M/S. GLENMARK PHARMACEUTICALS LTD, MUMBAI v. THE CIT(A) CC-VIII, MUMBAI

ITA 6916/MUM/2008 | 2005-2006
Pronouncement Date: 20-10-2010 | Result: Partly Allowed

Appeal Details

RSA Number 691619914 RSA 2008
Assessee PAN MARCH2005B
Bench Mumbai
Appeal Number ITA 6916/MUM/2008
Duration Of Justice 1 year(s) 10 month(s) 16 day(s)
Appellant M/S. GLENMARK PHARMACEUTICALS LTD, MUMBAI
Respondent THE CIT(A) CC-VIII, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 20-10-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 20-10-2010
Date Of Final Hearing 06-09-2010
Next Hearing Date 06-09-2010
Assessment Year 2005-2006
Appeal Filed On 04-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI A.L. GEHLOT(AM) AND SHRI R.S. PADVEKAR (JM) ITA NO. 6831/MUM/2008 ASSESSMENT YEAR : 2005-06 THE ASST. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE -33 MUMBAI. .. APPELLANT VS. M/S. GLENMARK PHARMACEUTICALS LTD. RESPONDE NT GLENMARK HOUSE HDO CORPORATE BUILDING WING A B.D. SAWANT MARG CHAKALA ANDHERI (E) MUMBAI 400 099. (PAN: AACG 2207L) ITA NO. 6916/MUM/2008 ASSESSMENT YEAR : 2005-06 M/S. GLENMARK PHARMACEUTICALS LTD. APPELLANT GLENMARK HOUSE HDO CORPORATE BUILDING WING A B.D. SAWANT MARG CHAKALA ANDHERI (E) MUMBAI 400 099. (PAN: AACG 2207L) V/S. THE ASST. COMMISSIONER OF INCOME TAX RESPONDENT CENTRAL CIRCLE-33 MUMBAI (PAN: AACG 2207L) REVENUE BY: SHRI PAVAN VED & SHRI A.K. NAYAK ASSESSEE BY : SHRI VIJAY MEHTA ORDER PER A.L. GEHLOT A.M. THESE CROSS APPEALS FILED BY THE REVENUE AND ASSESS EE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CO MMON ORDER FOR THE SAME OF CONVENIENCE. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 2 ITA NO. 6831/MUM/2008 (REVENUES APPEAL) 2. THE GROUNDS BY THE REVENUE READ AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE CIT(A) HAS ERRED IN 1. DELETING THE DISALLOWANACE OF RS. 22 42 588/- MADE U/S.14A APPARENTLY THE GROUND THAT THERE IS NO DIRECT NEXUS BETWEEN THE INVESTMENT YIELDING EXEMPT INCOME AND THE BORRO WED FUNDS. 2. FAILING TO APPRECIATE THAT FOR THE PURPOSE OF COMPU TING DISALLOWANCE U/S.14A THE OVERALL POSITION OF ALL L IABILITIES AND ITS APPLICATION IN VARIOUS INVESTMENTS OR ASSET S HAS TO BE TAKEN INTO ACCOUNT AND ONE CANNOT TAKE A NARROW VIE W THAT THERE HAS TO BE A ONE-TO-ONE NEXUS BETWEEN THE BORR OWED FUNDS AND INVESTMENTS YIELDING EXEMPT INCOME. 3. IGNORING THE DECISION OF THE JURISDICTION ITAT IN T HE CASE OF ACIT RANGE 10(1) MUMBAI VERSUS CITICORP FINANCE ( INDIA) LTD IN ORDER IT%A NO. 5832/MUM/2003 DATED 21/11/2006 WHEREIN IT WAS HELD THAT THE TERM EXPENDITURE OCC URRING IN SECTION 14A WOULD TAKEN IN ITS SWEEP NOT ONLY DIREC T EXPENDITURE BUT ALSO ALL FORMS OF EXPENDITURE REGAR DLESS OF WHETHER THEY ARE FIXED VARIABLE DIRECT INDIRECT ADMINISTRATIVE MANAGERIAL OR FINANCIAL. 4. IGNORING THE PROVISIONS OF RULE 8D WHICH EVEN HAS RETROSPECTIVE APPLICATION AS HELD BY THE ITAT MUMBA I SPL. BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT P VT.LTD. 3. GROUNDS NUMBERS 1 TO 4 RELATED ISSUE UNDER SECTI ON 14A OF THE ACT. THE ASSESSEE HAS ALSO RAISED GROUND VIDE GROUN D NUMBER 3 IN APPEAL FILED BY THE ASSESSEE. THE ISSUE IS SIMILAR TO A.Y.2002.2003 APPEAL FILED BY THE ASSESSEE VIDE ITA NO. 1110/M/07 AND THE RELEVANT FINDING READS AS UNDER:- 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND RECORDS PERUSED. IN THE LIGHT OF THE LATEST JUD GMENT OF THE HONBLE HIGH COURT IN THE CASE OF GODREJ & BOYCE M FG. CO. LTD. V. DCIT ITA NO. 6626 OF 2010 AND WRIT PETITION NO. 75 8 OF 2010 JUDGMENT DATED 12 TH AUGUST 2010 WHEREIN IT HAS BEEN HELD THAT PRIOR TO ASSESSMENT YEAR 2008-09 RULE 8D WAS NOT A PPLICABLE. HOWEVER THE DISALLOWANCE IS WARRANTED UNDER SECTIO N 14A OF THE ACT. THE A.O. MUST ADOPT A REASONABLE BASIS OR METH OD CONSISTENT WITH THE FACTS AND CIRCUMSTANCES OF THE CASE. IN TH E CASE UNDER ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 3 CONSIDERATION IS RELATED TO THE ASSESSMENT YEAR 200 2-03. IN THE ASSESSMENT YEAR 2004-05 THE A.O. HIMSELF ADMITTED 1 0% REASONABLE DISALLOWANCE UNDER SECTION 14A OF THE AC T. THE CIT (A) IN THE YEAR UNDER CONSIDERATION HAS ALSO ACCEPT ED 10% DISALLOWANCE OF THE EXPENDITURE U/S.14A OF THE ACT AS REASONABLE. WE THEREFORE DO NOT FIND ANY REASON A GAINST THE FINDINGS OF THE CIT (A). THE ORDER OF THE CIT (A) O N THIS ISSUE IS CONFIRMED. THUS GROUND NO. 2 OF THE ASSESSEES AP PEAL AND GROUND NO.2 OF THE REVENUES APPEAL BOTH ARE DISMIS SED. 3.1 SINCE FACTS ARE IDENTICAL THEREFORE IT IS COVER ED BY THE ORDER OF ITAT IN ASSESSEES OWN CASE WE FOLLOW THE SAME. TH E AO IS DIRECTED ACCORDINGLY. 4. GROUND NO. 5 IS IN RESPECT OF ALLOWING RELIEF OF RS. 10 33 544/- OUT OF THE TOTAL DISALLOWANCE OF RS. 10 74 906/- M ADE OUT OF EXPENSES CLAIMED UNDER THE HEAD REPAIRS AND MAINTENANCE WIT HOUT APPRECIATING THE FACT THAT THE VARIOUS ITEMS OF EXP ENDITURE LISTED IN THE ASSESSMENT ORDER ARE CLEARLY IN THE NATURE OF C APITAL EXPENDITURE GIVING ENDURING BENEFIT TO THE ASSESSEE. 4.1 DISALLOWANCE MADE BY THE AO HAS BEEN EXAMINED B Y THE CIT(A) AND FOUND THAT RS 41362/- IS ONLY CAPITAL IN NATURE WHICH ON ACCOUNT OF PURCHASE OF CONVERTER. BALANCE AMOUNT OF EXPENDI TURES PERTAIN TO REVENUE ACCOUNT. WE HEARD THE LEARNED REPRESENTATIV ES OF THE PARTIES AND RECORD PERUSED. IT HAS BEEN SUBMITTED THAT IDEN TICAL ISSUE IS IN AY 2002-03 VIDE GROUND NO. 1 OF GROUNDS OF APPEAL F ILED BY THE REVENUE. THE LEARNED REPRESENTATIVES OF THE PARTIES SUBMITTED THAT SAME VIEW MAY BE TAKEN IN THIS YEAR ALSO. WE FIND T HAT CIT (A) EXAMINED THE EXPENDITURES BEFORE GIVEN HIS FINDING. AFTER CONSIDERING THE DISCUSSIONS MADE BY THE ITAT IN AY 2002-03 IN P ARA 33 OF THE ORDER DATED 30/09/2010 WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A).WE CONFIRM THE ORDER OF THE CIT(A). 5. GROUND NO. 6 IS IN RESPECT OF DELETING THE DISA LLOWANCE OF DEPRECIATION OF RS.19 72 907/- ON ROYALTY PAYMENT M ADE TO M/S. LYKA LABORATORIES LTD. WITHOUT APPRECIATING THE FACT THA T SUCH ROYALTY PAYMENT IS NOT A DEPRECIABLE ASSET AND THAT SIMILAR RELIEF ALLOWED IN THE EARLIER YEARS HAS NOT BEEN ACCEPTED BY THE DEPA RTMENT. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 4 5.1 THE LEARNED REPRESENTATIVES OF THE PARTIES SUBM ITTED THAT SIMILAR ISSUE AROSE IN A.Y. 2002-03 BY GROUND NO. 3 OF GROUNDS OF APPEAL FILED BY THE REVENUE. WE FIND THAT SIMILAR I SSUE HAS BEEN DECIDED BY ITAT IN ASSESSEES APPEAL FOR THE A.Y. 2 002-03 VIDE ORDER DATED 30/09/2010. THE RELEVANT FINDINGS ARE REPRODU CED AS UNDER:- 39. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE SU BMITTED THAT THE ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL I N ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 IN ITA NO. 6477/M/04 AND OTHERS ORDER DATED 9 TH JULY 2008. THE RELEVANT FACTS AND FINDINGS OF THE ITAT ARE AS UNDER:- 16. THE NEXT DISPUTE IN THE REVENUES APPEAL RELAT ES TO ALLOWING OF DEPRECIATION OF RS. 69 97 585/- IN RESP ECT OF ROYALTY PAYMENTS. WE HAVE HEARD THE LEARNED COUNSEL FOR TH E ASSESSEE AND GONE THROUGH THE DISCUSSIONS IN PARA 13.6 TO 13 .10 AND AGREE WITH THE VIEW OF THE LEARNED CIT(A) THAT THE EXAMINATION OF THE AGREEMENT AS A WHOLE SHOWS THAT IN SUBSTANCE T HE ROYALTY INPAYMENT HAS BEEN MADE TO ACQUIRE THE BRANDS AND I T IS EVIDENT THAT SUCH PAYMENT FORMS PART OF THE COST OF ACQUISI TION OF BRANDS AND THEREFORE FORMS PART OF THE TOTAL COST OF THE ASSET. IN RESPECT OF THE EXPENDITURE INCURRED ON TECHNICAL KNOW-HOW THE ASSESSEE IS ENTITLED TO DEPRECIATION UNDER SECTION 32 OF THE ACT. WE DECLINE TO INTERFERE. THE AO FOLLOWED THE DETAILED DISCUSSION MADE IN TH E ASSESSMENT YEAR 2001-02. THE CIT (A) ALSO ALLOWED THE ASSESSEE S CLAIM FOLLOWING THE ORDER OF THE CIT (A) FOR THE ASSESSME NT YEAR 2001- 02. SINCE FACTS ARE IDENTICAL WE RESPECTFULLY FOLLO W THE ORDER OF THE ITAT AND IN THE LIGHT OF THAT THE ORDER OF THE CIT(A) IS CONFIRMED. 6. SINCE FACTS ARE IDENTICAL IN THIS YEAR THEREFOR E IT IS COVERED BY THE ORDER OF ITAT IN ASSESSEES OWN CASE WE ACCORD INGLY FOLLOWING THE ORDER CITED SUPRA CONFIRM THE ORDER OF THE LD. CIT( A) ON THIS ISSUE. 7. GROUND NO. 7 IS IN RESPECT OF DELETING THE DISA LLOWANCE OF RS.1 98 177/- U/S.43B ON ACCOUNT OF DELAYED PAYMENT OF PF AND ESIC BY PLACING RELIANCE ON THE FIRST APPELLATE ORDER IN THE ASSESSEES OWN CASE FOR AY 2003-04 AND 2004-05 WITHOUT APPRECIATIN G THE FACT THAT THERE IS NO SPECIFIC PROVISION UNDER THE IT ACT TO ALLOW BENEFIT IN RESPECT OF PAYMENTS MADE WITHIN THE GRACE PERIOD AL LOWED UNDER THE RELEVANT ACT. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 5 7.1 THE LEARNED REPRESENTATIVES OF THE PARTIES SUB MITTED THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN A Y 2002-03 VIDE GROUND NO 2 OF APPEAL FILED BY THE REVENUE. WE FIND THAT THE ISSUE IS COVERED BY THE ORDER OF THE ITAT FOR AY 2003-2004 B Y GROUND NO2 OF APPEAL FILED BY THE REVENUE VIDE ITS ORDER DATED 30 /09/2010. THE RELEVANT FINDINGS ARE REPRODUCED AS UNDER:- 72. THE AO MADE DISALLOWANCE UNDER SECTION 43B.THE AO WAS OF THE VIEW THAT THE PAYMENTS WERE TO MADE WITHIN 1 5 DAYS .THE AO DID NOT ALLOWED GRACE PERIOD OF 5 DAYS . THE CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING THAT THE PAY MENT MADE WITHIN THE GRACE PERIOD IS ALLOWABLE U/S.43B. AFTE R HEARING THE PARTIES WE NOTICE THAT THE ADMITTED FACTS OF THIS GROUND ARE THAT THE PAYMENT OF PF ESIC BONUS AND GRATUITY ETC W ERE MADE WITHIN THE GRACE PERIOD AS HELD BY THE CIT(A) AND T HERE IS NO CONTRARY MATERIAL ON RECORD NEITHER IT HAS BEEN POI NTED OUT BY THE REVENUE WE THEREFORE CONFIRM THE ORDER OF THE CIT (A). 8. SINCE FACTS ARE IDENTICAL THEREFORE IT IS COVE RED BY THE ORDER OF ITAT IN ASSESSEES OWN CASE WE FOLLOW THE SAME. TH E AO IS DIRECTED ACCORDINGLY. 9. GROUND NO. 8 IS PERTAINING TO DIRECTING THE A.O . TO ALLOW DEDUCTION OF RS. 2 49 25 217/- U/S.35(1)(IV) BEING EXPENDITURE INCURRED ON CONSTRUCTION OF BUILDING BY PLACING REL IANCE ON THE FIRST APPELLATE ORDER IN THE ASSESSEES OWN CASE FOR A.YS .2003-04 AND 2004- 05 WITHOUT APPRECIATING THE FACT THAT SUB-SECTION ( 2AB) OF SECTION 35 CLEARLY LAYS DOWN THAT AN ASSESSEE DEALING IN PHARM ACEUTICALS IS NOT ELIGIBLE FOR ANY DEDUCTION OF ACCOUNT OF EXPENDITUR E INCURRED IN THE NATURE OF COST OF ANY LAND OF BUILDING AND THAT SIM ILAR RELIEF ALLOWED IN THE EARLIER YEARS HAS NOT BEEN ACCEPTED BY THE DEPA RTMENT. 9.1 THE LEARNED REPRESENTATIVES OF THE PARTIES SUBM ITTED THAT SIMILAR ISSUE AROSE IN AY 2002-03 BY GROUND NO. 3 O F GROUNDS OF APPEAL FILED BY THE REVENUE. WE FIND THAT THE ISSUE IS COVERED BY THE ORDER OF THE ITAT FOR AY 2003-2004 BY GROUND NO. 3 OF APPEAL FILED BY THE REVENUE. THE RELEVANT FINDINGS ARE REPRODUCED A S UNDER:- ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 6 75. THE LEARNED AR SUBMITTED THAT THIS ISSUE IS CO VERED BY THE ORDER OF THE ITAT IN ASSESSMENT YEARS 1999-2000 AND 2001-02 IN ASSESSEES OWN CASE IN ITA NO. 4781 AND 4782/M/2007 ORDER DATED 7.09.2009. THE FINDING OF THE ITAT IS REPRODU CED BELOW: HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERE D THEIR RIVAL CONTENTIONS WE FIND THAT SEC.35 OF THE INCOME TAX ACT PROVIDES FOR DEDUCTION OF EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH. CL.(IV) OF SUB-SECTION (1) OF SEC.35 RELATES TO DED UCTION OF ANY EXPENDITURE OF CAPITAL NATURE ON AD HOC RESEARCH RE LATED TO HE BUSINESS CARRIED ON BY THE ASSESSEE AND SUCH DEDUC TION AS MAY BE ADMISSIBLE UNDER THE PROVISIONS OF SUB-SE.(2). S UB-SEC (2AB) OF SEC.35 PROVIDES THAT WHERE A COMPANY ENGAGED IN THE BUSINESS OF PHARMACEUTICALS ETC. INCURS AND EXPENDITURE ON SCIE NTIFIC RESEARCH [NOT BEING EXPENDITURE IN THE NATURE OF CO ST OF ANY LAND OR BUILDING] ON IN-HOUSE RESEARCH AND DEVELOPMENT F ACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY THEN DEDUCTIO N OF A SUM EQUAL TO 1 1/2TIME OF THE EXPENDITURE SO INCURRED S HALL BE ALLOWED. THUS IT CAN BE SEEN THAT THE EXCEPTION TO THE CLAIM OF DEDUCTION OF THE EXPENDITURE INCURRED ON COST OF AN Y LAND OR BUILDING IS PROVIDED FOR ONLY UNDER SUB-SEC.[2AB] O F SEC.35 AND NOT UNDER CLAUSE (IV) OF SUB-SEC.(1) OF SEC.35 OF T HE ACT. THE ASSESSEES CLAIM IS UNDISPUTEDLY U/S.35(1)(IV) OF THE ACT AND AS RIGHTLY HELD BY THE LD.CIT(A) 100% OF THE CAPITAL E XPENDITURE ON SCIENTIFIC RESEARCH RELATING TO THE BUSINESS CARRIE D ON BY THE ASSESSEE IS ADMISSIBLE AS PROVIDED UNDER SUB-SEC.(2 ) THEREOF. IN VIEW OF THE SAME WE DO NOT SEE ANY REASON TO INTER FERE WITH THE ORDER OF THE CIT(A) AND THE REVENUES APPEAL IS DIS MISSED. 10. SINCE ON THE IDENTICAL FACTS AS THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE WE RESPECTFULLY FOLLOW THE SAME AND IN THE LIGHT OF THE FACTS THE ORDER OF THE CIT(A) IS CONF IRMED ON THIS ISSUE ITA NO. 6916/M/2008 (ASSESSEES APPEAL) 11. GROUNDS TAKEN IN THIS APPEAL BY THE ASSESSEE RE AD AS UNDER: 1. THE HONBLE COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN LAW AND IN FACTS IN UPHOLDING THE IMPUGNED ASSESSME NT ORDER PASSED BY THE LEARNED ASSESSING OFFICER U/S.143(3) OF THE INCOME-TAX ACT 1961 WHICH WAS ILLEGAL AND BAD IN L AW. 2. THE HONBLE CIT(A) OUGHT TO HAVE HELD THAT THE VAR IOUS NOTICES INCLUDING NOTICE U/S.143(2) OF THE ACT AND CONSEQUENTIAL ASSESSMENT ORDER PASSED UNDER SECTION 43(3) OF THE ACT IS ALSO ILLEGAL BAD IN LAW AND HENCE NULL & VOID. 3. THE HONBLE CIT(A) HAS ERRED IN FACTS AND IN LAW IN RESTRICTING THE DISLLOWONACE TO RS. 12 20 286/- INSTEAD OF RS. 3 44 356/- U/S. 14A OF THE INCOME-TAX ACT. HE OUGHT TO HAVE RE STRICTED ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 7 THE DISALLOWANCE UPTO RS. 3 44 356/- ATTRIBUTABLE T O THE EXEMPT INCOME RELATING TO THE INVESTMENT OF RS. 149 07 176/- 4. THE HONBLE CIT(A) HAS ERRED IN FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE CLAIM OF REPAIRS AND MAINTENANCE EXPENSES OF RS. 41 362/- OUT OF RS. 10 74 906/- BY TREATING THE SAME AS CAPITAL IN NATU RE. 5. THE HONBLE CIT(A) HAS ERRED IN FACTS AND I LAW IN CONFIRMING THE DISALLOWANCE OF RESEARCH AND DEVELOPMENT EXPENS ES OF RS. 20 49 85 240/- INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE LEARNED AO HAS FURTHER ERR ED IN LAW AND IN FACTS IN NOT ALLOWING WEIGHED DEDUCTION @ 15 0@ ON SUCH RESEARCH AND DEVELOPMENT EXPENSES OF RS. 20 49 85 240/- U/S35(2AB) OF THE ACT. 6. THE HONBLE CIT(A) HAS ERRED IN FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 11 72 887/- U/S.41(1 ) OF THE ACT ON ACCOUNT OF CREDITORS OUTSTANDING FOR MORE TH AN 3 YEARS. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NOS. 1 & 2 ARE GENERAL IN NATURE AND REQUIRE NO FIN DING. 12.1 GROUND NO. 3 IS DECIDED ABOVE ALONG WITH GROU ND NUMBERS 1 TO 4 OF REVENUES APPEAL IN PARA 3 OF THIS ORDER. 12.2 GROUND NO. 4 DID NOT PRESS THE LEARNED COUNSEL FOR THE ASSESSEE AS THE AMOUNT INVOLVED IN THIS GROUND IS VERY SMAL L. THEREFORE THIS GROUND IS DISMISSED AS NOT PRESSED. 13. THE BRIEF FACTS RELATING TO GROUND NO. 5 AS NO TED FROM THE ORDER OF THE A.O ARE THAT THE ASSESSEE COMPANY IS ENGAGE D IN THE BUSINESS OF MANUFACTURING AND MARKETING PHARMACEUTICAL PRODU CTS AND RELATED RESEARCH AND DEVELOPMENT ACTIVITIES. THE ASSESSEE H AS ATTACHED NOTES TO THE COMPUTATION OF INCOME FILED WITH THE RETURN OF INCOME. IN NOTE 6 THE ASSESSEE HAS STATED THAT IT HAS INCURRED RES EARCH & DEVELOPMENT EXPENSES TOWARDS DEVELOPMENT OF NEW PRO DUCTS ON BEHALF OF GLENMARK PHARMACEUTICALS INC. USA . THE ASSESSEE STATED THAT THESE EXPENSES ARE NOT CHARGED TO THE PROFIT A ND LOSS ACCOUNT FOR THE YEAR AND ALSO NO DEDUCTION U/S. 35(2AB) IS CLAI MED ON THE SAME. HOWEVER IT IS CLARIFIED THAT IT RESERVES THE RIGHT TO CLAIM THE SAID ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 8 DEDUCTION AT THE TIME OF ASSESSMENT. SUBSEQUENTLY VIDE LETTER DATED 26.11.2007 THE ASSESSEE FILED A CLAIM FOR SAID EXP ENSES. THE ASSESSEE ALSO MADE A DETAILED SUBMISSION VIDE LETTER DATED 2.1.2008 ALONG WITH SUPPORTING DOCUMENTS TO CLAIM THESE EXPENSES A S R. & D. EXPENSES. IN THE SAID SUBMISSION THE ASSESSEE STAT ED THAT IT WAS UNDER THE AGREEMENT WITH ITS SUBSIDIARY VIZ. GLENMA RK PHARMACEUTICALS INC. UWSA (GPI-US) TO DEVELOP CERT AIN PRODUCTS ON ITS BEHALF FOR A CONSIDERATION DEPENDING ON CERTAIN MILESTONES. IN TURN. GPI-US WAS UNDER AN AGREEMENT WITH ANOTHER CO MPANY CALLED KV PHARMACEUTICAL COMPANY (KV) TO DEVELOP THE AFORE MENTIONED PRODUCTS. IT WAS SUBMITTED THAT THE ASSESSEE HAD IN CURRED TOTAL R. & D. EXPENSES OF RS. 20 49 85 240/- DURING THE FINANC IAL YEAR 2004-05 RELEVANT TO A.Y. 2005-06. OUT OF SAID EXPENSES THE ASSESSEE RECEIVED RS. 17 51 99 518/- FROM ITS SUBSIDIARY AS ADVANCE T OWARDS THE TOTAL DEVELOPMENT COSTS INCURRED AND THE BALANCE OF RS. 2 97 85 722/- WAS SHOWN AS RECEIVABLE BY THE ASSESSEE. IT WAS SUBMITT ED THAT IN APRIL 2006 CERTAIN DISPUTE AROSE BETWEEN GPI-US AND KV WI TH RESPECT TO THE DEVELOPMENT OF VARIOUS PRODUCTS AND IN CONSEQUE NCE RESULTING IN KV NOT MAKING MILESTONE PAYMENTS TO GPI-US AND THE REFORE THE MATTER WAS TAKEN TO ARBITRATION. FURTHER IT IS SUB MITTED THAT AS A RESULT OF THE AFORESAID DISPUTES GIP-US ASKED THE ASSESSEE NOT TO PROCEED WITH THE DEVELOPMENT OF THE PRODUCTS. IT WA S SUBMITTED THAT THE ASSESSEE DECIDED TO PROCEED WITH THE DEVELOPMEN T OF THESE PRODUCTS ON ITS OWN ACCOUNT WITH THE CONSENT OF GIP -US AND KV TILL THE DISPUTE BETWEEN GPI-US AND KV WAS RESOLVED. FU RTHER THE ASSESSEE CLAIMED WEIGHTED DEDUCTION IN RESPECT OF T HE R& D EXPENSES INCURRED ON THE AFORESAID PRODUCTS IN THE RETURN OF INCOME FOR A.Y. 2006-07 STATING THAT THE SAME WERE INCURRED ON ITS OWN ACCOUNT. 14. THEREAFTER DURING THE FINANCIAL YEAR 2006-07 RELEVANT TO A.Y.2007-08 A SETTLEMENT WAS ARRIVED AT BETWEEN THE PARTIES I.E. GIP- US AND KV WHO DECIDED TO TERMINATE THE PRODUCT DEVE LOPMENT AGREEMENT (PDA) WITHOUT ANY RECOURSE TO THE PARTIES CONCERNED. IN TURN GIP-US DECIDED TO TERMINATE ITS ARRANGEMENT W ITH THE ASSESSEE. AS A RESULT A TERMINATION AGREEMENT WAS ENTERED IN TO BETWEEN THE ASSESSEE AND GPI-US. THE PARTIES ARRIVED AT AN ARRA NGEMENT AS PER ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 9 WHICH THE ASSESSEE WOULD CONTINUE TO DEVELOP THE PR ODUCTS ON ITS OWN ACCOUNT AND GPI-US WOULD ACT AS DISTRIBUTOR FOR THE SAID PRODUCTS IN THE US MARKET. THE ASSESSEE FURTHER STATED THAT IN ORDER TO GIVE EFFECT THE TERMINATION AGREEMENT THE ASSESSEE RETURNED BA CK THE ADVANCE AMOUNT OF RS. 17 51 99 518/- RECEIVED FROM GPI-US A ND DECIDED NOT TO RECOVER THE BALANCE RECEIVABLE OF RS.2 97 85 722 /-. FURTHER THE ASSESSEE STATED THAT AFTER TERMINATION OF ALL THE A GREEMENTS AND REFUND OF THE INTERIM PAYMENT SO RECEIVED THE ASSE SSEE NOW OWNS ALL THE RIGHTS CLAIM TITLE PROPERTY AND INTEREST IN THE SAID PRODUCTS. THE ASSESSEE SUBMITTED THAT IN THE RETURN OF INCOME FOR A.Y. 2007-08 THE ASSESSEE HAS GIVEN EFFECT TO THE AFORESAID TERMINAT ION AGREEMENT AND TREATED SUBSEQUENT PAYMENTS AND WAIVER OF AMOUNT RE CEIVABLE AS COST OF ACQUIRING KNOW HOW RELATED TO THE PRODUCTS WHICH WERE DEVELOPED ON BEHALF OF GPI-US. THE ASSESSEE HAS ALSO CLAIMED DEPRECIATION ON THE SAID KNOW-HOW @25% IN THE RETURN OF INCOME FOR A.Y.2007-08. 15. THE ASSESSEE SUBMITTED AT THE TIME OF ASSESSMEN T BEFORE THE AO THAT IT HAS DECIDED TO CONTINUE DEVELOPMENT OF THE AFOREMENTIONED PRODUCTS ON ITS OWN ACCOUNT EVEN BEFORE FORMAL TERM INATION OF THE AGREEMENT. THE ASSESSEE FURTHER SUBMITTED THAT IT H AS REFUNDED THE ADVANCE PAYMENT RECEIVED FROM GPI-US GIVING EFFECT TO TERMINATION OF THE DEVELOPMENT AGREEMENT WITH GPI-US. FURTHER THE ASSESSEE STATED THAT SINCE THE SAID R&D EXPENSES WERE INCURRED BY T HE ASSESSEE ON ITS OWN RISKS AND ACCOUNT THE SAID ACTIVITY OF DEVELOP MENT OF THESE PRODUCTS IS TO BE CONSIDERED AS BUSINESS EXPENDITUR E OF THE ASSESSEE AND TO BE ALLOWED U/S.35(2AB) OF THE I.T. ACT AS T HE SAME WERE INCURRED IN CONNECTION WITH RESEARCH AND DEVELOPMEN T OF A PHARMACEUTICAL PRODUCT AT AN APPROVAL R&D FACILITY. THE ASSESSEE SUBMITTED THAT THEY WOULD WITHDRAW ITS CLAIM OF DEP RECIATION ON SUCH EXPENSES TREATED AS ACQUISITION OF KNOW-HOW IN A.Y. 2007-08. 16. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTI ON FOR ALLOWANCE OF DEDUCTION U/S.35(2AB) AMOUNTING TO RS. 20 49 85 240 ON THE GROUNDS THAT DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2005-06 THE ASSESSEE HAD BEEN INCURRING R&D EXPENSES ON BEHALF OF GPI-US AND NOT ON ITS OWN ACCOUNT. THE SAID EXPENSES WERE INCU RRED AT THE TIME ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 10 WHEN THE AGREEMENT WITH GPI-US WAS IN FORCE I.E. IN THE F.Y. 2004-05. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE W AS BOUND BY THE AGREEMENT TO DEVELOP THE SAID PRODUCTS ON BEHALF OF A THIRD PARTY AND THE EXPENSES WERE IN FACT TO BE CONSIDERED AS INC URRED ON BEHALF OF A THIRD PARTY. THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE IN ITS AUDITED ACCOUNTS ALSO SHOWS THAT THE EXPENSES HAD B EEN INCURRED ON BEHALF OF A THIRD PARTY. THE MONEY RECEIVED HAS BE EN REDUCED FROM THE EXPENSES AND THE BALANCE IS SHOWN AS RECEIVABLE . THE EXPENDITURE OF RS.20 49 85 240/- WAS INCURRED BY THE ASSESSEE I N THE PREVIOUS YEAR RELEVANT TO A.Y. 2005-06 AND THE ASSESSEE HAD RECEIVED RS. 17 51 99 518/- AS ADVANCE PAYMENT. THUS IT IS VERY CLEAR THAT IN THE RELEVANT PREVIOUS YEAR THE SAID EXPENSES WERE INCU RRED BY THE ASSESSEE ON BEHALF OF A THIRD PARTY I.E. GPI-US AN D THEREFORE IT CANNOT BE CONSIDERED AS THE BUSINESS EXPENSES OF TH E ASSESSEE FOR THE RELEVANT YEAR. ALL EVENTS RELATING TO THE DISPUTE B ETWEEN THE PARTIES AND SUBSEQUENT TERMINATION OF THE AGREEMENT ARE SUB SEQUENT EVENTS WHICH CANNOT BE CONSIDERED FOR DECIDING ALLOWABILIT Y OF AN EXPENSE IN AN EARLIER YEAR. IN THE FINANCIAL YEAR 2005-06 RE LEVANT TO A.Y. 2006- 07 BOTH THE PARTIES HAD ASKED THE ASSESSEE TO DISC ONTINUE DEVELOPMENT OF THESE PRODUCTS ON THEIR BEHALF AND T HE ASSESSEE DECIDED TO CONTINUE SUCH DEVELOPMENT ACTIVITIES ON ITS OWN ACCOUNT AND RISK. THUS THE EXPENSES INCURRED IN A SUBSEQU ENT YEAR ON ASSESSEES ON ACCOUNT AND RISK CAN BE ALLOWED IN TH AT YEAR BUT THE SAME DOES NOT GIVE ANY RIGHT TO THE ASSESSEE TO CLA IM THESE EXPENSES IN THE YEAR UNDER CONSIDERATION WHEN THE AGREEMENT WITH GPI-US WAS VERY MUCH IN FORCE AND WHEN THE EXPENSES WERE IN F ACT INCURRED ON BEHALF OF SUCH THIRD PARTY. 17. THE AO FURTHER NOTICED THAT IN THE PREVIOUS YEA R RELEVANT TO A.Y. 2007-08 THE ASSESSEE HAS TREATED THE TERMINATION O F AN AGREEMENT AS AN ACQUISITION OF KNOW-HOW IN RESPECT OF THE PRO DUCTS WHICH WERE DEVELOPED ON BEHALF OF GPI-US. THE PAYMENTS THAT HA D BEEN MADE AND THE BALANCE AMOUNT WHICH WAS WAIVED WERE TREATED A S COSTS OF ACQUISITION OF KNOW HOW AND DEPRECIATION WAS CLAIME D ON THE SAME. SINCE THESE EXPENSES WERE INCURRED ON BEHALF OF GP I-US DURING THE RELEVANT PREVIOUS YEAR THE SUBSEQUENT TERMINATION WHEREBY THE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 11 ASSESSEE ACQUIRED ALL THE RIGHTS CLAIM TITLE PRO PERTY AND INTEREST IN THE SAID PRODUCTS CAN BE TREATED AS ACQUISITION OF KNOW HOW IN THAT YEAR AND ONLY DEPRECIATION CAN BE ALLOWED ON THE SA ME. THE SAID EXPENSE CAN NEVER BE TREATED AS R&D EXPENSES INCURR ED BY THE ASSESSEE ON ITS OWN ACCOUNT AND THAT TOO IN THE Y EAR UNDER CONSIDERATION. 18. THE AO ALSO EXAMINED SECTION 35(2AB) OF THE ACT AND OBSERVED THAT THE SECTION PROVIDES FOR WEIGHTED DEDUCTION O F 150% IN RESPECT OF R&D EXPENSES INCURRED BY AN ASSESSEE FOR THE PUR POSE OF ITS BUSINESS IN AN APPROVED R&D FACILITY. THE AO FOUND THAT THE ASSESSEE ON BEHALF OF A THIRD PARTY AND NOT FOR THE PURPOSE OF ITS OWN BUSINESS HAS INCURRED THESE EXPENSES. THE ASSESSEE DECIDED TO INCUR THESE EXPENSES ON ITS OWN ACCOUNT AND RISK ONLY IN THE SU BSEQUENT YEAR I.E FINANCIAL YEAR 2005-06 RELEVANT TO A.Y. 2006-07. TH E A.O. IS OF THE OPINION THAT THE ASSESSEE SPECIFICALLY ACQUIRED THE RIGHTS IN RESPECT OF KNOW-HOW INVENTED/DEVELOPED BY INCURRING THESE EXP ENSES DURING FINANCIAL YEAR 2004-05 BY AN AGREEMENT WHICH WAS E NTERED INTO ONLY IN THE FINANCIAL YEAR 2006-07 RELEVANT TO A.Y. 2007 -08. THUS IT CANNOT BE HELD THAT THESE ARE R&D EXPENSES OF THE A SSESSEE FOR FINANCIAL YEAR 2004-05 RELEVANT TO A.Y. 2005-06 AND . THEREFORE THE CLAIM OF THE ASSESSEE FOR WEIGHTED DEDUCTION @ 150% ON THESE EXPENSES AMOUNTING TO RS. 20 49 85 240/- U/S.35(2AB ) WAS REJECTED. 19. THE CIT (A) CONFIRMED THE ORDER OF THE AO OBSER VING AS UNDER:- 5.10 I HAVE CAREFULLY CONSIDERED THE REPLY GIVEN B Y THE APPELLANT AND PERUSED THE ASSESSMENT ORDER. IT IS NOT UNDER DISPUTE THAT THE APPELLANT HAS NOT CLAIMED ANY DEDUCTION U/S 35 (2AB) IN RESPECT OF WEIGHTED DEDUCTION OF RS. 20 49 85 240/- IN ITS RETURN OF INCOME FOR AY 2005-06 FILED ON 29.10.2005 AS PER PROVISIONS OF SECTION 139(1) OF THE INCOME TAX ACT. THE APPELLANT HAS ALSO NOT FILED ANY REVISED RETURN AS PER PROVISIONS OF SECTI ON 139(5) OF THE INCOME TAX ACT WITHIN ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION OF THE ASS ESSMENT WHICHEVER IS EARLIER. THE APPELLANT HAS MADE ITS CL AIM BEFORE THE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 12 ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDING VIDE LETTER DATED 27.11.2007 WHEN THE TIME ALLOWED U/S 139(5) H AS ALSO BEEN EXPIRED. THE ASSESSING OFFICER CANNOT ENTERTAI N ANY CLAIM OF DEDUCTION OF THE APPELLANT IF THE SAME HAS NOT BEEN MADE IN THE RETURN FILED U/S 139(1) OR IN A REVISED RETURN FILE D U/S 139(5). THE RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD. VS. COMMISS IONER OF INCOME TAX 284 ITR 323 IN WHICH THE COURT HAVE HEL D THAT DEDUCTION CLAIMED AFTER RETURN OF INCOME FILED NO P OWER TO THE ASSESSING AUTHORITY TO ENTERTAIN CLAIM MADE OTHERWI SE THAN BY WAY OF REVISED RETURN. 5.11 THE APPELLANT HAS STATED THAT IT IS APPENDED N OTE NO. 6 ALONG WITH COMPUTATION OF INCOME IN WHICH IT IS STA TED THAT IT RESERVE ITS RIGHT TO CLAIM THE DEDUCTION UNDER SECT ION 35(2AB) DURING THE ASSESSMENT PROCEEDING. THERE IS NO AUTHO RITY OF LAW MAKING ANY SUCH CLAIM IN THE COMPUTATION OF INCOME AND THERE IS NO SUCH RIGHT RECOGNIZED BY THE LAW UNDER I.T. ACT WHERE THE APPELLANT HAS RESERVED A RIGHT TO MAKE ANY CLAIM TO WHICH HE HAS NOT MADE WHEN IT HAS FILED THE RETURN U/S 139(1) IT SELF. THUS IT IS CLEAR THAT THE APPELLANT WAS NOT VERY MUCH SURE ABO UT ALLOWABILITY OF ITS CLAIM U/S 35(2AB) HENCE IT HAS NOT MADE ANY SUCH CLAIM IN THE RETURN OF INCOME. 5.12 THE ASSESSING OFFICER HAS POINTED OUT THAT THE APPELLANT HAS NOT INCURRED ANY R&D EXPENSES AS PER PROVISIONS OF SECTION 35(2AB) FOR ITS BUSINESS DURING THE YEAR AND ENTIRE R&D EXPENDITURE WAS INCURRED ON BEHALF OF THIRD PARTY I .E. GPI-US. SINCE THE EXPENDITURE WAS NOT INCURRED FOR ITS BUSI NESS BY THE APPELLANT THEREFORE THE APPELLANT WAS NOT ENTITLED TO CLAIM DEDUCTION U/S 35(2AB) OF THE INCOME TAX ACT. AS FAR AS ACCOUNTING OF THE R&D EXPENSES ARE CONCERNED THE AP PELLANT HAS NOT CLAIMED THESE R&D EXPENSES AS ITS BUSINESS EXPE NSES IN THE P&L A/C BUT REDUCED THE SAME FROM THE ADVANCE RECEI VED FROM GPI-US AND BALANCE HAS BEEN SHOWN AS RECEIVABLE FRO M THE SAID PARTY. THEREFORE THE APPELLANT CANNOT CLAIM DEDUCT ION U/S ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 13 35(2AB) IN RESPECT OF EXPENDITURE INCURRED ON BEHAL F OF THIRD PARTY DURING THE YEAR UNDER APPEAL. THE DISPUTE BE TWEEN THE APPELLANT AND THE GPI-US AND KV HAS BEEN STARTED IN FY 2005-06 I.E. IN APRIL 2005 WHICH IS RELEVANT TO THE ASSESS MENT YEAR 2006- 07 AND THE APPELLANT HAS DECIDED TO CARRY OUT THIS RESEARCH ON ITS OWN ACCOUNT AND TERMINATED THE AGREEMENT WITH GPI-U S. THE SETTLEMENT OF DISPUTE ON ACCOUNT OF TERMINATION OF AGREEMENT WAS ARRIVED IN FY 2006-07 RELATED TO AY 2007-08. THE AP PELLANT HAS CAPITALIZED THE COST OF R&D EXPENDITURE IN ITS BOOK S OF ACCOUNT AND CLAIMED 25% DEPRECIATION ON THE SAID KNOW-HOW I N THE RETURN OF INCOME FOR ASSESSMENT YEAR 2007-08. THE APPELLAN T HAS NOT WITHDRAWN THIS CLAIM UP YET AS NOTHING HAS TRANSFER RED FROM RECORD. THEREFORE THE ASSESSING OFFICER IS JUSTIFI ED IN NOT ALLOWING DEDUCTION UNDER SECTION 35(2AB) TO THE APP ELLANT DURING THE YEAR UNDER CONSIDERATION. 20. THE LEARNED AR SUBMITTED THAT R&D EXPENSES WERE INCURRED BY THE ASSESSEE AMOUNTING TO RS. 20 49 85 240/-. HE FU RTHER SUBMITTED THAT THESE R&D EXPENSES INCURRED FOR RS. 15.03 CROR ES ON APPROVED SCHEME U/S 35(2AB) AND RS. 5.46 CRORE INCURRED FOR NON-APPROVED SCHEME U/S 35(2AB) WHICH IS ALLOWABLE U/S 37(1) OF THE ACT. THE LEARNED AR WHILE ARGUING THE MATTER IN RESPECT OF R &D EXPENDITURE INCURRED ON APPROVED ITEM U/S 35(2AB) SUBMITTED TH AT THE ASSESSEE ENGAGED IN THE BUSINESS OF BIO-TECHNOLOGY. THE NATU RE OF EXPENDITURE INCURRED IS ELIGIBLE FOR DEDUCTION U/S 35(2AB) OF T HE ACT. THE EXPENDITURE WAS INCURRED ON APPROVED SCHEMES. THE L EARNED AR FURTHER SUBMITTED THAT THE GRIEVANCE OF THE REVENUE IS THAT THE ASSESSEE DID NOT INCUR THE EXPENDITURE FOR OWN BUSI NESS PURPOSES. HE SUBMITTED THAT THERE IS NO SUCH CONDITION U/S 35(2A B) LIKE CONDITION IN SECTION 35(1)(I) OF THE ACT. THE LEARNED AR WHIL E REFERRING RULE 5(XI) WHICH ARE GUIDELINES FOR APPROVAL OF IN-HOUSE R&D CENTERS AND CERTIFICATE OF EXPENDITURE U/S 35(2AB) OF THE ACT SUBMITTED THAT INCASE OF SPONSORED RESEARCH PROGRAMME THE EXPENDI TURE WILL BE REDUCED TO THAT EXTENT. THE RELEVANT CLAUSE IS REPR ODUCED BELOW:- GRANTS/GIFTS DONATIONS PRESENTS AND PAYMENTS OBT AINED BY THE COMPANY FOR SPONSORED RESEARCH IN THE APPROVED IN-H OUSE R&D ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 14 CENTRES SHALL BE SHOWN AS CREDIT TO THE R&D ACCOUNT S FOR THE PURPOSE OF SECTION 35(2AB) OF IT ACT 1961 AND THE R&D EXPENDITURE CLAIMED FOR DEDUCTION UNDER THE SUB-SEC TION SHALL BE REDUCED TO THAT EXTENT. 21. THE LEARNED AR SUBMITTED THAT THE EXPENDITURE O F RS. 15.03 CRORE IS ELIGIBLE FOR CLAIM U/S 35(2AB) OF THE ACT. AS REGARDS RS. 5.06 CRORE THE EXPENDITURE INCURRED ON A PROJECT WHICH IS NOT APPROVED PROJECT U/S 35(2AB) OF THE ACT. THE LEARNED AR SUBM ITTED THAT SUCH EXPENSES ARE ALLOWABLE U/S 37(1) OF THE ACT. HE PLA CED HIS RELIANCE ON THE FOLLOWING DECISIONS:- 1. ITA NO. 4427/MUM/06 ORDER DATED 30.10.2009 2. ENEM NOSTRUM REMEDIES (P) LTD V ACIT 119 TTJ 427 (M UM). 22. IT IS ALSO THE SUBMISSION OF THE LEARNED AR THA T THOUGH INITIALLY THE EXPENDITURE WAS INCURRED ON BEHALF OF THE THIRD PARTY BUT ULTIMATELY THE AGREEMENT WAS CANCELLED AND THE ASSE SSEE BECAME OWNER OF THOSE PRODUCTS DEVELOPED BY R&D EXPENSES. THE LEARNED AR SUBMITTED THAT WORKING CAPITAL OF RS. 17.26 CRORE R ECEIVED AS ADVANCE WAS REFUNDED BY THE ASESSEE TO THE PARTY. THE LEARN ED AR SUBMITTED THAT WORKING CAPITAL WAS GIVEN TO THE ASSESSEE UNDE R CLAUSE 3.2 OF THE AGREEMENT. AS PER THE AGREEMENT THE ASSESSEE WAS R EQUIRED TO USE THAT AMOUNT AS WORKING CAPITAL. AS PER AGREED TERMS BETWEEN THE PARTIES THE FULL CONSIDERATION WAS TO BE PAID ONLY ON SUCCESSFUL COMPLETION OF THE PROJECT BY THE ASSESSEE. SINCE THE PROJECT AGREEMENT WAS CANCELLED THEREFORE THE ASSESSEE DI D NOT RAISE THE BILLS. THE LEARNED AR REFERRING TO VARIOUS PAGES OF THE AGREEMENT SUBMITTED THAT WORK WAS NOT CARRIED OUT STRICTLY IN ACCORDANCE WITH THAT AGREEMENT .EXPENSES WERE INCURRED BY THE ASSES SEE AS THE ASSESSEE ITSELF IS DOING R&D AND PRODUCTS WERE REG ISTERED IN THE NAME OF THE ASSESSEE AND THE SAME WERE USED BY THE ASSESSEE FOR PURPOSE OF ITS BUSINESS. THE ASSESSEE FURTHER INCUR RED THE EXPENDITURE OF ABOUT RS. 17.64 CRORE IN THE SUBSEQU ENT YEAR ON SAME R&D. THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAS CLAIMED THIS EXPENDITURE EVEN IN THE RETURN OF INCOME BY WAY OF A NOTE. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE MADE CLAIMED T HAT THOSE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 15 EXPENSES WERE INCURRED BY THE ASSESSEE FOR ITS BUSI NESS. THE LEARNED AR SUBMITTED THAT THE ONLY OBJECTION OF THE REVENUE IS THAT THE AGREEMENT WAS CANCELLED VIDE TERMINATION AND SETTLE MENT AGREEMENT DATED 1.1.2007 W.E.F 1.7.2006 THEREFORE SUCH EXPEN DITURES ARE NOT ALLOWABLE IN THE YEAR UNDER CONSIDERATION. THE LEAR NED AR SUBMITTED THAT IN CASE OF ACIT V/S FGP LTD REPORTED IN 114 TT J 655 THE I.T.A.T MUMBAI BENCH DECIDED THE ISSUE IN FAVOUR OF REVENUE ON THE GROUND THAT THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM TH EREFORE ROYALTY AMOUNT WAS TAXABLE BUT THE SAID ORDER HAS BEEN REVE RSED BY THE HONBLE BOMBAY HIGH COURT IN FGP LTD V/S CIT 326 IT R 444 (BOM ) ON THE GROUND OF REAL INCOME CONCEPT. THE LEARNED A R SUBMITTED THAT THESE ARE EXPENSES ALLOWABLE IN VIEW OF THE JUDGMEN T OF THE APEX COURT IN THE CASE OF BOKARO STEELS 236 ITR 315. TH E LEARNED AR FURTHER SUBMITTED THAT CIT(A) OBJECTED TO ASSESSEE S CLAIM ON THE GROUND THAT THE SAME WAS NOT CLAIMED BY FILING REVI SED RETURN FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN GOETZ (INDIA) LTD. VS. COMMISSIONER OF INCOME TAX 284 ITR 323. THE LEARNED AR SUBMITTED THAT THE ASSESSEES CLAIM IS ALLOWABLE IN ACCORDANCE WITH FOLLOWING DECISIONS WHEREIN THE GOETZ INDIA (SUPRA) HAS BEEN CONSIDERED:- 1. JCIT VS. HERO HONDA FINLEASE LTD. 115 TTJ 752 (DEL ) [TM] 2. CHICAGO PNEUMATIC INDIA LTD. VS. DCIT 15 SOT 252 ( MUM) 3. EMERSON NETWORK POWER INDIA P. LTD. V. ACIT 122 TT J 67 (MUM.) 4. CIT VS. MAHAVIR SPG. MILLS LTD. 303 ITR 353 (P&H) AND 5. CIT VS. JAI PARABOLIC SPRINGS LTD. 306 ITR 42 (DEL .) 23. THE LEARNED AR FINALLY SUBMITTED THAT EVEN IF T WO VIEWS ARE POSSIBLE FOR ALLOWING CLAIM U/S 35(2AB) THE VIEW I N FAVOUR OF THE ASSESSEE IS TO BE FOLLOWED AND CLAIM IS TO BE ALLOW ED IN FAVOUR OF THE ASSESSEE. 24. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF CIT (A) AND SUBMITTED THAT THE EXPENDITURE WAS I NCURRED BY THE ASSESSEE FOR THIRD PARTIES. HOWEVER FOR REFUND OF RS. 17.76 CRORE THE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 16 LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT REFUND WAS MADE TO THE UNILATERAL AGENCY WHO IS NOT OUTSIDER BUT A SISTER CONCERN OF THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATI VE SUBMITTED THAT THEY CAN DECIDE ANY THING WHICH SUITS TO THEM . THE LEARNED FURTHER SUBMITTED WITH REFERENCE TO THE LEARNED AR S CONTENTION THAT THERE WAS TWO TYPES OF EXPENSES ONE IS INCURRED ON APPROVED SCHEME U/S 35(2AB) AND ANOTHER IS INCURRED ON NON-APPROVED SCHEME U/S 35(2AB). THE LEARNED DEPARTMENTAL REPRESENTATIVE SU BMITTED THAT SUCH BIFURCATION WAS NEITHER FILE BEFORE THE AO NOR BEFORE THE CIT (A). THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT EXPENDITURE RELATED TO SUBSIDIARY COMPANY WHICH IS NOT ALLOWABL E TO ASSESSEE COMPANY. THE LEARNED DEPARTMENTAL REPRESENTATIVE IN SUPPORT OF HIS CONTENTION RELIED UPON THE DECISION REPORTED IN CIB A INDIA P. LTD V/S ITO 318 ITR 71 (MUM.)(AT). 25. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES RECORD PERUSED AND GONE THROUGH ALL THE DECISION CITED AT BAR. THE ISSUE TO BE EXAMINED IN THIS GROUND OF APPEAL IS WHETHER UND ER THE FACTS AND CIRCUMSTANCES WHERE INITIALLY THE ASSESSEE STARTED TO INCUR R&D EXPENDITURE ON BEHALF OF THIRD PARTY BUT FINALLY ON SUBSEQUENT EVENTS AFTER THE END OF THE PREVIOUS YEAR THE ASSESSEE TR EATED THOSE EXPENDITURES FOR ITS BUSINESS PURPOSES CAN SUCH EX PENDITURE IS ALLOWABLE UNDER SECTION 35(2AB) OR UNDER SECTION 37 (1) IN THE FIRST YEAR ITSELF. THE CASE OF REVENUE IS THAT DURING THE YEAR THE ASSESSEE INCURRED EXPENSES FOR THIRD PARTY THEREFORE EXPENSE S CANNOT SAID TO BE THE EXPENDITURE OF ASSESSEE FOR THE YEAR UNDER CONS IDERATION. 26. BEFORE COMING TO THE MAIN ISSUE WE FIND THAT CIT (A) OBJECTED TO ASSESSEES CLAIM BY WAY OF LETTER BEFORE THE AO RELYING ON A JUDGMENT OF THE APEX COURT IN THE CASE OF GOETZ (IN DIA) LTD. (SUPRA). WE FIND THAT THE ASSESSEE HAS CLAIMED THE EXPENDITU RE IN NOTE ATTACHED TO THE RETURN OF INCOME WHICH AMOUNTS TO C LAIM IN THE RETURN ITSELF. EVEN OTHERWISE ALSO IT IS LEGAL CLAIM OF T HE ASSESSEE THEREFORE IF AO DID NOT ADMIT THE CLAIM OF THE ASSESSEE TH E CIT(A) OUGHT TO HAVE ADMITTED THE SAME IN THE INTEREST OF JUSTICE AS AN APPELLATE AUTHORITY AND LD. CIT(A) HAS AUTHORITY TO ADMIT SUC H CLAIM WHICH IS IN ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 17 ACCORDANCE WITH GOETZ (INDIA) LTD.(SUPRA). MOREOVER THE TRIBUNAL CAN ALSO ADMIT ANY NEW GROUND OR CLAIM FOR THE FIRST TI ME IF IT IS LEGAL ISSUE AND NO FURTHER PROBE OF FACTS IS REQUIRED. AD MITTEDLY ALL MATERIAL FACTS ARE ON RECORDS. HENCE FOLLOWING THE PRINCIPLES LAID DOWN IN THE CASE OF THERMAL POWER CO. LTD. 229 ITR 363 (S.C) WE ADMIT THE ASSESSEES CLAIM IN THE INTEREST OF JUSTI CE 27. NOW WE COME TO THE MAIN ISSUE. TO EXAMINE THIS ISSUE WE WOULD LIKE TO REFER SOME IMPORTANT FACTS OF THE ISS UE. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE INCURRED R&D EXPEN SES FOR THIRD PARTY UNDER AN AGREEMENT DATED 1.4.2004. BUT SUBSEQ UENTLY DISPUTES AROSE. THE ASSESSEE WHILE FILING RETURN OF INCOME R ESERVES ITS RIGHT BY WAY OF A NOTE 6 APPENDED ALONG WITH COMPUTATION OF TOTAL INCOME TO CLAIM DEDUCTION UNDER SECTION 35(2AB). THE SAID NOT E READS AS UNDER: DURING THE YEAR THE COMPANY HAS INCURRED RS. 2049. 85 LACS (RS. 1460.76 LACS AT R&D MAHAPE RS. 42.31 LACS AT R&D SI NNAR AND RS. 546.76 LACS AT GOA PLANT) TOWARDS THE PRODUCT D EVELOPMENT FOR THE GLENMARK PHARMACEUTICALS INC. USA. THESE E XPENSES WHICH ARE INCURRED DURING THE F.Y. 2004-05 FOR THE BUSINESS PURPOSE HAVE NOT BEEN CHARGED TO THE PROFIT AND LO SS ACCOUNT FOR THE YEAR AND HAVE SHOWN AS ADVANCE RECEIVABLE. THE COMPANY HAVE NOT CLAIMED THE WEIGHED DEDUCTION U/S 35(2AB) IN RESPECT OF THE AFORESAID EXPENDITURES INCURRED AT THE APPROVED R&D AT MAHAPE AND SINNAR AND DEDUCTION U/S 80IB IN RESPECT OF AFORESAID EXPENDITURE INCURRED AT GOA PLANT. THE CO MPANY RESERVES THE RIGHT TO CLAIM SAID DEDUCTION AT THE T IME OF ASSESSMENT. 28. DURING ASSESSMENT PROCEEDINGS FOR THE YEAR UNDE R CONSIDERATION FOR AY 2005-06 BEFORE AO THE ASSESSEE FURNISHED DE TAILS OF R&D EXPENDITURES VIDE LETTERS DATED 27/11/2007 AND 2/01 /2008. ULTIMATELY THE AGREEMENT UNDER WHICH THE ASSESSEE I NCURRED EXPENDITURES WAS TERMINATED VIDE TERMINATION AND SE TTLEMENT AGREEMENT DATED 1.1.2007 W.E.F 1.7.2006 AS DISPUTES OCCURRED IN MARCH 2005 BETWEEN GPI USA AND KV. ACCORDING TO THE CLAUSE D OF THE SAID AGREEMENT THE ASSESSEE ALLOWED TO ALTER IT S COMMERCIAL STRATEGY AND THE ASSESSEE COMPANY DECIDED TO UNDERT AKE PRODUCT DEVELOPMENT ON ITS ACCOUNT AND IN ITS OWN NAME. THA T ULTIMATELY PRODUCTS DEVELOPED BY INCURRING R&D EXPENDITURES WE RE REGISTERED IN ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 18 THE NAME OF ASSESSEE WHICH IS RELATED TO ASSESSEE S BUSINESS AND ACCORDINGLY IN FACT USED BY ASSESSEE FOR ITS BUSINE SS PURPOSES. THERE IS NO DISPUTE REGARDING THESE FACTS. 29. NOW WE WOULD LIKE TO DISCUSS SOME THE PROVISION S OF THE ACT RELATED TO THE ISSUE .SECTION 29 SAYS THAT THE INCO ME AS REFERRED TO IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTIONS 30 TO 43D. THUS INCOMES WHICH ARE MENTIONED IN THE CHARGING SECTION 28 AS TAXABLE UNDER THE HE AD PROFITS AND GAINS OF BUSINESS OR PROFESSION ARE INCLUDIBLE ON LY AFTER GIVING EFFECT TO THE VARIOUS PROVISIONS MENTIONED UNDER SECTIONS 30 TO 43D. SECTIONS 30 TO 33B AND 35 TO 35E GRANT SPECIFIC DED UCTIONS ON SATISFYING CONDITIONS PRESCRIBED IN THOSE SECTIONS. HOWEVER CONDITIONS FOR GRANTING CERTAIN ALLOWANCE/DEDUCTION S OR IMPOSING RESTRICTIONS THEREON ARE PROVIDED IN SECTION 34 AND 34A. FURTHER SECTION 37 BEING RESIDUARY PRESCRIBES CONDITION(S ) FOR ALLOWING BUSINESS EXPENDITURE IN GENERAL AND SECTIONS 40 AND 40A PROVIDE FOR NON-DEDUCTIBLE EXPENSES OR PAYMENTS. PROFITS CHARGE ABLE TO TAX ON CERTAIN SPECIFIED EVENTUALITIES ARE MENTIONED IN SE CTION 41. UNDER SECTION 43B CERTAIN DEDUCTIONS ARE TO BE MADE ONLY ON ACTUAL PAYMENT. SECTION 43 PROVIDES DEFINITION OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS AND GAIN OF BUSINESS OR PROFESS ION. MOREOVER SECTIONS 42 43A 43C AND 43D ARE SPECIAL PROVISION S FOR COMPUTATION/DEDUCTIONS IN CERTAIN CASES. 30. SECTION 145 OF THE ACT PROVIDES THAT INCOME CH ARGEABLE UNDER THE HEAD PROFITS AND OF BUSINESS OR PROFESSION SH ALL BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THE PROFITS OF A BUSINESS MUST BE REAL PROFITS AND HAVE TO BE ASCERTAINED ON ORDINARY PRINCIPLES OF TRADING AND COMMERCIAL ACCOUNTING. IT IS A FUNDAMEN TAL PRINCIPLE OF INCOME TAX ACCOUNTING WHERE THE ASSESSEE PREPARES H IS ACCOUNTS UNDER THE MERCANTILE SYSTEM HIS BUSINESS PROFITS F OR INCOME TAX PURPOSES WOULD HAVE TO BE COMPUTED IN ACCORDANCE WI TH THOSE PRINCIPLES. THERE IS NO DEFINABLE RELATION BETWEEN THE ASSESSABLE INCOME AND PROFITS OF A BUSINESS CONCERN IN A COMME RCIAL SENSE. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 19 COMPUTATION OF INCOME FOR THE PURPOSE OF ASSESSMENT OF INCOME TAX IS BASED ON VARIOUS PROVISIONS OF THE ACT AND SEVERAL FICTIONAL DEDUCTIONS AND ALLOWANCES. THERE ARE DISTINCT PROVI SIONS IN THE ACT TO THAT EFFECT. THE ONLY CAUTIONARY RIDER IS THAT THE FOLLOW UP OF THE MERCANTILE METHOD OF ACCOUNTING ACCEPTED BY THE ASS ESSEE MUST TRULY REFLECT THE REAL PROFITS OF THE GIVEN BUSINES S. THERE ARE TWO IMPORTANT THINGS WHICH ARE TO BE NOTED ARE THAT ACC RUAL OF INCOME /EXPENDITURE MUST BE THERE AND PROFIT MUST BE REAL PROFIT. ACCORDING TO THE OXFORD ENGLISH DICTIONARY THE MEANING OF THE WORD ACCRUE IS TO FALL AS A NATURAL GROWTH OR INCREMENT; TO COME A S AN ACCESSION OR ADVANTAGE. THE WORD ARISE IS DEFINED AS TO SPRIN G UP TO COME INTO EXISTENCE. THE WORDS ACCRUE AND ARISE DO NOT M EAN ACTUAL RECEIPT OF PROFITS OR GAINS. BOTH THESE WORDS ARE USED IN CONT RADISTINCTION TO THE WORD RECEIVE AND INDICATE A RIGHT TO RECEIVE. THU S IT IS MANIFEST THAT IF AN ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE INCO ME THE INCOME CAN BE SAID TO ACCRUE TO HIM THOUGH IT MAY BE RECEIVED LATER ON. UNLESS AND UNTIL THERE IS CREATED IN FAVOUR OF AN ASSESSEE A DEBT DUE BY SOMEBODY IT CANNOT BE SAID THAT HE HAS ACQUIRED A RIGHT TO RECEIVE THE INCOME OR THAT INCOME HAS ACCRUED TO HIM. A MER E CLAIM TO INCOME WITHOUT AN ENFORCEABLE RIGHT THERETO CANNOT BE REGARDED AS ACCRUED INCOME FOR THE PURPOSE OF THE INCOME-TAX AC T. SIMILAR INTERPRETATION IS APPLICABLE FOR ACCRUAL OF EXPENDI TURES. IN THE CASE UNDER CONSIDERATION THERE IS NO DISPUTE THAT THE EX PENDITURES HAVE BEEN ACCRUED AS THERE WERE ENFORCEABLE RIGHTS CREAT ED IN BETWEEN THE PARTIES WORK DONE FOR R&D PRODUCT AND ASSESSEE. IT IS IMMATERIAL THAT WHO WILL PAY/BEAR THE AMOUNT WHETHER BY THE ASSESSE E OR BY THE ASSESSEE ON BEHALF OF ITS SISTER CONCERN UNDER THE AGREEMENT WITH IT. IN WHOSE HANDS IT ACCRUAL DEPENDS ON FACTS OF EACH CASE. IN THE PRESENT CASE THERE IS NO DISPUTE ABOUT THE ACCRUAL OF EXPENDITURES. THE DISPUTE IS IN WHOSE HANDS IT ACCRUED. THE AO WA S OF THE VIEW THAT THE ASSESSEE ON BEHALF OF A THIRD PARTY AND NOT FOR THE PURPOSE OF ITS OWN BUSINESS HAS INCURRED THESE EXPENSES. THE ASSES SEE DECIDED TO INCUR THESE EXPENSES ON ITS OWN ACCOUNT ACCEPTANCE OF REVENUE POINT TO OF VIEW AMOUNTS TO VIOLATION OF CONCEPT OF MATCH ING CONCEPT AND CONCEPT OF REAL INCOME. ACCORDING TO THE MATCHING P RINCIPLE THE REVENUES AND THE RELEVANT EXPENSES INCURRED SHOULD BE CORRELATED AND ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 20 MATCHED SO THAT COMPLETE PICTURE IS AVAILABLE. THE MATCHING CONCEPT HAS BEEN ACCEPTED BY THE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL MEASUREMENT CORPORATION LTD. VS. CIT 225 ITR 802 ( SC) WHEREIN IT HAS BEEN HELD THAT ORDINARILY REVENUE EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT IS INCURRED. I T CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESSEE HAS WRI TTEN OFF IN HIS BOOKS OF OVER PERIOD OF YEARS. HOWEVER THE FACTS M AY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICUL AR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF YEARS. IN FACT ALLOW ING THE REVENUE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF A PARTICULAR YEAR. ACCORDING TO THE REVENUE THESE E XPENDITURE INCURRED IN AY 2005-06 & 2006-07 ARE ALLOWABLE ONLY IN AY 20 07-08 IS CONTRARY TO THE ABOVE LAW LAID DOWN BY THE APEX COU RT. 31. THE IMPORTANT THING TO SEE IS HOW TO GIVE EFFEC T OF SUBSEQUENT EVENTS TO DETERMINE ACCRUAL OF EXPENDITURE AND REAL PROFIT/INCOME FOR THE PURPOSE OF INCOME TAX ACT. FOR THIS PURPOSE W E WOULD TO REFER THE FACTS AND FINDING OF THE APEX COURT CITED BY TH E LEARNED AR IN THE CASE OF CIT V BOKARO STEEL LTD 236 ITR 315 (SC) (PAGE NO 323&324) READS AS UNDER:- 9. IN THE ASST. YR. 1971-72 THE ASSESSEE HAD SHOW N IN ITS BOOKS OF ACCOUNTS A SUM OF RS. 7 39 232 AS INCOME FROM IN TEREST RECEIVED FROM HINDUSTAN STEEL LTD. FOR THE EIGHT LO COMOTIVES SUPPLIED BY THE ASSESSEE-COMPANY TO THEM. THE ENTRY IN THIS REGARD WAS REVERSED IN THE NEXT YEAR SINCE HINDUSTA N STEEL LTD. HAD REPLACED THE EIGHT LOCOMOTIVES LENT BY THE ASSE SSEE-COMPANY TO IT BY NEW ONES. THE ENTIRE NATURE OF THE TRANSAC TION WAS CHANGED BETWEEN THE PARTIES. THERE WAS A RESOLUTION OF THE ASSESSEE-COMPANY IN THIS REGARD AND THE INCOME FROM INTEREST DID NOT RESULT AT ALL AS THE ORIGINAL AGREEMENT CEA SED TO BE OPERATIVE AB INITIO. THE ENTRY IN THE BOOKS WHICH W AS MADE WAS ABOUT A HYPOTHETICAL INCOME WHICH DID NOT MATERIALI SE AND THE ENTRY WAS REVERSED IN THE NEXT YEAR. BOTH THE TRIBU NAL AS WELL AS THE HIGH COURT HAVE HELD THAT SINCE THIS ENTRY REFL ECTED ONLY HYPOTHETICAL INCOME IT COULD NOT BE BROUGHT TO TAX AS INCOME. ONLY REAL INCOME CAN BE BROUGHT TO TAX. 10. IN SUPPORT OF THIS FINDING THE ASSESSEE HAS DR AWN OUR ATTENTION TO A DECISION OF THIS COURT IN GODHRA ELE CTRICITY CO. LTD. VS. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 74 6 (SC) WHERE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 21 THE COURT INTER ALIA EXAMINED THE CASH SYSTEM AND THE MERCANTILE SYSTEM OF ACCOUNTING IN THE CONTEXT OF H YPOTHETICAL INCOME. THE COMPUTATION OF INCOME IS MADE IN ACCORD ANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT MAY BE EITHER THE CASH SYSTEM WHERE ENTRIES ARE MAD E ON THE BASIS OF ACTUAL RECEIPTS AND ACTUAL OUTGOINGS OR DI SBURSEMENTS; OR IT MAY BE THE MERCANTILE SYSTEM WHERE ENTRIES AR E MADE ON ACCRUAL BASIS THAT IS TO SAY ACCRUAL OF THE RIGHT TO RECEIVE PAYMENT AND THE ACCRUAL OF THE LIABILITY TO DISBURS E OR PAY. HOWEVER IN BOTH CASES UNLESS THERE IS REAL INCOME THERE CANNOT BE ANY INCOME-TAX. CONSIDERING THE FACTS BEFORE IT THE COURT SAID THAT ALTHOUGH THE ASSESSEE-COMPANY WAS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING AND HAD MADE ENTRIES IN THE BO OKS REGARDING ENHANCED CHARGES FOR THE SUPPLY OF ELECTR ICITY MADE TO ITS CONSUMERS NO REAL INCOME HAD ACCRUED TO THE AS SESSEE- COMPANY IN RESPECT OF THOSE ENHANCED CHARGES IN VIE W OF THE FACT THAT SOON AFTER THE ASSESSEE-COMPANY DECIDED TO ENH ANCE THE RATE REPRESENTATIVE SUITS WERE FILED BY THE CONSUM ERS WHICH WERE DECREED BY THE COURT AND ULTIMATELY AFTER VAR IOUS PROCEEDINGS WHICH TOOK PLACE THE ASSESSEE-COMPANY WAS NOT ABLE TO REALISE THE ENHANCED CHARGES. THE COURT HEL D THAT NO REAL INCOME HAD ACCRUED TO ASSESSEE-COMPANY AND HENCE TH E ENTRIES IN RESPECT OF ENHANCED CHARGES DID NOT REFLECT THE REAL INCOME OF THE ASSESSEE AND COULD NOT BE BROUGHT TO TAX BY THE ITO. 11. IN THE PRESENT CASE ALSO THE ENTRY WHICH WAS IN ITIALLY MADE AS INTEREST WAS REVERSED THE NEXT YEAR BECAUSE IN F ACT THE NATURE OF THE TRANSACTION WAS CHANGED AND THE ASSESSEE DID NOT RECEIVE ANY REAL INCOME. THE HIGH COURT HAS THEREFORE RIG HTLY HELD THIS ENTRY AS NOT REFLECTING THE REAL INCOME OF THE ASSE SSEE AND HENCE NOT EXIGIBLE TO INCOME-TAX. 32. THE SUPREME COURT IN THE CASE OF GODHRA ELECTRI CITY COMPANY LIMITED. VS. COMMISSIONER OF INCOME-TAX. 225 ITR 746 (SC) HELD AS UNDER:- PAGE NO 755 THE HIGH COURT HAS HELD THAT THE ASSESSEE-COMPANY WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND T HAT EVEN UNDER THIS SYSTEM IN ORDER TO VISIT THE ASSESSEE-CO MPANY WITH THE OBLIGATION TO PAY TAX THE PROFIT MUST BECOME ACTUAL LY DUE NO MATTER WHEN IT IS RECEIVED AND THAT INCOME CANNOT B E SAID TO HAVE ACCRUED TO AN ASSESSEE-COMPANY IF IT IS BASED ON A MERE CLAIM NOT BACKED BY ANY LEGAL OR CONTRACTUAL RIGHT TO REC EIVE THE AMOUNT AT A SUBSEQUENT DATE. 33. WE MAY ALSO STATE THAT EVENTS OCCURRING AFTER T HE BALANCE SHEET DATE AND ITS EFFECT TO FINANCIAL STATEMENTS HAS REC OGNISED BY THE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 22 INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA BY ISSU ING ACCOUNTING STANDARD AS 4. FROM ABOVE JUDGMENT WE FIND THAT IF BY SUBSEQUENT EVENT THE NATURE OF TRANSACTION HAS BEEN CHANGED TH E SAME IS REQUIRED TO BE CONSIDERED IN THE YEAR OF EFFECT ITS ELF TO DETERMINE THE REAL INCOME UNDER THE INCOME TAX ACT. WE FIND THAT IN THE CASE UNDER CONSIDERATION THERE IS CHANGE IN NATURE OF THE TRAN SACTION BY SUBSEQUENT EVENT AFTER THE END OF FINANCIAL YEAR. THE EXPENDITURES WHICH WERE TO BE REIMBURSED WAS NOT BACKED BY ANY LEGAL OR CONTRACTUAL RIGHT AS CONTRACT HAS BEEN CANCELLED. T HE ASSESSEE TOOK THE EXPENDITURES ITS OWN A/C. FACTS OF THE CASE UND ER CONSIDERATION ARE SIMILAR TO THE FACTS OF THE CASE DECIDED BY THE APEX COURT IN THE CASE OF BOKARO STEELS LTD. (SUPRA) WHEREIN ACCOUNTI NG ENTRIES WERE REVERSED IN THE SUBSEQUENT YEAR. IN THE CASE OF G ODHRA ELECTRICITY COMPANY LIMITED. VS. COMMISSIONER OF INCOME-TAX. 2 25 ITR 746 (SC) UP TO THE ASSESSMENT YEAR 1963-64 THE ASSESSEE-COM PANY WAS ASSESSED ON THE BASIS OF THE ACCOUNTS MAINTAINED AC CORDING TO THE MERCANTILE SYSTEM. FOR THE SUBSEQUENT ASSESSMENT YE ARS I.E. FROM 1964-65 TO71-72 THE ASSESSEE-COMPANY DEDUCTED DISPU TED AMOUNT FROM THE TOTAL EARNINGS IN RESPECT OF SALE OF ELECT RICAL ENERGY ON THE GROUND THAT THE SAID AMOUNT WAS NOT ACTUALLY RECOVE RED BY IT FROM THE CONSUMERS SINCE THE CONSUMERS HAD FILED A SUIT AGAI NST THE ASSESSEE- COMPANY AND HAD OBTAINED INTERIM RELIEF IN THAT BEH ALF AND FINALLY THE ADDITIONAL LEVY WAS CANCELLED ON MAY 4 1974. CONSI DERING THE ABOVE LAW LAID DOWN BY THE APEX COURT WE ARE OF THE VI EW THAT EFFECT OF CHANGE IN NATURE OF TRANSACTIONS THOUGH IT IS ON AC COUNT OF SUBSEQUENT EVENTS FROM THE END OF FINANCIAL YEAR I S REQUIRED TO BE GIVEN IN THE YEAR UNDER CONSIDERATION FOR THE PURPO SE OF REAL PROFIT/ INCOME. THE DECISION CITED BY THE LEARNED DR IN CIB A INDIA P. LTD V ITO 318 ITR 71 (MUM) (AT) IS DISTINGUISHABLE ON F ACTS AS IN THAT CASE EXPENDITURE WAS INCURRED FOR SISTER CONCERN AN D NOT FOR PURPOSE OF BUSINESS OF THE ASSESSEE. 34. IN THE LIGHT OF ABOVE DISCUSSIONS WE ARE OF TH E CONSIDERED OPINION THAT THE ASSESSEE IS ENTITLE FOR CLAIM OF E XPENDITURES AS THERE IS NO DISPUTE ABOUT OTHER CONDITIONS FOR ALLOW ABIL ITY OF EXPENDITURE. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 23 ONCE IT IS FOUND THAT THE EXPENDITURES ARE ALLOWABL E SAME ARE ALLOWABLE UNDER RESPECTIVE PROVISIONS AS IN THE CAS E UNDER CONSIDERATION UNDER SECTION 35(2AB) OR UNDER SECTIO N 37(1) AS THE CASE MAY BE IN ACCORDANCE WITH LAW. THE LEARNED DR SUBMITTED THAT THE BIFURCATION OF THE EXPENDITURE FOR APPROVED PRO GRAM AND NON- APPROVED PROGRAMME WERE NOT BEFORE THE AO AND CIT ( A) .THIS SUBMISSION OF THE LEARNED DR IS NOT CORRECT. THE AS SESSEE HAS FURNISHED THE BIFURCATION OF EXPENDITURES IN THE NO TE ATTACHED TO THE RETURN OF INCOME ITSELF. THE ASSESSEE ALSO FILED DE TAILS BEFORE AO VIDE LETTERS DATED 27.11.2007 AND 2.1.2008. WE DO NOT F IND SUBSTANCE IN THIS SUBMISSION OF LEARNED DR. HOWEVER SOME DIFFER ENCE IN FIGURES GIVEN IN NOTE AND FIGURES POINTED OUT BY THE LEARNE D AR ARE NOTICED BY US THEREFORE WE CONSIDERED IT FIT TO RESTORE THE ISSUE TO THE FILE OF THE AO FOR A LIMITED PURPOSE FOR BIFURCATION OF THE EXP ENDITURES TO BE ALLOWED IN RESPECTIVE PROVISIONS I.E UNDER SECTION 35(2AB) AND SECTION 37(1) AS THE CASE MAY BE. THE AO SHALL PROVIDE REAS ONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ACCORDINGLY RESPECTIVE GROUND OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 35. GROUND NO. 6 IS IN RESPECT OF ADDITION OF RS. 1 1 72 887/- U/S.41(1). BRIEFLY THE FACTS RELATING TO THIS GROUN D ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF CREDITORS THAT ARE OUTSTANDING FOR MORE THAN THREE YEARS AND TO SHOW CAUSE AS TO WHY THE SAME SHOULD NOT BE ADDE D U/S.41(1) OF THE ACT. IN RESPONSE TO THE SAME THE ASSESSEE HAS GIVEN A LIST OF 105 CREDITORS WHERE AN AGGREGATE BALANCE OF RS. 11 72 887/- IS OUTSTANDING FOR A PERIOD OF MORE THAN THREE YEARS. THE ASSESSEE HAS ALSO SUBMITTED THAT IT WAS STILL VERY MUCH LIABLE T O MAKE PAYMENTS TO THESE CREDITORS AS THE CORRESPONDING LIABILITY HAS NOT BEEN WAIVED OFF NOR HAS SUCH LIABILITY CEASED TO EXIST. ON CONSIDER ING THE SUBMISSIONS OF THE ASSESSEE THE ASSESSING OFFICER WAS OF THE V IEW THAT THERE IS NO MOVEMENT IN THESE CREDITORS ACCOUNT IN THE BOOKS O F THE ASSESSEE LEAVES LITTLE SCOPE FOR ACCEPTING THE ASSESSEES ST AND THAT IT IS TILL LIABLE FOR MAKING THE PAYMENTS UNDER REFERENCE. AS REGARDS THE ASSESSEES CONTENTION THAT SOME OF THE CREDITORS HA VE BEEN SUBSEQUENTLY BEEN PAID OFF NO EVIDENCE IN THIS RES PECT WERE ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 24 FURNISHED DESPITE SPECIFIC OPPORTUNITY ALLOWED TO THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. FURTHER NO P RUDENT BUSINESSMAN WOULD KEEP THE RECOVERY PENDING FOR 3 Y EARS UNLESS THE SAME IS NOT RECOVERABLE. UNDER THE LAW ALSO A DEBT BECOMES BARRED BY LIMITATION IN 3 YEARS. SINCE THESE LIABILITIES ARE OUTSTANDING FOR A PERIOD EXCEEDING 3 YEARS THE SAME HAVE BECOME BARR ED BY LIMITATION. IT IS ALSO EVIDENT THAT THE SAME HAVE NOT BEEN DEMA NDED EVEN AFTER A LAPSE OF 3 YEARS IT IS CLEAR THAT THE SAME HAVE CE ASED TO EXIST. ACCORDINGLY HE ADDED HACK THE AMOUNT OF RS. 11 72 887/- TO THE TOTAL INCOME OF THE ASSESSEE. 36. ON APPEAL BEFORE THE CIT(A) THE APPELLANT EXPLA INED THAT ADEQUATE TIME HAS NOT BEEN ALLOWED TO FILE CONFIRMA TION OF THE CREDITORS AND LIABILITY RESPECT OF CREDITORS ARE ST ILL OUTSTANDING. AFTER CONSIDERING THE SUBMISSION OF THE APPELLANT THE LEA RNED CIT(A) HELD THAT SINCE THE CREDITORS ARE OUTSTANDING FOR MORE T HAN 3 YEARS AND NO CONFIRMATION HAS BEEN FILED FROM THE CREDITOR EITHE R BEFORE THE AO OR IN THE APPELLATE PROCEEDING IT IS THEREFORE CLEAR THAT CREDITORS ARE NOT FORCING RECOVERY OF THEIR DEBTS FROM THE APPELLANT. THEREFORE THIS IS NOTHING BUT CESSATION OF LIABILITY WHICH IS TAXABL E AS BUSINESS INCOME AND NOT ASSESSABLE AS PROFIT U/S.41 (1) AS HELD BY THE AO. HE ACCORDINGLY MODIFIED THE ASSESSMENT ORDER AND CONFI RMED THE ADDITION OF RS. 11 72 887/-. 37. WE HEARD THE LEARNED REPRESENTATIVES OF THE PAR TIES. WE FIND THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE O RDER OF THE ITAT IN THE CASE DSA ENGINEERS (BOMBAY) VS ITO 30 SOT 31 (M UMB) WHERE IN IT WAS HELD THAT IF THE ASSESSEE HAS NOT WRITTE N OFF THE LIABILITIES REFLECTED IN SUNDRY CREDITORS ACCOUNT IT WAS NOT OP EN TO THE AO TO MAKE ADDITION INVOKING SECTION 41(1) OF THE ACT WIT HOUT PROVING THAT THERE WAS CESSATION OF LIABILITIES. WE FIND THAT IN THE CASE OF THE AO INVOKED SECTION 41(1) MERELY ON THE GROUND THAT THE LIABILITIES WERE THREE YEARS OLD. THE ORDER OF THE AO CIT (A) BOTH A RE NOT SUSTAINABLE THEREFORE WE SET ASIDE THE ORDERS OF THE REVENUE AU THORITIES AND ADDITION MADE BY AO IS DELETED. ITA NO.6831 & 6916/MUM/08 M/S. GLENMARK PHARMACEUTICALS LTD. 25 38. IN THE RESULT APPEAL OF REVENUE IS DISMISSED A ND APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF OCTOBER 2010. SD/- SD/- (R.S. PADVEKAR) (A. L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEM BER DATED: 20 TH OCTOBER 2010 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE D R A BENCH I.T.A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI. AKN/KV