2009 (9) TMI 747 - AT - Income Tax

Issues Involved:
1. Taxability of Rs. 7 crores received on transfer of marketing network.
2. Disallowance of Rs. 3,40,29,192 being a part of the leave encashment provision.
3. Disallowance of Rs. 16,85,000 under section 14A being expenditure incurred related to exempt income.
4. Treatment of Rs. 32,87,653 as revenue expenses or capital in nature.
5. Deduction of Rs. 23,63,586 being cost of advertisement film.
6. Addition of Rs. 63,90,570 to the valuation of closing stock.

Detailed Analysis:

1. Taxability of Rs. 7 Crores Received on Transfer of Marketing Network:
The primary issue was whether Rs. 7 crores received by the assessee for transferring the marketing network of pharmaceutical products should be treated as a capital receipt or as business income. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) held that the amount was taxable as business income under section 28 of the Income-tax Act, as it was a profit earned in the normal course of business. The AO concluded that the termination of the agreement did not impair the profit-making structure of the assessee-company, and the assessee continued to manufacture the same products under a toll manufacturing agreement. The Tribunal upheld this view, stating that the entire business activity of the assessee had not come to a standstill and the amount received was incidental to the business.

2. Disallowance of Rs. 3,40,29,192 Being a Part of the Leave Encashment Provision:
The AO disallowed the provision for leave encashment, stating that the assessee had changed its accounting method to reduce tax liability. The CIT(A) allowed Rs. 1,43,06,438 as incremental liability for the year, following the Supreme Court's decision in Bharat Earth Movers v. CIT. The Tribunal upheld the CIT(A)'s decision, noting that the provision for earlier periods could not be allowed in the current year.

3. Disallowance of Rs. 16,85,000 Under Section 14A Being Expenditure Incurred Related to Exempt Income:
The AO disallowed Rs. 16,85,000 as interest attributable to investment in UTI, invoking section 14A. The CIT(A) confirmed this disallowance. The assessee did not press this ground during the hearing, and the Tribunal upheld the CIT(A)'s decision, referencing the Special Bench decision in ITO v. Daga Capital Management Pvt. Ltd.

4. Treatment of Rs. 32,87,653 as Revenue Expenses or Capital in Nature:
The AO treated Rs. 3,78,72,745 spent on repairs to plant and machinery as capital expenditure. The CIT(A) deleted the disallowance, finding that the expenses were for maintaining existing assets and did not create new assets. The Tribunal upheld the CIT(A)'s decision, noting that the repairs were necessary to keep the machinery in running condition and did not bring new assets into existence.

5. Deduction of Rs. 23,63,586 Being Cost of Advertisement Film:
The AO disallowed the cost of film production for advertisement, treating it as capital expenditure. The CIT(A) deleted the disallowance, citing the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT. The Tribunal confirmed the CIT(A)'s decision, noting that the issue was covered by its earlier decision in the assessee's case for the assessment year 1999-2000.

6. Addition of Rs. 63,90,570 to the Valuation of Closing Stock:
The AO added Rs. 63,90,570 to the closing stock valuation for freight and octroi expenses. The CIT(A) deleted the addition, stating that opening and closing stock should be valued using the same method. The Tribunal upheld the CIT(A)'s decision, referencing its earlier order in the assessee's case for the assessment year 1999-2000.

Conclusion:
The Tribunal dismissed both the assessee's and the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The Rs. 7 crores received on transfer of marketing network was deemed taxable as business income, while the disallowances and additions made by the AO were either confirmed or deleted based on established precedents and the specific facts of the case.

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