Income Tax Appellate Tribunal - Mumbai
Glenmark Pharmaceuticals Ltd., Mumbai vs Assessee on 12 August, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G", MUMBAI
BEFORE SHRI A.L. GEHLOT(AM) AND SHRI R.S. PADVEKAR (JM)
ITA No. Assessment Year
1110/Mum/07 : 2002-03
1221/Mum/07 : 2003-04
4434/Mum/07 : 2004-05
M/s. Glenmark Pharmaceuticals Ltd., ... Appellant
Glenmark House,
HDO Corporate Building, Wing 'A'
B.D. Sawant Marg, Chakala,
Andheri (E), Mumbai 400 099.
(PAN: AACG 2207L)
Vs.
The Dy. Commissioner of Income Tax, ...Respondent
Central Circle-33, Mumbai
I.T.A. No. Assessment Year
652/Mum/07 : 2002-03
653/Mum/07 : 2003-04
4783/Mum/07 : 2004-05
.
The Dy. Commissioner of Income Tax, ... Appellant
Central Circle-33, Mumbai
Vs.
M/s. Glenmark Pharmaceuticals Ltd., ... Respondent
Glenmark House,
HDO Corporate Building, Wing 'A'
B.D. Sawant Marg, Chakala,
Andheri (E), Mumbai 400 099.
(PAN: AACG 2207L)
Assessee by : Shri Vijay Mehta
Revenue by: Shri Pavan Ved CIT- DR)
ORDER
PER A.L. GEHLOT, A.M.
These cross appeals filed by the assessee and Revenue were heard together and are being disposed of by this common order, for the sake of convenience.
ITA No. 1110/Mum/07 :Asst. Year : 2002-03- by assessee 2 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
2. Ground No.1 is general in nature requires no finding.
3. Ground No. 2 is in respect of disallowance under section 14A of the Act. Brief facts of the case are that during the assessment proceedings the Assessing Officer noticed that interest component relatable to investment from which dividend is exempt from common pool of funds. In absence of specific co-relation between interest free funds and its investments in investment from which dividend is exempt, the Assessing Officer disallowed proportionate interest Rs 16,45,319/-.
4. The CIT(A) considered the assessee's contention that the investment in shares were made in earlier year and there was no borrowed funds. The CIT(A) was of the view that the expenditure pertaining to exempt income is not disallowable in accordance with section 14A of the Act. The CIT(A)estimated 10% of the expenditure related to dividend income disallowable u/s.14A of which calculation comes to Rs.2,41,598/-. Against the order of the CIT(A), the assessee and the revenue both are in appeal before us. In the revenue's appeal being ITA No. 652/M/08, ground No. 2 is related to this issue.
5. The learned counsel for the assessee submitted that in the assessment year 2003- 04 no such disallowance was made. He further submitted that in the assessment year 2004-05, the Assessing Officer himself accepted the order of the CIT (A) for the assessment year 2002-03 and 10% of the expenditure was disallowed u/s.14A. In the assessment year 2004-05 the Assessing Officer himself held that 10% of disallowance is fair and justifiable.
6. The learned Departmental Representative, on the other hand, relied upon the order of the Assessing Officer.
7. We have heard the learned representatives of the parties and records perused. In the light of the latest judgment of the Hon'ble High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, ITA no. 6626 of 2010 and Writ Petition No. 758 of 2010, judgment dated 12th august, 2010, wherein it has been held that prior to assessment year 3 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
2008-09, Rule 8D was not applicable. However, the disallowance is warranted under section 14A of the Act. The A.O. must adopt a reasonable basis or method consistent with the facts and circumstances of the case. In the case under consideration is related to the assessment year 2002-03. In the assessment year 2004-05 the A.O. himself admitted 10% reasonable disallowance under section 14A of the Act. The CIT (A) in the year under consideration has also accepted 10% disallowance of the expenditure u/s.14A of the Act as reasonable. We, therefore, do not find any reason against the findings of the CIT (A). The order of the CIT (A) on this issue is confirmed. Thus, ground No. 2 of the assessee's appeal and ground No.2 of the revenue's appeal both are dismissed.
8. Ground No. 3 in the assessee's appeal reads as under:
"The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in holding that the expenditure incurred by the appellant for SAP maintenance amounting to Rs. 1,25,09,313/- is capital in nature."
9. Brief facts of the case are that during the assessment proceedings the Assessing Officer noticed that the assessee has shown expenditure pertaining to ERP implementation under the head "Miscellaneous Expenditure". The total expenditure incurred during the year on SAP implementation was Rs. 1,37,69,885/-. Out of which Rs. 34,42,471/- has been amortised by debiting it to Profit and Loss account and the balance of Rs.1.03.27,414/- has been shown under the head "Deferred Revenue Expenditure". The Assessing Officer further noticed that the assessee had claimed full amount of Rs.1.37,69,885/- as revenue expenditure. The A.O. was of the view that the expenditure pertaining to ERP implementation cannot be treated as revenue expenditure. The said expenditure was made for bringing into existence of an asset or advantage for the enduring benefit of the business. The expenditures incurred on account of technical knowhow. The assessee acquired intangible assets. The A.O. accordingly treated the said amount as capital expenditure and allowed depreciation @25%.
4 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
10. The CIT(A) considered the following break up of the expenditure :
Sr.No. Nature of expenditure Amount (Rs.)
1 License to use software - List Price 74,15,133
2 Maintenance Fees @17% of the list 12,60,572
price
3 Consultancy Fees 30,00,000
4 Pther expenses (out of pocket expenses 20,94,180
of consultants, personnel cost)
Total 1,37,69,885
The CIT(A) allowed maintenance fee of Rs. 12,60,572/-and for the balance amount he confirmed the order of the Assessing Officer observing that the assessee has incurred substantial amount on the installation of new soft ware. The assessee obtained enduring benefits for a number of years.
11. The assessee is in appeal against the order of the learned CIT(A). Though the revenue has filed appeal but no ground of appeal is taken in respect of this issue decided by the CIT(A).
12. The learned counsel for the assessee submitted that the assessee has claimed SAP expenditure as revenue expenditure. The A.O. taken it as capital expenditure. The CIT(A) confirmed the order of the A.O. except maintenance fees of Rs. 12,60,572/-. The learned counsel for the assessee submitted that SAP/ERP is a comprehensive software/program, which used by the assessee for its day-to-day administrative work. The learned counsel for the assessee drew our attention on various clauses of the Agreement dated 1.9.2000 of which photocopies have been placed at pages 33 to 47 of the assessee's paper book. On the basis of the clauses of the agreement, the learned counsel for the assessee submitted that the ownership right and title of the SAP remained with the Licensors. The assessees never become the owner of the SAP. The learned counsel for the assessee submitted that in case of assets on payment gets certain rights. But in the case under consideration, the assessee did not get any right. In the case of the assessee there are various contingencies, therefore, it cannot be held that the SAP is an asset to the assessee.
5 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
13. The learned counsel for the assessee further submitted that in case of termination of the agreement, the amount paid is not refundable. Therefore, it cannot be said that the assessee is getting any enduring benefit. All the benefits were in the revenue field and not in capital field. While summing up the submissions, the learned counsel for the assessee submitted that the assessee is not the owner of the SAP, no advantage in capital field and assessee has no enduring benefit. Therefore, it cannot be held as a capital expenditure. The learned counsel for the assessee relied upon the decision of the ITAT in the case of Amway India Enterprises & Ors. V. DCIT (111 ITD
112) (SB) (Bom). He has also referred to another decision of the Mumbai Tribunal in the case of Angel, Capital & Debt Market Ltd. v. ACIT (2008) 118 TTJ (Bom) 351, wherein the Tribunal held that share brokers for assessing NSC for controlling trading functions, the assessee did not gain any enduring benefit. The software ownership was not transferred to the assessee. The software was used for day-to-day business. Under the circumstances, the ITAT held that the expenditure cannot be held as capital expenditure. The learned counsel for the assessee also relied on the judgment of the Madras high Court CIT V. Southern Roadways Ltd 304 ITR 84(Mad).
14. The learned Departmental Representative relied upon the order of the CIT(A) and submitted that the agreement was for 25 years therefore expenditures have been rightly taken as capital in nature.
15. We have heard the learned representatives of the parties, records perused and gone through the decisions cited. The assessee purchases the software called as SAP. The assessee claimed the expenditure incurred on the said software as revenue expenditure, but the same disallowed by the revenue, treating it as capital expenditure. The question to be examined in this ground of appeal is whether the expenditure incurred on SAP/ERP/software by the assessee is a revenue expenditure or capital expenditure. There is no embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole 6 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
operation in respect of which the expenditure incurred. To know the nature of activities for which expenditures incurred we would like to refer written submissions of the assessee filed before CIT (A) of which copy placed in paper book at page numbers 80 to 117. The relevant part of Para 42 of the said letter reproduce as under:-
"It is relevant to note the concept of ERP in brief in order to understand the correct nature of said expenditure. There are number of different systems in a large company's "back office," including, planning, manufacturing, distribution, shipping, and accounting, Enterprise resource planning (ERP) is a system that integrates all of these functions into a single system, designed to serve the needs of each different department within the enterprise. ERP is more of a methodology than a piece of software, although it does incorporate several software applications, brought together under a single, integrated interface."
16 There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on application of this test. If the advantage consists merely in facilitating the assessee's day-to-day- administrative business operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. What is capital expenditure and what is revenue are not eternal verities but must be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The concept of enduring benefit must respond to the changing economic realities of the business. In the case under consideration, it is admitted fact that the assessee is a Licensee. The relevant clauses of the agreement read as under :-
7 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
"RECITAL Whereas, SAP desires to grant to Licensee and Licensee desires to accept from SAP, a license to use (as defined herein) SAP's proprietary R/3 Software (as defined herein) upon the terms and conditions hereinafter set forth:"
"6.1 SAP Proprietary information Licensee acknowledges that ownership of an title in and to all intellectual property rights, including patent, trademark, service mark, copyright and trade secret rights, in the SAP Proprietary information are and shall remain in SAP and its Licensors. Licensee acquires only the right to use the Software under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP Proprietary information and that of SAP's licensors.
(a) Licensee shall not copy, translate, disassemble, or decompile, nor create or attempt to create, by reverse engineering or otherwise, the source code from the object code of the Software. In the event source code is provided to Licensee, SAP, in its sole discretion, reserves the right to delete, or to require the deletion of, such source code and all copies thereof in Licensee's possession or control whenever a future Release, Version, or Correction Level provides for like functionality in an object code format.
(b) Subject to Section 6.3, all Modification and Extensions to the Software and Documentation shall be considered part of the Software and Documentation for purposes of this Section 6."
17 We find from the clauses of the agreement that the agreement itself could have been terminated by any party before the expiry of the term on any of the grounds stated in the agreement and amount will not be refunded. The relevant clauses of the agreement are reproduced as under:-
"5. TERMS AND TERMINATION"
"5.1 Term. This agreement and the license granted hereunder shall become effective upon execution by both parties and shall continue in effect for a period of 25 years unless terminated under section 5.2. Under section 19A of the Copy-right (Amendment) Act, 1994, SAP 8 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
waives Licensee's statutory requirement to use the Software within a period of one year from the date of this Agreement. "5.4 No Refund. In the event of any termination hereunder, Licensee shall not be entitled to any refund of any payments made by Licensee."
18 The expenses incurred for a software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances the efficiency of the operation. It is an aid in the business administration/ process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the business administration efficiency and hence, has to be treated as revenue expenditure. The length of the period of the agreement and quantum/ amount is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset.The concept of enduring benefit must respond to the changing economy and the realities of the business. The expenses incurred for software which revolves on the modern administrative technology for day to-day administration of business activity to enable the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances efficiency of such business operation. Therefore, acquiring such software in the present scenario of style of business, it cannot be held as a capital asset.
19 One of the aspects of the AO for disallowance of assessee's claim is that the expenditures were technical know - how. We find that payments for implementation of ERP system squarely falls outside the purview of the definition of the term 'technical know-how' provided under Explanation 4 in clause (ii) of sub-section 1 of Section 32 of the Act. The said section provides that know-how means any industrial information or technique likely to assist in the manufacturer or processing of goods or in the working of mines, oil-well or other sources of mineral deposits. In the case under consideration, the assessee neither purchased any software nor the expenditure is incurred related to manufacturing operation, therefore, we do not agree with this reason of the A.O. for disallowing the assessee's case.
9 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
20 In the light of discussions, we allow the claim of the assessee as revenue expenditures and the AO is directed accordingly .The AO further directed that if depreciation if any has been allowed same be withdrawn.
21. Ground Nos. 4 to 8 read as under:
"4. The learned CIT(A) has erred in law and in facts in restricting the claim of deduction of Rs. 47,72,129/- made by appellant u/s.80HHC of the Act.
5. The learned CIT(A) has erred in law and in facts in holding that income from DEPB should not be considered u/s.80HHC(3)(c) for the purpose of computing deduction u/s.80HHC of the Act
6. The learned CIT(A) has erred in law and in facts in upholding the action of the Assessing Officer of reducing income from DEPB from the profits of the business even after holding that DEPB does not fall under the provisions of section 28(iiia), (iiib) and (iiic) of the Act.
7. Without prejudice to the above and strictly in the alternate, the learned CIT(A) has erred law and in facts in holding that entire receipts from DEPB are required to be reduced for determining 'profits of the business'. The learned CIT(A) ought to have held that only "profits" from the sale of DEPB should be reduced for the purpose of computing 'profits of the business'.
8. The learned CIT(A) has erred in law and in facts in upholding the contention of the Assessing Officer that income under the head 'Profits and gains of business', for the purpose of calculation of deduction u/s.80HHC of the Act, should be the amount after setting off of brought forward business loss of the earlier years."
22. The learned counsel for the assessee submitted that he is not pressing these Ground Nos. 4 to 8 , as on basis of normal computation of income, 10 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
there is loss. Since the learned counsel for the assessee has not pressed these grounds of appeal, the same are dismissed as not pressed.
23. Ground Nos. 9 to 11 taken by the assessee read as under:
"9. The learned CIT(A) has erred in law in confirming the action of the AO of computing book profit u/s.115JBB at Rs. 28,23,52,811/- as against Rs. 27,75,80,681/- declared by the appellant. The Hon'ble CIT(A) ought to have appreciated that the claim made by the appellant is as per the provisions of the Act and hence, should be allowed.
10. The learned CIT(A) has erred in law and in facts in not agreeing with the contention of the appellant that for the purpose of computing book profits u/s.115JB, deduction u/s.80HHC, which is reduced from the 'profit after tax' is to be computed considering 'book profits' as 'profits of the business' in pursuance to provisions of section 1115JB of the Act.
11. The learned CIT(A) has erred in law and in facts in not agreeing with the contentions of the appellant that for the purpose of computing book profits u/s.115JB, 100% of the eligible profit so computed u/s.80HHC is to be reduced in pursuance with sub- clause (iv) of Explanation to section 115JB(2) of the Act."
24. The above grounds are in respect of the issue whether for the purpose of calculation of book profit u/s.115JB deduction u/s.80HHC is to be reduced or not. The learned counsel for the assessee submitted though in earlier years the ITAT has decided this issue in favour of the assessee but on account of fairness, the issue is covered against the assessee by the judgment of the jurisdiction High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010.
25. After hearing learned representatives of both the sides, we find that the issue is covered against the assessee by the judgment of the jurisdictional High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010 but subsequently it was noticed the finding of said judgment has been reversed by the Supreme court in the case of Ajanta Pharma Ltd V CIT Civil appeal NO 7518 of 2010 dated 9.9.2010, therefore the matter is sending back to the file of AO with 11 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
direction to decide the issue a fresh in accordance with above judgment of the supreme court after providing opportunity of hearing to the assessee.
26. The assessee has also raised the following additional ground:
"The learned CIT(A) has erred in law and in facts in confirming the action of the Assessing Officer in charging interest u/s.234B and 234D of the Act, even though the assessee was liable to pay tax under the provisions of section 115JB of the I.T.Act, 1961."
27. After hearing the learned representatives of both the parties, in the interest of justice, we admit the additional ground as the same is a legal ground.
28. The learned counsel for the assessee submitted that this issue is covered in favour of the assessee by the judgment of the jurisdictional High Court in Snowcem India Ltd. v. Deputy Commissioner of Income-tax 313 ITR 170(Bomb)
29. After hearing the learned Departmental Representative, we find that the issue is covered in favour of the assessee by the judgment of the jurisdictional High Court in the case of Snowcem India Ltd. v. Deputy Commissioner of Income-tax 313 ITR 170(Bomb), wherein it has been held that the interest under sections 234B and 234C could not be levied in the case of computation of income under the provisions of section 115JA. Respectfully following the decision of the jurisdictional High Court (supra), the Assessing Officer is directed accordingly.
ITA No.652/M/07 : Asst. Year 2002-03 by revenue30. Now we take up the appeal of the revenue for the assessment year 2002-03
31. The first ground taken by the revenue reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to treat the repairs and 12 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
maintenance expenses of Rs. 2,84,134/- as revenue expenses as against the capital expenses treated by the A.O. without appreciating the facts brought on record by the A.O."
32. Brief facts of the case are that during the assessment proceedings, the A.O. noticed that the assessee had claimed Rs.28,47,669/- as repairs and maintenance expenses of plant and machinery, out of which Rs. 2,84,134/- was found as capital expenditure. The AO rejected the assessee's claim as revenue expenditure and treated the same as capital expenditure after allowing depreciation, the net addition was Rs. 2,38,439/-. The learned CIT(A) allowed the claim of the assessee, after going through the details of expenses and the bills the expenditure is found to be revenue in nature.
33. We have heard the learned representatives of the parties and records perused. The AO has given details of such expenses at page 2 of his order. On perusal of the details of expenditure, we notice that the items, which mentioned by the AO in the details, are revenue in nature. The contention of the learned Departmental Representative that the items pertained to store items cannot be claimed as revenue unless the same is utilized for the purpose of business. We find that this was not the case of the AO. Therefore, we do not find any substance in this contention of the learned Departmental Representative, as contentions of the Learned DR are not relevant to the case make out by the AO. Even otherwise, when the assessee followed a particular method of accounting that the consumable store items as and when purchased is accounted for as expenditure. Such method is not an incorrect method of accounting. We, therefore, do not find any substance in this ground of the appeal of the same is dismissed.
34. Ground No. 2 taken by the revenue reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in restricting the disallowance u/s.14A of the I.T.Act to Rs. 2,41,598/- as against Rs. 16,45,319/-made by the A.O. without appreciating the facts brought on record by the A.O.
35. This ground has been decided along with assessee's appeal for the assessment year 2002-03 in Para 7 above. The AO is directed accordingly.
13 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
36. Ground No. 3 taken by the revenue reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow depreciation of Rs. 46,76,519/- of on payment of royalty without appreciating the facts brought on record by the A.O."
37. Brief facts of this ground noted by the AO from assessee's letter dated 1.8.2003 in his order reads as under:-
"The assessee has acquired Trademark in respect of 3 brands purchased from M/s. Lyka Labs Limited in the Financial Year 2000-01. As per the terms of said agreement, the assessee is required to pay royalty @ 5% if sales if said 3 brands for a period of 3 years from 1.8.2000. In the original return of income for the Assessment Year 2001-02, the assessee had shown the Royalty Payments as Revenue Expenditure. The assessee has now been advised that the said expenditure on Royalty Payments is a capital expenditure. Accordingly, the assessee is treating the said Royalty Payment as Capital Expenditure and claiming depreciation @ 25% on the same. The assessee has filed revised return of income for Assessment Year 2001-02 and has claimed depreciation by treating said Royalty Payments as capital expenditure. The royalty Payments made during the Financial Year 2000-01 are Rs.35,40,719/- and Financial Year 2001-02 are Rs.90,79,472/-. The Royalty Payments for the period from 1.4.2002 to 30.9.22002 are Rs.1,38,50,780/-. Accordingly, the assessee estimated that the total Royalty Payments for the period from 1.10.2002 to 31.7.2003 will be Rs. 1,01,81,143/-. Thus, the total capital expenditure on account of Royalty Payments are calculated as under:
Sr.No. Particulars Amount
(Rs.)
1 Royalty for the period from 1.8.2000 to 35,40,719
31.3.2001
2 Royalty for the period from 1.4.2001 to 90,79,472
31.3.2002
3 Royalty for the period from 1.4.2002 to 1,38,50,780
31.12.2002
4 Royalty for the period from 1.1.2003 to 1,01,81,143
14 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07
M/s. Glenmark Pharmaceuticals Ltd.
31.7.2003
Total 3,66,52,114
38. During the assessment proceedings, the A.O. noticed that the assessee incurred expenditure on royalty of Rs. 90,79,472/- and claimed depreciation of Rs. 68,72,271/-. However, in the application for a revision in computation of income, the assessee re-worked the depreciation claim on royalty payment for the financial year 2001-02 and withdrew the excess claim of Rs. 21,95,752/-, the balance depreciation amount is Rs.46,76,519/- as claimed on actual payment of royalty for the year under consideration. The AO was of the view that the assessee is not entitled to depreciation, as royalty is not a depreciable asset. The AO followed the detailed discussion made in the assessment year 2001-02 and disallowed the assessee's claim of depreciation. The CIT(A) allowed the assessee's claim following the order of the CIT(A) for the assessment year 2001-02 holding that the assessee is entitled to depreciation on the use of trade marks.
39. The learned representative for the assessee submitted that the issue is covered by the order of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No. 6477/M/04 and others order dated 9 t h July, 2008. The relevant facts and findings of the ITAT are as under:-
"16The next dispute in the Revenue's appeal relates to allowing of depreciation of Rs. 69,97,585/- in respect of royalty payments. We have heard the learned counsel for the assessee and gone through the discussions in para 13.6 to 13.10 and agree with the view of the learned CIT(A) that the examination of the agreement as a whole shows that in substance, the royalty payment has been made to acquire the brands and it is evident that such payment forms part of the cost of acquisition of brands and therefore, forms part of the total cost of the asset. In respect of the expenditure incurred on technical know-how, the assessee is entitled to depreciation under section 32 of the Act. We decline to interfere."15 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
The AO followed the detailed discussion made in the assessment year 2001-02. The CIT (A) also allowed the assessee's claim following the order of the CIT (A) for the assessment year 2001-02. Since facts are identical we respectfully follow the order of the ITAT and in the light of that the order of the CIT(A) is confirmed.
40. Ground No. 4 taken by the revenue reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow depreciation on marketing know-how without appreciating the facts brought on record by the A.O."
41. Facts of the case in brief are that the assessee raised additional ground before the CIT(A) claiming depreciation of Rs. 1,87,50,000/- on marketing know-how. The facts and findings pointed out to the CIT(A) which were noted by him in his order at page 13 which read as under:-
1. The appellate company in its original return of income for the assessment year 2001-02 had claimed depreciation @ 25% of Marketing know-how of Rs. 10 crores (which coincidentally formed part of total consideration of Rs. 34.25 crores paid for acquisition of brands/trade marks). Subsequently, the appellant company filed its revised return of income to claim the said payment as a Revenue Expenditure u/s.37(1) of the income-Tax Act(Act). However, the learned Assessing Officer treated the same as capital in nature and disallowed it, in his said assessment order, on the ground that the said expenses forms part of the same set of agreements entered into for acquiring brand/trade marks, so the expense incurred on the same should also be treated as capital in nature. Being aggrieved, the appellant company preferred an appeal against the said assessment order for the assessment year 2001-02.
2. On the said appeal, the learned CIT(A) vide his order (page No.74 of paper book (for assessment year 2002-03) & page No. 22 of his said order) dated 22.07.2004, considered the same as capital in nature and allow the depreciation of Rs. 2.50 crores (i.e. @ 25% on said amount of Rs. 10 crores) thereon. The copy of the said first appellate order, dated 22.07.2004 for assessment year 2001-02 is enclosed at Serial No.5 of said Paper Book for the assessment year 2002-03.
3. Meantime, the Learned Assessing Officer passed the assessment order for assessment year 2002-03 on 31.01.2005, rejecting the claim of the appellate company to consider the same as revenue expenses and at the same time did not allow the depreciation on the same , against which the Appellate company preferred an appeal dated 16.03.2005 before your honour, which is pending for final hearing and disposal."16 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
42. The finding of the CIT(A) reproduced as under:-
"I have perused the order of CIT(A) in the appellant's case for assessment year 2001-02. it is held therein that the expenditure incurred on marketing know-how be considered as a capital expenditure and depreciation be accordingly allowed. For this year the appellant has claimed depreciation on the basis of the decision of the CIT(A) for the assessment year 2001-02 The claim of the appellant has to be allowed. Hence, it is held that the appellant is eligible for depreciation on opening WDV for this year. Accordingly, this ground is decided in the favour of the appellant."
43. The learned representatives of the assessee submitted that the issue is covered against the assessee by the order of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No. 6477/M/04 and others order dated 9 th July, 2008. The learned AR submitted that in AY 2001-2002 the ITAT has allowed the entire expenditure as revenue expenditures therefore there is no question for allowing deprecation. We find in the assessment year 2001-02 the assessee filed an appeal before the ITAT against the order of the CIT(A) and claimed that the expenditure was revenue in nature. The Tribunal allowed the assessee's claim as revenue expenses and directed the AO to withdrew the depreciation allowed by the CIT(A).The relevant facts and findings of the ITAT are as under:-
Facts noted by the ITAT in Para 11 of the order as under:-
"The next dispute in the assessee's appeal relates to action of the learned CIT(A) with regard to the payment of Rs. 10 crores for acquiring marketing know-how in respect of three brands of M/s. Lyka Labs Ltd. As capital expenditure as against the claim of the revenue expenditure. It may be mentioned that the original return of the assessee company claimed depreciation of 25% on the said amount of Rs. 10 crores, which formed part of the total consideration of Rs. 34.25 crores paid for acquisition of brands/trademarks. The revised return came to be filed claiming the said expenditure as revenue expenditure. The Assessing Officer treated the same as capital in nature. According to the Assessing Officer the expenditure incurred on marketing know-how forms part of the same set of agreements entered into for acquiring the brand/trade mark, so the expenditure incurred in this regard, according to him, was capital in nature. The assessing Officer further held that the marketing know-how acquired by the assessee offered an enduring benefit to the assessee by 17 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
providing a database and documentation relating to sales and marketing of products...."
The findings of the ITAT given in order in para 12 reads as under:
"We have gone through the copies of the agreements and considered the facts of the case and the decision of the Mumbai Tribunal in the case of USV Ltd. In this case, the assessee company has already engaged in manufacturing and marketing of pharmaceutical products with a view to expand its market base, it entered into agreement with another company. Apart from acquiring the brands, it also acquired data and details of all scientific and marketing know-how. The benefit of the expenditure and noncompetition was dictated by business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability and was not in connection with the acquisition of any tangible or capital assets. The expenditure was held to be revenue in nature. The facts of this case are identical to the facts of the USV Ltd. case, where under identical circumstances, the Tribunal has already allowed the said expenditure to be treated as revenue in nature. To the same effect the decision of the Bangalore Bench of the Tribunal in the case of IBO Global Services India (P) Ltd., vs. DCIT., 113 TTJ (Bang.) 747. Following the aforesaid decisions, we are of the view that the expenditure in question is clearly in the revenue field and in the direction of improving the profitability of the company and the same is allowable as revenue expenditure. In the light of the above, the ground raised by the assessee on this issue is allowed and that of the Revenue on the same ground is dismissed and the direction of the learned CIT(A) to grant depreciation is accordingly withdrawn.
44. After hearing the learned representatives of the parties and after considering the above order of the ITAT we allow this ground of appeal of revenue and set aside the order of the CIT(A) and restore the order of the AO.
ITA No. 1221/Mum/07 : Asst. Year: 2003-04 by assessee45. Ground No. 1 is general in nature and requests no finding.
46. Ground No.2 taken by the assessee reads as under:
"The learned CIT(A) has erred in law and in facts in upholding the disallowance made by the AO of Rs. 57,900/- and treating it as capital expenditure instead of computer maintenance expenses as claimed by the appellant".18 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
47, Brief facts of the case are that the AO noticed that the assessee has claimed Rs.1,07,900/- for computer maintenance expenses. The details of expenditure given by the AO in his assessment order is as under:
Sr.No. Ref.No. Amount Nature of expenditure
(Rs.)
1 1002133471 50,000.00 APL sales database-II (singular
user version
2 1002121004 32,160.00 20 GB hard disk drive
3 1002128550 25,740.00 128 MB SD RAM
Total 1,07,900.00
48. The AO treated the said expenditure as capital in nature and made an addition of Rs. 1,907,900/-. The CIT(A) sustained the addition to Rs. 57,900/- .
49. We have heard the learned representatives of the parties and records perused. The expenditure is in respect of purchase of 20GB hard disk drive and 128 MB SD RAM. Considering the present scenario of modern technology and as per detailed discussions in Para 15 to 20 of this order, these expenses are revenue in nature. We, therefore, allow the claim of the assessee.
50. Ground No.3 taken by the assessee reads as under:
"the learned CIT(A) has erred in law and in facts in holding that the expenditure of Rs. 8,00,000/- incurred by the appellant for SAP maintenance is capital in nature".
51. The brief facts of the case are that the AO made an addition of Rs.8,00,000/- and treated it as capital expenditure as being technical know- how and allowed depreciation @ 25% of which calculation comes to Rs. 1,00,000. The learned CIT(A) following the order of his predecessor for the assessment year 2002-03 held that the expenditure on acquiring the licence to use ERP software is a capital expenditure.
19 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
52. The learned Departmental Representative submitted that the A.O. may be directed to follow the directions for the assessment year 2002-03. He further submitted that the assessee was not having the relevant bills and description and, therefore, the matter may be sent back to the file o the CIT(A) for necessary verification.
53. We have heard the learned representatives of the parties and records perused. Identical has been decided in the assessee's appeal for the assessment year 2002-03 in Para 15 to 20 of this order. The nature of payment is subject to verification, we, therefore, send back this issue to the file of the A.O. with direction to verify the nature of expenditure and decide the ground in the light of our discussion made in the assessee's appeal for the assessment year 2002-03 after providing adequate opportunity to the assessee.
54. Ground No. 4 taken by the assessee reads as under:
"The learned CIT(A) has erred in law and in facts in upholding the contention of the Assessing Officer and disallowing the claim for bad debts u/s.36(1)(vii) of the Act of Rs,. 40,62,649/-. The learned CIT(A) ought to have appreciated that since the appellant had actually written off the said debt in its books, conditions mentioned u/s.36(1)(vii) were fulfilled and hence the same should have been allowed"
55. Facts of the case in brief are that the during the assessment proceedings, the AO noticed that the assessee has claimed bad debts totaling to Rs.103 lakhs. After examining the assessee's submission, the A.O. disallowed the claim of bad debt of Rs.40,62,469/-as under:
"In the return of income filed by the assessee an amount of Rs. 1,03,00,000/- was claimed as a deduction in respect of bad debts written off. The assessee was asked to furnish details and supporting documents in respect of the same. The assessee furnished the explanation and details along with the supporting documents. The assessee has stated in its submission that -20 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
The above amount of Rs.103.00 lacs, which is related to exports made through Glenmark Exports Limited, has been provided in the F.Y. 2001-02 and has been added back in the total income for the year. During the F.Y.2002-03 Glenmark Exports has actually written off to the extent of Rs. 62,37,531/- and Rs. 40,62,469/- has been provided as doubtful debts.
In view of the above treatment given by Glenmark Exports Limited in their books, Glenmark Pharmaceuticals Limited has actually written off this amount in its book during the F.Y.2002-03 and accordingly the same has been claimed as allowable expenditure in view of the explanation to sec.36(1)(vii) of the Act."
Glenmark Exports is a sister concern of the assessee company. All the trading transactions are routed through Glenmark Exports since the licenses stand in the name of Glenmark Exports. These transactions are recorded in the books of the assessee company and there is no direct activity in Glenmark Exports.
Explanation to section 36(1)(vii) of the Act states that deduction claimed for bad debt written off shall not include any provision for bad and doubtful debts. Thus, even though the amount of Rs.40,62,469/- is written off in the books of the assessee, it has not been written off in the books of M/s.Glenmark Exports Limited. Further, it cannot be denied that there is probability that the same being doubtful may be recovered. If this amount is allowed as a deduction and in the near future the amounts is recovered then, the whole purpose behind the provision of this section shall be defeated. Thus, the deduction claimed by the assessee is reduced by Rs. 40,62,469/- and accordingly the deduction claimed and allowed for bad debts remains at Rs. 62,37,531/-."
56. The CIT(A) confirmed the order of the AO observing that the assessee has not furnished any evidence to show that the amount is impossible to recover from the debtor.
21 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
57. We have heard the parties and records perused. The admitted facts of this ground are that the assessee had written off the amount as bad debt in the books of accounts. The objection of the AO is that Glenmark Exports is a sister concern of the assessee. All trading transactions were routed through Glenmark Exports Pvt. Ltd. Glenmark Exports, not assessee but its sister concern has shown this amount as a provision for doubtful debts. The AO is not in correct in appreciating the facts. He should consider facts of the case of assessee and not the facts of books other party. As stated above that the assessee had written off the amount as bad debt in the books of accounts. We find that the issue is squarely covered by the judgment of the Apex Court in the case of TRF Ltd. v. CIT (323 ITR 397) wherein it was held that after amendments with effect from 1.4.1989, write off of bad debts in account is sufficient for allowing deduction. We respectfully following the above judgment of the apex court, the claim of the assessee is allowed.
58. Ground Nos. 5 & 7 read as under:
"5. The learned CIT(A) has erred in law and in facts in restricting the claim of deduction of Rs. 61,01,916/- made by appellant u/s.80HHC of the Act to Rs. 57,27,274/-."
"7. The learned CIT(A) has erred in law and in facts in upholding the contention of the Assessing Officer that income under the head "Profits and gains of business" for the purpose of calculation of deduction u/s.80HHC of the Act, should be the amount after setting off of brought forward business loss of the earlier years."
59. The learned representative for the parties submitted that these grounds are covered against the assessee by the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Shirke Construction Equipment Ltd.291 ITR 380 (SC). We respectfully following the above judgment of the apex court the order of the CIT(A) is confirmed on this issue.
60. Ground No. 6 reads as under:
"The learned CIT(A) has erred in law and in facts in not considering the additional proceedings of Rs. 1,51,54,274/- received by the 22 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
appellant after the statutory period, with the permission of the prescribed authority, for the purpose of computing deduction u/s.80HHC of the Act."
61. Brief facts of the case are that during the assessment proceedings the AO noticed that the assessee filed a revised claim u/s.80HHC in respect of funds realized after six months from the end of the previous year. However the assessee has not given copy of the authorized dealers/RBI. Therefore, the AO did not allow the claim u/s.80HHC in respect of additional proceeds received beyond the due date Rs.1,54,54,274/-. The learned AR submitted that the issue is pursuing and the AO may be directed to allow the deduction u/s.80HHC if the assessee is unable to furnish the necessary permission.
62. After hearing the parties, we send back this matter to the file of the AO with direction to consider the assessee's claim u/s.80HHC in accordance with law after providing opportunity of hearing to the assessee.
63. Grounds 8 to 10 taken by the assessee read as under:
"8. The learned CIT(A) has erred in law in confirming the action of the AO of computing book profit u/s.115JB at Rs.43,16,98,053/- as against Rs. 42,91,21,845/- declared by the appellant. The Hon'ble CIT(A) ought to have appreciated that the claim made by the appellant is as per the provisions of the Act and hence, should be allowed.
9. The learned CIT(A) has erred in law and in facts in not agreeing with the contention of the appellant that for the purpose of computing book profits u/s.115JB, deduction u/s. 80HHC, which is reduced from the 'profit after tax', is to be computed considering 'book profits' as 'profits of the business' in pursuance to provisions of section 115JBof the Act.
10. The learned CIT(A) has erred in law and in facts in not agreeing with the contentions of the appellant that for the purpose of computing book profits u/s.115JB, 100% of the eligible profit so computed u/s.80HHC is to be reduced, in pursuance with sub- clause (iv) of Explanation to section 115JB(2) of the Act."23 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
64. These grounds are identical to grounds taken in assessment year 2002- 03 which has been decided in Para 59 of this order above. The AO is directed accordingly.
65. The assessee has also raised additional ground which reads as under:
"The learned CIT(A) has erred in law and in facts in confirming the action of the Assessing Officer in charging interest u/s.234B and 234C of the Act, even though the assessee was liable to pay tax under the provisions of section 115JB of the I.T.Act, 1961."
66. After hearing the learned representatives of the parties, in the interest of justice, the addition grounds of the assessee are admitted.
67. The learned AR has not pressed these addition grounds as there will not be any positive income. However, he submitted that the assessee may be permitted to put this ground before the AO if the income is positive after giving effect to this order.
68. After hearing both the parties, we dismiss this ground as not pressed as indicated above.
ITA 653/M/07 :AY 2003-2004 by revenue
69. Ground No. 1 reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to treat the repairs and maintenance expenses of Rs 7,16,468/- as revenue expenses as against the capital expenses treated by the A.O. without appreciating the facts brought on record by the A.O."
70. During the assessment proceedings while examining the repairs and maintenance expenses the AO noticed that certain items are capital in nature which calculation comes to Rs. 7,16,468/-. The CIT(A) considered item wise 24 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
and found that except Rs. 57,900/- which pertaining to 20 GB hard disk drive and 128 MB SD Ram were in the nature of capital expenditure and the balance amount of Rs. 6,58,568/- is treated as revenue in nature. The assessee and the revenue were in appeal in the case of assessee 's appeal this issue has been decided in Para 49 of the above order. The CIT(A) has examined this item of expenditure and found that the expenses disallowed by the AO are revenue in nature. There is no contrary material on record. The CIT(A) treated the computer parts of Rs. 57,900/- as capital in nature is also allowed by us as revenue expenses in the appeal filed by the assessee. Therefore, under the circumstances we do not find any substance in the grounds of the revenue. Therefore, we dismiss this ground.
71. Ground No. 2 reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow the deduction u/s.43B of I.T.Act amounting to Rs.87,68,137/- being late payment of P.F. and ESIC without appreciating the facts brought on record by the A.O."
72. The AO made disallowance under section 43B.The AO was of the view that the payments were to made within 15 days .The AO did not allowed grace period of 5 days . The CIT(A) allowed the claim of the assessee by observing that the payment made within the grace period is allowable u/s.43B. After hearing the parties, we notice that the admitted facts of this ground are that the payment of PF, ESIC, bonus and gratuity, etc were made within the grace period as held by the CIT(A) and there is no contrary material on record neither it has been pointed out by the revenue, we therefore confirm the order of the CIT(A).
73. Ground No. 3 reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow the claim of the assessee u/s.35(1)(iv) of I.T.Act amounting to Rs. 3,70,35,456/- in respect of capital expenditure incurred by the assessee on cost of land 25 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
the construction of building without appreciating the facts brought on record by the A.O."
74. Brief facts of this ground are that the assessee claimed deduction respect of research and development expense of Rs. 3,70,35,456/- on account of capital expenditure for building u/s.35(1)(iv) of the Act. The A.O. was of the view that the cost of land and building shall not be allowed as R& D expenses under the provisions of section 35(2AB)of the Act. The AO, therefore, disallowed the capital expenditure incurred for building. The AO allowed depreciation @ `10%. The CIT(A) allowed the assessee's claim by observing as under:
"I have gone through the assessment order and the explanation given by the appellant. It is apparent from the said order that the Assessing Officer has erred in applying the provisions of the wrong section for making the disallowance. Provisions of section 35(1)(iv) do not restrict the purview of deduction and as a consequence even allow the expenses made on land and construction of building. This is unlike provisions of section 35(2AB) which restrict the deduction allowed, by making a condition that deduction shall not be allowed under that section in respect of expenditure incurred for the purpose of land or construction of building. Section 35(2AB) allows deduction of 1.5 times the expenses incurred by the assessee for research and development, whereas section 35(1)(iv) allows deduction of 100% for capital expenditure on land and building also. The scope of both the sections is different.
Also expenditure incurred to claim deduction u/s.35(2AB) requires approval of the prescribed authority, which is not the case u/s.35(1)(iv). I see no reason why deduction u/s.35(1)(iv) cannot be allowed to the appellant. Hence, this ground is decided in favour of the appellant."
75. The learned AR submitted that this issue is covered by the order of the ITAT in Assessment Years 1999-2000 and 2001-02 in assessee's own case in 26 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
ITA No. 4781 and 4782/M/2007 order dated 7.09.2009. The finding of the ITAT is reproduced below:
"Having heard both the parties and having considered their rival contentions, we find that sec.35 of the Income Tax Act provides for deduction of expenditure incurred on scientific research. Cl.(iv) of sub-section (1) of sec.35 relates to deduction of any expenditure of capital nature on ad hoc research related to he business carried on by the assessee, and such deduction as may be admissible under the provisions of sub-se.(2). Sub-sec (2AB) of sec.35 provides that where a company engaged in the business of pharmaceuticals etc. incurs and expenditure on scientific research [not being expenditure in the nature of cost of any land or building] on in-house research and development facility as approved by the prescribed authority, then deduction of a sum equal to 1 1/2time of the expenditure so incurred shall be allowed. Thus, it can be seen that the exception to the claim of deduction of the expenditure incurred on cost of any land or building is provided for only under sub-sec.[2AB] of sec.35 and not under clause (iv) of sub- sec.(1) of sec.35 of the Act. The assessee's claim is undisputedly u/s.35(1)(iv) of the Act and as rightly held by the ld.CIT(A) 100% of the capital expenditure on scientific research relating to the business carried on by the assessee is admissible as provided under sub-sec.(2) thereof. In view of the same, we do not see any reason to interfere with the order of the CIT(A) and the revenue's appeal is dismissed."
Since identical facts the issue has been decided in favour of the assessee, we respectfully follow the same and in the light of the facts, the order of the CIT(A) is confirmed.
76. Ground No.4 reads as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow depreciation of Rs.35,07,389/- of on payment of royalty without appreciating the facts brought on record by the A.O."27 ITA No.1110 , 1221 & 4434/Mum/07&
ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
77. Similar ground has also been taken by the revenue in assessment year 2002-2003 ground NO 3 which has been decided in Para No.39 of this order. The AO is directed accordingly.
ITA NO 4434/M /07 AY 2004-2005 by assessee
78. The grounds raised in this appeal reads as under:-
"1. The Hon'ble CIT(A) has erred in law and in facts in upholding the impugned assessment order, passed by the learned AO u/s.143(3) of the I.T. Act, 1961 which was illegal and bad in law.
2. The Hon'ble CIT(A) ought to have held that the various notices, including notice u/s.143(2) of the Act and consequential assessment order passed under section 143(3) of the Act is also illegal, bad in law and hence null and void.
79 The learned AR submitted that grounds number 1&2 are general, requires no finding.
3 The Hon'ble CIT(A) has erred in facts and in law in confirming the disallowance of Rs.1,24,500/- being 10% of the dividend earned on the premise that an amount of 10% of dividend earned would be expenses incurred for earning dividend income exempted under the provisions of the Act.
80 We heard the learned representatives of parties. We find that CIT (A) relied upon their earlier years order for AY 2001-2002 and 2002-2003. The issue has been decided in para 7 of this order, in the light of that discussions we confirmed the order of the CIT (A).
4. The Hon'ble CIT(A) has erred in facts and in law in confirming the disallowance of SAP/ERP implementation expenses amounting to Rs. 4,00,000/- treating the same as capital in nature. 81 We heard the learned representatives of parties. The issue has been decided in Para 53 of this order, following the discussions made in that Para the AO is directed accordingly.
5. The Hon'ble CIT(A) has erred in facts and in law in confirming the disallowance claim of repairs and maintenance expenses of Rs.7,32,341/- by treating the same as capital in nature.
28 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
82 The AO treated following expenditure as capital in nature.
S r.No. Amount Nature of expenses
Repairs and maintenance - Factory building
1 27000 Gypsum Board False Ceiling
2 87425 Interior ceiling and side walls of Gr.
3 436580 Structural Steel and Torr steal Ismb-400
551005
Repairs and maintenance - Factory others
4 181336 LAN Cabling at Nasik factory
181336
Repairs and maintenance - Machinery
5 31362 Prefilter (Flange Type) - Animal house
6 28308 Cooling coil
7 50966 Piston
8 23416 Tungsten lamp with holder
134052
83 The CIT(A) decided the issue as under:-
"5.5 I have considered the submissions of the appellant. On going through the details of repairs and maintenance expenditure of building which has been capitalized by the assessing officer. It is seen that the expenditure is incurred for making substantial renovation of office. The appellant has provided false gypsum board ceiling and also carried out work on Interior ceiling at side walls. The appellant has filed no evidence that the expenditure is in the nature of repairs only. By incurring this expenditure, the appellant has brought into existence a totally new asset in the form of furnished office. The expenditure is, therefore, required to be treated as capital expenditure as the same is for substantial renovation of an asset. Similarly, the appellant has not been able to explain the purpose of incurring expenditure on structural steel and torr steel. The appellant has merely stated that expenditure is incurred for repair to factory building. No further evidence was filed before the assessing officer. In view of this, the action of the assessing officer in treating expenditure on repairs and maintenance to factory building as capital expenditure is upheld. The appellant has also incurred expenditure of Rs.1,81,336/- on laying LAN cabling at Nasik factory. The appellant is claiming that the same is for replacement of old LAN cabling. Again no evidence has been filed for this. Therefore, the action of the assessing officer is upheld on this account also. As regards expenditure incurred on repairs and maintenance to machinery, the contention of the appellant is acceptable. The expenditure has been incurred on replacing old parts, the expenditure incurred by the appellant is on regular maintenance of plant and machinery and it cannot be said that any new asset of enduring nature has been brought into existence. Therefore, expenditure incurred by the appellant on repairs to plant and machinery amounting to Rs. 1,34,052/- is held as revenue expenditure. This ground of appeal is partly allowed."
84 We heard the learned representatives. We find that the CIT (A) has examined the expenditures in detail. Some of the expenditure like structural 29 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
steel and torr steel which are generally used for new structure. We therefore find that the order of the CIT (A) is a reasoned order and due relief has already been granted by the CIT (A). There are no contrary material on record against the finding of the CIT(A) we therefore confirm the order of the CIT(A) on the issue.
6 The Hon'ble CIT(A) has erred in facts and in law in restricting deduction u/s.80HHC of the Act up to Rs.89,39,705/-.
85 The learned counsel for the assessee submitted that he is not pressing these grounds, as on basis of normal computation of income, there is loss. 86 since the learned counsel for the assessee has not pressed these grounds of appeal, the same are dismissed as not pressed.
7. The Hon'ble CIT(A) has erred in computing the book profit at Rs. 51,52,35,536/- as against Rs. 51,44,01,870/- as declared by the appellant.
87 Above ground is similar to ground numbers 9 to 11 of AY 2002- 2003,accordingly confirmed the order of the CIT(A).
8. The Hon'ble CIT (A) has erred in facts and in law in charging interest u/s.234B and 234C of the Act.
88 This ground is consequential ground, the AO is directed accordingly.
9. The Hon'ble CIT (A) has erred in facts and in law in initiating penalty proceedings u/s.271 (1) (c) of the Act.
89 This ground requires no finding as same against the initiation of penalty.
ITA No 4783/M/07 Ay 2004-2005 by revenue 90 The grounds raised in this appeal reads as under:-
30 ITA No.1110 , 1221 & 4434/Mum/07&ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) is not right in directing to allow depreciation amounting to Rs.26,30,542/- on payment of royalty, which is not a depreciable asset
91 This ground of appeal is similar to ground No 3 of appeal of revenue for AY2002-2003 where in the issue has been decided in para 36 to 40 of this order, the AO is directed accordingly.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) is not right in directing to allow deduction u.s,43B r.w.s.36(1) of I.T.Act in respect of payments of the employee's contribution to the Provident Fund and to the ESIC etc. amounting to Rs. 9,96,069/- if the same is paid within the grace period of five days.
92 This ground is similar to ground No 2 of revenue appeal for AY2003 2004 which have been decided in Para 72 of this order, the AO is directed accordingly.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) is not right in directing to allow the claim of the assessee u/s.35(1)(iv) of the I.T. Act amounting to Rs. 1,46,19,646/- in respect of capital expenditure incurred for construction of building for the purpose of research.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has failed to appreciate that the Assessing Officer has rightly invoked the provisions of section 35(2AB) of I.T.Act act disallowed the claim of the assessee amounting to Rs.1,46,19,646/- in respect of capital expenditure incurred for construction of building for the purpose of research."
93 The grounds NO 3 and 4 are related to one issue, allowable of expenditure under section 35(1) (iv) of the Act. The identical ground NO3 31 ITA No.1110 , 1221 & 4434/Mum/07& ITA Nos.652, 653& 4783/M/07 M/s. Glenmark Pharmaceuticals Ltd.
has raised by revenue in its appeal for AY 2003-2004 which has been decided in this appeal in Para 73 to 75 of this order, the AO is directed accordingly. 94 In the result-
Appeals filed by assessee
ITA No. Assessment Year the result
1110/Mum/07 : 2002-03 ---- partly allowed for statistical purposes
1221/Mum/07 : 2003-04 ---- partly allowed for statistical purposes
4434/Mum/07 : 2004-05 ----partly allowed for statistical purposes
Appeals by revenue
I.T.A. No. Assessment Year the result
652/Mum/07 : 2002-03 -------- partly allowed
653/Mum/07 : 2003-04 -------- dismissed
4783/Mum/07 : 2004-05 -------- dismissed
.
Pronounced in the open court on this 6 t h day of October 2010.
Sd. Sd.
(R.S. PADVEKAR) (A.L. GEHLOT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated : 6th October, 2010.
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) concerned.
4) The CIT concerned.
5) The D R, "G" Bench, I.T.A.T., Mumbai.
By Order
//true copy//
Asst. Registrar, I.T.A.T., Mumbai.
Kv