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TMI Blog2021 (9) TMI 1384X X X X Extracts X X X X X X X X Extracts X X X X ..... et on cash cannot be ruled out - we direct the Assessing Officer to restrict the disallowance/addition to 12.5% of the non-genuine purchases Allocate the R D expenditure among 80IB and 80IC units and non 80IB and 80IC units - Allocating/sustaining allocation of Research Development Expenses incurred by the appellant amongst the different manufacturing unit of the appellant - HELD THAT:- We observe that when the details of products manufactured by the units and products on which R D is undertaking by the assessee were placed on record before the Assessing Officer to show that they are completely independent from each other, the Assessing Officer completely failed to bring on record that R D expenditure in fact benefited the existing units and thereby it is necessary to allocate the R D expenditure among 80IB and 80IC units and non 80IB and 80IC units on the basis of percentage of sales on respective units to the total sales. We further observe that even after allocation of expenses among 80IB eligible and non-eligible units the taxable income from the assessment under consideration remained the same as the tax was assessed under book profits u/s. 115JB of the Act and not under norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assessing Officer in allocating Research and Development (hereinafter for short "R & D") expenditure incurred by the assessee amongst different manufacturing units, by the Ld.CIT(A) was challenged. 4. Briefly stated the facts are that, assessee which is in the business of manufacturing of pharma products e-filed its return of income on 30.09.2009 declaring NIL income under normal provisions of the Act and book profits at ₹.94,54,57,100/- u/s.115JB of the Act. The assessment was completed u/s.143(3) of the Act on 25.08.2011 computing the income at NIL under normal provisions of the Act after allowing the deductions u/s.80IB, 80IC and 80G of the Act and book profits at ₹.94,62,35,833/- u/s. 115JB of the Act. 5. Subsequently, the Assessing Officer issued notice dated 22.03.2014 u/s.148 of the Act and reopened the assessment for the reason that the assessee company has entered into non-genuine purchase transactions with M/s. Shah Trading Company & Dhulee Enterprise to the tune of ₹.47,49,464/-, thereby income chargeable to tax has escaped assessment. Assessee objected for reopening of assessment stating that there is no tangible material available for reo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no logical reason for the assessee to indulge in a non-genuine purchases. The Ld. Counsel for the assessee placing reliance on the following judgements submits that where assessee had submitted purchase bills, transportation bills, confirmed copy of accounts and VAT Registration of sellers as also their Income-tax Return and payment was made through cheques, impugned purchases could not be disallowed. a) PCIT v. M/s Mohammad haji Adam & Co. ITA no. 1004 of 2016 (Bombay HC). b) CIT v. Odeon Builders (P.) Ltd [2019] 110 taxmann.com 64 (SC) 10. Coming to allocation of R & D expenses among various manufacturing units of the assessee the Ld. Counsel for the assessee submits that the assessee during the year incurred ₹.38.35 Crore expenditure on Research and development. As provided deduction @150% was claimed u/s. 35 of the Act by the assessee amounting to ₹.57.53 Crores. The assessee is duly registered with the Department of Science & Technology, Government of India and that department regularly and thoroughly audits the expenditure each year. Learned Counsel for the assessee submits that the assessee has been availing of the deduction since A.Y 2003-04 conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/- as per availability of total income 3,35,25,000/- The combined disallowance u/s section 80IB/80IC including is Rs. 11,46,21,342/ 80IC unit Baddi (claim 100% deduction) 47,44,09,000/- Total 62,25,55,342/- 50,79,34,000/- 11,46,21,342/- 11.1 Learned Counsel for the assessee submitted that the Assessing Officer 's action is wrong on the following counts: 11.2 The assessee has been availing of the deduction since A.Y.2003-04 continuously and even in year under consideration in the original assessment order passed on 25.08.2011 the Assessing Officer had accepted the assessee claiming the deduction of R & D expenses. The Assessing Officer in her reassessment order at para 5.6 herself had accepted that the issue was discussed in the original assessment, thereafter without any cogent material, the Assessing Officer had changed her mind. While computing the profits and gains of the concerned undertaking, only expenses relating thereto can be deducted. In other words, the expenses must be incurred, for and on behalf of the concerned undertaking. The expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n records and which are completely independent from each other. It is submitted that the ratio of judgement of Hon'ble Bombay High Court in the case of Zandu Pharmaceutical Works Limited [350 ITR 366] applies squarely to the assessee's case. 14. Ld. Counsel for the assessee also placed reliance on the following decisions in support of his submissions: - (i). Bush Baoke Allen India Limited v. ACIT [2005] 273 ITR 152 (Mad.) (ii). International Flavors & Fragrances India Ltd v. DCIT [142 of 2005] Madras HC. (iii). Bush Baoke Allen India Limited v. ACIT [TA 548 of 2004] (Mad.) (iv). Vanaz Engineers Limited [ITA No. 34 &35/PN/1989] (v). Ponds India Limited [ITA No. 2047/Mad/88] (vi). Wockardt India Limited [3991/Mum/2005] (vii). Wockardt India Limited [71/Mum/2007] (viii). FDC Limited v. ACIT 8(1) [6569/Mum/2009] 15. Learned Counsel for the assessee further submitted that the Ld.CIT(A) has dismissed the assessee's appeal by holding that the Zandu Pharmaceutical Works Limited (supra) is distinguishable and by saying that the Research is general in nature and the benefit of the same is derived by all the qualifying units also. It is submitted that the facts of ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealers, specifically, was subjected to search or survey or not. iii) The selling dealer has not given any general statement, leave apart a statement naming the assessee. iv) The amount of alleged bogus purchases has been added to assessee's income on the basis of notice u/s 133(6) having returned by the postal authorities with a remark 'left', (para 4.4 of the assessment order). The copy of bills and challans of the selling dealer were supplied to the assessing officer and the same clearly mention the selling dealer's mobile number and mail ID. However, no efforts were made by the assessing officer to contact him. Further, the assessing officer did not even went through the income tax return of the selling dealer and is also silent about the fate of TDS deducted from the payments made to the selling dealer by his customers (including TDS amounting to Rs. 98,456 deducted by the assessee). C. Reopening on the basis of Audit observation: A conjoint reading of A and B above brings us to the real reason behind the reopening. The assessing officer is under receipt of audit objection vide No. 1TRA/LAP IX/Pharma review 2014-15/DCIT 8(2)/AQ No 35 Dated 04/08/2014 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Company and Dhulee Enterprise, delivery challans showing receipt of material by assessee in its locations, copies of purchase orders issued by the assessee in the name of M/s. Shah Trading Company and Dhulee Enterprise, Transport receipt with packing list showing dispatch of items to various locations of the assessee. Assessee also submitted that it had made genuine purchases from M/s. Shah Trading Company and Dhulee Enterprise and all these purchases were promotional items with assessee's brand names printed on the items for distributing to various sales representative for onward delivery to clinics, Doctors and retailers. The items purchased were portable weighing scales which are typically used in clinics and hospitals. We observe from the Assessment Order that the notices issued u/s.133(6) of the Act were returned unserved and the Assessing Officer treated these purchases as non-genuine as the assessee could not produce the party. It is the contention of the assessee that due to lapse of time as the transaction has happened six years back the assessee was unable to produce the party for verification. It is not in dispute that sales have been accepted as genuine from out of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts on which R & D is undertaken were on records which shows that they are completely independent from each other. Assessee placed reliance on the Zandu Pharmaceuticals Works Ltd., v. CIT [350 ITR 366] and various other decisions in support of his contention that R & D expenditure incurred in head office cannot be allocated to the units. We observe from the Assessment Order that the Assessing Officer predominantly stating that R & D expenditure incurred by the assessee is inextricably linked with the business of the assessee including the business relating to products which are manufactured in the units for which deduction u/s. 80IB and 80IC were claimed. However, nothing has been brought on record to suggest that the R & D expenditure incurred by the assessee benefitted the existing units where claims u/s. 80IB and 80IC were made. We observe that when the details of products manufactured by the units and products on which R & D is undertaking by the assessee were placed on record before the Assessing Officer to show that they are completely independent from each other, the Assessing Officer completely failed to bring on record that R & D expenditure in fact benefited the existing u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid undertaking while computing the profits and gains of the undertaking. 11. In CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC); following question was considered by the Supreme Court (Page 581): "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipt from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961?" 12. The question, therefore, was converse to the one before us. The Supreme Court held as under (page 584): "Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined, or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not 'derived from refining crude petroleum'. The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the products manufactured in the Chittoor unit. The Chennai High Court held that the question had not been dealt with by the authorities. It was held that the apportionment of the expenses on the activities of the research and development to the Chittoor unit merely on the presumption that the products manufactured at the Chittoor unit also had the benefit of the research made at the Chennai R & D department, was not proper. It was further held that the authorities had proceeded on the presumption that any technology about new flavours and essences would automatically be utilized in the Chittoor unit without examining whether the R & D carried out in Chennai s of use to the unit at Chittoor. The matter was, therefore, remanded to ascertain whether the R & D undertaken related to the products manufactured in the Chittoor unit. 15. We are in respectful agreement with the judgment, the basis of which is that unless the expenditure incurred on the R & D work relates to the undertaking/unit in question, the same cannot be apportioned to it. 16. Mr. Suresh Kumar submitted that any research and development activity carried out by the head office would automatically ensure to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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