Halcyon Pharmaceuticals Ltd.,, v. ITO, Ward No-1,,

ITA 3472/DEL/2005 | 2001-2002
Pronouncement Date: 05-03-2010 | Result: Allowed

Appeal Details

RSA Number 347220114 RSA 2005
Assessee PAN AAACH4207K
Bench Delhi
Appeal Number ITA 3472/DEL/2005
Duration Of Justice 4 year(s) 6 month(s) 14 day(s)
Appellant Halcyon Pharmaceuticals Ltd.,,
Respondent ITO, Ward No-1,,
Appeal Type Income Tax Appeal
Pronouncement Date 05-03-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I
Tribunal Order Date 05-03-2010
Date Of Final Hearing 23-02-2010
Next Hearing Date 23-02-2010
Assessment Year 2001-2002
Appeal Filed On 22-08-2005
Judgment Text
ITA NO. 3472/DEL/2005 A.Y. 2001-02 1 IN THE INCOMETAX APPELATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI C.L. SETHI JUDICIAL MEMBER & SHRI SHAMIM YAHYA ACCOUNTANT MEMBER ITA NO. 3472/DEL/2005 A.Y. : 2001-02 M/S HALCYON PHARMACEUTICALS LTD. VS. INCOME TAX OFFICER SCF NO. 78 RAILWAY ROAD WARD NO. 1 HISAR HISAR (HARYANA) [PAN : AAACH4207K] (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY WADHWA CA DEPARTMENT BY : MS. ANUSHA KHURANA DR O R D E R PER SHAMIM YAHYA : AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE LD. CIT(A) DATED 20.5.2005 PERTAINING TO ASSESS MENT YEAR 2001-02. 2. THE FIRST ISSUE RAISED IS THAT LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN MAKING THE ADDITION OF RS. 2 LA CS ON ACCOUNT OF REJECTION OF BOOKS. 2.1 IN THIS CASE DURING THE COURSE OF ASSESSMENT AO ASKED THE ASSESSEE TO JUSTIFY THE INCREASE IN CONSUMPTION OF RAW MATERIAL TO THE FINISHED PRODUCTS AS COMPARED TO THE PREVIOUS Y EAR. THE ASSESSEE WAS ALSO ASKED TO PRODUCE THE STOCK REGIST ER AND OTHER ITA NO. 3472/DEL/2005 A.Y. 2001-02 2 RECORDS REQUIRED TO BE MAINTAINED COMPULSORILY UND ER THE DRUGS LICENCE ACT. AO ALSO ASKED COPY OF PRINTED PRICE LIST OF VARIOUS MEDICINES SOLD DURING THE YEAR. AO ALSO OBSERVED THAT PURCHASES MADE VIDE BILL NO. 760 DATED 1.11.2001 FOR RS. 2013 00/- WERE ENTERED IN THE BOOKS OF ACCOUNT TO THE EXTENT OF RS . 191000/- ONLY ON 1.3.2001. THIS DISCREPANCY WAS ALSO REQUIRED TO BE RECONCILED. THE ASSESSEE EXPLAINED THAT IT HAD NOT MAINTAINED A NY PRINTED PRICE LIST. ABOUT 75% OF THE TOTAL SALES WAS GONE TO GOVE RNMENT HOSPITAL. IT WAS FURTHER EXPLAINED AS COMPARED TO PREVIOUS YE AR THIS YEAR THERE WAS INCREASE IN SUPPLY IN GOVERNMENT DEPARTM ENTS WHERE THE MARGINS WERE VERY LOW. THE ASSESSEE ALSO GAVE VA RIOUS DETAILS AND COMPARATIVE CHARTS AND EXPLAINED THAT ALL THE DIFFE RENCE WAS TO DUE TO LOW MARGIN OF SUPPLY TO GOVERNMENT DEPARTMENTS A ND HIGHER PURCHASES OF RAW MATERIALS WITH RESPECT TO PREVIO US YEAR. AO OBSERVED THAT THE ASSESSEE DID NOT PRODUCE THE S TOCK REGISTER OR OTHER RECORD RELATING TO THE DAY TO DAY PRODUCTION OF THE FINISHED PRODUCT GOODS AND THE CONSUMPTION OF RA W MATERIAL. AO DID NOT ACCEPT THE ASSESSEES EXPLANATION THAT T HE RATES HAS DECLINED. FURTHER THE AO OBSERVED THAT CHART FURN ISHED BY THE ASSESSEE IS NOT EXHAUSTIVE. IN THE BACKGROUND OF TH E AFORESAID THE AO OBSERVED THAT THE ASSESSEE HAS NOT BEEN ABLE TO JUSTIFY THE VARIATION OF THE CLOSING OF STOCK THOUGH THE QUANT ITY DETAILS HAVE BEEN FURNISHED. IN THE ABSENCE OF THE STOCK REGIS TER AND DAY TO DAY RECORD THE FIGURES ARE NOT RELIABLE AND CANNOT BE T ALLIED. TRADING ADDITION OF RS. 2 LACS ON ESTIMATE BASIS IN THESE C IRCUMSTANCES WERE MADE SINCE THE TRADING RESULTS WERE NOT RELIABLE. ITA NO. 3472/DEL/2005 A.Y. 2001-02 3 2.2 UPON ASSESSEES APPEAL LD. CIT(A) OBSERVED THAT THE SUBMISSIONS MADE BY THE ASSESSEE WERE PERFUNCTORY I N NATURE. HE OBSERVED THAT AS THE MEDICINES ARE MEANT FOR HUMAN CONSUMPTION IT IS NOT ACCEPTABLE THAT IN THE YEAR OF APPEAL T HE PERCENTAGE OF RAW MATERIAL TO THAT OF PRODUCTION WOULD GO UP AS COM PARED TO EARLIER YEAR. HE FURTHER OBSERVED THAT NECESSARY STOCK REGISTERS WERE NOT MAINTAINED. HENCE HE OBSERVED THAT ASSESSEE HAD FAILED TO EXPLAIN THE UPWARD INCREASE OF THE RATE OF RAW MAT ERIAL INPUTS AS TO THE TURNOVER. HENCE LD. CIT(A) HELD THAT THE A DDITION OF RS. 2 LACS IS MORE THAN REASONABLE AS THE BOOKS OF ACCOUNTS D ESERVE TO BE REJECTED UNDER SECTION 45(3) OF THE IT ACT. 2.3 AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BE FORE US. 2.4 WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORDS. WE FIND THAT AO HAS NOT CATEGORICALLY REJECTED THE BOOKS OF ACCOUNTS. HE HAS ONLY OBSERVED THAT ASSESSEE HAS N OT MAINTAINED THE NECESSARY STOCK REGISTER AND HE HAS NOT ACCEPTE D THE ASSESSEES EXPLANATION REGARDING THE INCREASE IN CONSUMPTION OR THE DECLINE IN RATES WITHOUT GIVING PROPER REASONING AS TO WHY HE HAS REJECTED THE ASSESSEES CONTENTION. WITHOUT SPECIFYING IN DE TAIL THE SHORTCOMINGS OBSERVED BY HIM HE ADDED ON ESTIMAT E BASIS A SUM OF RS. 2 LACS WHICH IN HIS OPINION SHOULD BE ADDED TO THE ASSESSEES INCOME. IT IS NOT THE CASE THAT AO HAS EXAMINED TH E PROFITABILITY AS COMPARED TO PRECEDING YEARS OR AS COMPARED TO THE P REVAILING TREND IN THE MARKET AND HAS FOUND ABNORMALITY IN THIS REG ARD. IT IS ALSO NOT THE CASE THAT AO COME ACROSS ANY BOGUS PURCHAS E OR SALE ITA NO. 3472/DEL/2005 A.Y. 2001-02 4 OUTSIDE THE BOOKS. LD. CIT(A) HAS ALSO OBSERVED T HAT AS THE MEDICINES ARE MEANT FOR HUMAN CONSUMPTION IT IS N OT ACCEPTABLE THAT IN THE YEAR IN APPEAL THE PERCENTAGE OF RAW MATERIAL TO THAT OF PRODUCTION WOULD GO UP AS COMPARED TO EARLIER YEAR . IN OUR CONSIDERED OPINION THIS IS A PECULIAR OBSERVATION AS THERE IS NO RULE THAT THERE CANNOT BE INCREASE IN CONSUMPTION OF RA W MATERIAL IN MEDICINES MADE FOR HUMAN CONSUMPTION. WE FURTHER FIND THAT IN THE TAX AUDIT REPORT THE AUDITORS HAVE SPECIFIED TH AT QUANTITATIVE DETAILS OF PRINCIPAL ITEMS OF RAW MATERIALS FINIS HED PRODUCTS AND BY PRODUCTS ARE NOT FEASIBLE AS THERE ARE MORE THAN 500 MEDICINES DEALT WITH BY THE ASSESSEE. ASSSESSEE HAS GIVEN TH E QUANTITATIVE DETAILS OF OPENING AND CLOSING STOCK AND THE VARIAT ION THEREOF. NO SPECIFIC DEFECT IN THE SAME HAS BEEN POINTED OUT. WE FIND THAT HONBLE PUNJAB HIGH COURT IN THE CASE OF PANDIT BRO S. VS. CIT 26 ITR 159 HAD OBSERVED THAT WHEN PROFITS WERE LOW AND THERE WAS NO STOCK REGISTER MAINTAINED BY THE ASSESSEE THESE MA TTERS IN ITSELF WERE NOT SUFFICIENT TO WARRANT ADDITION IN THE PRO FIT DECLARED BY THE ASSESSEE. WE FURTHER FIND THAT HONBLE KERALA HIGH COURT IN 83 ITR 484 IN THE CASE OF MADURAI RAJ VS. CIT HAS HELD THA T WHEN THE ASSESSEE NOT IN OBLIGATION OF MAINTAINING STOCK O F ITS PRODUCTS BY WAY OF NON-MAINTENANCE OF SUCH STOCK REGISTER BY ITSELF NO GROUND TO REJECT THE ACCOUNTS. 2.5 IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDENT WE FIND THAT EXCEPT POINTING OUT THAT STOCK REGIST ER IS NOT BEING MAINTAINED BY THE ASSESSEE AUTHORITIES BELOW HAVE NOT POINTED OUT ANY SPECIFIC DEFECT TO WARRANT THE REJECTION OF BOO KS OF ACCOUNTS. ITA NO. 3472/DEL/2005 A.Y. 2001-02 5 MOREOVER AO IN HIS ASSESSMENT YEAR HAS ALSO NOT S PECIFICALLY MENTIONED THAT HE IS REJECTING THE BOOKS OF ACCOUNT S. MOREOVER THERE IS NO BASIS FOR ADHOC ADDITION OF RS. 2 LACS. UNDER THE CIRCUMSTANCES WE SET ASIDE THE ORDERS OF THE AUTHO RITIES BELOW AND DELETE THE ADDITION OF RS. 2 LACS. 3. THE NEXT ISSUE RAISED IS THAT THE LD. CIT(A) ER RED IN CONFIRMING THE ACTION OF THE AO IN MAKING THE ADDITION OF RS. 2 LACS ON ACCOUNT OF ALLEGED DISALLOWANCE OF MARKETING AND CO MMISSION EXPENSES. 3.1 ON THIS ISSUE AO OBSERVED THAT ASSESSEE HAS C LAIMED MARKETING EXPENSES AND COMMISSION WHICH HAVE ABNOR MALLY INCREASED OVER THE LAST YEAR. AO FURTHER OBSERVE D THAT ASESSEE WAS ASKED TO JUSTIFY THE EXPENSES ON COMMISSION A ND MARKETING EXPENSES. AO FURTHER OBSERVED THAT REGISTERED LETT ERS WERE SENT TO FEW PARTIES TO VERIFY THE COMMISSION AND MARKETIN G EXPENSES. AO OBSERVED THAT LETTERS ADDRESSED TO ONE OF THE PARTI ES WERE RETURNED BACK AS UNSERVED AND NO RESPONSE WAS RECEIVED FROM OTHER PARTIES. ASSESSEE REPLIED THAT ADDRESSES OF TWO OF THE PARTI ES HAD CHANGED AND HE ALSO SUPPLIED THE NEW ADDRESS. IN THIS BA CKGROUND THE AO WAS OF THE OPINION THAT SINCE 75% OF THE TOTAL SALE S WAS MADE TO THE GOVERNMENT DEPARTMENT THE JUSTIFICATION OF CO MMISSION PAID IN RESPECT OF SALES TO THE GOVERNMENT DEPARTMENT WAS N O LONGER VALID. HENCE HE DISALLOWED RS. 2 LACS OUT OF MARKETING EXP ENSES AND COMMISSION. IN THE PROCEEDING BEFORE THE LD. CIT(A ) ASSESSEE SUBMITTED CONFIRMATION FROM SOME OF THE PARTIES AND MATTER WAS ITA NO. 3472/DEL/2005 A.Y. 2001-02 6 REMANDED BY THE CIT(A) TO THE AO. LD. CIT(A) OBSERV ED THAT EVEN IN THE REMAND PROCEEDINGS ASSESSEE FAILED TO PRODUCE S OME OF THE PERSONS. SOME OF THE PERSONS HAD APPEARED BEFORE TH E AO AND THEIR STATEMENTS WERE RECORDED. THOSE PERSONS COULD N OT STATE AS TO WHOM/WHICH HOSPITAL THEY DID LIAISON WORK. HENCE LD . CIT(A) CONFIRMED THE DISALLOWANCE OF RS. 2 LACS MADE BY T HE AO. 3.2 AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL B EFORE US. 3.3 WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORDS. WE FIND THAT AOS CASE IS ONLY THAT SINCE THE MAJOR PART OF THE ASSESSEES SUPPLY WAS TO THE GOVERNMENT DEPARTMENT NO COMMISSION OR MARKETING EXPENSES WAS JUSTIFIABLE. IN OUR CONSIDERED OPINION THIS LINE OF REASONING IS NOT S USTAINABLE AS THERE IS NO RULE THAT NO MARKETING EFFORTS WERE REQUIRED IN MAKING THE SALES TO THE GOVERNMENT DEPARTMENT. IT IS ALS O NOT THE CASE THAT THE PERSONS WHO DID NOT ATTEND TO GIVE DEPOSI TION BEFORE THE AO WERE ISSUED SUMMONS UNDER SECTION 131 OF THE ACT . THE PERSONS WHO ATTENDED HAD CONFIRMED THAT THEY HAD DONE MARKETING WORK ON BEHALF OF THE ASSESSEE AND HAD RE CEIVED COMMISSION THEREOF. IN THIS BACKGROUND IN OUR CON SIDERED OPINION THERE IS NO JUSTIFICATION OF ADHOC ADDITION MADE BY THE AO IN THIS REGARD. HENCE WE SET ASIDE THE ORDERS OF THE AUTH ORITIES BELOW AND DELETE THE DISALLOWANCE OF RS. 2 LACS IN THIS REGAR D. 4. NEXT ISSUE RAISED IS THAT THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN MAKING THE ADDITION OF RS. 5794 2/- ON ACCOUNT OF ALLEGED DISALLOWANCE OF DEPRECIATION. ITA NO. 3472/DEL/2005 A.Y. 2001-02 7 4.1 ON THIS ISSUE AO NOTED THAT ASSESSEE HAD CLA IMED DEPRECIATION OF RS. 57942/- ON ACCOUNT OF DEPRECIAT ION ON DIESEL GENERATOR SET. AO NOTICED THAT NO EXPENSES ON ACC OUNT OF DG SET HAD BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT. H ENCE AO HELD THAT DEPRECIATION WAS NOT ALLOWABLE UNLESS IT WAS P ROVED THAT DG SET WAS ACTUALLY PUT INTO USE. 4.2 UPON ASSESSEES APPEAL THE LD. CIT(A) CONFIRME D THE ADDITION MADE BY THE AO. 4.3 AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL B EFORE US. 4.4 WE HAVE HEARD BOTH THE COUNSELS AND PERUSED TH E RECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THA T IT IS FACTUALLY WRONG THAT NO EXPENSES WAS ACTUALLY INCURRED ON DG SET. LD. COUNSEL FURTHER CLAIMED THAT EXPENDITURE FOR RUNNIN G AND MAINTENANCE OF DG SET WERE CLAIMED UNDER THE HEAD VEHICLE EXPENSES. IN THIS REGARD LD. COUNSEL ALSO SHOW ED VOUCHERS FOR PURCHASE OF DIESEL FOR RUNNING THE GENERATOR. LD. COUNSEL FURTHER CONTENDED THAT DEPRECIATION IS ALSO ALLOWED IN CASE OF PASSIVE USER . FOR THIS PROPOSITION HE RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT DELIVERED IN THE CASE RE FRIGERATION & ALLIED INDUSTRIES 247 ITR 12. ITA NO. 3472/DEL/2005 A.Y. 2001-02 8 4.5 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS W E FIND THAT AS PER PAPER BOOK SUBMITTED BY THE ASSESSEE VIDE PAGE NO.53 TO 61 EXPENDITURE INVOLVED IN THE RUNNING AND MAINTENANCE OF DG SET ARE DULY SET OUT. THESE EXPENSES WERE BOKED UNDER VEH ICLE EXPENSES. MOREOVER AS PER HONBLE JURISDICTIONAL HIGH COURT DECISION CITED ABOVE FOR THE PURPOSE OF SECTION 32(1) THERE IS NO REQUIREMENT THAT ASSET SHOULD BE USED FOR THE WHOLE OF THE ASSESSMEN T YEAR IN QUESTION. IT WAS FURTHER ACCEPTED THAT SECTION 3 2(1) INCLUDES PASSIVE USER OR ASSET IN BUSINESS. IT WAS HELD TH AT THE FACT THAT MATERIAL WAS KEPT IN GOOD WORKING CONDITIONS SO THA T IT CAN BE USED AT ANY MOMENT. THERE IS NO JUSTIFICATION TO DISALLOW THE CLAIM OF THE DEPRECIATION. IN THE BACKGROUND OF THE AFO RESAID DISCUSSION AND PRECEDENT WE SET ASIDE THE ORDERS OF THE AUTH ORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 5. THE LAST ISSUE RAISED IS THAT LD. CIT(A) CONFIRM ED THE ADDITION OF RS. 98850/- ON ACCOUNT OF DISALLOWANCE OF SALARY AND WAGES. 5.1 ON THIS ISSUE AO NOTED THAT ASSESSEE HAS SHOWN SALARY PAYABLE TO EMPLOYEES BUT NO DATE OF PAYMENT IS MEN TIONED IN THE MONTH OF FEBRUARY AND MARCH 2001. ASSESSEE REPLIE D THAT THEY ITA NO. 3472/DEL/2005 A.Y. 2001-02 9 HAD PAID SALARY ON 7.4.2001 AFTER THE EXPIRY OF THE ACCOUNTING YEAR AND THIS WAS THEIR GENERAL PRACTICE. AO REJECTED TH IS REPLY ON THE GROUND THAT ASSESSEE HAS NOT FILED ANY DOCUMENTAR Y EVIDENCE TO PROVE THE GENUINENESS OF THE SALARY PAID TO SHRI SO MBIR; KULDEEP AND VIJENDER AND THEIR EDUCATIONAL QUALIFICATION. H E FURTHER HELD THAT EMPLOYEES WERE DRAWING MEAGER SALARY AND IT W AS NOT PROBABLE THAT THE SALARY FOR THE PREVIOUS TWO MON THS WERE UNPAID. HENCE AO DISALLOWED A SUM OF RS. 98850/-. 5.2 UPON ASSESSEES APPEAL LD. CIT(A) CONFIRMED TH E ADDITION MADE BY THE AO. 5.3 AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL B EFORE US. 5.4 WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORDS. WE FIND THAT THE ASSESSEE HAS BEEN ADMITTEDLY FOLLO WING MERCANTILE SYSTEM OF ACCOUNTING. UNDER THE CIRCUMSTANCES IT WAS INCUMBENT UPON THE ASSESSEE TO BOOK ALL THE EXPENDITURES THAT HAD ACCRUED UPTO THE CLOSE OF THE YEAR. IN THIS REGARD THE AS SESSEE HAS DEBITED THE OUTSTANDING SALARY AND WAGES PAYABLE. ADMITT EDLY THE EXPENDITURE INVOLVE DID NOT ATTRACT THE PROVISIONS OF SECTION 43B. IT IS ALSO NOT THE CASE OF THE AO HAS COME ACROSS AN Y SPECIFIC ITA NO. 3472/DEL/2005 A.Y. 2001-02 10 INSTANCE OF ASSESSEE BOOKING FICTITIOUS EXPENSE OR THAT THE PERCENTAGE OF EXPENSE IN THIS REGARD HAS BECOME AB NORMALLY HIGH ON A COMPARATIVE BASIS. UNDER THE CIRCUMSTANCES IN OUR CONSIDERED OPINION THERE IS NO REASON TO REJECT TH E OUTSTANDING LIABILITY ON ACCOUNT OF SALARY AND WAGES. IN THE BACKGROUND OF THE AFORESAID DISCUSSION WE SET ASIDE THE ORDER OF THE LOWERS AUTHORITIES AND DELETE THE DISALLOWANCE OF RS. 98 850/-. 6. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/03/2010. SD/- SD/- [C.L. SETHI] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 05/03/ 2010 SRB COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR ITAT TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT DELHI BENCHES