ACIT, CHENNAI v. M/s. Universal Pharmaceuticals Ltd., CHENNAI

ITA 1520/CHNY/2011 | 2004-2005
Pronouncement Date: 30-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 152021714 RSA 2011
Assessee PAN AAACU3759R
Bench Chennai
Appeal Number ITA 1520/CHNY/2011
Duration Of Justice 2 month(s) 22 day(s)
Appellant ACIT, CHENNAI
Respondent M/s. Universal Pharmaceuticals Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-11-2011
Assessment Year 2004-2005
Appeal Filed On 08-09-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH CHENNAI BEFORE SHRI N.S. SAINI ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN JUDICIAL MEMBER I.T.A. NO. 1520/MDS/2011 (ASSESSMENT YEAR : 2004-05) THE A.C.I.T CIRCLE III(3) CHENNAI (APPELLANT) VS. M/S UNIVERSAL PHARMACEUTICALS LTD NO. 72 RUKMANI LAKSHMIPATHI SALAI EGMORE CHENNAI 600 008. PAN NO. AAACU 3759 R (RESPONDENT) ASSESSEE BY : SHRI G. BASKAR ADVO CATE DEPARTMENT BY : SHRI SHA JI P. JACOB SR. DR. DATE OF HEARING : 30.11.2011 DATE OF PRONOUNCEMENT : 30.11.2011 O R D E R PER N.S. SAINI ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY DEPARTMENT FOR THE ASSE SSMENT YEAR 2004-05 AGAINST THE ORDER DATED 15.12.2010 OF COMMI SSIONER OF INCOME TAX [A]-III CHENNAI. I.T.A. NO. 1520/MDS/2011 2 2. GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS GEN ERAL IN NATURE AND HENCE REQUIRES NO ADJUDICATION BY US. 3. GROUND NO. 2 READS AS UNDER: 2.1 IT IS SUBMITTED THAT DEDUCTION U/S.80IB IS ELI GIBLE ONLY TO THOSE PROFITS AND GAINS WHICH IS 'DERIVED F ROM' SUCH INDUSTRIAL UNDERTAKING. NOW THE RELIANCE IS PLACED IN THE CASE OF CIT VS. STERLING FOODS (1999) 104 TAXMAN 20 4 (SC) WHEREIN IT WAS HELD THAT THE EXPRESSION 'DERIVED FR OM' AS JUDICIALLY INTERPRETED HAS A DEFINITE BUT NARROW M EANING AND IT CANNOT RECEIVE A FLEXIBLE OR WIDER CONCEPT. THEREFORE THE ASSESSEE MUST ESTABLISH THAT HIS PRO FITS AND GAINS WERE L' DERIVED FROM THIS INDUSTRIAL UNDERTAKING. IT IS NOT JUST SUFFICIENT IF A COMMERCIAL CONNECTION IS ESTABLISHED BETWEEN THE PROFITS EARNED AND THE INDU STRIAL UNDERTAKING. 2.2 IT IS FURTHER SUBMITTED THAT IN THE INSTANT CAS E THE INCOME RECEIVED AS CONVERSION CHARGES ARE ARISING O UT OF LOAN LICENCE AGREEMENT ENTERED WITH CLIENTS AND AS SUCH THE SAME COULD NOT BE INCLUDED IN INCOME OF T HE ASSESSEE FOR COMPUTING DEDUCTION U/S.80IB OF THE ACT . I.T.A. NO. 1520/MDS/2011 3 4. AT THE TIME HEARING OF THE APPEAL THE LD. D.R. FAIRLY CONCEDED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSE E BY THE DECISION OF THE HON'BLE MADRAS JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TAJ FIREWORKS REPORTED IN 288 ITR 192 [MDS]. 5. WE FIND THAT THE LD. CIT(A) HAS DECIDED THIS ISS UE BY OBSERVING AS UNDER: THE FIRST ISSUE PERTAINS TO DISALLOWANCE OF DEDUCTI ON U/S 80IB. FOR THE YEAR UNDER APPEAL THE APPELLANT FILE D A RETURN ADMITTING A LOSS OF RS. 46 20 418/-. THE APPELLAN T HAS TWO UNITS AT PONDICHERRY AND CHENNAI. IN RESPECT OF THE PROFITS DERIVED FROM THE INDUSTRIAL UNDERTAKING AT PUDUCHERRY THE APPELLANT CLAIMED DEDUCTION U/S 80IB OF RS. 1 16 68 013/-. WHILE DOING SO IT HAS IGNORED THE LOSS OF CHENNAI UNIT OF RS. 45 87 204/-. IN THE COURSE OF THE ASSESSMENT PROCEE DINGS THE ASSESSING OFFICER FOUND THAT THE INCOME FROM OPERATI ONS INCLUDES CONVERSION CHARGES OF RS. 1 51 48 577/. TH E AO TREATED THE 'CONVERSION CHARGES' AS NOT DERIVED FRO M THE MANUFACTURING AND DENIED THE CLAIM FOR DEDUCTION U/S. 801B OF THE ACT. I.T.A. NO. 1520/MDS/2011 4 4.1. THE LD. A.R. HAS SUBMITTED AS UNDER: THE ASSESSEE IS A COMPANY AND HAS AN INDUSTRIAL UNIT AT PUDICHERRY. IT IS A REGISTERED AS A SMALL-SCALE INDUSTRIAL UNDERTAKING FROM 1999. IT IS ENGAGED IN THE MANUFACTURE OF VARIOUS PHARMACEUTICAL FORMULATIONS. FOR MANUFACTUR E OF PHARMACEUTICAL PRODUCTS THE ASSESSEE HAS OBTAINED THE NECESSARY LICENSES FROM THE DRUG CONTROLLER. THE PR ODUCTS MANUFACTURED BY THE ASSESSEE ARE NOT ONLY SOLD IN INDIA BUT ALSO EXPORTED. THE TOTAL TURNOVER OF THE ASSESSEE FOR THE EARLIER AND LATER YEARS IS AS UNDER ..... APART FROM THIS THE ASSESSEE CARRIES ON MANUFACTURE FOR OTHER COMPANIES ALSO ON LOAN LICENSE BASIS. EVEN FOR MANUFACTURING ON LOAN LICENSE BASIS THE ASSESSEE HAS TO OBTAIN LICENCES FROM THE CENTRAL EXCISE AUTHORITIES. THE ASSESSEE ENTERED INTO AN UNDERSTANDING WITH M/S TABLETS (INDIA) LTD. FOR MA NUFACTURE OF CERTAIN FORMULATIONS MENTIONED THEREIN. ONLY TO DISTINGUISH BETWEEN THE MANUFACTURE UNDERTAKEN FOR ITSELF AND THE ONE UNDERTAKEN ON LOA N LICENCE BASIS A DIFFERENT NOMENCLATURE HAD BEEN GIVEN. AS COULD BE SEEN FROM THE LOAN LICENCE AGREEMENT T HE LICENCEE SUPPLIES THE RAW MATERIALS AND OTHER INGREDIENTS REQUIRED FOR THE MANUFACTURE AND THE SA ME ARE PROCESSED ON PROCESSING VESSELS AND AFTER I.T.A. NO. 1520/MDS/2011 5 APPROPRIATE COOLING THE SAME IS PASSED THROUGH AUTOMATIC LIQUID FILLING MACHINE AND THE FINAL PRO DUCTS (FINISHED PRODUCTS) ARE DISPATCHED TO THE LICENSEE. THE END PRODUCT SUFFERS EXCISE DUTY REMITTED BY THE APPELLANT. THE MANUFACTURING CHARGE RECEIVED BY THE APPELLANT IS SHOWN UNDER OTHER INCOME. IT IS SUBMIT TED THAT EVEN THE 'CONVERSION CHARGES' HAD BEEN EARNED FROM THE MANUFACTURING OPERATIONS. THEREFORE EVEN T HE CONVERSION CHARGES ARE ELIGIBLE FOR DEDUCTION U/S.8 0IB.' 4.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE IN THE LIGHT OF THE FACTS OBTAINING IN THIS CASE. THERE IS NO DOUBT THAT THE CONVERSION CHARGES IS ALSO PART OF THE 'PROFITS OF THE UNDERTAKING. IT IS PROFITS ARISING OUT OF THE MANUFAC TURING ACTIVITY ALTHOUGH ON A LOAN LICENSE BASIS FOR OTHER S. AS HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. T AJ FIRE WORKS 288 ITR 92 EVEN AN INDUSTRIAL UNDERTAKING CARRY ING ON MANUFACTURING ACTIVITY ON JOB-WORK BASIS IS ELIGIBLE FOR DEDUCTION U/S.80IA/801 B OF THE ACT. RESPECTFULLY FOLL OWING THE SAID DECISION I DIRECT THE AO TO TREAT THE CON VERSION CHARGES OF RS. 1 57 48 577/- AS PART OF THE PROFITS OF THE UNDERTAKING. THIS GROUND IS ACCORDINGLY ALLOWED. I.T.A. NO. 1520/MDS/2011 6 6. IN VIEW OF THE ABOVE SUBMISSION OF THE LD. D.R. WE CONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 7. GROUND NO. 3 READS AS UNDER: 3. THE LEARNED CIT(A) HAS ERRED IN ALLOWING THE CONVERSION CHARGES RECEIVED AS PART OF THE UNDERTAKI NG FOR THE PURPOSE OF 80HHC CALCULATION. 3.1 IT IS SUBMITTED THAT SINCE THE INCOME UNDER DIS PUTE WAS NOT DERIVED FROM THE ASSESSEE'S INDUSTRIAL UNDERTAKING THE CALCULATION OF PROFIT OF BUSINESS FOR THE PURPOSE OF DEDUCTION U/S.80HHC AFTER REDUCING 90% CONVERSION CHARGES WORKED OUT IN THE ASSESSMEN T ORDER IS IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT. 8. WE FIND THAT THE LD. CIT(A) HAS DECIDED THIS ISS UE BY OBSERVING AS UNDER: I.T.A. NO. 1520/MDS/2011 7 6.1 ON A CAREFUL CONSIDERATION OF THE FACTS OF THE CASE IN THE LIGHT OF THE DECISION CITED BY THE ASSESSEE'S A R I AGREE THAT CONVERSION CHANGES IS ALSO PART OF THE PROFITS OF THE REGULAR BUSINESS ACTIVITY OF THE ASSESSEE. I HAVE ALR EADY DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT AT PARA 4.2 ABOVE. HENCE THE ACTION OF THE AO IN EXCLUDING 90% OF THIS FROM THE BUSINESS PROFITS IS INCORRECT. THE AO IS AC CORDINGLY DIRECTED TO RECOMPUTE THE DEDUCTION U/S 80HHC. THIS GR OUND IS ALLOWED. 6.2 IT IS FURTHER SUBMITTED BY THE APPELLANT THAT THE APPELLANT HAS ONLY INCORRECT A LOSS UNDER THE NORMAL COMPUTATION BUT HAS PAID TAX ONLY U/S.115JB. SINCE TH E AO HAS DETERMINED THE TAX UNDER THE NORMAL COMPUTATION A T A HIGHER FIGURE HE DID NOT LOOK INTO THE COMPUTATION OF DEDUCTION U/S.80HHC AT RS.8 23 478 FOR THE PURPOSES OF SEC.115JB. IT CONTENDED THAT DEDUCTION U/S 80HHC SHOUL D HAVE BEEN ALLOWED FROM BOOK PROFIT FOR PURPOSE OF COMPUTATION OF TAXU/S 115JB. FOR THIS THE ID.AR HAS RELIED ON THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. K.G. DENIM -LTD 180 TAXMAN 590(MAD). 6.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CAS E AND THE SUBMISSION OF THE ID. AR INCLUDING THE DECISION RELIE D ON. RESPECTFULLY FOLLOWING THE ABOVE DECISION IN K.G. I.T.A. NO. 1520/MDS/2011 8 DENIM(SUPRA) IT IS HELD THAT DEDUCTION U/S 80HHC IN A CASE OF MAT ASSESSMENT IS TO BE WORKED OUT ON THE BASIS OF A DJUSTED BOOK PROFIT U/S 115JB. HOWEVER IF DEDUCTION IS TO BE ALLOWED UNDER NORMAL COMPUTATION IT SHOULD BE ALLOWED ONLY ON NET INCOME AFTER SETTING OFF LOSSES CARRIED FORWARD. RELIANCE FOR THIS PURPOSE IS PLACED ON DECISION OF H ON'BLE SUPREME COURT IN THE CASES OF IPCA LABORATORIES V. CIT (266 ITR 521) AND CIT V. SHIRKE CONSTRUCTIONS (291 ITR 3 80). THE AO IS DIRECTED TO ALLOW DEDUCTION ACCORDINGLY. 9. THE LD. D.R. VEHEMENTLY ARGUED IN SUPPORT OF THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE HON'BLE SU PREME COURT IN THE CASE OF CIT VS. K. RAVINDRANATHAN NAIR [2007] 2 95 ITR 228 [SC] HAS HELD THAT A BARE READING OF CLAUSE (BAA)(1) OF SECTION 80HHC OF THE INCOME-TAX ACT 1961 INDICATES THAT RECEIPTS B Y WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES ETC F ORM PART OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTO RTION IN ARRIVING AT EXPORT PROFITS CLAUSE (BAA) OF SECTION 80HHC OF THE ACT STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFITS AND INDEPENDENT INCOMES CONSTITUTE PART OF THE GROSS TOTAL INCOME THEY HAD TO BE I.T.A. NO. 1520/MDS/2011 9 EXCLUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEI PTS HAD NOT NEXUS WITH EXPORT TURNOVER. PROCESSING CHARGES WHI CH ARE PART OF GROSS TOTAL INCOME FORM AN ITEM OF INDEPENDENT INCO ME LIKE RENT COMMISSION BROKERAGE ETC. AND THEREFORE 90% OF THE PROCESSING CHARGES HAVE TO BE REDUCED FROM THE GROSS TOTAL INC OME TO ARRIVE AT BUSINESS PROFITS. HE THEREFORE SUBMITTED THAT IN VIEW OF THE ABOVE DECISION OF THE HON'BLE SUPREME COURT THE ORDER OF THE LD. CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICE R SHOULD BE RESTORED. 10. ON THE OTHER HAND THE LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT THE LD. CIT(A) HAS DIRECTED TO ALLOW DEDUCTION U/S 80HHC OF THE ACT IN COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT WITHOUT REDUCING P ROCESSING CHARGES AND THAT DECISION OF THE LD. CIT(A) HAS BEE N ACCEPTED BY THE REVENUE AND THE REVENUE HAS NOT CHALLENGED THE SAME AND THEREFORE THE ISSUE SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE. I.T.A. NO. 1520/MDS/2011 10 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE THE ISSUE BEFORE US RELATES TO COMPUT ATION OF DEDUCTION ALLOWABLE U/S 80HHC OF THE ACT. ACCORDIN G TO THE ASSESSING OFFICER 90% OF THE PROCESSING CHARGES OF RS. 1 51 48 577/- IS TO BE REDUCED FROM THE PROFITS AND GAINS OF BUSINESS TO ARRIVE AT THE PROFIT FOR BUSINESS IN VI EW OF EXPLANATION (BAA) TO SECTION U/S 80HHC OF THE ACT. ON THE OTHER HAND THE LD. CIT(A) RELYING UPON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF K.G. DENIM LTD REPORTED IN 180 TAXMANN 590 [MDS] HELD THAT PROCESSING CHARGES IS NOT REQUIRED TO BE SO REDUCED FOR CALCULATING DEDUCTION ALLOWABLE U/S 80HHC OF THE AC T. WE FIND THAT THE HON'BLE SUPREME COURT IN THE CASE OF K. RAVINDR ANATHAN NAIR [SUPRA] HAS HELD THAT A BARE READING OF CLAUSE (BA A)(1) OF SECTION 80HHC OF THE INCOME-TAX ACT 1961 INDICATES THAT R ECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES ET C FORM PART OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DI STORTION IN ARRIVING AT EXPORT PROFITS CLAUSE (BAA) OF SECTION 80HHC OF THE ACT I.T.A. NO. 1520/MDS/2011 11 STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFI TS AND INDEPENDENT INCOMES CONSTITUTE PART OF THE GROSS TO TAL INCOME THEY HAD TO BE EXCLUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NOT NEXUS WITH EXPORT TURNOVER. PROCESSING CHA RGES WHICH ARE PART OF GROSS TOTAL INCOME FORM AN ITEM OF INDEPEND ENT INCOME LIKE RENT COMMISSION BROKERAGE ETC. AND THEREFORE 9 0% OF THE PROCESSING CHARGES HAVE TO BE REDUCED FROM THE GROS S TOTAL INCOME TO ARRIVE AT BUSINESS PROFITS. 12. THE LD. A.R. COULD NOT POINT OUT ANY GOOD REASO N AS TO WHY THE ABOVE DECISION OF THE HON'BLE SUPREME COURT SHOULD NOT BE FOLLOWED IN THE INSTANT CASE FOR DECIDING THE ISSUE UNDER CO NSIDERATION. THE LD. A.R. SUBMITTED THAT THE LD. CIT(A) HAS DIRECTED TO ALLOW DEDUCTION U/S 80HHC OF THE ACT IN COMPUTATION OF BO OK PROFIT U/S 115JB OF THE ACT WITHOUT REDUCING PROCESSING CHARGE S AND THAT DECISION OF THE LD. CIT(A) HAS BEEN ACCEPTED BY THE REVENUE AND THE REVENUE HAS NOT CHALLENGED THE SAME AND THEREFO RE THE ISSUE SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE. I.T.A. NO. 1520/MDS/2011 12 13. SINCE THE ISSUE OF COMPUTATION OF DEDUCTION ALL OWABLE U/S 80HHC HAS BEEN AGITATED BEFORE US BY THE DEPARTMENT AND SINCE THE ASSESSEE COULD NOT POINT OUT ANY GOOD REASON FOR WH ICH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF K. RAVI NDRANATHAN NAIR [SUPRA] IS NOT APPLICABLE IN THE INSTANT CASE WE THEREFORE RESPECTFULLY FOLLOWING THE SAME DECIDE THE ISSUE I N FAVOUR OF THE REVENUE. THUS THIS GROUND OF APPEAL TAKEN BY THE REVENUE IS ALLOWED. 14. IN THE RESULT THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE COURT AT THE CLOSE OF HEAR ING IN THE PRESENCE OF THE PARTIES ON 30 TH NOVEMBER 2011. SD/- SD/- (GEORGE MATHAN) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 30 TH NOVEMBER 2011. VL COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A) CHENNAI (4) CIT CHENNAI (5) D.R. (6) GUARD FILE