Natco Pharma Ltd., Hyderabad v. DCIT, Hyderabad

ITA 60/HYD/2009 | 2004-2005
Pronouncement Date: 23-07-2010 | Result: Partly Allowed

Appeal Details

RSA Number 6022514 RSA 2009
Assessee PAN AAACN6927A
Bench Hyderabad
Appeal Number ITA 60/HYD/2009
Duration Of Justice 1 year(s) 6 month(s) 11 day(s)
Appellant Natco Pharma Ltd., Hyderabad
Respondent DCIT, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 23-07-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 23-07-2010
Date Of Final Hearing 30-06-2010
Next Hearing Date 30-06-2010
Assessment Year 2004-2005
Appeal Filed On 12-01-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI N.R.S. GANSAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA.36/HYD/2009 ASSESSMENT YEAR 2004-05 THE DY. CIT CIRCLE 16 (1) HYDERABAD VS M/S NATCO PHARMA LTD. HYDERABAD (AAA CN 6927 A) (APPELLANT) (RESPONDENT) ITA.60/HYD/2009 ASSESSMENT YEAR 2004-05 M/S NATCO PHARMA LTD. HYDERABAD (AAA CN 6927 A) VS THE DY. CIT CIRCLE 16 (1) HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. VASUNDHARA SINHA DR RESPONDENT BY : A.V. RAGHU RAM O R D E R PER: CHANDRA POOJARI ACCOUNTANT MEMBER: THESE TWO CROSS APPEALS ONE BY THE REVENUE AND ANOTH ER BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER PASSED BY TH E CIT(A)V HYDERABAD AND PERTAINS TO THE ASSESSMENT YEARS 2004-05. 2 THE MAIN GRIEVANCE IN THE REVENUE APPEAL I S : THE CIT(A) OUGHT TO HAVE HELD THAT DEDUCTION U/S 80 HHC IS NOT ALLOWABLE WHILE COMPUTING INCOME UNDER SECTION 115J B AS THE ASSESSEE HAS BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIAT ION TO BE SET OFF AGAINST CURRENT YEARS INCOME THEREBY RESULTING IN NIL INCOME FOR THE YEAR. 3 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERI AL AVAILABLE ON RECORD. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 2 JUDGEMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. A JANTHA PHARMA LTD. (318 ITR 352) (BOM.). ON THE CONTRARY THE AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF CIT VS. RAJANIKANT SCHNELDER & ASSOCI ATES (P) LTD. (2008) (302 ITR 22 ) (MDS.). HE ALSO RELIED ON THE JUDGEMENT OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. AMBIKA COTTON M ILLS LTD. (321 ITR 448) (MAD.) WHEREIN IT WAS HELD: THAT DISMISSING THE APPEAL THAT THE TRIBUNAL WAS R IGHT IN LAW IN HOLDING THAT THE DISALLOWANCE OF DEDUCTION U/S 80HHC OF THE INCOME TAX ACT IS TO BE WORKED OUT ON THE BASIS OF THE ADJUSTED BOOK PROFITS U/S 115JB. 3.1. HE ALSO RELIED ON THE JUDGEMENT OF HONBLE SUP REME COURT IN THE CASE OF VEGETABLE PRODUCTS LTD. (88 ITR 192) (HO N'BLE SUPREME COURT) FOR THE PROPOSITION THAT WHEN THERE ARE TWO CONFLICTING VIEWS OF DIFFERENT HIGH COURTS THE VIEW WHICH FAVOURS THE ASSESSEE HAS TO BE ADOPTED. ADMITTEDLY THERE ARE TWO CONFLICTING JUDGE MENTS FROM DIFFERENT HIGH COURTS. FURTHER THE SPECIAL BENCH OF T HE TRIBUNAL IN THE CASE OF DCIT VS. SYNCOME FORMULATIONS (I) LTD. (292 IT R 144) (MUM) WAS OVER RULED BY THE BOMBAY HIGH COURT. THERE IS A L ATEST JUDGEMENT FROM THE MADRAS HIGH COURT WHEREIN IT WAS HELD THAT DE DUCTION U/S 80HHC HAS TO BE COMPUTED ON THE ADJUSTED BOOK PROFIT. T HEREFORE IN VIEW OF THE JUDGEMENT OF THE APEX COURT IN THE CASE O F VEGETABLE PRODUCTS CITED SUPRA WE ARE INCLINED TO DECIDE THE ISSU E IN FAVOUR OF THE ASSESSEE. THE DEDUCTION U/S 80HHC HAS TO BE COMPUTED ON TH E ADJUSTED BOOK PROFIT U/S 115JB. THE DEPARTMENTAL RE PRESENTATIVE STRONGLY RELIED ON THE EARLIER ORDER OF THE TRIBUNAL WHICH IS IN FAVOUR OF THE DEPARTMENT STATING THAT THERE SHOULD BE CONSISTENCY I N THE JUDICIAL PROCEEDINGS. HOWEVER IN VIEW OF THE LATEST JUDGEMENT OF MADRAS HIGH COURT WE ARE UNABLE TO APPRECIATE THE ARGUMENT OF T HE LEARNED ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 3 DEPARTMENTAL REPRESENTATIVE. ACCORDINGLY WE DISMISS THE APPEAL OF THE REVENUE. 4. NOW WE WILL TAKE UP THE CROSS APPEAL FILED BY TH E ASSESSEE. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN ITS CROSS APPE AL : 4.1. GROUND NOS. (2A B C) ARE AGAINST SUSTAINING TH E DISALLOWANCE OF RS.2 44 45 338/- BEING INTEREST FREE AD VANCE TO THE GROUP COMPANIES. THE SAME ISSUE WAS CONSIDERED BY THE TRIB UNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03 IN ITA NO.341/HYD/2006 VIDE THE TRIBUNAL IN ITS ORDER DATED 9/1/2009 AND DECIDED THE SAME IN FAVOUR OF THE ASSESSEE BY HOLDING AS FOLLOWS: 44. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT IT HAS BEEN CONSISTENTLY CONTENDED BY THE ASSESSEE THAT THE SAID ADVANCES WE RE MADE OUT OF THE COMPANYS OWN GENERATION OF FUNDS AND NO ADDITIONAL BORROWINGS WERE MADE TO FINANCE THE ADVANCES TO THE GROUP CONCERNS. TH E ASSESSING OFFICER WHILE OBSERVING THAT THE ASSESSEE INCURRED EXCESS INTERES T EXPENDITURE ON ACCOUNT OF BUSINESS OF THE GROUP COMPANIES AND NOT FOR ITS OWN BUSINESS HAS MADE PROPORTIONATE DISALLOWANCE OF INTEREST OF RS.1 51 8 4 680/-. THE LEARNED CIT(A) WHILE OBSERVING THAT EVEN IF THE ASSESSEE HA D SUFFICIENT FUNDS TO LEND INTEREST FREE ADVANCES TO ITS GROUP COMPANIES THE PROPORTIONATE DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFICER IS JUSTIF IED AND ACCORDINGLY UPHELD THE DISALLOWANCE. 45. FROM THE ABOVE WE FIND THAT THERE IS NO DISPU TE THAT THE ADVANCES WERE MADE BY THE ASSESSEE COMPANY OF ITS OWN GENERATION OF FUNDS AND NOT OUT OF BORROWED FUNDS AND THERE IS NO NEXUS BETWEEN THE IN TEREST FREE ADVANCES AND INTEREST BEARING FUNDS. WE FURTHER FIND THAT IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAD INCURRED EXCESS INTEREST EXPENDITURE O N ACCOUNT OF BUSINESS OF THE GROUP COMPANIES. THUS THE ASSESSEE HAS PROVED THAT THE SAID ADVANCES WERE MADE TO ITS GROUP COMPANIES AS A MEASURE OF CO M MERCIAL EXPEDIENCY. 46. IN CIT VS. BABY CO. (2002) 254 ITR 248 (KER) R ELIED ON BY THE REVENUE IT HAS BEEN HELD (PAGE 250). THAT THEREFORE SO LONG AS THE ASSESSEE IS NOT THE BENEFICIARIES OF THE INVESTMENTS MADE BY THE PARTNE RS THEIR RELATIVES AND THE SISTER CONCERNS AND SO LONG AS THE ADVANCES WERE IN TEREST FREE THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING IN PROPORTION TO THE ADVANCES MADE. 47. WHEREAS IN THE CASE US THERE IS NO DISPUTE THA T THE INTEREST FREE ADVANCES WERE MADE BY THE ASSESSEE COMPANY TO ITS GROUP COMP ANIES ON ACCOUNT OF BUSINESS OF THE GROUP COMPANIES HENCE THERE WAS A COMMERCIAL EXPEDIENCY ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 4 AND THEREFORE FOLLOWING THE RATIO OF THE DECISION O F THE HONBLE SUPREME COURT IN SA BUILDERS VS. CIT (2007) 288 ITR I (HON'BLE SU PREME COURT) THE DECISION RELIED ON BY THE REVENUE IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 48. THE OTHER TWO DECISIONS RELIED ON BY THE LEAR NED DEPARTMENTAL REPRESENTATIVE IN CIT VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 (P&H) AND IN CIT VS. MUNJAL SALES CORPORATION (2008) 294 ITR 294 (P&H) THE HONBLE SUPREME COURT IN MUNJAL SALES CORPORATION V S.CIT AND ANOTHER (2008) 298 ITR 298 (HON'BLE SUPREME COURT) WHILE HO LDING AT PAGE 305 THAT THE PROFITS EARNED BY THE ASSESSEE DURING THE RELE VANT YEAR WERE SUFFICIENT TO COVER THE IMPUGNED LOAN OF RS.5 LAKHS HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 49. IN SA BUILDERS VS. CIT (SUPRA) THEIR LORDSHIPS WHILE OBSERVING THAT WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH A MOUNT TO ITS SISTER CONCERN AS A M EASURE OF COMMERCIAL EXPEDIENCY HAS HELD AS UNDER (PAGES 9- 10): WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OP INION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CI RCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PER SONAL BENEFIT OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A ME ASURE OF COMMERCIAL EXPEDIENCY. HOWEVER MONEY CAN BE SAID TO BE ADVAN CED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANC ES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER WHERE IT IS OBVIOUS THA T A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USE D BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES THE ASSESSEE WOULD IN OUR OPINION ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED L OANS. IN VIEW OF THE MATTER AND RESPECTFULLY FOLLOWING TH E RATIO OF THE ABOVE DECISIONS WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED TO THE DEDUCTION OF INTEREST AS CLAIMED BY IT AND THE CIT(A) WAS NOT JU STIFIED IN UPHOLDING THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING PROPO RTIONATE AMOUNT OF INTEREST OF RS.15184680/- AND ACCORDINGLY THE DISALLOWANCE O F INTEREST RS.15184680/- IS DELETED. THE GROUNDS TAKEN BY THE ASSESSEE ARE THEREFORE ALLOWED. 4.2. THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE IS SIMIL AR TO THAT ONE CONSIDERED BY THE TRIBUNAL IN ITS ORDER ON EA RLIER OCCASION IN ASSESSEES OWN CASE. IN VIEW OF THE DECISION OF THIS TRIBUNA L WE ARE INCLINED TO ALLOW THE CLAIM OF THE ASSESSEE. THE ADDITIO N IS DELETED AND THIS GROUND OF THE ASSESSEE ALLOWED. ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 5 4.3. GROUND NOS.(3A B) IS RELATING TO SUSTAINING OF DISALLOWANCE OF RS.4 02 276/- BEING SALARY ADVANCE. 4.4. IN GROUND NOS.(4A B) IS RELATING TO SUSTAINING OF DISALLOWANCE OF RS.87 88 478/- ON ACCOUNT OF WRITTEN OFF OF TOUR ADVANCES TO STAFF. 4.5. IN GROUND NOS.(5A B) IS RELATING TO SUSTAINING OF DISALLOWANCE OF WRITTEN OFF OF BAD DEBT AT RS.15 45 78 89/-. AT THE TIME OF HEARING THE ASSESSEES COUNSEL FILED ADDITIONAL EVIDENCE IN THE FORM OF LEDGER ACCOUNT AND SUB LEDGER COPIES FOR THE PURPOSE OF D ISPOSAL OF THE CLAIM MADE BY THE ASSESSEE. 4.6. IN GROUND NOS.6A B IS RELATING TO SUSTAINING O F DISALLOWANCE OF WRITTEN OFF OF ADVANCE OF GIVEN TO CHAKKILAM CON STRUCTION (P) LTD. AT RS.13 30 411/- 5. FURTHER THE ASSESSEE MADE PLEA THAT ON ACCOUNT OF INADVERTENCE AND DUE TO COMMUNICATION GAP THESE LEDGER ACCOUNT COPIES COULD NOT BE ABLE TO FILE BEFORE THE LOWER AUTH ORITIES AND PRAYED TO ADMIT THE SAME WHICH IS PLACED AT PAPER BOOK FROM PA GES NO.1-56. THE DEPARTMENTAL REPRESENTATIVE STRONGLY OPPOSED THE ADMISSION OF ADDITIONAL EVIDENCE AND PLACED RELIANCE ON THE JUDGEME NT IN THE CASE OF CIT VS. SAS EDUCATIONAL SOCIETY (PUNJAB & HARYANA) (31 9 ITR 65 ) WHEREIN IT WAS HELD THAT: ALLOWING THE APPEAL THAT DESPITE THERE BEING A FIN DING THAT THE ASSESSEE HAD BEEN GIVEN A SUFFICIENT NUMBER OF OPPORTUNITIES TH E TRIBUNAL HAD PASSED THE ORDER WITHOUT RECORDING ANY FINDING THAT SUFFICIEN T OPPORTUNITIES HAD NOT BEEN GIVEN. THE TRIBUNAL COULD NOT DIRECT THE ASSE SSING OFFICER TO PROVIDE FURTHER OPPORTUNITY TO THE ASSESSEE WITHOUT RECORDI NG A FINDING WHETHER THE ASSESSEE WAS DENIED SUFFICIENT OPPORTUNITY. FOR JU STIFYING ITS DIRECTION FOR GIVING FURTHER OPPORTUNITY THE TRIBUNAL HAD TO REC ORD A FINDING OF DENIAL OF ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 6 OPPORTUNITY. THUS THE ORDER OF THE TRIBUNAL WAS S ET ASIDE AND THE MATER WAS REMANDED TO THE TRIBUNAL. 6. WE HAVE CONSIDERED THE ARGUMENT OF BOTH THE PART IES. IN OUR OPINION THE ASSESSEE DUE TO ITS INADVERTENCE NOT ABL E TO PRODUCE THE ADDITIONAL EVIDENCE BEFORE THE LOWER AUTHORITIES. THIS EVIDENCE IS VERY IMPORTANT FOR PROPER DISPOSAL OF THE CLAIM MADE B Y THE ASSESSEE. ACCORDINGLY WE ADMIT THE ADDITIONAL EVIDENCE FURNISHED BY THE ASSESSEE IN THE FORM OF LEDGER AND SUB LEDGER AND REMIT BACK T HE ISSUE TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LIGHT O F THE ABOVE EVIDENCE. 7. THE GROUNDS IN 3(A) & (B) 4 (A) & (B) 5(A) & (B) 6(A) & (B) ARE SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR FRE SH CONSIDERATION IN THE LIGHT OF THE ADDITIONAL EVIDENCE FILED BY THE ASSE SSEE DURING THE COURSE OF HEARING BEFORE US. 8. THE NEXT GROUND (NOS.7A B) IS RELATING TO SUSTA INING OF DISALLOWANCE OF RS.3 40 864/- PAID TO THE CONTROLLER O F PATENT STATING THAT THE SAID FEES IS IN THE NATURE OF CAPITAL EXPENDIT URE. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE PAID ADDITIONAL DRUG LICEN SE FEE OF RS.4 19 736/-. THE ASSESSING OFFICER OBSERVED THAT THIS AMOU NT WAS PAID TOWARDS FEE FOR NEW PRODUCT. ACCORDING TO THE ASSESSING OF FICER THE AMOUNT WAS INCURRED FOR PRODUCTION OF NEW PRODUCT AND IT WOULD GIVE ENDURING BENEFIT AND TREATED THE EXPENDITURE AS CAPIT AL EXPENDITURE AND DISALLOWED THE SAME. THE CONTENTION OF THE ASSESSEE COUNSEL IS THAT THIS AMOUNT WAS INCURRED NOT FOR THE PURPOSE OF REGISTRATIO N OF NEW PRODUCTS IT WAS FOR CARRYING OUT SEARCH ACTIVITY TO SEE WHETHER TH IS NEW PRODUCT WHICH THE ASSESSEE INTENDED TO PRODUCE HAS ALREADY REGISTER ED OR NOT. IT WAS PAID TO CONTROLLER OF PATENT IN INDIA FOR FIL ING AND PROCESSING ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 7 INTERNATIONAL APPLICATIONS FOR PATENTS UNDER PATENT C OOPERATIVE TREAT (PCT) TO BE PAID AT INTERNATIONAL BUREAU WOULD INT ELLECTUAL PROPERTY ORGANIZATION GENEVA AND INTERNATIONAL SEARCHING AUT HORITIES AT AUSTRALIA CHINA SWEDEN USA AND EUROPEAN PATENT OF FICES TOWARDS BASIC FEE DESIGNATION FEE AND SEARCH FEE. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE CA SE. AS GATHERED FROM THE ARGUMENTS OF THE ASSESSEES COUNSEL THE ELEMENT PURPOSE IS TO DO REGISTRATION OF PATENT RIGHT AT THE LEVEL OF PATE NT COOPERATIVE TREAT (PCT) TO BE PAID AT INTERNATIONAL BUREAU WORLD INT ELLECTUAL PROPERTY ORGANIZATION GENEVA. BEING THE ELEMENT OBJECTIVE I S TO ACQUIRE PATENT RIGHT THE EXPENDITURE INCURRED IN CONNECTION WITH ACQU IRING THE PATENT RIGHT CANNOT BE CONSTRUED AS REVENUE EXPENDITURE AS IT BRINGS ENDURING BUSINESS TO THE ASSESSEE. ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. 10. THE NEXT GROUND NOS.(8A B) IS WITH REGARD TO DISALLOWANCE OF CONTRIBUTION TO GROUP GRATUITY AND RISK PREMIUM PAID AT RS.3 40 864/-. AT THE TIME OF HEARING THE ASSESSEE SUBMITTED THAT THE C IT SUBSEQUENTLY GIVEN APPROVAL FOR GRATUITY TRUST FUND RETROSPECTIVELY AS SUCH SUITABLE DIRECTION BE GIVEN TO ALLOW CLAIM. WE ARE AGREED WIT H THE ARGUMENTS OF THE ASSESSEES COUNSEL. SINCE THE ASSESSEES GROUP TRUST FUND WA S APPROVED BY THE CIT RETROSPECTIVELY THE ASSESSEES CLAIM T O BE ALLOWED. 11. THE NEXT GROUND NOS.(9A B) IS WITH REGARD TO DISALLOWANCE OF FINANCE CHARGES AT RS.10 74 410/-. THIS GROUND WAS NO T PRESSED BEFORE US BY THE ASSESSEES COUNSEL ON ACCOUNT OF SMALLNESS OF TAX EFF ECT. HENCE THIS GROUND IS DISMISSED AS NOT PRESSED. ITA NOS.36 & 60/H/2009 M/S NATCO PHARMA LTD 8 12. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT 23. 7.2010 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 23 RD JULY 2010 COPY FORWARDED TO: 1. M/S NATCO PHARMA LTD. NATCO HOUSE ROAD NO.2 BANJA RA HILLS HYDERABAD. 2. THE DCIT CIRCLE 16(1) BASHEER BAGH HYDERABAD 3. CIT(A)-V HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP