash this order of CIT passed u/s 263 of the Act.
16. In the result, appeal of the assessee is allowed.
17. To sum up, appeal in ITA No. 508/H/12 is partly allowed for statistical purposes and appeal in ITA No. 1041/H/13 is allowed.
21ITA No. 508 /Hyd/2012 & 1041/H/13 M/s Vivimed Labs Ltd.
Pronounced in the open court on 31 st May, 2016.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st May, 2016
kv
Copy to:-
1) M/s Vivimed Labs Ltd., C/o P. Murali & Co., CAs., 6-3-655/2/3, 1 st Floor, Somajiguda, Hyderabad - 500 082
2) DCIT, Circle - 3(3), Hyderabad.
3 CIT(A) -IV, Hyderabad
4) CIT - III, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
D es c ri p t i o n Date Intls
S . N o.
1. D r af t di c t at ed on S r. P . S . / P . S
2. D r af t pl ac e d be f or e a ut h or S r. P . S / P S
D r af t p ro p os ed & pl ac e d b ef o re t h e s e c on d J M/ A M
Mem b er
3
4 D r af t di s c us s e d/ a pp r ov e d b y s e c o n d Mem b er J M/ A M
5 A p pr ov e d D r af t c om es t o t he S r . P . S . / P S S r. P . S . / P . S
6. K e pt f or p r o no u nc em e nt on S r. P . S . / P . S .
7. Fi l e s en t t o t h e B e nc h C l erk S r. P . S . / P . S
8 D a t e o n w hi c h f i l e g o es t o t h e H e ad C l e rk
9 D a t e o f D i s p at c h o f o rd e r