2024 (10) TMI 470 - AT - Income Tax

Estimation of income - Bogus purchases - HELD THAT - The fact would remain that supplier M/s Globe Pharma has changed its stand before the AO. When the above said party changes its stand before different authorities, it may not be possible to ascertain which of his statement was right and hence, it would be difficult to rely upon his changed stand. We noticed that the assessing officer had placed reliance on certain investigation report and the tax authorities have also pointed out certain deficiencies in the documents. Since the assessee has submitted stock records to prove the receipt and consumption of materials, one possibility could be that the assessee might have purchased material from one source and could have obtained bill from other source. We are not meaning that the assessee has actually indulged in such kind of practices. This issue may be put an end by estimating profit, if any, that could have been made by the assessee in this alleged bogus purchases. Accordingly, we estimate the profit @ 8% of the value of alleged bogus purchases - Decided partly in favour of assessee. Disallowance of R D expenses claimed u/s 35(2AB) - AO has disallowed the claim on the reasoning that the assessee has failed to substantiate the nature of expenses, genuineness of expenses and purpose of expenses - HELD THAT - The above said observations of the AO, in our view, are beyond the scope of order passed by ITAT. We notice that Cadila Healthcare Limited. 2013 (3) TMI 539 - GUJARAT HIGH COURT has held in the above said case that the R D expenses incurred on clinical trials outside approved laboratory facility is eligible for weighted deduction. Accordingly, we hold that the expenses incurred on Clinical Trial expenses are eligible for weighted deduction. Expenses is Building repairs - In the case of USV Ltd 2012 (9) TMI 43 - ITAT MUMBAI the co-ordinate bench of Tribunal has held that the rent, repairs etc., incurred on the premises relating to R D activities is eligible for weighted deduction. Accordingly, we hold that the building repairs expenses incurred on the premises relating to R D activity is eligible for weighted deduction. Expenses is Foreign Consultancy expenses - As stated therein the payments have been made to A A Thornton Co in connection with international patent applications and also in Third party infringement cases. Thus, it is not clear as to whether the payments made to A A Thornton Co is related to R D activity or not? We also notice that the nature of payment made to Michael Best Friedrich LLP is not explained and further, it is not clear as to whether the said payment was related to R D activity. Hence, we restore this item of expenses to the file of AO for fresh examination. The assessee may furnish necessary details before the AO to prove that the foreign consultancy charges are related to R D activity. Expenses of R D Exhibit Batches - As submitted that the expenses incurred on materials alone have been included in the cost of Exhibit Batches. As stated that other overhead expenses, labour expenses have not been claimed. It is noticed this expenses are in the nature of clinical trial expenses incurred in its manufacturing facility for production of samples for trial purposes. Accordingly, as per the ratio laid in the case of Cadila Healthcare Limited 2013 (3) TMI 539 - GUJARAT HIGH COURT this expenses are also eligible for weighted deduction u/s 35(2AB). Salary of CMD Chairman allocated to R D activity - A.R did not advance his argument on this item of expenditure. Accordingly, we reject this claim of the assessee. Difference in the quantum of expenses disallowed by the AO and the details furnished by the assessee . It requires reconciliation. Further, the nature and relationship of foreign consultancy charges are also require examination. Disallowance made u/s 14A - AR submitted that the own funds available with the assessee are more than the value of investments and hence no disallowance out of interest expenses is called for u/r 8D(2)(ii) - HELD THAT - As per the decision rendered in the case of HDFC Bank Ltd 2014 (8) TMI 119 - BOMBAY HIGH COURT the presumption is that the investments have been made out of own funds and accordingly, no disallowance out of interest expenses is called for. Accordingly, we direct the AO to delete the interest disallowance. Expenditure disallowance made u/r 8D(2)(iii) - A.R submitted that the assessee had worked out the expenditure attributable to exempt dividend income at Rs. 10,48,529/-. However, the AO did not examine the same having regard to the books of accounts and hence the AO could not have applied Rule 8D of I T Rules. The present assessment is set aside proceedings and the assessee had only requested before the Tribunal to set aside this issue to the file of the AO, meaning thereby, the assessee s case before the Tribunal was restricted to the computation of disallowance u/s 14A r.w Rule 8D. In the case of Vireet Investments P Ltd 2017 (6) TMI 1124 - ITAT DELHI has held that , for the purpose of computing average value of investments, only those investments which have yielded exempt income alone should be considered. We direct the AO to compute average value of investments by considering only those investments which have yielded exempt income and accordingly compute the disallowance u/r 8D(2)(iii) of I T Rules. Appeal of the assessee is treated as partly allowed.

Summary

Issues:
1. Addition of alleged bogus purchases
2. Disallowance of R&D expenses claimed under section 35(2AB) of the Act
3. Deduction claimed under sections 80IB/80IC/10B on scrap sales
4. Disallowance made under section 14A of the Act

Issue 1: Addition of alleged bogus purchases

The Tribunal considered the appeal challenging the addition of Rs. 38,80,657 for alleged bogus purchases made by the pharmaceutical company. The supplier, M/s Globe Pharma, initially confessed to providing only accommodation bills without supplying materials but later changed its stand before the AO. The Tribunal noted the discrepancies in the documents but also acknowledged the stock records provided by the assessee. Due to conflicting statements and deficiencies in documents, the Tribunal estimated a profit of Rs. 3,10,452 (8% of alleged bogus purchases) and directed the AO to restrict the disallowance accordingly.

Issue 2: Disallowance of R&D expenses claimed under section 35(2AB) of the Act

The Tribunal analyzed various expenses claimed by the assessee under section 35(2AB) of the Act. It scrutinized expenses such as Clinical Trial expenses, Building Repairs, Foreign Consultancy expenses, R&D Exhibit Batches, and the salary of CMD allocated to R&D activity. The Tribunal referred to relevant case laws and principles to determine the eligibility of each expense for weighted deduction. It directed the AO to verify the discrepancies in the disallowed amount and the expenses claimed, and further examine the nature and relationship of foreign consultancy charges for fresh assessment.

Issue 3: Deduction claimed under sections 80IB/80IC/10B on scrap sales

The Tribunal noted that the deduction claimed on scrap sales under sections 80IB/80IC/10B was not pressed by the Ld A.R. Consequently, the ground related to this issue was dismissed as not pressed.

Issue 4: Disallowance made under section 14A of the Act

Regarding the disallowance made under section 14A of the Act, the Tribunal observed that the AO disallowed interest expenses and expenses under Rule 8D(2)(ii) and (iii) of the IT Rules. The Tribunal directed the AO to delete the interest disallowance based on the available own funds of the assessee. It also instructed the AO to compute the disallowance under Rule 8D(2)(iii) by considering only investments that yielded exempt income. The Tribunal partially allowed the appeal of the assessee, providing specific directions for the AO to re-examine the issues related to disallowances under section 14A of the Act.

This detailed judgment by the Appellate Tribunal ITAT Mumbai addresses multiple issues including alleged bogus purchases, R&D expenses disallowance, deduction claims on scrap sales, and disallowances under section 14A of the Act. The Tribunal meticulously analyzed each issue, considered relevant legal principles and case laws, and provided specific directions for the AO to re-evaluate the claims and disallowances.