Income Tax Appellate Tribunal - Mumbai
Hindsutan Ciba Geigy Ltd., Mumbai vs Department Of Income Tax
1
Novartis India Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'I ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI VIJAY PAL RAO, JM
ITA No.1584/Mum/1999
(Asst Year 1992-93 )
&
CO No.256/Mum/1999
Novartis India Ltd Vs The Joint Commr of Income Tax
(Formerly known as Hindustan Cibe-Geigy Ltd) Spl. Range 23, Mumbai
Sandoz House
Dr Annie Beasent Road, Worli
Mumbai 18
(Appellant/Cross Objector) (Respondent)
ITA No.1360/Mum/1999
(Asst Year 1992-93 )
The Joint Commr of Income Tax Vs Novartis India Ltd
Spl. Range 23, Mumbai Sandoz House
Dr Annie Beasent Road, Worli
Mumbai 18
(Appellant) (Respondent)
PAN No. AAACH2914F
Assessee by Shri J D Mistri/Sh Nitesh Joshi
Revenue by Sh Sanjiv Dutt
Dt.of hearing 13.9.2011
Dt of pronouncement 12th Oct 2011
PER VIJAY PAL RAO, JM
These cross appeals and the Cross Objection by the assessee are directed against the order dated 16.12.98 of the CIT(A) for the Assessment Year 1992-93. 2 In appeal ITA No.1584/Mum/1999, the assessee has raised the following Concise Grounds in this appeal:
2
Novartis India Ltd Ground No.1 The Commissioner of Income-tax (Appeals)-XXIII, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the disallowance of Rs.90,00,000 debited in the profit and loss account for impending union settlement on the ground that the said amount was a contingent liability.Ground No. 2
The CIT(A) erred in confirming the disallowance of an amount of Rs.4,89,9l8 on account of gift, articles as being in the nature of entertainment.Ground No. 3
The CIT(A) erred in upholding the AC's contention that the Compensation received towards breach of contract from Bharat Vijay Chemicals amounting to Rs.5,05,000 was taxable as a revenue receipt. The CIT(A) ought to have held that the said sum was a capital receipt and that the same was not chargeable to tax.Ground No. 4
The CIT(A) erred in upholding the AC's contention that the expenditure incurred on Production of TV films of Rs.3,046,536, Production of Promotion films of Rs.1 ,300,250 and Medical films of Rs.892,759 are capital in nature. In any event the same are allowable under section 37(3) and, without prejudice if these contentions are rejected depreciation thereon ought to be allowed.Ground No. 5
The CIT(A) erred in holding that Lunch expenses etc. to personnel on outdoor duty of Rs.5,76,143, 5% of total canteen expenses of Rs.92,85,039 i.e. Rs.4,64,252, Conference expenses of Rs.l,59,752 and Expenses on Annual General Meeting (AGM) of Rs.6,991 are in the nature of entertainment expenses under section 37(2) of the Act.Ground No. 6
The CIT(A) erred in upholding the inclusion of Sales Tax not charged to P&L A/c of Rs. 4,54,91,606/-, Trade discount & Margins of Rs. 18,81 ,86,0061-, Trade discount & Margins Plan of Rs. 7,16,41,285/- in total turnover for computing deduction under Section 8OHHC of the Incometax Act.Ground No. 7
The CIT(A) erred in upholding the disallowance of Rs. 1,67,768/- being air fare and hotel expenses incurred on foreign visitors who came to India in connection with the MCP Project. If the disallowance is upheld, depreciation thereon ought to be allowed.Ground No. 8
The CIT(A) erred in upholding the disallowance of Hotel expenses and air fares on foreign visitors to India under section 37(2A) of the Act.Ground No. 9
The CIT(A) erred in upholding the disallowance of Rs.6,78,8161- on the ground that this constitutes an excess provision for expenses. Without prejudice to the above, the appellants submit that since the provision for expenses made at the year end are credited to the respective expense 3 Novartis India Ltd heads in the subsequent year, the CIT(A) ought to have held that the income for the subsequent year ought to be reduced to that extent.Ground No. 10
The CIT(A) erred in upholding the disallowance of Rs.2,52,152/- under Section 43B of the Act being sales tax remaining unpaid upto the due date of filing the return of income for the relevant assessment year. Without prejudice to the above, the appellants submit that Rs. 1,84,026/- which had already been offered for tax by the appellants in their return of income for the subsequent assessment year ought not be taxed.Ground No. 11
The CIT(A) erred in upholding the disallowance of the appellant's claim for Rs.50,00,000/- in respect of premium payable at the rate of 5% on redemption of non- convertible debentures.Ground No. 12
The CIT(A) erred in confirming the disallowance of Rs.1 55,442 against Dividend Income towards administrative and overhead expenses for earning such income for computing deduction under Section 80M.Ground No. 13
The CIT(A) erred in not adjudicating the additional ground filed by the appellants vide letter Ref.VAM/MT/1 142 dated 24th September, 1997 which reads as under:"The DIT ought to have allowed a deduction of Rs.4,28,696/- being the difference between the provision of Rs.3,66,42,316/- made and the subsequent payment of Rs.3,70,71,012 there against." Additional Ground:
The Assessing Officer ought to have excluded excise duty element from the figure of total turnover for the purpose of computing deduction u/s 80HHC of the Act."
2 Ground no.1 is regarding the disallowance of Rs. 90 lacs debited in the P&L account on account of impending settlement with labours.
2.1 During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of Rs. 90 lacs being the provision on account of pending union settlement. The Assessing Officer further noted that as per note no.8, the liability was workout on the basis of union charter of demand and best possible estimates. The Assessing Officer questioned the allowability of the claim of the assessee and pointed out that the provision made by the assessee is not on the basis of any service condition or contractual obligation but on the basis of an impending settlement between the assessee and the union of workers. Therefore, the Assessing 4 Novartis India Ltd Officer was of the view that the liability for which the provision is made is contingent because it is depending upon the agreement, which is yet to be made.
Accordingly, the Assessing Officer held that assessee's liability is contingent and not determined and disallowed the claim of the assessee. While doing so, the Assessing Officer has discussed various relevant facts regarding the settlement between the assessee and the workers.
2.2 On appeal, the CIT(A) has confirmed the addition made by the Assessing Officer by recording the facts that the said amount of Rs. 90 lacs has been allowed in the subsequent year.
3 Before us, the ld Sr counsel Shri J D Mistri has submitted that earlier there was Memorandum of Settlement (MoS) dated 29.2.1988 with the employee's Union. As per clause 27 of the said MoS, all permanent employees, who are in the services of the assessee company as on 1.1.1987 shall be entitled to and be paid benefits under the said settlement only, if they accept all the terms and conditions. The payment was workout on the basis of years of completed permanent service as on 1.1.1987 and onwards. Sr ld counsel has pointed out that the said MoS expired on 31.12.1990 and a fresh charter of demands were received from the employee's Union in Jan 1991. The Sr ld counsel has submitted that there were discussions between the assessee and the representative of the employee's Union and on the basis of the said discussions, it became clear that a portion of the demands would have to be accepted. Accordingly, the assessee has determined the liability for the AY 1992-93 at best possible estimate based on the past experience. He has further submitted that the liability was accounted for being prudential commercial practice on the basis of charter of the demands submitted by the Union and subsequent negotiations between the assessee and the Union. He has further submitted that as 5 Novartis India Ltd per the settlement dated 23.8.1993, a liability w.e.f 1.1,1991 was worked out at Rs 600/- per worker/employee and an additional increase from 1.1.93 was worked out at Rs. 288/-. He has referred the working of the payments settlement at page 15 of the paper book as per the settlement dt 23.8.93.
3.1 Sr ld counsel has submitted that the assessee's estimation for Rs. 90 lacs of the liability for the assessment year under consideration is on basis of systematic and best judgment as per the past experience and negotiations between the parties. Therefore, the estimate of the assessee, in making the provision of the said liability, is most reasonable. Though, in the subsequent years, due to the VRS taken by some of the employees, the payment under the settlement was reduced and the excess of this provision was reversed. The ld senior counsel has submitted that the provision made by the assessee is not a malafide and unreasonable decision; but it was still an anticipated prudent commercial decision of the assessee to make the provision of the liability. The ld Sr counsel has submitted that, though that claim was allowed in the subsequent year; however, when the provision is a reasonable decision, based on the past experience and accounted for as prudent commercial practice, then, the disallowance of the same is not warranted solely on the ground that the claim was allowed in the subsequent year. He has relied upon the decision of the Hon'ble jurisdictional High Court in the case of United reported in 181 ITR 347 as well as in the case of CIT v. United Motors (India) Ltd., reported in 250 ITR 89. 3.2 On the other hand, the ld DR has submitted that the earlier MoS dt 29.2.1988 w.e.f 1.7.1987 expired on 31.12.1990 and thereafter, the charter of demand was made by the Union on 9.1.1991 and a long term settlement took place in 1993. Thus, the ld DR has submitted that the provision of the liabilities is neither based on the MoS dated 29.2.1988 nor on the charter of demand dt 9.1.1991. He has further 6 Novartis India Ltd submitted that if this provision is based on charter of demands, then, the liability arises only in AY 1991-92 and not AY 1992-93 in which the assessee has made the provision. The long term settlement took placed in Aug 1993 which also falls in the AY 1994-95. The ld DR further contended that there was no occasion or event for making such provision in the year under consideration. He has referred the voucher placed at page 18 of the paper book and submitted that even the assessee has recorded this provision as contingent liability as mentioned in the voucher dt 31.3.1992. When the provision was made for contingent liability and there was no occasion or event in the year under consideration for the said liability, then, the claim of the assessee cannot be allowed as made for a contingent liability. He has further submitted that the Assessing Officer, on the basis of the earlier settlement between the employee's union and the assessee has allowed the claim to the extent of Rs. 21,25,177/- and there is no basis for making the provision of Rs. 90 lacs when the final settlement arrived at only in the year 1993. He has further submitted that when the actual claim was allowed in the subsequent year and negotiations between the assessee and the employee's union did not reach at a stage where a liability can be ascertained then, the provision made by the assessee is purely for a contingent liability. He has relied upon the orders of the lower authorities.
4 We have considered the rival contention and carefully perused the relevant material on record. It is settled position of law that if a provision is made in view of impending liability on account of change in the service condition of the employees of the assessee based on the negotiations and resulted in the settlement between the assessee and the employee's union, then, the said claim, though is a provision of estimated liability, is allowable, if the settlement was arrived at in the subsequent years and the assessee discharged its entire liability of which the provision is a part. 7
Novartis India Ltd 4.1 As it is evident from the facts of the case that this provision was not in pursuant to the MoS dt 29.2.1988. It is also not the case of the assessee that the negotiations between the assessee and the Union reached to a point where the liability could be ascertained for higher payment to the workers. No material is on record to show that during the year under consideration any tentative settlement between the assessee and the employee's Union arrived in pursuant to the negotiations. Since the final settlement arrived between the parties in Aug 1993; therefore, there may be a reason for the assessee to estimate the liability in pursuant to the impending settlement as a result of negotiations between the parties. But there is nothing on record to suggest that any such stage or development has occurred during the year under consideration on the basis of which a prudent commercial decision can be taken. We can't overlook the question that when there was a MoS dt 29.2.1988 and thereafter there was a fresh charter of demands of dt 7.1.1991 then, why the assessee had not made any provision either on the basis of MoS dt 29.2.1988 or on the basis of charter of demands dt 7.1.199. There was no significant development or event occurred during the year under consideration which led to such provision of the liability likely to be finalised in view of the impending settlement. Further, when the claim of the assessee was allowed in the subsequent year and finally, the claim was reduced due to VRS taken by some of the employees and the liability of the assessee in pursuant to the settlement was not remained as estimated; then, in view of the facts and circumstances of the case, we do not find any reason to interfere with the order of the lower authorities on this issue.
5 Ground no.2 is regarding the disallowance of gift articles. 8
Novartis India Ltd 5.1 The Assessing Officer noticed that the total value of the items exceeding Rs. 200/- is Rs. 4,84,148/-. The Assessing Officer proposed to disallow the said expenditure under Rule 6D. After considering the submissions of the assessee, the Assessing Officer disallowed the entire amount of Rs. 4,84,184/- treating the same as in the nature of entertainment u/s 37(2).
5.2 On appeal, the CIT(A) has confirmed the addition by following the order for the AY 1991-92 and also the decision of the Hon'ble Himachal Pradesh High Court in the case of Commissioner of Income-tax v. Mohan Meakin Breweries Ltd. , reported in 192 ITR 134 (HP).
6 Before us, the ld Senior counsel has submitted that this issue is covered in favour of the assessee by the order of the Tribunal for the AY 1991-92. He has further submitted that even for the AY 1984-85, 85-86 to 1988-89, this issue has been decided in favour of the assessee. He has relied upon the decision of the jurisdictional High Court in the case of Commissioner of Income-tax v. Allana Sons Pvt. Ltd., reported in 216 ITR 690 (Bom).
6.1 On the other hand, the ld DR has submitted that there is an amendment in the Act and the decision of the Hon'ble High Court In the case of Allana Sons Pvt. (supra) is without considering the amendment. He has relied upon the decision of the Hon'ble Himachal Pradesh High Court in the case of Mohan Meakin Breweries Ltd. (supra). He has also relied upon the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Patel Brothers and Co. Ltd., reported in 215 ITR 165 (SC). The ld DR has submitted that the Assessing Officer has observed that the details of the person to whom the food facility was provided was not furnished. He has relied upon the orders of the lower authorities. 9
Novartis India Ltd 7 We have considered the rival contention and perused the relevant material on record. We note that the issue before the Tribunal for the AY 1991-92 as recorded in para 45 as under:
"45. Ground No.3(A), 3(B) and 3(c) raised by the Assessee reads as follows:
"3A. On the facts and in the circumstances of the case, the CIT(A) erred n holding that an amount of Rs. 9,00,000/- was in the nature of entertainment expenditure included in sales conference, business meeting expenses and canteen expenses."
7.1 From the above ground, it is clear that the issue was regarding the expenses in sales conference and business meeting expenditure and canteen expenses whereas in the year under consideration, the Assessing Officer disallowed the expenditure on account of gift articles. Therefore, it is apparent that the issue before us is not identical to the issue which was considered by the Tribunal in the assessee's own case for the AY 1991-92.
7.2 However, we further note that for the AY 1991-92 only Rs. 1,62,598/- was included and part of the whole issue as mentioned above, relating to the gift item. The Tribunal has adjudicated the said issue in para 53 as under:
"53. Regarding the disallowance of Rs1,62,598 included in advertisement and publicity expenses as entertainment expenses, we find that the addition sustained by the CIT(A) relates to total value of gift items the details of the gift items are given at page-24 and 25 of the paper book. Out of the above the Assessee on its own had admittedly not claimed expenditure to the tune of Rs.1,43,498/-. The Assessee claimed deduction of only Rs.19,100/- and has further justified its claim on the ground that the items of gifts were of small value and did not contain the company's logo. Thus CIT(A) proceeded under an erroneous assumption that the entire expenditure of Rs 1,62,598/- had been claimed as deduction. We therefore find no basis for the order of CIT(A) in sustaining part of the disallowance made by the AO and therefore direct that the addition sustained by CIT(A) be deleted."10
Novartis India Ltd 7.3 Thus, it is clear from the order of the Tribunal for the AY 1991-92 that the assessee itself has disallowed the expenditure on this account to the tune of Rs. 1,43,498/- out of the total Rs. 1,62,598/- and therefore, the claim of the assessee was limited only to Rs. 19,100/-, which was allowed by the Tribunal only on the reason of smallness of the gift items, which was disallowed by the Assessing Officer. 7.4 As regards the decision of the jurisdictional High Court in the case of Allana Sons Pvt.(supra), the issue before the High Court was disallowance of advertisement expenses by applying Rule 6B. The questions as well as the observations of their Lordship are as under;
"2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure on articles intended for presentation is not to be considered for disallowance under rule 6B(1)(a) of the Income-tax Rules, 1962?"
This question pertains to the assessment year 1979-80. For that year, the Assessing Officer disallowed, in the course of the assessment, a sum of Rs. 10,905 by applying the provisions of rule 6B of the Income-tax Rules. This expenditure was in respect of articles of presentation or gift incurred by the assessee. The Tribunal has held that these presentation articles did not bear either the name of the company nor its logo and could not be considered as meant for advertisement and, hence, rule 6B would not be attracted. In view of these findings of fact which are arrived at by the Tribunal, if we examine rule 6B, it becomes clear that rule 6B deals with expenditure on advertisement. Rule 6B(1) provides that the allowance in respect of expenditure on advertisement shall not, inter alia, in respect of articles intended for presentation, exceed the limits which are set out in that rule. Therefore, articles intended for presentation must be such articles which advertise the company's wares in some manner or the other. In the present case, the Tribunal has found as a fact that the presentation articles were not in the nature of advertisement. In view thereof, the Tribunal has rightly come to the conclusion that rule 6B is not attracted. We may also add that the assessment for the relevant year was nil assessment and the amount involved in the present petition is only Rs. 10,905. Hence, no useful purpose would be served by granting the rule, in any event.
11
Novartis India Ltd 7.5 The Hon'ble High Court has held that the presentation articles were not in the nature of advertisement; therefore, the Tribunal has rightly come to the conclusion that Rule 6B is not attracted.
8 In the case in hand, the Assessing Officer, though initially proposed to disallow the expenditure u/r 6B; however, finally the disallowance was made u/s 37(2) being entertainment expenditure. The assessee has also contended before the lower authorities that the gift articles did not bear the name and logo; therefore, provisions of Rule 6B are not attracted. In the ground before the CIT(A) on this issue, the assessee has contended as under;
(i) The gift articles did not bear the name or logo of the company and therefore the provisions of Rule 6B are not attracted. A 'without prejudice' statement showing full details of these expenses had been furnished to the DCI by the appellants as Annexure 2 to their letter dated 23.1.95 and an amendment had been made vide letter dated 16.2.95. A copy of the said statement (as amended) is enclosed as Annexure 3 to the statement of facts herewith.
ii) There is no hospitality involved in giving the gift articles and the provisions of section 37(2A) are therefore not attracted."
However, in the details of the grounds before us, the assessee has mentioned its contention as under;
"In this connection the appellants submit as under:
i) the gift articles did not bear the name or logo of the company and therefore, the provisions of Rule 6B are not attracted.
ii) There is no hospitality involved in giving the gift articles and the provisions of sec. 37(2A) are therefore not attracted."
Therefore, the issue does not involved Rule 6B, but is in the nature of entertainment expenditure.
8.1 On this point, the decision of the Hon'ble Supreme Court in the case of Patel Brothers and Co. Ltd (supra) as well as the decision of the Hon'ble Himachal Pradesh 12 Novartis India Ltd High Court in the case of Mohan Meakin Breweries Ltd. ,(supra), as relied upon by the ld DR are relevant.
8.2 The Hon'ble Himachal Pradesh High Court, after considering the various decisions on the point has decided the issue as framed as under:
"1. Whether the Tribunal was right in law in holding that the expenses amounting to Rs. 49,750 under the heads 'Hotel bills', 'Travelling and taxi expenses' and 'Presentation items' for the assessee's guests, suppliers and customers fell outside the purview of the provisions of section 37(2B) of the Income-tax Act, 1961
2. Whether the Tribunal has rightly held that Rs. 25,250 as expenditure incurred on eating facilities by the assessee to its customers did not constitute entertainment expenditure within the meaning of section 37(2B)"
8.3 The High Court in paras 9 to 10 has discussed the legislative history of the provision as well as the other decisions of the High Court. Finally, the High Court has concluded in paras 17 to 20 as under:
"17 From the legislative history and the introduction of Explanation 2, we are of the opinion that the Legislature always intended that entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessee. It was in order to resolve the ambiguity that Explanation 2 was added. The intention of the Legislature cannot be ascertained from any statement by way of Notes on Clauses of a Bill or brevet and as has been stated, the duty of the court is to find the natural meaning of the words in a statute in the context in which they are used.
18 It has always been considered permissible and even desirable for a court while interpreting a statute to take note of the history of the statute and the circumstances in which it was passed or the mischief at which it was directed. The reason is that the meaning which is to be given to a statute should be such as will carry out its object. (See Chettiam Veettil Ammad v. Taluk Land Board, AIR 1979 SC 1573).
19 Following the rule in Heydon's case [1584] 76 E. R. 637, it appears to us that to construe the true import of sub-section (2B) of section 37 which starts with a non-obstante clause, it is not only legitimate but convenient to refer both to the former Income-tax Act and the state of uncertainty brought about due to conflict of views between the different High Courts and that Explanation 2 seeks to provide a remedy by not only explaining but by removal of doubts declaring that entertainment expenditure includes 13 Novartis India Ltd expenditure or provision on hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever.
20 In view of the above discussion, we have no hesitation in following the ratio of the decision of the Full Bench of the Kerala High Court in Reddiar's case [1977] 106 ITR 610. We, accordingly, answer questions Nos. 1 and 2 in the negative, that is, in favour of the Revenue and against the assessee. No costs."
8.4 The decision of the Hon'ble Gujarat High Court was though upheld the Hon'ble Supreme Court in the case of Patel Brothers & Co Ltd etc. (supra) but only on the point of applicability of the Explanation-2 to sec. 37(2A) w.e.f 1.4.1976 and not retrospective. The Hon'ble Supreme Court in the said case has laid down the broad guidelines and then observed at page 175 & 176 as under:
"On the other hand, the Gujarat High Court in Patel Brothers and Co. Ltd.'s case [1977] 106 ITR 424 took a different view. In this decision, certain broad tests or guidelines have also been indicated to determine the nature of expenses allowed as entertainment expenses. In our opinion, that exercise is unnecessary since the broad test indicated by us is the only thing which can safely be indicated and the determination of the question in each case is one of fact. The conclusion on the basis of the finding of fact recorded therein was stated thus (at page 442) :
" The Tribunal has agreed with the Appellate Assistant Commissioner who has found that it was customary for the assessee due to very long established tradition that farmers who came to deliver the goods, i.e., cotton, groundnuts, rice, pulses, were given meals from the kitchen run by the assessee and if the assessee failed to give this normal courtesy, it apprehended that the farmers might offer their produce to other competitors in the field of the assessee and the assessee would lose the goods. The Appellate Assistant Commissioner has also found that the expenditure was for serving ordinary meals to the employees as well as to the farmer customers and they were not such which entertained or amused the guests since the assessee provided meals as a bare necessity of the business. In that view of the matter, therefore, these references must be rejected and we answer the questions referred to us in the negative and against the Commissioner. ..."
This conclusion of the Gujarat High Court on the finding of fact recorded by the Tribunal is consistent with the view we have taken and, therefore, we 14 Novartis India Ltd uphold the same for the reasons given by us which are sufficient to sustain the ultimate view. We may observe that the wide observations and the elaborate guidelines given in the Gujarat decision which are in excess of the broad test indicated by us and not necessary to support the conclusion, are unnecessary for the decision and, therefore, affirmance of the conclusion reached in the Gujarat decision should not be construed as an affirmance of the wide observations therein.
We may now refer to the decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400. The true effect of Explanation 2 added in sub-section (2A) of section 37 of the Act has been correctly understood therein as under (at page 416) " The declaration and the clarification involved in Explanation 2, are only for the purposes of assessments with effect from April 1, 1976. This provision widens the concept of 'entertainment expenditure' by including in its scope such of the expenditure which are otherwise traditionally understood as routine business expenditure incurred in connection with 'business hospitality'. Therefore, the widened meaning cannot be extended to past periods when the amended Explanation 2 was not in operation."
We approve the above view which accords with the construction made by us of the provision.
In the view we have taken, the contrary view of the Allahabad High Court in Brij Raman Dass and Sons [1976] 104 ITR 541, cannot be accepted to be correct and so also the decisions of the different High Courts which have taken the same view. Accordingly, the decision of the Allahabad High Court and the other decisions of the different High Courts taking that view are to be treated as overruled.
Consequently, all these matters are decided in favour of the assessees and against the Revenue with the result that the appeals of the assessees are allowed while the appeals, special leave petitions and tax references by the Revenue are dismissed. No costs.
Thus, though the decision of the Hon'ble Gujarat High Court was affirmed on the point of prospective application of Explanation-2 but their Lordship have expressed their reservation in confirming the observation and elaborate guidelines given in the decision of Gujarat High Court being in excess of broad test indicated their Lordship and not necessary to support the conclusion; though are unnecessary for decision. 15
Novartis India Ltd 9 In view of the above discussion, we do not find any merit in the contention of the ld Sr counsel of the assessee and therefore, the same is rejected. Accordingly, the orders of the lower authorities are upheld on this issue. 10 Ground no.3 is regarding the compensation of Rs. 5,05,000/- received towards breach of contact.
10.1 The assessee received a sum of Rs. 5,05,000/- towards the damage for breach of contract from Bharat Vijay Chemicals (BVC). It has been stated that the assessee entered into an agreement on 3.3.1988 with BVC for not to make use of the know-how for manufacturing n-tributy Phosphate for suppliers to any other party. When it was fond that after some time, BVC started supplying the aforesaid products to parties other than the assessee, the assessee filed a suit for damages against BVC and finally the dispute was resolved in accordance with the consent terms whereby the BVC paid a sum of Rs. 5,05,000/- to the assessee and the assessee allowed BVC to sell the said products in the open market. The Assessing Officer proposed to treat the said amount as income of the assessee. The assessee submitted before the Assessing Officer that this amount represents damages received for breach of contract and not in the normal course of carrying on the business activities is therefore, a capital receipt not liable to be taxed. The contention of the assessee did not find favour from the Assessing Officer, who has assessed the said amount as income of the assessee 10.1 The assessee challenged the action of the Assessing Officer before the CIT(A) and the CIT(A) concurred with the view of the Assessing Officer. 11 Before us, the ld Sr counsel for the assessee has submitted that it was an amount of compensation/damages received by the assessee against breach of 16 Novartis India Ltd agreement by the BVC. He has referred the consent terms arrived at by the parties in the suit and submitted that the assessee received the said amount in pursuant to the suit filed by the assessee, which was compromised vide consent terms dated 25.6.1991. Thus, the ld Sr counsel has submitted that the said amount is in the nature of capital and not to be treated as revenue receipt.
11.1 Alternatively, the ld Sr counsel has submitted that if it is held that the receipt is transfer for know-how then the same is not attracted to capital gain tax as there is no cost on the said know-how. He has relied upon the decision of the Hon'ble Supreme Court in the case of CIT v Amar Dye Chemical Ltd reported in 74Taxman
254. 11.2 The ld DR, on the other hand, has submitted that the receipt is in connection with the trading activity of the assessee. He has further submitted that the agreement between the assessee and BVC was commercial agreement whereby BVC was under a contract for manufacturing the products of the assessee and supplying to the assessee. After the payment of the amount of Rs. 5,05,000/-, the BVC was allowed to sell the products to the parties other than the assessee. Therefore, the compensation is only for the losses of the profitability of the assessee because of sale by BVC to other parties. He has relied upon the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Rai Bahadur Jairam Valji reported in 35 ITR 148.
12 We have considered the rival contentions and perused the relevant material on record. Undisputedly, as per the agreement between the assessee and BVC, the BVC was manufacturing the products for the assessee. Subsequently, the assessee and BVC have compromised the dispute by consent terms whereby the BVC was allowed to supply the said products to other parties and in lieu of that consent of 17 Novartis India Ltd assessee to allow the manufacturing the products by BVC to other parties, the assessee received the said amount of Rs. 5,05,000/-. Thus, it is clear that the amount received by the assessee is not a compensation for breach of contract but it was for allowing the BVC to manufacture and sell the products to the other parties. In the case of Amar Dye Chemical Ltd (supra) the damage was received by the assessee against illegal use of technical know-how. It was made available by the employees, who left the services of the assessee. Therefore, when the case is in hand, the compensation received for allowing the BVC to use the technical know-how and sale of the products to the other parties and not for ratifying the past breach of contract. In any case, from the consent terms dated 25.6.1991; it could not be inferred that the assessee has transferred the technical know-how. Even otherwise, it is not the claim of the assessee that the assessee has transferred the technical know-how to BVC, Thus, it was only allowing the use of the technical know-how by BVC for manufacturing of the goods and to sell to the other parties. Therefore, the amount received by the assessee is nothing but in the nature of revenue and has been rightly assessed as income of the assessee.
13 The Hon'ble Supreme Court has also taken a similar view in the case of Rai Bahadur Jairam Valji in para 20 as under:
"20 In the present case, the contract dated May 9, 1940, was simply an agreement to carry on business. In settlement of that contract, Rs. 2,50,000 was paid to the respondent. That was not a payment on account of any capital expenditure incurred by him in the execution of the contract. That indeed was the point sought to be raised by the respondent, but therein he has failed. It is also to be noted that at no time was he prevented from carrying on business. Clause 6 of the agreement dated May 9, 1940, contemplates that the respondent was to carry on generally the business of supply of limestone even apart from his work in the Gangapur quarry, and the agreement dated August 2, 1941, provides for his supplying limestone for the furnaces at Kulti for a period of 12 years and for loading iron at Monoharpore for a like period. There was, therefore, at no time any agreement which 18 Novartis India Ltd operated as a bar to the carrying on of business by the respondent. On a consideration of all the facts established, we are of opinion that the receipt of Rs. 2,50,000 by the respondent is a revenue receipt and is chargeable to tax.
Accordingly, the ground is decided against the assessee.
14 Ground no.4 is regarding the disallowance of expenditure on production of TV films, production of promotion films and medical films as capital in nature. 14.1 The assessee had debited the PL& a/c the expenditure on production of TV films at Rs. 30,46,536/-; production of promotion films at Rs.13,00,250/- and Medical film at Rs. 8,92,759/. Further, out of the total expenditure of R. 73,38,891/- on account of advertisement and publicity, a sum of Rs. 8,92,759/-are the expenditure on promotion on medical films. The Assessing Officer held that both the expenditure on TV film of Rs.30,46,536/- and promotion film of Rs.13,00,250/- are capital in nature as it is accrued enduring benefit to the assessee.
14.2 As regards the expenditure of Rs. 8,92,759/- on medical film, the Assessing Officer disallowed the same as capital in nature as held for the AY 1991-92. 14.3 On appeal, the CIT(A) confirmed the disallowance. 15 Before us, the ld Sr counsel for the assessee has submitted that the expenses have been incurred on yearly advertisement campaign for their various products. The marketing strategies adopted by the competitors in the market require these films and TV spots to be changed frequently in order to keep adapting to current developments and advertisements of competitors. He has further submitted that these films sports are also pulled out after some time as they tend to lose appeal and effect on consumers and medical fertility repeated viewing. Thus, the ld Sr counsel for the assessee has submitted that these TV films and spots do not have any enduring benefit/life.
19
Novartis India Ltd 15.1 Alternatively, it has been submitted that the entire expenditure on advertisement and publicity is allowable u/s 37(3) irrespective of its nature whether it is of capital or revenue. Further, it has been urged that in any case, the depreciation at the prevailing rate of plant & machinery on the expenditure treated as capital in nature shall be allowed. He has relied upon various decisions and mainly the decision of the jurisdictional High Court in the case of CIT v. Geoffrey Manners and Co. Ltd. reported in 315 ITR 134 (Bom). He has further pointed out that a similar issue was decided by the Tribunal for the Assessment Year 1996-97, which has been confirmed by the Jurisdictional High Court as the appeal filed by the revenue has been dismissed.
15.2 The ld DR, on the other hand, has relied upon the orders of the lower authorities and submitted that the Assessing Officer has disallowed the expenditure by following the decision of the jurisdictional High Court in the case of CIT v. Patel International Film Ltd., reported in 102 ITR 219 and therefore, the disallowance is justified.
16 We have considered the rival contention and perused the relevant material on record. The Assessing Officer disallowed the expenditure by following the decision in the case of the Patel International Film Ltd., (supra) and treated the expenditure on making of film for advertisement and promotion as capital in nature. The CIT(A) agreed with the view of the Assessing Officer. It is to be noted that the jurisdictional High Court in the case of Geoffrey Manners and Co. Ltd (supra), after considering the decision in the case of Patel International Film Ltd., (supra) has decided the issue in favour of the assessee as under:
"In our opinion, the correct test to be applied in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit it can be treated as revenue expenditure. If, 20 Novartis India Ltd however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed. Considering the above, in our opinion, the judgment in Patel International Film Ltd. [1976] 102 ITR 219 (Bom) is clearly distinguishable. The Commissioner of Income-tax (Appeals) and the Tribunal on the facts of this case were clearly within their jurisdiction in holding that the expenditure was by way of revenue expenditure as it was in respect of promoting ongoing products of the assessee herein."
17 Accordingly, respectfully following the decision of the jurisdictional High Court in the case of Geoffrey Manners and Co. Ltd (supra), we decide this issue in favour of the assessee and against the revenue. Hence, the disallowance made by the Assessing Officer is deleted.
18 Ground no.5 is regarding the disallowance of expenditure by treating the same as entertainment expenses u/s 37(2).
18.1 The Assessing Officer has disallowed lunch expenses to personal on outdoor duty of Rs. 5,76,143/- as entertainment expenditure and disallowed the same. Further, the Assessing Officer disallowed 5% of the canteen expenses and food subsidy amounting to Rs. 4,64,252/- as hospitality in nature covered by Explanation to sec. 37(2).
18.2 Similarly, the Assessing Officer has also disallowed conference expense and expenses on AGM of Rs. 1,59,752/- and Rs. 6,991/- respectively by holding that the same are in the nature of entertainment.
18.3 On appeal, the CIT(A) confirmed the action of the Assessing Officer. 19 We have heard the ld Sr counsel as well as the ld DR and considered the relevant material on record. The ld Sr counsel has pointed out that similar issue has been adjudicated by the Tribunal in assessee's own case for Assessment Year 21 Novartis India Ltd 1991-92 and therefore, the expenses on lunch and canteen may be decided on similar lines.
19.1 Regarding the expenses on conference and AGM, the ld Sr counsel has submitted that these are incurred for the purpose of business of the assessee. 19.2 The ld DR relied upon the orders of the lower authorities and submitted that as per the Explanation to sec. 37(2), the expenses incurred on hospitality by way of provision on food and beverage and whatever other manner are treated as entertainment expense. He has further pointed out that the assessee has failed to provide the necessary details and explanation as to whether the entire expenditure incurred on the employees or for entertaining outsiders also. 20 Having heard both the parties and considered the relevant material on record, we note that the Tribunal, in assessee's own case for Assessment Year 1991- 92 has decided similar issue in paras 51 & 52 as under:
"51. We have considered the rival submissions. As far as the disallowance of Rs.9,00,000/- sustained by the CIT(A) is concerned, the breakup of the same is as follows:
Business meeting expenses Rs.2,26,531
Conference expenses Rs. 4,29,745
Canteen Expenses Rs. 2,20,000
-----------------
Total Rs. 8,76,276
-----------------
The Business and conference meeting was not with the employees. There were business meeting with the employees for which the Assessee incurred expenditure of Rs.1,08,647/-. According to the CIT(A) there were some expenditure under the head advertisement and publicity expenses like symposium and promotion expenses included in the above expenditure and therefore considering all facts, the CIT(A) sustained addition of Rs.9,00,000/-. In our view the disallowance of expenses on Business meeting and conference expenses cannot be disallowed as laid down in the following decisions on which reliance was placed by the learned counsel for the Assessee.
Lakhanpal National Ltd. Vs. ITO 69 ITD 9 (ahd.) (SB) Associate Marketing Agencies Vs. ITO 43 ITD 543 (Mad) 22 Novartis India Ltd Sharada Plywood Industries Ltd. Vs. CIT 238 ITR 354 (Cal) CIT Vs. Kirloskar Oil Engines Ltd. 157 ITR 762 (Bom) The tribunal has considered all these decisions in the case of Cadbury India Ltd. Vs. DCIT ITA No.9910/Mum/92 order dated 18-10-2001 and has held that expenditure on conference and meetings cannot be disallowed as they are for the purposes of business and there is no element of entertainment to any outsider. In view of the aforesaid decisions, the disallowance sustained, in so far as it relates to expenditure on conference and business meeting is deleted.
52. As far as canteen expenses disallowed as entertainment expenditure is concerned, the same has been made by the CIT(A) for the reason that the Assessee has not maintained complete records regarding the expenditure incurred under this head to employees and outsiders and has also taken note of the past history of the Assessee's case. We are of the view that an adhoc disallowance of Rs.1,00,000/- on this count would be just and fair."
21 Therefore, following the earlier order of the Tribunal in the case of the assessee for Assessment Year 1991-92, we allow the expenses of conference and AGM. 21.1 As regard the lunch and canteen expenses, the Tribunal has disallowed the ad-hoc expenses of Rs. 1 lac out of the total Rs. 2,20,000/- disallowed by the CIT(A). Accordingly, following the same ratio/analogy, we disallow Rs. 2 lacs each against Rs. 5,76,143/- on account of lunch expenses and Rs. 4,64,252/- on account of canteen expenses. To sum-up, a total disallowance of these two items would be Rs.4 lacs.
22 Ground no.6 is regarding sales tax, trade discount and margins money not to be included in the total turnover for the purpose of deduction u/s 80HHC. 22.1 The Assessing Officer noted that the assessee has shown sales exclusive of sales tax, trade discount and cash discount etc. The Assessing Officer asked the assessee to explain as to why the said figure should not be included in the total turnover for the purpose of deduction /s 80HHC as these are of trading in nature. 23
Novartis India Ltd 22.2 After considering the reply of the assessee, the Assessing Officer increased the total turnover of the assessee by following amounts:
I) Trade discount and margins Rs. 18,81,86,006/-
ii) Trade discount and margins plan Rs. 7,16,41,285/-
iii) Rebates Rs. 5,28,83,037/-
iv)Cash discount Rs. 48,38,000/-
v) Sales tax charged to P&L A/c Rs. 42,75,000/-
vi) Sales tax not charged to P&L A/c Rs. 4,54,91,606/-
Total Rs. 36,73,14,934/-
22.3 On appeal, the CIT(A) noted the fact that four items i.e. rebates, cash discount, sales tax were charged to P&L a/c and octroi duty were already included in the turnover by the assessee and by order dated 22.03.1995, the Assessing Officer has rectified the issue. Accordingly, the CIT(A) directed the Assessing Officer to exclude the above items from the total turnover as already taken into account in the order u/s 154.
23 As regards the remaining items i.e. trade discount, margin and sales tax not charged to the P&L Account, the CIT(A) confirmed the action of the Assessing Officer.
24 We have heard the ld Sr. Counsel of the assessee and the ld DR. The ld Sr counsel has pointed that for the Assessment Year 1991-92, a similar issue has been decided by the Tribunal in favour of the assessee. He has further submitted that in view of the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Lakshmi Machine Works reported in 290 ITR 667 as well as the decision of the jurisdictional High Court in the case of Commissioner of Income-tax v. Sudarshan Chemicals Industries Ltd., reported in 245 ITR 769 , sales tax cannot be included in the turnover for the purpose of deduction u/s 880HHC. 24
Novartis India Ltd 24.1 On the other hand, the ld DR has relied upon the orders of the lower authorities and submitted that the assessee has not even included the sales tax in the sale turnover and the same has not taken into account in the P&L Account. 25 Having considered the rival contention and relevant material on record, we note that the assessee has recorded sales in the P&L Account by excluding the sale tax, trade discount and margins. First we take up the question whether sales tax would form part of the total turnover for the purpose of deduction u/s 80HHC in view of the decisions of the Hon'ble Supreme Court in the case of Lakshmi Machine Works (supra), the sales tax and excise duty shall not form part of the turnover as per sec. 80HHC(3).
25.1 In the case in hand, the assessee has not booked the sales turnover in the P&L account. Thus, for the purpose of sec. 80HHC, the amount of sales tax is neither to be added nor to be included from the total turnover. As regards traded discount and margins is concerned, undisputedly, the sale turnover has been shown by the assessee net of trade discount and margins. It is to be noted that the invoice raised by the assessee is for the net amount and therefore, the amount of trade discount and margins cannot be added to the turnover. In view of the facts and circumstances, we decide this part of the issue in favour of the assessee. 26 Ground no.7 is regarding the disallowance of expenditure on foreign visitors. 26.1 The assessee has shown air fare and hotel expenses on foreign visitors, who came to India in connection with MCP project and claimed the same as revenue 25 Novartis India Ltd expenditure. The Assessing Officer asked the assessee to produce the date wise details of the said expenditure. The assessee submitted before the Assessing Officer that it does not have the record of date wise details of the activities undertaken during the foreign travel. The Assessing Officer held that since the expenditure was incurred for the purpose of process of operation of the MCP project; therefore, it is capital in nature and depreciation shall be allowed on this account for Assessment Year 1993-94.
26.2 On appeal, the CIT(A) held that the expenditure is for setting up of MCP project involved expansion of the business for increasing the production capacity and therefore, to be capital in nature.
27 Before us, the ld Sr counsel for the assessee has submitted that the assessee is a subsidiary of Swiss Co. The holding company provided the assistance for setting up the plant & project (MCP). It is only expansion of the existing business of the assessee; therefore, the expenditure is allowable He has relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Bralco Metal Industries Pvt. Ltd. v. Commissioner of Income-tax reported in 206 ITR 477.
27.1 On the other hand, the ld DR has referred the assessment order and submitted that no record of date wise details maintained by the assessee. He has further submitted that the facts are distinguishable to the case relied upon by the ld Sr Counsel for the assessee.
28 We have considered the rival contention and carefully perused the relevant material on record. Undisputedly, the expenses were incurred in connection with the setting up of a new plant of MCP project. In the absence of relevant details of the expenditure, the assessee did not produce the date wise particulars. Prima facie, it 26 Novartis India Ltd appears that the expenses form part of the cost of the project and therefore, would be eligible for depreciation as per sec. 32 of the I T Act. The AO has already stated in the assessment order that depreciation shall be allowed for AY 1993-94. However, the claim of depreciation for the AY under consideration can be considered, if the project was commenced in the year under consideration and other conditions as provided u/s 32 are fulfilled.
28.2 As regards the decision of the Jurisdictional High Court in the case of Bralco Metal Industries Pvt. Ltd. (supra), the issue in the said case was the expenditure on the foreign visit of the Managing Director of the assessee in connection with the project of plant & machinery; whereas in the case in hand, the expenditure was incurred by the assessee on the persons, who visited for assisting the setting up the project. Therefore, the facts are distinguishable and the case relied upon by the assessee would not help the case of the assessee.
29 Ground no.8 is regarding disallowance u/s 37(2) regarding hotel expenses and air fare.
29.1 The assessee has shown the expense of Rs. 3,46,614/- on account of hotel and expense of Rs. 3,71,534/- on account of air fare in respect of the visits of the foreign persons. The Assessing Officer treated the said expense as entertainment by applying the provisions of sec. 37(2A) of the I T Act. Accordingly, the entire expenditure of Rs. 7,18,148/- was held as in the nature of entertainment and hospitality to the foreign visitors and subjected to the limit specified u/s 37(2A) of the I T Act.
30 On appeal, the CIT(A) accepted the contention of the assessee in respect of reducing the disallowance to the extent of Rs.1,67,768/-, which has been disallowed 27 Novartis India Ltd by the Assessing Officer as capital expenditure and directed the Assessing Officer to verify the same.
30.1 Before us, the ld Sr counsel for the assessee has submitted that the issue has been decided by the Tribunal for the Assessment Years 1981-82 to 83-84, and has been held for the purpose of business.
30.2 The ld DR on the other hand has relied upon the orders of the lower authorities and submitted that the expenditure is clearly in the nature of hospitality as the assessee has spent the expenses of air fare and hotel accommodation of the foreign visitors, who came to India.
31 We have considered the rival contention and perused the relevant material on record. We note that for the AY 1983-84, the Tribunal following the order for the AY 1981-82 to 82-83 has decided the issue in para 11 as under:
11. Ground no.3 is in respect of deletion of an addition of Rs. 83,202/- made on account of entertainment expenses incurred on foreign national. In assesse's own case in the past i.e. Assessment Year 1981-82 and 1982-83, cited supra, this issue has been decided in favour of the assessee. Our attention was drawn on the order of I Bench Mumbai in assessee's own case for the Assessment Year 1982-83 bearing ITA No.2091 & 2077/B/94 order dated 17.12.02 wherein it was held as under:
"3. The second ground is that the CIT(A) erred in deleting the addition of Rs. 51,375/- made on account of entertainment expenses incurred on foreign nationals. This issue is discussed in page 6, paras 9 & 10 of the assessment order. The brief facts in this connection are that the assessee incurred expenditure in respect of visitors to India, in connection with its business. Such expenditure amounted to Rs. 51,375/-. The assessee furnished the details of such expenditure. The Assessing Officer took the view that the expenditure represented hospitality extended to the visitors and therefore, disallowed the same as entertainment expenses. On appeal the CIT(A) noted that the foreign visitors had come to India for the purpose of attending Board meeting, general discussion, finance, reporting etc. The assessee contended that this expenditure cannot therefore, be considered to be entertainment expenditure. An order of the Bombay Bench of the 28 Novartis India Ltd Tribunal in the case of R H Windsor India Ltd vs ITO was relied upon the CIT(A), finding that the facts of the present case are nearly similar, held that the expenditure cannot be treated as entertainment expenditure. The revenue is in appeal. In view of the finding recorded by the CIT(A) that the foreign victors came to India for purposes of attending the board meetings, general discussion, finance, reporting etc. It is considered that the expenditure represented predominantly busi9enss expenditure. This decision of the CIT(A) is accordingly upheld and the ground is dismissed."
31.1 Therefore, following the order of the Tribunal for the AY 83-84, we decide the issue in favour of the assessee and against the assessee. 32 Ground no.9 is regarding disallowance of excess provision. 32.1 The assessee made the provision for the expenses which were found by the Assessing Officer in excess to the actual expense. The whole of the excess provision are as under:
i) Bank charges Rs. 1,35,175/-
ii) Dies and Chemical dvn. Rs. 5,30,276/-
iii) Water charges Rs. 13,365/-
Total Rs. 6,78,816/-
32.2 The assessee claimed that it is following the policy of making annual provision for expenditure at the end on the basis of available bills and departmental estimates of expenses incurred for which bills have not been received till the time the annual accounts are finalized. These provisions are reversed in the subsequent year against the relevant expenses and subsequent payments against the said provision are debited in the succeeding year. Therefore, it was also contended that the disallowance made by the Assessing Officer of Rs. 6,78,816/- constitutes a negligible 1.85% of the total provisions made by the assessee and therefore, cannot be held to be excessive, erroneous and malafide. The grievance of the assessee is restricted on the point that the CIT(A) has not directed the Assessing Officer to reduce the income of the subsequent year by the similar amount to that extant. 29
Novartis India Ltd 32.3 The ld DR on the other hand has submitted that there is no dispute about the excess provision on comparison to the actual expenses; therefore, no deduction can be allowed on such provision. He has relied upon the orders of the lower authorities.
33 We have considered the rival contention and perused the relevant material on record. The Assessing Officer disallowed the expenditure on the ground that no basis of the provision and the same is in the nature of contingent; therefore, it was added back to the income of the assessee. The CIT(A) has adjudicated the issue in para 79 at page 20 as under;
"79 Having regard to all the facts and the appellate order for the Assessment Year 1993-94 on the same issue, I confirm the disallowance. However, I do not find any reason to give the direction as claimed, because the appeal for the subsequent year is not before me at present."
34 At the time assessment when the actual expenditure was available; therefore, there was no doubt that the provision made on estimate was found in hence, we find no reason to interfere with the order of the lower authorities. However, the consequential effect in the subsequent year has to be taken into account to avoid the double addition or deduction; accordingly. 35 Ground no. 10 is regarding the disallowance u/s 43B.
35.1 The Assessing Officer disallowed an amount of Rs.2,52,152/- u/s 43B in respect of sales tax, which was collected from the customers and remain unpaid upto the due date of filing of return of income.
35.2 On appeal, the CIT(A) considered the submissions of the assessee that the assessee has offered a sum of Rs 1,84,026/- out of the total disallowance made of Rs. 2,52,152/- for tax for the Assessment Year 1993-94 and therefore, the said amount should be reduced from the disallowance. However, the CIT(A) was of the view that 30 Novartis India Ltd the fact of offering any part of the income in the subsequent year is of no consequence as regards the disallowance of sales tax u/s 43B for the Assessment Year under consideration and accordingly, no direction was passed by the CIT(A). 36 We have heard the ld Sr Counsel for the assessee and the ld DR and considered the relevant material on record. There is no dispute that the assessee did not pay the sales tax collected from the customers to the tune of Rs. 2,52,152/- and hence, the provisions of sec. 43B are applicable. Accordingly, we do not find any illegality in the orders of the lower authorities. If the assessee has offered any income part of this disallowance for the Assessment Year 1993-94, that is a subject matter of that assessment year and not Assessment Year under consideration. Accordingly, this ground of the assessee is dismissed. 37 Ground no.11 is regarding disallowance of Rs 50 lacs on account of premium payable on redemption of non convertible debentures. 37.1 During the year under consideration, the assessee has debited a sum of Rs. 50 lacs on account of premium on non convertible debenture. After considering the explanations of the assessee, the Assessing Officer held that the premium became payable only in sixth and seven years and not in the year of issuance of debenture. Accordingly, the Assessing Officer disallowed Rs. 50 lacs and added the same to the total income of the assessee.
37.2 On appeal, the CIT(A) agreed with the view of the Assessing Officer. 38 Before us, the ld Sr counsel for the assessee has submitted that the premium payable @ 5% on redemption of the debentures should be allowed on prorate basis. He has relied upon the decision of the Hon'ble Supreme Court in the case of Madras 31 Novartis India Ltd Industrial Investment Corpn. Ltd. v. CIT, reported in 225 ITR 802 (SC). On the other hand, the ld DR has supported the orders of the lower authorities. 39 We have considered the rival contention and perused the relevant material on record. Undisputedly, the premium of 5% was to be paid by the assessee on the expiry of 6th &7th years from the date of issue of debentures. The Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) has held at page 813 as under:
"Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.
The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M. P. Financial Corporation v. CIT [1987] 165 ITR 765. The view that we have taken is also in conformity with the accounting practice of showing the discount in the "discount on debentures account" which is written off over the period of the debentures.
The appellant is, therefore, entitled to deduct a sum of Rs. 12,500 out of the discount of Rs. 3,00,000 in the relevant assessment year. The balance expenditure of Rs. 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed), therefore, which is the subject-matter of appeal before us, is answered in the negative in so far as it relates to the deduction of Rs. 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. The second part of the reframed question is answered in the affirmative. But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. The appeal is disposed of accordingly and the judgment of the High Court is set aside. There will be no order as to costs in the circumstances of the case."
39.1 Accordingly, following the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn Ltd (supra), we allow proportionate claim of 32 Novartis India Ltd the premium payable on the debentures to be spread-over to the period of debenture. Accordingly, this ground is partly allowed. 40 Ground no. 12 is regarding deduction u/s 80M for reducing 2% of the dividend income towards administrative and overhead expenses. 40.1 We have heard the ld Sr counsel for the assessee as well as the ld DR and considered the relevant material on record. The Sr counsel has submitted that no disallowance can be mad from the dividend income for the purpose of allowing deduction u/s 80M. He has further submitted that similar issue has been decided by the Tribunal for the Assessment Year 1991-92. He has also relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs General Insurance Corpn of India reported in 254 ITR 203 (SC).
40.2 On the other hand, the ld DR has submitted that the onus is on the assessee to produce the relevant records and establish that no expense has been incurred for earning dividend income. He has relied upon the decisions of the Hon'ble Supreme Court in the case of Distributors (Baroda) P td vs Union of India & Ors reported in 155 ITR 120(SC) as well as in the case of Commissioner of Income-tax v. United General Trust Ltd., and the decision of the Hon'ble Kerala High Court in the case of CIT vs The South Indian Bank Ltd reported in 194 Taxman 73.
41 Having considered the rival contentions and relevant material on record, we find that it is settled law that deduction or exemption is allowed only on the net income i.e. gross income ( - ) the expenditure incurred for earning the said dividend income. Further, there is no two views on the point that onus is on the assessee to prove that no expense has been incurred for earning the dividend income for claiming exemption u/s 80M. The Hon'ble Supreme Court in the case of Distributors 33 Novartis India Ltd (Baroda) P td vs Union of India & Ors (supra) has held that deduction u/s 80M is to be calculated with reference to the amount of dividend income computed in accordance with the provisions of sec. 80AA. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), following the decision in the case of Distributors (Baroda) P Ltd (supra) held that deduction u/s 80M has to be computed with reference to the net amount after deducting the proportionate management expenses from the amount of dividend received.
41.1 Similarly, the Hon'ble Kerala High Court in the case of The South Indian Bank Ltd (supra) has held that the actual expense for earning dividend income has to be determined and deduction u/s 80M should be granted only on the net dividend income in term of sec 80AA.
42 In the latest decision, the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg P Ltd vs ACIT reported in 328 ITR 81; though the issue before the jurisdictional High Court was in relation to disallowance u/s 14A; however, the ratio laid down for apportionment of the expenses is very much relevant as primary question is dividend income. Accordingly, the issue is set aside to the record of the Assessing Officer to consider and decide the same in accordance with law after allowing reasonable opportunity of being heard to the assessee. 43 Ground no.13 is regarding non adjudication of the additional ground filed by the assessee before the CIT(A) vide letter dated 24.9.1997. 44 We have heard the ld Sr counsel for the assessee and the ld DR and considered the relevant material on record. The assessee alleged that this issue was raised before the CIT(A) as additional ground vide letter dated 24.9.1997. However, the CIT(A) has not adjudicated this issue. It is to be noted that this issue requires 34 Novartis India Ltd verification of the facts and it appears that no claim was made even before the Assessing Officer. In any case, before the CIT(A) also the assessee claimed to have raised additional ground and not in the Memo of Appeal. When the issue has not at all been considered and adjudicated by the CIT(A) and no steps were taken by the assessee before the CIT(A), then the same does not emanate from the order of the lower authorities. In view of the fact that the assessee has not taken any steps before the lower authorities to raise and adjudication of this issue, we decline to entertain the ground raised by the assessee and hence, the same is dismissed. Additional Ground:
45 Ground no.14 is regarding excise duty to be excluded from the total turnover for the purpose of deduction u/ 80HHC.
46 We have heard the ld Sr counsel for the assessee and the ld DR and considered the relevant material on record. Since this issue involved in the appeal is purely a legal in nature; therefore, in view of the decision of the Hon'ble Supreme Court in the case of NTPC, we admit this additional ground. As a matter of fact this issue was not verified by the lower authorities and raised for the first time before us; therefore, we set aside this issue to the record of the Assessing Officer to decide the same as per law after considering the contention of the assessee and after giving reasonable opportunity of being heard to the assessee. ITA No.1360/Mum/1999 (by the revenue) 47 The revenue has raised the following effective grounds in this appeal:
i) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting an amount of Rs. 25,21,194/- which was added by the Assessing Officer on account of proportionate cost of freight to the closing stock.35
Novartis India Ltd
ii) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting an amount of Rs.10 lacs which was made by the Assessing Officer on account of local conveyance, telephone and other allied expenditures incurred by the persons on tour under Rule 6D.
iii) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer regarding disallowance made u/s 37(2A) of Rs. 7,18,148/- to reduce the amount by the amount disallowed by the appellant itself u/r 6D and also the amount of Rs. 1,67,768/- which has been disallowed as capital expenditure.
iii)(a) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to reduce R. 1,67,768/- out of total disallowance of Rs.7,18,148/- made u/s 37(2A) without referring to para 22 of the assessment order wherein due credit was given to the assessee while calculating disallowance out of travel expenses.
iv) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting the addition made @ 10% on foreign travel expenses amounting to Rs. 77,38,628/- minus Rs. 1,67,768/- being capital expenditure in MCP project.
v) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in deleting an amount of Rs.41,15,484/- which was added to the closing stock on account of unutilised Modvat credit
vi) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to compute and allow deduction u/s 80Iand 80HH on the same basis as claimed and directed by the CIT(A) for Assessment Year 1993-94.
vii) On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the Assessing Officer to restrict the disallowance to 2% of th dividend income as in the preceding year."
48 Ground no.l is regarding valuation of the closing stock. 49 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we note that this issue is considered and adjudicated by the Tribunal in assessee's own case for Assessment Year 1993-94 in ITA No.213/Mum/1997 vide order dated 19.8.2005. In view of the order of the coordinate Bench of the Tribunal in assessee's own case, the issue is decided in favour of the assessee and against the revenue. 36
Novartis India Ltd 50 Ground no.2 is regarding deletion of addition of Rs. 10 lacs made by the Assessing Officer under Rule 6D.
50.1 The Assessing Officer made an adhoc disallowance of Rs. 10 lacs in respect of conveyance and telephone expenses incurred during the domestic travel. 50.2 On appeal, the CIT(A deleted the addition by following the order for the Assessment Year 1991-92 and the decision of the Hon'ble Kolkata High Court in the case of CIT v Vidyut Metallics Ltd reported in 203 ITR 779(Cal). 51 Before us, the ld DR has relied upon the order of the Assessing Officer and submitted that the expenditure incurred by the assessee on the travel while on tour falls in the nature of entertainment and therefore, the provisions of Rule6D are applicable. The ld Sr counsel for the assessee, on the other hand submitted that for the Assessment Year 1991-92, the Tribunal has decided the issue in favour of the assessee. He has also relied upon the decision of the jurisdictional High Court in the case of CIT vs Gannom Dunkerly & Co reported in 114 CTR 56 (Bom) 52 We have considered the rival contention and carefully perused the relevant material on record. At the outset, we note that the Tribunal, in assessee's own case for AY 1991-92 has decided this issue in para 8 as under:
"8. We have considered the rival submissions. Rule 6D of the Income Tax Rules 1962 read with section 37(3) of the Income Tax Act , limits of expenditure incurred on traveling to the extent of stay in hotel confining it to daily allowance referred to in Rule 6D and does not extend to any other expenditure incurred provided expenditure wholly and exclusively let out for the purpose of business. The Assessee had made the disallowance on its own by taking into consideration the above principles. The dispute, as rightly pointed out by learned counsel for the assessee, is not as to whether disallowance has to be computed on a per trip basis or per day basis. In the circumstances, we are of the view that the learned CIT(A) was right in deleting the addition made by the Assessing Officer. We therefore confirm the order of learned CIT(A) and dismiss ground No. 1 raised by the revenue."37
Novartis India Ltd 52.1 Accordingly, following the order of the Tribunal in assessee's own case for Assessment Year 1991-92, we decide this issue against revenue and in favour of the assessee.
53 Ground no.3 is regarding disallowance made by the Assessing Officer u/s 37(2A) r.w.r 6D.
54 The grievance of the revenue is that the CIT(A) directed the Assessing Officer to reduce the disallowance made at Rs. 1,67,768/- on the ground that the assessee itself has disallowed the said amount, which has been disallowed as capital expenditure by the Assessing Officer without referring to para 27 of the assessment order whereby, the Assessing Officer has already given due credit to the assessee while calculating the disallowance out of the travel expenses. 55 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. To avoid the double deduction as well as double addition, we have already made necessary observations while deciding the issue involved in assessee's appeal. Accordingly, the issue raised by the revenue is remanded to the record of the Assessing Officer to verify and decide the same in accordance with law.
56 Ground no.4 is regarding deletion of addition being 10% on foreign travel expenses in MCP project.
57 We have heard the ld DR as well as the ld Sr. counsel for the assessee and considered the relevant material on record. At the outset, we note that identical issue has been decided by the Tribunal in assessee's own case for AY 1991-92 in para 56 & 56.1 as under:
38
Novartis India Ltd
56. We have heard the rival submissions. The disallowance has been made on the basis that the foreign travel was for the benefit of the parent company and that some of the visits pertained to acquisition of capital assets. The details given by the AO in this regard and the explanation of the Assessee regarding the said items are as follows:
Sr.N Name Amount Purpose
o
1 Mr R C Hartland Rs24,423/- Group Company Heads Meet to discuss
latest implications & repercussions of
events and the Gulf crises.
2 Mr A M Yeri Rs. 38,843/- Line Managers Meeting workshop
3 Dr (Mrs) P Ram Rs. 35,091/- General Management Training Kit.
(Training Programme) & Discussions
relating to corporate communications.
4 Mrs K Singh & Rs. 63,455/- General Management Training Kit -
Mr G V V Sarma & Rs. 63,055/- Seminar for Senior Managers
Mr N Sukmar Rs. 64,015/-
5 Dr A B Vaidya Rs 570/- Exchange released by RBI was subject
to repatriation of the exchange and
production of FIRC in due course which
was done.
6 Dr D S Nag Rs, 50,912/- Participating in Regional Leadership
Workshop & Divisional Managers
Meeting.
7 Shri S S Patel Rs. 42,649/- Organizational & HRD issues &
Management development
8 Mr R C Hartland Rs. 64,729/- Pending projects & business plan
9 Shri S G Kale Rs. 61,860/- Tinopal CBS-X Project.
10 Mr A K Bahl & - Travel not undertaken
Mr J M Smith
11 Mr F Quadros - Travel not undertaken
12 Dr H A Monteiro `Rs.76,055/- Latest developments in various business
segments and their repercussion on
Indian Business.
13 Dr A B Vaidya - Exchange released by RBI was subject
to repatriation of the exchange &
production of FIRC in due course which
was done.
14 Mr R Ram Rs. 79,299/- Conference covering empowerment to
negotiations, communicating during
corporate restricting,
ethical communication, the
new consumer activism.
15 Mr H P Punwani Rs. 78,893/- Meeting of heads of Agrl.divn.
56.1 Perusal of the above details shows that none of the visit was for starting manufacture of a new produce. The allegation that the visits were for 39 Novartis India Ltd benefiting the parent company is again not correct. New Tinopal CBS-X is not a new project but the name of existing product of the Assessee. The disallowance has been made on assumptions and presumptions. The very basis on which the disallowance has been made is found to be not correct.
In fact in AY 74-75, 64-65 76-77 and 77-78 similar disallowance of expenses has been deleted by the Tribunal. Copies of the said orders are in the paper book. In view of the above, we direct that the disallowance sustained by the CIT(A) be deleted. Ground No.4(a) is allowed and therefore Ground No.4(b) and (c) do not require any adjudication. Ground No.2 of the Revenue is dismissed 57.1 Accordingly, this issue is decided against the revenue and in favour of the assessee.
58 Ground no.5 is regarding closing stock on account of Modvat credit. 59 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. The ld Sr counsel for the assessee has submitted that this issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Indo Nippo Chemicals reported in 261 ITR 275. He has further submitted that this issue has already been decided by the Tribunal in assessee's own case for AY 1991-92 in para 13 as under;
"13. Before us, it is not in dispute that the issue raised by the revenue in Ground No. 3 has to be dismissed in view of the decision of Hon'ble Supreme Court in the case of Indo Nippon Chemical Co. Ltd., 261 ITR 275 (SC). In the aforesaid decision, Hon'ble Supreme Court has held that whether the net method of valuation of inventory or gross method of valuation of inventory is followed by the assessee, that will not have any impact on the ultimate profits of the assessee and therefore addition to the value of closing stock by including excise duty was not proper. In view of the above, there is no merit in Ground No. 3 raised by the revenue and the same is dismissed."40
Novartis India Ltd 50.1 Accordingly, we decide this issue against the revenue and in favour of the assessee.
60 Ground no.6 is regarding allowing deduction u/s 80I and 80HH. 61 We have heard the ld DR and the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we note that this issue is now covered by the latest decision of the Hon'ble jurisdictional High Court in the case of Associated Capsules P. Ltd. v. Deputy Commissioner of Income-tax, reported in 332 ITR 42 (Bom). Accordingly, the Assessing Officer is directed to compute deduction in view of the decision of the Hon'ble jurisdictional High Court (supra) 61.2 Accordingly, we decide this issue against the revenue and in favour of the assessee.
62 Ground no.7 is regarding restricting the disallowance to 2% of the dividend income.
63 This issue is common in both the appeals of the assessee as well as the Revenue. We have already considered and decided this issue. Accordingly, we set aside this issue to the file of the Assessing Officer in terms of similar grounds. CROSS OBJECTION NO. 256/MUM/2011 64 The assessee has not raised any new ground in the cross objection; therefore, in view of our findings in the appeals of the revenue as well as of the assessee, the Cross Objection filed by the assessee has become infructuous and accordingly dismissed.
41
Novartis India Ltd 65 In the result, the appeal filed by the assessee as well as by revenue are partly allowed and the Cross Objection of the assessee are dismissed. Order pronounced on the 12th, day of Oct 2011.
Sd/ Sd/-
( J SUDHAKAR REDDY ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: Oct 2011
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai