2018 (10) TMI 193 - HC - Income Tax

Deduction u/s.37 - contribution made by the assessee for non-business purposes viz. Contribution to Ranbaxy Community Health Care Society and contribution to Ranbaxy science foundation - Held that - The pension would be paid to the employees upon their resignation or retirement or to the member of the family in event of premature death of the employee the liability was ascertained through scientific method. The claim of deduction on the basis of provision made for future liability which is ascertainable and ascertained through scientific statistical data is well recognized through series of judgments. We do not see the Tribunal has therefore committed any error. Our attention was however drawn to the judgment in case of Dishergarh Power Supply Co. Ltd., vs. CIT, (1990 (3) TMI 374 - CALCUTTA HIGH COURT). It was however a case where the assessee had claimed deduction on payment of pension on actual basis as well as towards provision for future actuarial basis which the High Court found was not permissible. We notice that very High Court in case of this very assessee in case of Commissioner of Income-tax vs. Ranbaxy Laboratories Ltd.(2011 (3) TMI 1032 - DELHI HIGH COURT ) upheld the assessee s claim of deduction. This question is therefore not considered. VAT deduction claimed by the assessee under Section 35(2AB) - AO disallowed a part of the claim on the ground that it did not relate to the in-house research facility created by the assessee - CIT (A) under Tribunal ruled in favour of the assessee - Held that - Tribunal, in impugned order, noted that the expenditure was incurred for vehicles, computers and other assets provided to the employees of the company who are working at the approved research facility and were directly engaged in the research and development activities. Thus, the expenditure was held to be related to the in-house research activity. This question is therefore not considered. Revenue expenditure claimed towards convertible bonds - Held that - Tribunal while confirming the view of the CIT (Appeals) recorded that the conversion of the bonds into shares never took place. Entire loan was repaid alongwith redemption premium by the assessee. Learned counsel for the Revenue however submitted that by very nature of things, the bonds were convertible. The expenditure should therefore be seen as increasing the share capital of the company and therefore capital in nature. Since the facts on record suggest that the conversion of bonds into shares never took place and the entire borrowed amount was repaid with redemption premium, keeping a contention of the counsel for the Revenue open this question is not considered.

Summary

Issues:
1. Deduction of contribution made for nonbusiness purposes.
2. Pension provision made by the assessee.
3. Expenditures qualifying for deduction under Section 35(2AB).
4. Treatment of expenditure towards convertible bonds.

Issue 1: Deduction of Contribution Made for Nonbusiness Purposes
The primary issue in this case was whether the deduction under Section 37 of the Income Tax Act should be allowed for contributions made by the assessee for nonbusiness purposes. The ITAT allowed the deduction for contributions made to certain societies, which the Revenue contested. The Court examined the facts and circumstances of the case and the purpose of the contributions. The ITAT's decision was upheld as the contributions were deemed allowable under Section 37(1) of the Income Tax Act, despite not being incurred for business purposes.

Issue 2: Pension Provision Made by the Assessee
Another significant issue was the deduction claimed by the assessee for the provision made for pension payable to employees based on actuarial calculations. The Assessing Officer initially disallowed this deduction, but the CIT (Appeals) and the Tribunal ruled in favor of the assessee. The Tribunal considered the provision for pension as an ascertained business liability, which was upheld by the Court. The Court cited previous judgments recognizing deductions for provisions made for future liabilities as ascertainable through scientific methods, supporting the Tribunal's decision.

Issue 3: Expenditures Qualifying for Deduction under Section 35(2AB)
The third issue revolved around the deduction claimed by the assessee under Section 35(2AB) of the Income Tax Act for expenditures on computers, vehicles, and other assets not directly used for in-house research facilities. The Assessing Officer disallowed a part of the claim, but the CIT (Appeals) and the Tribunal ruled in favor of the assessee. The Tribunal found that the expenditures were related to the in-house research activity as they were provided to employees directly engaged in research and development activities. Thus, the Court upheld the Tribunal's decision on this issue.

Issue 4: Treatment of Expenditure Towards Convertible Bonds
The final issue concerned the treatment of revenue expenditure claimed by the assessee towards convertible bonds. The Assessing Officer argued that the expenditure should be treated as capital in nature due to the convertible nature of the bonds. However, the CIT (Appeals) allowed the deduction, which was confirmed by the Tribunal. The Court referred to the Supreme Court's decision in the Brook Bond case and noted that the conversion of bonds into shares never occurred, and the entire loan was repaid by the assessee. Therefore, the Court upheld the Tribunal's decision, considering the expenditure as revenue expenditure rather than capital in nature.