MACLEODS PHARMACEUTICALS P.LTD., MUMBAI v. A.C.I.T. CIRCLE 8(2), MUMBAI

ITA 3069/MUM/2008 | 2004-2005
Pronouncement Date: 28-02-2011 | Result: Dismissed

Appeal Details

RSA Number 306919914 RSA 2008
Assessee PAN MARCH2008H
Bench Mumbai
Appeal Number ITA 3069/MUM/2008
Duration Of Justice 2 year(s) 9 month(s) 22 day(s)
Appellant MACLEODS PHARMACEUTICALS P.LTD., MUMBAI
Respondent A.C.I.T. CIRCLE 8(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-02-2011
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 28-02-2011
Date Of Final Hearing 24-02-2011
Next Hearing Date 24-02-2011
Assessment Year 2004-2005
Appeal Filed On 06-05-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.3069/MUM2008(A.Y. 2004-05) MACLEODS PHARMACEUTICALS PVT. LTD. ATLANTA ARCADE MAROL CHURCH ROAD ANDHERI (EAST) MUMBAI 59. PAN:AAACM 4100C (APPELLANT) VS. THE ACIT CIR. 8(2) MUMBAI. (RESPONDENT) APPELLANT BY : SHRI R.C.JAIN RESPONDENT BY : SHRI NARESH KUMAR BALODIA ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 7/1/2008 OF CIT(A)-VIII MUMBAI RELATING TO ASSESSMENT YEAR 200 4-05. 2. THERE IS A DELAY OF 31 DAYS IN FILING THE APPEA L BY THE ASSESSEE. THE REASONS FOR THE DELAY IN FILING THE APPEAL ARE STAT ED TO BE BECAUSE OF THE CHARTERED ACCOUNTANT OF THE ASSESSEE MR. SANJAY BAN SAL COULD NOT FILE THE APPEAL IN TIME BECAUSE IN THE MONTH OF MARCH 2008 H E WAS PRE-OCCUPIED WITH ATTENDING PENALTY PROCEEDINGS UNDER SECTION 27 1(1)(C) OF THE INCOME TAX ACT 1961 (THE ACT) AND IN THE MONTH OF APRIL HE HA D TO PROCEED TO HOME TOWN NOHAR IN RAJASTHAN TO ATTEND SOME IMPORTANT RE LIGIOUS CEREMONIES. THE CHARTERED ACCOUNTANT RETURNED TO MUMBAI ON 3/3/ 2008 AND FILED THE APPEAL ON 7/5/2008. THE CHARTERED ACCOUNTANT HAS A LSO FILED AN AFFIDAVIT AFFIRMING THE ABOVE FACTS. THE LD. D.R HOWEVER PO INTED OUT THAT NO PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT WERE PENDING IN THE MONTH OF MARCH IN THE CASE OF THE ASSESSEE AND THEREFORE T HE CONTENTION PUT FORTH BY ITA NO.3069/MUM2008(A.Y. 2004-05) 2 THE ASSESSEE WAS NOT TRUE. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PENALTY PROCEEDINGS REFERRED TO IN THE AFFIDAVI T DID NOT RELATE TO THE ASSESSEE AND THEREFORE THE CONTENTION OF THE LD. D.R IS WITHOUT ANY MERIT. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE REASONS GIVEN IN THE AFFIDAVIT ARE ACCEPTABLE. THE SE REASONS IN OUR VIEW WOULD BE REASONABLE CAUSE FOR THE DELAY IN FILING T HE APPEAL BY THE ASSESSEE. WE THEREFORE CONDONE THE DELAY IN FILING THE APPE AL BY THE ASSESSEE AS THE ASSESSEE CANNOT BE SAID TO BE GUILTY OF LATCHES OR HIS CONDUCT LACKING BONAFIDES. 4. GROUND NO.1 OF APPEAL RAISED BY THE ASSESSEE REA DS AS FOLLOWS: THE AUTHORITIES BELOW HAVE ERRED IN DISALLOWING MI SCELLANEOUS EXPENSES TO THE EXTENT OF PAYMENTS MADE TO ORGANIZA TION OF POLITICAL NATURE OF RS. 1 10 201/-. 5. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF DEALING IN PHARMACEUTICAL PRODUCTS NAMELY TABLETS CAPSULES AN D LIQUIDS. AS FAR AS GROUND NO. 1 IS CONCERNED THE AO NOTICED THAT IN NO TE 17 TO THE ACCOUNTS THAT IT HAD BEEN MENTIONED THAT THE ASSESSEE HAD PA ID CERTAIN CONTRIBUTION TO ORGANIZATIONS OF POLITICAL NATURE. THE AO FOUND THAT THERE WAS NO RECEIPT FOR CLAIMING DEDUCTION OF THE AFORESAID SUM UNDER SECTION 80 GGB OF THE ACT. THE DEDUCTION CLAIMED WAS ACCORDINGLY DISALLO WED BY THE AO. 6. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT T HE EXPENDITURE IN QUESTION CANNOT BE ALLOWED AS A DEDUCTION BEING OF THE NATURE OF EXPENSES NOT INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE. WE ARE OF THE VIEW THAT IT IS NOT THE CASE OF THE ASSESSEE THAT THE DE DUCTION IS BEING CLAIMED UNDER SECTION 80 GGB OF THE ACT. THE ASSESSEE CLAI MS THAT IT WAS FOR THE ITA NO.3069/MUM2008(A.Y. 2004-05) 3 PURPOSE OF BUSINESS BUT NO DETAILS WHATSOEVER HAVE BEEN FURNISHED. IN THE SAID CIRCUMSTANCES WE ARE OF THE VIEW THAT THE DIS ALLOWANCE MADE BY THE REVENUE AUTHORITIES WAS JUSTIFIED. WE THEREFORE DISMISS GROUND NO.1 RAISED BY THE ASSESSEE. 7. GROUND NO.2 RAISED BY THE ASSESSEE IS ALSO WITH OUT ANY MERIT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA LTD. THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY IN DIA LTD. VS. CIT 317 ITR 218 (SC) HELD THAT DUTY DRAWBACK RECEIPTS AND DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDE RTAKINGS FOR THE PURPOSE OF THE DEDUCTION UNDER SECTION 80-I / 80-IA / 80-IB OF THE INCOME-TAX ACT 1961. THE HONBLE COURT HELD THAT THE INCOME-TAX AC T 1961 BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES VIZ. INV ESTMENT-LINKED INCENTIVES AND PROFIT-LINKED INCENTIVES. CHAPTER VI-A OF THE A CT WHICH PROVIDES FOR INCENTIVES IN THE FORM OF DEDUCTIONS ESSENTIALLY BE LONGS TO THE CATEGORY OF 'PROFIT-LINKED INCENTIVES'. THEREFORE WHEN SECTION 80-IA / 80-IB REFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS IT IS NOT T HE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES : WHAT ATTRACTS THE I NCENTIVES UNDER SECTION 80- IA / 80-IB IS THE GENERATION OF PROFITS (OPERATIONA L PROFITS). IT IS FOR THIS REASON THAT PARLIAMENT HAS CONFINED DEDUCTION OF PR OFITS DERIVED FROM ELIGIBLE BUSINESSES MENTIONED IN SUB-SECTIONS (3) TO (11A). EACH OF THE BUSINESSES MENTIONED IN SUB-SECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. THE HONBLE COUR T FURTHER HELD THAT SECTIONS 80-IB AND 80-IA ARE A CODE BY THEMSELVES A S THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. SECTI ON 80-IB PROVIDES FOR THE ALLOWING OF DEDUCTION IN RESPECT OF PROFITS AND GAI NS DERIVED FROM THE ELIGIBLE BUSINESS. THE CONNOTATION OF THE WORDS 'DERIVED FRO M' IS NARROWER AS COMPARED TO THAT OF THE WORDS 'ATTRIBUTABLE TO'. BY USING THE EXPRESSION 'DERIVED FROM' PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. SECTIONS 80-I 80-IA AND 80-IB ARE TO BE RE AD AS HAVING A COMMON ITA NO.3069/MUM2008(A.Y. 2004-05) 4 SCHEME. SUB-SECTION (5) OF SECTION 80-IA (WHICH IS REQUIRED TO BE READ INTO SECTION 80-IB ) PROVIDES FOR THE MANNER OF COMPUTAT ION OF THE PROFITS OF AN ELIGIBLE BUSINESS. SUCH PROFITS ARE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFOR E DEVICES ADOPTED TO REDUCE OR INFLATE THE PROFITS OF THE ELIGIBLE BUSIN ESS HAVE TO BE REJECTED IN VIEW OF THE OVERRIDING PROVISIONS OF SECTION 80-IA( 5) . SECTIONS 80-I 80-IA AND 80-IB PROVIDE FOR INCENTIVES IN THE FORM OF DEDUCTI ONS WHICH ARE LINKED TO PROFITS AND NOT INVESTMENT. ON ANALYSIS OF SECTIONS 80-IA AND 80-IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING WHICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2) WOULD BE ENTITLED TO DED UCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER THE SPECIFIED DATE. APART FROM ELIGIBILITY S UB-SECTION (1) PURPORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PE RCENTAGE OF THE PROFITS. THIS IS THE IMPORTANCE OF THE WORDS 'DERIVED FROM A N INDUSTRIAL UNDERTAKING' AS AGAINST 'PROFITS ATTRIBUTABLE TO AN INDUSTRIAL U NDERTAKING'. 8. THE HONBLE COURT HELD THAT DEPB/DUTY DRAWBACK A RE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY THE CENTRAL G OVERNMENT OR FROM SECTION 75 OF THE CUSTOMS ACT 1962. INCENTIVE PROFI TS ARE NOT PROFITS DERIVED FROM ELIGIBLE BUSINESS UNDER SECTION 80-IB : THEY B ELONG TO THE CATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKING. PROFITS DERI VED BY WAY OF INCENTIVES SUCH AS DEPB/DUTY DRAWBACK CANNOT BE CREDITED AGAIN ST THE COST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT AND LOSS ACCOUNT AND THEY DO NOT FALL WITHIN THE EXPRESSION 'PROFITS DERIVED FROM IN DUSTRIAL UNDERTAKING' UNDER SECTION 80-IB . 9. THE DECISIONS OF THE PUNJAB AND HARYANA HIGH COU RT IN LIBERTY INDIA V. CIT [2007] 293 ITR 520 AND CIT V. LAKHWINDER SIN GH [2009] 317 ITR 209 OF THE DELHI HIGH COURT IN CIT V. RITESH INDUSTRIES LTD. [2005] 274 ITR 324 ITA NO.3069/MUM2008(A.Y. 2004-05) 5 AND OF THE MADRAS HIGH COURT IN SHAKTI FOOTWEAR V. CIT (NO. 2) [2009] 317 ITR 199 WERE AFFIRMED. 10. AS FAR AS GROUND NO. 3 IS CONCERNED THE PLEA OF NETTING OF INTEREST INCOME CANNOT BE ALLOWED IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASIAN STAR CO (BOMBAY HIGH COURT) WHEREIN IT WAS HELD THAT FOR EXPL (BAA) TO S. 80HHC NETTING O F INCOME FROM EXPENDITURE IS NOT ALLOWED. THE ASSESSEE IN THAT CASE CLAIMED DEDUCTION U/S 80H HC ON PROFITS WHICH INCLUDED INTEREST INCOME OF RS. 3.25 CRORES. UNDER EXPLANATION (BAA) TO S. 80HHC 90% OF THE SAID INTEREST INCOME HAS TO BE RE DUCED FROM THE PROFITS. THE ASSESSEE CLAIMED THAT THE INTEREST EXPENDITURE INCURRED BY IT HAVING A NEXUS WITH THE SAID INTEREST INCOME HAD TO BE NETTED OFF AND ONLY THE BALANCE IF ANY COULD BE SUBJECTED TO THE 90% REDU CTION. THE ASSESSEE PROVED THAT THERE WAS A NEXUS BETWEEN THE INCOME AN D THE EXPENDITURE. THE CLAIM WAS REJECTED BY THE AO THOUGH IT WAS ACCEPTED BY THE CIT (A) AND THE TRIBUNAL RELYING ON LALSONS ENTERPRISES 89 ITD 25 (DEL) (SB). ON APPEAL BY THE REVENUE THE HONBLE HIGH COURT HELD REVERSING THE TRIBUNAL: (I) EXPLANATION (BAA) TO S. 80HHC REQUIRES THAT NIN ETY PER CENT OF RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARG ES OR ANY OTHER RECEIPT OF A SIMILAR NATURE HAVE TO BE REDUCED FROM THE PROFIT S. THE REASON WHY ITEMS LIKE BROKERAGE ETC HAVE TO BE EXCLUDED IS BECAUSE T HEY DO NOT POSSESS ANY NEXUS WITH EXPORT TURNOVER AND THEIR INCLUSION IN P ROFITS WOULD RESULT IN A DISTORTION OF THE FIGURE OF EXPORT PROFITS. HOWEVER AS SOME EXPENDITURE MIGHT HAVE BEEN INCURRED IN EARNING THESE INCOMES AN ADH OC DEDUCTION OF TEN PER CENT FROM SUCH INCOME IS ALLOWED; (II) ONCE PARLIAMENT HAS LEGISLATED BOTH IN REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE EXCLUSION IT WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWRITING THE LEGISLATIVE PRO VISION. THE TASK OF ITA NO.3069/MUM2008(A.Y. 2004-05) 6 INTERPRETATION IS TO FIND OUT THE TRUE INTENT OF A LEGISLATIVE PROVISION AND IT IS CLEARLY NOT OPEN TO THE COURT TO LEGISLATE BY SUBST ITUTING A FORMULA OR PROVISION OTHER THAN WHAT HAS BEEN LEGISLATED BY PA RLIAMENT. IT IS NOT OPEN TO SAY THAT SOMETHING MORE THAN THE 10% STATUTORILY PR OVIDED SHOULD ALSO BE ALLOWED. THE HONBLE COURT FURTHER HELD THAT IN SHRI RAM HONDA POWER EQUIP 289 ITR 475 THE DELHI HIGH COURT HAS NOT ADEQUATEL Y EMPHASIZED THE ENTIRE RATIONALE FOR CONFINING THE DEDUCTION ONLY T O THE EXTENT OF NINETY PER CENT OF THE EXCLUDIBLE RECEIPTS AND IT CANNOT BE FOLLOWED ; IN THE VIEW OF THE ABOVE THE CLAIM OF THE ASSESSEE FOR NETTING OF INT EREST INCOME FOR EXCLUSION UNDER CLAUSE (BAA) OF EXPLANATION TO SEC.80-HHC OF THE ACT IS REJECTED. 11. SIMILARLY THE CLAIM FOR DEDUCTION UNDER SECTION 80 IA IN RESPECT OF DEPB/ADVANCE LICENCE AS RAISED IN GROUND NO.3 CANN OT ALSO BE ACCEPTED IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. KALPATARU COLOURS AND CHEMICALS (BOMBAY HIGH CO URT) IN INCOME TAX APPEAL (LODG.) NO.2887 OF 2009 BY JUDGMENT DATED 28 /29 JUNE 2010 THE HONBLE BOMBAY HIGH COURT HAS HELD : THAT DEPB SALE PROCEEDS CANNOT BE BIFURCATED INTO PROFITS AND FACE VALUE. THE ENTIRE AMOUNT IS PROFITS FOR S. 80HHC R.W.S. 28(IIID). IT WAS FURTHER HELD THAT S. 28 (IIID) PROVIDES THAT ANY PROFIT ON THE TRANSFER OF THE DEPB SHALL BE B USINESS PROFITS. UNDER EXPLANATION (BAA) TO S. 80HHC 90% OF THE SUM REFE RRED TO IN S. 28(IIID) HAS TO BE REDUCED FROM THE BUSINESS PROFITS. UNDER THE THIRD PROVISO TO S. 80HHC (3) IN THE CASE OF AN ASSESSEE HAVING AN EXPORT TU RNOVER EXCEEDING RS. 10 CRORES THE PROFITS REFERRED TO IN S. 80HHC (3) CAN BE INCREASED BY 90% OF THE SUM REFERRED TO IN S. 28 (IIID) ONLY IF TWO C ONDITIONS ARE SATISFIED. IF THE SAID CONDITIONS ARE NOT SATISFIED NO RELIEF ON ACC OUNT OF DEPB CAN BE GRANTED U/S 80HHC. IN TOPMAN EXPORTS VS. ITO 318 ITR 87 (MUM)(SB)(AT) THE SPECIAL BENCH OF THE TRIBUNAL HELD THAT THE SU M REFERRED TO IN S. 28(IIID) MEANT ONLY THE PROFITS ON TRANSFER OF THE DEPB AN D NOT THE ENTIRE SALE PROCEEDS. THE TRIBUNAL HELD THAT THE AMOUNT RECEIVE D ON ACCOUNT OF DEPB HAD TO BE BIFURCATED INTO THE FACE VALUE OF THE D EPB AND THE PROFIT AND THAT WHILE THE FACE VALUE WAS ASSESSABLE U/S 28(I IIB) THE PROFIT WAS ASSESSABLE U/S 28(IIID). THE CONSEQUENCE WAS THAT O NLY THE PROFIT SUFFERED ITA NO.3069/MUM2008(A.Y. 2004-05) 7 THE RIGORS OF THE THIRD PROVISO TO S. 80HHC (3) AND NOT THE FACE VALUE. ON APPEAL BY THE DEPARTMENT THE HONBLE HIGH COURT HE LD REVERSING THE SPECIAL BENCH: THE ARGUMENT THAT S. 28(IIID) COVERS ONLY THE PROF IT (DIFFERENCE BETWEEN SALE CONSIDERATION AND FACE VALUE OF THE DEPB CREDIT) AN D THAT THE FACE VALUE IS ASSESSABLE U/S 28(IIIB) IS NOT CORRECT. THE ENTIRE AMOUNT RECEIVED ON TRANSFER OF THE DEPB CREDIT IS PROFITS AND FALLS UNDER S. 28(IIID). THERE WAS NO BASIS OR JUSTIFICATION FOR THE TRIBUNAL TO HOLD THAT THE FACE VALUE OF THE DEPB CREDIT CAN BE REDUCED FROM THE SALE CONSIDERATION. IT IS N OT PERMISSIBLE TO BIFURCATE THE PROCEEDS OF THE DEPB INTO FACE VALUE AND EXC ESS OF FACE VALUE. THE APPROACH OF THE TRIBUNAL IS MISCONCEIVED AND UNSUST AINABLE. AS THE ASSESSEE HAD AN EXPORT TURNOVER EXCEEDING RS.10 CRO RES AND DID NOT FULFILL THE CONDITIONS SET OUT IN THE THIRD PROVISO TO S. 8 0HHC (3) IT WAS NOT ENTITLED TO A DEDUCTION U/S 80HHC ON THE AMOUNT RECEIVED ON TRANSFER OF DEPB. IN VIEW OF THE ABOVE THE CLAIM OF THE ASSESSEE IN THI S REGARD AS MADE IN GROUND NO.3 IS REJECTED. 12. THUS THE APPEAL OF THE ASSESSEE BEING WITHOUT A NY MERIT IS DISMISSED. 13. IN THE RESULT THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH DAY OF FEBRUARY 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 28 TH FEB.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.3069/MUM2008(A.Y. 2004-05) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 24/2/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 25/2/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER