The DCIT, Circle-8,, Ahmedabad v. M/s. Torrent Pharmaceuticals Ltd.,, Ahmedabad

ITA 1347/AHD/2007 | 2003-2004
Pronouncement Date: 21-05-2010 | Result: Partly Allowed

Appeal Details

RSA Number 134720514 RSA 2007
Assessee PAN AAACT5456A
Bench Ahmedabad
Appeal Number ITA 1347/AHD/2007
Duration Of Justice 3 year(s) 1 month(s) 16 day(s)
Appellant The DCIT, Circle-8,, Ahmedabad
Respondent M/s. Torrent Pharmaceuticals Ltd.,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 21-05-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 21-05-2010
Date Of Final Hearing 10-05-2010
Next Hearing Date 10-05-2010
Assessment Year 2003-2004
Appeal Filed On 04-04-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI N.S. SAINI ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH JUDICIAL MEMBER DATE OF HEARING: 10.05.10 DRAFTED ON: 10.05.10 ITA NO.970/AHD/2007 ASSESSMENT YEAR : 2003-2004 TORRENT PHARMACEUTICALS LTD. TORRENT HOUSE NR. DINESH HALL ASHRAM ROAD AHMEDABAD. VS. ACIT CIRCLE-8 AHMEDABAD. PAN/GIR NO. : AAACT5456A (APPELLANT) .. (RESPONDENT) ITA NO.1347/AHD/2007 ASSESSMENT YEAR : 2003-2004 DCIT CIRCLE-8 AHMEDABAD. VS. TORRENT PHARMACEUTICALS LTD. TORRENT HOUSE NR. DINESH HALL ASHRAM ROAD AHMEDABAD. PAN/GIR NO. : AAACT5456A (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI S.N.SOPARKAR & P.M.MEHTA ADV. RESPONDENT BY: SHRI RAJEEV AGARWAL CIT D.R. O R D E R PER N.S.SAINI ACCOUNTANT MEMBER :- THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF THE LEARNED COMMISSION ER OF INCOME TAX(APPEALS)-XIV AHMEDABAD DATED 22.12.2006. - 2 - ITA NO.970/AHD/2007 APPEAL OF THE ASSESSEE 2. GROUND NO.1 OF THE APPEAL OF THE ASSESSEE AND G ROUND NO.2 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 1. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT(A) HAS GROSSLY ERRED I N UPHOLDING DISALLOWANCE OF COMPONENT OF WEIGHTED DEDUCTION U/S. 35(2AB) OF RS.79.34 LACS FOR PROFESS IONAL FEES. THE HON. TRIBUNAL MAY THEREFORE BE PLEASED TO HOL D THAT THERE IS NO JUSTIFICATION IN HOLDING THAT THE PROFESSIONAL FEES AND OTHER EXPENSES WOULD NOT BE ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB) AND DIR ECT THE ASSESSING OFFICER ACCORDINGLY TO DELETE SUCH DISALLOWANCE. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF WEIGHTED DEDUCTION U/S.35(2AB) OF THE ACT IN RESPECT OF MUNICIPAL TAXES (RS.2.25 LAKH S) AND SALARY TO DR. DUTT. (RS.77.74 LAKHS) (RELIEF RS.39 99 500/- 3. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNE D ASSESSING OFFICER DISALLOWED WEIGHTED DEDUCTION ON R & D EXPE NDITURE OF RS.1 03 35 000/- ON THE GROUND THAT THE PRESCRIBED AUTHORITY HAS NOT CONSIDERED THE FOLLOWING ITEMS TO BE ELIGIBLE FOR W EIGHTED DEDUCTION: RS. IN LAC 1. RECURRING EXPENDITURE 46.64 (BUILDING RELATED) 2. RECURRING EXPENDITURE (OTHER THAN BUILDING) I) MUNICIPAL TAXES 2.25 II) PROFESSIONAL FEES 79.34 III) SALARY TO DR. C.DUTT 77.74 IV) UNEXPLAINED 0.42 160.05 HE THEREFORE FOLLOWING THE SAME ADDED BACK RS.103. 05 LACS BEING WEIGHTED COMPONENTS OF THE SAID EXPENDITURE. - 3 - 4. IN APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) FOLLOWING ITS ORDER FOR ASSESSMENT YEA R 2001-02 DATED 28.09.2004 GRANTED RELIEF OF WEIGHTED DEDUCTION FOR MUNICIPAL TAXES SALARY OF DR. C.DUTTA AND RECURRING EXPENDITURE ON BUILDING BUT DID NOT ALLOW WEIGHTED DEDUCTION ON PROFESSIONAL FEES O F RS.79.34 LACS OBSERVING THAT THE SAME IS NOT ELIGIBLE TO WEIGHTED DEDUCTION. 5. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE BY FILING COPY OF ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2001-02 IN ITA NO.3569/AHD/2004 SUB MITTED THAT THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY SAID ORDER OF THE TRIBUNAL. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO AG REED WITH THIS SUBMISSION OF THE LEARNED AUTHORISED REPR ESENTATIVE OF THE ASSESSEE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT SIMILAR ISSUE OF DISALLOWANCE OF WEIGHTING DEDUCTION ON PROFESSIONAL FEE UNDER SECTION 35(2AB) WAS CONSIDERED BY THE TRIBUNAL IN T HE ASSESSEES OWN CASE IN ASSESSMENT YEAR 2001-02 WHEREIN THE TRI BUNAL ALLOWED WEIGHTED DEDUCTION ON PROFESSIONAL FEES BY OBSERVIN G AS UNDER:- 6. THE REVENUE HAS RAISED THE FOLLOWING GROUND NO.2 :- . THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO EXCLUDE ONLY RS.48 LACS FOR PROFESSIONAL FEES AND GARDEN EXPENSES OF RS.6.93 LACS FOR THE COMPUTATION OF DED UCTION U/S.235(2AB) INSTEAD OF RS.1 71 47 000/- AS DONE BY THE A.O. - 4 - WHEREAS THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.1 IN C.O.:- 1. IN LAW AND IN THE FATS AS WELL AS CIRCUMSTANCES OF THE RESPONDENTS CASE THE LEARNED CIT(A) HAS GROSSLY ER RED IN HOLDING WHILE DISPOSING OF THE GROUND REGARDING THE DISALLOWANCE OF RS.85 73 500 AS INADMISSIBLE WEIGHT ED DEDUCTION U/S.35(2AB) THAT THE EXPENDITURE OF RS.48 00 000 BEING PROFESSIONAL FEES AND RS.6 93 000 (THE CORREC T FIGURE SHOULD BE RS.9 44 000) BEING GARDEN EXPENSES ARE NO T RELATED TO THE RESEARCH ACTIVITY AND THEREFORE THE RESPON DENT WOULD NOT BE ENTITLED TO A FURTHER DEDUCTION OF 50% THERE ON U/S.35(2AB) OF THE I.T. ACT WHEN HE OUGHT TO HAVE H ELD THAT THE RESPONDENT IS ENTITLED TO SUCH DEDUCTION EVEN ON TH E AFORESAID EXPENSES. THE HONBLE TRIBUNAL MAY THEREFORE BE P LEASED TO HOLD THAT THERE IS NO JUSTIFICATION IN HOLDING THAT THE PROFESSIONAL EXPENSES AND GARDEN EXPENSES WOULD NOT BE COVERED FOR THE PURPOSE OF WEIGHTED DEDUCTION U/S.3 5(2AB) OF THE I.T. ACT AND DIRECT THE ASSESSING OFFICER TO DE LETE THE DISALLOWANCE REFERABLE TO SUCH EXPENSES. 7. THE BRIEF FACTS LEADING TO THE ABOVE COMMON ISSU E ARE THAT THE ASSESSEE CLAIMED WEIGHTED DEDUCTION U/S.35(2AB) OF THE ACT AMOUNTING TO RS.31 86 54 942/-. THE ASSESSING OFFIC ER STATED THAT FOR THIS DEDUCTION THE APPROVAL IN FORM NO CM IS REQUIRED FROM SECRETARY DEPARTMENT OF SCIENCE AND I NDUSTRIAL RESEARCH (DSIR IN SHORT). BEFORE THE ASSESSING OFF ICER THE ASSESSEE SUBMITTED THE AGREEMENT FOR RESEARCH IN FO RM NO.3CL AND FILED THE APPROVAL FOR THE FACILITY OF IN-HOUSE RESEARCH IN FORM NO.3CL. THE ASSESSEE ALSO FILED THE APPROVAL I N FORM NO. 3CL GIVING THE DETAILS OF EXPENDITURE TO BE ALL OWED FOR THE PURPOSE OF DEDUCTION U/S.35(2AB) OF THE ACT FOR THE RELEVANT ASSESSMENT YEAR. ACCORDING TO THE ASSESSING OFFICE R THE DATE OF APPROVAL IN FORM NO.3CL IS 23-01-2004 AND THE AS SESSEE HAS FILED ITS COPY OF LETTER SENT BY DSIR TO DG (IN COME-TAX EXEMPT) KOLKATA DATED 27-01-2004. THE ASSESSEE SUB MITTED THE TOTAL BREAK UP OF EXPENDITURE ALLOWED AS PER FO RM NO.3CL AS UNDER:- (RS. IN LACS) A.Y. 2001-02 I) CAPITAL EXPENDITURE LAND: NIL - 5 - BUILDING 4 9.92 II) CAPITAL EXPENDITURE OTHER THAN LAND & BUILDING 178.61 III) RECURRING EXPENDITURE (BUILDING RELATED) 37.55 IV) RECURRING EXPENDITURE (OTHER THAN BUILDING) 1723.02 V) TOTAL COST OF IN-HOUSE RESEARCH FACILITY EXCLUDING LAND & BUILDING 1901.63 VI) TOTAL COST OF IN-HOUSE RESEARCH FACILITY INCLUDING LAND & BUILDING 1989.10 VII) EXPENSES RELATED TO CLINICAL TRIALS OUTSIDE THE APPROVED FACILITY NOT INCLUDED IN THE ABOVE 51.26 ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE CLA IMED EXPENDITURE FOR R & D AS UNDER:- (1) REVENUE EXPENSES RS.19 45 75 518/- (2) CAPITAL EXPENDITURE (OTHER THAN BLDG.) RS. 1 78 61 110/- RS.21 24 36 628/- BUT DSIR IN FORM NO.3CL ALLOWED AS UNDER:- (1) REVENUE EXPENSES RS.19 45 75 518/- LESS: DISALLOWED BY DSIR (1) BLDG. REPAIRS RS. 37 55 000/- (2) OTHER REVENUE EXP. RS.1 33 92 000/- RS. 1 71 47 000/- RS.17 74 28 518/- (2) CAPITAL EXPENDITURE (OTHER THAN BLDG.) RS. 1 78 61 110/- RS.19 52 89 628/- WHEREAS THE ASSESSING OFFICER FINALLY DISALLOWED AS UNDER:- (1) ALLOWABLE @ 150% ON RS.19 52 89 628/- RS.29 29 34 442/- ALLOWABLE @ 100% ON RS.1 71 47 000/- RS. 1 71 47 000/- RS.31 00 81 442/- (2) CLAIMED RS.31 86 54 942/- RS. 85 73 500/- (ADDITION OF RS.86 73 500/-) AGGRIEVED THE ASSESSEE PREFERRED APPEAL BEFORE CIT (A) WHO CONFIRMED THE EXCLUSION OF RS.48 LAKHS ON ACCOUNT O F - 6 - PROFESSIONAL FEE PAID TO DR. C DUTT AS WELL AS GARD EN EXPENSES OF RS.6.93 LAKHS AND ALLOWED THE BALANCE DEDUCTION BY HOLDING IN PARA-5.3 OF HIS APPELLATE ORDER AS UNDER:- 5.3 I HAVE CONSIDERED THE ABOVE SUBMISSIONS AND T HE ASSESSMENT ORDER. ON PERUSAL OF THE NATURE OF EXPE NDITURE IS ON MARKET RESEARCH SALES PROMOTION QUALITY CONTROL TESTING COMMERCIAL PRODUCTION STYLE CHANGE OR ROUTINE DATA COLLECTION. THEREFORE THE DISALLOWANCE OF THE ABOVE EXPENDITURE MADE BY THE ASSESSING OFFICER ONLY ON THE BASIS OF THE REPO RT OF THE PRESCRIBED AUTHORITY WAS NOT JUSTIFIED. WHAT IS TO BE SEEN BY THE AO IS THE NATURE OF EXPENDITURE. THEREFORE I CONSID ER THIS GROUND FOR DISPOSAL ON MERITS. ON PERUSAL OF THE NA TURE OF EXPENDITURE IT IS SEEN THAT EXCEPT FOR PROFESSIONAL FEES OF RS.48 LACS AND GARDEN EXPENSE OF RS.6.93 LACS THE OTHER EXPENSE ARE NOT OF THE NATURE REFERRED TO ABOVE OR LIKE. TH E PROFESSIONAL FEES ARE IN CONNECTION WITH PATENT TO BE REGISTERED OVERSEAS AND HENCE IT WOULD BE COVERED BY THE NATURE OF EXPE NSES COVERED ABOVE. GARDEN EXPENSE HAS NO RELATION WITH THE RESEARCH ACTIVITY. THEREFORE I HOLD THAT THE A.O WAS JUSTIFIED IN EXCLUDING THESE TWO EXPENSES IN GRANTING DEDUCTI ON U/S.35(AB). HOWEVER HE IS DIRECTED TO ALLOW DEDUCT ION IN RESPECT OF THE OTHER DEDUCTIONS. THIS GROUND IS ACC ORDINGLY PARTLY ALLOWED. 8. BEFORE US LD. CIT DEPARTMENTAL REPRESENTATIVE RE LIED ON THE ASSESSMENT ORDER AND STATED THAT THE ASSESSI NG OFFICER HAS RIGHTLY ALLOWED THE WEIGHTED DEDUCTION AT 100% ON 1 71 47 000/- ON THE AMOUNT OF BUILDING REPAIRS AND OTHER REVENUE EXPENSES. ACCORDINGLY HE SUPPORTED THE OR DERS OF THE ASSESSING OFFICER. ON THE OTHER HAND LD. COUNSEL F OR THE ASSESSEE CARRIED US TO ASSESSEES PAPER BOOK AT PAG E 127 AND 128 AND NARRATED THE FACTS AS GIVEN AS UNDER:- FINANCIAL YEAR - 2001-02 (RS.IN LAC) SR. CLAIMED GRANTED DISALLOWED (I) CAPITAL EXPENDITURE: LAND:- BUILDING NIL 49.92 NIL 49.92 0.00 0.00 - 7 - (II) CAPITAL EXPENDITURE (OTHER THAN LAND & BUILDING) 178.61 178.61 00 (III) RECURRING EXPENDITURE (OTHER THAN BUILDING) 37.55 -- 37.55 (IV) RECURRING EXPENDITURE (OTHER THAN BUILDING) 1856.94 1723.02 133.92 (V) TOTAL COST OF IN- HOUSE RESEARCH FACILITY EXCLUDING LAND & BUILDING 2073.10 1901.63 -- (VI) TOTAL COST OF IN- HOUSE RESEARCH FACILITY INCLUDING LAND & BUILDING 2123.02 1989.10 -- (VII) EXPENSES RELATED TO CLINICAL TRIALS OUTSIDE THE APPROVED FACILITY NOT INCLUDED IN THE ABOVE 51.26 51.26 -- THE LD. COUNSEL FOR THE ASSESSEE ALSO CO-RELATE THE EXPENDITURE DISALLOWED AS UNDER:- RS.IN LAC. 1. RECURRING EXPENDITURE - 37.55 (BUILDING RELATED) 2. RECURRING EXPENDITURE: (OTHER THAN BUILDING) I) SECURITY EXPENSES 11.01 II) GARDENING EXPENSES 9.44 III) MUNICIPAL TAX 6.93 IV) PROFESSIONAL FEES 48.00 V) SALARY TO DR. C. DUTT 58.54 133.92 133.92 171.47 - 8 - AND FURTHER STATED THAT AS PER PROVISIONS OF SECTIO N 35(2AB) THE ASSESSEE IS ENTITLED TO WEIGHTED DEDUCTION FOR THE FOLLOWING EXPENDITURE:- RS. IN LAC I) CAPITAL EXPENDITURE (OTHER THAN LAND & BUILDING) 178.61 II) REVENUE EXPENDITURE RELATING TO BUILDING 37.55 III) RECURRING EXPENDITURE I.E. REVENUE EXPENDITU9RE (OTHER THAN BUILDING) 1856.94 IV) EXPENSES RELATED TO CLINICAL TRIALS OUTSIDE THE APPROVED FACILITY NOT INCLUDED IN THE ABOVE EXPENDITURE. 51.26 2124.36 V) ACTUAL WEIGHTED DEDUCTION AT 1.1/2 TIMES OF THE ELIGIBLE EXPENDITURE ABOVE REFERRED TO OF RS.2124.36 LACS. 3186.54 IN VIEW OF THE ABOVE FACTS AND FIGURE THE LD. COUN SEL FOR THE ASSESSEE STATED THAT THE WEIGHTED DEDUCTION SHOULD BE ALLOWED TO THE ASSESSEE AS PER THE PROVISIONS OF SECTION 35 (2AB) OF THE ACT. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND F ROM THE FACTS OF THE CASE THAT THE PRESCRIBED AUTHORITY HAS SEPAR ATELY INDICATED RS.51.26 LACS FOR THE CLINICAL TRIALS AND AS PER THE EXPLANATION TO THE SEC. 35(2AB) THE ASSESSEE INCURR ING EXPENDITURE ON SCIENTIFIC RESEARCH & DEVELOPMENT IN RELATION TO DRUGS AND PHARMACEUTICALS SHALL BE GRANTED EXPENDI TURE INCURRED ON CLINICAL DRUG TRIALS. ACCORDINGLY WE F IND THAT THE SUM OF RS.51.26 LACS IN ELIGIBLE EXPENDITURE AS THE PRESCRIBED AUTHORITY HAS DISALLOWED SUM OF RS.37.55 LACS REVEN UE EXPENDITURE RELATING TO BUILDING AND SUM OF RS.133. 92 LACS FROM THE REVENUE EXPENDITURE OTHER THAN BUILDING. A S PER THE BREAK UP GIVEN ABOVE WE FIND THAT THE ASSESSEE IS E NTITLED TO WEIGHTED DEDUCTION OF SUM OF RS.37.55 LACS AND RS.1 33.92 LACS - 9 - IN VIEW OF THE FOLLOWING EXPLANATIONS SUBMITTED BEF ORE THE LOWER AUTHORITIES :- SECTION 35(2AB) GRANTS WEIGHTED DEDUCTION FOR ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPEN DITURE IN THE NATURE OF COST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEARCH & DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY. WHAT IS EXCLUDED IS COST OF LAND & BUILDING AND NOT THE RECURRING EXPENDITURE RELATED TO BUILDING THAT IS R EPAIRS AND RENOVATION OF BUILDINGS THEREFORE ASSESSEE IS ENT ITLED TO WEIGHTED DEDUCTION FOR REPAIRS OF RS.37.55 LACS REL ATED TO BUILDINGS. SIMILARLY MUNICIPAL TAX PAID OF RS.6.93 LACS IS ENTIRELY RELATED TO BUILDINGS WHEREIN IN-HOUSE RESE ARCH ACTIVITY IS CARRIED ON. IT IS ONLY MUNICIPAL TAX OF R & D CE NTRE BHATT HENCE LIKE CURRENT REPAIRS IT IS ELIGIBLE FOR WEIG HTED DEDUCTION U/S.35(2AB). SO FAR AS SECURITY EXPENSES OF RS.11. 01 LACS IS CONCERNED IT IS SUBMITTED THAT IN-HOUSE RESEARCH A CTIVITY REQUIRES PROPER TIGHT SECURITY TO AVOID LEAKAGE THR OUGH VISITORS AND ONLY IN-HOUSE STAFF WILL HAVE ACCESS TO THE SAID BUILDING AND NO OTHERS AND TO PRESERVE RESEARCH WH ICH IS COMPLETED BUT ITS CLINICAL TRIAL IS PENDING. CONSID ERING ALL THESE FACTORS SECURITY EXPENSES OF RS.11.01 LACS I S ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB). SO FAR AS GARDENING EXPENSES OF RS.9.44 LACS IT IS SUBMITTED AS UNDER:- THE COMPANY HAS A DEDICATED RESEARCH CENTRE WHERE E XTENSIVE RESEARCH IS CARRIED OUT. THE COMPANY HAS A VERY COM POSITE R & D FACILITY. THE COMPANY IS CONSCIOUS OF THE ENVIR ONMENTAL ISSUES AND HAS PUT UP EFFLUENT TREATMENT PLANT (COS TS APPROX. RS.36 LACS.). AS IS WIDELY ACCEPTED THE VEGETATION PARTICULARLY THE TREES HELP CONTAIN THE POLLUTION RESULTING FROM THE RELEASE OF POLLUTANTS (INCLUDING GASES). SO THE TREES AND P LANTS BECOME AN INTEGRAL PART OF THE RESEARCH CENTRE. ONCE HAVIN G ACCEPTED THIS POSITION ANY EXPENDITURE INCURRED ON GARDENING SHOULD BE FULLY ALLOWED UNDER THE PROVISIONS OF SECTION 35(2A B) OF THE INCOME TAX ACT. IN THIS CONNECTION WE WOULD LIKE T O ADD THAT THE GUJARAT POLLUTION CONTROL BOARD HAS ALSO DIRECT ED THAT SUCH TREES AND GARDENS SHOULD BE DEVELOPED AND WATE RED TREATED BY THE ETP SHOULD BE UTILIZED FOR A FORESTA TION PURPOSES. OVER AND ABOVE THIS GOOD LABORATORY PRAC TICES REQUIRE THAT RESEARCH CENTERS SHOULD HAVE GREEN COV ER SO THAT - 10 - POLLUTION LEVELS (INCLUDING DUST) ARE ELIMINATED. S INCE THE OBJECT OF THE ASSESSEE COMPANY IS TO HAVE A WORLD C LASS R & D CENTER SUCH GARDENS (AND THEREFORE THE GARDENING EX PENSES) BECOME A NECESSARY. IN RESPECT OF SALARY OF RS.58.54 LACS PAID TO DR. C . DUTT HE IS IN-CHARGE OF RESEARCH & DEVELOPMENT CENTRE AT BHATT . THROUGH HIM ONLY ENTIRE IN-HOUSE RESEARCH ACTIVITY IS CARRIED ON BY THE ASSESSEE. HE IS THE PERSON THROUGH WHOM A LL CO- ORDINATION OF THE TECHNICAL SCIENTISTS AND OTHER TE CHNICAL PERSONS IS CARRIED OUT AND SMOOTH FUNCTIONING IS CA RRIED OUT IN VARIOUS RESEARCH ACTIVITIES. TO CONVEY AND FOR REPO RTING OF ENTIRE RESEARCH ACTIVITY TO THE MANAGEMENT HE HAS B EEN TAKEN TO THE BOARD OF DIRECTORS BY THE ASSESSEE-COMPANY. THEREFORE SALARY PAID TO DR. C. DUTT IS ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB). WHEN SECTION SPEAKS OF ANY EXPENDITURE THERE IS NO JUSTIFICATION TO EXCLUDE THE EXPENDITURE OF RS.1 33.92 LACS AS DONE BY THE PRESCRIBED AUTHORITY. THE ASSESSEE IS E LIGIBLE FOR WEIGHTED DEDUCTION ON THE ENTIRE EXPENDITURE OF RS. 2124.36 LAC AS CLAIMED ABOVE. 10. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES W E ARE OF THE VIEW THAT IT IS ONLY THE EXPENDITURE WHICH WIL L ONLY BE ALLOWED WHEREAS THE ASSESSEE VIDE THE COPY OF THE LETTER REPRODUCED HEREINABOVE HAS VERY CLEARLY EXPLAINED A S TO HOW THE ENTIRE EXPENDITURE CLAIMED BY THE ASSESSEE IS A LLOWABLE. THUS THERE WAS NO JUSTIFICATION IN HARPING UPON THE FIGURE CONTAINED IN FORM NO.3CL AS IS DONE BY THE ASSESSIN G OFFICER. THE PROVISIONS OF THE ACT IT DOES NOT CONTAIN ANY S PECIFIC CONDITIONS FOR THE ALLOWANCE OF EXPENDITURE TO THE EFFECT THAT IT WILL BE RESTRICTED THAT CONTAINED IN FORM NO.3CL. N EEDLESS TO POINT OUT THAT SUCH ALLOWABLE EXPENDITURE ETC. IS R EPORTED BY THE DSIR TO DG (INCOME-TAX EXEMPTION) KOLKATA WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WHERE VER HE QUANTIFIES THE EXPENDITURE WHICH IS LESS THAN THAT CLAIMED BY THE ASSESSEE. WE FURTHER FIND THAT THE ASSESSEE HA S INCLUDED A SUM OF RS.51.26 LAKHS AS ELIGIBLE EXPENDITURE BEING REVENUE EXPENDITURE RELATING TO BUILDING AND ANOTHER SUM OF RS.133.92 LAKHS BEING REVENUE EXPENDITURE OTHER THAN BUILDING WHICH WAS CONSIDERED AS REVENUE BY THE ASSESSING OFFICER HIMSELF. THESE ITEMS CLEARLY ARE WITHIN THE PURVIEW OF ALLOW ABLE U/S 35(2AB) OF THE ACT AS WEIGHTED DEDUCTION. THE SECUR ITY - 11 - EXPENSES ARE ALSO DIRECTLY RELATED TO IN-HOUSE RESE ARCH AS PROPER SECURITY IS REQUIRED TO AVOID LEAKAGE AND ONLY IN-H OUSE STAFF WILL HAVE ASSESSED TO BUILDING. ACCORDINGLY THIS E XPENDITURE ARE FOR PRESERVING THE RESEARCH WHICH IS COMPLETED AND ITS CLINICAL TRIAL IS PENDING. AS REGARDS TO THE ENVIR ONMENTAL ISSUE THE ASSESSEE-COMPANY HAS SET UP AN AFFLUENT PLANT A ND AS IS WIDELY ACCEPTED THE VEGETATION I.E. TREES HAVE CON TAINED THE POLLUTION. THIS EXPENDITURE OF GARDENING AND PLANTA TION HAVE BEEN DONE FOR THE PERSEVERANCE OF ENVIRONMENT AND T HIS IS DIRECTLY RELATED TO R & D FACILITIES. AS REGARDS T O SALARY PAID TO DR. C.DUTT AMOUNTING TO RS.58.54 LAKHS HE IS IN-CH ARGE OF R & D CENTRE AT BHATT. HE IS THE PERSON THROUGH WHOM A LL CO- ORDINATION OF TECHNICAL SCIENTISTS AND OTHER TECHNI CAL PERSONS ARE CARRIED OUT. THE ENTIRE REPORTING OF THE RESEAR CH ACTIVITY TO THE MANAGEMENT HAS BEEN TAKEN TO THE BOARD OF DIREC TORS THROUGH HIM ONLY AND FOR THIS THE SALARY IS PAID. ACCORDINGLY THE ASSESSEE HAS RIGHTLY PAID THE ENTIRE EXPENDITUR E OF RS.133.92 LAKHS AND BUILDING REPAIRS RS.37.55 LAKHA S ON WHICH WEIGHTED DEDUCTION U/S.35(2AB) OF THE ACT IS ALLOWA BLE. IN VIEW OF THE ABOVE DISCUSSION WE ALLOW THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED AND THAT OF THE ASSESSEES CO IS ALLOWED. 8. FACTS BEING IDENTICAL TO THE FACTS OF THE ASSE SSEE IN ASSESSMENT YEAR 2001-02 AND IN ABSENCE OF ANY DISTI NGUISHING FEATURES POINTED OUT BY THE REVENUE RESPECTFULLY FOLLOWING THE ABOVE QUOTED DECISION WE ALLOW THE GROUND OF APPEAL OF T HE ASSESSEE AND DISMISS THE GROUND OF APPEAL OF THE REVENUE. 9. GROUND NO.2 OF THE APPEAL OF THE ASSESSEE AND G ROUND NO.6 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 2. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS GROSSLY ERRED I N NOT ACCEPTING THE ERRONEOUS CONTENTION THAT FOR QUANTIF ICATION OF DEDUCTION U/S. 80HHC SALES TAX WAS NOT TO BE TR EATED AS PART OF TOTAL TURNOVER. 6. THE LD. CIT(A) HAS FURTHER ERRED IN LAW AN D ON FACTS IN DIRECTING TO EXCLUDE THE COMPONENT OF EXCI SE - 12 - DUTY FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.80HHC. 10. BOTH THE PARTIES BEFORE US AGREED THAT THE ISS UE IS NOW COVERED AGAINST THE ASSESSEE BY THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF CIT VS. LAXMI MACHINE WORKS (2 007) 290 ITR 667(SC) WHEREIN IT WAS HELD THAT THE EXCISE DUTY A ND SALES TAX ARE NOT INCLUDIBLE IN TOTAL TURNOVER IN THE FORMULA C ONTAINED IN SECTION 80HHC(3). THEREFORE THE GROUND OF APPEAL OF THE AS SESSEE IS ALLOWED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSE D. 11. GROUND NO.3 OF THE APPEAL OF THE ASSESSEE REA DS AS UNDER:- 3(A) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT(A) HAS GROSSLY ERRED U/S.80HHC BY DISALLOWING A SUM OF RS.4 22 85 605 BEING INCOME OF DEPB LICENCES DURING THE RELEVANT ASSESSMENT YEAR TREAT ING IT NOT AS THE INCOME FROM BUSINESS UNDER THE PROVISIONS OF SECTION 28(IIIA) 28(IIIB) AND 28(IIIC) OF THE INCOME TAX A CT. THE HON. TRIBUNAL MAY THEREFORE BE PLEASED TO HOL D AND DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION U/S .80HHC IN RESPECT OF PROFIT ON SALE OF DEBP LICNECES. (B) WITHOUT PREJUDICE TO THE ABOVE THE LD. CIT(A) HAS ERRED IN FACT IN LAW AND IN THE CIRCUMSTANCES OF THE CASE B Y HOLDING THAT THE APPELLANT IS NOT ENTITLED TO CLAIM DEDUCTI ON U/S. 80HHC AND DEPB INCOME OF RS.4 22 85 605 BY VIRTUE O F TAXATION LAWS (AMENDMENT) ACT 2005 WHEN NO SUCH DISALLOWANCE IS CALLED FOR. IT MAY KINDLY BE DELETE D. (C) WITHOUT PREJUDICE TO THE ABOVE THE LD.CIT(A) H AS ERRED TO APPRECIATE THAT AS PER THE NEW TAX LAWS (AMENDMENT) ACT 2005 ONLY PROFIT ON SALE/TRANSFER OF DEPB LICENCES ARE COVERED U/S.28(IIID) OF THE ACT AND NOT THE AMOUNTS CREDITED FOR SUCH ENTITLEMENTS. THE LD.CIT(A) OUGHT TO HAVE ALLOWED - 13 - DEDUCTION U/S.80HHC FOR SOME OF RS.4 22 85 605 CONSIDERING SUCH FACT. 12. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS ) HAS DECIDED THIS ISSUE AS UNDER:- 10. GROUND NO.8 IS REGARDING NOT ALLOWING DEDUCTIO N U/S 80HHC OF THE ACT WITH REFERENCE TO THE DEPB INCOME OF RS.4 22 85 605/-. THE AO HAS NOT ALLOWED DEDUCTI ON IN RESPECT OF THIS ITEM WHEREAS THE APPELLANT HAS SUBMITTED THE DEDUCTION U/S.80HHC SHOULD ALLOWED ON DEPB RECEIPT. I HAVE CONSIDERED THE FACTS AND I DON T AGREE WITH THE VIEWS OF THE APPELLANT. AS PER THE AMENDED PROVISIONS OF SEC.80HHC WHEN THE TURNOVER EXCEEDS RS.10 CR. DEDUCTION U/S.80HHC RECEIPT IS N OT AVAILABLE UNLESS THE APPELLANT FULFILLS THE CONDIT IONS SPECIFIED THEREIN. THE APPELLANT HAS NOT FURNISHED ANY EVIDENCE WHICH SHOWS THAT IT SATISFIES ALL THE CON DITIONS. HENCE THE ACTION OF THE A.O. IS JUSTIFIED AND THE SAME IS HEREBY UPHELD. 13. THE LEARNED AUTHORISED REPRESENTATIVE OF THE A SSESSEE SUBMITTED THAT IN VIEW OF THE DECISION OF THE SPECI AL BENCH OF THE TRIBUNAL IN THE CASE OF TOPMAN EXPORTS VS. ITO (200 9) 125 TTJ (MUMBAI) (SB) 289 THE MATTER SHOULD BE RESTORED BA CK TO THE FILE OF THE LEARNED ASSESSING OFFICER TO ALLOW DEDUCTION UN DER SECTION 80HHC ON PROFIT FROM SALE OF DEBP. 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPOR TED THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS). 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. THE CLAIM OF DISALLO WANCE UNDER SECTION 80HHC IN RESPECT OF INCOME FROM DEBP OF RS. 4 22 85 605/- WAS DENIED BY THE LOWER AUTHORITIES TO THE ASSESSEE ON THE GROUND THAT - 14 - THE ADDITIONAL CONDITIONS ENVISAGED IN THE THIRD PR OVISO TO SECTION 80HHC(3) WAS NOT SATISFIED IN THE INSTANT CASE. 16. THE LEARNED AUTHORISED REPRESENTATIVE OF THE A SSESSEE BEFORE US SUBMITTED THAT THE ISSUE IS TO BE DECIDE D IN ACCORDANCE WITH THE DECISION OF THE MUMBAI SPECIAL BENCH OF THE TRI BUNAL IN THE CASE OF TOPMAN EXPORTS (SUPRA). 17. WE FIND THAT IN THE CASE OF TOPMAN EXPORTS (S UPRA) IT WAS HELD THAT INCOME BY WAY OF RECEIPT OF DEBP AND INCOME BY WAY OF PROFIT ON SALE OF DEBP ARE TWO DISTINCT AND SEPA RATE INCOME. WHILE INCOME IN RESPECT OF DEBP IS THE FACE VALUE OF THE DEBP AND THE SAME IS COVERED BY CLAUSE (IIIB) OF SECTION 28 WHER EAS PROFIT ON SALE OF DEBP IS ONLY THE ELEMENT OF PROFIT I.E. SALE PRI CE MINUS FACE VALUE OF DEBP AND THE SAME IS COVERED BY CLAUSE (IIID) OF SECTION 28 OF THE ACT. ON A READING OF THIRD PROVISO TO SUB-SECTION (3) OF SECTION 80HHC IT IS OBSERVED THAT THE ADDITIONAL CONDITION ENVISAGED THEREIN GOVERNS THE INCOME COVERED BY CLAUSE (IIID) OF SECT ION 28 AND DO NOT EFFECT THE INCOME COVERED BY CLAUSE (IIIB) OF SECTI ON 28. IT IS ALSO OBSERVED THAT NO MATERIAL COULD BE BROUGHT BEFORE U S BY THE ASSESSEE TO SHOW THAT IT SATISFIED THE CONDITIONS ENUMERATED IN THE THIRD PROVISO TO SECTION 80HHC (3) OF THE ACT. ON THE ABOVE CIRC UMSTANCES IN OUR CONSIDERED VIEW THE LOWER AUTHORITIES WERE JUSTIFI ED IN DENYING THE CLAIM IN RESPECT OF PROFIT ON SALE OF DEBP COVERED BY CLAUSE (IIID) OF SECTION 28 OF THE ACT. BUT IN THE INSTANT CASE FRO M THE MATERIALS AVAILABLE ON RECORD IT IS NOT CLEAR WHETHER THE WH OLE AMOUNT OF RS.4 22 85 605/- IS COVERED BY CLAUSE (IIID) OF SEC TION 28 OR IT ALSO INCLUDES THE AMOUNT WHICH IS COVERED BY CLAUSE (III B) OF SECTION 28 - 15 - ALSO. IN THE CIRCUMSTANCES IN OUR CONSIDERED OPINI ON IT SHALL BE IN THE INTEREST OF THE JUSTICE TO RESTORE THE ISSUE BACK T O THE FILE OF THE LEARNED ASSESSING OFFICER FOR PROPER VERIFICATION A ND THEREAFTER ADJUDICATE THE ISSUE AFRESH IN LIGHT OF THE OBSERVA TIONS MADE HEREINABOVE AFTER ALLOWING SUFFICIENT OPPORTUNITY O F HEARING TO THE ASSESSEE. WE ORDER ACCORDINGLY. THUS THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.4 AND 5 OF THE APPEAL READS AS UNDER :- 4. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS GROSSLY ERRED IN CHARGING I NTEREST U/S. 234A 234B AND234COFTHEACT. IT MAY BE DELETED. 5. WITHOUT PREJUDICE TO GROUND NO. 3 ABOVE THE CIT (A) HAS FAILED TO APPRECIATE THAT IN VIEW OF THE CIRCULAR I SSUED BY THE CBDT WHILE MAKING AMENDMENT IN SECTION 28 AND 80HHC(3) VIDE TAX LAW AMENDMENT ACT 2005 DIRECTED THAT NO INTEREST BE CHARGED U/S. 234A 234B ETC ON THE DEMAND ON ACCOUNT OF ANY DISALLOWANCE MADE WITH REFERENCE TO INCOME OF DEPB LICENSE. 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE DEDUCTION CLAIMED UNDER SECTION 80HHC WAS RESTRICTED TO A LES SER AMOUNT ON ACCOUNT OF PROFIT ON SALE OF DEBP BY APPLYING THE L AW WHICH WAS RETROSPECTIVELY AMENDED BY THE TAXATION LAWS (AMEND MENT) ACT 2005. AS A CONSEQUENCE OF THE ABOVE DEMAND WAS RAIS ED AGAINST THE ASSESSEE AND INTEREST UNDER SECTION 234A 234B AND 234C WAS LEVIED ON THE ASSESSEE BY THE LEARNED ASSESSING OFFICER. 20. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS NOT ALLOWED THE CLAIM OF THE ASSES SEE THAT INTEREST - 16 - UNDER SECTION 234A 234B AND 234C SHOULD NOT BE CHA RGED IN RESPECT OF DEMAND WHICH WAS CREATED AS A CONSEQUENCE OF RET ROSPECTIVE AMENDMENT OF LAW. WE FIND THAT THE ISSUE IS SQUAREL Y COVERED BY THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF EASTMAN INDUSTRIES LTD. VS. DCIT (2007) 110 TTJ (DEL) 798 WHEREIN ON THE SIMILAR FACTS THE TRIBUNAL BY RELYING ON THE CBDT CIRCULAR NO.2 OF 2006 DATED 17.01.2006 HAS HELD THAT THE LEARNED ASS ESSING OFFICER WAS NOT JUSTIFIED IN CHARGING INTEREST UNDER SECTIO N 234B AND 234D AS A CONSEQUENCE OF REDUCTION IN THE CLAIM OF DEDUCTIO N UNDER SECTION 80HHC IN VIEW OF THE RETROSPECTIVE AMENDMENT OF LAW BY THE TAXATION LAWS (AMENDMENT) ACT 2005 WITH EFFECT FRO M 1.04.1998. WE THEREFORE ALLOW THESE GROUNDS OF APPEALS OF THE ASSESSEE AND DIRECT THE LEARNED ASSESSING OFFICER NOT TO CHARGE INTEREST IN RESPECT OF THE INCOME WHICH RELATES TO THE LESSER GRANT OF DEDUCTION UNDER SECTION 80HHC AS A CONSEQUENCE TO RETROSPECTIVE AME NDMENT BROUGHT BY THE TAXATION LAWS (AMENDMENT) ACT 2005. 21. GROUND NO.6 OF THE APPEAL OF THE ASSESSEE READ S AS UNDER:- 6. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS GROSSLY ERRED IN WITHDRAWING INTEREST U/S.244A AMOUNTING TO RS.28 18 963 IN THE NOTICE OF DEMAND. 22. AT THE TIME OF HEARING THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THIS GROUND OF APPEAL OF THE ASSESSEE IS NOT PRESSED AS WITHDRAWAL OF INTERE ST UNDER SECTION 244A WOULD BE CONSEQUENTIAL. THEREFORE THIS GROUN D OF APPEAL IS DISMISSED. - 17 - ITA NO.1347/AHD/2007 REVENUES APPEAL 23. GROUND NO.1 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N DELETING THE DISALLOWANCE OUT OF SELLING PUBLICITY AND MEDI CAL LITERATURE RS.10 11 85 625/-. 24. AT THE OUTSET WE FIND THAT THE LEARNED ASSESS ING OFFICER MADE DISALLOWANCE OF RS.19 11 85 625/- ON ACCOUNT O F SELLING PUBLICITY AND MEDICAL LITERATURE WHICH WAS DELETED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). THUS IT IS OB SERVED THAT THE FIGURE MENTIONED IN THE GROUND OF APPEAL OF THE REV ENUE IS INCORRECT AND THE SAME SHOULD READ AS RS.19 11 85 625/- . 25 THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNE D ASSESSING OFFICER DISALLOWED RS.19 11 85 625/- ON ACCOUNT OF EXPENSES ON SELLING PUBLICITY AND MEDICAL LITERATURE CLAIMED BY THE ASSESSEE. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES O WN CASE FOR ASSESSMENT YEAR 1990-91 AND 1991-92 DELETED THE DIS ALLOWANCE OBSERVING THAT THE AHMEDABAD BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 1990-91 AND 1991-92 HAD DECIDED THIS POINT IN FAVOUR OF THE ASSESSEE. IN SUBSEQUENT YEAR S INCLUDING UP TO 2002-03 THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) HAS DELETED THE SIMILAR DISALLOWANCE MADE FROM YEAR TO YEAR. THE LEARNED ASSESSING OFFICER HAS NOTED THAT IN ASSESSM ENT YEAR 1995- 96 ON SIMILAR ISSUE THE DEPARTMENTS APPEAL HAS NO T BEEN ALLOWED. - 18 - 26. AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSI NG THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AV AILABLE ON RECORD WE FIND THAT THE DISALLOWANCE MADE BY THE LEARNED A SSESSING OFFICER FROM OUT OF EXPENDITURE ON SELLING PUBLICITY AND ME DICAL LITERATURE WAS DELETED BY THE LEARNED COMMISSIONER OF INCOME T AX(APPEALS) FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES O WN CASE FOR ASSESSMENT YEARS 1990-91 AND 1991-92. THE LEARNED DEPARTMENTAL REPRESENTATIVE MERELY RELIED UPON THE ORDER OF THE LEARNED ASSESSING OFFICER. HE COULD NOT POINT OUT WHY THE ORDER OF T HE TRIBUNAL FOR ASSESSMENT YEAR 1990-91 AND 1991-92 SHOULD NOT BE F OLLOWED IN THE PRESENT YEAR OF APPEAL. HENCE WE DO NOT FIND ANY GOOD AND JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF T HE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WHICH IS CONFIR MED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 27. GROUND NO.3 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT S IN DELETING THE DISALLOWANCE OF GARDEN EXPENSES RS.13 67 730/-. 28. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARN ED ASSESSING OFFICER DISALLOWED THE EXPENSES ON GARDEN ON THE GR OUND THAT IT WAS NOT RELATED TO MANUFACTURING PROCESS. THE ASSESSEE SUBMITTED THAT GARDEN EXPENSES WERE INCURRED FOR MAINTAINING GOOD ATMOSPHERE WITHIN THE FACTORY PREMISES. IT WAS HELPFUL IN CONT ROLLING POLLUTION ARISING FROM CHEMICAL PROCESS. FURTHER GARDEN EXP ENSES IMPROVE THE WORKING CONDITION AND THUS THIS IS FOR THE PURPOSE OF BUSINESS AND THE LEARNED ASSESSING OFFICER WRONGLY TRIED TO LINK IT WITH PROCESS OF PRODUCTION. IT WAS FURTHER SUBMITTED THAT IT HAS B EEN HELD IN THE CASE - 19 - OF STEEL TUBES INDIA PVT. LTD. VS. CIT (1996) 130 CTR (MP) 547 EXPENDITURE INCURRED IN DEVELOPING GARDEN IN FRONT OF FACTORY IN THE PROCESS OF ERECTION OF FACTORY IS REVENUE EXPENDITU RE. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AGREEING WITH T HE SUBMISSION WITH THE ASSESSEE DELETED THE DISALLOWANCE. 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. THE ASSESSEE IS ENG AGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICALS ITEMS. IN THE PRODUCTION THE ASSESSEE USES VARIOUS TYPES OF CHEM ICALS. IN ORDER TO CONTROL THE POLLUTION ARISING OUT OF CHEMICAL PROCE SS THE ASSESSEE HAS INCURRED EXPENDITURE FOR THE PURPOSE OF MAINTAINING GARDEN IN FACTORY PREMISES. THIS EXPENDITURE HAS BEEN CLAIMED DEDUCT ION BY THE ASSESSEE HAS BEEN DISALLOWED BY THE LEARNED ASSESSI NG OFFICER AND ALLOWED BY THE CIT(A) ON APPEAL BY THE ASSESSEE. TH E LEARNED ASSESSING OFFICER MADE THE DISALLOWANCE FOR THE REA SON THAT IT IS NOT INCURRED FOR THE PROCESS OF PRODUCTION. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ALLOWED THE DEDUCTION TO THE AS SESSEE FOLLOWING THE DECISION OF MADHYA PRADESH HIGH COURT IN THE CASE OF STEEL TUBES PVT. LTD. (SUPRA) FOR THE REASONS THAT GARDEN EXPENSES IMPROVES THE WORKING CONDITIONS OF THE WORKERS IN T HE FACTORY AND HENCE IT WAS AN EXPENDITURE INCURRED FOR THE BUSIN ESS OF THE ASSESSEE. IN THE ABOVE CIRCUMSTANCES IN OUR CONSIDERED OPINI ON THE MANUFACTURING PROCESS OF THE ASSESSEE BEING SUCH TH AT IT INVOLVES USE OF HAZARDOUS CHEMICALS WHICH AFFECT THE HEALTH OF T HE WORKERS. THUS IT IS THE DUTY OF THE ASSESSEE TO MAKE GOOD THE LOS S CAUSED TO NATURE AND TO PREVENT THE HEALTH OF THE WORKERS ENGAGED IN PRODUCTION. THEREFORE THE ASSESSEE MAINTAINED THE GARDEN FOR M AINTAINING BETTER - 20 - ENVIRONMENT IN THE FACTORY AND THE EXPENDITURE INCU RRED IN THE PROCESS WAS THEREFORE FOR THE PURPOSES OF THE BUSI NESS OF THE ASSESSEE AND WAS RIGHTLY ALLOWED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). WE THEREFORE CONFIRM THE ORDER OF T HE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AND DISMISS THE GROUND OF APPEAL OF THE REVENUE. 30. GROUND NO.4 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FAC TS IN DELETING THE ADDITION MADE UNDER TRANSFER PRICING U/S.92CA(3 ) OF THE ACT RS.1 63 887/-. 31. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS ) HAS DECIDED AS UNDER:- 7.1 THE FIFTH GROUND OF APPEAL RELATES TO ADDITIO N OF RS.1 63 887/- BY APPLYING THE PROVISIONS OF SEC. 92CA(3) OF THE ACT. THE AO HAS MADE ADDITION ON THI S POINT BY APPLYING THE PROVISIONS OF SEC. 92CA(93) O F THE ACT. THE APPELLANT HAS INVITED REFERENCE TO CIRCULA R NO. 12 DATED 23.08.2001 WHEREIN IT IS STATED AS UNDER: 'HOWEVER THIS IS A NEW LEGISLATION. IN THE INITIAL YEARS OF ITS IMPLEMENTATION THERE MAY BE ROOM FOR DIFFERENT INTERPRETATIONS LEADING TO UNCERTAINTIES WITH REGAR D TO DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIO NAL TRANSACTION. WHILE IT WOULD BE NECESSARY TO PROTECT OUR TAX BASE THERE IS A NEED TO ENSURE THAT THE TAXPAY ERS ARE NOT PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS. IN THIS BACKGROUND THE BOARD HAVE DECIDED THE FOLLOWING: (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTMENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER IF SUCH PRICE IS UP TO 5 PER CENT. LESS OR UP TO 5 PER CENT MORE THAN THE PRICE DETERMINED BY THE - 21 - ASSESSING OFFICER. IN SUCH CASES THE PRICE DECLARED BY THE TAXPAYER MAY BE ACCEPTED. (II) THE PROVISIONS OF SECTIONS 92 AND 92A TO 92F COME INTO FORCE WITH EFFECT FROM 1 ST APRIL 2002 AND ARE ACCORDINGLY APPLICABLE TO THE ASSESSMENT YEAR 2002-03 AND SUBSEQUENT YEARS. THE LAW REQUIRES THE ASSOCIATED ENTERPRISES TO MAINTAIN SUCH DOCUMENTS AND INFORMATION RELATING TO INTERNATIONAL TRANSACTIONS AS MAY BE PRESCRIBED. HOWEVER THE NECESSARY RULES COULD BE FRAMED BY THE BOARD ONLY AFTER THE FINANCE BILL RECEIVED THE ASSESSEE OF THE PRESIDENT AND HAVE JUST BEEN NOTIFIED. THEREFORE WHERE AN ASSESSEE HAS FAILED TO MAINTAIN THE PRESCRIBED INFORMATION OR DOCUMENTS IN RESPECT OF TRANSACTIONS ENTERED INTO DURING THE PERIOD 01.04.2001 TO 31.08.2001 THE PROVISIONS OF SECTION 92C(3) SHOULD NOT BE INVOKED FOR SUCH FAILURE. PENALTY PROCEEDINGS UNDER SECTION 271AA OR 271G SHOULD ALSO NOT BE INITIATED FOR SUCH DEFAULT. (III) IT SHOULD BE MADE CLEAR TO THE CONCERNED ASSESSING OFFICER THAT WHERE AN INTERNATIONAL TRANSACTION HAS BEEN PUT TO A SCRUTINY THE ASSESSING OFFICER CAN HAVE RECOURSE TO SUB- SECTION (3) OF SECTION 92C ONLY UNDER THE CIRCUMSTANCES ENUMERATED IN CLAUSES (A) TO (D) OF THAT SUB-SECTION AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENTS IN HIS POSSESSION ON THE BASIS OF WHICH AN OPINION CAN BE FORMED THAT ANY SUCH CIRCUMSTANCES EXISTS. IN ALL OTHER CASES THE VALUE OF THE INTERNATIONAL TRANSACTION SHOULD BE ACCEPTED WITHOUT FURTHER SCRUTINY.' IN VIEW OF PARA (I) ABOVE FROM SAID CIRCULAR THER E IS NO JUSTIFICATION FOR THE DISALLOWANCE MADE BY THE TPO PARTICULARLY WHEN DIFFERENCE BETWEEN COMMISSION PA ID AT 12.5% AND ARM'S LENGTH PRICE ADOPTED AT 12% IS MARGINAL AND IS LESS THAN 5%. IT IS SUBMITTED THAT SUCH - 22 - BENEFICIAL CIRCULARS ARE BINDING OF DEPARTMENT'S OF FICERS AND IT SHOULD BE FOLLOWED AS HELD IN VARIOUS CASES . 7.2 I HAVE CONSIDERED THE FACTS AND THE SUBMISSIONS GIVEN BY THE APPELLANT. I AM INCLINED TO AGREE WITH THE APPELLANT'S VIEWS. AS PER BOARD'S CIRCULAR SUPRA IF THE VARIATION IS LESS THAN 5% NO ADJUSTMENT HAS TO BE MADE. HENCE FOLLOWING THE SAID CIRCULAR THE APPELLANT I S ALLOWED RELIEF ON THIS POINT. 32. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE DIFFERENCE IN THE ARMS LENGTH PRICE AS TAKEN BY THE ASSESSEE AND AS APPLIED BY THE LEARNED ASSESSING OFFICER WAS LESS THAN 5% OF THE P RICE TAKEN BY THE ASSESSEE IS NOT IN DOUBT OR DEBATE. THEREFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) FOLLOWING CBDT CIRCULAR NO.12/2001 DATED 23.08.2001 HAS HELD THAT THE ADDIT ION MADE BY THE LEARNED ASSESSING OFFICER IS NOT TENABLE. LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT POINT OUT ANY ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WHICH W AS PASSED FOLLOWING THE CBDT CIRCULAR. THUS WE DO NOT FIND A NY MERIT IN THE GROUND OF APPEAL OF THE REVENUE. THEREFORE THIS GR OUND OF APPEAL OF THE REVENUE IS DISMISSED. 33. GROUND NO.5 OF THE APPEAL READS AS UNDER:- 5. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT S IN DIRECTING TO ADOPT NET INTEREST INCOME FOR THE PURPOSE OF DED UCTION U/S.80HHC AS AGAINST GROSS INTEREST INCOME OF RS.2 77 73 000/-. 34. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS ) HAS DECIDED AS UNDER:- - 23 - 11.1 GROUND NO. 9 IS AGAINST AO'S FINDING THAT IN TEREST INCOME IS INCOME FROM OTHER SOURCES AND IT IS NOT A PART OF BUSINESS INCOME AND ADDITIONAL GROUND AGAINST TA KING GROSS INTEREST INCOME IN PLACE OF NET INTEREST. THE AO HAS FOUND THAT THE ASSESSEE HAS EARNED GROSS INTERE ST OF RS.2 77 73 000/- AND HE TREATED THE SAME AS INCOME FROM OTHER SOURCES BY FOLLOWING THE DECISIONS OF VARIOU S HIGH COURTS INCLUDING THE DECISION IN THE CASE OF SOUTHERN CASHEW EXPORTERS VS. DCIT SLP (C) NO. 15119-20 OF 2003. (264 ITR 142) WHEREIN IT WAS HEL D THAT INCOME DERIVED FROM DEPOSIT MADE WITH THE BANK WAS NOT ENTITLED TO THE RELIEF U/S. 80HHC OF THE AC T THE APPELLANT HAS CLAIMED THAT AGAINST GROSS INTEREST O F RS.2 77 73 000/- IT HAS INCURRED THE INTEREST EXPE NDITURE AND THE NET INTEREST COMES TO RS.1 53 I7 984/-. THE REFORE THE ASSESSEE HAS REDUCED THE 90% OF NET INTEREST FR OM THE BUSINESS PROFIT FOR CALCULATING THE DEDUCTION U/S. 80HHC OF THE ACT. THE AO DID NOT ACCEPT THIS CALCULATION AND CALCULATED THE DEDUCTION BY EXCLUDING 90% OF THE GR OSS INTEREST INSTEAD OF NET INTEREST. 11.2 THE APPELLANT HAS SUBMITTED THAT INTEREST INCO ME SHOULD BE TREATED AS PART OF BUSINESS INCOME AS TH E INCOME HAS BEEN GENERATED FROM THE BUSINESS FUNDS. FURTHER THE APPELLANT SUBMITTED THAT FOR THE PURPO SE OF DEDUCTION U/S. 80HHC NET INTEREST SHOULD BE TAKEN OUT IN PLACE OF 90% OF GROSS INTEREST. SIMILAR ISSUE AR OSE WHICH WAS DECIDED IN APPELLANT'S FAVOUR FOR THE A.Y . 1999-2000 AND 2001-02 BY THE CIT (APPEALS) WHO HEL D THAT 90% OF NET INTEREST SHOULD BE EXCLUDED FROM TH E BUSINESS PROFIT. AFTER CONSIDERING THE FACTS AND TH E SUBMISSION OF THE APPELLANT I HOLD THAT FOR CALCUL ATION OF DEDUCTION U/S 80HHC OF THE ACT 90% OF NET INTERES T SHOULD BE TAKEN OUT FROM THE BUSINESS PROFIT. I ALS O HOLD THAT INTEREST INCOME IS ALSO PART OF THE BUSINESS I NCOME AND NOT ASSESSABLE AS INCOME FROM OTHER SOURCES. 35. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE UND ISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE HAS RECEIVED INTEREST OF RS.2 77 73 000/- ON - 24 - INVESTMENT OF SURPLUS FUNDS OF BUSINESS. TO ADJUDIC ATE THE ISSUE BEFORE US THE FIRST QUESTION WHICH IS TO BE DECIDE D IS THAT THE HEAD UNDER WHICH SUCH INTEREST INCOME IS ASSESSABLE TO T AX. ON THE ABOVE FACTS THE CONTENTION OF THE ASSESSEE IS THAT THE S AME IS TO BE ASSESSED UNDER THE HEAD BUSINESS INCOME WHEREAS AS PER THE L EARNED ASSESSING OFFICER THE SAME IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF MUMBAI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF TOPMAN EXPORTS (SUPRA). THE HON'BLE SPECIAL BENCH HAS HELD THAT TO DECIDE THE HEAD UNDER WHICH INTEREST INCOME IS ASSESSABLE IT IS NOT RELEVANT WHETHER IT IS DEPLOYMENT OF BUSINESS FUND BUT THE I SSUE IS TO BE DECIDED BY LOOKING AT THE NATURE OF ACTIVITY WHICH RESULTS INTO SUCH INCOME. IF THE FUNDS OF THE BUSINESS ARE PARKED FOR SAFE KEEPING OR WITH A VIEW TO EARN INTEREST INCOME DEHORS THE MAIN BUSINESS ACTIVITY THE INTEREST RESULTING THEREFROM CANNOT ASSUME THE CHARACTER OF BUSINESS INCOME AND HENCE WILL RESULTANTLY FALL UND ER THE HEAD INCOME FROM OTHER SOURCES. IN THE INSTANT CASE WE FIND THAT THE ASSESSEE HAS BROUGHT NO MATERIAL EITHER BEFORE ANY OF THE LOWER AUTHORITIES OR BEFORE US TO SHOW THAT THERE WAS SOM E BUSINESS EXIGENCY NECESSITATING THE DEPLOYMENT OF FUNDS WHI CH RESULTED IN THE YIELD OF INTEREST TO IT. THE ONLY CONTENTION OF THE ASSESSEE IS THAT AS BUSINESS FUNDS WERE DEPLOYED FOR EARNING INTEREST I NCOME THEREFORE INTEREST SHOULD BE HELD AS ASSESSABLE UNDER THE HEA D BUSINESS INCOME. IN OUR CONSIDERED OPINION IN VIEW OF THE ABOVE CIT ED DECISION OF HON'BLE MUMBAI SPECIAL BENCH IN THE CASE OF TOPMAN EXPORTS (SUPRA) THE ABOVE CONTENTION OF THE ASSESSEE IS NO T TENABLE AND SUCH INTEREST INCOME IS ASSESSABLE ONLY UNDER THE HEAD I NCOME FROM OTHER SOURCES. AS A CONSEQUENCE OF IT THE ASSESSEE CANNO T CLAIM ANY - 25 - DEDUCTION UNDER SECTION 80HHC IN RESPECT OF SUCH IN TEREST INCOME WHICH DOES NOT FORM THE PART OF BUSINESS INCOME. TH EREFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN ALLOWING NETTING OFF OF SUCH INTEREST INCOME AGAINS T INTEREST EXPENDITURE AND HOLDING THAT ONLY 90% OF THE NET IN TEREST INCOME IS TO BE EXCLUDED FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. WE THEREFORE SET ASIDE THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ON THIS ISSUE A ND RESTORE THAT OF THE LEARNED ASSESSING OFFICER. THUS THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED. 36. IN THE RESULT THE APPEAL OF THE ASSESSEE AND OF THE REVENUE BOTH ARE PARTLY ALLOWED AS ABOVE. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 21 ST DAY OF MAY 2010. SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; ON THIS 21 ST DAY OF MAY 2010 PARAS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-XIV AHMEDABAD. 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD - 26 - DATE INITIALS 1. DRAFT DICTATED ON 10.05.2010 -------------- ----- 2. DRAFT PLACED BEFORE AUTHORITY 17.05.2010 ---- --------------- 3. DRAFT PROPOSED & PLACED 18.05.2010 ----------- -------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 18.05.2010 ---------- --------- JM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 19.05.2010 -------- ------------ 6. KEPT FOR PRONOUNCEMENT ON 21.05.2010 --------- ----------- 7. FILE SENT TO THE BENCH CLERK 21.05.2010 ------ -------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------