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2010 (2) TMI 1292 - AT - Income TaxDisallowance of component of weighted deduction u/s. 35(2AB) for professional fees - AO disallowed weighted deduction on R D expenditure on the ground that the prescribed authority has not considered some items to be eligible for weighted deduction - CIT(A) following its order for AY 2001-02 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 observing that the same is not eligible to weighted deduction. HELD THAT - Respectfully following the assessee s own case in AY 2001-02 ACIT v/s Torrent Pharmaceuticals LTD. 2009 (11) TMI 819 - ITAT AHMEDABAD held that; Accordingly this expenditure are for preserving the research which is completed and its clinical trial is pending. As regards to the environmental issue the assessee-company has set up an affluent plant and as is widely accepted the vegetation i.e. trees have contained the pollution. This expenditure of gardening and plantation have been done for the perseverance of environment and this is directly related to R D facilities. As regards to salary paid to Dr. C. Dutt he is in-charge of R D Centre at Bhatt. He is the person through whom all coordination of technical scientists and other technical persons are carried out. The entire reporting of the research activity to the management has been taken to the Board of Directors through him only and for this the salary is paid. Accordingly the assessee has rightly paid the entire expenditure and building repairs on which weighted deduction u/s.35(2AB) is allowable. In view of the above discussion we allow the claim of the assessee and this issue of the Revenue s appeal is dismissed and that of the assessee s CO is allowed. Facts being identical to the facts of the assessee in AY 2001-02 and in absence of any distinguishing features pointed out by the revenue. we allow the ground of appeal of the assessee and dismiss the ground of appeal of the revenue. Deduction u/s. 80HHC - CIT(A) held that deduction u/s. 80HHC sales tax was not to be treated as part of total turnover - CIT(A) further directed to exclude the component of excise duty from the total turnover for the purpose of computation of deduction u/s.80HHC - HELD THAT - Both the parties before us agreed that the issue is now covered against the assessee by the decision of Hon ble Supreme court in the case of CIT Vs. Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT wherein it was held that the excise duty and sales tax are not includible in total turnover in the formula contained in section 80HHC(3). Therefore the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. Claim of disallowance u/s 80HHC in respect of income from DEBP was denied by the lower authorities to the assessee on the ground that the additional conditions envisaged in the third proviso to section 80HHC(3) was not satisfied in the instant case. HELD THAT - We find that in the case of Topman Exports 2009 (8) TMI 827 - ITAT MUMBAI 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 separate income. In our considered view the lower authorities were justified in denying the claim in respect of profit on sale of DEBP covered by clause (iiid) of section 28. While income in respect of DEBP is the face value of the DEBP and the same is covered by clause (iiib) of section 28 whereas profit on sale of DEBP is only the element of profit i.e. sale price minus face value of DEBP and the same is covered by clause (iiid) of section 28 of the Act. But in the instant case from the materials available on record it is not clear whether the whole amount is covered by clause (iiid) of section 28 or it also includes the amount which is covered by clause (iiib) of section 28 also. In the circumstances it shall be in the interest of the justice to restore the issue back to the file of the AO for proper verification. We order accordingly. Thus the ground of appeal of the assessee is allowed for statistical purposes. Charging interest u/s. 234A 234B and 234C - deduction claimed u/s 80HHC - restricted to a lesser amount on account of profit on sale of DEBP by applying the law which was retrospectively amended by the Taxation Laws (Amendment) Act 2005 - demand was raised against the assessee - AO levied the interest u/s 234A 234B and 234C - CIT(A) has not allowed the claim of the assessee. HELD THAT - We find that the issue is squarely covered by the decision in the case of Eastman Industries Ltd. Vs. DCIT 2007 (7) TMI 338 - ITAT DELHI-B wherein on the similar facts the Tribunal by relying on the CBDT Circular No.2 of 2006 has held that AO was not justified in charging interest u/s 234B and 234D as a consequence of reduction in the claim of deduction u/s 80HHC in view of the retrospective amendment of law by the Taxation Laws (Amendment) Act 2005 with effect from 1.04.1998. We therefore allow these grounds of appeals of the assessee and direct the AO not to charge interest in respect of the income which relates to the lesser grant of deduction u/s 80HHC as a consequence to retrospective amendment brought by the Taxation Laws (Amendment) Act 2005. Disallowance made by AO from out of expenditure on selling publicity and medical literature - Deleted by CIT(A) following the order of the Tribunal in assessee s own case for A/Y s 1990-91 and 1991-92. HELD THAT - The Ld DR merely relied upon the order of the AO. He could not point out why the order of the Tribunal for AY 1990-91 and 1991-92 should not be followed in the present year of appeal. Hence we do not find any good and justifiable reason to interfere with the order of CIT(A) which is confirmed and the ground of appeal of the revenue is dismissed. Disallowance of Garden expenses - assessee is engaged in the business of manufacturing of pharmaceuticals items - In the production the assessee uses various types of chemicals. In order to control the pollution arising out of chemical process - incurred expenditure for the purpose of maintaining garden in factory premises. This expenditure has been claimed deduction by the assessee - AO disallowed for the reason that it is not incurred for the process of production - CIT(A) allowed the deduction. HELD THAT - In our considered opinion the manufacturing process of the assessee being such that it involves use of hazardous chemicals which affect the health of the workers. Thus it is the duty of the assessee to make good the loss caused to nature and to prevent the health of the workers engaged in production. Therefore the assessee maintained the garden for maintaining better environment in the factory and the expenditure incurred in the process was therefore for the purposes of the business of the assessee and was rightly allowed by CIT(A). We therefore confirm the order of CIT(A) and dismiss the ground of appeal of the revenue. Addition made under transfer pricing u/s.92CA(3) - difference in the Arm s length price as taken by the assessee and as applied by the AO was less than 5% of the price taken by the assessee is not in doubt or debate. Therefore CIT(A) following CBDT Circular No.12/2001 has held that the Addition made by AO is not tenable HELD THAT - As Ld DR could not point out any error in the order of the CIT(A) which was passed following the CBDT Circular. Thus we do not find any merit in the ground of appeal of the revenue. Therefore this ground of appeal of the revenue is dismissed. Claim of deduction u/s 80HHC - Interest income - head under which such interest income is assessable to tax? - The only contention of the assessee is that as business funds were deployed for earning interest income therefore interest should be held as assessable under the head business income. As per AO the same is assessable under the head income from other sources - HELD THAT - 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 some business exigency necessitating the deployment of funds which resulted in the yield of interest to it. In our considered opinion in view of the case of Topman Exports (Supra) the above contention of the assessee is not tenable and such interest income is assessable only under the head income from other sources. As a consequence of it the assessee cannot claim any deduction u/s 80HHC in respect of such interest income which does not form the part of business income. Therefore CIT(A) was not justified in allowing netting off of such interest income against interest expenditure and holding that only 90% of the net interest income is to be excluded for the purposes of computing deduction u/s 80HHC. We therefore set aside the order of CIT (A) on this issue and restore that of the AO. Thus this ground of appeal of the revenue is allowed.
Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) for professional fees and other expenses. 2. Inclusion of sales tax and excise duty in total turnover for section 80HHC deduction. 3. Deduction under section 80HHC for DEPB income. 4. Charging of interest under sections 234A, 234B, and 234C. 5. Disallowance of selling, publicity, and medical literature expenses. 6. Disallowance of garden expenses. 7. Addition under transfer pricing provisions. 8. Treatment of net versus gross interest income for section 80HHC deduction. Detailed Analysis: 1. Disallowance of Weighted Deduction under Section 35(2AB): - Assessee's Appeal: The assessee contested the disallowance of weighted deduction for professional fees amounting to Rs. 79.34 lakhs. - Revenue's Appeal: The revenue contested the allowance of weighted deduction for municipal taxes (Rs. 2.25 lakhs) and salary to Dr. Dutt (Rs. 77.74 lakhs). - Tribunal's Decision: The Tribunal followed its earlier decision in the assessee's case for AY 2001-02, allowing the weighted deduction for professional fees and other expenses. The Tribunal held that the expenditure on professional fees, municipal taxes, and salary to Dr. Dutt were eligible for weighted deduction under section 35(2AB). 2. Inclusion of Sales Tax and Excise Duty in Total Turnover for Section 80HHC Deduction: - Assessee's Appeal: The assessee argued that sales tax should not be included in the total turnover for computing deduction under section 80HHC. - Revenue's Appeal: The revenue argued against the exclusion of excise duty from the total turnover. - Tribunal's Decision: The Tribunal, following the Supreme Court's decision in CIT vs. Laxmi Machine Works, held that both excise duty and sales tax are not includible in the total turnover for the purpose of section 80HHC deduction. 3. Deduction under Section 80HHC for DEPB Income: - Assessee's Appeal: The assessee contested the disallowance of deduction under section 80HHC for DEPB income amounting to Rs. 4,22,85,605. - Tribunal's Decision: The Tribunal remanded the issue back to the Assessing Officer for verification, following the Special Bench decision in Topman Exports, which distinguished between income from DEPB (clause iiib) and profit on sale of DEPB (clause iiid). 4. Charging of Interest under Sections 234A, 234B, and 234C: - Assessee's Appeal: The assessee argued against the charging of interest due to retrospective amendments affecting section 80HHC deductions. - Tribunal's Decision: The Tribunal, following the Delhi Bench decision in Eastman Industries Ltd., directed the Assessing Officer not to charge interest under sections 234A, 234B, and 234C on the demand arising from the retrospective amendment. 5. Disallowance of Selling, Publicity, and Medical Literature Expenses: - Revenue's Appeal: The revenue contested the deletion of disallowance amounting to Rs. 19,11,85,625. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, which followed the Tribunal's earlier orders in the assessee's own case for AY 1990-91 and 1991-92, allowing the expenses as they were incurred for business purposes. 6. Disallowance of Garden Expenses: - Revenue's Appeal: The revenue contested the deletion of disallowance of garden expenses amounting to Rs. 13,67,730. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, which allowed the expenses as they were incurred for maintaining a pollution-free environment within the factory premises. 7. Addition under Transfer Pricing Provisions: - Revenue's Appeal: The revenue contested the deletion of addition amounting to Rs. 1,63,887 under section 92CA(3). - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, which followed CBDT Circular No. 12/2001, stating that no adjustment is required if the difference is within 5%. 8. Treatment of Net versus Gross Interest Income for Section 80HHC Deduction: - Revenue's Appeal: The revenue contested the CIT(A)'s direction to adopt net interest income for section 80HHC deduction. - Tribunal's Decision: The Tribunal reversed the CIT(A)'s decision, holding that interest income should be assessed under the head "income from other sources" and not as business income. Consequently, the deduction under section 80HHC should be computed based on gross interest income. Conclusion: The Tribunal allowed the assessee's appeal on weighted deduction under section 35(2AB) and the exclusion of sales tax and excise duty from total turnover. The issue of DEPB income was remanded for verification. The Tribunal directed no interest to be charged under sections 234A, 234B, and 234C due to retrospective amendments. The Tribunal upheld the CIT(A)'s decisions on selling, publicity, medical literature, and garden expenses, and transfer pricing adjustments. However, the Tribunal reversed the CIT(A)'s decision on net versus gross interest income for section 80HHC deduction, favoring the revenue.
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