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TMI Blog2012 (4) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ially inflate the profit - the formulations in Mekaguda unit cannot be sold in the market, it is obviously not practical for him to calculate the prices of inputs on the basis of market prices - Held that :- it is most appropriate to consider the actual cost as per cost records maintained by the assesee and thereafter assessing office consider the profits on these transaction as compared to other industries in similar line or if there is no comparable, fix reasonable percentage of profit depending upon market condition prevailing in the similar line of industry. Thus to set aside this issue to the file of assessing office to bring the comparable cases on record and redo the assessment on this issue. addition made by the assessing office towards interest - The assessee company had advanced certain loans to M/s Natco Organics Limited in the earlier years and the assessee has not admitted any interest - Held that :- Assessing Officer does not have any basis on the addition made for the interest - The issue is covered in favor of the assessee as that interest has to be charged from the date on which there is a resolution of the Board of the company stating that interest has to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer and with regard to the addition made by the assessing office towards interest, he deleted the addition. Thus, the appeal of the assessee is partly allowed by the CIT [A]. Aggrieved further, both the assessee and department are in appeal before us. 5. The learned counsel for the assessee submitted that during the financial year relevant to the assessment year 2007-08, the company received Rs.10 Crores towards compensation for waiving the right to receive the equity shares which was admitted under the head "Other Income" in the profit and loss account. In the computation of income the assessee company claimed this receipt to be capital in nature. The assessee company promoted KPCL for establishing and developing a minor deep seaport at village Krishnapatnam in Nellore District. In order to implement the project and pending financial closure, the assessee company financed capital expenditure and also day to day revenue expenditure of the promoted company pursuant to agreement entered into on 9-6-1997. As per the agreement, the assessee company has a right to convert the advances given into equity shares of KPCL at a mutually agreed rate. The assessee company promoted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce funds to KPCL to meet its expences and in consideration for having met advanced funds, the assessee will have a right to convert its advances into equity shares of KPCL at a rate to be mutually between these two paties. We have perused the said agreement and we find that by virtue of this agreement entered into with KPCL on 9-6-1997, the assessee company has a right to convert its advances into equity shares of KPCL at a price to be mutually agreed upon. However, there was a tripartite agreement on 30-06-05 between assessee, KPCL and Shri V.C Nannapaneni by which the present assessee agreed to waive its right to convert the advance made by it to KPCL into equity shares of KPCL subject to receiving suitable compensation. The assessee through this triprtite agrement has received Rs. 26,19,72,872, which is reimurse of enitre advance and also received Rs. 11,60,82,000/- as interest on money advanced to KPCL which was paid by Mr.V.C. Nannapaneni on behalf of M/S KPCL. However, the issue relating to compensation payble to assessee to be decided on mutually agreebale terms, at a later point of time. The compensation for waiver of right to convert the shares has been agreed upon by Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation to a capital asset, includes: i) The sale, exchange or relinquishment of the asset; or ii) The extinguishment of any rights therein; 9. In the present case, the assessee gave up its right to get allotment of shares of KPCL and the relinquishment of an asset is a transfer u/s 2(47). There was yet another contention raised by the ld. AR relying on the decision of Supreme Court in the case of B.C. Sreenivasa Setty (128 ITR 294) that what is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost and that none of the provision pertaining to the head capital gains suggests that they include an asset in the acquisition of which no cost at all can be conceived. He also relied on the judgement of Supreme Court in the case of CIT vs. D.P. Sandu Bros., Chembur Pvt. Ltd. Ors. [273 ITR 1 (SC)] . It was the contention of AR that, there was no cost of acquisition incurred by the assessee for obtaining the rights under the agreement cited earlier in this order and so there could be no capital gains assessable in that connection. We are not inclined to agree with the ld. Counsel that there was no cost incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hradun was set up in June, 2006 and during the current year deduction under section 80IC was available. In Mekaguda, bulk drugs and active pharmaceuticals (APIs) are manufactured whereas in Kothur and Dehradun finished dosage of pharmaceutical formulations are made. The Assessing Officer observed that the total turnover of the Dehradun unit was Rs.25,66,45,736/- and the net profit was Rs.20,82,36,882/-. The net profit worked out to 81.14% of the turnover. For the other units excluding Dehradun unit the profit worked out to only 6% of the total sales. Even for the Kothur unit where exactly the same operations-were carried out as at Dehradun, the profit margin was much less and at Mekaguda, whereas the main work was done, there was actually a loss. Accordingly, the Assessing Officer recalculated the profits and the eligible deductions under section 80IC of the Act. He made a detailed working at pages 12 and 13 of his order and found that the profits of Dehradun unit have been overstated or inflated. He held that the average gross profit ratio of Mekaguda and Dehradun units has to be adopted for the Dehradun unit also for the purpose of working out eligible deduction under section 80I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er by just comparing with eligible unit with non eligible unit concluded that there is inflation of income and deflation of income. It is submitted that this is contrary to provisions of law and even on facts. 15. It is submitted that the assessing officer at best could have arrived at the market value of the goods transferred by adding reasonable percentage of profit of the unit that manufactured the same and should not have resorted to clubbing and arriving at the allowable deduction. It is prayed that the assessing officer be directed to arrive at the Market value and re-compute the profits eligible for deduction. Further he submitted that the AO shall consider the price of the goods which ordinarily fetch in the opern market. For this purpose he relied on the order of the Tribunal in the case of DCW vs. Addl. CIT (37 SOT 322) (Mum) . 16. On the other hand, the learned Departmental Representative submitted that sub-section (8) is applicable where any goods held for any other business of the assessee are transferred to the eligible business. In the case of the assessee, Active Pharmaceutical Ingredients (APIs) in the form of Imatinib Mesylate and Geftinib from Mekaguda unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the raw material for the Dehradun is transferred from Mekaguda unit. Final product is being manufactured at Mekaguda unit, whereas, at Dehradun unit capsules are filled with the drug. The value addition is nominal at Dehradun unit and virtually the entire value addition takes place at Mekaguda unit. For the purpose of arriving at deduction under section 80IC of the Act, the eligible profits should be worked out basing on the gross profit ratio at Mekaguda unit. Therefore, the lower authorities correctly restricted deduction under section 80IC of the Act of Rs.6,01,46,943/- as against the claim of the assessee for a sum of Rs.20,69,69,445/- 18. We have considered the rival submissions and perused the materials available on record. We have also considered carefully the facts and circumstances of this case. We find that proviso to section 80IA (8) of the Act clearly empowers the assessing officer to re-compute the eligible profits on a reasonable basis as he deems fit. The facts of the case are self-evident that it is unthinkable that the Dehradun unit would be giving such exceptional profits while the main unit at Mekaguda is showing less. The Assessing Officer has pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st not admitted on the amount, advanced to sister company Natco. It is submitted that when disallowance of interest was made by the assessing officer for easrlier assessment year, this tribunal has deleted such additions holding that these advances are from own funds and not from borrowed funds requiring disallowance. The company itself during the financial year 2007-08 has decided to charge interest on these advances and accordingly has admitted such interest income in the assessment year 2008-09 to the tune of Rs.596.30 lakhs which is the interest for all the years including the present assessment year. When such is the case, the assessing officer is of the opinion that such interest renting to this assessment year ought to have been admitted and accordingly has added. It is submitted that this opinion does not stand to reason and also is not in accordance with the provisions of law. Therefore, it is prayed that the addition deleted by the CIT[A] is to be confirmed. On the other hand, the learned Departmental Representative relied on the order of the assessing officer and the grounds of appeal. 21. We have examined carefully the facts and find that the addition made by the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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