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TMI Blog2018 (6) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue expenditure. Addition of rent paid for the property - Held that:- Considering the above decision of the Tribunal in assessee’s own case, we are of the opinion that the expenditure on account of rent paid on the house property is allowable in favour of the assessee. Allowability of depreciation of capital expenditure in connection with the said house property at 70, Koregaon Park - Held that:- There is no clarity with reference to the capitalised items of assets credited to the Serum Institute of India Ltd. in the said house premises occupied by Mr. Z.S. Poonawalla, applicable rate of depreciation and the use of the asset etc. As discussed in the open court, we are of the opinion that this limb of the ground should be remanded to the file of AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee in accordance with the set principles of natural justice. Allowability of deduction to the Wealth Tax paid by the assessee for the purpose of computing book profits u/s.115JB - AO denied the said payment of tax as not an allowable deduction - Held that:- Wealth Tax paid constitutes an allowable deduction as held by the Tribunal in assessee’s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case the Ld. CIT(A) has erred in interpreting the provisions of Sec. 10B and accordingly allowed exclusion of Freight & Insurance from Total Turnover for the purpose of quantifying deduction u/s.10B. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has made an extrapolation of definition of Export Turnover to define "Total Turnover, and thereby distorted the legislative intent in providing strict interpretation of "Export Turnover" as per Explanation 2 to Sec. 10B of the Income Tax Act 1961. 3. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in allowing Product Development Expenditure as Revenue expenditure when the same should have been capitalized. 4. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that donation paid by the assessee was an allowable expenditure for the purpose of Sec. 37(1) and expanded wholly for business purposes. 5. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in accepting the assessee's contention when the Assessing Officer had adhered to the definition of Plant & Machinery and Furniture a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd. reported as 330 ITR 175. We do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in directing the Assessing Officer to exclude freight and insurance charges both from export turnover and total turnover while allowing deduction u/s. 10B and 10AA of the Act. Accordingly, ground No. 4 raised by the Department in its appeal is dismissed." Thus, it is a settled legal proposition that the said expenditures, i.e. freight and insurance are to be excluded both from the total turnover and the expected turnover of the assessee for the year under consideration. Therefore, following the decision of Co-ordinate Bench of the Tribunal in assessee's own case, the Ground Nos. 1 and 2 raised by the Revenue are dismissed. 9. Ground No. 3 relates to allowing of Product Development Expenditure of ₹ 20,07,02,581/- as Revenue expenditure by the CIT(A). 10. Relevant facts include that the assessee capitalised the development cost amounting to ₹ 20,07,02,581/- in the books of account and claimed the same as revenue expenditure u/s.35(1)(i) of the Act. CIT(A) after elaborately discussing the same and relying on various judgmental laws deleted the same hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted as 348 ITR 302 (SC) the Hon'ble Supreme Court of India has reaffirmed the view that the accounts maintained by the assessee are not conclusive for deciding the nature of expenditure. Thus, in view of the facts of the case and various decisions discussed above, we do not find any infirmity in the findings of Commissioner of Income Tax (Appeals) in accepting the product development expenditure as revenue in nature. Accordingly, ground Nos. 1 and 2 raised by the Revenue in its appeal are dismissed." Thus, the Tribunal decided an identical issue in the own case of the assessee and in favour of the assessee. Following the said decision of the Co-ordinate Bench of the Tribunal, the Ground No. 3 raised by the Revenue is dismissed. 13. Ground No. 4 raised by the Revenue relates to the donation paid by the assessee amounting to ₹ 16,10,000/- to Aslaji Agiary Trust - ₹ 14,00,000/-, IndCare Charitable Trust - ₹ 2,00,000/- and Ram Krishna Math - ₹ 10,000/- and claimed the same as deduction u/s.37(1) of the Act. AO disallowed the same holding that the expenditure has nothing to do with the business of the assessee. In the First Appellate proceedings, the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ', eligible for depreciation at the rate of 15% like trolley etc. Accordingly, this ground is partly allowed subject to the direction mentioned above." 17. After hearing both the sides, we find this issue also has been adjudicated by the Co-ordinate Bench of Tribunal in the assessee's own case vide ITA No.931/PN/2013 for the A.Y. 2008-09 (supra.) in favour of the assessee. We therefore, find it relevant to extract the finding given by the Tribunal and the same reads as under: "35. Both sides heard. Findings of authorities below on the issue examined. We have also considered the decision of Co-ordinate Bench of the Tribunal on this issue. We find that the issue of reclassification of certain assets which were classified by the assessee as 'Plant and Machinery' and held to be 'Furniture and Fixtures' by the revenue was considered by the Tribunal in assessment year 2001-02 in ITA No. 948/PN/2005 (supra). The Co-ordinate Bench of the Tribunal after considering the submission of the assessee held as under: 6. We have heard the parties and perused the orders of the revenue. The jurisdictional High Court's judgment in the case of Park Devis, supra, is clear on the issue that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cines. In our opinion, the revenue authorities have carried away more by the nomenclature rather than the functions of the impugned items. Therefore, considering the set principle of functional test advocated by the jurisdictional High Court cited above, we are of the opinion the assessee must win on this issue. Accordingly, ground 2 raised in the appeal of the assessee are allowed." 36. The ld. DR has not placed on record any material to controvert the findings of Co-ordinate Bench on this issue. Respectfully, following the decision of Co-ordinate Bench we allow this ground of appeal of the assessee." Following the rule of consistency, the Ground No.5 raised by the Revenue is dismissed. 18. In the result, appeal of the Revenue is dismissed. Now, we shall take up assessee's appeal for adjudication. ITA No.1184/PUN/2015 ( By Assessee) A.Y.2009-10 19. Grounds raised by the assessee are extracted here as under : "On the facts and in the circumstances of the case and in law learned CIT(A) erred: 1a. in confirming the disallowance u/s.14A amounting to ₹ 3,34,98,903/- as per rule 8D. b. without prejudice to ground (a) above, confirming the disallowance applying Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmits that the grounds of appeal, save as otherwise specified, notwithstanding and without prejudice to each other." We shall take up the issue-wise adjudication in the following paragraphs. 20. First issue : If the disallowance made by the AO u/s.14A r.w. Rule 8D(2) of the I.T. Rules, 1962 is sustainable when there is no satisfaction invoking the provisions of the Act/Rules ? 21. Bringing our attention to the assessment order in this regard, Ld. Counsel for the assessee submitted that, on similar satisfaction mentioned by the AO, the Tribunal in the case of group company - Poonawalla Investments and Industries Ltd. Vs. DCIT in ITA Nos. 245 to 250/PUN/2016 for A.Yrs. 2006-07 to 2011-12, dated 28-02-2018 deleted the disallowance made u/s.14A of the Act. In this regard, he read out the following lines from the assessment order : "5.1 . . . . . . . . It is difficult to accept the proposition that all the tax free income has been earned without incurring these expenditures and these expenditures were incurred only for earning taxable income. Further, assessee has disallowed expenditure on Adhoc basis without applying rule 8D. Therefore, I am satisfied that the assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon'ble Apex Court and the Para No.37 of the judgment of Hon'ble Apex Court in the case of Godrej and Boyce Manufacturing Company Ltd. (supra) are relevant. Hon'ble Supreme Court explained the provisions of sub-section (2) and (3) of section 14A of the Act. For the sake of completeness, we proceed the extract the same here as under : "37. We do not see how in the aforesaid fact situation a different view could have been taken for the assessment year 2002-03. Sub-sections (2) and (3) of section 14A of the Act read with rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance, considers the explanation of assessee and holds that the contention of assessee cannot be accepted. The preliminary satisfaction to be recorded by Assessing Officer, before making disallowance under section 14A of the Act read with Rule 8D of the Rules, is missing in the case; in the absence of the same, there is no merit in the disallowance made by the Assessing Officer. We find support from the ratio laid down by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). "37. We do not see how in the aforesaid fact situation a different view could have been taken for the assessment year 2002-03. Sub-sections (2) and (3) of section 14A of the Act read with rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,34,98,903 3. The assessee contends that no disallowance should be made u/s.14A for the interest component as there are sufficient own funds lying with the assessee. The details in respect of own funds and investments is given before the CIT(A). 4. In respect of disallowance made by AO u/s.14A, submission were also made before CI(A) based on following principles (refer Page No.72-88 of the paper book). i. Non recording of satisfaction of AO before resorting to Rule 8D. ii. AO has to show computation of the assessee to be incorrect. iii. There should be nexus of expenditure with exempt income for disallowance to be made. iv. Investment in group companies should be excluded while computing disallowance u/s.14A r.w. r 8D. v. Investments which have not earned exempt income should not be considered while working out disallowance under Rule 8D. vi. As liability of MAT is based on actual expenses and income, no disallowance should be made on notional basis. vii. Any other method to be adopted which will result into reasonable basis of disallowance." 24. Ld. DR for the Revenue relied on the orders of the AO/CIT(A). He also relied on the following judgments on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nveniently but for such expenditure on foreign tours which is a must for personal interaction of the company with various customers which includes Govt. authorities / agencies of different countries. The same is also necessary to create awareness and goodwill and public opinion all over world of our company and our products. In our opinion the expenditure is incurred in normal course of business and the same is fully allowable. It is our practice to submit the tour report to the superior when an employee comes back from foreign tour. During the course of hearing, Your Honor has asked to justify the travelling expenses of some of the employees who have travelled for the purpose of acquiring the fixed assets which may need to be disallowed and to be capitalized in the year of purchase of fixed asset. In this regard, we submit as under: Justification of foreign undertaken by employees travelled for capital purposes Details of travelling for the purpose of purchase of machinery : Your Honor has asked for the details of the employees who have made foreign tours for purpose of purchase of machinery. In this regard, we state that following employees have undertaken foreign tours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign travel expenses of employees ₹ 25,77,069/-. The assessee had claimed the expenditure as revenue expenditure. The ld. AR of the assessee fairly admitted that in the earlier assessment year 2005-06 under identical circumstances the Tribunal has disallowed the capitalization of foreign travel expenditure of employees. The ld. AR placed on record a copy of the order of Tribunal in assessee's own case in ITA No. 1383/PN/2011 for assessment year 2006-07 decided on 22-02-2013. The Assessing Officer disallowed the foreign travel expenditure incurred on employees for finalizing the proposal of purchasing the plant and machinery. The assessee had claimed expenditure as revenue in nature. The Assessing Officer held expenditure to be capital expenditure and allowed depreciation on the same. Therefore, Assessing Officer rectified his order u/s. 154 and disallowed ₹ 25,77,069/-. In first appeal, the Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer. 27. The ld. DR vehemently defended the order of Commissioner of Income Tax (Appeals) in upholding the expenditure incurred towards foreign travel of employees as capital in nature. 28. Both sides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the purchase of the machinery was not finalized in the particular year but the same has been purchased in subsequent year, as adverted by the assessee before the Assessing Officer. Therefore, it would be in the fitness of things that such expenditure would form part of cost of purchase of machinery as and when in the year in which the machinery is capitalized. On facts, therefore, the claim of the assessee for allowability of such expenditure as revenue expenditure is liable to be negated and on this aspect, we affirm the order of the Assessing Officer. In so far as the reliance placed by the assessee on the decision of the Tribunal for A.Y. 2002-03 is concerned, we find it appropriate to reproduce operative part of the order of the Tribunal contained in para 13, which is as under:- "We find that Revenue has not made out a case to demonstrate that the said foreign travel expenditure was incurred in connection with any capital asset. Therefore, Assessing Officer failed to discharge the onus successfully. When allegation is made by AO, it is expected that he should demonstrate with evidence against the assessee. In our opinion, the said judgments are relevant and applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being difference in depreciation @10% and 15% on some items under block of Plant and Machinery treating the same as Furniture. Before the CIT(A), the assessee submitted that this issue has been decided in favour of the assessee for the A.Yrs. 2006-07, 2007-08 and 2008-09. The CIT(A) after considering the submissions of the assessee and the order of CIT(A) for the A.Y. 2008-09 partly allowed the appeal of the assessee. Contents of Para No.13.3.3 of the order of CIT(A) are relevant. 34. After hearing both the sides, we find this issue has already been adjudicated by us against the Revenue and in favour of the assessee while dealing with the appeal of the Revenue. Considering the same, this ground raised by the assessee is allowed. 35. Fourth issue: Ground No.4 raised by the assessee relates to disallowance made by the AO on account of 'provision for Leave Encashment' amounting to ₹ 96,47,634/-. 36. Before us, Ld. Counsel for the assessee submitted that the issue stands decided against the assessee by the order of Tribunal in assessee's own case in ITA No.931/PN/2013, dated 22-07-2016 for the A.Y.2008-09. 37. After hearing both the sides on this issue, we find the Tribunal v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000/- in respect of the donations made to Indcare Charitable Trust and Ramakrishna Math. 40. Earlier, assessee made a written submission before the CIT(A) on this issue stating that company contributed ₹ 14 lakhs on 28-01-2009 to Aslaji Agiary Trust towards General Maintenance Fund. It is the submission of the assessee that the said contribution is allowable u/s.37 of the Act since the said contribution enhances the status of Dr. Cyprus Poonawalla, MD of the company being well known in Parsi Community. The said contribution also helps the trust as business advertisement through the word of mouth. 41. Ld. DR for the Revenue relied on the order of the AO/CIT(A). 42. After hearing both the sides, and perusing the orders of the Revenue, we find it relevant to extract the relevant finding of the CIT(A) while sustaining the disallowance of ₹ 14 lakhs and the same reads as under : "15.3 The submissions made by the Ld. Counsel are carefully considered with reference to the nature of contributions made and the provisions of sec. 37( 1) of the I T Act. The first item of contribution amounting to ₹ 14 lacs is stated to have been made to Aslaji Agiary Trust, which is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the opinion that the expenditure of ₹ 14 lakhs falls short of the legal requirement of wholly and exclusiveness qua the business purpose of the assessee. It cannot be said that the said expenditure is for the company in its entirety. Therefore, we are of the opinion that the CIT(A) is justified in upholding the addition to the extent of ₹ 14 lakhs in respect of donation made to Aslaji Agiary Trust. Thus, the fifth issue raised by the assessee is dismissed. 43. Sixth issue : Ground No.6 raised by the assessee relates to addition of ₹ 1,10,605/- u/s.48 of the Act made on account of demat charges which was claimed as expenditure incurred for earning income from capital gains. 44. Relevant facts on this issue include that assessee debited the said sum to the profit and loss account and claimed that the same should be allowed while computing the capital gains. Assessee relied on the decision of Bangalore Bench of the Tribunal in the case of Infosys Technologies Vs. JCIT 109 TTJ 631 (Bang.). Assessee contended that the said expenses has been incurred in the normal course of business and the dematerialization helped the assessee significantly in reducing the admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee went in appeal before the CIT(A). The CIT(A) noted that similar issue for assessment years 2004-05 to 2006-07 was adjudicated by the Tribunal in the assessee's own case in favour of the assessee and against the Revenue vide order dated 31st May, 2011 (supra). However, the CIT(A) noticed that subsequently Mumbai Bench of the Tribunal in the case of one Shri Homi K. Bhabha vs. ITO in ITA No. 3287/Mum/2009 decided a similar issue against the assessee and therefore he held the issue against the assessee. In view of the aforesaid, assessee is in further appeal before us. 11. At the time of hearing, the learned counsel for the assessee submitted that similar stand of the CIT(A) in the assessee's own case for assessment year 2007-08 came up before the Tribunal in ITA No. 356 & 240/PN/2011 dated 25.07.2012 and after considering the divergent view of the Mumbai Bench of the Tribunal in the case of Shri Homi K. Bhabha (supra) which has been relied upon by the CIT(A), the issue has been decided in favour of the assessee. It was, therefore, contended that the issue is accordingly liable to be decided in favour of the assessee. 12. The learned CIT(DR) appearing for the Revenue h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee and since the order of CIT(A) for earlier year has been reversed by the Tribunal, therefore, unless and until the decision of the Tribunal is reversed by a higher court, the same in our opinion should be followed. In this view of the matter, we respectfully following the order of the Tribunal in assessee's own case for A.Y. 2004-05 allow the claim of the Portfolio Management fees as an allowable expenditure. The ground raised by the assessee is accordingly allowed." 14. Following the aforesaid precedent, which has considered the similar objections of the CIT(A), in our considered opinion, the order of the CIT(A) in the present case is untenable and we accordingly set-aside the same and direct the Assessing Officer to delete the impugned addition." Respectfully following the above decision of the Tribunal, we reverse the order of CIT(A). The Demat expenditure of ₹ 1,10,605/- is allowable u/s.48 of the Act. The ground No.6 raised by the assessee. Accordingly, Ground No.6 raised by the assessee is allowed. 48. Seventh issue : Ground No.7 raised by the assessee relates to addition of ₹ 65,04,144/- made by the AO on account of expenditure incurred on la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reservoir, without going into using the other sources of water 1. Vaccine manufacturing and water: Control of the quality of water throughout the production, storage and distribution processes, including microbiological and chemical quality, is a major concern for Pharmaceutical company. Unlike other product and process ingredients, water is usually drawn from a system on demand, and is not subject to testing and batch or lot release before use. Assurance of quality to meet the on-demand expectation is, therefore, essential for Vaccines. Pharmacopoeias requirements or guidance for WPU are described in national, regional and international pharmacopoeias and limits for various impurities or classes of impurities are either specified or recommended. Companies wishing to supply multiple markets should set specifications that meet the strictest requirements from each of the relevant pharmacopoeias. Similarly, requirements or guidance are given in pharmacopoeias on the microbiological quality of water. 2. Volume of Water Requirement: Serum Institute is one of the biggest manufacturer of vaccines in world. For any vaccine, water is the most widely used substance, raw material or sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce the water level by taking out the huge water daily either through bore well or approvals from municipality. b. Availability of water: As the canal is passing near by factory location for irrigation of farming land, the continuous supply of water is ensured. c. Expenditure required for purification: Even if the water is made available, the company cannot ensure the quality of water from bore well. It would have incurred heavy expenditure on erection of purification plants and due to this company cannot make available vaccines on affordable prices." 50. Ld. DR for the Revenue relied heavily on the orders of the AO/CIT(A). 51. We heard both the sides and perused the orders of the Revenue as well as the cited binding judgment in the case of CIT Vs. Chowgule Chemicals Pvt. Ltd. 216 ITR 234. There is no dispute on the facts that the assessee spent ₹ 72.96 lakhs (rounded off) on the project of laying water pipeline to carry the water from the source-Pond/Reservoir to the factory premises for continuous supply of water to the company for its business purposes. The whole of the project involves a number of obligations or undertakings given to the Irrigation Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be the aim and object of the expenditure. The question, however, will have to be decided by looking at the overall facts and circumstances of the case from the point of view of a practical and prudent businessman rather than from the angle of a tax gatherer upon strict juristic classification of the legal rights, if any, secured in the process. In other words, in order to arrive at a just and proper conclusion, one must look at the type, nature and character of the advantage in a commercial sense (without giving undue emphasis to the form thereof or the terminology used) in the light of the surrounding circumstances and in the larger context of necessity and expediency. If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit making process and not for acquisition of an asset or a right of permanent character, the expenditure may be regarded as revenue expenditure even though the advantage may endure for some indefinite future. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way, having regard to the business realities. In a given case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cility provided to its own Director, Serum Institute paid rent of ₹ 24 lakhs per annum over the years including the year under consideration. Allowability of the said expenditure incurred the rent and the repairs/renovation was the bone of contention between the assessee and the Revenue over the years. Eventually, the Tribunal decided the issue in favour of the assessee and held that the said expenditure incurred on repairs and renovation constitutes revenue expenditure and allowable u/s.37(1) of the Act in the case of Serum Institute of India Ltd, The decision of the Tribunal in this regard are already cited by the assessee's counsel before us. Additionally, the rent of ₹ 24 lakhs paid by Serum Institute of India Ltd. to Poonawalla Finvest and Agro Pvt. Ltd. is also held as an allowable deduction in the case of Serum Institute of India Ltd. over the years including A.Y. 2006-07. Contents of Para Nos. 24 to 27 of the order of Tribunal in ITA Nos. 985 and 986/PN/2015 and ITA Nos.1535 & 1536/PUN/2015, dated 28-11-2007 for the A.Yrs. 2006-07 and 2007-08 are relevant. 54. We heard both the sides and perused the orders of the Revenue and the order of the Tribunal in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with the said house property at 70, Koregaon Park, it is now settled legal issue that the expenditure by Serum Institute of India Ltd. constitutes an allowable expenditure so long as there are revenue in nature. Regarding the expenditure of capital nature of same analogy, assessee only wanted allowability of depreciation on the said capitalised expenditure considered for business purposes. 56. On hearing both the parties on this issue, we find there is no clarity with reference to the capitalised items of assets credited to the Serum Institute of India Ltd. in the said house premises occupied by Mr. Z.S. Poonawalla, applicable rate of depreciation and the use of the asset etc. As discussed in the open court, we are of the opinion that this limb of the ground should be remanded to the file of AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee in accordance with the set principles of natural justice. Accordingly, this part of the issue is allowed for statistical purposes. Thus, Ground No.8 is partly allowed for statistical purposes. 57. Ninth issue : Ground No.9 raised by the assessee relates to allowability of deduction to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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