Income Tax Appellate Tribunal - Ahmedabad
Torrent Pharmaceuticals Ltd.,, ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B" AHMEDABAD
Before Shri Mahavir Singh, Judicial Member, and
Shri D. C. Agrawal, Accountant Member
IT A No.333 & 346/Ahd/2006
Assessment Year:2002-03
Date of hearing:4.1.11 Drafted:25.1.11
ACIT, Circle-8, V/s. Torrent Pharmaceuticals
Ahm edabad, 4 t h Floor, Ltd. "Torrent House, Nr.
Ajanta Dinesh Hall, Off Ashram
Commission.Centres, "A", Road, Ahmedabad
Wing, Ashram Road,
Ahm edabad
Torrent Pharm aceuticals V/s. ACIT, Circle-8,
Ltd. Nr. Dinesh Hall, Ahm edabad
Ashram Road, Ahm edabad
PAN No. AAACT5456A
(Appellant) .. (Respondent)
ITA No.4343 & 4356/ Ahd/2007
Assessment Year:2004-05
Torrent Pharm aceuticals V/s. DCIT, Circle-8,
Ltd. Nr. Dinesh Hall, Ahm edabad, Ashram
Ashram Road, Ahm edabad Road.
PAN No. AAACT5456A
ACIT, Circle-8, 4 t h Floor, V/s. Torrent Pharmaceuticals
Ajanta Commission. Ltd. "Torrent House, Nr.
Centres, 'A', W ing, Dinesh Hall, Off Ashram
Ashram Road, Ahm edabad Road, Ahmedabad
(Appellant) .. (Respondent)
Assessee by :- Shri S.N.Soparkar, SR-AR &
Shri P.M. Mehta, AR
Revenue by:- Shri Alok Johari, CIT-DR
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05
Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 2
ORDER
PER Mahavir Singh, Judicial Member:-
These four cross-appeals, by assessee and Revenue, are arising out of the order of Commissioner of Income-tax, in appeal Nos CIT(A)-XIV/AC8,107 & 282/2005-06 & 2007-08 of different dates i.e. 30-11-2005 & 24-09-2007. The assessments were framed by ACIT, Range-8/DCIT, Circle-8, Ahmedabad u/s143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide their orders dated30-03-2005 & 29-12-2006 for assessment years 2002-03 & 2004-05 respectively.
2. The first common issue in these appeals of Revenue in ITA No.333/Ahd/2006 and ITA No.4356/Ahd/2007 is as regards to the order of CIT(A) in deleting the disallowance on account of selling, publicity and medical expenses. For this, assessee has raised the following ground No.1:-
ITA No.333/Ahd/2006 in A.Y.2002-03."1. The ld. CIT(A) has erred in law and on facts in deleting selling, publicity expenses and medical expenses amounting to Rs.18,58,17,166/-."ITA No.4356/Ahd/2007 in A.Y.2004-05.
"1. The ld. Commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made out of selling, publicity and medical literature expenses amounting to Rs.23,76,75,964/-"
The issue being identical on facts in both the years, we will decide the issue after taking the facts from assessment year 2002-03.
3. The brief facts leading to the above issue are that Assessing Officer made disallowance of selling publicity and medical literature expenditure. The assessee- company has incurred expenditure of Rs.33,05,49,237/- on selling & publicity expenses along with includes presentation articles of Rs.5,18,23,488/-. The assessee-company has incurred expense on printing on packing i.e. brief literature of medicines, medical representative training expenses, sales promotion expenses etc. The AO noted that similar issue was involved in assessment year 1998-99 and CIT(A) has decided the issue in favour of assessee. The AO has stated that in ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 3 assessment years 1998-99 and 1999-00 the expenses on presentation article was disallowed and out of the balance amount 2/3rd of the expenditure was disallowed. The decision of CIT(A) for assessment years 1998-99 and 1999-00 have not been accepted by Revenue. The AO has stated that the facts in the present year being identical and expenditure of Rs.5,18,23,488/- included in the above expenditure on account of presentation articles is allowed in full and out of the balance expenditure of Rs.27,87,25,749/- i.e. 1/3rd Rs.5,29,08,583/- is considered as admissible and remaining expenditure of Rs.18,58,17,166/- is disallowed. It is also stated that no deduction is allowed for such expenses of earlier years, in view of the fact, that revenue has not accepted the assessment orders for earlier years. The CIT(A) noted that the issue is covered by the order of this Tribunal for assessment years 1998-99 & 2000-01 and the relevant finding of CIT(A) in para-3.2 are as under:-
"3.2 I have considered the above submission, the assessment and the appellate orders for earlier years. The issue is similar to that involved in earlier years. The Assessing Officer has also mainly relief upon the assessment orders for earlier years. Therefore, for the reason discussed in the appellate orders for A.Y 1998-99 to 2001-02 I direct the Assessing Officer to delete this addition. The appellate get relief of Rs.18,58,17,166/-."
4. At the outset Ld. Sr-Counsel for the assessee, Shri S.N.Soparkar stated that this issue is covered in favour of assessee and against the Revenue by the decision of this Tribunal in ITA No.3569/Ahd/2004 for assessment year. 2001-02 vide para-4 as under:-
"4. After hearing the rival contentions and going through the case records we find that the Tribunal exactly on similar facts has dealt with this issue in ITA No.3146/Ahd/2003 for the assessment year 2000-01 order dated 21-08-2000 vide para-7 to 11 as under:-
"7. Ground no.2 relates to disallowance of Rs.12,74,66,253/- on account of selling, publicity and medial literature expenses. Relying upon his own order in assessment year 1998-99, the AO allowed one third of the claim for deduction of the said expenditure while disallowing the remaining amount.
8. On appeal, the learned CIT(A), following his own orders for the assessment years 1998-99 and 1999-2000 and the decision of the ITAT for the AY 199-93, allowed the claim of the assessee.
9. Both the parties agreed that issue is covered in favour of the assessee by the decision dated 9-6-2007 of the ITAT in assessee's own case for the assessment year 1998-99 in ITA No.446/Ahd/2002. ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 4
10. We find that the Tribunal while adjudicating a similar claim in the assessee's own case in the AY 1998-99, concluded in their order dated 26-6-2007 as under:
'10. During the course of hearing, both the parties agreed that this issue is covered in favour of the assessee by the decision of ITAT, Ahmedabad Bench in assessee's own case for the AY 1997-98 in ITA No.1044/Ahd/2002. wherein the ITAT has upheld the order of the CIT(A) and dismiss the ground raised by the Revenue by observing in its order in paragraph 3-series, which is reproduced as under:
"3.1 Ground no.2 is in respect of deletion of Disallowance on account of selling publicity and medical literature expenses Rs.7,83,87,87/-
3.2 Facts of the issue are that the Assessing Officer following earlier years allowed only 1/3rd expenditure. The CIT(A) followed earlier years orders of CIT(A) and deleted the addition. Aggrieved, the department has come up in appeal and urged cancellation of the CIT(A) order.
3.3 Heard the parties. It is found that this matter is also covered by the order dated 23.02.05 of the ITAT, Ahmedabad passed in appeal filed by the department beating ITA No.1150/A/1997 for the assessment year 1993-94 wherein the Tribunal has held as under:
13. Ground No.3 reads as under:
3. The ld. CIT(A) has erred I law and on facts in deleting the disallowance of Rs.2,44,03,667/- out of expenses on selling publicity etc.
14. The ld. DR admitted that this issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case for A.Y 1992-93 whereby para 18, the Tribunal has uphold the order of the CIT(A) vide which similar addition was deleted. Copy of the said order is placed at page nos.39 to 50 of the paper book (ITA No.4226/Ahd/1995, ITA No.4204/Ahd/1995 dated 17.4.2002). The said para for the sake of convenience is reproduced below:
"18. Ground No. vii related to medical literature etc. expenses for Rs.1,25,03,910/-. It has been found by the Assessing Officer that the assessee debited expenditure under the head publicity and medial literature expenses amounting to Rs.1,87,57,74/- out ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 5 calculation of the impugned addition 66.66% of Rs.1,87,57,742/- comes to Rs.1,25,03,910/-. The CIT(A) has deleted the same with the observations in earlier years, following the same reasons as in earlier years there was no basis to disallow 66.6% expenses as deferred capital expenditure. The ld. AR submitted that the issue is covered b the order of the Tribunal in assessee's own assessee for AY 1988-89 in ITA No.4938/91. The relevant observation of the Tribunal in that case is reproduced below:
"The ld. counsel for the assessee submitted that the issue in dispute is covered in favour of the assessee and against the revenue as per the decision of the Tribunal in the case of Torrent Laboratories 59 TTJ 676 which although related to disallowance u/s.37(3A) yet the ratio is applicable to deduction u/s.37 also. It was submitted that in the year under consideration the Assessing Officer has disallowed only 4/5 of the expenses presumably considering the same as deferred revenue expenditure. It was pleased that the CIT(A) however has allowed the claim of the assessee following the decision of the jurisdictional. High Court in the case of Navsari Cotton & Silk Mills supra"
After considering the submission of the parties to the disputes, we are of the opinion that the order of CIT(A) requires no interference as it is based on the principles laid down by the jurisdictional High Court in the case of Navsari Cotton & Silk Mills supra. Accordingly this ground of appeal is also dismissed.
15. After hearing both the parties, respectfully following the afore cited decision, we find no merits in this ground and the same is dismissed. The order of the ld. CIT(A) in this regard is upheld."
3.4 Thus, respectfully following the above order of the Tribunal as the revenue did no dispute that facts were not identical, we uphold the order of the CIT(A), deleting the disallowance made by the Assessing Officer."
Respectfully following the said order of the ITAT, as the Revenue did not dispute that facts were not identical, we uphold the impugned order of the CIT(A) in disallowance made by the Assessing Officer.
11. In the light of the aforesaid decision of the Tribunal for the AY 1998-99, following their decision for the assessment year 1997-98 in ITA No.1044/Ahd/2002 while undisputedly facts and circumstances remaining the same as in the earlier assessment years, we have no alternative but to uphold the findings of the ld. CIT(A). Therefore, ground no.2 is dismissed."
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 6 We find that the above issue is covered in favour of the assessee and against the Revenue. Respectfully following the Tribunal's decision in assessee's own case in ITA No.3146/Ahd/2003 (supra) in immediate preceding year, on similar facts, we confirm the order of CIT(A) allowing the claim of the assessee and this issue of the Revenue's appeal is dismissed."
5. The Ld CIT-DR stated that additions were made by following earlier years order where it was held that such expenditure gives benefit of enduring nature hence only 1/3rd of it were allowed. According to him, various appellate authorities following the Hon'ble Gujarat High Court decision in the case of Navsari Cotton Mills allowed such expenditure treating such expenditure as wholly and exclusively for the purpose of business and now the peculiar thing is about no information available of details of such expenditure on one hand and the fact in the other hand that balance-sheet of the appellant does not show any inventory of medical literature and unutilized advertisement contract related to goods. According to him, this suggests that the entire material so prepared or utilized is being utilized during the previous year, which is quite anomalous and generally the medical literature is being got printed in large number for the utilization of medical representatives. Similarly for advertisement and publicity if contract is spread over next year for contract of more than one year or contract is made in between year for one year then part period of the contract has to be considered in next year. It is basically this spill over which is treated as expenditure of enduring nature. Accordingly, he supported the order of Assessing Officer.
6. We have heard rival contentions and gone through the facts and circumstances of the case. We find that this issue is consistently allowed by the Tribunal in favour of assessee as noted above in assessee's own case (supra). No doubt, the assessee is following mercantile system of accounting but the liability of expenditure accrues, moment assessee incurs expenditure on a particular item. It is also a fact that the assessee has produced complete bills & vouchers for verification before Assessing Officer as argued by Ld. counsel for the assessee and the AO could not point out, which bills pertains to next year. Accordingly, we feel that this issue is squarely covered in favour of the assessee by Tribunal's decision in assessee's own case (supra). Respectfully following the co-ordinate Bench decision, ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 7 we allow the claim of the assessee and confirm the order of CIT(A). This common issue of Revenue's appeal, in both years, is dismissed.
7. The next common issue in these cross appeals of Revenue as well as assessee is as regards to the order of CIT(A) in restricting the disallowance u/s.14A of the Act to Rs.1 lac out of Rs.30,54,041/- made by Assessing Officer. For this, assessee has raised the following ground No.2:-
ITA No.333/Ahd/2006 by Revenue (for A.Y.2002-03)"2. The ld. CIT has erred in law and on facts in directing to restrict the disallowance u/s.14A to Rs. 1 lac out of Rs.30,54,041/- made by the A.O."
And against the deletion of addition by CIT(A), Revenue raised the following ground No.1:-
ITA No.346/Ahd/2006 by assessee (for A.Y.2002-03)"1. On the facts and in the circumstances of the case, the CIT(A) has grossly erred in partly sustaining the addition to the extent of Rs.1,00,000 on estimate basis while disposing of the ground regarding disallowance of Rs.30,54,041 under section 14A of Income tax Act.
This Hon'ble Tribunal may, therefore, be pleased to hold that there is no justification in disallowing Rs.1,00,000 on estimate basis u/s.14A of the Act."
8. The brief facts leading to the above issue are that Assessing Officer noted that the assessee had claimed exemption u/s 10(33) of the Act for dividend amount to Rs.55,83,147/- earned during the year under consideration and he noted in para 6.2 of his assessment order as under:-
"6.2 In the absence of proper working made available by the assessee, proportionate expenses, based on the ratio of exempted income to total income, is worked out on pro-rate basis considering the following common expenses debited in P & L Account for this purpose
i) Salaries, Wages & Bonus Rs.28,18,66,000
ii) Traveling, conveyance & vehicle exp. Rs. 5,37,43,000 Total Rs.33,56,09,000"
Therefore the expenses pertaining to exempted income is worked out at 0.91% of Rs.33,,56,09,000/- i.e. Rs.30,54,041/-. The CIT(A) restricted the addition at Rs.1 lakh by giving following findings in para-4.1 of his appellate order:-
"4.1 I have carefully considered the assessment order and the above submissions. I appreciate the submissions of the appellant that no specific ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 8 expenditure is incurred for the purpose of earning of dividend. The most of administrative expenses and other expenses are referable to the Pharmaceutical business of the appellant. However, at the same time when dividend income has been earned by the appellant, naturally some efforts are required for investment activity from which the dividend is earned. As per decision of ITAT Chennai Bench in the case of Suuthern Petro Chemicals Industries V. CIT, 93 TTJ 161, it was held that investment decisions are very strategic decisions in which top management is involved. Therefore, proportionate management expenses assessee required to be deducted for computing dividend income. In the circumstances the assessee' administrative expenses are partly referable to earning of such dividend. Hence it should be apportioned by estimate. The A.O has allocated expenses of Rs.30.54 lacs for earning dividend income of Rs.55.83 lacs which is not reasonable. I hold that on estimate basis the disallowance of Rs.1,00,000 would be sufficient to cover such expenses as referable to earning of dividend. The addition is therefore, confirmed at Rs.1,00,000/.- and the balance amount is deleted".
Aggrieved, both came in appeal before Tribunal.
9. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has not incurred any specific expenditure for the purpose of earning exempted income i.e. dividend income of Rs.55.83 lakhs. A proportionate management expenses are required to be disallowed in proportion to dividend income or not, this aspect has been examined by Hon'ble Pubjab & Haryana High Court in the case of CIT v. Winsome Textiles Industries Ltd. (2009) 319 ITR 204 (P&H) and CIT v. Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H). Further we find that the Hon'ble Bombay High Court In the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai v. DCIT in Tax Appeal No.626 of 2010 dated 12-08-2010 has clearly held that the provisions of Rule 8D of IT Rules, 1962 are prospective and not retrospective, and the relevant interpretation of Hon'ble High Court reads as under:-
"iv)The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;
v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09;
vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 9 (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;
vii) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."
10. In view of the above, we find that the Ld. counsel for the assessee fairly conceded the position, due to smallness of amount of disallowance confirmed by CIT(A) at Rs.1 lakh out of total dividend earned by the assessee at Rs.55.83 lakh, which is claimed to have been exempt. We find the CIT(A)'s disallowance of Rs 1 lakh has reasonable on account of proportionate expenditure qua exempted income u/s.14A of the Act. This issue of Revenue's appeal as well as assessee's appeal is dismissed.
11. The next common issue in these cross-appeals of Revenue as well as assessee is against the order of CIT(A) in allowing deduction u/s.35(AB) of the Act on security expenses, municipal tax and salary paid to Mr. Dutt and building expenses. For this, both have raised the following grounds:-
ITA No.333/Ahd/2006 (for the A.Y. 2002-03 by Revenue)"3. The ld. CIT(A) has erred in law and on facts in directing to give weighted deducted u/s.35(AB) on security expenses, Municipal Tax and Salary paid to Mr. Dutt and Building expenses."
ITA No.346/Ahd./2006 for A.Y. 2002-03 (by assessee) "2. On the facts and in the circumstances of the case, CIT(A) has grossly erred in holding while disposing of the ground regarding the disallowance of Rs.1,67,62,039 as inadmissible weighted deduction u/s.35(AB) that the expenditure of Rs.1,75,28,000 being professional fees and Rs.11.21,000 being garden expenses are not of the nature envisaged in Sec. 35(2AB) and, therefore, the appellant would not be entitled to a further deduction of 50% thereon u/s.35(2AB) of the I.T. Act when he ought to have held that the appellant is entitled to such further deduction even on the aforesaid expenses. ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 10 This Hon'ble Tribunal may, therefore, be pleased to hold that there is no justification in holding that the professional expenses and garden expenses would not be covered for the purpose of weighted deduction u/s.35(2AB) of the I.T. Act, and direct the Assessing Officer to delete the disallowance referable to such expenses."
ITA No.4343/Ahd/2007 for A.Y.2004-05( by assessee)"6. On the facts and in the circumstances of the case, the CIT(A) erred in holding that for computing weighted deduction u/s.35(2AB) the following sums were not includable:ITA No.4356/Ahd/2007 for A..Y.2004-05 (by Revenue)
"6. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of weighted deduction u/s.35(2AB) of the Act in respect of Municipal taxes (Rs.2.37 lacs), salary to Dr. C. Dutt of Rs.82.71 lakhs and expenses related to Building Rs.71.19 lakhs giving a total relief of Rs.78,13,500/-."
The issue being identical on facts in both the cross-years, we will decide the issue after taking the facts from assessment year 2002-03.
12. The brief facts leading to above issue that Assessing Officer noted that the assessee-company has claimed deduction on account of R & D expenditure u/s.35 as under:-
i) Contribution to research institute u/s.35(1) Rs. 6,25,000
ii) R & D buildings u/s.35(1)(iv) r.w.s. Section 35(D) Rs. 13,33,995
iii) R & D capital assets other than building Rs.3,02,46,518
iv) R & D Revenue expenditure on weighted component Rs.10,23,37,170 Rs.13,45,42,683 The Assessing Officer noted in his assessment order that against this, the assessee in tax audit report furnished the details as under:-
"Details of capital R & D Exp. claimed u/s.35(1) Building Rs.133,33,995/-
Deduction u/s.35 2ab)
A) Capital expenditure (other than building)
i) Plant & Machinery Rs. 25,24,122/-
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 11
ii) R & D equipments Rs.1,51,17,985/-
iii) Furniture & fixture Rs. 20,47,573/-
iv) Appliances Rs.474665 Rs.2,01,64,345/-
B) Revenue expenditure: Rs. 2,04,74,340/-
C) Total ( A + B) Rs.22,48,38,685/-
D) Weighted deduction @ 150% Rs.33,72,58,028/-
Deduction u/s.35(1)(ii)
Contribution to U.N. Mehta Charitable
Institute of Cardiology Rs. 5,00,000/-
Eligible Deduction @ 125% Rs. 6,25,000/-
The Assessing Officer noted that the amount of Rs.20,46,74,340/- debited to the profit & loss account has not been written back in the return of income and the deduction has been claimed at lesser amount as against deduction worked out in the tax audit report and he referred to certificate of the prescribed authority u/s.35(2AB) dated 23-01-2004 and stated that out of the claim for revenue expenditure of Rs.1926.73 lakh expenditure to the extent of Rs.1667.07 lakh is allowed and disallowance of Rs.305.86 lakh is worked out. The assessee stated in reply given various explanation and details and claimed excess deduction of Rs.59.07 lakh and further excess deduction u/s.35(2AB) of Rs.89,871/-. After considering the explanation of the assessee, the Assessing Officer has stated that the explanation given is not fully acceptable. The assessee stated that the competent authority has not allowed deduction for the entire amount claimed under the head R & D expenses and excess deduction of Rs.1,53,38,173/- is worked out on this account and the addition made as under:-
"Therefore as noted above the assessee has claimed R & D expenses on account of revenue and capital other than building amounting to Rs.22,48,38,655/- as against Rs.19,41,62,340/- allowed by the competent authority. This disallowance is ultimately reflected in the excess weighted deduction claimed by the assessee which required to be disallowed as discussed above as under:-
i) Allowable deduction @ 150% on Rs.19,41,62,340/- Rs.29,12,43,510/-
ii) Allowable deduction @ 100% on
Rs.3,06,76,345/- Rs. 3,06,76,345/-
Total deduction allowable u/s.35(2AB) Rs.32,19,19,855/-
Deduction claimed by the assessee Rs.33,72,58,028/-
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 12 Total disallowance u/s.35(2AB) Rs. 1,53,38,173/-
The assessee before CIT(A) stated that the disallowance of Rs.1.53,38,173/- made by the Assessing Officer represents disallowance of weighted deduction on the following items:-
Revenue. Expenditure on buildings Rs.46.20 lakh
Break up of Reev. Exp. disallowance
Security expenses Rs.10.87 lakh
Gardening expenses Rs.11.21 lakh
Municipal tax Rs. 2.14 lakh
Profession fees Rs.175.28 lakh
Salary to CD Rs. 60.36 lakh
Rs.305.86 lakh
13. The CIT(A) allowed the claim of assessee vide para-5.3 of his appellate order as under:-
"5.3 I have carefully considered the facts of the case and the above submissions. Exactly similar issue was raised in appellant's case for A.Y 2001-02 wherein vide para-5.3 it was held as under:-
'I have considered the above submissions and the assessment order. On perusal of the nature of expenditure it is seen that none of the expenditure is on market research, sales promotion, quality control, testing, commercial production, style change or routine data collection. Therefore, he disallowance of the above expenditure made by the assessing office only on the basis of the report of the prescribed authority was not justified. What is to be seen by the A.O is the nature of expenditure. Therefore, I consider this ground for disposal on merits. On perusal of the nature of expenditure it is seen that except for professional fees of Rs.48 lacs and garden expense of Rs.6.93 lacs the other are in connection with patent to be registered overseas and hence it would be covered by the nature of expense covered above. Garden expense has no relation with the research activity, therefore I hold that the A.O was justified din excluding these two expenses in granting deduction u/s.35(2AB). However, he is directed to allow deduction in respect of the other deduction. This ground is accordingly partly allowed.
I agree with the above findings of the CIT(A) in appellant's own case for A.Y 2001-02 and direct the assessing officer to consider the deduction u/s.35(2AB) in the light of the said directions.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 13 Accordingly I direct the Assessing Officer to allow weighted deduction with reference to Security expenses of Rs.10.87 Lakhs, Municipal tax of Rs.1.14 lakhs and salary of Mr. Dutt of Rs.60.36 lakhs. That building expenses of Rs.46.20 lakhs is also deductible. However, garden expenses of Rs.11.21 lakhs and professional fees of Rs.175.28 lakhs is not of the nature envisaged in section 35(2AB) and would not be eligible for deduction."
Aggrieved, the assessee and Revenue came in appeal before Tribunal.
14. At the outset Ld. SR-Counsel for the assessee stated that Tribunal in Revenue's appeal and asessee's own CO in ITA No.3569/Ahd/2004 & CO No.18/Ahd/2005 for assessment year 2001-2002 dated 13-11-2009 vide para-9 & 10 as under:-
"9. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the prescribed authority has separately indicated Rs.51.26 lacs for the clinical trials and as per the explanation to the sec. 35(2AB) the assessee incurring expenditure on scientific research & development in relation to drugs and pharmaceuticals, shall be granted expenditure incurred on clinical drug trials. Accordingly, we find that the sum of Rs.51.26 lacs in eligible expenditure as the prescribed authority has disallowed sum of Rs.37.55 lacs revenue expenditure relating to Building and sum of Rs.133.92 lacs from the revenue expenditure other than Building. As per the break up given above we find that the assessee is entitled to weighted deduction of sum of Rs.37.55 lacs and Rs.133.92 lacs in view of the following explanations submitted before the lower authorities :-
"Section 35(2AB) grants weighted deduction for any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research & development facility as approved by the prescribed authority. What is excluded is cost of land & building and not the recurring expenditure related to building that is repairs and renovation of buildings, therefore, assessee is entitled to weighted deduction for repairs of Rs.37.55 lacs related to buildings. Similarly, Municipal Tax paid of Rs.6.93 lacs is entirely related to Buildings wherein in-house research activity is carried on. It is only municipal tax of R & D Centre, Bhatt, hence like current repairs, it is eligible for weighted deduction u/s.35(2AB). So far as security expenses of Rs.11.01 lacs is concerned, it is submitted that in-house research activity requires proper tight security to avoid leakage through visitors, and only in-house staff will have access to the said Building and no others, and to preserve research which is completed but its clinical trial is pending. Considering all these factors, security expenses of Rs.11.01 lacs is eligible for weighted deduction u/s.35(2AB).
So far as gardening expenses of Rs.9.44 lacs, it is submitted as under:- ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 14 The company has a dedicated research centre where extensive research is carried out. The company has a very composite R & D facility. The company is conscious of the environmental issues and has put up effluent treatment plant (costs approx. Rs.36 lacs.). As is widely accepted the vegetation particularly the trees help contain the pollution resulting from the release of pollutants (including gases). So the trees and plants become an integral part of the research centre. Once having accepted this position any expenditure incurred on gardening should be fully allowed under the provisions of section 35(2AB) of the Income Tax Act. In this connection, we would like to add that the Gujarat Pollution Control Board has also directed that such trees and gardens should be developed and watered treated by the ETP should be utilized for a forestation purposes. Over and above this, good laboratory practices require that research centers should have green cover so that pollution levels (including dust) are eliminated. Since the object of the assessee company is to have a world class R & D center such gardens (and therefore the gardening expenses) become a necessary.
In respect of salary of Rs.58.54 lacs paid to Dr. C. Dutt, he is in-Charge of Research & Development Centre at Bhatt. Through him only, entire in-house research activity is carried on by the assessee. He is the person through whom all co-ordination of the technical scientists and other technical persons is carried out and smooth functioning is carried out in various research activities. To convey and for reporting of entire research activity to the management he has been taken to the Board of Directors by the assessee-company. Therefore, salary paid to Dr. C. Dutt is eligible for weighted deduction u/s.35(2AB). When section speaks of any expenditure, there is no justification to exclude the expenditure of Rs.133.92 lacs as done by the prescribed authority. The assessee is eligible for weighted deduction on the entire expenditure of Rs.2124.36 lac, as claimed above."
10. In view of the above facts and circumstances, we are of the view that it is only the expenditure which will only be allowed, whereas the assessee vide the copy of the letter reproduced hereinabove has very clearly explained as to how the entire expenditure claimed by the assessee is allowable. Thus there was no justification in harping upon the figure contained in Form No.3CL as is done by the Assessing Officer. The provisions of the Act it does not contain any specific conditions for the allowance of expenditure to the effect that it will be restricted that contained in Form No.3CL. Needless to point out that such allowable expenditure etc. is reported by the DSIR to DG (Income-tax Exemption), Kolkata without giving an opportunity of being heard to the assessee wherever he quantifies the expenditure which is less than that claimed by the assessee. We further find that the assessee has included a sum of Rs.51.26 lakhs as eligible expenditure being Revenue expenditure relating to building and another sum of Rs.133.92 lakhs being revenue expenditure other than building, which was considered as revenue by the assessing officer himself. These items clearly are within the purview of allowable u/s 35(2AB) of the Act as weighted deduction. The security ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 15 expenses are also directly related to in-house research as proper security is required to avoid leakage and only in-house staff will have assessed to building. Accordingly, this expenditure are for preserving the research which is completed and its clinical trial is pending. As regards to the environmental issue, the assessee-company has set up an affluent plant and as is widely accepted the vegetation, i.e. trees have contained the pollution. This expenditure of gardening and plantation have been done for the perseverance of environment and this is directly related to R & D facilities. As regards to salary paid to Dr. C.Dutt amounting to Rs.58.54 lakhs, he is in-charge of R & D Centre at Bhatt. He is the person through whom all co-ordination of technical scientists and other technical persons are carried out. The entire reporting of the research activity to the management has been taken to the Board of Directors through him only and for this the salary is paid. Accordingly, the assessee has rightly paid the entire expenditure of Rs.133.92 lakhs and building repairs Rs.37.55 lakhas on which weighted deduction u/s.35(2AB) of the Act is allowable. In view of the above discussion, we allow the claim of the assessee and this issue of the Revenue's appeal is dismissed and that of the assessee's CO is allowed."
In view of this decision of Tribunal in assessee's own case, the Ld. counsel for the assessee stated that the issue is covered in favour of the assessee.
15. On the other hand, Ld. CIT-DR argued that the issue is, no doubt, decided by the Tribunal but he wants to make further submission and the relevant submissions reads as under:-
(a) As per section 35(3) of the Act., "If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to-
(a) The Central Government, when such question relates to any activity under clauses (ii) and (iii) of such-section(1), and its decision shall be final;
(b) The prescribed authority, when such question relates to any activity other than the activity specified in clause (a),whose decision shall be final."
It is, therefore, the prescribed authority in case of appellant while issuing certificate in the prescribed proforma is amounting to taking a final decision about the allowable expenditure and therefore disallowed expenditure both in the nature of capital as well as revenue are to be treated as final. The A.O. or anybody else has no authority to consider any of such disallowable expenditure as specify by prescribed authority. If appellant has any dispute then he should represent case before prescribed authority. It is, therefore, repair and renovation expenditure of land and building, other revenue expenditure, even clinical trial expenditure which were disallowed by prescribed authority has to be disallowed by the A.O. ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 16
(b) Further, in reference to disallowance of expenditure on clinical trial. An Explanation to section 35(2AB) has been inserted by the Finance Act 2001 w.e.f. 01-04-2002 which reads as follows. [Explanation.--For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).] The Explanation is only with respect to the expenditure incurred in relation to drugs and pharmaceuticals. The device of inserting an explanation is found to be a convenient method of elucidating several detailed aspects that cannot be verbally accommodated in the main provision. It enables the draftsman to say, what he has to say without encumbering the main provision with too many detail. The function of the Explanation is to clarify the scope of certain words or expression (occurring in the main provision), about whose precise scope a doubt may arise as has been held by the Hon'ble Supreme Court in the case of Controller of Estate Duty Vs Kantilal Trikamlal, AIR 1976 SC 1935. Also the Hon'ble Supreme Court in the case of Oblum Electrical Industries Pvt Ltd, Hyderabad Vs Collector of Customs, Bombay AIR 1997 SC 3467 has held that the Explanation should not be construed so as to widen the scope of the main section.
The Explanation uses the words "Shall Include". Provisions which are inclusive in their content use the plural word "Includes" as opposed to the singular "Include". In this particular Explanation the phrase that has been used is "Shall Include". The phrase "Shall Include" has necessarily to be interpreted as signifying that only the conditions stated therein have to be taken into consideration and nothing else. The word "Includes" signifies that a particular thing means a lot of other things and also includes certain specified things. It enlarges the scope of the section and is mainly used for definition purposes. The words can also be seen from the perspective of singular and plural. If the word connotes a plural meaning then it necessarily includes more than one thing, while a singular would include only one thing.
The other aspect that requires interpretation and consequent adjudication is whether the three conditions have to be read in isolation, i.e. independent of each other or has to be read collectively, i.e. all the three conditions have to be fulfilled simultaneously. The expenditure on drugs and pharmaceuticals is the section that is the most regulated by laws and regulations. The other expenditures are expenditures on electronic equipment, computers, telecommunication devices, chemicals etc. Clinical research necessarily includes animal and human trials and is therefore required to be regulated by law of the country. Various guidelines are required to be followed and records have to be maintained before a clinical research can be undertaken. Also clinical research cannot be undertaken by any organization just like that, without obtaining prior permission from regulatory authorities. Therefore the entire clause is to be read together and cannot be read in isolation.
16. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the issue in respect of deduction u/s.35(AB) ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 17 of the Act on security expenses, municipal taxes, salary paid to Mr. Dutt, building expenses, professional fees and gardening expenses are covered by the decision of this Tribunal and the facts being identical, taking a consisting view, we allow the cross appeals of the assessee and that of Revenue's cross-appeals are dismissed.
17. The next issue in ITA No.333/Ahd/2006 for assessment year 2002-03 of Revenue's appeal is against the order of CIT(A) in deleting the disallowance of long term capital loss on account of assignment of unsecured loan given to Torrent Gujarat Byotech Ltd. in favour of M/s. Focus Corporate Restructuring Pvt. Ltd. For this, Revenue has raised the following ground No.4:-
"4. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of long term capital loss of Rs.17,30,67,016/- on account of assignment of unsecured loan given to Torrent Gujarat Byotech Ltd. in favour of M/s. Focus Corporate Restructuring Pvt. Ltd."
18. The brief facts leading to the above issue are that the Assessing Officer disallowed assessee's claim for long term capital loss by stating that assessee claimed long term capital loss on account of assignment of a loan of Torrent Gujarat Biotech Ltd. (TGBL for short) to Focus Corporate Restructuring Pvt. Ltd. The assessee had given a loan of Rs.12.84 crores to associated concern TGBI in the year 1996-97 and during that year under consideration the assessee had assigned/transferred the said loan to Focus Corporate Restructuring Pvt. Ltd. vide agreement dated 07-02-2005 for a sum of Rs.64 lakhs and the difference of Rs.12,21,28,000/- was claimed as long term capital loss. After claiming indexation benefits, the long term capital loss was calculated at Rs.17,30,67,016/- which was claimed and set off with long term capital gains from sale of trade mark. The AO stated that as per section 45(1) of the Act capital gain/loss is chargeable only on transfer of capital asset. Reference is also made to Section 2(14) and sated that capital assets mean property of any kind held by the assessee whether concerned with the business or not, the same cannot be considered to inclusive of advances given was in the nature of loans/investments. It is further stated that there is no reasons cited by the assessee for assignment of loan at its value of less than 5% of the original loan. The entire cash advance given to associated concern and its assignment to third party cannot be considered as capital loss u/s.45 of the Act. If at all there is a loss, it is on account of investment and not long term capital loss as ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 18 alleged for set off against the capital gains. If it further sated by the AO that the assessee-company had earned long term capital gains during the year under consideration on profit on sale of shares belonging to group concerns and profit on sale of know how on sale of business of valprin. It, therefore, does not seem to be correct as per the provisions and the loan cannot be considered as capital asset and AO disallowed the entire capital loss of Rs.17,30,67,016/-. Aggrieved, the assessee preferred appeal before CIT(A).
19. Before the CIT(A), assessee made the following calculation of loss of Rs.17,30,67,016/-: -
Sr Particulars Computation of capital gain/loss
No
Year of No. of Cost (Rs) CII Indexed Amount
purchase/sale
shares
Cost (Rs) (Rs)
E Proceeds of 2001-02 426 64,00,000
Assignment of
loan of TGBL
Less:
Stamp duty
1,28,000
Net Sales
consideration 62,72,000
Cost of Loan
305 179339016 17,93,39,016
1996-97 128400000
Cost of loan
-
Long Term 17,30,67,016
Capital Loss
(D)
The assessee made the following submissions before CIT(A):-
(a) Torrent Gujarat Bio Tech Ltd. was incorporated in March 1991 as a public company. The assessee being one of the promoter group company, was interest in development of the business of the said company. As a promoter group, it had made investment in said company. Torrent Pharmaceuticals Ltd.
is the flagship company of the promoter group.
(b) Torent Gujarat Bio Tech Ltd. was in need of funds and had approached the financial institutes for financial assistance. IFCI of India had agreed to grant loan of Rs.1,875/- lacs loan/. However, while granting such facility they had put certain conditions. The terms of conditions include the following:-
"1. Before availing itself of any assistance from IFCL, TGBL shall:
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 19
a) deploy share capital to the extent of Rs.1250/- lakh out of the rights issue of equity shares and 50% of the envisaged internal accruals of Rs.613 lakh i.e. Rs.307 lakh from the promoters for financing the down stream project.
b) Finance the cashs loss of Rs.671 lakh incurred during the yar ended 31st March, 1996 through subordinated interest free unsecured loans from the promoters, which shall not be repaid without the prior approval of IFCL. The terms and conditions of such unsecured loans shall be to the satisfaction of IFCI.
c) Thus it will be appreciated that the appellant had to give advance to TGBI as a promoter company and that it was in the interest of the company who had made huge investment in the company as a promoter group.
d) However, TGBL could not successfully carry out restructuring and its business activities and incurred huge financial loss. They were not in a apposition to repay the loans borrowed by them from financial institute in as also from the group companies. It is declared as sick undertaking under the SICA Act. In the circumstances the appellant thought that the capital of TGBL was eroded and there was no likelihood of getting any recovery of the loan. In the meantime the appellant entered into an agreement with Focus Corporate Restructuring Pvt. Ltd. whereby the above loan was assigned to them for a sum of Rs.64 lakh. This amount of assignment is supported by the report of the Chartered Accountant Mr. Divyang P Mazumdar. As such the asignement was not for reducing taxable income but was in order to reduce loss of investment in TGBL.
e) Coming to the point raised in para marked 7 of your Honour's letter under reference, it is submitted that assignment of loan does give rise to capital loss or capital gain, as the case may be in view of the following:-
i) Vide Sec. 45(1) income (or loss) under the head "Capital gains"
arises sin the year of 'transfer' if a 'capital asset' is transferred.
ii) So first requirement is that it could be a 'capital asset'. Sec.
2(14) defines 'capital asset' to mean as 'property or any kind held by the assessee whether or not connected with his business include ... ...' Note: The items enumerated thereafter for exclusion are not relevant and hence not be considered.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 20
iii) So, the main part of sec. 2(14) talks of 'property of any kind and makes it irrelevant whether it is connected with the assessee's business or not. Term 'property' has not been defined in the Income tax Act but these are judicial pronouncements according to which the word property means "a bundle of rights which the owner can lawfully exercise to the exclusion of all others". It does not mean merely physical property but also means the right, title or interest init. For Example, mortgagor of an immovable property holds right (and hence property) subject to the rights (hence property) of the mortgagee. Refer CIT v. Daksha Ramanlal (1992) 197 ITR 123 (Guj). Supreme Court in Rustom Cavasjee Cooper v. Union of India AIR (1970) Supreme Court 564 and also in Ahmed G.H. Ariff v. CWT (1970) 76 ITR 471 (SC) has held that property means 'highest right a man can have to anything, being that right which one has to lands or tenements, goods or chattels which does not depend on another's courtesy: it includes ownership estates and interests in corporeal things and also rights such a trade marks, copy rights patents and even rights in personam capable of transferor transmission, such as debts; and signifies a beneficial right to or a thing considered as having a money value, especially with reference to transfer or succession, and to their capacity of being injured."
iv) So, on first principles it can be said that a creditor's right in a debt given (to another person) is a property and hence can be treated as capital asset. In support of this proposition we need take notice of the following two decisions:
1) CIT v. Minor Bababhaia alias Lavkumar Kantilal (1981) 128 ITR 1 (Guj). Therein the assessee had advanced a sum of Rs.25,000 to a company on account of promissory note and could realize only Rs.13,323 and a share of Rs.50 and hence claimed the balance of Rs.11,617 as capital loss. The High Court naturally considered both the aspects viz. existence (i) of capital asset and (ii) of transfer of the same. On the fist aspect of the existence of capital asset towards the middle of page-4 of the Reports (128 ITR) fresh para starts with the following sentence:
"Mr. Raval. Ld. Advocate appearing for the revenue did not contest the proposition that the assets was holding a capital asset in the form of a promissory note of Rs.25,000 under which he was an unsecured creditor of the mill company in the winding up proceedings (emphasis supplied.) Note: In that decision greater part is devoted to the second aspect of 'transfer' which may not be really important for our purpose because in our case an assignment of a debt would certainly be a transfer. All the same, in the interest of completeness, it may be mentioned that cut the aspect of ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 21 transfer in that decision the Gujarat High Court relied on its earlier decision in CIT v. Vanika Silk Mills P. Ltd. (1977) 107 ITR 300 (Guj). However, that decision in Vania Silk Mills case was reversed by the Supreme Court in Vania Silk Mills P. Ltd. v. CIT (1991) 191 ITR 647 (SC). However, it is important to note that the decision of the SC in Vania Silk Mills has been specifically disapproved by a larger Bench of the Supreme Court in a later decision in CIT v. Mrs. Grace Collis (2001) 248 ITR 323 (SC) meaning thereby that the Gujarat High Court's reliance on Gujarat High Court decision in CIT Vs. Mrs. Grace Collis. (248 ITR 323) (SC)
2) CIT V. East India Charitable Trust (1994) 206 ITR 152 (Cal.) In that case the trust had earned some capital gains on sale of shares and utilized the sale proceeds, inter alia, for making fixed deposits with some banks or public sector undertakings. It was held that 'the investment or deposit in a public sector company is firstly as asset and secondly a capital asset and thirdly a permitted capital asset under special law relating to the asset. of charitable or public religious trust". (page 153 C & D of the Reports - 206 ITR) Note: At that time, on the aspect of 'transfer' the Supreme Court decision in Vania Silk Mills case (1991_) 191 ITR 647 held the field and hence was followed. But as already mentioned that decision of the SC has been subsequently disapproved by a larger Bench of the Supreme Court in CIT Vs. Mrs. Grace Collis (212001) 248 ITR 323 (SC). Be it as it may, the point is that the fixed deposits made with public sector companies were regarded as capital asset.
f) So, even as a proposition of law it can be reasonably said at a creditor's right in along giver, to another persons is a capital asset.
g) On the aspect of 'transfer' again even purely as a legal a proposition an assignment of a debt for a smaller sum should be considered as 'transfer' even on first principles.
h) Further, regarding benefit of indexation we may a note that the second proviso to section 48 envisages indexation and the third proviso excludes the applicability of the proceeding proviso (i.e. from indexation) any "bond or debenture other than capital indexed bonds issued by the Government". So even on first principles, it appears that ordinarily benefit of indexation may be available to the capital asset which is a creditor's right in a loss given or deposit made."
The CIT(A) keeping in view the above explanation and submissions held that this loan was a capital asset within the meaning of Section 2(14) of the Act.. According to CIT(A) this being a capital asset transferred for a consideration, the loss arising on ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 22 account of transfer of this long term capital asset is a long term capital loss and held as under:-
"6.2 I have considered the assessment order and the facts relating to this claim of the appellant. It is a fact that the appellant had given an amount of Rs.1284 lacs to TGBL to promoted the company and for appellant it was an investment. The Assessing Officer has rejected the claim mainly for the reasons that according to him it is not an asset but is advance/investment and that no reason is explained for assignment of loan at lessor value. On perusal of explanation of assessee it is seen that TGBL had become sick undertaking the amount invested was not likely to be received back. Hence, the appellant justifiably assigned the said right to other company so that loss in future can be minimized.
It is not unusual to assign such types of rights/assets to third party who can take follow up actions for realizing such assets/rights from such sick companies. It was also pointed out hereinabove that right to recover or realise the asset is its if an asset covered u/s.2(14). The appellant has also referred in this respect various judicial decisions which suggest that the right to recover loans is an actionable claim. It is also true that the said assignment is subject matter of substantial stamp duty to the same of Rs.1.28 lakhs and the civil laws also recognises the said transactions as transfer of movable asset and covers the same as liable to stamp duty.
The value of loan assignment is supported by valuation report. The assignment is supported by Board Resolution. Capital loss/gain u/s.45 is to be computed on transfer of capital asset. The term capital asst as per sec.2(14) means property of any kind. Looking to this aspect loan assigned is capital asset. The A.O has also considered it to be investment. Loan has been transferred to Focus Corporate Restrucuring P. Ltd. by way of assignment. The value of loan is supported by a report of Chartered Accountant. Tin the circumstances, the assessee was justified in considering it u/s.45.
The Calcutta High Court in the case of CIT Vs. East India Charitable Trust, 206 ITR 652 (supra), held that 'the interest or deposit in a Company is firstly an asset and secondly a capital asset and thirdly a permitted capital asset under special law relating to assessment of Charitable Trust (Page 153 of CTD). The Hon. Gujarat High Court had considered and decided the similar question in the case of CIT Vs. Bababhai alias Lav Kumar Kantila 128 ITR 1 (Guj). The facts of that case were that assessee advanced Rs.25,000 to a company on promissory note. Company would up scheme, assessee realized only Rs.13,323 and equity share of Rs.50 and claimed balance as short term capital loss. The Ho'ble Gujarat High Court confirmed the ITAT's finding that assessee was entitled to short term capital loss of Rs.11,617 on the ground that extinguishment of rights there in as contemplated u/s.45 read with sec.
2(47) need not be form any extraneous source and that such extinguishment nay be brought about by the assessee's own account. Accordingly, assessee's loss in his deposits with the company was allowed as short term capital loss.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 23 In view of the facts as discussed above and the case law mentioned above, the assessing officer is accordingly directed to allow long term capital loss claimed by the appellant."
Aggrieved, Revenue came in appeal before Tribunal.
20. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us Ld. CIT-DR made submissions that TPL was the promoter of TGBL and IFCI had sanctioned a scheme of financial assistance vide letter dated 28-08-1996 in which it had sanctioned a loan to TGBL. As a part of the scheme TPL had to infuse fresh capital in TGBL in the form of share capital and as part of the same scheme, TPL as promoters of TGBL, had to give unsecured loan to TGBL. He further stated that capital infusion in TGBL had taken place in two forms, i.e. as equity share capital and as unsecured loan. He argued that during the year under consideration the equity share capital had been sold off to Torrent Private Ltd, a group company and this transaction was not routed through the stock exchange and further unsecured loan was sold off to Focus Corporate Restructuring Pvt Ltd. Long Term capital Loss has been claimed upon the sale of the loan to FCRPL. In view of these facts, he argued that there are two distinct treatments for the introduction of the loan to TGBL i.e. on the one hand the equity share has been sold to a group company to maintain the control of the group over TGBL, while on the other hand the unsecured loan has been sold off to another company and loss has been claimed upon it with indexation. The entire transaction has been carried out with only one aim, and that is to set off the Capital gain that had accrued to the company during the year under consideration. Ld. CIT-DR further stated that the assessee as a promoter of TGBL was in the total know-how of the financial viability of TGBL and the fact that the money lent to TGBL could not be repaid but in spite of this fact the assessee had not provided any provision in the diminution in the value of the loan in the previous years, which it was required to do so, if such loan is treated as investment in the form of long term capital asset to correctly arrive at the profits of the company and it was only during the year that the so called debt was sold off to set off the capital gains during the year. This is, therefore, a collusive transaction which has difference in its form and substance. Even following the ratio of Hon'ble ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 24 Bombay High Court in the case of Salem Magnesite (P) Ltd. v. CIT (2010) 321 ITR 43 (Bom) the same cannot be treated as business loss.
21. After going through the arguments of Ld. CIT-DR and by Ld. Sr-Counsel, Shri Soparkar that the assessee had given a loan of Rs.12.84 crores to TGBTL in the year 1996-97 and during the year 2001-02 i.e. the relevant year under consideration, this loan was assigned to Focus Corporate Restructuring Pvt. Ltd. as per agreement dated 07-02-2005 for a sum of Rs.64 lakh. The assessee claimed the differential amount as long term capital loss amounting to Rs.12,21,28,000/-. The brief facts are that TGBL was incorporated in March'91 as a Public Company and assessee being one of the promoters Group-Company was interesting in developing the business of the said company. The assessee as a promoter company had made investment in the said company. TGBL was in need of fund and had approached IFCI to grant loan and IFCI in turn has agreed to grant loan of Rs.1875 lakhs on the following terms:-
"1. Before availing itself of any assistance from IFCL, TGBL shall:-
a) deploy share capital to the extent of Rs.1250/- lakh out of the rights issue of equity shares and 50% of the envisaged internal accruals of Rs.613 lakh i.e. Rs.307 lakh from the promoters for financing the down stream project.
b) Finance the cash loss of Rs.671 lakh incurred during the year ended 31st March, 1996 through subordinated interest free unsecured loans from the promoters, which shall not be repaid without the prior approval of IFCI. The terms and conditions of such unsecured loans shall be to the satisfaction of IFCI... .... "
The TGBL incurred huge losses as it could not carry out restructuring successfully and they were not in a position to repay the loans borrowed from IFCI and also the group company and accordingly it was declared as "sick undertaking". Accordingly, the assessee entered into an agreement with Focus Corporate Restructuring Pvt. Ltd. for assigning the above loan for a sum of Rs.64 lakh. Now the question arises that how this loan is an asset. The first requirement is that it should be a capital asset within the provisions of Section 2(14) of the Act as defined so as to "Capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- (The items enumerated thereafter for exclusion are not relevant and hence need not be considered.) The main part of Section 2(14) talks of "property of any kind" and makes it irrelevant ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 25 whether it is connected with the assessee's business or not but the term "property" has not been defined in the Act. We find that the property has been defined by various judicial pronouncements according to which the word "property" means "a bundle of rights which the owner can lawfully exercise to the exclusion of all others". It does not mean merely physical property but also means the right, title or interest in it. For example, mortgagor of an immovable property holds right subject to the rights of the mortgagee. The Supreme Court in the case of Ahmed G.H. Ariff v. CWT (1970) 76 ITR 471 (SC) has held that property means "highest right a man can have to anything" being that right which one has to lands or tenements, goods or chattels which does not depend on another's courtesy: it includes ownership, estates and interests in corporeal things, and also rights such as trade-marks, copy-rights, patents and even rights in personam capable of transfer or transmission, such as debts; and signifies a beneficial right to or a thing considered as having a money value, especially with reference to transfer or succession, and to their capacity of being injured." So on first principles it can be said that a creditor's right in a debt given is a property and hence can be treated as capital asset. We find that Hon'ble jurisdictional High Court in the case of CIT v. Minor Bababhai alias Lavkumar Kantilal 1981) 128 ITR 1 (Guj) held on the facts that the assessee had advanced a sum of Rs.25,000 to a company on a promissory note and could realize only Rs.13,323/- and a share of Rs.50 and hence claimed the balance of Rs.11,617/- as capital loss. The High Court naturally considered both the aspects viz. existence (i) of capital asset and (ii) of transfer of the same. On the fist aspect of the existence of capital asset, with the following sentence:-
"Mr. Raval, learned advocate appearing for the revenue, did not contest the proposition that the assessee was holding a capital asset in the form of a promissory note of Rs.25,000/- under which he was an unsecured creditor of the milling companyin the winding-up proceedings.........
22. Further, we find from the decision of Hon'ble Calcutta High Court in the case of CIT v. East India Charitable Trust (1994) 206 ITR 152 (Cal) in that case the trust had earned some capital gains on sale of shares and utilized the sale proceeds, inter alia, for making fixed deposits with some banks or public sector undertakings. It was held that "the investment or deposit in a public sector company is firstly an asset and secondly a capital asset and thirdly a permitted capital asset under special law relating to the assessment of charitable or public religious trust". (page 153 C & D of ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 26 206 ITR). Accordingly, in the present case also, we are of the view, on the proposition of law that creditor's right in a loan is a capital asset. On the other aspect of transfer, the legal proposition in respect of assignment of "debt" should be considered as transfer and this has rightly been held so by the CIT(A). Accordingly, we confirm the order of CIT(A) on this issue and Revenue's issue is dismissed.
23. The next common issue in these cross-appeals of Revenue as well as assessee is as regards to the order of CIT(A) in allowing the claim of deduction u/s.80HHC on the following:-
ITA No.333/Ahd/2006 for A.Y.02-03 (by Revenue)"5.(a) The ld CIT(A) has erred in law and on facts in holding that Excise duty and Sales tax is to be excluded from the sales for the purpose of deduction u/s.80HHC 5 (b) The ld. CIT(A) has erred in law and on facts in directing to treat the foreign exchange gain realized on export proceeds as part of export turnover and eligible for deduction u/s.HHC.
5© The ld. CIT(A) has erred in law and on facts in directing to treat the recovery of processing charges as business profit eligible for deduction u/s.HHC 5(d) The ld. CIT(A) has erred in aw and on facts in holding that for the purpose of deduction ud/s.80HHC, the net interest only should be considered."ITA No.346/Ahd/2006 for A.Y.02-03 (by assessee)
"4. On the facts and in the circumstances of the case, CIT(A) has grossly erred while considering deduction u/s. 80HHC in disallowing Rs.3,76,01,039 being the profit derived by the appellant on sale of DEPB licenses during the Assessment year is not income from business under the provisions of Section 28(iia, 28(iib) and 28(iic) of the I.T. Act.
This Hon'ble Tribunal may, therefore, be pleased to so hold and direct the Assessing Officer to allow deduction u/s.80HHC of the I.T. Act in respect of profit on sale of DEPB licenses.
5. On the facts and in the circumstances of the case, CIT(A) has erred while considering deduction u/s.80HHC of the I.T. Act, in reducing the export trading loss of Rs.36,82,721 from the export manufacturing profit by relying on the judgement of the Supreme Court in the case of Ipca Laboratories Ltd. (266 ITR) (SC) ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 27
6. On the facts and in the circumstances of the case, CIT(A) has erred while considering deduction u/s 80HHC of the I.T. Act, in not treating as business income the following items of operating income.
Particulars Rs in lacs
Scrap Disposal 29.60
Insurance Receipt 22.67
Lab testing fees 1.27
Bad Debt recovered 3.59
Notice Pay 0.95
Kasar / write off 4.52
Total 62.6
This Hon'ble Tribunal may, therefore, be pleased to so hold and direct the Assessing Officer to quantify deduction u/s.80HHC of the I.T. Act by treating the aforesaid items of operating income as business income."ITA No.4356/Ahd/2007 for A.Y. 04-05 (by Revenue)
"4. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in directing to exclude the component of excise duty from the total turnover for the purpose of computation off deduction u/s.80HHC of the Act.
5. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in directing to treat interest income to be treated as business income rather than income from other sources of Rs.23,63,668/-.
8. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in directing to treat the processing charges as business since amounting to Rs.1,26,73,537/-."ITA No.4343/Ahd/2007 for A.Y.04-05 (by assessee.)
"2. On the facts and in the circumstances of the case, the CIT(A) erred in holding that in computation of deduction u/s.80HHC job work charges of Rs.1,26,73,572 were required to be included in the total turnover.
3. On the facts and in the circumstances of the case, the CIT(A) erred in upholding the view taken by the Assessing Officer that in the quantification of deduction u/s.80HHC for computing profits of the business the following sums were required too be excluded:
Rs.
(i) Scrap sales 49,58,508
(ii) Notice pay 6,41,717
(iii) Compensations on
termination of contract 98,65,000
(iv) Balance written back 1,23,09,000
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 28
4. On the facts and in the circumstances of the case, the CIT(A) erred in holding that for quantification of deduction u/s.80HHC the DEPB income of Rs.3,94,65,445 was not to be considered.
5. Without prejudice, On the facts and in the circumstances of the case, the CIT(A) erred in not himself upholding the assessee's contention that interest u/s.234B, 234C and 234D was not chargeable even if adverse view is taken against the assessee in respect of DEPB income and he further erred in merely leaving it to the Assessing Officer too be considered by the latter (.e.
the Assessing Officer)."
24. From the above common grounds, the common issues arising on account of computation of deduction u/s 80HHC of the Act are as under:-
i) Profit on sale on DEPB;
ii) Export trading loss'
iii) Scrap disposal;
iv) Insurance receives;
v) Labour testing fees;
vii) Bad debt recover;
vii) Notice pay;
viii) Kasar/write off
ix) Excise duty & sales tax;
x) Interest income;
xi) processing charges;
xii) Job working charges;
xiii) Balance written off'
xiv) Foreign exchange gains
25 The Ld. CIT-DR argued that Hon'ble Supreme Court in its land mark judgment in the case of CIT v. Lakshmi Machine Works (2007) 290 ITR 667 (SC) and CIT v. K. Ravindranath Nair (2007) 295 ITR 228 (SC) has made categorical observation that on account of frequent amendment in section 80HHC of the Act, it is no more a code in itself and the judgment in the case of LMW is related to the law applicable for that particular A.Y. 1993-94. Further, in the case of Laxmi Machine Works, (supra) it was ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 29 argued that unpaid Central Excise duty and unpaid sales-tax has to be treated as revenue following the Hon'ble Supreme Court judgment in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT and this clearly reflects that appellant was having a separate account where duties collected in the form of sales-tax and Central Excise are paid, which was prescribed at that particular time. This account was not mandatory to be part of trading or profit and loss account even by Accounting standard. He argued that after introduction of section 145A of the Act., where basic issue was settled related to value of closing stock on account of modvat credit and it was made compulsory to include the duties in the form of sales-tax, Central Excise, octroi etc. not only in the opening, purchase of raw material but also in the closing stock of such goods. He argued with due regard to ratio of Laxmi Machine Works (supra) and K Ravindranathan Nair (supra) in respect of exclusion of such duties that to exclude only from turn over is not applicable in the present context. Either both side of trading account and profit and loss account should be included with such duties or else excluded. The account of reducing Central excise from total turnover is given distorting picture particular with concept of modvat credit. The profit elements is therefore crept in the 'business profit' of the assessee on account of modvat credit, is benefit given to assessee out of the total collection of central Excise for the central excise paid on raw material and capital goods. The ratio of Laxmi Machine Works (supra) and K.Ravindra Nair (supra) is specified that, since in the year of consideration of those cases no element of business profit was involved by collection of such duties, therefore, the same were directly to be excluded from total turn over. Now the appellant is getting more deduction u/s.80HHC on the inflated profit on account of modvat credit, which was not the intention of legislature.
26. On the other hand, Ld. Counsel for the assessee fairly stated that the issue of sales tax and excise duty, whether is to be excluded from the total turnover for the purpose of deduction u/s.80HHC of the Act, is squarely covered in favour of assessee and against the revenue by the decision of Hon'ble Apex Court in the case of Lakshmi Machine Works (supra), wherein the Hon'ble Apex Court has held as under:-
"In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the Assessing Officer [See : page No.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the "total turnover"
under section 80HHC(3), otherwise the formula becomes unworkable. In our ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 30 view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc., It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time."
27. We find that this issue is squarely covered by the decision of Hon'ble apex court in the case of Lakshmi Machine Works (supra) and even the argument of Ld. CIT-DR that after the introduction of Section 145A, the excise duty and sales tax will be included in the total turnover for the purpose of computation of deduction u/s.80HHC of the Act, the co-ordinate Bench in the case of DCIC v. Mazda Ltd. in ITA No.793/Ahd/2007 for assessment year 2003-04 vide order dated 06-08-2010 has decided this issue after considering the amendment of Section 145A of the Act. and held that there is no change in the formula of Section 80HHC(3) of the Act and still excise duty and sales tax is to be excluded from the total turnover. Respectfully following the Hon'ble Apex Court and co-ordinate Bench, cited (supra), we confirm the order of CIT(A) and these common issue of the Revenue's appeals is dismissed.
28. As regards to Foreign Exchange Gains, the issue raised by the assessee, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of jurisdictional High Court in the case of CIT v. Amba Impex (2006) 282 ITR 144 (Guj), wherein it is held as under:-
"The entire case of the Revenue is built on the fact that the amount has been received in a year subsequent to the year of exports. As can be seen from the assessment order it talks of export realization for exports made up in March 31, 2000. There is nothing to indicate, and none of the authorities have applied their mind, as to whether the sum of Rs.13,18,068 is relatable to exports made during only one financial year or more than one financial year preceding March 31, 2000. This would have a material bearing, taking into consideration the provisions of sub-section (2) of section 80HHC of the Act as was applicable during the year under consideration.
Under sub-section (2) of section 80HHC of the Act, sale proceeds of goods or merchandise exported out of India and received in convertible foreign exchange become entitled to the deduction subject to fulfillment of other requisite conditions. Clause (a) of sub-section (2) of section 80HHC of the Act provides that such sale proceeds have to be received in convertible foreign exchange within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 31 behalf. Thus, a plain reading of the provision makes it clear that once the competent authority has extended the time, in a case where it is necessary, or, where the sale proceeds have been received within a period of six months from the end of the previous year, such sale proceeds are directly relatable to the exports made and no further inquiry is necessary. Therefore, the entire controversy as to whether such receipt amounts to "any other receipt"
stipulated in Explanation (baa)(1) need not be taken up for consideration. Once the Legislature has provided for treating a receipt within a period of six months after the end of the previous year, or within further extended period, as sale proceed relatable exports, it would not be open to the Revenue to raise such a controversy. The Legislature in its wisdom has taken into consideration the fact that in the case of exports made, sale proceeds are not necessarily realizable immediately within the accounting period in which exports have been made. As a corollary, by the time such sale proceeds are received within the prescribed time, by virtue of exchange rate difference, there might be a situation where a larger amount is received than the amount as reflected in the shipping bill. Hence, merely because an amount is received in a year subsequent to the year of export by way of exchange rate difference, it does not necessarily always follow that the same is not relatable to the exports made.
As can be seen from the impugned order of the Tribunal as well as the orders of the Commissioner (Appeals) and the Assessing officer, none of the authorities have approached the issue in the light of the provisions of subs- section (2) of section 80HHC of the Act. No evidence is available on record to establish fulfillment or otherwise, of the conditions stipulated by subs-section (2) of section 80HHC of the Act. In these circumstances, it would not be fair and just for either side to resolve the controversy in the absence of the relevant facts and evidence being available on record.
In the light of what is stated hereinbefore, the question is left unanswered and the appeal is restored to the file of the Tribunal only in relation to the issue relatable to deduction under section 80HHC of the Act without expressing any final opinion on the merits of the matter. The Tribunal shall, after hearing both the sides, decide the appeal on this count, be open to the Tribunal to restore the issue to the file of the assessing authority to ascertain proper facts in the circumstances."
We find that the issue is squarely covered by the jurisdictional High Court decision in the case of Amba Impex (supra), respectfully following the same we allow the claim of the assessee.
29. The next common issues i.e. scrap disposal, insurance receipts, labour testing fee, bad debt recover, notice pay, kasar/right off, balance written off, whether all these items require exclusion of 90% of these receipts from the business profits under clause (baa) for the purpose of deduction u/s.80HHC of the Act.. We find that ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 32 this issue is now settled by Hon'ble apex court in the case of K. Ravindranath Nair (supra) it is observed that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profits. However, as some expenditure might have been incurred in earning these incomes, an adhoc deduction of ten per cent from such income is allowed. The task of interpretation is to find out the true intent of a legislative provision and it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. It is not open to say that something more than the 10% statutorily provided should also be allowed.
30. We find that none of the authorities below has given a finding that these receipts have nexus with the export or not and in the absence of the same, these issues cannot be decided at this stage. However, these issues are set aside to the file of Assessing Officer to re-decide these issues after finding out whether these have nexus with the exports or not and in case, there is nexus with the exports with these receipts, the Assessing Officer will allow the claim of assessee and no exclusion under clause (baa) will be made to the extent of 90%. Accordingly, these issues are set aside to the file of Assessing Officer with the above directions.
31. The next issue is regarding profit on sale of DEPB, whether eligible for deduction u/s.80HHC of the Act or not and whether 90% is to be excluded for the computation of deduction u/s.80HHC of the Act under clause (baa).
32. At the outset, it is admitted by both the sides that the issue needs to be set aside to the file of the Assessing officer to decide afresh in the light of insertion of clause (iiid) to Section 28 by the Taxation Laws (Amendment) Act, 2005, w.r.e.f. 1-4- 1998 and also insertion of Second, third and fourth proviso by this Amendment. Neither of the authorities below have examined the amendment. The Ld. Counsel for the assessee have also referred to the case law of Mumbai Bench of this Tribunal in the case of Glenmark Laboratories Ltd. vs. DCIT (2008) 1 DTR (Mum)(Trib) 460, ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 33 wherein it is held that part of the direct cost of export of trading goods is attributable to the value of DEPB licence and this has to be reduced from the total direct cost to find out the direct cost relatable to trading export: issue is restored to the AO to ascertain the value of DEPB licence on the date of receipt and reduce the same from total direct cost. The Assessing Officer will decide the issue in the light of latest decision of Hon'ble Bombay High Court in the case of CIT v. Kalpataru Colours & Chemicals Ltd. 233 CTR 313 (Bom)
33. The next issue is regarding export trading loss is to be reduced from export manufacturing profit u/s.80HHC of the Act.
34. At the outset, the Ld. counsel for the assessee fairly conceded that this issue is covered is against the assessee and in favour of Revenue by the decision of Hon'ble apex court in the case of IPCA Laboratory Ltd. v. DCIT [2004] 266 ITR 521 (SC), wherein it is held as under:-
"We are unable to accept the submission of Mr. Dastur. Undoubtedly section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wording of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. In this case we are concerned with the wordings of sub-section (3)© of section 80HHC. As noted earlier sub-section (3)(a) deals with case where the export s only of self manufactured goods. Subsection 3(b) deals with the case where the export is only of trading goods. Thus when the Legislature wanted to take exports from self manufactured goods or trading goods separately, it has already so provided in sub-sections (3)(a) and (3)(b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-section (3)(c) deals with cases where the export is of both self manufactured goods as well as trading goods. The opening part of sub-section (3)(c) states "profits derived from such export shall". Then follow (i) and (ii). Between (i) and (ii) the word "and" appears. A plain reading of sub-section (3)(c) shows that "profits from such exports" has to be profits of exports of self manufactured goods plus profits of exports of trading goods. The profit is to be calculated in the manner laid down in sub-sections (3)(c)(i) and (ii). The opening words "profit derived from such exports" together with the word "and" clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) of section 80HHC(3) that a deduction can be permitted only if there is a positive profit in the exports of both self manufactured goods as well as trading goods. ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 34 If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits.
Under section 80HHC(1), the deduction is to be given in computing the total income of the assessee. In computing the total income of the assessee both profits as well as losses will have to be taken into consideration. Section 80AB is relevant. It reads as follows:
"80AB. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading 'C, - Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."
Section 80B(5) is also relevant. Section 80B(5) provides that "gross total income" means the total income computed in accordance with the provisions of the Income-tax Act.
Section 80AB is also in Chapter VI-A. It starts with the words "where any deduction is required to be made or allowed under any section of this Chapter". This would include Section 80HHC. Section 80AB further provides that "notwithstanding anything contained in that section". Thus section 80AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80HC does not provide that its provisions are to prevail over section 80AB or over any other provision of the Act, Section 80HHC would thus be governed by section 80AB. The decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Section 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration."
We find that this issue is covered by the decision of Hon'ble apex court against assessee in the case of IPCA Laboratory Ltd. (supra). Respectfully following the same, we uphold the order of CIT(A) and this issue of assessee's appeal is dismissed.
35. The next issue in this appeal of assessee is against the order of CIT(A) in not allowing deduction u/s.80HHC on interest income.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 35
36. At the outset, we find that this issue is squarely covered by the recent decision of Hon'ble Bombay High Court in the case of CIT v. Asian Star Co. Ltd. in ITA No.200 of 2009 (Bom), wherein it observed that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profits. However, as some expenditure might have been incurred in earning these incomes, an ad hoc deduction of ten per cent from such income is allowed. It was further observed by the Hon'ble High Court that once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision and it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. It is not open to say that something more than the 10% statutorily provided should also be allowed. Hon'ble High Court further held that in CIT v. Shri Ram Honda Power Equip, (2007)289 ITR 475 (Del), the Delhi High Court has not adequately emphasized the entire rationale for confining the deduction only to the extent of ninety per cent of the excludible receipts and it cannot be followed. As regards the judgment of the Special Bench in Lalsons Enterprises, Hon'ble High Court held that "We are affirmatively of the view that the Tribunal has transgressed the limitations on the exercise of judicial power and .... has in effect legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by Parliament. That is impermissible".
In reply the learned Counsel for the assessee stated that when two High Courts differ on the same issue, the beneficial view should be taken in favour of the assessee. He stated that Hon'ble Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip (2007) 289 ITR 475 (Delhi) has allowed the claim of the assessee as regard to netting of interest on the allowance of deduction under Section 80HHC of the Act.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 36
37. We find that the Hon'ble Bombay High Court in the case of Asian Star Co. Ltd. (supra) has considered the Delhi High Court judgment in the case of Shri Ram Honda Power Equip (supra) as well the case of Special Bench of this Tribunal in Lalson Enterprises and held that 90% of receipts by way of interest have to be reduced from the business profits while computing deduction u/s.80HHC of the Act under Clause (baa). In the present case before us it is not clear whether the interest income is business income or income from other sources. First, this should be find out and accordingly the issue should be decided. The facts are not clear from the orders of lower authorities, hence, this issue is set aside to the file of Assessing Officer for verification and allowed for statistical purposes.
38. The next common issues are as regards to claim of deduction u/s 80HHC in respect of processing charges and job work charges.
39. At the outset Ld. counsel for the assessee, Shri Soparkar stated that the processing charges and job work charges are recovered by the assessee for carrying out manufacturing activity at its factory for other concerns thus it is forming part of the profit of the business of the assessee and in any case, it is going to reduce expenses of manufacturing and therefore it is forming part of business profit of the assessee-company. Accordingly, he urged that this issue needs verification, whether these charges have any relation with export activity or not, in view of the decision of Hon'ble apex court in the case of K. Ravindranathan Nair (supra). The CIT DR also stated that this issue can be set aside to the file of Assessing Officer for verification, whether there is nexus with the export profit or not with these processing charges and job work charges. Accordingly, we are of the view that this aspect needs verification at the level of Assessing Officer and accordingly set aside to the file of the Assessing Officer and allowed for statistical purposes.
40. The next issue in this appeal of assessee in ITA No.346/Ahd/2006 is as regards to the order of CIT(A) in upholding the disallowance in respect of RD equipment advance to weighted deduction. For this, assessee has raised the following ground No.3:-
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 37 "3. On the facts and in the circumstances of the case, the CIT(A) has grossly erred in not upholding the assessee's objection to the Assessing Officer's finding that in respect of R.D. equipment advance made in the earlier year in a sum of Rs.2,74,748 (being excess of Rs.1,50,88,115 over Rs.1,48,13,367 -
vide page 6 of the assessment order) was not entitled to weighted deduction. The CIT(A) should have held that the assessee was actually entitled the weighted deduction also with reference to the said sum of Rs.2,74,748"
41. At the outset Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee and against the Revenue by the decision of this Tribunal in the case of ACIT v. Torrent Pharmaceuticals Ltd. in ITA No.3569 /Ahd/2004 & CO No.18/Ahd/2005 for assessment year 2001-02 vide order dated 13-11-2009, wherein the Tribunal has held in para-10:-
"10. In view of the above facts and circumstances, we are of the view that it is only the expenditure which will only be allowed, whereas the assessee vide the copy of the letter reproduced hereinabove has very clearly explained as to how the entire expenditure claimed by the assessee is allowable. Thus there was no justification in harping upon the figure contained in Form No.3CL as is done by the Assessing Officer. The provisions of the Act it does not contain any specific conditions for the allowance of expenditure to the effect that it will be restricted that contained in Form No.3CL. Needless to point out that such allowable expenditure etc. is reported by the DSIR to DG (Income-tax Exemption), Kolkata without giving an opportunity of being heard to the assessee wherever he quantifies the expenditure which is less than that claimed by the assessee. We further find that the assessee has included a sum of Rs.51.26 lakhs as eligible expenditure being Revenue expenditure relating to building and another sum of Rs.133.92 lakhs being revenue expenditure other than building, which was considered as revenue by the assessing officer himself. These items clearly are within the purview of allowable u/s 35(2AB) of the Act as weighted deduction. The security expenses are also directly related to in-house research as proper security is required to avoid leakage and only in-house staff will have assessed to building. Accordingly, this expenditure are for preserving the research which is completed and its clinical trial is pending. As regards to the environmental issue, the assessee-company has set up an affluent plant and as is widely accepted the vegetation, i.e. trees have contained the pollution. This expenditure of gardening and plantation have been done for the perseverance of environment and this is directly related to R & D facilities. As regards to salary paid to Dr. C.Dutt amounting to Rs.58.54 lakhs, he is in-charge of R & D Centre at Bhatt. He is the person through whom all co-ordination of technical scientists and other technical persons are carried out. The entire reporting of the research activity to the management has been taken to the Board of Directors through him only and for this the salary is paid. Accordingly, the assessee has rightly paid the entire expenditure of Rs.133.92 lakhs and building repairs Rs.37.55 lakhas on which weighted deduction u/s.35(2AB) of the Act is allowable. In view of the above discussion, we allow ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 38 the claim of the assessee and this issue of the Revenue's appeal is dismissed and that of the assessee's CO is allowed. "
Respectfully following the same, we allow the claim of assessee and this issue of assessee's appeal is allowed.
42. The next common issue in these appeals of assessee in ITA No.346/Ahd/2006 & ITA No.4343/Ahd/2007 is as regards to the order of CIT(A) in upholding the interest u/s.234B and 234C of the Act. For this, assessee has raised the following grounds No.7:-
"7 On the facts and in the circumstances of the case, the CIT(A) has grossly erred in holding that levy of interest u/s.234B and 234C of the I.T. Act are mandatory and consequential when the same ought to have been directed to be deleted as the appellant objected to the very levy of such interest.. This Hon'ble Tribunal may, therefore, be pleased to so hold and direct the deletion of interest levied u/s.234B and 234C of the I.T. Act.
7. On the facts and in the circumstances of the case, the CIT(A) erred in not upholding the assessee's contention that it was not at all a fit case for levy of interest u/s. 234B, 234C and 234D and he further erred in holding that only consequential relief may be allowed to the assessee. Actually, he should have held that it was not at all a fit case for levy of interest u/s.234B, 234C and 234D of the Act."
43. At the outset, Ld. Counsel for the assessee fairly stated that this common issue is squarely covered in favour of assessee and against the Revenue by the decision of this Tribunal in assessee's own case in ITA No.970/Ahd/2007 for assessment year 2003-04 dated 21-05-2010, wherein the Tribunal has held in para- 20 as under:-
"20. On appeal, the Lear4ned Commissioner of Income Tax (Appeals) has not allowed the claim of the assessee that interest under section 234A, 234B and 234C should not be charged in respect of demand which was created as a consequence of retrospective amendment of law. We find that the issue is squarely covered by the decision of the Delhi Bench of the Tribunal in the case of Eastman Industries Ltd. Vs. DCIT (2007) 110 TTJ (Del) 798, wherein on the similar facts, the Tribunal by relying on the CBDT Circular No.2 of 2006 dated 17.01.2006 has held that the Learned Assessing Officer was not justified in charging interest under Section 234B and 234D as a consequence of reduction in the claim of deduction under section 80HH in view of the retrospective amendment of law by the Taxation Laws (Amendment) Act,2005 with effect from 1.04.198. We therefore, allow these grounds of appeals of the assessee and direct the Learned Assessing Officer ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 39 not to charge interest in respect of the income which relates to the lesser grant of deduction under section 80HHC as consequence to retrospective amendment brought by the Taxation Laws )(Amendment) Act,2005."
Taking a consistent view, we direct the Assessing Officer to re-compute the interest according to the decision in assessee's own case (supra), this common issue in these appeals of assessee are allowed for statistical purposes.
44. The next issue in this appeal of assessee in ITA No.4343/Ahd/2007 is as regards to the order of CIT(A) in deleting the disallowance of software development expenditure. For this assessee has raised the following ground No.1:-
"1. On the facts and in the circumstances of the case, the CIT(A) erred in confirming the disallowance of Rs.77,000,000 which was claimed by the assessee on revenue account."
45. The brief facts leading to the above issue are that assessee is a public limited company engaged in the business of manufacturing and marketing of pharmaceutical produced and regarding Enterprise Resource Planning System (ERPS for short) the details was asked and the assessee replied vide letter dated 19-12-2006. The assessee appointed IBM to implement SAP a enterprise resource planning package which primarily aims at stream ling the various operations and make available the data which would help run the organization efficiently and ERP is a business management system that integrates all facets of the business including planning, manufacturing, sales and marketing. As the ERP methodology has become more popular software applications have emerged to help business managers implement ERP in business activities such as inventory control, order tracking, customer service, finance and human resources. The IBM would undertake to study the existing business system and come with solutions as required by an ERP provided by SAP. The IBM would also help train people so that the data migration from the legacy system to SAP would be smooth and would also train people in the running of the ERP system. Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee and against the Revenue by the decision of this Tribunal.
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 40
46. We find from arguments made by the Ld-CIT-DR and Ld-Counsel that this software purchased by the assessee is for the purpose of smooth running of the computers and better management and conduct of business. This expenditure was incurred for the purchase of software which only aids in better management and conduct of business and becomes part of earning process. This in itself is not an advantage, of enduring nature considering the rapid technological advance being made. Any expenditure which does not have permanence and is incurred to meet fast changing technology and the same would be revenue in nature. This issue is squarely covered by the decision of the Delhi Bench of ITAT in the case of Amway India Enterprises v DCIT (2008) 301 ITR (AT) 1 (Delhi). We find that in this case the ITAT has held as under:
"There cannot be any specific or precise test, which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. The cardinal rule is that the question whether a certain expenditure is on capital or revenue account should be decided from the practical and business view point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business.
Three tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, are the test of enduring benefit, the ownership test and the functional test. Applying these tests, expenditure is treated as capital expenditure either when it results in acquisition of a capital asset by the assessee as owner thereof or when it results in accrual of an advantage of enduring nature to the assessee in the capital field. If the expenditure results merely in acquisition or creation of asset without the assessee becoming the owner thereof, it cannot be said that the expenditure is a capital expenditure. The coming into existence of an asset as a result of incurring expenditure alone thus is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assessee.
Expenditure can be treated as capital expenditure only when it results in accrual of an advantage of enduring nature to the assessee in the capital field. The relevant tests applied to determine the nature of expenditure in such a situation are the functional test and the test of enduring benefit. An advantage is to be considered as of enduring benefit if the benefit accruing is not of a transient nature but is of such durability as to justify it being treated as a capital asset.
On the question whether computer software was goods, the Supreme Court in Tata Consultancy Services [20041 271 1TR 401 took into account the view of American courts on the issue as well as its own decision rendered in the case of Associated Cement Co. [2001] 124 STC 59 in the context of 1 the Customs Act wherein the definition of the term "goods" given was not as wide or exhaustive as the definition of the term "goods" in the A. P. Tax Act, to hold ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 41 that software, whether customised or non-customised, satisfies all the attributes of being a "goods" and as such, is capable of being bought and sold and becomes an object of trade and commerce can only lead to the conclusion that purchase of such disc is acquiring a tangible asset. If the disc, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires the same, acquires a tangible asset. Computer software has not .been defined in the Income-tax Act, 1961, but in Note 7 to Appendix I to the Income-tax Rules, 1962, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or un-canned form) is goods and a tangible asset by itself. The question whether an assessee by purchase of a disc containing software has purchased a. capital asset or not should not. therefore, be viewed from the angle of acquisition of any copyright or any of the bundle of rights comprised in such copyright. An assessee purchasing such a software becomes the owner thereof."
TATA CONSULTAN CY SERVICES V. STATE OF ANDHRA PRADESH [2004] 137 STC 620; [2004] 271 ITR 401 (SC) followed.
"But the question whether expenditure for acquisition of computer software or revenue cannot be decided on the basis of the ownership test alone from the point of its utility to a businessman and how important and or functional role it plays in his business, because of the peculiar nature of a computer software and its possible use in different areas of business. The fact that generally computer software is acquired on a licence by itself will not be sufficient to conclude that the expenditure is revenue expenditure, if it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very economic life so as to be treated as capital expenditure, though owned by an assessee.
For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee right to use the software becomes relevant; Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because software is a business too enabling a businessman's ability to run his business.
The nature of the advantage which the assesses derives has to be seen in a commercial sense. Software normally functions as a too enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment. ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 42 Where the assessee-company is engaged in the business of software development as well as running a training centre to impart specialized training to the students in software technology, f the software is used in such business to impart training to the students, it would be part of the profit-making apparatus of the assessee and consequently expenditure on software, capital.
Where the said software helps in compression of size of e-mails and it includes licences for 150 users and it is limited to facilitate merely an effective and fast communication in order to increase in its organizational efficiency it cannot be treated as forming part of the profit-making apparatus, of the assessee. On the other hand, if such software is being used by an assess engaged in the business of placement agency where the applications from per- sons seeking jobs .are invited through e-mail and are also forwarded to t concerned clients through e-mail, it may form part of the profit-making apparatus of the assessee's business of placement agency and can be treated as capital asset.
As a general rule the more expensive the computer software the more it a likely to be a central too! of the business and the more enduring is likely to its effect adding to the profit earning apparatus, if there is associated cap expenditure like purchase of new computer equipment for running the ware developed under a project, it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable necessary for this purpose.
Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to 'provide services to customers will have a bearing. The more radical the changes, the more likely that the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerized.
The presence of an element of upgrading will not necessarily cause the expenditure in question to be capital.
With effect from April 1, 1999, computers were treated as a different class of asset falling within the description of plant and depreciation was allowed at 60 per cent. With effect from April 1, 2003, computer software was also included along with computers. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent, with effect from April 1, 1999, on computer software, it would have said so specifically by making the provisions retrospective. Depreciation can be allowed at 25 per cent, under section 32W(i) read with Appendix I, Part A, Division 111(1) to the Income-tax Rules, 1962 and with effect from April 1, 2003, computer software having been classified as a tangible asset under the heading "Plant" in Appendix Ito the Rules, is entitled to depreciation at 60 per cent."
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 43
47. We find that the Revenue has relied on the decision of this Tribunal Delhi Bench in the case of Escorts Ltd. v. ACIT (2007) 104 ITD 427 (Del), wherein the expenditure on software is considered as capital in nature by holding that where the assessee acquires ERP business software with unlimited users of licence and expenditure incurred on acquisition of software by way of outright purchase is to be considered as capital in nature. But in the present case, the facts are entirely different and it is not the allegation of the Revenue from the Assessing Officer's stage till now that the assessee has acquired this software for unlimited user of licence and this is outright purchase. The Revenue also relied on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Arawali Constructions Co.(P) Ltd. (2003) 259 ITR 30 (Raj) but the facts in that case are also in regard to distinguishable as in that case the software was an outright purchase of computer programme which relates to technical "know-how". We find that the Assessing Officer has not given any finding as to the fact that whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee right to use the software becomes relevant. Accordingly we are of the view that in case the software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter or say less than 2 years, it may be treated as revenue expenditure. Hence, we find that the CIT(A) has recorded a categorical finding that the software programme without which the computer cannot work and with the advancement of technology, the programme changes during short period and this change is requirement of the business of the assessee i.e. share broking. Accordingly, we delete the addition confirmed by CIT(A) and this issue of assessee's appeal is allowed.
48. The next issue in this appeal of Revenue in ITA No.4356/Ahd/2007 is as regards to the order of CIT(A) in deleting the garden expenses. For this, Revenue has raised the following ground No.2:-
"2. The ld. Commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance out of garden expenses of Rs.14,04,356/-."
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 44
49. At the outset Ld. Counsel for the assessee stated that this issue is covered in favour of assessee and against the Revenue by the decision of this Tribunal in assessee's own case in ITA No.1347/Ahd/2007 for assessment year 2003-04 dated 21-05-2010, wherein the Tribunal has held in para-29 as under:-
"29. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of manufacturing of pharmaceuticals items. In the production, the assessee uses various types of chemicals. In order to control the pollution arising out of chemical process, the assessee has incurred expenditure for the purpose of maintaining garden in factory premises. This expenditure has been claimed deduction by the assessee has been disallowed by the Learned Assessing Officer and allowed by the CIT(A) on appeal by the assessee. The Learned Assessing Officer made the disallowance for the reason that it is not incurred for the process of production. The Learned Commissioner of Income Tax(Appeals) allowed the deduction to the assessee following the decision of Madhya Pradesh High Court in the case of Steel Tubs Pvt. Ltd. (supra) for the reasons that garden expenses improves the working conditions of the workers in the factory and hence, it was an expenditure incurred for the business of the assessee. In the above circumstances, in our considered opinion, the manufacturing process of the assessee being such that it involves use of hazardous chemicals which affect the health of the workers. Thus, it is the duty of the assessee to make good the loss caused to nature and to prevent the health of thee workers engaged in production. Therefore, the assessee maintained the garden for maintaining better environment in the factory and the expenditure incurred in the process was therefore, for the purposes of the business of the assessee and was rightly allowed by the Learned Commissioner of Income Tax(Appeals). We therefore, confirm the order of the Learned Commissioner of Income Tax(Appeals) and dismiss the ground of appeal of the revenue."
Respectfully following the same, we dismiss this issue in the appeal of Revenue. This issue of Revenue's appeal is dismissed.
50. The next ground in this appeal of Revenue in ITA No.4356/Ahd/2007 is against the order of CIT(A) in deleting the addition made by Assessing Officer on account of international transaction u/s.92B of the Act. For this, Revenue has raised the following ground No.3:-
"3. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the addition made out of international transaction u/s 92B of the Act of Rs.48,520/-."
ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 45
51. At the outset Ld. Counsel for the assessee stated that this issue is covered in favour of assessee and against the Revenue by the decision of this Tribunal in assessee's own case in ITA No.1347/Ahd/2007 for assessment year 2003-04 dated 21-05-2010, wherein the Tribunal has held in para-32 as under:-
"32. We have heard the rival submissions and perused the materials available on record. In the instance case, the difference in the Arm's length price as taken by the assessee and as applied by the Learned Assessing Officer was less than 5% of the price taken by the assessee is not in doubt or debate. Therefore, the Learned Commissioner of Income Tax(Appeals) following CBDT Circular No.12/2001 dated 23.08.2001 has held that the Addition made by the Learned Assessing Officer is not tenable. Learned Departmental Representative could not point out any error in the order of the Learned Commissioner of Income Tax(Appeals) which was passed following the CBDT Circular. Thus, we do not find any merit in the ground of appeal of the revenue. Therefore, this ground of appeal of the revenue is dismissed."
Respectfully following the same, we dismiss this issue of Revenue's appeal.
52. The next ground in this appeal of Revenue in ITA No.4356/Ahd/2007 is against the order of CIT(A) in deleting the addition made by Assessing Officer on account of club expenses. For this, Revenue has raised the following ground No.7:-
"7. The ld. commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance out of club expenses of Rs.58,50,000/-."
53. The brief facts leading to the above issue are that the Assessing Officer has observed that the assessee had paid Rs.58.50 lakh being club fees which includes Rs.8.50 lakh being corporate membership fees and Rs.50 lakh towards fees of different specified employees. The AO has held that the club membership fee paid by the assessee is not bringing any benefit to the business of the assessee and that it was incurred for the benefit of employees. He held that it is not revenue expenditure. The assessee submitted that the payment was mad to facilitate the business contracts to be maintained by the employees which would in long run help the business relationship in company's interest. Accordingly, it was an expenditure incurred for the business and the A.O was not justified in holding that it does not bring any benefit to the business of the assessee and claim was therefore admissible in the hands of the assessee. We are of the view that the expenditure was incurred with the intention to establish and maintain business contact which is in the long term ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd Page 46 interest of the company's business. This expenditure was incurred in the interest of the assessee's business. It would provide employees and officers better contacts and association with the persons in good position and would result in publicity. We find from the order of CIT(A) that such expenditure was not incurred with an intention to benefit employees of the assessee but was for the promotion of business of the assessee. This view of CIT(A) was considered by the High Court and was approved. Further we are of the view that this issue is squarely covered by the decision of the Hon'ble jurisdiction High Court in the case of Gujarat State Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj), wherein it is held that by paying the entrance fee to the sports club, the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business. By common sense standards, it could be stated that it was for running the business or for bettering the conduct of its business. The amount paid as entrance fee was deductible Considering the above position, and in view of the facts of the assessee's case, we confirm the order of CIT(A) and this issue of Revenue's appeal is dismissed.
54. In the result, assessee's appeals and that of Revenue are partly allowed for statistical purposes as indicated above.
Order pronounced in Open Court on 31/01/2011
Sd/- Sd/-
(D.C.Agrawal) (Mahavir Singh)
(Accountant Member) (Judicial Member)
Ahmedabad,
Dated : 31/01/2011
*Dkp
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-XIV, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad