9911796707
TMI Blog2024 (11) TMI 859X X X X Extracts X X X X X X X X Extracts X X X X ..... or all the subsequent years and it goes without saying that the assessee company has the right to bring out relevant facts so as to allow claim of expenditure u/s. 37(1) of the Act. So far as alternate claim of the assessee that it is entitled for higher deduction u/s. 80- IB/80-IE on the above disallowance is concerned, claim of assessee is allowable as per CBDT Circular No. 37 of 2016, dated 2nd November, 2016. Thus the Ld. AO is directed to verify that if above referred expenditure is part of profit loss account for Unit eligible for deduction under Section 80-IB/80-IE, the assessee would be entitled for higher deduction and re-compute the same accordingly. Thus, Ground of Appeal no.2 raised by assessee is dismissed and relevant ground no.4 in Revenue s appeal is allowed. Disallowance u/s 14A r.w. Rule 8D - HELD THAT:- So far as proportionate interest disallowance is concerned, the Ld Senior Counsel contended that it is evident from audited financial statements that the assessee has sufficient interest-free funds, whereas the CIT(A) has given adverse findings in this regard. Considering these facts, we set aside this issue to the file of AO and direct him to verify whether the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the LTCL is neither claimed by the assessee in the original return nor in the revised return, but claimed during the course of assessment proceedings. The judgements referred above deals with fresh claim namely 80IA, depreciation made for the first time during the appellate proceedings and not on a LTCL/loss. Section 139[3] makes it mandatory to claim business loss or capital loss in the return filed u/s. 139[1] and as per Rule 12 of Income Rules. Thus we do not find any infirmity in the order passed by Ld CIT[A] and the Ground raised by the assessee is devoid of merits and the same is liable to be dismissed. Disallowance of deduction u/s 80IE in respect to Sikkim Unit - HELD THAT:- . Since the eligibility of deduction was upheld in the first year of claim being AY 2010-11, the same cannot be disputed in the subsequent year of claim on the same ground of ineligibility. More particularly when the AO himself has observed that there is no change in facts and circumstances of the case during the year under consideration. Before us, no material has been brought on record by the Revenue to demonstrate the above decision of the Co-ordinate bench in earlier year has been reversed or se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deleted by the Ld CIT[A] which does not require and interference. MAT - addition of Wealth Tax to book profit for computation u/s. 115JB - CIT(A) following his predecessor s order held that Wealth-tax paid cannot be treated on par with Income-tax and accordingly the payment of Wealth-tax was not required to be added to the book profit u/s. 115JB - HELD THAT:- Clause (a) of Section 115JB of the Act clearly talks on the Income Tax paid or payable only liable to be included for the purpose of book profit u/s. 115JB of the Act. Thus the addition made by the AO to Wealth Tax paid is liable to be deleted. Ground raised by the Revenue is devoid of merits and is hereby dismissed. Disallowance of management consultancy charges paid to Mckinsey Company - Addition made as payment was incurred for the benefit of the parent company namely, SPIL and not that of the assessee and the consultancy fees will benefit the assessee for indefinite period being capital in nature, therefore not allowable u/s 37(1) - HELD THAT:- No hesitation in upholding the order passed by Ld. CIT(A) deleting the addition made on account of consultancy service charges paid to Mckinsey Company. Consultancy charges paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / 80-IE in respect of interest on staff advances and statutory/ bank deposits. Brief facts is the Ld AO observed that the Assessee is not entitled for deduction under Section 80-IB/80-IE on loan to employees and bank deposits as such interest income is not income derived from industrial undertaking as held by Hon ble Supreme Court in the case of CIT -Vs- Sterling Foods reported in 237 ITR 579 and Liberty India -Vs- CIT reported in 317 ITR 218. The above disallowance of deduction was upheld by CIT (Appeal) in his order, wherein he has observed that identical issue has been decided against the erstwhile Sun Pharma, Sikkim [SPS] by CIT(Appeals)-37, Mumbai, for A.Y. 2010-11 following the order of Hon ble ITAT in the case of Sun Pharmaceutical Industries which was also merged with assessee in ITA No.184/ASR/2009, dated 11th June, 2010. 3.1. Aggrieved by the appellate order, the assessee is in appeal before us. Ld. Senior Counsel Sri S.N. Soparkar appearing for the assessee fairly conceded that similar issue was decided against the assessee by Co-ordinate Bench of the Tribunal in ITA No. 3507/ Mum/2016 in A.Y. 2011-12 in the case of erstwhile SPI which was later on merged with Assessee C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the decisions of the Amritsar Tribunal in the identical issues, we allow the assessee's claim of deduction under section 80-IB of the Act in respect of interest on delayed payments in question and direct the AO to delete the additions. However, we disallow the assessee's claim of deductions in respect of interest on staff advances statutory/bank deposits. 34.1 Thus, respectfully following the consistent view of Amritsar tribunal in the own case of the assessee, we do not find infirmity in the finding of the learned CIT(A). Hence the ground of appeal of the assessee is hereby dismissed. 4.1. Thus, respectfully following the above orders of the Coordinate Benches of the Tribunal in assessee s own case, we uphold the finding of the learned CIT(A). Thus, the Ground no.1 raised by the assessee is hereby dismissed. 5. The Ground No.2 relates to disallowance of expenditure incurred for doctors towards business promotion and accommodation of Rs. 9,81,46,332. The Ground No. 4 in Departmental Appeal also relates to disallowance of business/ conference fee and sponsorship expenses under the gift and freebies to doctors of Rs. 2,26,07,758/-. As both the grounds of appeal are inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spitality to be distributed to such medical practitioners, which is prohibited by Medical Council of India [MCI]. It is found that Ld. CIT(A) has confirmed the expenditure in nature of accommodation and business promotion but deleted Conference and Sponsorship expenses incurred for Doctors on the ground that same are incurred for sharing the knowledge in the medical field, which is not hit by Circular No.5/2012 and amended MCI guidelines. The Ld. CIT DR on the other hand placed reliance on the decision of the Supreme Court in the case of Apex Laboratories cited supra. 6.1. Ld. Sr. Counsel on the other hand pointed out that the facts in the case before the Apex court were completely different. He also pointed out that in the case of Apex Laboratories, it had given costly personal gifts/benefits like Gold coins, LCD TV, Laptops, etc. to medical practitioners and thereby it had solicited favourable prescriptions at the cost of patients. The Hon ble Supreme Court also observed that there was an quid pro quo arrangement between the parties requiring the medical practitioners to prescribe the products of the company in lieu of receiving the freebies. Accordingly, the ratio of the said de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been made from the interest bearing funds also. In addition the assessee must have incurred administrative expenditure and part of such expenditure is attributable to earning of exempt income. The Ld. AO has referred to the decision of Hon ble Supreme Court in the case of Wallfort Shares Brokers Ltd 310 ITR 421 and Godrej Boyce Manufacturing Co. Ltd and observed that Rule 8D is applicable and he computed such disallowance at Rs. 69,89,859/-. The above disallowance was confirmed by CIT(A) in para 13.2 of his order observing as follows: 13.2. I have carefully considered the facts on records and submission of the Ld. Authorized Representative. Undisputedly, average value of investment resulting into exempt income is Rs. 121.02 Crores against which share capital share application money etc. amounted to Rs. 90 Crores only (excluding revaluation capital reserve). Since investment was more than the own interest free funds available, it is clear that borrowed funds have been used for earning exempt income and hence decisions relied upon by the appellant are distinguishable on facts. Thus I am of the considered view that the interest expenditure incurred by the appellant at Rs. 22,55,11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient interest-free funds or not and workout the disallowance in accordance with law. 8.1. So far as the disallowance under Rule 8D(2)(iii) is concerned, considering the principle of natural justice, we direct the AO to verify the disallowance on the basis of facts of the case and provisions of the law. Thus, the ground no.3 raised by the assessee is hereby allowed for statistical purpose. 9. The Ground No. 4 of the Appeal relates to addition of the amortization of Intangibles of Rs. 1523,97,50,000/- while computing book profits under section 115JB. The brief facts of the case are that Domestic Formulation Unit (DFU) of Sun Pharmaceutical Industries Ltd. (SPIL) has been Spun off/ transferred to the assessee company in term of Scheme of Arrangement approved by the Hon'ble High Court of Gujarat vide judgement dated 03.05.2013 under sections 391 to 394 of the Companies Act, 1956. As a result of this arrangement, certain tangible and intangible assets have been transferred from SPIL to the assessee company. On perusal of the Schedule-11 (Fixed Assets) of the Audited Account, the Ld AO noticed that Rs. 15,23,97,000/= were debited by the assessee company under the head (depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement ('Scheme') approved by Hon'ble Bombay High Court [pages 648 to 678 of the Paper Book] under sections 391 to 394 of Companies Act, 1956 vide order dated 03.05.2013 in Company claim Petition No. 283 of 2013 and also by the Hon'ble Gujrat High Court vide order dated 03.05.2013 [pages 679 to 682 of the Paper Book] in Company Petition No. 31 of 2013 connected with the Company Application No. 373 of 2012. The assets received by the assessee company have been recorded at fair value pursuant to said Scheme. The entire objective of the above action was to enable the assessee company to focus on the domestic formulation business which significantly differed from the rest of the parent company in terms of the customer base, regulatory environment, supply chain, risks and rewards, etc. thereby resulting into significant value addition in the hands of the stakeholders. 15.1. Pursuant to the above arrangement, the intangibles have been recorded by the assessee company for the first time at their value as on 31-03-2012 based on the valuation report obtained from two independent Valuers like Earnest Young and KPMG. The Ld AO has held that the assessee company revalued intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred decision, Co-ordinate Bench of Delhi Tribunal had concluded the issue based on the reading of clause (j) of Explanation to section 115JB for calculation of book profit u/s. 115JB, provisions of Section 129 of the Companies Act, AS14 of the recognized accounting standard, keeping in view the fact that the revenue has not brought any tangible material to prove that the scheme is a colourable device to avoid taxes, keeping in view of the amalgamation of the companies and keeping in view of the accounting resorted by the group companies regarding the book value of investments in shares pre and post amalgamation, we hereby hold that, the appeal of the assessee on this ground is allowed. We are in conformity with the above view taken by the Co-ordinate Bench of Delhi Tribunal and in view of above discussion we are of the view that recording of the assets at fair value pursuant to scheme of arrangement and at time of initial recognition cannot be regarded as revaluation and consequently no adjustment is required to be made to book profit. 15.7. Further, section 115JB is a deeming provision and the same is required to be interpreted strictly and that no further adjustment is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standard namely AS-14 and AS-10 and it is a fundamental requirement that the accounts must present true and fair view. To re-iterate Paragraph 12 of AS-14, which is to be mandatorily followed by the assessee company, which permits the Transferee Company to record the assets and liabilities of the amalgamating companies, acquired under the scheme of amalgamation, at Fair Values as on the date of amalgamation. Therefore, recording of the assets received on spinoff date at fair value is also in line with the accounting framework. Furthermore, the difference was the difference between the fair market value of assets and liabilities taken over as per the book values, which has resulted in 'capital reserve' and been recorded in the books of the Assessee. 16.1. Further, as we examine the issue it is also imperative to consider the relevant provisions of section 115JB pursuant to which the Ld. Assessing Officer has made an adjustment: Explanation 1. For the purposes of this section, book profit means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by (g) the amount of depreciation, if any amount ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangible assets with the assessee company, instead these assets were transferred to and acquired by the assessee company as a consequence to the Scheme of Arrangement approved by the Hon'ble High Court of Gujarat. The recording of these assets in the books of the assessee company at Fair Value is in accordance with the generally accepted accounting principles and cannot be treated as revaluation of assets. In absence of any revaluation of assets carried out by the assessee company, there should not be any adjustment to the computation of the book profit u/s. 115JB as erroneously considered by the Assessing Officer and confirmed by the Ld CIT[A]. 16.4. Further, the issue under consideration is also covered by the order of the ITAT, Delhi in case of Hespera Realty (P.) Ltd v. DCIT reported in [2020] 121 taxmann.com 80 (Delhi-Trib.). In the case before the Tribunal the assessee company had recorded assets and investments received on amalgamation at fair value, however the AO treated it to be in the nature of the revaluation and adjustment was made to book profit under clause (j) of Explanation 1 to section 115JB of the Act on sale thereof. The co-ordinate bench quashed the adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2014-15, the Co-ordinate Bench considered various judgements, Accounting Standard AS- 14, AS-10 and also provision of section 115JB of the Act and held that adjustment made by the Ld AO in the Book profit is liable to be deleted. Thus respectfully following the above decision of the Coordinate Bench dated 06-10-2023 in ITA Nos.1464 1465/Ahd/ 2018 and various other judicial precedents, we hereby set-aside the findings of the lower authorities and direct the AO to delete the adjustment made in the book profit under section 115JB of the Act. Hence, the ground no.4 of the assessee company is hereby allowed. 12. Ground No. 5 of the Appeal relates to disallowance of Stamp Duty charges of Rs. 28,00,000/- being capital in nature on the share expenses pursuant to the terms of Court sanctioned Scheme of Arrangement. The Ld AO at para 19 of the assessment order has observed that RoC filing fees paid for increase in share capital is capital expenditure in view of decisions of Brooke Bond India Ltd Vs CIT [225 ITR 798] and Punjab State Industrial Development Corporation Ltd Vs CIT [225 ITR 792]. The above addition was upheld by Ld. CIT(A) mainly relying on the findings of the Ld. AO in his or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, with indexation appellant claimed LTCL of Rs. 49,80,848/- during assessment proceedings. The appellant has failed to record LTCL in ITR under normal provisions of the Act. The appellant has filed ITR on 28.11.2015 and revised its ITR u/s 139(5) on 30.03.2016. In both the ITRs filed, the appellant has not claimed Long Term Capital Loss of Rs. 49,80,848/-, hence, such loss cannot be carried forward to future years. Another grievance of the appellant is that the AO has added this loss of Rs 49,80,848/- in total income. I agree with the Ld. AR's that the loss cannot be added to the income rather it should have been restricted from setting off from business loss during current year. Such long-term capital loss on sale of land amounting to Rs. 49,80,848/- should not be allowed for set off and carry forward to future years accordingly. Thus, addition on this count is directed to be deleted. Ground No.18 is partly allowed. 15.1. Ld Senior Counsel made reliance on the judgements of jurisdictional High Court in the case of CIT -Vs- Mitesh Impex reported in 270 CTR 66 [Guj] and Bombay High Court judgement in the case of Pruthvi Brokers reported in 349 ITR 336 [Bmy] and the LTCL is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma Sikkim was formed by the splitting up and reconstruction of the existing business of Sun Pharmaceutical Industries (SPI), and the condition that used machinery is less than 20% of the stipulated limit, has not been fulfilled by the assessee. 2.4 On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in holding that the claim of the appellant in respect of deduction u/s. 80IE is allowable without appreciating that in the absence of proper details and bills, it could not be ascertained as to whether plant and machinery were new and not used earlier, and without appreciating that plant and machinery transferred by Sun Pharmaceutical Industries to Sun Pharma Sikkim was used by Sun Pharmaceutical Industries prior to put to use by Sun Pharma Sikkim, and hence such plant and machinery could not be regarded as new plant and machinery. 2.5 On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in holding that the claim of deduction u/s. 80IE in respect of Sikkim Unit, is allowable without appreciating that mere submission of journal entries generated in computer cannot be treated as an authentic document for having purchased plant and machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce u/s 14A, without appreciating the facts and reasons mentioned by the AO in the assessment order. 5.2 On the facts and circumstances of the case and in law, CIT(A) erred in deleting the addition of Rs. 69.82,659/- to Book Profit u/s. 115JB without appreciating the fact that the said amount was disallowed u/s. 14A and hence was required to be added to the book profit as per clause (f) to Explanation 1 of section 115/8(2). On the facts and circumstances of the case and in law, CIT(A) erred in deleting the addition of Rs. 89,39,883/- on account of disallowance of expenditure made towards care protection plan for Apple i-Pads being part of subsequent years without appreciating the fact that the assessee has taken care protection plan for various I-Pad purchased for its field staff and the said plans were valid for the period ranging from 12 month to 24 months we / February 2015 and therefore, although the whole expenditure was made in the year under consideration, the benefit of the same would be availed for 02 months for the year under consideration and the remaining benefit would be availed in subsequent years. 7.1 On the facts and circumstances of the case and in law, CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in law, CIT(A) erred in deleting the disallowance of expenses incurred towards consultancy charges to Makov Associates Ltd. amounting to Rs. 67,64,69,735/-, without appreciating the findings of the AO in assessment order and also the fact that the assessee company itself declared that the benefits of the services provided by the M/s. Makov Associates Limited would provide enduring benefits to the company in domestic as well as global level market. 11.2 On the facts and circumstances of the case and in law, CIT(A) failed to appreciate that the disallowance in the assessee's case was made by the AO on the basis of agreement between the assessee company and Makov Associates Limited. 12. The appellant craves leave to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. 20. The Ground No.1 is General in nature, which does not require any adjudication and hence dismissed. 21. Ground No. 2 of the Revenue appeal relates to disallowance of deduction u/s 80IE in respect to Sikkim Unit. The AO at page 27 of his order has followed the earlier assessment order relating to the A.Y. 2010-11 in the case of erstwhile firm M/s Sun Pharma, Sikk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 held as under: ... 26. We have duly considered rival contentions and gone through the details. According to the AO, bills having value of Rs. 6.88 crores with regard to certain additions to plant machinery were not furnished. Therefore, he presumed such machinery as second-hand machinery. Against his presumption, the assessee has filed an application for permission to adduce additional evidence. It was contended therein that questionnaire issued on 12.11.2012; bills were lying at factory premises in Sikkim; staff was not well conversant with income tax proceedings; they were lying in boxes; hence in a short span of time, complete details could not be submitted. Thereafter, the assessee produced complete details. The remand report was called for by the ld.CIT(A) on those details. In the remand proceedings, each bill was analysed and objection of the AO were noted. The bills have been discussed by the CIT(A) and the details are available in tabular form extracted (supra). We also have perused such details and are of the view that the defects are not substantive. They have only shown that some of the bills are photo- copies, LRs are not available etc. The ld.CIT(A) while considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,959/-. The AO at para 5.5.5 of the assessment order has observed that interest income cannot be said to have been 'derived from' the Industrial undertaking as held by the Hon'ble Supreme Court. Aggrieved by the Assessment Order, the assessee filed an appeal before Ld. CIT(A), whereby the Ld. CIT((A) has allowed such deduction u/s 80IB/80IE in respect of interest on delayed payments by following the decision of Hon'ble Jurisdictional High Court as well as the decision of ITAT Amritsar in the case of erstwhile firm M/s. Sun Pharma Industries (which is also merged with the assessee company). Aggrieved by the order of CIT(A), the revenue is in appeal before us. 23.1. We have heard the rival contentions and carefully perused the materials available on record. The Ld. CIT DR Dr. Darsi Suman Ratnam mainly relied upon the findings of the AO in the Assessment Order, whereas the Ld. Senior Counsel Sri S.N. Soparkar appearing on behalf of the assessee vehemently relied upon the order of CIT(A) as well as ITAT in the case of M/s Sun Pharma Industries, wherein the decision of Hon'ble Jurisdictional High Court is followed. It is undisputed fact that during the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Rs. 48,20,32,772/-, the facts are identical to the facts in assessee's own case for the assessment year 2004-05 decided by us hereinabove. Following the same, this ground of the Revenue is dismissed. 54. As regards ground No 5 6 of the assessee with respect to the interest on FDR amounting to Rs. 3,27,599/- (correct figure Rs. 2,27,599/-) and loan to employees with regard to disallowance of deduction u/s 80-IB, the facts of the issues In hand are identical to the facts decided by the tribunal in assessee's own case dated 11.06.210 in ITA No 184(Asr)/2009 for the assessment year 2005-06. Following the same, the ground No 5 6 of the assessee are dismissed. 24. Following the orders of the decisions of the Amritsar Tribunal in the identical issues, we allow the assessee's claim of deduction under section 80-IB of the Act in respect of interest on delayed payments in question and direct the AO to delete the additions. However, we disallow the assessee's claim of deductions in respect of interest on staff advances statutory/bank deposits. 45.1 Thus respectfully following the consistent view of Tribunal in the own case of the assessee, we do not find any infirmity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in its entirety as soon as the agreement to purchase the protection plan had been entered into. The expenditure at-most ought to be regarded as 'deferred revenue expenditure' akin to advertisement, staff-training expenses, etc., where the expenditure is incurred in year one and the benefit of which will be availed and enjoyed for longer period. An expenditure on revenue field cannot be disallowed simply because the assessee is going to enjoy the benefits of it for longer period. Therefore, the contention of Assessing Officer that the expenditure should be only partly allowed is untenable. Therefore, the expenditure not being capital in nature and for the purposes of the business of the Appellant, the same shall be allowed under section 37(1) in its entirety. The Assessing Officer is directed to allow the aforementioned relief. Addition of Rs. 89,39,883/- is cancelled. Accordingly, Ground No. 12 is allowed. 26.1. Ld. D.R. appearing for the Revenue could not point out any error in the findings arrived by Ld. CIT(A). 26.2. Per contra Ld. Senior Counsel appearing for the assessee supported the order passed by the Ld. CIT(A) and also relied upon Jurisdictional High Court Judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount despite being cash rich. Further, the Assessing Officer has disallowed the interest expenditure on the ground that the entire arrangement is between group concerns. 17.2.2. From the above agreement it is evidently clear that not only the said expenditure incurred for the purpose of the Appellant's business but also was it pursuant to a legal obligation imposed on the Appellant due to an agreement entered between the Appellant with Neetnav. The agreement categorically stated that in case the security deposit is not paid within the stipulated time period of 30 days, then the Appellant was liable to pay interest @ 9% p.a. It is obvious that the interest rate on delayed payment of 9% p.a. was quite lower than the general interest rate prevailing in the market. There is no denial of the fact by the Assessing Officer that the Appellant has made late payment of the security deposits. There is also no denial of the fact that the Appellant has utilized the funds lying with it for the business purposes. It is also undisputed that the Appellant has made payment of Rs. 50,16,000/- to Neetnav, after deducting tax at source. All the above factors collectively corroborate the genuinenes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket. It is undisputed fact that based on contractual obligation the late payment of 232 days has attracted the penal interest of Rs. 50,16,000/- which is to be allowed u/s. 37(1) of the Act. Thus the addition made by the Ld AO on this account is against the provisions of law and was rightly deleted by Ld. CIT(A). Thus Ground No. 7 raised by the Revenue is hereby dismissed. 28. Ground No.8 of Department s appeal relates to CIT(A) erred in deleting disallowance of Rs. 1,49,62,413/= on account of software upgradation and support expenses. The assessee claimed that these expenditures were mainly on account of data migration charges, online support services, improve its accounting software so as to effectively manage its day-to-day operation and also includes expenditure for regular maintenance of the software. The AO held that the said software expenses gives benefit which would be available for more than one year i.e. enduring in nature and held as capital expenditure. The Ld CIT[A] held that software upgradation expenses are revenue in nature and allowable u/s. 37[1] of the Act by observing as follows: 18.2. I have carefully considered the facts on records and submission of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in the nature of technical support and maintenance of the existing software and hardware. For example service provider had to provide technical support to the employees of the company and to maintain the computers and the laptop, had to supply security service for controlling the data theft and providing checks on access by unauthorized persons to the data etc. 7. In essence, these services, therefore, were in the nature of maintenance, back up and support service to the existing hardware and software already installed by the company for the purpose of its business. The Tribunal, in our opinion, therefore, rightly held that the expenditure is type: revenue in nature. The Tribunal observed that even the test of enduring benefit, may, in given of the set of circumstances, break down as held by Delhi High Court in the case of CIT v. Asahi India The Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 in which it was observed, inter alia, on of that the expenditure which is incurred enables the profit-making structure to work more efficiently leaving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 1 contains list of amounts to be added while computing assessee's book profit under Section 115JB of the Act. Clause (a) thereof reads as under- (a) To the amount of income-tax paid or payable, and the provision therefor, Likewise, clause (c) reads as under- (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, In plain terms, clause (a) as noted above refers to amount of income tax paid or payable or the provision made therefor. The legislature has advisedly not included wealth tax in this clause. By no interpretative process, the wealth tax can be included in clause (a). The Revenue, further made a vague attempt to bring this item in clause (c) noted above. Clause (c) would include the amount set aside for provisions made for meeting liabilities other than ascertained liabilities. For applicability of this clause, therefore, fundamental facts would have to be brought on record which in the present case, the Revenue has not done. In fact, the entire thrust of the Revenue's argument at the outset appears to be on clause (a) which refers to the income tax which according to the Revenue would also inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. Further, it is not even the case of the AO that entire consultancy expenditure for the Ranbaxy merger integration was borne by the Assessee. As per the communication issued by Mckinsey Co., the cost for the project was recommended to be allocated in the ratio of 65 : 35 between SPIL and the Assessee. Thus it makes abundantly clear that the services provided by Mckinsey Co. were not just for SPIL as alleged by the AO, but for both the entities. Thus, the expenditure of Rs. 16,55,52,260/- has been wholly and exclusively incurred by the Assessee for the purposes of its business. 30.2. The Ld AO has disallowed the consultancy fees secondly on the basis that incurrence of the same will benefit the Assessee for an indefinite period without providing any evidence in support thereof. Aggrieved against the addition assessee filed appeal before the Ld CIT[A] who deleted the addition by observing as follows: 23.4.2. . The assessee claimed that mere incurrence of an expenditure does not guarantee or entitle the payer to any benefits. It is fact on record that the consultancy services rendered by Mckinsey were concerned with devising probable ways in which the post-merger business could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the business itself to the extent required. The fact that it sought such advice did not imply that it would accept all the advice that was tendered and would implement it in the manner recommended. Merely obtaining a report from a management consultant and paying fees therefore, could not be regarded as capital expenditure, as such report was not obtained as part of documentation packages, but in a contract covering comprehensive restructuring of the business involved. No new line of business was started on the strength of the report of the consultants. That report was not regarded as essential part for any new business that the assessee commenced thereafter. In the circumstances of the case, the expenditure incurred by the assessee in obtaining that report was clearly an expenditure of revenue character. It is not only permissible but is abo necessary for any business to update its own knowledge and adopt better ways of organizing its business if it is to survive in the market The expenditure incurred for such purpose could not be regarded as capital expenditure and was only a revenue expenditure 23.4.4. The decision rendered in the case of CIT v. Carborandum Universal Ltd. [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely (i) CIT-Vs-Gujarat State Fertilizers Chemicals Ltd. 358 ITR 323 (Guj.), (ii) CIT-Vs-Gujarat Urja Vikas Ltd. 51 taxmann.com 517 and (iii) CIT-Vs-Telco Construction Equipment Co. Ltd. 127 taxmann.com 488 (Karnataka). Thus claimed that the consultancy services rendered by Mckinsey Company is allowable as a deduction u/s 37(1) of the Act and the Ld. CIT(A) correctly deleted the addition made by the Assessing Officer. Thus the Revenue appeal on this count is liable to be dismissed. 31. We have given our thoughtful consideration and perused the materials available on record. The Ld. AOs disallowed the consultancy fees firstly, on the ground that payment was incurred for the benefit of the parent company namely, SPIL and not that of the assessee. Secondly, the consultancy fees will benefit the assessee for indefinite period being capital in nature, therefore not allowable u/s 37(1) of the Act. It is not in dispute that consultancy services were rendered by Mckinsey Co to the assessee. As per communication from Mckinsey Co the cost for the project was recommended to be allocated in the ratio of 65:35 between SPIL and the assessee company. So both the companies enjoying the benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch question needs to be determined on a consideration of all the facts and circumstances of the case and by application of principle of commercial trading. While holding the expenditure as revenue in nature, it spread the same over a period. The Tribunal further held that : 34. We have considered the rival submissions, perused the materials on record and gone through the orders of authorities below and various judgments cited by ld.AR of the assessee. We find that Ld.CIT(A) has decided this issue in favour of assessee by following these very judgments of Hon'ble Apex Court which are cited by the Ld.AR of the assessee before us and considering the facts of the present case, we do not find any good reason to interfere in the order of Ld.CIT(A) on this issue. We therefore decline to interfere in the order of Ld.CIT(A) on this issue. This ground of Revenue is also rejected. 4.3 In the present case also, the CDR expenses to the tune of Rs. 2.57 crore have been rightly held by both the CIT (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan, the payment has been made to the financial consultants. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature. Such question needs to be determined on a consideration of all the facts and circumstances of the case and by application of the principle of commercial expediency. This Court answered the question as follow : 4.3 In the present case also, the CDR expenses to the tune of Rs. 2.57 crores have been rightly held by both the Commissioner of Income-tax (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan, the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable under section 37 (1) of the Act. Having held the said amount to be revenue in nature applying the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Limited (Supra), when the amount has been spread over a period of six years, no error is committed by both the authorities. Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred. However, considering the decision in the case of Madras Industrial Investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid by the assessee is for the purposes of studying and preparing a strategy to reduce the cost of production by the assessee. It has further been held that no new asset has come into existence and the study conducted was only for improving the sales and profitability of the assessee and has upheld the order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has placed reliance on the decision of the Supreme Court on Empire Jute Co. supra. The aforesaid concurrent findings of fact have not been challenged on the ground of perversity. Thus, concurrent findings of fact which have been recorded on the aforesaid issue, could not be demonstrated to be perverse. Therefore, no interference is called with the aforesaid concurrent findings of fact in this appeal under section 260A of the Act. [SEE: Syeda Rahimunnisa v. Malan Bi [2016] 10 SCC 315 and Principal Commissioner Of Income Tax, v. Softbrands India (P.) Ltd. [2018] 94 taxmann.com 426/406 ITR 513 (Kar.) In view of aforementioned well settled legal principles, the second substantial question of law is also answered against the revenue and in favour of the assessee. 31.4. Respectfully following the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Makov Associates included the following: Keeping a macro view of general operations of the domestic formulation undertaking Improving its capability for future growth Involved in strategic planning including preparation of short, medium and long-term business plans Identifying profitable business opportunities Geographic expansion and diversification of business Competitive intelligence and feasibility analysis Striking strategic alliances with business partners involving mergers and acquisitions Negotiating and closing strategic and commercial deals Focusing on market enlargement, product differentiation Building/enhancing the brand of the company Designing marketing and market promotion strategies Building the right human resources pool for the Company Holding periodic meetings/discussions with senior management 32.2. Thus the assessee pleaded the payment made to Makov Associates is wholly and exclusively for the purpose of its business, to enable the Assessee company to effectively undertake its operation and at the same time focus on growth prospects and the expenditure incurred during the course of running of the business. It is undisputable fact that the nexus of the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1993] 68 Taxman 302 (Calcutta) that has been vehemently relied upon by the AO for the impugned disallowance made by him. The Hon'ble High Court held that since the assessee came into existence only as a result of amalgamation, the expenditure was capital in nature so far as the assessee was concerned. The said decision was pronounced on the basis of a peculiar fact that is when the expenditure has been incurred prior to the existence of the assessee. However, the facts of the case of the Appellant are entirely on a different footing i.e. the appellant is ongoing concern and the expenses for consultancy fees have been incurred in the ordinary course of its business, the case law relied upon by the Assessing Officer is distinguishable and hence not applicable law. It is apparent that the expenditure incurred on consultancy services received from Makov Associates Ltd. was for the purposes of smoother and more efficient functioning of the business. In any case, the Consultant's report by the said expenditure has not brought into existence any new assest in the hands of the appellant so as to be regarded as capital expenditure. 24.2.6. It is well equally well settled position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quested to uphold the disallowance. 34. Per contra Ld. Senior Counsel appearing for the Revenue supported the order passed by the Ld. CIT(A) and also relied upon relied upon same set of judgments referred in [Paragraph 30.4. of this judgement] in the case of management consultancy charges paid to Mckinsey Company which is squarely applicable to the consultancy charges paid to Makov Associates. Therefore requested to uphold the order passed by Ld. CIT(A). 35. We have perused the materials available on record and consultancy charges paid to Makov Associates for availing strategic consulting services especially with respect to strategy building, business development, management of mergers and acquisitions etc. for an initial period of three years vide agreement dated 28-05- 2012. Even after the domestic formulation undertaking of SPIL was transferred to the assessee w.e.f. 31-03-2012. The consultancy services was continued further by way of Addendum in the original agreement. The Ld AO treated the above expenses will benefit the assessee for indefinite period and therefore treated as capital in nature. In our considered view following various judicial precedents, the Ld AO failed to c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
