Income Tax Appellate Tribunal - Hyderabad
Nagarjuna Agrichem Ltd., Hyd, ... vs Assessee on 8 October, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI B. RAM AKOTAIAH, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 272/HYD/2011
Assessment Year: 2004-05
Nagarjuna Agrichem Ltd., ... Appellant
Hyderabad
(PAN - AAACN6932H))
Vs.
Dy. Commissioner of Income-tax, ...Respondent
Circle - 16(1), Hyderabad.
and
ITA No. 285/HYD/2011
Assessment Year: 2004-05
Dy. Commissioner of Income-tax, ... Appellant
Circle - 16(1), Hyderabad.
Vs.
Nagarjuna Agrichem Ltd., ... Respondent
Hyderabad
(PAN - AAACN6932H))
Assessee by : Shri C.P. Rama Swamy
Revenue by : Shri R. Laxman
Date of Hearing : 08/10/2013
Date of Pronouncement : 13/11/2013
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
These are cross appeals directed against the order of CIT(A)-V, Hyderabad dated 10-12-2010 for the AY 2004-05.
2 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
ITA NO. 272/H/11 - assesse's appeal
2. Briefly the facts of the case are that the assessee company is engaged in the business of manufacture of pesticides. For the AY 2004- 05, the assessee company filed its return of income on 01-11-2004 admitting total income of Rs. 11,04,18,840/-. Assessment u/s 143(3) of the Act was completed determining the total income at Rs. 11,56,87,950/-. Subsequently, consequential order dated 23-02-2009 was passed giving relief granted by the CIT(A) and the total income was determined at Rs. 11,15,76,122/-. Thereafter, the AO reopened the assessment u/s 147 of the Act and completed it u/s 143(3) r.w.s. 147 of the Act determining the total income of the assessee company at Rs. 13,48,31,735/-.
3. As regards the issue of legality of reopening of assessment u/s 147 of the Act, the facts are that the assessee company filed its e-return of income for the A.Y. 2004-05 on 01.11.2004 disclosing income of Rs. 11,04,18,840/-. The return was processed under section 143(1) of I.T Act on 27.10.2005. Thereafter, assessment U/s 143(3) was completed on an income of Rs. 11,56,87,950/-. Consequent to the order dated 23.02.2009 of Commissioner of Income Tax(Appeals), relief of Rs. 41,11,828/- was granted thereby determining the income at Rs. 11,15,76,122/-. Thereafter it was found that income of Rs. 55,90,739/- had escaped assessment on account of the fact that 100% of the capital expenditure amounting to Rs. 1,39,76,847/- on purchase of software was allowed instead of allowance of 60% as per the provisions of Income Tax Act. It was further found that the assessee had claimed higher deduction U/s 80HHC to the tune of Rs. 12,20,129/- which escaped assessment. It was also found that the assessee is not eligible for deduction U/s 35(2AB) of the I.T. Act 3 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
and is eligible for deduction U/s 35(1) of the IT Act. On the basis of the above, the assessment has been reopened U/s 147 of the IT. Act and notice U/s 148 was issued to the assessee on 30.03.2009 which was served on 01.04.2009.
4. Before the CIT(A), the assessee stated that the action of the Assessing Officer in acquiring jurisdiction under section 147 of the Act is not correct as the original order of assessment was passed u/s 143(3) of the Act. The following written submissions were made:
"The assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act is null and void since it was on facts which were available on file and formed part of assessment and appeal proceedings.
In the Assessment Order u/s 143(3) dated 29-12-2006 (copy enclosed in Annexure -1) addition of Rs.52,01,203/- was made towards Product Development expenses. During the course of assessment proceedings the AO had called for details of expenditure incurred on Testing Fees, Purchase of lab chemicals etc. The same was furnished to the AO who however felt that since the expenditure was towards testing fees, lab chemicals etc, the same was Capital Expenditure and hence an amount of Rs.52,01,203/- was disallowed.
Aggrieved against the same an appeal was filed before the Commissioner of Income Tax (Appeal) - V. Written submissions along with details of Expenditure incurred towards testing fees was submitted to the CIT(A) who in turn forwarded the information to AO and called for a Remand Report. The CIT (A) vide Order dated 12-12-2008 in ITA No.380/DC- 16(1)/CIT(A)V/2006-07 (copy enclosed in Annexure -2) held that the expenditure incurred on testing fees, lab chemicals was Revenue in nature and allowed a sum of Rs. 41,11,828/- as expenditure for the year, and since Rs.10.89.375/- was expenditure incurred in the earlier year, the CIT directed that the same be allowed in the earlier year. In effect the entire expenditure was allowed as Revenue Expenditure over two years.
Similarly Software (SAP) Expenditure of Rs.1.39.76.846/- was clearly disclosed in the Annual report and Bad Debts written off of Rs.12,27,845/- were explained to the AO during the course of Assessment Proceedings.
All these facts were available on file and the Re-opening of 4 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
Assessment based on change of opinion and pursuant to Audit objections is grossly unjustified.
During the pendency of the appeal before the Commissioner of Income Tax (Appeal's) - V, the AO had called for additional information (based on Audit Objections) vide letter dated 29- 04-2008 (copy enclosed in Annexure -3). The Information called for was: -
a) Software Expenditure of Rs. 139,76,847/- which was claimed by the company as Revenue Expenditure which the AO proposed to treat the same as Capital Expenditure and allow depreciation @60%.
(b) Provision for Bad Debts RS.12,27,845/- which the AO proposed to add back.
(c) Mistake in calculation of Deduction u/s 80HHC which the AO proposed to add back.
(d) Disallowance of Expenditure u/s 35(2AB) and Sec.35(1)(ii).
(e) Excessive claim of MAT credit which the AO proposed to restrict to RS.9,55,830/- instead of RS.27,47,561/-
claimed by the Company.
The Company had filed a reply to the AO and the AO rectified the assessment u/s 154 only on the issue of MAT credit.
As the said letter was based on Audit objections, it has been held in Transworld International Inc. V. JClT (2005) 273 ITR 242 (Delhi) that an Audit objection by itself cannot justify notice of reassessment.
Similarly the Bombay High Court in the case of M.J. Pharmaceuticals Ltd V. DClT (2008) 297 ITR (Bom) held that reassessment proceedings based on change of opinion is not valid.
In CIT V Feather Foam Enterprises Pvt. Ltd (2008) 296 ITR 342 (Del.) it was held that where the explanation of assessee has been accepted in original assessment subsequent rejection of explanation for the purpose of reassessment amounts to change of opinion.
Hence the assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act is null and void since it was on facts which were available on file and formed part of assessment and appeal proceedings."
5. After considering the submissions of the assessee, the CIT(A) held as follows:
5 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
"5.2 I have considered carefully the facts and evidence and.I find that the notice under section 148 was not issued on the basis of change of opinion. There is no doubt that there was an audit objection. However, that itself does not preclude the Assessing Officer from obtaining jurisdiction of section 148 of the Act. The cases referred to by the appellant do not contain a ratio that whenever there is an audit objection, section 148 is inapplicable. The import of the judgements is that mere audit objection is not enough to reopen an assessment completed u/s 143(3). However, if the facts justify the same, the assessment can be reopened. In the present case, it is seen that the reopening was not only on the basis of information on record. In fact vide letter dated 24.9.2008, the Assessing Officer asked for detailed information on various issues from the appellant. Only after collection of additional information, which was not on record earlier, the Assessing Officer made up his mind that certain income had escaped assessment. Thereafter, reasons were recorded and notice u/s 148 was issued. The fact is that the reasons recorded categorically state that the three issues in the reasons recorded were not considered at the time of original assessment proceedings."
6. Aggrieved the assessee is in appeal before us on the issue of legality of reopening of assessment u/s 147 of the Act.
7. The learned counsel for the assessee Shri CP Rama Swamy brought to our notice that no fresh material was found by the AO in the process of reopening and the notice was issued u/s 148 on the basis of change of opinion. Further, the learned counsel pointed out that based on audit objection, reopening u/s 148 is not justified. For this proposition, he relied on the decision of Transworld International Inc. Vs. JCIT, [2005] 273 ITR 242 (Del.). The learned counsel also relied on the decision of CIT Vs. Feather Foam Enterprises (P) Ltd., [2008] 296 ITR 0342 (Del.) wherein it was held that where the explanation of the assessee has been accepted in the original assessment, subsequent rejection of explanation for the purpose of reassessment amounts to change of opinion.
6 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
8. The learned DR, on the other hand, submitted that certain issues were not discussed in the original order, hence, reopening is valid. The learned DR relied on the following cases:
1. ITO Vs. Purushottam Das Bangur & Anr., [1997] 224 ITR 362 (SC)
2. Ess Kay Engg. Co. (P) Ltd. Vs. CIT [2001] 247 ITR 818 (SC)
9. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities. W e find from the assessment order that the AO has completed the assessment without forming any opinion. The AO has pointed out that the assessee's claim cannot be allowed as such without compliance of provisions of the Act. In the case before us only after collection of additional information, which was not on record earlier, the AO made up his mind that certain income had escaped assessment and, thereafter, reasons were recorded and notice u/s 148 was issued. According to the AO, the following three issues have not been considered at the time of original assessment proceedings:
i) out of the amount debited by the company towards software expenses of a sum of Rs. 1,39,76,847/-. The AO held that 60% of expenditure towards SAP package is eligible for deduction and balance of Rs. 55,90,739/- has to be brought to tax.
ii) Excess allowance of Rs. 12,20,129/- has been allowed u/s 80HHC.
iii) weighted deduction u/s 35(2AB) of Rs. 32,56,643/- is to be disallowed.
We find that the AO has rightly reopened the assessment and the action of the CIT(A) in confirming the same is also proper and, therefore, we do not find any infirmity in the issue of notice u/s 148 of the Act. The decisions relied on by the DR in the case of Ess Kay Engineering Co. (P) Ltd. Vs. CIT, 247 ITR 818(SC) and ITO Vs. Purushottam Das Bangur 7 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
& Anr., 224 ITR 362 (SC) are appropriate on the issue and we rely on the same for upholding the reopening initiated by the AO. Hence, Ground No. 2 raised by the assessee is dismissed.
10. Now we proceed to adjudicate the issues on the merits of the case.
11. Ground No. 3 a) & b) with reference to the disallowance of expenditure incurred for license fee for the use of SAP in the company and other communication expenditure amounting to Rs. 55,90,739/-.
12. The assessee claimed software expenditure of Rs. 1,39,76,847/- in the P&L A/c. The AO noticed that the amount had been paid by the assessee for the use of SAP package in their company for 25 years and the company had been granted license to have access to SAP's online software for 25 years. The AO held that the acquisition of license was a capital expenditure and he capitalized the same and allowed 60% depreciation on that by giving following reasons:
"3.3 It is observed from the agreement entered into by the company with M/s SAP India that the term of the agreement is for a period of 25 years and the assessee will be granted with a license to have access to SAP's online software services. The terms as mentioned in Para-5.1 of the R/3 software End user value Licence agreement' is reproduced below Term: This agreement and the licence granted hereunder shall become effective upon execution by both parties and shall continue in effect for a period of 25 years unless terminated under sect. 5.2. Under section 19A of the Copyright (amendment) Act, 1994, SAP waives Licensee's statutory requirement to use the software within a period of one year from the date of this agreement.
3.4 As per the agreement, As per the agreement, the assessee was to pay Rs.52,50,OOO//towards net licence fee within the month of November, 2002 as per the agreement. The software will be installed at the designated site. The ledger extract of SAP 8 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
expenses furnished by the company has been examined. From this, it can be observed that Rs.54,60,0001- in all has been paid to SAP in the fin. year 2002-03 and has been transferred to the present head of expenditure through a journal entry passed on 01.07.2003. The remaining expenses of Rs.82,16,957/- represent expenses incurred on purchase of computer parts and charges for initial uploading of SAP and systems installation charges, network installation accessories cost etc. They are all of the nature of expenses to enable initial set up of the SAP enabled computer software programmes. Hence, on facts of the case, it can be easily observed that they are all capital expenditure and not expenses of revenue nature.
3.5. As per the provisions of Clause(ii) of Sub-section(l) of Sec.32, know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the pt day of April, 1998, owned wholly or partly by the assessee and used for the purposes of business or profession are eligible for depreciation.
3.6. In the case of the assessee, the licence obtained from SAP and the related expenses on installation and initialization of software fall under the provisions of Sec.32 and therefore, eligible for depreciation @60% of such expenditure. The assessee, therefore, cannot treat the entire sum of Rs.1,39,76,847/- as revenue expenditure. Therefore, after allowing deduction of 60% on account of depreciation, the balance of Rs.55,90,739/- is added back to the income of the assessee."
13. On appeal, before the CIT(A) the assessee stated that it was merely the license holder and not the owner of the software. Relying on decisions of the various Benches of the ITAT (not the jurisdictional Bench), the assessee argued that the expenditure on SAP was not a capital expenditure. After considering the submissions of the assessee, the CIT(A) held that the expenditure on SAP software is not a capital expenditure by observing as under:
"6.3.1 Having said that, it is further to be seen that the software will be used for producing the various products for a period of 25 years. There is an annual maintenance and up-gradation charge to the software. The Assessing Officer was rightly held that such annual maintenance charge is revenue expenditure. However, with 9 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
respect to the amount in question the exact nature or the exact accounting treatment to be given to this expenditure will be clear after considering the judgement of Rajasthan High Court in the case Bajaj Sevasharam Ltd. Vs Dy.C1T (2006) 280 ITR 480 (Raj). In this case, the question before the Hon'ble Rajasthan High Court was whether while considering allowance of revenue expenditure incurred for advertisement during any assessment y,ear, the same can be spread over by an assessee on the principle of deferred revenue expenses on the ground that the benefit of such expense would flow for subsequent years also? The facts are that the. assessee incurred certain expenditure on advertisement through audio visual media. Such expenditure created certain rights in audio-visual clippings which were published and advertised through the medium of audio-visual films whether by telecasting or through the clippings shown on the screen in the cinema halls. Since the assessee was deriving the benefit of expenditure of advertisement through video clippings spread over certain period, it had adopted a policy of spreading over the expenses for a number of years depending upon the period during which the clippings were likely to be used instead of claiming the entire expenses for one year in which the amount has been paid to the producer of the clippings. The AO was of the opinion that there was no categorization of deferred revenue expenditure. The Tribunal allowed assessee to spread expenses incurred in a particular year over a number of years. The Tribunal held that the assessee was entitled to spread the claim proportionately over a period of ensuing years. According to the Tribunal entire expenses incurred and spread over for four years had to be allowed as a whole up to the assessment year 1993-94.
6.3.1 Respectfully following the above judgement, I too hold that the expenditure on purchase of license of SAP software for 25 years has to be spread over as a deferred revenue expenditure for 25 years. In this way, the principle of matching of revenue and expenses will be adhered to and this is the correct way of booking the expenditure. Accordingly, I hold that 1/25th of the expenditure is to e allowed in the current year and the balance in the other 24 years."
14. Aggrieved by the order of the CIT(A), the assessee is in appeal before us on this issue.
10 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
15. The learned counsel for the assessee submitted that SAP expenditure is a one time expenditure and in support of his contention he invited our attention to pages 1, 2 & 3 of the paper book containing details of software expenses. The learned counsel had enclosed the end-user value licence agreement duly signed by the SAP signatories at pages 2 to 24 of the paper book. He drew our attention to para 2.1 with reference to grant of licence at page 6. He also pointed out to page 18 of paper book where at Clause (3), it had mentioned that there are use restrictions to be observed by licensee and it is affiliated for the licensed software. The software licensed under this agreement is licensed subject to receipt of payment within the stipulated terms. The learned counsel relied on the decision in the case of CIT Vs. Varinder Agro Chemicals Ltd., 309 ITR 272 (P&H). He submitted that the total amount incurred was of Rs. 139,76,847/- comprising as under:
i) Rs. 54,60,000/- towards Software Expenses including license fees.
ii) Installation charges (including internet charges for running the SAP) Rs. 78,61,136/-.
iii) SAP enabled computer accessories Rs. 6,55,711/-.
It is submitted that the company was merely licence holder and not the owner of the software and the amount spent for purchase of SAP enabled computer accessories was insignificant when compared to the total expenditure of Rs.139.76.847/-. In this connection, he referred to the decision of Addl. CIT Vs. Asahi India Safety Glass, 6 SOT 656 (Delhi), wherein it was held as under:
"that by acquiring license to use Oracle Software, the assessee did not create any tangible asset much less any asset which provides any new source of income or augments the present source of income and accordingly the expenditure was revenue in nature.
In IBM India Ltd VS ClT 105 ITD (Bangalore) it was held that application of Software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself 11 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
Thus the payment for such application Software though enduring in nature, it does not result into acquisition of any capital asset. The same enhances the productivity or efficiency and hence to be treated as revenue expenditure. "
"In Sonata Information Technology Ltd VS Add/. ClT 103 ITD 324, it was held that Software acquired under a license on terms and conditions wherein the ownership is retained by the licensor and where such Software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they are only copyrighted articles."
16. The learned DR on the other hand pointed out that from AY 2003- 04 as per Rule-5 of IT Rules read with old appendix-1 indicates that the items falling under the category of computers including computer software are eligible for depreciation of 60% and hence the AO has rightly treated it as capital expenditure and allowed depreciation at 60%.
17. After hearing the parties and perusing the record, we are of the opinion that as it is one time expenditure and grant of licence is tied up to the payment made by the user, the same shall be allowed as revenue expenditure. Ld CIT(A) has rightly came to a conclusion that expenditure is revenue in nature but that of deferred revenue. W e do not agree with the later conclusion. The expenditure is revenue in nature and AO has rightly considered as such at the time of original assessment Accordingly, we modify the order of the CIT(A) and allow this ground of appeal of the assessee. AO is directed to allow entire expenditure as claimed.
18. Ground No. 4 is as follows:
"a) The learned CIT(A) erred in confirming the disallowance of the claim made in terms of section 35(2AB) for a sum of Rs.
31,34,928/-.
b) The learned CIT(A) failed to appreciate that the appellant obtained approval from the prescribed authority, prescribed in 12 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
terms of section 35(2AB) and consequently erred in confirming the disallowance.
c) The learned CIT(A) failed to appreciate that the approval obtained by the appellant from Secretary, DSIR was the same, in effect, as prescribed in Form No. 3CM and applying the provisions of section 292B, the deduction claimed by the appellant cannot be denied."
19. The assessee claimed a deduction of Rs. 1,92,96,426/- towards R&D expenditure consisting of in house R&D of 62,69,856/- and outside R&D of Rs. 1,30,26,571/-. Further, the assessee claimed weighted deduction u/s 35(2AB) of an amount of Rs. 31,34,928/- being 50% of the in house R&D expenses. The assessee also claimed 25% of the out- side R&D expenditure. The Assessing Officer held that the weighted deduction with respect to in house R&D was not allowable to the assessee by giving the following reasons, the addition of Rs. 31,34,928/- was made:
"5.2. In respect of 'In-house R&D expenditure' of Rs.62,69,855/-, the assessee has furnished aetails of expenditure as under:
i) R&D staff salaries Rs. 27,67,602/-
ii) R&D Technical consultancy Rs. 12,97,920/-
iii) Expenses on 'in-house R&D lab. Rs. 22,04,334/-
Total Rs. 62,69,856/-
============
It has been explained that the company's R&D facility is approved by the Ministry of Science and Technology, Dept. of Science and Industrial Research, Govt. of India for the first time in 1999 and has been renewed every 3 years after due diligence and inspection of records and facilities. Renewal has taken place in 2001, 2004 and 2007. As per clause(i) of Sub-sec.(l) of Sec.35, if a company incurs any expenditure on scientific research related to its business then the same can be allowed as deduction. Therefore, the assessee is eligible for 100% deduction of expenditure since the nature of expenditure laid out by the assessee is not capital. However, the assessee also has claimed weighted deduction under sub-sec(2AB) for 50% of the above expenditure amounting to RS.31,34,928/-. The relevant approvals for claim of weighted deduction as prescribed have not been 13 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
produced by the assessee. Neither form 3CL nor form 3CM have been furnished by the assessee to be eligible for the weighted deduction. Therefore, the Assessee-Company is not eligible for th same and the claim for deduction of RS.31,34,928/- is disallowed."
20. On appeal, before the CIT(A) the assessee stated that the company's R&D facility was approved by Ministry of Science & Technology, Government of India. It was further stated that once the approved is granted, the remaining part of CCO & CCM is purely statistical in nature. After considering the submissions of the assessee the CIT(A) discussed the issue elaborately at paras 8.2 to 8.4 of the impugned order and analyzing section 35(2AB), confirmed the order of the AO.
21. The learned counsel submitted that the assessee is eligible for weighted deduction though the assessee has not complied with the statutory formalities. For this proposition, he relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Sandan Vikas India Ltd., 335 ITR 117 (Delhi) wherein the Hon'ble Delhi High Court following decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Claris Life Sciences Ltd., [2010] 326 ITR 251 (Guj.) held that the Tribunal was justified in allowing benefit of weighted deduction u/s 35(2AB) for AY 2005-06, though the recognition and approval by the prescribed authority was given in Feb/Sept.2006.
22. The learned DR, on the other hand, relied on the orders of the revenue authorities.
23. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities. It is observed that the statutory formalities for getting approval u/s 35(2AB) are that application in Form No. 3CK and 3CL are to be submitted and an order of approval has to be obtained in Form No. 3CM from the 14 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
prescribed authority. W e find that the assessee has not furnished Form No. 3CM either before the revenue authorities or before us for claiming weighted deduction u/s 35(2AB). The AO has allowed this claim earlier without examining the allowability in the absence of certificates. Consequently there is justification for reopening of assessment. In these circumstances, we set aside the order of the CIT(A) and restore the issue to the file of the AO with a direction to allow weighted deduction u/s 35(2AB) as and when the assessee receives the approval under Form No. 3CM from the prescribed authority. Ground No. 4 is allowed for statistical purposes.
24. Ground No. 5 is as follows:
"The learned CIT(A) erred in confirming the disallowance of the claim made for weighted deduction u/s 35(1)(ii). He failed to appreciate that the conditions laid down for allowing weighted deduction for scientific expenditure incurred wholly and exclusively for the purpose of business, having been established by the appellant, he ought to have allowed the weighted deduction instead of allowing the expenditure only u/s 37(1)."
25. It is observed that with respect to outside R&D expenditure of Rs. 1,30,26,571/-, the AO allowed some claim on account of weighted deduction u/s 35(1)(ii). With respect to balance payment of Rs. 79,78,975/-, the AO found that the payments were made to various Universities and Research Institutes and export related testing fees, as below:
Name of the Vendor Amount in (Rs.)
Acharya NG Ranga Agricultural University 136,000.00
Central Leather Research Institute 243,000.00
Central Rice Research Institute, Cuttack 30,000.00
Cotton Research Station 7,000.00
Directorate of Rice Research 75,000.00
Directorate of W heat Research 120,000.00
International Institute of Bio-technology and 15 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
Toxicology (IIBAT) - Tamilnadu
1,418,575.00
Inveresk Research International ltd., UK 3,434,558.00
Mandya Research Station 5,000.00
Other Institutes 1,922,181.00
Plant Protection Consultants 338,404.00
University of Agricultural Sciences 105,000.00
Sub Total - A 7,834,718.00
R&D Export Related Expenses:
Clearing and other incidental charges 144,257.00
Sub Total - B 7,834,718.00
Total (A+B) 7,978,975.00
26. Giving the following reasons, the AO disallowed the entire amount:
"5.5. The details furnished have been verified. Except fdr clearing and other incidental charges of Rs.1,44,257/-, all other expenses are payments made to different universities totaling to Rs.78,34,718/-. According to the provisions of clause(ii) :
[an amount equal to one and one-fourth times of] any sum paid to a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research:
[Provided that such association, university, college or other institution for the purposes of this clause-
(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed' and (B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government]' 16 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
5.6. On perusal of the information furnished by the assessee, it is observed that the proof of payments made to the universities and other institutes as claimed by the assessee have not been furnished. Further, it is not known whether the research institutes, universities to which the payments have been made, are approved in accordance with the guidelines prescribed in Rules 5C and 50 and / or notified by the Central Govt. as required under the provisio to clause(ii). In the absence of the above details, the assessee cannot be allowed the weighted deduction. In regard to the expenditure itself, the assessee has not furnished proof. Hence, it is not known whether the expenditure is laid out wholly and exclusively for the purposes of its business. Therefore, even the expenditure per se of Rs. 79,78,975.00/- cannot be a/lowed as deduction either under sec.37 or V/s 35(l)(ii) of the I. T. Act. In view of this, Rs.79,78,975/- + RS.32,56,643/- (25% weighted deduction) = RS.1,12,35,618/- is disallowed and added back to income returned."
27. Before the CIT(A), the assessee stated that the disallowance cannot be made completely and even if the weighted deduction is not allowed, the expenditure for business purpose and is to be allowed under section 37(1). After considering the submissions of the assessee, the CIT(A) held that the assessee has not demonstrated that it is eligible for weighted deduction as claimed and the AO has himself given a list of Universities and Testing Institutes to whom these amounts have been paid, as it is not the case of the AO that the payments are bogus or that they are not made for business purpose. He further held that a mere look at the relevant expenditure would reveal that the same is made for certain testing and export related services pertaining directly to the assessee's business. He finally concluded as under:
" I do not see any reason for disallowing the entire expenditure. Given the facts and circumstances, I agree with the weighted deduction is not to be allowed on this amount, but expenditure is definitely allowable as business expenditure u/s 37(1) of the Act. The appellant gets relief accordingly. "
28. Before us, the learned counsel submitted that the company made payments of Rs. 1,30,26,571/- to various universities and research institutions for the purpose of testing. It is further submitted that the 17 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
entire list of parties to whom the above payments were made were furnished to the AO in the re-assessment proceedings once again and out of this the AO has simply reduced Rs. 50,47,593/- and for the remaining balance the AO has merely picked up some items in the list and disallowed the same on the reasoning that it was not known whether the research institutes/universities are approved or not. The learned counsel contended that this is contrary to facts since from a perusal of the list of parties to whom payments are made it will be very clear that they are either central Government research institutions or other research institutions / universities which are approved institutions and the expenditure is allowable u)s 35(1)(ii).
29. The learned DR, however, relied on the order of the CIT(A).
30. We have heard both the parties and perused the record. The assessee at page 33 of the paper book filed list of payments i.e. payees list consisting of various Universities and Institutions for purpose of testing and at page 36 of the paper book, sample note for approval from Central Rice Research Institute, Cuttack has been produced. However, the learned DR submitted that directions should be given to verify whether approval has been in accordance with the guidelines prescribed in Rules 5C and 5D or notified by the Central Government on proviso to Clause (2). In these circumstances, we are inclined to set aside the issue to the file of the AO to grant weighted deduction after verifying whether the approval has been obtained by the Universities/Institutions to whom payments have been made.
31. Ground No. 6 is with reference to the disallowance under 80HHC amounting to Rs. 20,66,392/-.
18 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
32. The assessee claimed deduction u/s 80 HHC of Rs. 48,23,632/- by arriving at eligible profits of Rs. 1,60,78,773/- and while arriving at this eligible profits considering the following:
Profits of the business Rs. 15,40,03,795
Adjusted export turnover Rs. 22,62,41,093
Adjusted total turnover Rs.206,97,17,782
The AO recomputed the export turnover and disallowed the claim u/s
80HHC amounting to Rs. 20,66,392/-.
33. On appeal, before the CIT(A) the assessee stated that the calculations made by the AO were correct and deemed export sales were to be added to the total export sales. The AR of the assessee submitted that the details of deemed exports were never asked for during assessment proceedings, however, the same were produced during the appeal proceedings before the CIT(A). After considering the submissions, the CIT(A) held that deemed exports are duly certified by the concerned agencies and are fully documented and the AO did not take a look at these documents. He, therefore, held that the deemed exports are to be treated as part of the export turnover and the rest of the calculations have been made correctly made by the AO.
34. After hearing the parties and perusing the record, it is observed that the CIT(A) has given a finding that deemed export sales are duly certified by the concerned agencies and fully documented and, therefore, the same are to be treated as part of the export turnover. W e find no infirmity in the order of CIT(A) and uphold the same. Further, we direct the AO to modify the calculation u/s 80 HHC after including the deemed export sales as part of export turnover. Hence, we set aside the issue to the file of the AO.
19 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
35. In the result, appeal of the assessee is partly allowed for statistical purposes.
ITA No. 285/Hyd/2011 - by the revenue36. Ground No. 1 raised by the revenue is as follows:
"The learned CIT(A) ought to have held the software expenditure of Rs. 1,39,76,847/- is capital expenditure in nature and ought not to have held that it is of the nature of deferred revenue expenditure spread over a period of 25 years.
37. This ground has already been decided in Ground No.3 of the asesssee's appeal vide paras 11 to 17, wherein we have allowed the full claim of the assessee. Therefore, this ground of appeal of the revenue is dismissed.
38. Ground No. 2 is directed against the action of the CIT(A) in allowing the bad debts claim of Rs. 12,27,854/-.
39. After considering the rival submissions and perusing the orders of the revenue authorities, we confirm the order of the CIT(A) taking into consideration the written submissions filed before the CIT(A) by the assessee:
"The AO merely disallowed on the grounds that "there should be some indication that the debt has become a non performing asset to be written off in the books".
It is pertinent to note that ledger account of both the above parties for the past several years were submitted to the AO and the said accounts clearly showed that no amounts were recovered from the parties for the last several years.
"In ClT VS Ahmedabed Electricity Co. Ltd (2003) 2621TR 97 (Guj) it was held that the Tax payers opinion that a debts is a bad debt should suffice, when there are circumstances or material to indicate the reasonableness of the decision to treat the debt as bad".
20 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
"In Newdeal Finance & Invest. Ltd VS DClT (2000) 741TD 469(Chennai} it was held that where the assessee had acted bona fide and reasonably, the AO cannot substitute his own subjective judgment and must accept the assessee's decision. Similar view was expresse1J, in the case of jayanti Commerce Ltd VS AClT(l997) 61 ITD 183 (Cal)".
40. We find that the management has taken conscious decision for writing off bad debts due to non-recovery of the same. The assessee has also demonstrated that the debt had become non-performing. The Hon'ble Supreme Court in the case of TRF Ltd. V. CIT, [2010] 323 ITR 397 (SC) held as under:-
"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."
41. Respectfully following the ratio laid down by the Hon'ble Supreme Court in the said case, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue.
42. Ground NO. 3 is as follows:
"The learned CIT(A) ought to have held that the entire 'outside R&D expenditure of Rs. 79,78,975/- is not an allowable expenditure u/s 35(i)(ii) since the assessee has not furnished proof of approvals of the Institutions u/s 35 in accordance with Rules5C and 5D or notified by the Central Govt."
43. This ground is similar to the ground that has been decided by us in ground No. 5 of assessee's appeal vide paras 24 to 30 wherein we have set aside the issue to the file of the AO with a direction to allow the claim after furnishing the proof of approvals of the institutions u/s 35 in accordance with Rules 5C and 5D or notified by the Central Govt. Therefore, this ground of the revenue is allowed for statistical purposes.
21 ITA NOs. 272 & 285 /Hyd/11 Nagarjuna Agrichem Ltd.
44. Ground No. 4 is as follows:
"The learned CIT(A) ought not to have held that the deemed export sales of technicals of Rs. 56,08,050/- and deemed export sales of formulations of Rs. 1,37,64,135/- forms part of export turnover for calculating eligible deduction u/s 80HHC."
45. This issue has also been decided in ground No. 6 of assessee's appeal vide paras 31 to 34 wherein we have upheld the order of the CIT(A) and set aside the issue to the file of the AO to modify the calculation u/s 80HHC after including the deemed export sales as part of export turnover. Therefore, this ground of appeal of the revenue is dismissed.
46. In the result, appeal of the revenue is partly allowed for statistical purposes.
47. To sum up appeal of the assessee being ITA No. 272/Hyd/2011 and the appeal of the revenue being ITA No. 285/Hyd/2011 are partly allowed for statistical purposes.
Pronounced in the open court on 13 th day of November, 2013.
Sd/- Sd/-
(B. RAMAKOTAIAH) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 13 th November, 2013
kv
22 ITA NOs. 272 & 285 /Hyd/11
Nagarjuna Agrichem Ltd.
Copy to:-
1) M/s Nagarjuna Agrichem Ltd., C/o. Dr. CP Ramaswami,
Advocate, Flat No. 303, Gitanjali Apts., Plot No. 108, Srinagar Colony, Hyderabad - 500 072.
2) DCIT, Circle - 16(1), Hyderabad
3) The CIT (A)-V, Hyderabad
4) The CIT-IV, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.