The ACIT, Circle-8,, Ahmedabad v. Torrent Pharmaceuticals Ltd.,, Ahmedabad

ITA 333/AHD/2006 | 2002-2003
Pronouncement Date: 31-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 33320514 RSA 2006
Assessee PAN RULES2008A
Bench Ahmedabad
Appeal Number ITA 333/AHD/2006
Duration Of Justice 4 year(s) 11 month(s) 19 day(s)
Appellant The ACIT, Circle-8,, Ahmedabad
Respondent Torrent Pharmaceuticals Ltd.,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 31-01-2011
Date Of Final Hearing 21-10-2010
Next Hearing Date 21-10-2010
Assessment Year 2002-2003
Appeal Filed On 10-02-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI MAHAVIR SINGH JUDICIAL MEMBER AND SHRI D. C. AGRAWAL ACCOUNTANT MEMBER ITA NO.333 & 346/AHD/2006 ASSESSMENT YEAR:2002-03 DATE OF HEARING:4.1.11 DRAFTED:25.1.11 ACIT CIRCLE-8 AHMEDABAD 4 TH FLOOR AJANTA COMMISSION.CENTRES A WING ASHRAM ROAD AHMEDABAD TORRENT PHARMACEUTICALS LTD. NR. DINESH HALL ASHRAM ROAD AHMEDABAD PAN NO.AAACT5456A V/S . V/S . TORRENT PHARMACEUTICALS LTD. TORRENT HOUSE NR. DINESH HALL OFF ASHRAM ROAD AHMEDABAD ACIT CIRCLE-8 AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.4343 & 4356/AHD/2007 ASSESSMENT YEAR:2004-05 TORRENT PHARMACEUTICALS LTD. NR. DINESH HALL ASHRAM ROAD AHMEDABAD PAN NO.AAACT5456A ACIT CIRCLE-8 4 TH FLOOR AJANTA COMMISSION. CENTRES A WING ASHRAM ROAD AHMEDABAD V/S . V/S . DCIT CIRCLE-8 AHMEDABAD ASHRAM ROAD. TORRENT PHARMACEUTICALS LTD. TORRENT HOUSE NR. DINESH HALL OFF ASHRAM ROAD AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S.N.SOPARKAR SR-AR & SHRI P.M. MEHTA AR REVENUE BY:- SHRI ALOK JOHARI CIT-DR ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 2 O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE FOUR CROSS-APPEALS BY ASSESSEE AND REVENUE ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX IN APPEAL NOS CIT(A)-XIV/AC8 107 & 282/2005-06 & 2007-08 OF DIFFERENT DATES I.E. 30-11 -2005 & 24-09-2007. THE ASSESSMENTS WERE FRAMED BY ACIT RANGE-8/DCIT CIRC LE-8 AHMEDABAD U/S143(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER REFERRED T O AS THE ACT) VIDE THEIR ORDERS DATED30-03-2005 & 29-12-2006 FOR ASSESSMENT YEARS 2 002-03 & 2004-05 RESPECTIVELY. 2. THE FIRST COMMON ISSUE IN THESE APPEALS OF REVEN UE IN ITA NO.333/AHD/2006 AND ITA NO.4356/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING TH E DISALLOWANCE ON ACCOUNT OF SELLING PUBLICITY AND MEDICAL EXPENSES. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.1 :- ITA NO.333/AHD/2006 IN A.Y.2002-03. 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING SELLING PUBLICITY EXPENSES AND MEDICAL EXPENSES AMOUNTING TO RS.18 58 17 166/-. ITA NO.4356/AHD/2007 IN A.Y.2004-05. 1. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE OUT OF SELLING PUBLICITY AND MEDICAL LITERATURE EXPENSES AMOUNTING TO RS.23 76 7 5 964/- THE ISSUE BEING IDENTICAL ON FACTS IN BOTH THE YEAR S WE WILL DECIDE THE ISSUE AFTER TAKING THE FACTS FROM ASSESSMENT YEAR 2002-03. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSING OFFICER MADE DISALLOWANCE OF SELLING PUBLICITY AND MEDICAL LITER ATURE EXPENDITURE. THE ASSESSEE- COMPANY HAS INCURRED EXPENDITURE OF RS.33 05 49 237 /- ON SELLING & PUBLICITY EXPENSES ALONG WITH INCLUDES PRESENTATION ARTICLES OF RS.5 18 23 488/-. THE ASSESSEE-COMPANY HAS INCURRED EXPENSE ON PRINTING O N PACKING I.E. BRIEF LITERATURE OF MEDICINES MEDICAL REPRESENTATIVE TRAINING EXPEN SES SALES PROMOTION EXPENSES ETC. THE AO NOTED THAT SIMILAR ISSUE WAS INVOLVED I N ASSESSMENT YEAR 1998-99 AND CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. THE AO HAS STATED THAT IN ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 3 ASSESSMENT YEARS 1998-99 AND 1999-00 THE EXPENSES O N PRESENTATION ARTICLE WAS DISALLOWED AND OUT OF THE BALANCE AMOUNT 2/3 RD OF THE EXPENDITURE WAS DISALLOWED. THE DECISION OF CIT(A) FOR ASSESSMENT YEARS 1998-99 AND 1999-00 HAVE NOT BEEN ACCEPTED BY REVENUE. THE AO HAS STATED THAT THE FAC TS IN THE PRESENT YEAR BEING IDENTICAL AND EXPENDITURE OF RS.5 18 23 488/- INCLU DED IN THE ABOVE EXPENDITURE ON ACCOUNT OF PRESENTATION ARTICLES IS ALLOWED IN FUL L AND OUT OF THE BALANCE EXPENDITURE OF RS.27 87 25 749/- I.E. 1/3 RD RS.5 29 08 583/- IS CONSIDERED AS ADMISSIBLE AND REMAINING EXPENDITURE OF RS.18 58 17 166/- IS DISAL LOWED. IT IS ALSO STATED THAT NO DEDUCTION IS ALLOWED FOR SUCH EXPENSES OF EARLIER Y EARS IN VIEW OF THE FACT THAT REVENUE HAS NOT ACCEPTED THE ASSESSMENT ORDERS FOR EARLIER YEARS. THE CIT(A) NOTED THAT THE ISSUE IS COVERED BY THE ORDER OF THIS TRIB UNAL FOR ASSESSMENT YEARS 1998-99 & 2000-01 AND THE RELEVANT FINDING OF CIT(A) IN PARA-3.2 ARE AS UNDER:- 3.2 I HAVE CONSIDERED THE ABOVE SUBMISSION THE AS SESSMENT AND THE APPELLATE ORDERS FOR EARLIER YEARS. THE ISSUE IS SI MILAR TO THAT INVOLVED IN EARLIER YEARS. THE ASSESSING OFFICER HAS ALSO MAINLY RELIEF UPON THE ASSESSMENT ORDERS FOR EARLIER YEARS. THEREFORE FOR THE REASON DISCUSSED IN THE APPELLATE ORDERS FOR A.Y 1998-99 TO 2001-02 I DIRECT THE ASSE SSING OFFICER TO DELETE THIS ADDITION. THE APPELLATE GET RELIEF OF RS.18 58 17 1 66/-. 4. AT THE OUTSET LD. SR-COUNSEL FOR THE ASSESSEE S HRI S.N.SOPARKAR STATED THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE AND AGA INST THE REVENUE BY THE DECISION OF THIS TRIBUNAL IN ITA NO.3569/AHD/2004 FOR ASSESSMENT YEAR. 2001-02 VIDE PARA-4 AS UNDER:- 4. AFTER HEARING THE RIVAL CONTENTIONS AND GOING T HROUGH THE CASE RECORDS WE FIND THAT THE TRIBUNAL EXACTLY ON SIMILAR FACTS HAS DEALT WITH THIS ISSUE IN ITA NO.3146/AHD/2003 FOR THE ASSESSMENT YEAR 2000-01 ORDER DATED 21-08- 2000 VIDE PARA-7 TO 11 AS UNDER:- 7. GROUND NO.2 RELATES TO DISALLOWANCE OF RS.12 74 66 253/- ON ACCOUNT OF SELLING PUBLICITY AND MEDIAL LITERATURE EXPENSES. RELYING UPON HIS OWN ORDER IN ASSESSMENT YEAR 1998-99 THE AO ALLOWED ONE THIRD OF THE CLAIM FOR DEDUCTION OF THE SAID EXPEND ITURE WHILE DISALLOWING THE REMAINING AMOUNT. 8. ON APPEAL THE LEARNED CIT(A) FOLLOWING HIS OWN ORDERS FOR THE ASSESSMENT YEARS 1998-99 AND 1999-2000 AND THE DECI SION OF THE ITAT FOR THE AY 199-93 ALLOWED THE CLAIM OF THE AS SESSEE. 9. BOTH THE PARTIES AGREED THAT ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION DATED 9-6-2007 OF THE ITAT IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998-99 IN ITA NO. 446/AHD/2002. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 4 10. WE FIND THAT THE TRIBUNAL WHILE ADJUDICATING A SIMILAR CLAIM IN THE ASSESSEES OWN CASE IN THE AY 1998-99 CONCLUDED IN THEIR ORDER DATED 26-6-2007 AS UNDER: 10. DURING THE COURSE OF HEARING BOTH THE PARTIES AGREED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT AHMEDABAD BENCH IN ASSESSEES OWN CASE FOR TH E AY 1997-98 IN ITA NO.1044/AHD/2002. WHEREIN THE ITAT HAS UPHELD THE ORDER OF THE CIT(A) AND DISMISS THE GROU ND RAISED BY THE REVENUE BY OBSERVING IN ITS ORDER IN PARAGRAPH 3-SERIES WHICH IS REPRODUCED AS UNDER: 3.1 GROUND NO.2 IS IN RESPECT OF DELETION OF DISALLOWANCE ON ACCOUNT OF SELLING PUBLICITY AND MEDICAL LITERATURE EXPENSES RS.7 83 87 87/- 3.2 FACTS OF THE ISSUE ARE THAT THE ASSESSING OFFIC ER FOLLOWING EARLIER YEARS ALLOWED ONLY 1/3 RD EXPENDITURE. THE CIT(A) FOLLOWED EARLIER YEARS ORDERS OF CIT(A) AND DELETED THE ADDITION. AGGRIEVED THE DEPARTMENT HAS COME UP IN APPEAL AND URGED CANCELLATION OF THE CIT (A) ORDER. 3.3 HEARD THE PARTIES. IT IS FOUND THAT THIS MATTER IS ALSO COVERED BY THE ORDER DATED 23.02.05 OF THE ITAT AHMEDABAD PASSED IN APPEAL FILED BY THE DEPARTMENT BEATING ITA NO.1150/A/1997 FOR THE ASSESSMENT YEAR 1993-94 WHEREIN THE TRIBUNAL HAS HELD AS UNDER: 13. GROUND NO.3 READS AS UNDER: 3. THE LD. CIT(A) HAS ERRED I LAW AND ON FACTS IN D ELETING THE DISALLOWANCE OF RS.2 44 03 667/- OUT OF EXPENSE S ON SELLING PUBLICITY ETC. 14. THE LD. DR ADMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y 1992-93 WHEREBY PARA 18 THE TRIBUNAL HAS UPHOLD THE ORDER OF THE CIT(A) VID E WHICH SIMILAR ADDITION WAS DELETED. COPY OF THE SAI D ORDER IS PLACED AT PAGE NOS.39 TO 50 OF THE PAPER BOOK (I TA NO.4226/AHD/1995 ITA NO.4204/AHD/1995 DATED 17.4.2002). THE SAID PARA FOR THE SAKE OF CONVENIEN CE IS REPRODUCED BELOW: 18. GROUND NO. VII RELATED TO MEDICAL LITERATURE E TC. EXPENSES FOR RS.1 25 03 910/-. IT HAS BEEN FOUND BY THE ASS ESSING OFFICER THAT THE ASSESSEE DEBITED EXPENDITURE UNDER THE HEA D PUBLICITY AND MEDIAL LITERATURE EXPENSES AMOUNTING TO RS.1 87 57 74/- OUT ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 5 CALCULATION OF THE IMPUGNED ADDITION 66.66% OF RS.1 87 57 742/- COMES TO RS.1 25 03 910/-. THE CIT(A) HAS DELETED T HE SAME WITH THE OBSERVATIONS IN EARLIER YEARS FOLLOWING T HE SAME REASONS AS IN EARLIER YEARS THERE WAS NO BASIS TO D ISALLOW 66.6% EXPENSES AS DEFERRED CAPITAL EXPENDITURE. THE LD. A R SUBMITTED THAT THE ISSUE IS COVERED B THE ORDER OF THE TRIBUN AL IN ASSESSEES OWN ASSESSEE FOR AY 1988-89 IN ITA NO.49 38/91. THE RELEVANT OBSERVATION OF THE TRIBUNAL IN THAT CA SE IS REPRODUCED BELOW: THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH E ISSUE IN DISPUTE IS COVERED IN FAVOUR OF THE ASSESSEE AND AG AINST THE REVENUE AS PER THE DECISION OF THE TRIBUNAL IN THE CASE OF TORRENT LABORATORIES 59 TTJ 676 WHICH ALTHOUGH RELA TED TO DISALLOWANCE U/S.37(3A) YET THE RATIO IS APPLICABLE TO DEDUCTION U/S.37 ALSO. IT WAS SUBMITTED THAT IN THE YEAR UNDE R CONSIDERATION THE ASSESSING OFFICER HAS DISALLOWED ONLY 4/5 OF TH E EXPENSES PRESUMABLY CONSIDERING THE SAME AS DEFERRED REVENUE EXPENDITURE. IT WAS PLEASED THAT THE CIT(A) HOWEVER HAS ALLOWED THE CLAIM OF THE ASSESSEE FOLLOWING THE DEC ISION OF THE JURISDICTIONAL. HIGH COURT IN THE CASE OF NAVSARI C OTTON & SILK MILLS SUPRA AFTER CONSIDERING THE SUBMISSION OF THE PARTIES TO THE DISPUTES WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) REQU IRES NO INTERFERENCE AS IT IS BASED ON THE PRINCIPLES LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF NAVSARI CO TTON & SILK MILLS SUPRA. ACCORDINGLY THIS GROUND OF APPEAL IS ALSO DISMISSED. 15. AFTER HEARING BOTH THE PARTIES RESPECTFULLY FO LLOWING THE AFORE CITED DECISION WE FIND NO MERITS IN THIS GROUND AN D THE SAME IS DISMISSED. THE ORDER OF THE LD. CIT(A) IN THIS REGA RD IS UPHELD. 3.4 THUS RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL AS THE REVENUE DID NO DISPUTE THAT FACTS WERE NOT IDENTICA L WE UPHOLD THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. RESPECTFULLY FOLLOWING THE SAID ORDER OF THE ITAT AS THE REVENUE DID NOT DISPUTE THAT FACTS WERE NOT IDENTICAL WE UPHOL D THE IMPUGNED ORDER OF THE CIT(A) IN DISALLOWANCE MADE BY THE ASSESSING OFFICER. 11. IN THE LIGHT OF THE AFORESAID DECISION OF THE T RIBUNAL FOR THE AY 1998-99 FOLLOWING THEIR DECISION FOR THE ASSESSMEN T YEAR 1997-98 IN ITA NO.1044/AHD/2002 WHILE UNDISPUTEDLY FACTS AND C IRCUMSTANCES REMAINING THE SAME AS IN THE EARLIER ASSESSMENT YEA RS WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LD. C IT(A). THEREFORE GROUND NO.2 IS DISMISSED. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 6 WE FIND THAT THE ABOVE ISSUE IS COVERED IN FAVOUR O F THE ASSESSEE AND AGAINST THE REVENUE. RESPECTFULLY FOLLOWING THE TRIBUNALS DECISION IN ASSESSEES OWN CASE IN ITA NO.3146/AHD/2003 (SUPRA) IN IMMEDIATE PRECEDING YEAR ON SIMILAR FACTS WE CONFIRM THE ORDER OF CIT(A) ALLOW ING THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 5. THE LD CIT-DR STATED THAT ADDITIONS WERE MADE BY FOLLOWING EARLIER YEARS ORDER WHERE IT WAS HELD THAT SUCH EXPENDITURE GIVES BENEFIT OF ENDURING NATURE HENCE ONLY 1/3 RD OF IT WERE ALLOWED. ACCORDING TO HIM VARIOUS APPE LLATE AUTHORITIES FOLLOWING THE HONBLE GUJARAT HIGH COURT DECISION IN THE CASE OF NAVSARI COTTON MILLS ALLOWED SUCH EXPENDITURE TREATING SUCH EXPENDITURE AS WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOW THE PECULIAR THING IS ABOUT NO INFORMATION AVAILABLE OF DETAILS OF SUCH EXPENDITURE ON ONE HAND AND THE FACT IN THE OT HER HAND THAT BALANCE-SHEET OF THE APPELLANT DOES NOT SHOW ANY INVENTORY OF MEDICA L LITERATURE AND UNUTILIZED ADVERTISEMENT CONTRACT RELATED TO GOODS. ACCORDING TO HIM THIS SUGGESTS THAT THE ENTIRE MATERIAL SO PREPARED OR UTILIZED IS BEING UT ILIZED DURING THE PREVIOUS YEAR WHICH IS QUITE ANOMALOUS AND GENERALLY THE MEDICAL LITERATURE IS BEING GOT PRINTED IN LARGE NUMBER FOR THE UTILIZATION OF MEDICAL REPRESE NTATIVES. SIMILARLY FOR ADVERTISEMENT AND PUBLICITY IF CONTRACT IS SPREAD O VER NEXT YEAR FOR CONTRACT OF MORE THAN ONE YEAR OR CONTRACT IS MADE IN BETWEEN YEAR F OR ONE YEAR THEN PART PERIOD OF THE CONTRACT HAS TO BE CONSIDERED IN NEXT YEAR. IT IS BASICALLY THIS SPILL OVER WHICH IS TREATED AS EXPENDITURE OF ENDURING NATURE. ACCORDIN GLY HE SUPPORTED THE ORDER OF ASSESSING OFFICER. 6. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THIS ISSUE IS CONSISTENTLY ALLOWED BY THE TRIBUNAL IN FAVOUR OF ASSESSEE AS NOTED ABOVE IN AS SESSEES OWN CASE (SUPRA). NO DOUBT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BUT THE LIABILITY OF EXPENDITURE ACCRUES MOMENT ASSESSEE INCURS EXPENDI TURE ON A PARTICULAR ITEM. IT IS ALSO A FACT THAT THE ASSESSEE HAS PRODUCED COMPLETE BILLS & VOUCHERS FOR VERIFICATION BEFORE ASSESSING OFFICER AS ARGUED BY LD. COUNSEL F OR THE ASSESSEE AND THE AO COULD NOT POINT OUT WHICH BILLS PERTAINS TO NEXT Y EAR. ACCORDINGLY WE FEEL THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY TRIBUNALS DECISION IN ASSESSEES OWN CASE (SUPRA). RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISION ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 7 WE ALLOW THE CLAIM OF THE ASSESSEE AND CONFIRM THE ORDER OF CIT(A). THIS COMMON ISSUE OF REVENUES APPEAL IN BOTH YEARS IS DISMIS SED. 7. THE NEXT COMMON ISSUE IN THESE CROSS APPEALS OF REVENUE AS WELL AS ASSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) IN RE STRICTING THE DISALLOWANCE U/S.14A OF THE ACT TO RS.1 LAC OUT OF RS.30 54 041/- MADE B Y ASSESSING OFFICER. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.2 :- ITA NO.333/AHD/2006 BY REVENUE (FOR A.Y.2002-03) 2. THE LD. CIT HAS ERRED IN LAW AND ON FACTS IN DI RECTING TO RESTRICT THE DISALLOWANCE U/S.14A TO RS. 1 LAC OUT OF RS.30 54 0 41/- MADE BY THE A.O. AND AGAINST THE DELETION OF ADDITION BY CIT(A) REV ENUE RAISED THE FOLLOWING GROUND NO.1 :- ITA NO.346/AHD/2006 BY ASSESSEE (FOR A.Y.2002-03) 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) HAS GROSSLY ERRED IN PARTLY SUSTAINING THE ADDITION TO THE EXTE NT OF RS.1 00 000 ON ESTIMATE BASIS WHILE DISPOSING OF THE GROUND REGARDING DISAL LOWANCE OF RS.30 54 041 UNDER SECTION 14A OF INCOME TAX ACT. THIS HONBLE TRIBUNAL MAY THEREFORE BE PLEASED TO HOLD THAT THERE IS NO JUSTIFICATION IN DISALLOWING RS.1 00 000 ON ESTIMAT E BASIS U/S.14A OF THE ACT. 8. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD CLAIMED EXEMPTION U/S 10(33) OF THE ACT FOR DIVIDEND AMOUNT TO RS.55 83 147/- EARNED DURING THE YEAR UNDER CONS IDERATION AND HE NOTED IN PARA 6.2 OF HIS ASSESSMENT ORDER AS UNDER:- 6.2 IN THE ABSENCE OF PROPER WORKING MADE AVAILABL E BY THE ASSESSEE PROPORTIONATE EXPENSES BASED ON THE RATIO OF EXEMP TED INCOME TO TOTAL INCOME IS WORKED OUT ON PRO-RATE BASIS CONSIDERING THE FOLLOWING COMMON EXPENSES DEBITED IN P & L ACCOUNT FOR THIS PURPOSE I) SALARIES WAGES & BONUS RS.28 18 66 000 II) TRAVELING CONVEYANCE & VEHICLE EXP. RS. 5 37 43 000 TOTAL RS.33 56 09 000 THEREFORE THE EXPENSES PERTAINING TO EXEMPTED INCOM E IS WORKED OUT AT 0.91% OF RS.33 56 09 000/- I.E. RS.30 54 041/-. THE CIT(A) RESTRICTED THE ADDITION AT RS.1 LAKH BY GIVING FOLLOWING FINDINGS IN PARA-4.1 OF HIS APPELLATE ORDER:- 4.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER AND THE ABOVE SUBMISSIONS. I APPRECIATE THE SUBMISSIONS OF THE AP PELLANT THAT NO SPECIFIC ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 8 EXPENDITURE IS INCURRED FOR THE PURPOSE OF EARNING OF DIVIDEND. THE MOST OF ADMINISTRATIVE EXPENSES AND OTHER EXPENSES ARE REFE RABLE TO THE PHARMACEUTICAL BUSINESS OF THE APPELLANT. HOWEVER AT THE SAME TIME WHEN DIVIDEND INCOME HAS BEEN EARNED BY THE APPELLANT N ATURALLY SOME EFFORTS ARE REQUIRED FOR INVESTMENT ACTIVITY FROM WHICH THE DIV IDEND IS EARNED. AS PER DECISION OF ITAT CHENNAI BENCH IN THE CASE OF SUUTHERN PETRO CHEMICALS INDUSTRIES V. CIT 93 TTJ 161 IT WAS HELD THAT INVESTMENT DECISIONS ARE VERY STRATEGIC DECISIONS IN WHICH TOP MANAGEMENT IS INVO LVED. THEREFORE PROPORTIONATE MANAGEMENT EXPENSES ASSESSEE REQUIRED TO BE DEDUCTED FOR COMPUTING DIVIDEND INCOME. IN THE CIRCUMSTANCES THE ASSESSEE ADMINISTRATIVE EXPENSES ARE PARTLY REFERABLE TO EAR NING OF SUCH DIVIDEND. HENCE IT SHOULD BE APPORTIONED BY ESTIMATE. THE A.O HAS ALLOCATED EXPENSES OF RS.30.54 LACS FOR EARNING DIVIDEND INCOME OF RS. 55.83 LACS WHICH IS NOT REASONABLE. I HOLD THAT ON ESTIMATE BASIS THE DISAL LOWANCE OF RS.1 00 000 WOULD BE SUFFICIENT TO COVER SUCH EXPENSES AS REFER ABLE TO EARNING OF DIVIDEND. THE ADDITION IS THEREFORE CONFIRMED AT R S.1 00 000/.- AND THE BALANCE AMOUNT IS DELETED. AGGRIEVED BOTH CAME IN APPEAL BEFORE TRIBUNAL. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSE E HAS NOT INCURRED ANY SPECIFIC EXPENDITURE FOR THE PURPOSE OF EARNING EXEMPTED INC OME I.E. DIVIDEND INCOME OF RS.55.83 LAKHS. A PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DISALLOWED IN PROPORTION TO DIVIDEND INCOME OR NOT THIS ASPECT HAS BEEN EXAMINED BY HONBLE PUBJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. WINSOME TEXTILES INDUSTRIES LTD. (2009) 319 ITR 204 (P&H) AND CIT V. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 (P&H). FURTHER WE FIND THAT THE HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. MUMBAI V. DCIT IN TAX APPEAL NO.626 OF 2010 DATED 12-08-2010 HAS CLEARLY HELD THAT THE PROVISIONS OF RULE 8D OF IT RULES 1962 ARE PROSPECTIVE AND NOT RETROSPECTIVE AND THE RELEVANT INTERPRETATION OF HONBLE HIGH COURT READS AS UNDER:- IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RUL ES AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RUL E 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB SECTION ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 9 (1) OF SECTION 14A. FOR THAT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SH ALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FU NDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION THE ASSESSING OFFICER SH ALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 10. IN VIEW OF THE ABOVE WE FIND THAT THE LD. COUN SEL FOR THE ASSESSEE FAIRLY CONCEDED THE POSITION DUE TO SMALLNESS OF AMOUNT O F DISALLOWANCE CONFIRMED BY CIT(A) AT RS.1 LAKH OUT OF TOTAL DIVIDEND EARNED BY THE ASSESSEE AT RS.55.83 LAKH WHICH IS CLAIMED TO HAVE BEEN EXEMPT. WE FIND THE C IT(A)S DISALLOWANCE OF RS 1 LAKH HAS REASONABLE ON ACCOUNT OF PROPORTIONATE EXP ENDITURE QUA EXEMPTED INCOME U/S.14A OF THE ACT. THIS ISSUE OF REVENUES APPEAL AS WELL AS ASSESSEES APPEAL IS DISMISSED. 11. THE NEXT COMMON ISSUE IN THESE CROSS-APPEALS OF REVENUE AS WELL AS ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN ALLOWING DEDUCTION U/S.35(AB) OF THE ACT ON SECURITY EXPENSES MUNICIPAL TAX AND SALARY PAID TO MR. DUTT AND BUILDING EXPENSES. FOR THIS BOTH HAVE RAISED THE FOLLOWING GROUNDS :- ITA NO.333/AHD/2006 (FOR THE A.Y. 2002-03 BY REVENU E) 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO GIVE WEIGHTED DEDUCTED U/S.35(AB) ON SECURITY EXPENSES MUNICIPAL TAX AND SALARY PAID TO MR. DUTT AND BUILDING EXPENSES. ITA NO.346/AHD./2006 FOR A.Y. 2002-03 (BY ASSESSEE) 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE CIT(A) HAS GROSSLY ERRED IN HOLDING WHILE DISPOSING OF THE GROUND REGA RDING THE DISALLOWANCE OF RS.1 67 62 039 AS INADMISSIBLE WEIGHTED DEDUCTION U /S.35(AB) THAT THE EXPENDITURE OF RS.1 75 28 000 BEING PROFESSIONAL FE ES AND RS.11.21 000 BEING GARDEN EXPENSES ARE NOT OF THE NATURE ENVISAG ED IN SEC. 35(2AB) AND THEREFORE THE APPELLANT WOULD NOT BE ENTITLED TO A FURTHER DEDUCTION OF 50% THEREON U/S.35(2AB) OF THE I.T. ACT WHEN HE OUGHT T O HAVE HELD THAT THE APPELLANT IS ENTITLED TO SUCH FURTHER DEDUCTION EVE N ON THE AFORESAID EXPENSES. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 10 THIS HONBLE TRIBUNAL MAY THEREFORE BE PLEASED TO HOLD THAT THERE IS NO JUSTIFICATION IN HOLDING THAT THE PROFESSIONAL EXPE NSES AND GARDEN EXPENSES WOULD NOT BE COVERED FOR THE PURPOSE OF WEIGHTED DE DUCTION U/S.35(2AB) OF THE I.T. ACT AND DIRECT THE ASSESSING OFFICER TO D ELETE THE DISALLOWANCE REFERABLE TO SUCH EXPENSES. ITA NO.4343/AHD/2007 FOR A.Y.2004-05( BY ASSESSEE) 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE CIT(A) ERRED IN HOLDING THAT FOR COMPUTING WEIGHTED DEDUCTION U/S.3 5(2AB) THE FOLLOWING SUMS WERE NOT INCLUDABLE: ITA NO.4356/AHD/2007 FOR A..Y.2004-05 (BY REVENUE) 6. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF WEIGHT ED DEDUCTION U/S.35(2AB) OF THE ACT IN RESPECT OF MUNICIPAL TAXES (RS.2.37 L ACS) SALARY TO DR. C. DUTT OF RS.82.71 LAKHS AND EXPENSES RELATED TO BUILDING RS. 71.19 LAKHS GIVING A TOTAL RELIEF OF RS.78 13 500/-. THE ISSUE BEING IDENTICAL ON FACTS IN BOTH THE CROS S-YEARS WE WILL DECIDE THE ISSUE AFTER TAKING THE FACTS FROM ASSESSMENT YEAR 2002-03 . 12. THE BRIEF FACTS LEADING TO ABOVE ISSUE THAT ASS ESSING OFFICER NOTED THAT THE ASSESSEE-COMPANY HAS CLAIMED DEDUCTION ON ACCOUNT O F R & D EXPENDITURE U/S.35 AS UNDER:- I) CONTRIBUTION TO RESEARCH INSTITUTE U/S.35(1) RS. 6 25 000 II) R & D BUILDINGS U/S.35(1)(IV) R.W.S. SECTION 35(D) RS. 13 33 995 III) R & D CAPITAL ASSETS OTHER THAN BUILDING RS.3 02 46 518 IV) R & D REVENUE EXPENDITURE ON WEIGHTED COMPONENT RS.10 23 37 170 RS.13 45 42 683 THE ASSESSING OFFICER NOTED IN HIS ASSESSMENT ORDER THAT AGAINST THIS THE ASSESSEE IN TAX AUDIT REPORT FURNISHED THE DETAILS AS UNDER: - DETAILS OF CAPITAL R & D EXP. CLAIMED U/S.35(1) BUILDING RS.133 33 995/- DEDUCTION U/S.35 2AB) A) CAPITAL EXPENDITURE (OTHER THAN BUILDING) I) PLANT & MACHINERY RS. 25 24 122/- ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 11 II) R & D EQUIPMENTS RS.1 51 17 985/- III) FURNITURE & FIXTURE RS. 20 47 573/- IV) APPLIANCES RS.47466 5 RS.2 01 64 345/- B) REVENUE EXPENDITURE: RS. 2 04 7 4 340/- C) TOTAL ( A + B) RS.22 48 38 685/- D) WEIGHTED DEDUCTION @ 150% RS.33 72 58 028 /- DEDUCTION U/S.35(1)(II) CONTRIBUTION TO U.N. MEHTA CHARITABLE INSTITUTE OF CARDIOLOGY RS. 5 00 000/- ELIGIBLE DEDUCTION @ 125% RS. 6 25 000/- THE ASSESSING OFFICER NOTED THAT THE AMOUNT OF RS.2 0 46 74 340/- DEBITED TO THE PROFIT & LOSS ACCOUNT HAS NOT BEEN WRITTEN BACK IN THE RETURN OF INCOME AND THE DEDUCTION HAS BEEN CLAIMED AT LESSER AMOUNT AS AGAI NST DEDUCTION WORKED OUT IN THE TAX AUDIT REPORT AND HE REFERRED TO CERTIFICATE OF THE PRESCRIBED AUTHORITY U/S.35(2AB) DATED 23-01-2004 AND STATED THAT OUT OF THE CLAIM F OR REVENUE EXPENDITURE OF RS.1926.73 LAKH EXPENDITURE TO THE EXTENT OF RS.166 7.07 LAKH IS ALLOWED AND DISALLOWANCE OF RS.305.86 LAKH IS WORKED OUT. THE A SSESSEE STATED IN REPLY GIVEN VARIOUS EXPLANATION AND DETAILS AND CLAIMED EXCESS DEDUCTION OF RS.59.07 LAKH AND FURTHER EXCESS DEDUCTION U/S.35(2AB) OF RS.89 871/- . AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE THE ASSESSING OFFICER HAS STATED THAT THE EXPLANATION GIVEN IS NOT FULLY ACCEPTABLE. THE ASSESSEE STATED THAT THE COMPETENT AUTHORITY HAS NOT ALLOWED DEDUCTION FOR THE ENTIRE AMOUNT CLAIMED UNDER THE HEAD R & D EXPENSES AND EXCESS DEDUCTION OF RS.1 53 38 173/- IS WORKED OUT ON THIS ACCOUNT AND THE ADDITION MADE AS UNDER:- THEREFORE AS NOTED ABOVE THE ASSESSEE HAS CLAIMED R & D EXPENSES ON ACCOUNT OF REVENUE AND CAPITAL OTHER THAN BUILDING AMOUNTING TO RS.22 48 38 655/- AS AGAINST RS.19 41 62 340/- ALLO WED BY THE COMPETENT AUTHORITY. THIS DISALLOWANCE IS ULTIMATELY REFLECTE D IN THE EXCESS WEIGHTED DEDUCTION CLAIMED BY THE ASSESSEE WHICH REQUIRED TO BE DISALLOWED AS DISCUSSED ABOVE AS UNDER:- I) ALLOWABLE DEDUCTION @ 150% ON RS.19 41 62 340/- RS.29 12 43 510/- II) ALLOWABLE DEDUCTION @ 100% ON RS.3 06 76 345/- RS. 3 06 76 345/- TOTAL DEDUCTION ALLOWABLE U/S.35(2AB) RS.32 19 19 855/- DEDUCTION CLAIMED BY THE ASSESSEE RS.33 72 58 028/- ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 12 TOTAL DISALLOWANCE U/S.35(2AB) RS. 1 53 38 17 3/- THE ASSESSEE BEFORE CIT(A) STATED THAT THE DISALLOW ANCE OF RS.1.53 38 173/- MADE BY THE ASSESSING OFFICER REPRESENTS DISALLOWANCE OF WEIGHTED DEDUCTION ON THE FOLLOWING ITEMS:- REVENUE. EXPENDITURE ON BUILDINGS RS.46.20 LAKH BREAK UP OF REEV. EXP. DISALLOWANCE SECURITY EXPENSES RS.10.87 LAKH GARDENING EXPENSES RS.11.21 LAKH MUNICIPAL TAX RS. 2.14 LAKH PROFESSION FEES RS.175.28 LAKH SALARY TO CD RS. 60.36 LAKH RS.305.86 LAKH 13. THE CIT(A) ALLOWED THE CLAIM OF ASSESSEE VIDE PARA-5.3 OF HIS APPELLATE ORDER AS UNDER:- 5.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE ABOVE SUBMISSIONS. EXACTLY SIMILAR ISSUE WAS RAISED IN AP PELLANTS CASE FOR A.Y 2001-02 WHEREIN VIDE PARA-5.3 IT WAS HELD AS UNDER: - I HAVE CONSIDERED THE ABOVE SUBMISSIONS AND THE AS SESSMENT ORDER. ON PERUSAL OF THE NATURE OF EXPENDITURE IT IS SEEN THAT NONE OF THE EXPENDITURE IS ON MARKET RESEARCH SALES PROMOTION QUALITY CONTROL TESTING COMMERCIAL PRODUCTION STYLE CHANGE OR ROU TINE DATA COLLECTION. THEREFORE HE DISALLOWANCE OF THE ABOVE EXPENDITURE MADE BY THE ASSESSING OFFICE ONLY ON THE BASIS OF THE REPORT OF THE PRESCRIBED AUTHORITY WAS NOT JUSTIFIED. WHAT IS TO BE SEEN BY THE A.O IS THE NATURE OF EXPENDITURE. THEREFORE I CONSIDER THIS GROUND F OR DISPOSAL ON MERITS. ON PERUSAL OF THE NATURE OF EXPENDITURE IT IS SEEN THAT EXCEPT FOR PROFESSIONAL FEES OF RS.48 LACS AND GARDEN EXPENSE OF RS.6.93 LACS THE OTHER ARE IN CONNECTION WITH PATENT TO BE REGISTERE D OVERSEAS AND HENCE IT WOULD BE COVERED BY THE NATURE OF EXPENSE COVERED ABOVE. GARDEN EXPENSE HAS NO RELATION WITH THE RESEARCH AC TIVITY THEREFORE I HOLD THAT THE A.O WAS JUSTIFIED DIN EXCLUDING THESE TWO EXPENSES IN GRANTING DEDUCTION U/S.35(2AB). HOWEVER HE IS DIRE CTED TO ALLOW DEDUCTION IN RESPECT OF THE OTHER DEDUCTION. THIS G ROUND IS ACCORDINGLY PARTLY ALLOWED. I AGREE WITH THE ABOVE FINDINGS OF THE CIT(A) IN AP PELLANTS OWN CASE FOR A.Y 2001-02 AND DIRECT THE ASSESSING OFFICER TO CONSIDE R THE DEDUCTION U/S.35(2AB) IN THE LIGHT OF THE SAID DIRECTIONS. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 13 ACCORDINGLY I DIRECT THE ASSESSING OFFICER TO ALLOW WEIGHTED DEDUCTION WITH REFERENCE TO SECURITY EXPENSES OF RS.10.87 LAKHS M UNICIPAL TAX OF RS.1.14 LAKHS AND SALARY OF MR. DUTT OF RS.60.36 LAKHS. THA T BUILDING EXPENSES OF RS.46.20 LAKHS IS ALSO DEDUCTIBLE. HOWEVER GARDEN EXPENSES OF RS.11.21 LAKHS AND PROFESSIONAL FEES OF RS.175.28 LAKHS IS N OT OF THE NATURE ENVISAGED IN SECTION 35(2AB) AND WOULD NOT BE ELIGIBLE FOR DE DUCTION. AGGRIEVED THE ASSESSEE AND REVENUE CAME IN APPEAL BEFORE TRIBUNAL. 14. AT THE OUTSET LD. SR-COUNSEL FOR THE ASSESSEE S TATED THAT TRIBUNAL IN REVENUES APPEAL AND ASESSEES OWN CO IN ITA NO.3569/AHD/2004 & CO NO.18/AHD/2005 FOR ASSESSMENT YEAR 2001-2002 DATED 13-11-2009 VID E PARA-9 & 10 AS UNDER:- 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE FACTS OF THE CASE THAT THE PRESCRIBED AUTHORITY HAS SEPARATELY INDICATED RS.51 .26 LACS FOR THE CLINICAL TRIALS AND AS PER THE EXPLANATION TO THE SEC. 35(2A B) THE ASSESSEE INCURRING EXPENDITURE ON SCIENTIFIC RESEARCH & DEVELOPMENT IN RELATION TO DRUGS AND PHARMACEUTICALS SHALL BE GRANTED EXPENDITURE INCUR RED ON CLINICAL DRUG TRIALS. ACCORDINGLY WE FIND THAT THE SUM OF RS.51.26 LACS IN ELIGIBLE EXPENDITURE AS THE PRESCRIBED AUTHORITY HAS DISALLOWED SUM OF RS.3 7.55 LACS REVENUE EXPENDITURE RELATING TO BUILDING AND SUM OF RS.133. 92 LACS FROM THE REVENUE EXPENDITURE OTHER THAN BUILDING. AS PER THE BREAK U P GIVEN ABOVE WE FIND THAT THE ASSESSEE IS ENTITLED TO WEIGHTED DEDUCTION OF S UM OF RS.37.55 LACS AND RS.133.92 LACS IN VIEW OF THE FOLLOWING EXPLANATION S SUBMITTED BEFORE THE LOWER AUTHORITIES :- SECTION 35(2AB) GRANTS WEIGHTED DEDUCTION FOR ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPENDITURE IN THE N ATURE OF COST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEARCH & DEVELOPMEN T FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY. WHAT IS EXCLU DED IS COST OF LAND & BUILDING AND NOT THE RECURRING EXPENDITURE RELATE D TO BUILDING THAT IS REPAIRS AND RENOVATION OF BUILDINGS THEREFORE ASS ESSEE IS ENTITLED TO WEIGHTED DEDUCTION FOR REPAIRS OF RS.37.55 LACS REL ATED TO BUILDINGS. SIMILARLY MUNICIPAL TAX PAID OF RS.6.93 LACS IS EN TIRELY RELATED TO BUILDINGS WHEREIN IN-HOUSE RESEARCH ACTIVITY IS CAR RIED ON. IT IS ONLY MUNICIPAL TAX OF R & D CENTRE BHATT HENCE LIKE CU RRENT REPAIRS IT IS ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB). SO FA R AS SECURITY EXPENSES OF RS.11.01 LACS IS CONCERNED IT IS SUBMI TTED THAT IN-HOUSE RESEARCH ACTIVITY REQUIRES PROPER TIGHT SECURITY TO AVOID LEAKAGE THROUGH VISITORS AND ONLY IN-HOUSE STAFF WILL HAVE ACCESS TO THE SAID BUILDING AND NO OTHERS AND TO PRESERVE RESEARCH WHICH IS CO MPLETED BUT ITS CLINICAL TRIAL IS PENDING. CONSIDERING ALL THESE FA CTORS SECURITY EXPENSES OF RS.11.01 LACS IS ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB). SO FAR AS GARDENING EXPENSES OF RS.9.44 LACS IT IS SUBMITTED AS UNDER:- ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 14 THE COMPANY HAS A DEDICATED RESEARCH CENTRE WHERE E XTENSIVE RESEARCH IS CARRIED OUT. THE COMPANY HAS A VERY COM POSITE R & D FACILITY. THE COMPANY IS CONSCIOUS OF THE ENVIRONME NTAL ISSUES AND HAS PUT UP EFFLUENT TREATMENT PLANT (COSTS APPROX. RS.3 6 LACS.). AS IS WIDELY ACCEPTED THE VEGETATION PARTICULARLY THE TREES HELP CONTAIN THE POLLUTION RESULTING FROM THE RELEASE OF POLLUTANTS (INCLUDING GASES). SO THE TREES AND PLANTS BECOME AN INTEGRAL PART OF THE RESEARCH CENTRE. ONCE HAVING ACCEPTED THIS POSITION ANY EXPENDITURE INCURRED ON GARDENING SHOULD BE FULLY ALLOWED UNDER THE PROVISIONS OF SECTION 35 (2AB) OF THE INCOME TAX ACT. IN THIS CONNECTION WE WOULD LIKE TO ADD T HAT THE GUJARAT POLLUTION CONTROL BOARD HAS ALSO DIRECTED THAT SUCH TREES AND GARDENS SHOULD BE DEVELOPED AND WATERED TREATED BY THE ETP SHOULD BE UTILIZED FOR A FORESTATION PURPOSES. OVER AND ABOVE THIS GOOD LABORATORY PRACTICES REQUIRE THAT RESEARCH CENTERS SHOULD HAVE GREEN COVER SO THAT POLLUTION LEVELS (INCLUDING DUST) ARE ELIMINATED. SINCE THE OBJECT OF THE ASSESSEE COMPANY IS TO HAVE A WORLD C LASS R & D CENTER SUCH GARDENS (AND THEREFORE THE GARDENING EXPENSES) BECOME A NECESSARY. IN RESPECT OF SALARY OF RS.58.54 LACS PAID TO DR. C . DUTT HE IS IN-CHARGE OF RESEARCH & DEVELOPMENT CENTRE AT BHATT. THROUGH HIM ONLY ENTIRE IN-HOUSE RESEARCH ACTIVITY IS CARRIED ON BY THE ASS ESSEE. HE IS THE PERSON THROUGH WHOM ALL CO-ORDINATION OF THE TECHNI CAL SCIENTISTS AND OTHER TECHNICAL PERSONS IS CARRIED OUT AND SMOOTH F UNCTIONING IS CARRIED OUT IN VARIOUS RESEARCH ACTIVITIES. TO CONVEY AND F OR REPORTING OF ENTIRE RESEARCH ACTIVITY TO THE MANAGEMENT HE HAS BEEN TAK EN TO THE BOARD OF DIRECTORS BY THE ASSESSEE-COMPANY. THEREFORE SALAR Y PAID TO DR. C. DUTT IS ELIGIBLE FOR WEIGHTED DEDUCTION U/S.35(2AB) . WHEN SECTION SPEAKS OF ANY EXPENDITURE THERE IS NO JUSTIFICATIO N TO EXCLUDE THE EXPENDITURE OF RS.133.92 LACS AS DONE BY THE PRESCR IBED AUTHORITY. THE ASSESSEE IS ELIGIBLE FOR WEIGHTED DEDUCTION ON THE ENTIRE EXPENDITURE OF RS.2124.36 LAC AS CLAIMED ABOVE. 10. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES W E ARE OF THE VIEW THAT IT IS ONLY THE EXPENDITURE WHICH WILL ONLY BE ALLOWED WHEREAS THE ASSESSEE VIDE THE COPY OF THE LETTER REPRODUCED HEREINABOVE HAS V ERY CLEARLY EXPLAINED AS TO HOW THE ENTIRE EXPENDITURE CLAIMED BY THE ASSESSEE IS ALLOWABLE. THUS THERE WAS NO JUSTIFICATION IN HARPING UPON THE FIGURE CON TAINED IN FORM NO.3CL AS IS DONE BY THE ASSESSING OFFICER. THE PROVISIONS OF TH E ACT IT DOES NOT CONTAIN ANY SPECIFIC CONDITIONS FOR THE ALLOWANCE OF EXPEND ITURE TO THE EFFECT THAT IT WILL BE RESTRICTED THAT CONTAINED IN FORM NO.3CL. NEEDLE SS TO POINT OUT THAT SUCH ALLOWABLE EXPENDITURE ETC. IS REPORTED BY THE DSIR TO DG (INCOME-TAX EXEMPTION) KOLKATA WITHOUT GIVING AN OPPORTUNITY O F BEING HEARD TO THE ASSESSEE WHEREVER HE QUANTIFIES THE EXPENDITURE WHI CH IS LESS THAN THAT CLAIMED BY THE ASSESSEE. WE FURTHER FIND THAT THE ASSESSEE HAS INCLUDED A SUM OF RS.51.26 LAKHS AS ELIGIBLE EXPENDITURE BEING REVENUE EXPENDITURE RELATING TO BUILDING AND ANOTHER SUM OF RS.133.92 L AKHS BEING REVENUE EXPENDITURE OTHER THAN BUILDING WHICH WAS CONSIDER ED AS REVENUE BY THE ASSESSING OFFICER HIMSELF. THESE ITEMS CLEARLY ARE WITHIN THE PURVIEW OF ALLOWABLE U/S 35(2AB) OF THE ACT AS WEIGHTED DEDUCT ION. THE SECURITY ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 15 EXPENSES ARE ALSO DIRECTLY RELATED TO IN-HOUSE RESE ARCH AS PROPER SECURITY IS REQUIRED TO AVOID LEAKAGE AND ONLY IN-HOUSE STAFF W ILL HAVE ASSESSED TO BUILDING. ACCORDINGLY THIS EXPENDITURE ARE FOR PRE SERVING THE RESEARCH WHICH IS COMPLETED AND ITS CLINICAL TRIAL IS PENDING. AS RE GARDS TO THE ENVIRONMENTAL ISSUE THE ASSESSEE-COMPANY HAS SET UP AN AFFLUENT PLANT AND AS IS WIDELY ACCEPTED THE VEGETATION I.E. TREES HAVE CONTAINED THE POLLUTION. THIS EXPENDITURE OF GARDENING AND PLANTATION HAVE BEEN D ONE FOR THE PERSEVERANCE OF ENVIRONMENT AND THIS IS DIRECTLY RELATED TO R & D FACILITIES. AS REGARDS TO SALARY PAID TO DR. C.DUTT AMOUNTING TO RS.58.54 LAK HS HE IS IN-CHARGE OF R & D CENTRE AT BHATT. HE IS THE PERSON THROUGH WHOM A LL CO-ORDINATION OF TECHNICAL SCIENTISTS AND OTHER TECHNICAL PERSONS AR E CARRIED OUT. THE ENTIRE REPORTING OF THE RESEARCH ACTIVITY TO THE MANAGEMEN T HAS BEEN TAKEN TO THE BOARD OF DIRECTORS THROUGH HIM ONLY AND FOR THIS TH E SALARY IS PAID. ACCORDINGLY THE ASSESSEE HAS RIGHTLY PAID THE ENTI RE EXPENDITURE OF RS.133.92 LAKHS AND BUILDING REPAIRS RS.37.55 LAKHAS ON WHICH WEIGHTED DEDUCTION U/S.35(2AB) OF THE ACT IS ALLOWABLE. IN VIEW OF TH E ABOVE DISCUSSION WE ALLOW THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF THE REV ENUES APPEAL IS DISMISSED AND THAT OF THE ASSESSEES CO IS ALLOWED. IN VIEW OF THIS DECISION OF TRIBUNAL IN ASSESSEES OWN CASE THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. 15. ON THE OTHER HAND LD. CIT-DR ARGUED THAT THE I SSUE IS NO DOUBT DECIDED BY THE TRIBUNAL BUT HE WANTS TO MAKE FURTHER SUBMISSIO N AND THE RELEVANT SUBMISSIONS READS AS UNDER:- (A) AS PER SECTION 35(3) OF THE ACT. IF ANY QUESTION ARISES UNDER THIS SECTION AS TO WH ETHER AND IF SO TO WHAT EXTENT ANY ACTIVITY CONSTITUTES OR CONSTITUTED OR ANY ASSET IS OR WAS BEING USED FOR SCIENTIFIC RESEARCH THE BOARD SHALL REFE R THE QUESTION TO- (A) THE CENTRAL GOVERNMENT WHEN SUCH QUESTION RELA TES TO ANY ACTIVITY UNDER CLAUSES (II) AND (III) OF SUCH-SECTION(1) AND ITS DECISION SHALL BE FINAL; (B) THE PRESCRIBED AUTHORITY WHEN SUCH QUESTION RE LATES TO ANY ACTIVITY OTHER THAN THE ACTIVITY SPECIFIED IN CLAUSE (A) WHOSE DEC ISION SHALL BE FINAL. IT IS THEREFORE THE PRESCRIBED AUTHORITY IN CASE OF APPELLANT WHILE ISSUING CERTIFICATE IN THE PRESCRIBED PROFORMA IS AMOUNTING TO TAKING A FINAL DECISION ABOUT THE ALLOWABLE EXPENDITURE AND THEREFORE DISAL LOWED EXPENDITURE BOTH IN THE NATURE OF CAPITAL AS WELL AS REVENUE ARE TO BE TREATED AS FINAL. THE A.O. OR ANYBODY ELSE HAS NO AUTHORITY TO CONSIDER ANY OF SU CH DISALLOWABLE EXPENDITURE AS SPECIFY BY PRESCRIBED AUTHORITY. IF APPELLANT HAS ANY DISPUTE THEN HE SHOULD REPRESENT CASE BEFORE PRESCRIBED AUT HORITY. IT IS THEREFORE REPAIR AND RENOVATION EXPENDITURE OF LAND AND BUILDING OTHER REVENUE EXPENDITURE EVEN CLINICAL TRIAL EXPENDITUR E WHICH WERE DISALLOWED BY PRESCRIBED AUTHORITY HAS TO BE DISALLOWED BY THE A. O. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 16 (B) FURTHER IN REFERENCE TO DISALLOWANCE OF EXPEND ITURE ON CLINICAL TRIAL. AN EXPLANATION TO SECTION 35(2AB) HAS BEEN INSERTED BY THE FINANCE ACT 2001 W.E.F. 01-04-2002 WHICH READS AS FOLLOWS. [ EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE EXPENDITURE ON SCIENTIFIC RESEARCH IN RELATION TO DRUGS AND PHARMACEUTICALS SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UN DER ANY CENTRAL STATE OR PROVINCIAL ACT AND FILING AN APPLICATION FOR A PATE NT UNDER THE PATENTS ACT 1970 (39 OF 1970).] THE EXPLANATION IS ONLY WITH RESPECT TO THE EXPENDI TURE INCURRED IN RELATION TO DRUGS AND PHARMACEUTICALS. THE DEVICE OF INSERTING AN EXPLANATION IS FOUND TO BE A CONVENIENT METHOD OF ELUCIDATING SEVERAL DETAI LED ASPECTS THAT CANNOT BE VERBALLY ACCOMMODATED IN THE MAIN PROVISION. IT ENA BLES THE DRAFTSMAN TO SAY WHAT HE HAS TO SAY WITHOUT ENCUMBERING THE MAIN PRO VISION WITH TOO MANY DETAIL. THE FUNCTION OF THE EXPLANATION IS TO CLARI FY THE SCOPE OF CERTAIN WORDS OR EXPRESSION (OCCURRING IN THE MAIN PROVISION) AB OUT WHOSE PRECISE SCOPE A DOUBT MAY ARISE AS HAS BEEN HELD BY THE HONBLE SUP REME COURT IN THE CASE OF CONTROLLER OF ESTATE DUTY VS KANTILAL TRIKAMLAL AIR 1976 SC 1935 . ALSO THE HONBLE SUPREME COURT IN THE CASE OF OBLUM ELECTRICAL INDUSTRIES PVT LTD HYDERABAD VS COLLECTOR OF CUSTOMS BOMBAY AIR 1997 SC 3467 HAS HELD THAT THE EXPLANATION SHOULD NOT BE CONSTRUED S O AS TO WIDEN THE SCOPE OF THE MAIN SECTION. THE EXPLANATION USES THE WORDS SHALL INCLUDE. PRO VISIONS WHICH ARE INCLUSIVE IN THEIR CONTENT USE THE PLURAL WORD INC LUDES AS OPPOSED TO THE SINGULAR INCLUDE. IN THIS PARTICULAR EXPLANATION THE PHRASE THAT HAS BEEN USED IS SHALL INCLUDE. THE PHRASE SHALL INCLUDE HAS NECESSARILY TO BE INTERPRETED AS SIGNIFYING THAT ONLY THE CONDITIONS STATED THERE IN HAVE TO BE TAKEN INTO CONSIDERATION AND NOTHING ELSE. THE WORD INCLUDES SIGNIFIES THAT A PARTICULAR THING MEANS A LOT OF OTHER THINGS AND ALSO INCLUDES CERTAIN SPECIFIED THINGS. IT ENLARGES THE SCOPE OF THE SECTION AND IS MAINLY USE D FOR DEFINITION PURPOSES. THE WORDS CAN ALSO BE SEEN FROM THE PERSPECTIVE OF SINGULAR AND PLURAL. IF THE WORD CONNOTES A PLURAL MEANING THEN IT NECESSARILY INCLUDES MORE THAN ONE THING WHILE A SINGULAR WOULD INCLUDE ONLY ONE THIN G. THE OTHER ASPECT THAT REQUIRES INTERPRETATION AND C ONSEQUENT ADJUDICATION IS WHETHER THE THREE CONDITIONS HAVE TO BE READ IN ISO LATION I.E. INDEPENDENT OF EACH OTHER OR HAS TO BE READ COLLECTIVELY I.E. ALL THE THREE CONDITIONS HAVE TO BE FULFILLED SIMULTANEOUSLY. THE EXPENDITURE ON DRU GS AND PHARMACEUTICALS IS THE SECTION THAT IS THE MOST REGULATED BY LAWS AND REGULATIONS. THE OTHER EXPENDITURES ARE EXPENDITURES ON ELECTRONIC EQUIPME NT COMPUTERS TELECOMMUNICATION DEVICES CHEMICALS ETC. CLINICAL RESEARCH NECESSARILY INCLUDES ANIMAL AND HUMAN TRIALS AND IS THEREFORE R EQUIRED TO BE REGULATED BY LAW OF THE COUNTRY. VARIOUS GUIDELINES ARE REQUIRED TO BE FOLLOWED AND RECORDS HAVE TO BE MAINTAINED BEFORE A CLINICAL RESEARCH CA N BE UNDERTAKEN. ALSO CLINICAL RESEARCH CANNOT BE UNDERTAKEN BY ANY ORGAN IZATION JUST LIKE THAT WITHOUT OBTAINING PRIOR PERMISSION FROM REGULATORY AUTHORITIES. THEREFORE THE ENTIRE CLAUSE IS TO BE READ TOGETHER AND CANNOT BE READ IN ISOLATION. 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ISSUE I N RESPECT OF DEDUCTION U/S.35(AB) ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 17 OF THE ACT ON SECURITY EXPENSES MUNICIPAL TAXES S ALARY PAID TO MR. DUTT BUILDING EXPENSES PROFESSIONAL FEES AND GARDENING EXPENSES ARE COVERED BY THE DECISION OF THIS TRIBUNAL AND THE FACTS BEING IDENTICAL TAKING A CONSISTING VIEW WE ALLOW THE CROSS APPEALS OF THE ASSESSEE AND THAT OF REVENUES CROSS-APPEALS ARE DISMISSED. 17. THE NEXT ISSUE IN ITA NO.333/AHD/2006 FOR ASSESSMENT YEAR 2002-03 OF REVENUES APPEAL IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE OF LONG TERM CAPITAL LOSS ON ACCOUNT OF ASSIGNMENT OF UNSEC URED LOAN GIVEN TO TORRENT GUJARAT BYOTECH LTD. IN FAVOUR OF M/S. FOCUS CORPOR ATE RESTRUCTURING PVT. LTD. FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND NO.4 :- 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF LONG TERM CAPITAL LOSS OF RS.17 30 67 016/- ON ACCO UNT OF ASSIGNMENT OF UNSECURED LOAN GIVEN TO TORRENT GUJARAT BYOTECH LTD . IN FAVOUR OF M/S. FOCUS CORPORATE RESTRUCTURING PVT. LTD. 18. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSING OFFICER DISALLOWED ASSESSEES CLAIM FOR LONG TERM CAPITAL L OSS BY STATING THAT ASSESSEE CLAIMED LONG TERM CAPITAL LOSS ON ACCOUNT OF ASSIGN MENT OF A LOAN OF TORRENT GUJARAT BIOTECH LTD. (TGBL FOR SHORT) TO FOCUS CORPORATE RE STRUCTURING PVT. LTD. THE ASSESSEE HAD GIVEN A LOAN OF RS.12.84 CRORES TO ASS OCIATED CONCERN TGBI IN THE YEAR 1996-97 AND DURING THAT YEAR UNDER CONSIDERATI ON THE ASSESSEE HAD ASSIGNED/TRANSFERRED THE SAID LOAN TO FOCUS CORPORA TE RESTRUCTURING PVT. LTD. VIDE AGREEMENT DATED 07-02-2005 FOR A SUM OF RS.64 LAKHS AND THE DIFFERENCE OF RS.12 21 28 000/- WAS CLAIMED AS LONG TERM CAPITAL LOSS. AFTER CLAIMING INDEXATION BENEFITS THE LONG TERM CAPITAL LOSS WAS CALCULATED AT RS.17 30 67 016/- WHICH WAS CLAIMED AND SET OFF WITH LONG TERM CAPITAL GAINS FR OM SALE OF TRADE MARK. THE AO STATED THAT AS PER SECTION 45(1) OF THE ACT CAPITAL GAIN/LOSS IS CHARGEABLE ONLY ON TRANSFER OF CAPITAL ASSET. REFERENCE IS ALSO MADE T O SECTION 2(14) AND SATED THAT CAPITAL ASSETS MEAN PROPERTY OF ANY KIND HELD BY TH E ASSESSEE WHETHER CONCERNED WITH THE BUSINESS OR NOT THE SAME CANNOT BE CONSID ERED TO INCLUSIVE OF ADVANCES GIVEN WAS IN THE NATURE OF LOANS/INVESTMENTS. IT IS FURTHER STATED THAT THERE IS NO REASONS CITED BY THE ASSESSEE FOR ASSIGNMENT OF LOA N AT ITS VALUE OF LESS THAN 5% OF THE ORIGINAL LOAN. THE ENTIRE CASH ADVANCE GIVEN TO ASSOCIATED CONCERN AND ITS ASSIGNMENT TO THIRD PARTY CANNOT BE CONSIDERED AS C APITAL LOSS U/S.45 OF THE ACT. IF AT ALL THERE IS A LOSS IT IS ON ACCOUNT OF INVESTMENT AND NOT LONG TERM CAPITAL LOSS AS ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 18 ALLEGED FOR SET OFF AGAINST THE CAPITAL GAINS. IF I T FURTHER SATED BY THE AO THAT THE ASSESSEE-COMPANY HAD EARNED LONG TERM CAPITAL GAINS DURING THE YEAR UNDER CONSIDERATION ON PROFIT ON SALE OF SHARES BELONGING TO GROUP CONCERNS AND PROFIT ON SALE OF KNOW HOW ON SALE OF BUSINESS OF VALPRIN. IT THEREFORE DOES NOT SEEM TO BE CORRECT AS PER THE PROVISIONS AND THE LOAN CANNOT B E CONSIDERED AS CAPITAL ASSET AND AO DISALLOWED THE ENTIRE CAPITAL LOSS OF RS.17 30 6 7 016/-. AGGRIEVED THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 19. BEFORE THE CIT(A) ASSESSEE MADE THE FOLLOWING CALCULATION OF LOSS OF RS.17 30 67 016/-: - SR NO PARTICULARS COMPUTATION OF CAPITAL GA IN/LOSS YEAR OF PURCHASE/SALE NO. OF SHARES COST (RS) CII INDEXED AMOUNT COST (RS) (RS) E PROCEEDS OF ASSIGNMENT OF LOAN OF TGBL LESS: STAMP DUTY NET SALES CONSIDERATION COST OF LOAN COST OF LOAN LONG TERM CAPITAL LOSS (D) 2001-02 1996-97 128400000 426 305 179339016 64 00 000 1 28 000 62 72 000 17 93 39 016 - 17 30 67 016 THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS BEFORE CIT(A):- (A) TORRENT GUJARAT BIO TECH LTD. WAS INCORPORATED IN MARCH 1991 AS A PUBLIC COMPANY. THE ASSESSEE BEING ONE OF THE PROMOTER GRO UP COMPANY WAS INTEREST IN DEVELOPMENT OF THE BUSINESS OF THE SAID COMPANY. AS A PROMOTER GROUP IT HAD MADE INVESTMENT IN SAID COMPANY. TORR ENT PHARMACEUTICALS LTD. IS THE FLAGSHIP COMPANY OF THE PROMOTER GROUP. (B) TORENT GUJARAT BIO TECH LTD. WAS IN NEED OF FUN DS AND HAD APPROACHED THE FINANCIAL INSTITUTES FOR FINANCIAL ASSISTANCE. IFCI OF INDIA HAD AGREED TO GRANT LOAN OF RS.1 875/- LACS LOAN/. HOWEVER WHILE GRANT ING SUCH FACILITY THEY HAD PUT CERTAIN CONDITIONS. THE TERMS OF CONDITIONS INC LUDE THE FOLLOWING:- 1. BEFORE AVAILING ITSELF OF ANY ASSISTANCE FROM I FCL TGBL SHALL: ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 19 A) DEPLOY SHARE CAPITAL TO THE EXTENT OF RS.1250/- LAKH OUT OF THE RIGHTS ISSUE OF EQUITY SHARES AND 50% OF THE ENVISAGED INT ERNAL ACCRUALS OF RS.613 LAKH I.E. RS.307 LAKH FROM THE PROMOTERS FOR FINANCING THE DOWN STREAM PROJECT. B) FINANCE THE CASHS LOSS OF RS.671 LAKH INCURRED D URING THE YAR ENDED 31 ST MARCH 1996 THROUGH SUBORDINATED INTEREST FREE UNS ECURED LOANS FROM THE PROMOTERS WHICH SHALL NOT BE REPAID WITHO UT THE PRIOR APPROVAL OF IFCL. THE TERMS AND CONDITIONS OF SUCH UNSECURED LOANS SHALL BE TO THE SATISFACTION OF IFCI. C) THUS IT WILL BE APPRECIATED THAT THE APPELLANT H AD TO GIVE ADVANCE TO TGBI AS A PROMOTER COMPANY AND THAT IT WAS IN THE I NTEREST OF THE COMPANY WHO HAD MADE HUGE INVESTMENT IN THE COMPANY AS A PROMOTER GROUP. D) HOWEVER TGBL COULD NOT SUCCESSFULLY CARRY OUT R ESTRUCTURING AND ITS BUSINESS ACTIVITIES AND INCURRED HUGE FINANCIAL LOS S. THEY WERE NOT IN A APPOSITION TO REPAY THE LOANS BORROWED BY THEM FROM FINANCIAL INSTITUTE IN AS ALSO FROM THE GROUP COMPANIES. IT IS DECLARED AS SICK UNDERTAKING UNDER THE SICA ACT. IN THE CIRCUMSTANCES THE APPELL ANT THOUGHT THAT THE CAPITAL OF TGBL WAS ERODED AND THERE WAS NO LIKELIH OOD OF GETTING ANY RECOVERY OF THE LOAN. IN THE MEANTIME THE APPELLANT ENTERED INTO AN AGREEMENT WITH FOCUS CORPORATE RESTRUCTURING PVT. L TD. WHEREBY THE ABOVE LOAN WAS ASSIGNED TO THEM FOR A SUM OF RS.64 LAKH. THIS AMOUNT OF ASSIGNMENT IS SUPPORTED BY THE REPORT OF THE CHA RTERED ACCOUNTANT MR. DIVYANG P MAZUMDAR. AS SUCH THE ASIGNEMENT WAS NOT FOR REDUCING TAXABLE INCOME BUT WAS IN ORDER TO REDUCE LOSS OF INVESTMENT IN TGBL. E) COMING TO THE POINT RAISED IN PARA MARKED 7 OF Y OUR HONOURS LETTER UNDER REFERENCE IT IS SUBMITTED THAT ASSIGNMENT OF LOAN DOES GIVE RISE TO CAPITAL LOSS OR CAPITAL GAIN AS THE CASE MAY BE IN VIEW OF THE FOLLOWING:- I) VIDE SEC. 45(1) INCOME (OR LOSS) UNDER THE HEAD CAPITAL GAINS ARISES SIN THE YEAR OF TRANSFER IF A CAPITAL ASS ET IS TRANSFERRED. II) SO FIRST REQUIREMENT IS THAT IT COULD BE A CAP ITAL ASSET. SEC. 2(14) DEFINES CAPITAL ASSET TO MEAN AS PROPERTY OR ANY KIND HELD BY THE ASSESSEE WHETHER OR NOT CONNECTED WITH HIS BUSINESS INCLUDE NOTE: THE ITEMS ENUMERATED THEREAFTER FOR EXCLUSION ARE NOT RELEVANT AND HENCE NOT BE CONSIDERED. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 20 III) SO THE MAIN PART OF SEC. 2(14) TALKS OF PROP ERTY OF ANY KIND AND MAKES IT IRRELEVANT WHETHER IT IS CONNECTED WITH TH E ASSESSEES BUSINESS OR NOT. TERM PROPERTY HAS NOT BEEN DEFIN ED IN THE INCOME TAX ACT BUT THESE ARE JUDICIAL PRONOUNCEMENT S ACCORDING TO WHICH THE WORD PROPERTY MEANS A BUNDLE OF RIGHT S WHICH THE OWNER CAN LAWFULLY EXERCISE TO THE EXCLUSION OF ALL OTHERS. IT DOES NOT MEAN MERELY PHYSICAL PROPERTY BUT ALSO MEA NS THE RIGHT TITLE OR INTEREST INIT. FOR EXAMPLE MORTGAG OR OF AN IMMOVABLE PROPERTY HOLDS RIGHT (AND HENCE PROPERTY) SUBJECT TO THE RIGHTS (HENCE PROPERTY) OF THE MORTGAGEE. REFER CIT V. DAKSHA RAMANLAL (1992) 197 ITR 123 (GUJ). SUPREME C OURT IN RUSTOM CAVASJEE COOPER V. UNION OF INDIA AIR (1970) SUPREME COURT 564 AND ALSO IN AHMED G.H. ARIFF V. CWT (1970 ) 76 ITR 471 (SC) HAS HELD THAT PROPERTY MEANS HIGHEST RIGH T A MAN CAN HAVE TO ANYTHING BEING THAT RIGHT WHICH ONE HAS TO LANDS OR TENEMENTS GOODS OR CHATTELS WHICH DOES NOT DEPEND ON ANOTHERS COURTESY: IT INCLUDES OWNERSHIP ESTATES A ND INTERESTS IN CORPOREAL THINGS AND ALSO RIGHTS SUCH A TRADE MARKS COPY RIGHTS PATENTS AND EVEN RIGHTS IN PERSONAM CAPABLE OF TRAN SFEROR TRANSMISSION SUCH AS DEBTS; AND SIGNIFIES A BENEFI CIAL RIGHT TO OR A THING CONSIDERED AS HAVING A MONEY VALUE ESPECIA LLY WITH REFERENCE TO TRANSFER OR SUCCESSION AND TO THEIR C APACITY OF BEING INJURED. IV) SO ON FIRST PRINCIPLES IT CAN BE SAID THAT A C REDITORS RIGHT IN A DEBT GIVEN (TO ANOTHER PERSON) IS A PROPERTY AND HE NCE CAN BE TREATED AS CAPITAL ASSET. IN SUPPORT OF THIS PROPOS ITION WE NEED TAKE NOTICE OF THE FOLLOWING TWO DECISIONS: 1) CIT V. MINOR BABABHAIA ALIAS LAVKUMAR KANTILAL ( 1981) 128 ITR 1 (GUJ). THEREIN THE ASSESSEE HAD ADVANCED A SUM OF R S.25 000 TO A COMPANY ON ACCOUNT OF PROMISSORY NOTE AND COULD RE ALIZE ONLY RS.13 323 AND A SHARE OF RS.50 AND HENCE CLAIMED TH E BALANCE OF RS.11 617 AS CAPITAL LOSS. THE HIGH COURT NATURALLY CONSIDERED BOTH THE ASPECTS VIZ. EXISTENCE (I) OF CAPITAL ASSET AND (II ) OF TRANSFER OF THE SAME. ON THE FIST ASPECT OF THE EXISTENCE OF CAPITA L ASSET TOWARDS THE MIDDLE OF PAGE-4 OF THE REPORTS (128 ITR) FRESH PAR A STARTS WITH THE FOLLOWING SENTENCE: MR. RAVAL. LD. ADVOCATE APPEARING FOR THE REVENUE DID NOT CONTEST THE PROPOSITION THAT THE ASSETS WAS HOLDING A CAPITAL ASSET IN THE FORM OF A PROMISSORY NOTE OF RS.25 000 UNDER WHICH HE WAS AN UNSECURED CREDITOR OF THE MILL COMPANY IN THE WINDING UP PROCEEDINGS (EMPHASIS SUPPLIED.) NOTE: IN THAT DECISION GREATER PART IS DEVOTED TO T HE SECOND ASPECT OF TRANSFER WHICH MAY NOT BE REALLY IMPORT ANT FOR OUR PURPOSE BECAUSE IN OUR CASE AN ASSIGNMENT OF A DEBT WOULD CERTAINLY BE A TRANSFER. ALL THE SAME IN THE INTER EST OF COMPLETENESS IT MAY BE MENTIONED THAT CUT THE ASPE CT OF ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 21 TRANSFER IN THAT DECISION THE GUJARAT HIGH COURT RE LIED ON ITS EARLIER DECISION IN CIT V. VANIKA SILK MILLS P. LTD . (1977) 107 ITR 300 (GUJ). HOWEVER THAT DECISION IN VANIA SILK MIL LS CASE WAS REVERSED BY THE SUPREME COURT IN VANIA SILK MILLS P . LTD. V. CIT (1991) 191 ITR 647 (SC). HOWEVER IT IS IMPORTANT T O NOTE THAT THE DECISION OF THE SC IN VANIA SILK MILLS HAS BEEN SPECIFICALLY DISAPPROVED BY A LARGER BENCH OF THE SUPREME COURT IN A LATER DECISION IN CIT V. MRS. GRACE COLLIS (2001) 248 ITR 323 (SC) MEANING THEREBY THAT THE GUJARAT HIGH COURTS RELIA NCE ON GUJARAT HIGH COURT DECISION IN CIT VS. MRS. GRACE C OLLIS. (248 ITR 323) (SC) 2) CIT V. EAST INDIA CHARITABLE TRUST (1994) 206 IT R 152 (CAL.) IN THAT CASE THE TRUST HAD EARNED SOME CAPITAL GAIN S ON SALE OF SHARES AND UTILIZED THE SALE PROCEEDS INTER ALIA FOR MAKING FIXED DEPOSITS WITH SOME BANKS OR PUBLIC SECTOR UNDERTAKI NGS. IT WAS HELD THAT THE INVESTMENT OR DEPOSIT IN A PUBLIC SE CTOR COMPANY IS FIRSTLY AS ASSET AND SECONDLY A CAPITAL ASSET AN D THIRDLY A PERMITTED CAPITAL ASSET UNDER SPECIAL LAW RELATING TO THE ASSET. OF CHARITABLE OR PUBLIC RELIGIOUS TRUST. (PAGE 153 C & D OF THE REPORTS 206 ITR) NOTE: AT THAT TIME ON THE ASPECT OF TRANSFER THE SUPREME COURT DECISION IN VANIA SILK MILLS CASE (1991_) 191 ITR 6 47 HELD THE FIELD AND HENCE WAS FOLLOWED. BUT AS ALREADY MENTIO NED THAT DECISION OF THE SC HAS BEEN SUBSEQUENTLY DISAPPROVE D BY A LARGER BENCH OF THE SUPREME COURT IN CIT VS. MRS. G RACE COLLIS (212001) 248 ITR 323 (SC). BE IT AS IT MAY THE POI NT IS THAT THE FIXED DEPOSITS MADE WITH PUBLIC SECTOR COMPANIES WE RE REGARDED AS CAPITAL ASSET. F) SO EVEN AS A PROPOSITION OF LAW IT CAN BE REASO NABLY SAID AT A CREDITORS RIGHT IN ALONG GIVER TO ANOTHER PERSONS IS A CAPITAL ASSET. G) ON THE ASPECT OF TRANSFER AGAIN EVEN PURELY AS A LEGAL A PROPOSITION AN ASSIGNMENT OF A DEBT FOR A SMALLER SUM SHOULD BE CO NSIDERED AS TRANSFER EVEN ON FIRST PRINCIPLES. H) FURTHER REGARDING BENEFIT OF INDEXATION WE MAY A NOTE THAT THE SECOND PROVISO TO SECTION 48 ENVISAGES INDEXATION AND THE THIRD PROVISO EXCLUDES THE APPLICABILITY OF THE PROCEEDING PROVIS O (I.E. FROM INDEXATION) ANY BOND OR DEBENTURE OTHER THAN CAPIT AL INDEXED BONDS ISSUED BY THE GOVERNMENT. SO EVEN ON FIRST PRINCIP LES IT APPEARS THAT ORDINARILY BENEFIT OF INDEXATION MAY BE AVAILABLE T O THE CAPITAL ASSET WHICH IS A CREDITORS RIGHT IN A LOSS GIVEN OR DEPO SIT MADE. THE CIT(A) KEEPING IN VIEW THE ABOVE EXPLANATION AN D SUBMISSIONS HELD THAT THIS LOAN WAS A CAPITAL ASSET WITHIN THE MEANING OF SECT ION 2(14) OF THE ACT.. ACCORDING TO CIT(A) THIS BEING A CAPITAL ASSET TRANSFERRED FOR A CONSIDERATION THE LOSS ARISING ON ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 22 ACCOUNT OF TRANSFER OF THIS LONG TERM CAPITAL ASSET IS A LONG TERM CAPITAL LOSS AND HELD AS UNDER:- 6.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE FACTS RELATING TO THIS CLAIM OF THE APPELLANT. IT IS A FACT THAT THE APPEL LANT HAD GIVEN AN AMOUNT OF RS.1284 LACS TO TGBL TO PROMOTED THE COMPANY AND FO R APPELLANT IT WAS AN INVESTMENT. THE ASSESSING OFFICER HAS REJECTED THE CLAIM MAINLY FOR THE REASONS THAT ACCORDING TO HIM IT IS NOT AN ASSET BU T IS ADVANCE/INVESTMENT AND THAT NO REASON IS EXPLAINED FOR ASSIGNMENT OF LOAN AT LESSOR VALUE. ON PERUSAL OF EXPLANATION OF ASSESSEE IT IS SEEN THAT TGBL HAD BECOME SICK UNDERTAKING THE AMOUNT INVESTED WAS NOT LIKELY TO BE RECEIVED B ACK. HENCE THE APPELLANT JUSTIFIABLY ASSIGNED THE SAID RIGHT TO OTHER COMPAN Y SO THAT LOSS IN FUTURE CAN BE MINIMIZED. IT IS NOT UNUSUAL TO ASSIGN SUCH TYPES OF RIGHTS/AS SETS TO THIRD PARTY WHO CAN TAKE FOLLOW UP ACTIONS FOR REALIZING SUCH ASSET S/RIGHTS FROM SUCH SICK COMPANIES. IT WAS ALSO POINTED OUT HEREINABOVE THAT RIGHT TO RECOVER OR REALISE THE ASSET IS ITS IF AN ASSET COV ERED U/S.2(14). THE APPELLANT HAS ALSO REFERRED IN THIS RESPECT VARIOUS JUDICIAL DECISIONS WHICH SUGGEST THAT THE RIGHT TO RECOVER LOANS IS AN ACTIONABLE CLAIM. IT IS ALSO TRUE THAT THE SAID ASSIGNMENT IS SUBJECT MATTE R OF SUBSTANTIAL STAMP DUTY TO THE SAME OF RS.1.28 LAKHS AND THE CIV IL LAWS ALSO RECOGNISES THE SAID TRANSACTIONS AS TRANSFER OF MOV ABLE ASSET AND COVERS THE SAME AS LIABLE TO STAMP DUTY. THE VALUE OF LOAN ASSIGNMENT IS SUPPORTED BY VALUAT ION REPORT. THE ASSIGNMENT IS SUPPORTED BY BOARD RESOLUTION. CAPITA L LOSS/GAIN U/S.45 IS TO BE COMPUTED ON TRANSFER OF CAPITAL ASSET. THE TERM CAP ITAL ASST AS PER SEC.2(14) MEANS PROPERTY OF ANY KIND. LOOKING TO THIS ASPECT LOAN ASSIGNED IS CAPITAL ASSET. THE A.O HAS ALSO CONSIDERED IT TO BE INVESTM ENT. LOAN HAS BEEN TRANSFERRED TO FOCUS CORPORATE RESTRUCURING P. LTD. BY WAY OF ASSIGNMENT. THE VALUE OF LOAN IS SUPPORTED BY A REPORT OF CHART ERED ACCOUNTANT. TIN THE CIRCUMSTANCES THE ASSESSEE WAS JUSTIFIED IN CONSID ERING IT U/S.45. THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. EAST INDIA CHARITABLE TRUST 206 ITR 652 (SUPRA) HELD THAT THE INTEREST OR DEP OSIT IN A COMPANY IS FIRSTLY AN ASSET AND SECONDLY A CAPITAL ASSET AND THIRDLY A PERMITTED CAPITAL ASSET UNDER SPECIAL LAW RELATING TO ASSESSMENT OF CHARITA BLE TRUST (PAGE 153 OF CTD). THE HON. GUJARAT HIGH COURT HAD CONSIDERED AN D DECIDED THE SIMILAR QUESTION IN THE CASE OF CIT VS. BABABHAI ALIAS LAV KUMAR KANTILA 128 ITR 1 (GUJ). THE FACTS OF THAT CASE WERE THAT ASSESSEE AD VANCED RS.25 000 TO A COMPANY ON PROMISSORY NOTE. COMPANY WOULD UP SCHEME ASSESSEE REALIZED ONLY RS.13 323 AND EQUITY SHARE OF RS.50 AND CLAIME D BALANCE AS SHORT TERM CAPITAL LOSS. THE HOBLE GUJARAT HIGH COURT CONFIRM ED THE ITATS FINDING THAT ASSESSEE WAS ENTITLED TO SHORT TERM CAPITAL LOSS OF RS.11 617 ON THE GROUND THAT EXTINGUISHMENT OF RIGHTS THERE IN AS CONTEMPLA TED U/S.45 READ WITH SEC. 2(47) NEED NOT BE FORM ANY EXTRANEOUS SOURCE AND TH AT SUCH EXTINGUISHMENT NAY BE BROUGHT ABOUT BY THE ASSESSEES OWN ACCOUNT. ACCORDINGLY ASSESSEES LOSS IN HIS DEPOSITS WITH THE COMPANY WA S ALLOWED AS SHORT TERM CAPITAL LOSS. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 23 IN VIEW OF THE FACTS AS DISCUSSED ABOVE AND THE CAS E LAW MENTIONED ABOVE THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO AL LOW LONG TERM CAPITAL LOSS CLAIMED BY THE APPELLANT. AGGRIEVED REVENUE CAME IN APPEAL BEFORE TRIBUNAL. 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. BEFORE US LD. CIT-DR MAD E SUBMISSIONS THAT TPL WAS THE PROMOTER OF TGBL AND IFCI HAD SANCTIONED A SCHE ME OF FINANCIAL ASSISTANCE VIDE LETTER DATED 28-08-1996 IN WHICH IT HAD SANCTI ONED A LOAN TO TGBL. AS A PART OF THE SCHEME TPL HAD TO INFUSE FRESH CAPITAL IN TGBL IN THE FORM OF SHARE CAPITAL AND AS PART OF THE SAME SCHEME TPL AS PROMOTERS OF TGB L HAD TO GIVE UNSECURED LOAN TO TGBL. HE FURTHER STATED THAT CAPITAL INFUSION IN TGBL HAD TAKEN PLACE IN TWO FORMS I.E. AS EQUITY SHARE CAPITAL AND AS UNSECURE D LOAN. HE ARGUED THAT DURING THE YEAR UNDER CONSIDERATION THE EQUITY SHARE CAPITAL H AD BEEN SOLD OFF TO TORRENT PRIVATE LTD A GROUP COMPANY AND THIS TRANSACTION WAS NOT R OUTED THROUGH THE STOCK EXCHANGE AND FURTHER UNSECURED LOAN WAS SOLD OFF TO FOCUS CORPORATE RESTRUCTURING PVT LTD. LONG TERM CAPITAL LOSS HAS BEEN CLAIMED UP ON THE SALE OF THE LOAN TO FCRPL. IN VIEW OF THESE FACTS HE ARGUED THAT THERE ARE TWO DISTINCT TREATMENTS FOR THE INTRODUCTION OF THE LOAN TO TGBL I.E. ON THE ON E HAND THE EQUITY SHARE HAS BEEN SOLD TO A GROUP COMPANY TO MAINTAIN THE CONTROL OF THE GROUP OVER TGBL WHILE ON THE OTHER HAND THE UNSECURED LOAN HAS BEEN SOLD OFF TO ANOTHER COMPANY AND LOSS HAS BEEN CLAIMED UPON IT WITH INDEXATION. THE ENTIR E TRANSACTION HAS BEEN CARRIED OUT WITH ONLY ONE AIM AND THAT IS TO SET OFF THE C APITAL GAIN THAT HAD ACCRUED TO THE COMPANY DURING THE YEAR UNDER CONSIDERATION. LD. CI T-DR FURTHER STATED THAT THE ASSESSEE AS A PROMOTER OF TGBL WAS IN THE TOTAL KNO W-HOW OF THE FINANCIAL VIABILITY OF TGBL AND THE FACT THAT THE MONEY LENT TO TGBL CO ULD NOT BE REPAID BUT IN SPITE OF THIS FACT THE ASSESSEE HAD NOT PROVIDED ANY PROVISI ON IN THE DIMINUTION IN THE VALUE OF THE LOAN IN THE PREVIOUS YEARS WHICH IT WAS REQUIR ED TO DO SO IF SUCH LOAN IS TREATED AS INVESTMENT IN THE FORM OF LONG TERM CAPITAL ASSE T TO CORRECTLY ARRIVE AT THE PROFITS OF THE COMPANY AND IT WAS ONLY DURING THE YEAR THAT TH E SO CALLED DEBT WAS SOLD OFF TO SET OFF THE CAPITAL GAINS DURING THE YEAR. THIS IS THEREFORE A COLLUSIVE TRANSACTION WHICH HAS DIFFERENCE IN ITS FORM AND SUBSTANCE. EVE N FOLLOWING THE RATIO OF HONBLE ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 24 BOMBAY HIGH COURT IN THE CASE OF SALEM MAGNESITE (P) LTD. V. CIT (2010) 321 ITR 43 (BOM) THE SAME CANNOT BE TREATED AS BUSINESS LOS S. 21. AFTER GOING THROUGH THE ARGUMENTS OF LD. CIT-DR AND BY LD. SR-COUNSEL SHRI SOPARKAR THAT THE ASSESSEE HAD GIVEN A LOAN OF RS.1 2.84 CRORES TO TGBTL IN THE YEAR 1996-97 AND DURING THE YEAR 2001-02 I.E. THE R ELEVANT YEAR UNDER CONSIDERATION THIS LOAN WAS ASSIGNED TO FOCUS CORPORATE RESTRUCTU RING PVT. LTD. AS PER AGREEMENT DATED 07-02-2005 FOR A SUM OF RS.64 LAKH. THE ASSES SEE CLAIMED THE DIFFERENTIAL AMOUNT AS LONG TERM CAPITAL LOSS AMOUNTING TO RS.12 21 28 000/-. THE BRIEF FACTS ARE THAT TGBL WAS INCORPORATED IN MARCH91 AS A PUBLIC COMPANY AND ASSESSEE BEING ONE OF THE PROMOTERS GROUP-COMPANY WAS INTERESTING IN DEVELOPING THE BUSINESS OF THE SAID COMPANY. THE ASSESSEE AS A PROMOTER COMPAN Y HAD MADE INVESTMENT IN THE SAID COMPANY. TGBL WAS IN NEED OF FUND AND HAD APPROACHED IFCI TO GRANT LOAN AND IFCI IN TURN HAS AGREED TO GRANT LOAN OF RS.187 5 LAKHS ON THE FOLLOWING TERMS:- 1. BEFORE AVAILING ITSELF OF ANY ASSISTANCE FROM I FCL TGBL SHALL:- A) DEPLOY SHARE CAPITAL TO THE EXTENT OF RS.1250/- LAKH OUT OF THE RIGHTS ISSUE OF EQUITY SHARES AND 50% OF THE ENVISAGED INT ERNAL ACCRUALS OF RS.613 LAKH I.E. RS.307 LAKH FROM THE PROMOTERS FOR FINANCING THE DOWN STREAM PROJECT. B) FINANCE THE CASH LOSS OF RS.671 LAKH INCURRED DU RING THE YEAR ENDED 31 ST MARCH 1996 THROUGH SUBORDINATED INTEREST FREE UNS ECURED LOANS FROM THE PROMOTERS WHICH SHALL NOT BE REPAID WITHO UT THE PRIOR APPROVAL OF IFCI. THE TERMS AND CONDITIONS OF SUCH UNSECURED LOANS SHALL BE TO THE SATISFACTION OF IFCI . THE TGBL INCURRED HUGE LOSSES AS IT COULD NOT CARRY OUT RESTRUCTURING SUCCESSFULLY AND THEY WERE NOT IN A POSITION TO REPAY THE LOANS BORROWED FROM IFCI AND ALSO THE GROUP COMPANY AND ACCORDINGLY IT WAS DECLARED AS S ICK UNDERTAKING. ACCORDINGLY THE ASSESSEE ENTERED INTO AN AGREEMENT WITH FOCUS C ORPORATE RESTRUCTURING PVT. LTD. FOR ASSIGNING THE ABOVE LOAN FOR A SUM OF RS.6 4 LAKH. NOW THE QUESTION ARISES THAT HOW THIS LOAN IS AN ASSET. THE FIRST REQUIREME NT IS THAT IT SHOULD BE A CAPITAL ASSET WITHIN THE PROVISIONS OF SECTION 2(14) OF THE ACT AS DEFINED SO AS TO CAPITAL ASSET MEANS PROPERTY OF ANY KIND HELD BY AN ASSESSEE W HETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION BUT DOES NOT INCLU DE- ( THE ITEMS ENUMERATED THEREAFTER FOR EXCLUSION ARE NOT RELEVANT AND HENCE NEED NOT BE CONSIDERED. ) THE MAIN PART OF SECTION 2(14) TALKS OF PROPERTY OF AN Y KIND AND MAKES IT IRRELEVANT ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 25 WHETHER IT IS CONNECTED WITH THE ASSESSEES BUSINES S OR NOT BUT THE TERM PROPERTY HAS NOT BEEN DEFINED IN THE ACT. WE FIND THAT THE P ROPERTY HAS BEEN DEFINED BY VARIOUS JUDICIAL PRONOUNCEMENTS ACCORDING TO WHICH THE WORD PROPERTY MEANS A BUNDLE OF RIGHTS WHICH THE OWNER CAN LAWFULLY EXERC ISE TO THE EXCLUSION OF ALL OTHERS. IT DOES NOT MEAN MERELY PHYSICAL PROPERTY BUT ALSO MEANS THE RIGHT TITLE OR INTEREST IN IT. FOR EXAMPLE MORTGAGOR OF AN IMMOVABLE PROPERTY HOLDS RIGHT SUBJECT TO THE RIGHTS OF THE MORTGAGEE. THE SUPREME COURT IN THE CASE OF AHMED G.H. ARIFF V. CWT (1970) 76 ITR 471 (SC) HAS HELD THAT PROPERTY MEANS HIGHEST RIGHT A MAN CAN HAVE TO ANYTHING BEING THAT RIGHT WHICH ONE HAS TO LAND S OR TENEMENTS GOODS OR CHATTELS WHICH DOES NOT DEPEND ON ANOTHERS COURTESY: IT INC LUDES OWNERSHIP ESTATES AND INTERESTS IN CORPOREAL THINGS AND ALSO RIGHTS SUCH AS TRADE-MARKS COPY-RIGHTS PATENTS AND EVEN RIGHTS IN PERSONAM CAPABLE OF TRAN SFER OR TRANSMISSION SUCH AS DEBTS; AND SIGNIFIES A BENEFICIAL RIGHT TO OR A THI NG CONSIDERED AS HAVING A MONEY VALUE ESPECIALLY WITH REFERENCE TO TRANSFER OR SUC CESSION AND TO THEIR CAPACITY OF BEING INJURED. SO ON FIRST PRINCIPLES IT CAN BE SA ID THAT A CREDITORS RIGHT IN A DEBT GIVEN IS A PROPERTY AND HENCE CAN BE TREATED AS CAP ITAL ASSET. WE FIND THAT HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. MINOR BABABHAI ALIAS LAVKUMAR KANTILAL 1981) 128 ITR 1 (GUJ) HELD ON THE FACTS THAT THE AS SESSEE HAD ADVANCED A SUM OF RS.25 000 TO A COMPANY ON A PROMISSORY NOTE AND COU LD REALIZE ONLY RS.13 323/- AND A SHARE OF RS.50 AND HENCE CLAIMED THE BALANCE OF RS.11 617/- AS CAPITAL LOSS. THE HIGH COURT NATURALLY CONSIDERED BOTH THE ASPECT S VIZ. EXISTENCE ( I) OF CAPITAL ASSET AND (II) OF TRANSFER OF THE SAME. ON THE FIST ASPECT OF THE EXISTENCE OF CAPITAL ASSET WITH THE FOLLOWING SENTENCE:- MR. RAVAL LEARNED ADVOCATE APPEARING FOR THE REVE NUE DID NOT CONTEST THE PROPOSITION THAT THE ASSESSEE WAS HOLDI NG A CAPITAL ASSET IN THE FORM OF A PROMISSORY NOTE OF RS.25 000/- UNDER WHICH HE WAS AN UNSECURED CREDITOR OF THE MILLING COMPANYIN THE WIN DING-UP PROCEEDINGS... 22. FURTHER WE FIND FROM THE DECISION OF HONBLE C ALCUTTA HIGH COURT IN THE CASE OF CIT V. EAST INDIA CHARITABLE TRUST (1994) 206 ITR 1 52 (CAL) IN THAT CASE THE TRUST HAD EARNED SOME CAPITAL GAINS ON SALE OF SHARES AND UTILIZED THE SALE PROCEEDS INTER ALIA FOR MAKING FIXED DEPOSITS WITH SOME BANKS OR PUBLIC SECTOR UNDERTAKINGS. IT WAS HELD THAT THE INVESTMENT OR DEPOSIT IN A PUBLIC SE CTOR COMPANY IS FIRSTLY AN ASSET AND SECONDLY A CAPITAL ASSET AND THIRDLY A PERMITTED CA PITAL ASSET UNDER SPECIAL LAW RELATING TO THE ASSESSMENT OF CHARITABLE OR PUBLIC RELIGIOUS TRUST. (PAGE 153 C & D OF ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 26 206 ITR). ACCORDINGLY IN THE PRESENT CASE ALSO WE ARE OF THE VIEW ON THE PROPOSITION OF LAW THAT CREDITORS RIGHT IN A LOAN IS A CAPITAL ASSET. ON THE OTHER ASPECT OF TRANSFER THE LEGAL PROPOSITION IN RESPECT OF AS SIGNMENT OF DEBT SHOULD BE CONSIDERED AS TRANSFER AND THIS HAS RIGHTLY BEEN HE LD SO BY THE CIT(A). ACCORDINGLY WE CONFIRM THE ORDER OF CIT(A) ON THIS ISSUE AND RE VENUES ISSUE IS DISMISSED. 23. THE NEXT COMMON ISSUE IN THESE CROSS-APPEALS OF REVENUE AS WELL AS ASSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) IN AL LOWING THE CLAIM OF DEDUCTION U/S.80HHC ON THE FOLLOWING:- ITA NO.333/AHD/2006 FOR A.Y.02-03 (BY REVENUE) 5.(A) THE LD CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT EXCISE DUTY AND SALES TAX IS TO BE EXCLUDED FROM THE SALES FOR THE PURPOSE OF DEDUCTION U/S.80HHC 5 (B) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO TREAT THE FOREIGN EXCHANGE GAIN REALIZED ON EXPORT PROCEEDS A S PART OF EXPORT TURNOVER AND ELIGIBLE FOR DEDUCTION U/S.HHC. 5 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO TREAT THE RECOVERY OF PROCESSING CHARGES AS BUSINESS PROFIT E LIGIBLE FOR DEDUCTION U/S.HHC 5(D) THE LD. CIT(A) HAS ERRED IN AW AND ON FACTS IN HOLDING THAT FOR THE PURPOSE OF DEDUCTION UD/S.80HHC THE NET INTEREST O NLY SHOULD BE CONSIDERED. ITA NO.346/AHD/2006 FOR A.Y.02-03 (BY ASSESSEE) 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE CIT(A) HAS GROSSLY ERRED WHILE CONSIDERING DEDUCTION U/S. 80HHC IN DIS ALLOWING RS.3 76 01 039 BEING THE PROFIT DERIVED BY THE APPELLANT ON SALE O F DEPB LICENSES DURING THE ASSESSMENT YEAR IS NOT INCOME FROM BUSINESS UNDER T HE PROVISIONS OF SECTION 28(IIA 28(IIB) AND 28(IIC) OF THE I.T. ACT. THIS HONBLE TRIBUNAL MAY THEREFORE BE PLEASED TO SO HOLD AND DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION U/S.80HHC OF T HE I.T. ACT IN RESPECT OF PROFIT ON SALE OF DEPB LICENSES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E CIT(A) HAS ERRED WHILE CONSIDERING DEDUCTION U/S.80HHC OF THE I.T. ACT IN REDUCING THE EXPORT TRADING LOSS OF RS.36 82 721 FROM THE EXPORT MANUFA CTURING PROFIT BY RELYING ON THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF I PCA LABORATORIES LTD. (266 ITR) (SC) ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 27 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E CIT(A) HAS ERRED WHILE CONSIDERING DEDUCTION U/S 80HHC OF THE I.T. ACT IN NOT TREATING AS BUSINESS INCOME THE FOLLOWING ITEMS OF OPERATING INCOME. PARTICULARS RS IN LACS SCRAP DISPOSAL 29.60 INSURANCE RECEIPT 22.67 LAB TESTING FEES 1.27 BAD DEBT RECOVERED 3.59 NOTICE PAY 0.95 KASAR / WRITE OFF 4.52 TOTAL 62.6 THIS HONBLE TRIBUNAL MAY THEREFORE BE PLEASED TO SO HOLD AND DIRECT THE ASSESSING OFFICER TO QUANTIFY DEDUCTION U/S.80HHC O F THE I.T. ACT BY TREATING THE AFORESAID ITEMS OF OPERATING INCOME AS BUSINESS INCOME. ITA NO.4356/AHD/2007 FOR A.Y. 04-05 (BY REVENUE) 4. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO EXCLUDE THE COMPONENT OF EXCISE DUTY FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OFF D EDUCTION U/S.80HHC OF THE ACT. 5. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO TREAT INTEREST INCOME TO BE TREATED AS BUSINESS INCOME RATHER THAN INCOME FROM OTHER SOURCES OF RS. 23 63 668/-. 8. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO TREAT THE PROCESSING C HARGES AS BUSINESS SINCE AMOUNTING TO RS.1 26 73 537/-. ITA NO.4343/AHD/2007 FOR A.Y.04-05 (BY ASSESSEE.) 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN HOLDING THAT IN COMPUTATION OF DEDUCTION U/S.80HHC JOB WORK CHARGES OF RS.1 26 73 572 WERE REQUIRED TO BE INCLUDED IN THE TOTAL TURNOVER. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN UPHOLDING THE VIEW TAKEN BY THE ASSESSING OFFICER T HAT IN THE QUANTIFICATION OF DEDUCTION U/S.80HHC FOR COMPUTING PROFITS OF THE BU SINESS THE FOLLOWING SUMS WERE REQUIRED TOO BE EXCLUDED: RS. (I) SCRAP SALES 49 58 508 (II) NOTICE PAY 6 41 717 (III) COMPENSATIONS ON TERMINATION OF CONTRACT 98 65 000 (IV) BALANCE WRITTEN BACK 1 23 09 000 ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 28 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN HOLDING THAT FOR QUANTIFICATION OF DEDUCTION U/S.80 HHC THE DEPB INCOME OF RS.3 94 65 445 WAS NOT TO BE CONSIDERED. 5. WITHOUT PREJUDICE ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE THE CIT(A) ERRED IN NOT HIMSELF UPHOLDING THE ASSESSEE S CONTENTION THAT INTEREST U/S.234B 234C AND 234D WAS NOT CHARGEABLE EVEN IF ADVERSE VIEW IS TAKEN AGAINST THE ASSESSEE IN RESPECT OF DEPB INCOME AND HE FURTHER ERRED IN MERELY LEAVING IT TO THE ASSESSING OFFICER TOO BE C ONSIDERED BY THE LATTER (.E. THE ASSESSING OFFICER). 24. FROM THE ABOVE COMMON GROUNDS THE COMMON ISSUE S ARISING ON ACCOUNT OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT ARE A S UNDER:- I) PROFIT ON SALE ON DEPB; II) EXPORT TRADING LOSS III) SCRAP DISPOSAL; IV) INSURANCE RECEIVES; V) LABOUR TESTING FEES; VII) BAD DEBT RECOVER; VII) NOTICE PAY; VIII) KASAR/WRITE OFF IX) EXCISE DUTY & SALES TAX; X) INTEREST INCOME; XI) PROCESSING CHARGES; XII) JOB WORKING CHARGES; XIII) BALANCE WRITTEN OFF XIV) FOREIGN EXCHANGE GAINS 25 THE LD. CIT-DR ARGUED THAT HONBLE SUPREME COURT IN ITS LAND MARK JUDGMENT IN THE CASE OF CIT V. LAKSHMI MACHINE WORKS (2007) 290 ITR 667 (SC) AND CIT V. K. RAVINDRANATH NAIR (2007) 295 ITR 228 (SC) HAS MADE CATEGORICAL OBSERV ATION THAT ON ACCOUNT OF FREQUENT AMENDMENT IN SECTION 80HHC O F THE ACT IT IS NO MORE A CODE IN ITSELF AND THE JUDGMENT IN THE CASE OF LMW IS RE LATED TO THE LAW APPLICABLE FOR THAT PARTICULAR A.Y. 1993-94. FURTHER IN THE CASE OF LA XMI MACHINE WORKS (SUPRA) IT WAS ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 29 ARGUED THAT UNPAID CENTRAL EXCISE DUTY AND UNPAID S ALES-TAX HAS TO BE TREATED AS REVENUE FOLLOWING THE HONBLE SUPREME COURT JUDGMEN T IN THE CASE OF CHOWRINGHEE SALES BUREAU (P) LTD. V. CIT AND THIS CLEARLY REFLECTS THAT APPELLANT WAS HAVING A SEPARATE ACCOUNT WHERE DUTIES COLLECTED IN THE FORM OF SALES-TAX AND CENTRAL EXCISE ARE PAID WHICH WAS PRESCRIBED AT THAT PARTICULAR T IME. THIS ACCOUNT WAS NOT MANDATORY TO BE PART OF TRADING OR PROFIT AND LOSS ACCOUNT EVEN BY ACCOUNTING STANDARD. HE ARGUED THAT AFTER INTRODUCTION OF SECT ION 145A OF THE ACT. WHERE BASIC ISSUE WAS SETTLED RELATED TO VALUE OF CLOSING STOCK ON ACCOUNT OF MODVAT CREDIT AND IT WAS MADE COMPULSORY TO INCLUDE THE DUTIES IN THE FO RM OF SALES-TAX CENTRAL EXCISE OCTROI ETC. NOT ONLY IN THE OPENING PURCHASE OF RA W MATERIAL BUT ALSO IN THE CLOSING STOCK OF SUCH GOODS. HE ARGUED WITH DUE REGARD TO R ATIO OF LAXMI MACHINE WORKS (SUPRA) AND K RAVINDRANATHAN NAIR (SUPRA) IN RESPEC T OF EXCLUSION OF SUCH DUTIES THAT TO EXCLUDE ONLY FROM TURN OVER IS NOT APPLICABLE IN THE PRESENT CONTEXT. EITHER BOTH SIDE OF TRADING ACCOUNT AND PROFIT AND LOSS ACCOUNT SHOULD BE INCLUDED WITH SUCH DUTIES OR ELSE EXCLUDED. THE ACCOUNT OF REDUCING CE NTRAL EXCISE FROM TOTAL TURNOVER IS GIVEN DISTORTING PICTURE PARTICULAR WITH CONCEPT OF MODVAT CREDIT. THE PROFIT ELEMENTS IS THEREFORE CREPT IN THE BUSINESS PROFIT OF THE ASSESSEE ON ACCOUNT OF MODVAT CREDIT IS BENEFIT GIVEN TO ASSESSEE OUT OF THE TOTAL COLLE CTION OF CENTRAL EXCISE FOR THE CENTRAL EXCISE PAID ON RAW MATERIAL AND CAPITAL GOODS. THE RATIO OF LAXMI MACHINE WORKS (SUPRA) AND K.RAVINDRA NAIR (SUPRA) IS SPECIFIED TH AT SINCE IN THE YEAR OF CONSIDERATION OF THOSE CASES NO ELEMENT OF BUSINESS PROFIT WAS INVOLVED BY COLLECTION OF SUCH DUTIES THEREFORE THE SAME WERE DIRECTLY T O BE EXCLUDED FROM TOTAL TURN OVER. NOW THE APPELLANT IS GETTING MORE DEDUCTION U/S.80H HC ON THE INFLATED PROFIT ON ACCOUNT OF MODVAT CREDIT WHICH WAS NOT THE INTENTI ON OF LEGISLATURE. 26. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSE E FAIRLY STATED THAT THE ISSUE OF SALES TAX AND EXCISE DUTY WHETHER IS TO BE EXCLUDE D FROM THE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC OF THE ACT IS SQUAR ELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF LAKSHMI MACHINE WORKS (SUPRA) WHEREIN THE HONBLE APEX COURT HAS HELD AS UNDER:- IN FACT IN CIVIL APPEAL NO.4409 OF 2005 THE ABOV E PROPOSITION HAS BEEN ACCEPTED BY THE ASSESSING OFFICER [SEE : PAGE NO.24 OF THE PAPER BOOK] IF SO THEN EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PAR T OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3) OTHERWISE THE FORMULA BECOM ES UNWORKABLE. IN OUR ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 30 VIEW SALES TAX AND EXCISE DUTY ALSO DO NOT HAVE AN Y ELEMENT OF TURNOVER WHICH IS THE POSITION EVEN IN THE CASE OF RENT COM MISSION INTEREST ETC. IT IS IMPORTANT TO BEAR IN MIND THAT EXCISE DUTY AND SALE S TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. THEREFORE IF THEY ARE MADE RELATABLE TO EXPORTS THE FORMULA UNDER SECTION 80HHC WOULD BECOME UNWORKABLE. THE VIEW WHICH WE HAVE TAKEN IS IN THE LIGHT OF THE AMENDMENTS MADE TO SECTION 80HHC FROM TIME TO TIME. 27. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF LAKSHMI MACHINE WORKS (SUPRA) AND EVEN THE ARGUMENT OF LD. CIT-DR THAT AFTER THE INTRODUCTION OF SECTION 145A THE EXCISE DUTY AND SALES TAX WILL BE INCLUDED IN THE TOTAL TURNOVER FOR THE PURPOSE O F COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT THE CO-ORDINATE BENCH IN THE CASE OF DCIC V. MAZDA LTD. IN ITA NO.793/AHD/2007 FOR ASSESSMENT YEAR 2003-04 VIDE ORDER DATED 06-08 -2010 HAS DECIDED THIS ISSUE AFTER CONSIDERING THE AMENDM ENT OF SECTION 145A OF THE ACT. AND HELD THAT THERE IS NO CHANGE IN THE FORMULA OF SECTION 80HHC(3) OF THE ACT AND STILL EXCISE DUTY AND SALES TAX IS TO BE EXCLUDED F ROM THE TOTAL TURNOVER. RESPECTFULLY FOLLOWING THE HONBLE APEX COURT AND CO-ORDINATE BE NCH CITED (SUPRA) WE CONFIRM THE ORDER OF CIT(A) AND THESE COMMON ISSUE OF THE R EVENUES APPEALS IS DISMISSED. 28. AS REGARDS TO FOREIGN EXCHANGE GAINS THE ISSU E RAISED BY THE ASSESSEE WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR O F THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT V. AMBA IMPEX (2006) 282 ITR 144 (GUJ) WHEREIN IT IS HELD AS UN DER:- THE ENTIRE CASE OF THE REVENUE IS BUILT ON THE FAC T THAT THE AMOUNT HAS BEEN RECEIVED IN A YEAR SUBSEQUENT TO THE YEAR OF EXPORT S. AS CAN BE SEEN FROM THE ASSESSMENT ORDER IT TALKS OF EXPORT REALIZATION FOR EXPORTS MADE UP IN MARCH 31 2000. THERE IS NOTHING TO INDICATE AND NONE OF THE AUTHORITIES HAVE APPLIED THEIR MIND AS TO WHETHER THE SUM OF R S.13 18 068 IS RELATABLE TO EXPORTS MADE DURING ONLY ONE FINANCIAL YEAR OR MORE THAN ONE FINANCIAL YEAR PRECEDING MARCH 31 2000. THIS WOULD HAVE A MATERI AL BEARING TAKING INTO CONSIDERATION THE PROVISIONS OF SUB-SECTION (2) OF SECTION 80HHC OF THE ACT AS WAS APPLICABLE DURING THE YEAR UNDER CONSIDERATION. UNDER SUB-SECTION (2) OF SECTION 80HHC OF THE A CT SALE PROCEEDS OF GOODS OR MERCHANDISE EXPORTED OUT OF INDIA AND RECEIVED I N CONVERTIBLE FOREIGN EXCHANGE BECOME ENTITLED TO THE DEDUCTION SUBJECT T O FULFILLMENT OF OTHER REQUISITE CONDITIONS. CLAUSE (A) OF SUB-SECTION (2 ) OF SECTION 80HHC OF THE ACT PROVIDES THAT SUCH SALE PROCEEDS HAVE TO BE REC EIVED IN CONVERTIBLE FOREIGN EXCHANGE WITHIN A PERIOD OF SIX MONTHS FROM THE END OF THE PREVIOUS YEAR OR WITHIN SUCH FURTHER PERIOD AS THE COMPETEN T AUTHORITY MAY ALLOW IN THIS ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 31 BEHALF. THUS A PLAIN READING OF THE PROVISION MAKE S IT CLEAR THAT ONCE THE COMPETENT AUTHORITY HAS EXTENDED THE TIME IN A CAS E WHERE IT IS NECESSARY OR WHERE THE SALE PROCEEDS HAVE BEEN RECEIVED WITH IN A PERIOD OF SIX MONTHS FROM THE END OF THE PREVIOUS YEAR SUCH SALE PROCEE DS ARE DIRECTLY RELATABLE TO THE EXPORTS MADE AND NO FURTHER INQUIRY IS NECESSAR Y. THEREFORE THE ENTIRE CONTROVERSY AS TO WHETHER SUCH RECEIPT AMOUNTS TO ANY OTHER RECEIPT STIPULATED IN EXPLANATION (BAA)(1) NEED NOT BE TAKEN UP FOR CONSIDERATION. ONCE THE LEGISLATURE HAS PROVIDED FOR TREATING A RE CEIPT WITHIN A PERIOD OF SIX MONTHS AFTER THE END OF THE PREVIOUS YEAR OR WITHI N FURTHER EXTENDED PERIOD AS SALE PROCEED RELATABLE EXPORTS IT WOULD NOT BE OPEN TO THE REVENUE TO RAISE SUCH A CONTROVERSY. THE LEGISLATURE IN ITS WI SDOM HAS TAKEN INTO CONSIDERATION THE FACT THAT IN THE CASE OF EXPORTS MADE SALE PROCEEDS ARE NOT NECESSARILY REALIZABLE IMMEDIATELY WITHIN THE ACCOU NTING PERIOD IN WHICH EXPORTS HAVE BEEN MADE. AS A COROLLARY BY THE TIME SUCH SALE PROCEEDS ARE RECEIVED WITHIN THE PRESCRIBED TIME BY VIRTUE OF E XCHANGE RATE DIFFERENCE THERE MIGHT BE A SITUATION WHERE A LARGER AMOUNT IS RECEIVED THAN THE AMOUNT AS REFLECTED IN THE SHIPPING BILL. HENCE MERELY B ECAUSE AN AMOUNT IS RECEIVED IN A YEAR SUBSEQUENT TO THE YEAR OF EXPORT BY WAY OF EXCHANGE RATE DIFFERENCE IT DOES NOT NECESSARILY ALWAYS FOLLOW T HAT THE SAME IS NOT RELATABLE TO THE EXPORTS MADE. AS CAN BE SEEN FROM THE IMPUGNED ORDER OF THE TR IBUNAL AS WELL AS THE ORDERS OF THE COMMISSIONER (APPEALS) AND THE ASSESS ING OFFICER NONE OF THE AUTHORITIES HAVE APPROACHED THE ISSUE IN THE LIGHT OF THE PROVISIONS OF SUBS- SECTION (2) OF SECTION 80HHC OF THE ACT. NO EVIDENC E IS AVAILABLE ON RECORD TO ESTABLISH FULFILLMENT OR OTHERWISE OF THE CONDITIO NS STIPULATED BY SUBS-SECTION (2) OF SECTION 80HHC OF THE ACT. IN THESE CIRCUMST ANCES IT WOULD NOT BE FAIR AND JUST FOR EITHER SIDE TO RESOLVE THE CONTROVERSY IN THE ABSENCE OF THE RELEVANT FACTS AND EVIDENCE BEING AVAILABLE ON RECO RD. IN THE LIGHT OF WHAT IS STATED HEREINBEFORE THE QUESTION IS LEFT UNANSWERED AND THE APPEAL IS RESTORED TO THE FILE OF THE TRIBU NAL ONLY IN RELATION TO THE ISSUE RELATABLE TO DEDUCTION UNDER SECTION 80HHC OF THE ACT WITHOUT EXPRESSING ANY FINAL OPINION ON THE MERITS OF THE M ATTER. THE TRIBUNAL SHALL AFTER HEARING BOTH THE SIDES DECIDE THE APPEAL ON THIS COUNT BE OPEN TO THE TRIBUNAL TO RESTORE THE ISSUE TO THE FILE OF THE AS SESSING AUTHORITY TO ASCERTAIN PROPER FACTS IN THE CIRCUMSTANCES. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY THE J URISDICTIONAL HIGH COURT DECISION IN THE CASE OF AMBA IMPEX (SUPRA) RESPECTFULLY FOLLOWING THE SAME WE ALLOW THE CLAIM OF THE ASSESSEE. 29. THE NEXT COMMON ISSUES I.E. SCRAP DISPOSAL INS URANCE RECEIPTS LABOUR TESTING FEE BAD DEBT RECOVER NOTICE PAY KASAR/RI GHT OFF BALANCE WRITTEN OFF WHETHER ALL THESE ITEMS REQUIRE EXCLUSION OF 90% OF THESE R ECEIPTS FROM THE BUSINESS PROFITS UNDER CLAUSE (BAA) FOR THE PURPOSE OF DEDUCTION U/S .80HHC OF THE ACT.. WE FIND THAT ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 32 THIS ISSUE IS NOW SETTLED BY HONBLE APEX COURT IN THE CASE OF K. RAVINDRANATH NAIR (SUPRA) IT IS OBSERVED THAT EXPLANATION (BAA) TO S . 80HHC REQUIRES THAT NINETY PER CENT OF RECEIPTS BY WAY OF BROKERAGE COMMISSION I NTEREST RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE HAVE TO BE REDUCE D FROM THE PROFITS. THE REASON WHY ITEMS LIKE BROKERAGE ETC HAVE TO BE EXCLUDED IS BEC AUSE THEY 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 EXPE NDITURE MIGHT HAVE BEEN INCURRED IN EARNING THESE INCOMES AN ADHOC DEDUCTION OF TEN PER CENT FROM SUCH INCOME IS ALLOWED. THE TASK OF INTERPRETATION IS TO FIND OUT THE TRUE INTENT OF A LEGISLATIVE PROVISION AND IT IS CLEARLY NOT OPEN TO THE COURT T O LEGISLATE BY SUBSTITUTING A FORMULA OR PROVISION OTHER THAN WHAT HAS BEEN LEGISLATED BY PARLIAMENT. IT IS NOT OPEN TO SAY THAT SOMETHING MORE THAN THE 10% STATUTORILY PROVID ED SHOULD ALSO BE ALLOWED. 30. WE FIND THAT NONE OF THE AUTHORITIES BELOW HAS GIVEN A FINDING THAT THESE RECEIPTS HAVE NEXUS WITH THE EXPORT OR NOT AND IN T HE ABSENCE OF THE SAME THESE ISSUES CANNOT BE DECIDED AT THIS STAGE. HOWEVER TH ESE ISSUES ARE SET ASIDE TO THE FILE OF ASSESSING OFFICER TO RE-DECIDE THESE ISSUES AFTER FINDING OUT WHETHER THESE HAVE NEXUS WITH THE EXPORTS OR NOT AND IN CASE THE RE IS NEXUS WITH THE EXPORTS WITH THESE RECEIPTS THE ASSESSING OFFICER WILL ALLOW TH E CLAIM OF ASSESSEE AND NO EXCLUSION UNDER CLAUSE (BAA) WILL BE MADE TO THE EX TENT OF 90%. ACCORDINGLY THESE ISSUES ARE SET ASIDE TO THE FILE OF ASSESSING OFFIC ER WITH THE ABOVE DIRECTIONS. 31. THE NEXT ISSUE IS REGARDING PROFIT ON SALE OF D EPB WHETHER ELIGIBLE FOR DEDUCTION U/S.80HHC OF THE ACT OR NOT AND WHETHER 9 0% IS TO BE EXCLUDED FOR THE COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT UNDER CLAUSE (BAA). 32. AT THE OUTSET IT IS ADMITTED BY BOTH THE SIDES THAT THE ISSUE NEEDS TO BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO DECID E AFRESH IN THE LIGHT OF INSERTION OF CLAUSE (IIID) TO SECTION 28 BY THE TAXATION LAWS (A MENDMENT) ACT 2005 W.R.E.F. 1-4- 1998 AND ALSO INSERTION OF SECOND THIRD AND FOURTH PROVISO BY THIS AMENDMENT. NEITHER OF THE AUTHORITIES BELOW HAVE EXAMINED THE AMENDMENT. THE LD. COUNSEL FOR THE ASSESSEE HAVE ALSO REFERRED TO THE CASE LAW OF MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF GLENMARK LABORATORIES LTD. VS. DCIT (2008) 1 DTR (MUM)(TRIB) 460 ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 33 WHEREIN IT IS HELD THAT PART OF THE DIRECT COST OF EXPORT OF TRADING GOODS IS ATTRIBUTABLE TO THE VALUE OF DEPB LICENCE AND THIS HAS TO BE RED UCED FROM THE TOTAL DIRECT COST TO FIND OUT THE DIRECT COST RELATABLE TO TRADING EXPOR T: ISSUE IS RESTORED TO THE AO TO ASCERTAIN THE VALUE OF DEPB LICENCE ON THE DATE OF RECEIPT AND REDUCE THE SAME FROM TOTAL DIRECT COST. THE ASSESSING OFFICER WILL DECID E THE ISSUE IN THE LIGHT OF LATEST DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT V. KALPATARU COLOURS & CHEMICALS LTD. 233 CTR 313 (BOM) 33. THE NEXT ISSUE IS REGARDING EXPORT TRADING LOSS IS TO BE REDUCED FROM EXPORT MANUFACTURING PROFIT U/S.80HHC OF THE ACT. 34. AT THE OUTSET THE LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE IS COVERED IS AGAINST THE ASSESSEE AND IN FAVOUR OF REVENUE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF IPCA LABORATORY LTD. V. DCIT [2004] 266 ITR 521 (SC) WHEREIN IT IS HELD AS UNDER:- WE ARE UNABLE TO ACCEPT THE SUBMISSION OF MR. DAST UR. UNDOUBTEDLY SECTION 80HHC HAS BEEN INCORPORATED WITH A VIEW TO PROVIDIN G INCENTIVE TO EXPORT HOUSES. EVEN THOUGH A LIBERAL INTERPRETATION HAS TO BE GIVEN TO SUCH A PROVISION THE INTERPRETATION HAS TO BE AS PER THE W ORDING OF THIS SECTION. IF THE WORDINGS OF THE SECTION ARE CLEAR THEN BENEFITS WH ICH ARE NOT AVAILABLE UNDER THE SECTION CANNOT BE CONFERRED BY IGNORING OR MIS INTERPRETING WORDS IN THE SECTION. IN THIS CASE WE ARE CONCERNED WITH THE WO RDINGS OF SUB-SECTION (3) OF SECTION 80HHC. AS NOTED EARLIER SUB-SECTION (3)( A) DEALS WITH CASE WHERE THE EXPORT S ONLY OF SELF MANUFACTURED GOODS. SUBSE CTION 3(B) DEALS WITH THE CASE WHERE THE EXPORT IS ONLY OF TRADING GOODS. THU S WHEN THE LEGISLATURE WANTED TO TAKE EXPORTS FROM SELF MANUFACTURED GOODS OR TRADING GOODS SEPARATELY IT HAS ALREADY SO PROVIDED IN SUB-SECTI ONS (3)(A) AND (3)(B). IN ARRIVING AT THE FIGURE OF POSITIVE PROFIT BOTH THE PROFITS AND THE LOSSES WILL HAVE TO BE CONSIDERED. IF THE NET FIGURE IS A POSITIVE P ROFIT THEN THE ASSESSEE WILL BE ENTITLED TO A DEDUCTION. IF THE NET FIGURE IS A LO SS THEN THE ASSESSEE WILL NOT BE ENTITLED TO A DEDUCTION. SUB-SECTION (3)(C) DEALS W ITH CASES WHERE THE EXPORT IS OF BOTH SELF MANUFACTURED GOODS AS WELL AS TRADI NG GOODS. THE OPENING PART OF SUB-SECTION (3)(C) STATES PROFITS DERIVED FROM SUCH EXPORT SHALL. THEN FOLLOW (I) AND (II). BETWEEN (I) AND (II) THE WORD AND APPEARS. A PLAIN READING OF SUB-SECTION (3)(C) SHOWS THAT PROFITS FROM SUCH EXPORTS HAS TO BE PROFITS OF EXPORTS OF SELF MANUFACTURED GOODS PLUS PROFITS OF EXPORTS OF TRADING GOODS. THE PROFIT IS TO BE CALCULATED IN THE MANNER LAID D OWN IN SUB-SECTIONS (3)(C)(I) AND (II). THE OPENING WORDS PROFIT DERIVED FROM S UCH EXPORTS TOGETHER WITH THE WORD AND CLEARLY INDICATE THAT THE PROFITS HA VE TO BE CALCULATED BY COUNTING BOTH THE EXPORTS. IT IS CLEAR FROM A READI NG OF SUB-SECTION (1) OF SECTION 80HHC(3) THAT A DEDUCTION CAN BE PERMITTED ONLY IF THERE IS A POSITIVE PROFIT IN THE EXPORTS OF BOTH SELF MANUFACTURED GOO DS AS WELL AS TRADING GOODS. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 34 IF THERE IS A LOSS IN EITHER OF THE TWO THEN THAT L OSS HAS TO BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF COMPUTING PROFITS. UNDER SECTION 80HHC(1) THE DEDUCTION IS TO BE GIVE N IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. IN COMPUTING THE TOTAL INCO ME OF THE ASSESSEE BOTH PROFITS AS WELL AS LOSSES WILL HAVE TO BE TAKEN INT O CONSIDERATION. SECTION 80AB IS RELEVANT. IT READS AS FOLLOWS: 80AB. WHERE ANY DEDUCTION IS REQUIRED TO BE MADE O R ALLOWED UNDER ANY SECTION INCLUDED IN THIS CHAPTER UNDER THE HEAD ING C - DEDUCTIONS IN RESPECT OF CERTAIN INCOMES IN RESPECT OF ANY IN COME OF THE NATURE SPECIFIED IN THAT SECTION WHICH IS INCLUDED IN THE GROSS TOTAL INCOME OF THE ASSESSEE THEN NOTWITHSTANDING ANYTHING CONTAI NED IN THAT SECTION FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER TH AT SECTION THE AMOUNT OF INCOME OF THAT NATURE AS COMPUTED IN ACCO RDANCE WITH THE PROVISIONS OF THIS ACT (BEFORE MAKING ANY DEDUCTION UNDER THIS CHAPTER) SHALL ALONE BE DEEMED TO BE THE AMOUNT OF INCOME OF THAT NATURE WHICH IS DERIVED OR RECEIVED BY THE ASSESSEE AND WHICH IS INCLUDED IN HIS GROSS TOTAL INCOME. SECTION 80B(5) IS ALSO RELEVANT. SECTION 80B(5) PRO VIDES THAT GROSS TOTAL INCOME MEANS THE TOTAL INCOME COMPUTED IN ACCORDAN CE WITH THE PROVISIONS OF THE INCOME-TAX ACT. SECTION 80AB IS ALSO IN CHAPTER VI-A. IT STARTS WIT H THE WORDS WHERE ANY DEDUCTION IS REQUIRED TO BE MADE OR ALLOWED UNDER A NY SECTION OF THIS CHAPTER. THIS WOULD INCLUDE SECTION 80HHC. SECTIO N 80AB FURTHER PROVIDES THAT NOTWITHSTANDING ANYTHING CONTAINED IN THAT SE CTION. THUS SECTION 80AB HAS BEEN GIVEN AN OVERRIDING EFFECT OVER ALL OTHER SECTIONS IN CHAPTER VI-A. SECTION 80HC DOES NOT PROVIDE THAT ITS PROVISIONS A RE TO PREVAIL OVER SECTION 80AB OR OVER ANY OTHER PROVISION OF THE ACT SECTIO N 80HHC WOULD THUS BE GOVERNED BY SECTION 80AB. THE DECISIONS OF THE BOM BAY HIGH COURT AND THE KERALA HIGH COURT TO THE CONTRARY CANNOT BE SAID TO BE THE CORRECT LAW. SECTION 80AB MAKES IT CLEAR THAT THE COMPUTATION OF INCOME HAS TO BE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IF THE INCOME HAS T O BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT THEN NOT ONLY PROFI TS BUT ALSO LOSSES HAVE TO BE TAKEN INTO CONSIDERATION. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE APEX COURT AGAINST ASSESSEE IN THE CASE OF IPCA LABORATORY LTD. (SUPRA ). RESPECTFULLY FOLLOWING THE SAME WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF ASSESSEES APPEAL IS DISMISSED. 35. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN NOT ALLOWING DEDUCTION U/S.80HHC ON INTEREST INCOME. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 35 36. AT THE OUTSET WE FIND THAT THIS ISSUE IS SQUAR ELY COVERED BY THE RECENT DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT V. ASIAN STAR CO. LTD. IN ITA NO.200 OF 2009 (BOM) WHEREIN IT OBSERVED THAT EXPLANATION (BAA) TO S. 80HHC REQUIRES THAT NINETY PER CENT OF RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NAT URE HAVE TO BE REDUCED FROM THE PROFITS. THE REASON WHY ITEMS LIKE BROKERAGE ETC HA VE TO BE EXCLUDED IS BECAUSE THEY DO NOT POSSESS ANY NEXUS WITH EXPORT TURNOVER AND THEIR INCLUSION IN PROFITS WOULD RESULT IN A DISTORTION OF THE FIGURE OF EXPOR T PROFITS. HOWEVER AS SOME EXPENDITURE MIGHT HAVE BEEN INCURRED IN EARNING THE SE INCOMES AN AD HOC DEDUCTION OF TEN PER CENT FROM SUCH INCOME IS ALLOW ED. IT WAS FURTHER OBSERVED BY THE HONBLE HIGH COURT THAT ONCE PARLIAMENT HAS LEGISLA TED BOTH IN REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE EXCLUSION I T WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWRITING THE LEGISLATIVE PROVIS ION. THE TASK OF INTERPRETATION IS TO FIND OUT THE TRUE INTENT OF A LEGISLATIVE PROVISION AND IT IS CLEARLY NOT OPEN TO THE COURT TO LEGISLATE BY SUBSTITUTING A FORMULA OR PROVISION OTHER THAN WHAT HAS BEEN LEGISLATED BY PARLIAMENT. IT IS NOT OPEN TO SAY THAT SOMETHING MORE THAN THE 10% STATUTORILY PROVIDED SHOULD ALSO BE ALLOWED. HONBLE HIGH COURT FURTHER HELD THAT IN CIT V. SHRI RAM HONDA POWER EQUIP (2007)289 ITR 475 (DEL) THE DELHI HIGH COURT HA S NOT ADEQUATELY EMPHASIZED THE ENTIRE RATIONALE FOR CONF INING THE DEDUCTION ONLY TO THE EXTENT OF NINETY PER CENT OF THE EXCLUDIBLE RECEIPT S AND IT CANNOT BE FOLLOWED. AS REGARDS THE JUDGMENT OF THE SPECIAL BENCH IN LALSONS ENTERPRISES HONBLE HIGH COURT HELD THAT WE ARE AFFIRMATIVELY OF THE VIEW THAT THE TRIBUNA L HAS TRANSGRESSED THE LIMITATIONS ON THE EXERCISE OF JUDICIAL POWER A ND . HAS IN EFFECT LEGISLATED BY PROVIDING A DEDUCTION ON THE GROUND OF EXPENSES OTH ER THAN IN THE TERMS WHICH HAVE BEEN ALLOWED BY PARLIAMENT. THAT IS IMPERMISSIBLE. IN REPLY THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT WHEN TWO HIGH COURTS DIFFER ON THE SAME ISSUE THE BENEFICIAL VIE W SHOULD BE TAKEN IN FAVOUR OF THE ASSESSEE. HE STATED THAT HONBLE DELHI HIGH COURT I N THE CASE OF CIT V. SHRI RAM HONDA POWER EQUIP (2007) 289 ITR 475 (DELHI) HAS ALLOWED THE CLAIM O F THE ASSESSEE AS REGARD TO NETTING OF INTEREST ON THE AL LOWANCE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 36 37. WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN T HE CASE OF ASIAN STAR CO. LTD. (SUPRA) HAS CONSIDERED THE DELHI HIGH COURT JUDGMEN T IN THE CASE OF SHRI RAM HONDA POWER EQUIP (SUPRA) AS WELL THE CASE OF SPECIAL BENCH OF THIS TRIBUNAL IN LALSON ENTERPRISES AND HELD THAT 90% OF RECEIPTS BY WAY OF INTEREST HA VE TO BE REDUCED FROM THE BUSINESS PROFITS WHILE COMPUTING D EDUCTION U/S.80HHC OF THE ACT UNDER CLAUSE (BAA). IN THE PRESENT CASE BEFORE US I T IS NOT CLEAR WHETHER THE INTEREST INCOME IS BUSINESS INCOME OR INCOME FROM OTHER SOUR CES. FIRST THIS SHOULD BE FIND OUT AND ACCORDINGLY THE ISSUE SHOULD BE DECIDED. TH E FACTS ARE NOT CLEAR FROM THE ORDERS OF LOWER AUTHORITIES HENCE THIS ISSUE IS S ET ASIDE TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION AND ALLOWED FOR STATISTICA L PURPOSES. 38. THE NEXT COMMON ISSUES ARE AS REGARDS TO CLAIM OF DEDUCTION U/S 80HHC IN RESPECT OF PROCESSING CHARGES AND JOB WORK CHARGES. 39. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE SHR I SOPARKAR STATED THAT THE PROCESSING CHARGES AND JOB WORK CHARGES ARE RECOVER ED BY THE ASSESSEE FOR CARRYING OUT MANUFACTURING ACTIVITY AT ITS FACTORY FOR OTHER CONCERNS THUS IT IS FORMING PART OF THE PROFIT OF THE BUSINESS OF THE ASSESSEE AND IN ANY CASE IT IS GOING TO REDUCE EXPENSES OF MANUFACTURING AND THEREFORE IT I S FORMING PART OF BUSINESS PROFIT OF THE ASSESSEE-COMPANY. ACCORDINGLY HE URGED THAT THIS ISSUE NEEDS VERIFICATION WHETHER THESE CHARGES HAVE ANY RELATION WITH EXPORT ACTIVITY OR NOT IN VIEW OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF K. RAVINDRANATHAN NAIR (SUPRA). THE CIT DR ALSO STATED THAT THIS ISSUE CAN BE SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION WHETHER THERE IS NEXUS WITH THE EXPOR T PROFIT OR NOT WITH THESE PROCESSING CHARGES AND JOB WORK CHARGES. ACCORDINGLY WE ARE O F THE VIEW THAT THIS ASPECT NEEDS VERIFICATION AT THE LEVEL OF ASSESSING OFFICE R AND ACCORDINGLY SET ASIDE TO THE FILE OF THE ASSESSING OFFICER AND ALLOWED FOR STATI STICAL PURPOSES. 40. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IN ITA NO.346/AHD/2006 IS AS REGARDS TO THE ORDER OF CIT(A) IN UPHOLDING THE DIS ALLOWANCE IN RESPECT OF RD EQUIPMENT ADVANCE TO WEIGHTED DEDUCTION. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.3 :- ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 37 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) HAS GROSSLY ERRED IN NOT UPHOLDING THE ASSESSEES OBJECTION TO THE ASSESSING OFFICERS FINDING THAT IN RESPECT OF R.D. EQUIPMENT ADVANCE M ADE IN THE EARLIER YEAR IN A SUM OF RS.2 74 748 (BEING EXCESS OF RS.1 50 88 115 OVER RS.1 48 13 367 VIDE PAGE 6 OF THE ASSESSMENT ORDER) WAS NOT ENTITL ED TO WEIGHTED DEDUCTION. THE CIT(A) SHOULD HAVE HELD THAT THE ASSESSEE WAS A CTUALLY ENTITLED THE WEIGHTED DEDUCTION ALSO WITH REFERENCE TO THE SAID SUM OF RS.2 74 748 41. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVEN UE BY THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT V. TORRENT PHARMACEUTICALS LTD. IN ITA NO.3569 /AHD/2004 & CO NO.18/AHD/2005 FOR ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 13-11-2009 WHEREIN THE TRIBUNAL HAS HELD IN PARA-10 :- 10. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES WE ARE OF THE VIEW THAT IT IS ONLY THE EXPENDITURE WHICH WILL ONLY BE ALLOWED WHEREAS THE ASSESSEE VIDE THE COPY OF THE LETTER REPRODUCED HEREINABOVE HAS V ERY CLEARLY EXPLAINED AS TO HOW THE ENTIRE EXPENDITURE CLAIMED BY THE ASSESSEE IS ALLOWABLE. THUS THERE WAS NO JUSTIFICATION IN HARPING UPON THE FIGURE CON TAINED IN FORM NO.3CL AS IS DONE BY THE ASSESSING OFFICER. THE PROVISIONS OF TH E ACT IT DOES NOT CONTAIN ANY SPECIFIC CONDITIONS FOR THE ALLOWANCE OF EXPEND ITURE TO THE EFFECT THAT IT WILL BE RESTRICTED THAT CONTAINED IN FORM NO.3CL. NEEDLE SS TO POINT OUT THAT SUCH ALLOWABLE EXPENDITURE ETC. IS REPORTED BY THE DSIR TO DG (INCOME-TAX EXEMPTION) KOLKATA WITHOUT GIVING AN OPPORTUNITY O F BEING HEARD TO THE ASSESSEE WHEREVER HE QUANTIFIES THE EXPENDITURE WHI CH IS LESS THAN THAT CLAIMED BY THE ASSESSEE. WE FURTHER FIND THAT THE ASSESSEE HAS INCLUDED A SUM OF RS.51.26 LAKHS AS ELIGIBLE EXPENDITURE BEING REVENUE EXPENDITURE RELATING TO BUILDING AND ANOTHER SUM OF RS.133.92 L AKHS BEING REVENUE EXPENDITURE OTHER THAN BUILDING WHICH WAS CONSIDER ED AS REVENUE BY THE ASSESSING OFFICER HIMSELF. THESE ITEMS CLEARLY ARE WITHIN THE PURVIEW OF ALLOWABLE U/S 35(2AB) OF THE ACT AS WEIGHTED DEDUCT ION. THE SECURITY EXPENSES ARE ALSO DIRECTLY RELATED TO IN-HOUSE RESE ARCH AS PROPER SECURITY IS REQUIRED TO AVOID LEAKAGE AND ONLY IN-HOUSE STAFF W ILL HAVE ASSESSED TO BUILDING. ACCORDINGLY THIS EXPENDITURE ARE FOR PRE SERVING THE RESEARCH WHICH IS COMPLETED AND ITS CLINICAL TRIAL IS PENDING. AS RE GARDS TO THE ENVIRONMENTAL ISSUE THE ASSESSEE-COMPANY HAS SET UP AN AFFLUENT PLANT AND AS IS WIDELY ACCEPTED THE VEGETATION I.E. TREES HAVE CONTAINED THE POLLUTION. THIS EXPENDITURE OF GARDENING AND PLANTATION HAVE BEEN D ONE FOR THE PERSEVERANCE OF ENVIRONMENT AND THIS IS DIRECTLY RELATED TO R & D FACILITIES. AS REGARDS TO SALARY PAID TO DR. C.DUTT AMOUNTING TO RS.58.54 LAK HS HE IS IN-CHARGE OF R & D CENTRE AT BHATT. HE IS THE PERSON THROUGH WHOM A LL CO-ORDINATION OF TECHNICAL SCIENTISTS AND OTHER TECHNICAL PERSONS AR E CARRIED OUT. THE ENTIRE REPORTING OF THE RESEARCH ACTIVITY TO THE MANAGEMEN T HAS BEEN TAKEN TO THE BOARD OF DIRECTORS THROUGH HIM ONLY AND FOR THIS TH E SALARY IS PAID. ACCORDINGLY THE ASSESSEE HAS RIGHTLY PAID THE ENTI RE EXPENDITURE OF RS.133.92 LAKHS AND BUILDING REPAIRS RS.37.55 LAKHAS ON WHICH WEIGHTED DEDUCTION U/S.35(2AB) OF THE ACT IS ALLOWABLE. IN VIEW OF TH E ABOVE DISCUSSION WE ALLOW ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 38 THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF THE REV ENUES APPEAL IS DISMISSED AND THAT OF THE ASSESSEES CO IS ALLOWED. RESPECTFULLY FOLLOWING THE SAME WE ALLOW THE CLAIM OF ASSESSEE AND THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 42. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSES SEE IN ITA NO.346/AHD/2006 & ITA NO.4343/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN UPHOLDING THE INTEREST U/S.234B AND 234C OF THE ACT . FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUNDS NO.7 :- 7 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) HAS GROSSLY ERRED IN HOLDING THAT LEVY OF INTEREST U/S.234B AND 234C OF THE I.T. ACT ARE MANDATORY AND CONSEQUENTIAL WHEN THE SAME OUGHT TO HAVE BEEN DIRECTED TO BE DELETED AS THE APPELLANT OBJECTED TO THE VERY LE VY OF SUCH INTEREST.. THIS HONBLE TRIBUNAL MAY THEREFORE BE PLEASED TO SO HOLD AND DIRECT THE DELETION OF INTEREST LEVIED U/S.234B AND 234C OF TH E I.T. ACT. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN NOT UPHOLDING THE ASSESSEES CONTENTION THAT IT WAS NOT AT ALL A FIT CASE FOR LEVY OF INTEREST U/S. 234B 234C AND 234D AND HE FURTHER ER RED IN HOLDING THAT ONLY CONSEQUENTIAL RELIEF MAY BE ALLOWED TO THE ASSESSEE . ACTUALLY HE SHOULD HAVE HELD THAT IT WAS NOT AT ALL A FIT CASE FOR LEVY OF INTEREST U/S.234B 234C AND 234D OF THE ACT. 43. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE FAI RLY STATED THAT THIS COMMON ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.970/AHD/2007 FOR ASSESSMENT YEAR 2003-04 DATED 21-05-2010 WHEREIN T HE TRIBUNAL HAS HELD IN PARA- 20 AS UNDER:- 20. ON APPEAL THE LEAR4NED COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT ALLOWED THE CLAIM OF THE ASSESSEE THAT INTEREST UND ER SECTION 234A 234B AND 234C SHOULD NOT BE CHARGED IN RESPECT OF DEMAND WHI CH WAS CREATED AS A CONSEQUENCE OF RETROSPECTIVE AMENDMENT OF LAW. WE F IND THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF EASTMAN INDUSTRIES LTD. VS. DCIT (2007) 110 TTJ (DEL) 798 WHEREIN ON THE SIMILAR FACTS THE TRIBUNAL BY RELYI NG ON THE CBDT CIRCULAR NO.2 OF 2006 DATED 17.01.2006 HAS HELD THAT THE LEARNED ASSESSING OFFICER WAS NOT JUSTIFIED IN CHARGING INTEREST UNDER SECTIO N 234B AND 234D AS A CONSEQUENCE OF REDUCTION IN THE CLAIM OF DEDUCTION UNDER SECTION 80HH IN VIEW OF THE RETROSPECTIVE AMENDMENT OF LAW BY THE T AXATION LAWS (AMENDMENT) ACT 2005 WITH EFFECT FROM 1.04.198. WE THEREFORE ALLOW THESE GROUNDS OF APPEALS OF THE ASSESSEE AND DIRECT THE L EARNED ASSESSING OFFICER ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 39 NOT TO CHARGE INTEREST IN RESPECT OF THE INCOME WHI CH RELATES TO THE LESSER GRANT OF DEDUCTION UNDER SECTION 80HHC AS CONSEQUEN CE TO RETROSPECTIVE AMENDMENT BROUGHT BY THE TAXATION LAWS )(AMENDMENT) ACT 2005. TAKING A CONSISTENT VIEW WE DIRECT THE ASSESSING O FFICER TO RE-COMPUTE THE INTEREST ACCORDING TO THE DECISION IN ASSESSEES OWN CASE (S UPRA) THIS COMMON ISSUE IN THESE APPEALS OF ASSESSEE ARE ALLOWED FOR STATISTIC AL PURPOSES. 44. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IN ITA NO.4343/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING THE DISA LLOWANCE OF SOFTWARE DEVELOPMENT EXPENDITURE. FOR THIS ASSESSEE HAS RAISED THE FOLLO WING GROUND NO.1 :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.77 000 000 WHICH WAS CLAIMED BY THE ASSESSEE ON REVENUE ACCOUNT. 45. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AN D MARKETING OF PHARMACEUTICAL PRODUCED AND REGARDING ENTERPRISE RE SOURCE PLANNING SYSTEM (ERPS FOR SHORT) THE DETAILS WAS ASKED AND THE ASSE SSEE REPLIED VIDE LETTER DATED 19-12-2006. THE ASSESSEE APPOINTED IBM TO IMPLEMENT SAP A ENTERPRISE RESOURCE PLANNING PACKAGE WHICH PRIMARILY AIMS AT STREAM LIN G THE VARIOUS OPERATIONS AND MAKE AVAILABLE THE DATA WHICH WOULD HELP RUN THE OR GANIZATION EFFICIENTLY AND ERP IS A BUSINESS MANAGEMENT SYSTEM THAT INTEGRATES ALL FA CETS OF THE BUSINESS INCLUDING PLANNING MANUFACTURING SALES AND MARKETING. AS TH E ERP METHODOLOGY HAS BECOME MORE POPULAR SOFTWARE APPLICATIONS HAVE EMER GED TO HELP BUSINESS MANAGERS IMPLEMENT ERP IN BUSINESS ACTIVITIES SUCH AS INVENTORY CONTROL ORDER TRACKING CUSTOMER SERVICE FINANCE AND HUMAN RESOU RCES. THE IBM WOULD UNDERTAKE TO STUDY THE EXISTING BUSINESS SYSTEM AND COME WITH SOLUTIONS AS REQUIRED BY AN ERP PROVIDED BY SAP. THE IBM WOULD ALSO HELP TRAIN PEOPLE SO THAT THE DATA MIGRATION FROM THE LEGACY SYSTEM TO SAP WOULD BE SM OOTH AND WOULD ALSO TRAIN PEOPLE IN THE RUNNING OF THE ERP SYSTEM. LD. COUNSE L FOR THE ASSESSEE STATED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSE E AND AGAINST THE REVENUE BY THE DECISION OF THIS TRIBUNAL. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 40 46. WE FIND FROM ARGUMENTS MADE BY THE LD-CIT-DR AN D LD-COUNSEL THAT THIS SOFTWARE PURCHASED BY THE ASSESSEE IS FOR THE PURPO SE OF SMOOTH RUNNING OF THE COMPUTERS AND BETTER MANAGEMENT AND CONDUCT OF BUSI NESS. THIS EXPENDITURE WAS INCURRED FOR THE PURCHASE OF SOFTWARE WHICH ONLY AI DS IN BETTER MANAGEMENT AND CONDUCT OF BUSINESS AND BECOMES PART OF EARNING PRO CESS. THIS IN ITSELF IS NOT AN ADVANTAGE OF ENDURING NATURE CONSIDERING THE RAPID TECHNOLOGICAL ADVANCE BEING MADE. ANY EXPENDITURE WHICH DOES NOT HAVE PERMANENC E AND IS INCURRED TO MEET FAST CHANGING TECHNOLOGY AND THE SAME WOULD BE RE VENUE IN NATURE. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF AMWAY INDIA ENTERPRISES V DCIT (2008) 301 ITR (AT) 1 (DEL HI). WE FIND THAT IN THIS CASE THE ITAT HAS HELD AS UNDER: THERE CANNOT BE ANY SPECIFIC OR PRECISE TEST WHIC H CAN BE APPLIED CONCLUSIVELY OR UNIVERSALLY FOR DISTINGUISHING BETW EEN CAPITAL AND REVENUE EXPENDITURE. THE CARDINAL RULE IS THAT THE QUESTION WHETHER A CERTAIN EXPENDITURE IS ON CAPITAL OR REVENUE ACCOUNT SHOULD BE DECIDED FROM THE PRACTICAL AND BUSINESS VIEW POINT AND IN ACCORDANCE WITH SOUND ACCOUNTANCY PRINCIPLES AND THIS RULE IS OF SPECIAL SIGNIFICANCE IN DEALING WITH EXPENDITURE ON EXPANSION AND DEVELOPMENT OF BUSINESS. THREE TESTS GENERALLY APPLIED TO DECIDE THE NATURE OF EXPENDITURE AS TO WHETHER IT IS CAPITAL OR REVENUE ARE THE TEST OF E NDURING BENEFIT THE OWNERSHIP TEST AND THE FUNCTIONAL TEST. APPLYING THESE TESTS EXPENDITURE IS TREATED AS CAPITAL EXPENDITURE EITHER WHEN IT RESULTS IN ACQUI SITION OF A CAPITAL ASSET BY THE ASSESSEE AS OWNER THEREOF OR WHEN IT RESULTS IN ACCRUAL OF AN ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE IN THE CAPITAL FIEL D. IF THE EXPENDITURE RESULTS MERELY IN ACQUISITION OR CREATION OF ASSET WITHOUT THE ASSESSEE BECOMING THE OWNER THEREOF IT CANNOT BE SAID THAT THE EXPENDITU RE IS A CAPITAL EXPENDITURE. THE COMING INTO EXISTENCE OF AN ASSET AS A RESULT O F INCURRING EXPENDITURE ALONE THUS IS NOT SUFFICIENT TO TREAT THE SAID EXPE NDITURE AS OF CAPITAL NATURE UNLESS THE ASSET COMING INTO EXISTENCE IS ALSO OWNE D BY THE ASSESSEE. EXPENDITURE CAN BE TREATED AS CAPITAL EXPENDITURE O NLY WHEN IT RESULTS IN ACCRUAL OF AN ADVANTAGE OF ENDURING NATURE TO THE A SSESSEE IN THE CAPITAL FIELD. THE RELEVANT TESTS APPLIED TO DETERMINE THE NATURE OF EXPENDITURE IN SUCH A SITUATION ARE THE FUNCTIONAL TEST AND THE TEST OF ENDURING BENEFIT. AN ADVANTAGE IS TO BE CONSIDERED AS OF ENDURING BENEFI T IF THE BENEFIT ACCRUING IS NOT OF A TRANSIENT NATURE BUT IS OF SUCH DURABILITY AS TO JUSTIFY IT BEING TREATED AS A CAPITAL ASSET. ON THE QUESTION WHETHER COMPUTER SOFTWARE WAS GOODS THE SUPREME COURT IN TATA CONSULTANCY SERVICES [20041 271 1TR 401 TOOK I NTO ACCOUNT THE VIEW OF AMERICAN COURTS ON THE ISSUE AS WELL AS ITS OWN DEC ISION RENDERED IN THE CASE OF ASSOCIATED CEMENT CO. [2001] 124 STC 59 IN THE C ONTEXT OF 1 THE CUSTOMS ACT WHEREIN THE DEFINITION OF THE TERM 'GOODS' GIVE N WAS NOT AS WIDE OR EXHAUSTIVE AS THE DEFINITION OF THE TERM 'GOODS' IN THE A. P. TAX ACT TO HOLD ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 41 THAT SOFTWARE WHETHER CUSTOMISED OR NON-CUSTOMISED SATISFIES ALL THE ATTRIBUTES OF BEING A 'GOODS' AND AS SUCH IS CAPAB LE OF BEING BOUGHT AND SOLD AND BECOMES AN OBJECT OF TRADE AND COMMERCE CAN ONL Y LEAD TO THE CONCLUSION THAT PURCHASE OF SUCH DISC IS ACQUIRING A TANGIBLE ASSET. IF THE DISC TAPE OR FLOPPY OR OTHER ELECTRONIC MEDIUM IN WHICH THE SOFTWARE IS STORED IS BY ITSELF GOODS THEN THE ASSESSEE WHO ACQUIRES THE SA ME ACQUIRES A TANGIBLE ASSET. COMPUTER SOFTWARE HAS NOT .BEEN DEFINED IN T HE INCOME-TAX ACT 1961 BUT IN NOTE 7 TO APPENDIX I TO THE INCOME-TAX RULES 1962 IT HAS BEEN EXPLAINED TO INCLUDE COMPUTER PROGRAMME RECORDED ON ANY DISC TAPE PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E. THEREFORE COMPUTER SOFTWARE (WHETHER IN CANNED FORM OR UN-CANNED FORM) IS GOODS AND A TANGIBLE ASSET BY ITSELF. THE QUESTION WHETHER AN ASSESSEE B Y PURCHASE OF A DISC CONTAINING SOFTWARE HAS PURCHASED A. CAPITAL ASSET OR NOT SHOULD NOT. THEREFORE BE VIEWED FROM THE ANGLE OF ACQUISITION OF ANY COPYRIGHT OR ANY OF THE BUNDLE OF RIGHTS COMPRISED IN SUCH COPYRIGHT. A N ASSESSEE PURCHASING SUCH A SOFTWARE BECOMES THE OWNER THEREOF. TATA CONSULTAN CY SERVICES V. STATE OF ANDHRA PRAD ESH [2004] 137 STC 620; [2004] 271 ITR 401 (SC) FOLLOWE D. BUT THE QUESTION WHETHER EXPENDITURE FOR ACQUISITI ON OF COMPUTER SOFTWARE OR REVENUE CANNOT BE DECIDED ON THE BASIS OF THE OWNER SHIP TEST ALONE FROM THE POINT OF ITS UTILITY TO A BUSINESSMAN AND HOW IMPOR TANT AND OR FUNCTIONAL ROLE IT PLAYS IN HIS BUSINESS BECAUSE OF THE PECULIAR NATU RE OF A COMPUTER SOFTWARE AND ITS POSSIBLE USE IN DIFFERENT AREAS OF BUSINESS . THE FACT THAT GENERALLY COMPUTER SOFTWARE IS ACQUIRED ON A LICENCE BY ITSEL F WILL NOT BE SUFFICIENT TO CONCLUDE THAT THE EXPENDITURE IS REVENUE EXPENDITUR E IF IT IS FOUND THAT THE EXPENDITURE OPERATES TO CONFER A BENEFIT IN THE CAP ITAL FIELD. ON THE OTHER HAND SOME COMPUTER SOFTWARE MAY HAVE A VERY ECONOMIC LIF E SO AS TO BE TREATED AS CAPITAL EXPENDITURE THOUGH OWNED BY AN ASSESSEE. FOR ASCERTAINING AS TO WHETHER EXPENDITURE ON COMPU TER SOFTWARE GIVES AN ENDURING BENEFIT TO AN ASSESSEE THE DURATION OF TI ME FOR WHICH THE ASSESSEE RIGHT TO USE THE SOFTWARE BECOMES RELEVANT; HAVING REGARD TO THE FACT THAT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVA TION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME IT CAN BE SAID THAT WH ERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN 2 YEARS) IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILITY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSIDERED AS ACCRUAL OF BE NEFIT OF ENDURING NATURE. HOWEVER THAT BY ITSELF WILL NOT MAKE THE EXPENDITU RE INCURRED ON SOFTWARE AS CAPITAL IN NATURE AND THE FUNCTIONAL TEST AS DISCUS SED ABOVE ALSO NEEDS TO BE SATISFIED. THE PERIOD OF ADVANTAGE IN THE CONTEXT O F COMPUTER SOFTWARE SHOULD NOT BE VIEWED FROM THE POINT OF VIEW OF DIFFERENT A SSETS OR ADVANTAGE LIKE TENANCY OR USE OF KNOW-HOW BECAUSE SOFTWARE IS A BU SINESS TOO ENABLING A BUSINESSMAN'S ABILITY TO RUN HIS BUSINESS. THE NATURE OF THE ADVANTAGE WHICH THE ASSESSES DERI VES HAS TO BE SEEN IN A COMMERCIAL SENSE. SOFTWARE NORMALLY FUNCTIONS AS A TOO ENABLING BUSINESS TO BE CARRIED ON MORE EFFICIENTLY. THE SCOPE POWER L ONGEVITY OF SUCH A TOOL AND ITS CENTRALITY TO THE FUNCTIONS OF THE BUSINESS WIL L ALL BEAR ON ITS TREATMENT. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 42 WHERE THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINE SS OF SOFTWARE DEVELOPMENT AS WELL AS RUNNING A TRAINING CENTRE TO IMPART SPECIALIZED TRAINING TO THE STUDENTS IN SOFTWARE TECHNOLOGY F THE SOFTW ARE IS USED IN SUCH BUSINESS TO IMPART TRAINING TO THE STUDENTS IT WOULD BE PAR T OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE AND CONSEQUENTLY EXPENDIT URE ON SOFTWARE CAPITAL. WHERE THE SAID SOFTWARE HELPS IN COMPRESSION OF SIZ E OF E-MAILS AND IT INCLUDES LICENCES FOR 150 USERS AND IT IS LIMITED T O FACILITATE MERELY AN EFFECTIVE AND FAST COMMUNICATION IN ORDER TO INCREASE IN ITS ORGANIZATIONAL EFFICIENCY IT CANNOT BE TREATED AS FORMING PART OF THE PROFIT-MAK ING APPARATUS OF THE ASSESSEE. ON THE OTHER HAND IF SUCH SOFTWARE IS BE ING USED BY AN ASSESS ENGAGED IN THE BUSINESS OF PLACEMENT AGENCY WHERE T HE APPLICATIONS FROM PER- SONS SEEKING JOBS .ARE INVITED THROUGH E-MAIL AND ARE ALSO FORWARDED TO T CONCERNED CLIENTS THROUGH E-MAIL IT MAY FORM PART OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE'S BUSINESS OF PLACEMENT A GENCY AND CAN BE TREATED AS CAPITAL ASSET. AS A GENERAL RULE THE MORE EXPENSIVE THE COMPUTER S OFTWARE THE MORE IT A LIKELY TO BE A CENTRAL TOO! OF THE BUSINESS AND THE MORE ENDURING IS LIKELY TO ITS EFFECT ADDING TO THE PROFIT EARNING APPARATUS IF T HERE IS ASSOCIATED CAP EXPENDITURE LIKE PURCHASE OF NEW COMPUTER EQUIPMENT FOR RUNNING THE WARE DEVELOPED UNDER A PROJECT IT CAN BE CONSIDERED AS CAPITAL EXPENDITURE. THIS IS ESPECIALLY THE CASE WHERE THE NEW HARDWARE IS NOT M ERELY DESIRABLE NECESSARY FOR THIS PURPOSE. SIMILARLY THE DEGREE OF CHANGE INTENDED IN THE WAY OPERATIONS ARE CARRIED OUT AS A RESULT OF THE COMPUTER SOFTWARE FOR EXAMPLE SAVINGS IN THE NUMBER AND CHANGES IN THE LOCATION OF STAFF USED TO 'PROVIDE SERVICES TO CUSTOMERS WILL HAVE A BEARING. THE MORE RADICAL THE CHANGES THE M ORE LIKELY THAT THE EXPENDITURE WILL BE CAPITAL. THESE CHANGES ARE LIKE LY TO BE MOST RADICAL WHEN OPERATIONS PREVIOUSLY CARRIED ON MANUALLY ARE COMPU TERIZED. THE PRESENCE OF AN ELEMENT OF UPGRADING WILL NOT NE CESSARILY CAUSE THE EXPENDITURE IN QUESTION TO BE CAPITAL. WITH EFFECT FROM APRIL 1 1999 COMPUTERS WERE TREA TED AS A DIFFERENT CLASS OF ASSET FALLING WITHIN THE DESCRIPTION OF PLANT AND D EPRECIATION WAS ALLOWED AT 60 PER CENT. WITH EFFECT FROM APRIL 1 2003 COMPUTER SOFTWARE WAS ALSO INCLUDED ALONG WITH COMPUTERS. THE AMENDMENT IS PROSPECTIVE. IT IS NOT CLARIFICATORY FOR THE REASON THAT COMPUTER AND COMPUTER SOFTWARE ARE TWO DIFFERENT ITEMS OF ASSETS. IF THE LEGISLATURE WANTED TO ALLOW DEPRECIA TION AT 60 PER CENT WITH EFFECT FROM APRIL 1 1999 ON COMPUTER SOFTWARE IT WOULD HAVE SAID SO SPECIFICALLY BY MAKING THE PROVISIONS RET ROSPECTIVE. DEPRECIATION CAN BE ALLOWED AT 25 PER CENT UNDER SECTION 32W(I) READ W ITH APPENDIX I PART A DIVISION 111(1) TO THE INCOME-TAX RULES 1962 AND W ITH EFFECT FROM APRIL 1 2003 COMPUTER SOFTWARE HAVING BEEN CLASSIFIED AS A TANGIBLE ASSET UNDER THE HEADING 'PLANT' IN APPENDIX ITO THE RULES IS ENTIT LED TO DEPRECIATION AT 60 PER CENT. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 43 47. WE FIND THAT THE REVENUE HAS RELIED ON THE DECI SION OF THIS TRIBUNAL DELHI BENCH IN THE CASE OF ESCORTS LTD. V. ACIT (2007) 104 ITD 427 (DEL) WHEREIN THE EXPENDITURE ON SOFTWARE IS CONSIDERED AS CAPITAL IN NATURE BY HOLDING THAT WHERE THE ASSESSEE ACQUIRES ERP BUSINESS SOFTWARE WITH UNLIMI TED USERS OF LICENCE AND EXPENDITURE INCURRED ON ACQUISITION OF SOFTWARE BY WAY OF OUTRIGHT PURCHASE IS TO BE CONSIDERED AS CAPITAL IN NATURE. BUT IN THE PRESENT CASE THE FACTS ARE ENTIRELY DIFFERENT AND IT IS NOT THE ALLEGATION OF THE REVEN UE FROM THE ASSESSING OFFICERS STAGE TILL NOW THAT THE ASSESSEE HAS ACQUIRED THIS SOFTWARE FOR UNLIMITED USER OF LICENCE AND THIS IS OUTRIGHT PURCHASE. THE REVENUE ALSO RELIED ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. ARAWALI CONSTRUCTIONS CO.(P) LTD. (2003) 259 ITR 30 (RAJ) BUT THE FACTS IN THAT CASE ARE ALSO IN REGARD TO DISTINGUISHABLE AS IN THAT CASE THE SOFTWARE WAS AN OUTRIGHT PURCHASE OF COMPUTER PROGRAMME WHICH RELATES TO TECHNICAL KNOW-HOW. WE FIND THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING AS TO THE FACT TH AT WHETHER EXPENDITURE ON COMPUTER SOFTWARE GIVES AN ENDURING BENEFIT TO AN ASSESSEE THE DURATION OF TIME FOR WHICH THE ASSESSEE RIGHT TO USE THE SOFTWARE BECOMES RELEVANT . ACCORDINGLY WE ARE OF THE VIEW THAT IN CASE THE SOFTWARE BECOMES OBSOLETE WITH TEC HNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER OR SAY LESS THAN 2 YEA RS IT MAY BE TREATED AS REVENUE EXPENDITURE. HENCE WE FIND THAT THE CIT(A) HAS REC ORDED A CATEGORICAL FINDING THAT THE SOFTWARE PROGRAMME WITHOUT WHICH THE COMPUTER C ANNOT WORK AND WITH THE ADVANCEMENT OF TECHNOLOGY THE PROGRAMME CHANGES DU RING SHORT PERIOD AND THIS CHANGE IS REQUIREMENT OF THE BUSINESS OF THE ASSESS EE I.E. SHARE BROKING. ACCORDINGLY WE DELETE THE ADDITION CONFIRMED BY CI T(A) AND THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 48. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IN ITA NO.4356/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING THE GARD EN EXPENSES. FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND NO.2 :- 2. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHM EDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OUT OF GA RDEN EXPENSES OF RS.14 04 356/-. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 44 49. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE D ECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1347/AHD/2007 FOR ASSESSMENT YEAR 2003-04 DATED 21-05-2010 WHEREIN THE TRIBUNAL HAS HELD IN PARA-29 AS UNDER:- 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICALS ITEMS. IN THE PRODUCTION THE ASSES SEE USES VARIOUS TYPES OF CHEMICALS. IN ORDER TO CONTROL THE POLLUTION ARISIN G OUT OF CHEMICAL PROCESS THE ASSESSEE HAS INCURRED EXPENDITURE FOR THE PURPOSE O F MAINTAINING GARDEN IN FACTORY PREMISES. THIS EXPENDITURE HAS BEEN CLAIMED DEDUCTION BY THE ASSESSEE HAS BEEN DISALLOWED BY THE LEARNED ASSESSI NG OFFICER AND ALLOWED BY THE CIT(A) ON APPEAL BY THE ASSESSEE. THE LEARNE D ASSESSING OFFICER MADE THE DISALLOWANCE FOR THE REASON THAT IT IS NOT INCURRED FOR THE PROCESS OF PRODUCTION. THE LEARNED COMMISSIONER OF INCOME TAX( APPEALS) ALLOWED THE DEDUCTION TO THE ASSESSEE FOLLOWING THE DECISION OF MADHYA PRADESH HIGH COURT IN THE CASE OF STEEL TUBS PVT. LTD. (SUPRA) FOR THE REASONS THAT GARDEN EXPENSES IMPROVES THE WORKING CONDITIONS OF THE WOR KERS IN THE FACTORY AND HENCE IT WAS AN EXPENDITURE INCURRED FOR THE BUSIN ESS OF THE ASSESSEE. IN THE ABOVE CIRCUMSTANCES IN OUR CONSIDERED OPINION THE MANUFACTURING PROCESS OF THE ASSESSEE BEING SUCH THAT IT INVOLVES USE OF HAZ ARDOUS CHEMICALS WHICH AFFECT THE HEALTH OF THE WORKERS. THUS IT IS THE D UTY OF THE ASSESSEE TO MAKE GOOD THE LOSS CAUSED TO NATURE AND TO PREVENT THE H EALTH OF THEE WORKERS ENGAGED IN PRODUCTION. THEREFORE THE ASSESSEE MAIN TAINED THE GARDEN FOR MAINTAINING BETTER ENVIRONMENT IN THE FACTORY AND T HE EXPENDITURE INCURRED IN THE PROCESS WAS THEREFORE FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE AND WAS RIGHTLY ALLOWED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). WE THEREFORE CONFIRM THE ORDER OF TH E LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AND DISMISS THE GROUND OF AP PEAL OF THE REVENUE. RESPECTFULLY FOLLOWING THE SAME WE DISMISS THIS IS SUE IN THE APPEAL OF REVENUE. THIS ISSUE OF REVENUES APPEAL IS DISMISSED. 50. THE NEXT GROUND IN THIS APPEAL OF REVENUE IN ITA NO.4356/AHD/2007 IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITIO N MADE BY ASSESSING OFFICER ON ACCOUNT OF INTERNATIONAL TRANSACTION U/S.92B OF TH E ACT. FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE OUT OF I NTERNATIONAL TRANSACTION U/S 92B OF THE ACT OF RS.48 520/-. ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 45 51. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE D ECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1347/AHD/2007 FOR ASSESSMENT YEAR 2003-04 DATED 21-05-2010 WHEREIN THE TRIBUNAL HAS HELD IN PARA-32 AS UNDER:- 32. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANCE CASE THE DIFFERENCE IN THE ARMS LENGTH PRICE AS TAKEN BY THE ASSESSEE AND AS APPLIED BY THE LEARNED ASSESSING OFFICER WAS LESS THAN 5% OF THE PRICE TAKEN BY THE ASSESSEE IS NOT IN DOUBT OR DEBATE. THEREFORE THE LEARNED COMMISSIONER OF INCOME TAX(A PPEALS) FOLLOWING CBDT CIRCULAR NO.12/2001 DATED 23.08.2001 HAS HELD THAT THE ADDITION MADE BY THE LEARNED ASSESSING OFFICER IS NOT TENABLE. LE ARNED DEPARTMENTAL REPRESENTATIVE COULD NOT POINT OUT ANY ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WHICH WAS PASSE D FOLLOWING THE CBDT CIRCULAR. THUS WE DO NOT FIND ANY MERIT IN THE GRO UND OF APPEAL OF THE REVENUE. THEREFORE THIS GROUND OF APPEAL OF THE RE VENUE IS DISMISSED. RESPECTFULLY FOLLOWING THE SAME WE DISMISS THIS IS SUE OF REVENUES APPEAL. 52. THE NEXT GROUND IN THIS APPEAL OF REVENUE IN ITA NO.4356/AHD/2007 IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITIO N MADE BY ASSESSING OFFICER ON ACCOUNT OF CLUB EXPENSES. FOR THIS REVENUE HAS RA ISED THE FOLLOWING GROUND NO.7 :- 7. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OUT OF CL UB EXPENSES OF RS.58 50 000/-. 53. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAD PAID RS.58.50 LAKH B EING CLUB FEES WHICH INCLUDES RS.8.50 LAKH BEING CORPORATE MEMBERSHIP FEES AND RS .50 LAKH TOWARDS FEES OF DIFFERENT SPECIFIED EMPLOYEES. THE AO HAS HELD THAT THE CLUB MEMBERSHIP FEE PAID BY THE ASSESSEE IS NOT BRINGING ANY BENEFIT TO THE BUSINESS OF THE ASSESSEE AND THAT IT WAS INCURRED FOR THE BENEFIT OF EMPLOYEES. HE HE LD THAT IT IS NOT REVENUE EXPENDITURE. THE ASSESSEE SUBMITTED THAT THE PAYMEN T WAS MAD TO FACILITATE THE BUSINESS CONTRACTS TO BE MAINTAINED BY THE EMPLOYEE S WHICH WOULD IN LONG RUN HELP THE BUSINESS RELATIONSHIP IN COMPANYS INTEREST. AC CORDINGLY IT WAS AN EXPENDITURE INCURRED FOR THE BUSINESS AND THE A.O WAS NOT JUSTI FIED IN HOLDING THAT IT DOES NOT BRING ANY BENEFIT TO THE BUSINESS OF THE ASSESSEE A ND CLAIM WAS THEREFORE ADMISSIBLE IN THE HANDS OF THE ASSESSEE. WE ARE OF THE VIEW TH AT THE EXPENDITURE WAS INCURRED WITH THE INTENTION TO ESTABLISH AND MAINTAIN BUSINE SS CONTACT WHICH IS IN THE LONG TERM ITA NO.333 & 346/A/06 & 4343 4356/A/07 A.YS 02-03 & 04-0 5 TORENT PHARMACEUTICALS P. LTD. V ACIT/DCIT CIR-8 ABD PAGE 46 INTEREST OF THE COMPANYS BUSINESS. THIS EXPENDITUR E WAS INCURRED IN THE INTEREST OF THE ASSESSEES BUSINESS. IT WOULD PROVIDE EMPLOYEES AND OFFICERS BETTER CONTACTS AND ASSOCIATION WITH THE PERSONS IN GOOD POSITION A ND WOULD RESULT IN PUBLICITY. WE FIND FROM THE ORDER OF CIT(A) THAT SUCH EXPENDITURE WAS NOT INCURRED WITH AN INTENTION TO BENEFIT EMPLOYEES OF THE ASSESSEE BUT WAS FOR TH E PROMOTION OF BUSINESS OF THE ASSESSEE. THIS VIEW OF CIT(A) WAS CONSIDERED BY THE HIGH COURT AND WAS APPROVED. FURTHER WE ARE OF THE VIEW THAT THIS ISSUE IS SQUAR ELY COVERED BY THE DECISION OF THE HONBLE JURISDICTION HIGH COURT IN THE CASE OF GUJARAT STATE EXPORT CORPORATION LTD. V. CIT (1994) 209 ITR 649 (GUJ) WHEREIN IT IS HELD THAT B Y PAYING THE ENTRANCE FEE TO THE SPORTS CLUB THE ASSESSEE HAD NO INTENTION TO A CQUIRE ANY CAPITAL ASSET OR TAKE ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS. BY COMMON SENSE STANDARDS IT COULD BE STATED THAT IT WAS FOR RUNNING THE BUSINES S OR FOR BETTERING THE CONDUCT OF ITS BUSINESS. THE AMOUNT PAID AS ENTRANCE FEE WAS DEDUC TIBLE CONSIDERING THE ABOVE POSITION AND IN VIEW OF THE FACTS OF THE ASSESSEE S CASE WE CONFIRM THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMIS SED. 54. IN THE RESULT ASSESSEES APPEALS AND THAT OF REVE NUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE. ORDER PRONOUNCED IN OPEN COURT ON 31/01/2011 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD DATED : 31/01/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-XIV AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD