M/s. Insecticides (India) Ltd., New Delhi V. DCIT, New Delhi

CO 226/DEL/2010

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6592 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SALIL MISHRA
• Assessee Lawyers: MOHIT PAREKH
• Keywords: Opportunity of being heard
• Section: 115JB; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `C: NEW DELHI BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T. A. NO.2334/DEL/2010 ASSESSMENT YEAR : 2006-07 DY. COMMISSIONER OF INCOME-TAX, M/S. INSECTICIDES (INDIA) LTD., CIRCLE 11(1), NEW DELHI. VS. 401-402, LUSA TOWER, AZADPUR COMMERCIAL COMPLEX, AZADPUR, NEW DELHI. PAN: AAACI3076P C.O. NO.226/DEL/2010 (IN I.T. A. NO.2334/DEL/2010) ASSESSMENT YEAR : 2006-07 INSECTICIDES (INDIA) LTD., DY. COMMISSIONER OF INC OME-TAX, 401-402, LUSA TOWER, VS. CIRCLE 11(1), NEW DELHI. AZADPUR COMMERCIAL COMPLEX, AZADPUR, NEW DELHI. (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI SALIL MISHRA, SR. DR. ASSESSEE BY: SHRI MOHIT PAREKH, CA. O R D E R PER C.L. SETHI, JUDICIAL MEMBER: THE REVENUE IS IN APPEAL AGAINST THE ORDER DATED 09 .03.2010 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) PE RTAINING TO THE ASSESSMENT YEAR 2006-07. 2 2. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION IN R ELATION THERETO. 3. WE SHALL FIRST TAKE THE APPEAL FILED BY THE REVE NUE. 4. THE GROUND OF APPEAL RAISED BY THE REVENUE IS DI RECTED AGAINST THE CIT(A)S ORDER IN DELETING THE DISALLOWANCE OF RS.2 0,83,600/- OUT OF R&D EXPENSES OF RS.40,52,138/- CLAIMED AGAINST THE PROF ITS OF CHOPANKI UNIT. 5. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING AND TRADING OF PESTICIDES, INSECTICIDES AND OTHER A GRO CHEMICALS ETC. THE ASSESSEE FILED ITS RETURN OF INCOME ON 22.11.2006 S HOWING THE TOTAL INCOME AT RS.10,11,202/- UNDER THE NORMAL PROVISIONS OF THE A CT, AND AT RS.11,23,28,463/- UNDER SEC. 115JB OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY AND THE NOTICE UNDER SEC. 143(2) OF THE AC T WAS ISSUED AND SERVED ON THE ASSESSEE ON 06.10.2007. IN RESPONSE TO NOT ICE UNDER SEC.143(2), THE ASSESSEE FURNISHED THE DETAILS CALLED FOR. CONSIDE RING THE DETAILS FILED BY THE ASSESSEE AS NOT ACCEPTABLE, THE AO COMPUTED THE TOT AL INCOME OF THE ASSESSEE AT RS.11,23,28,463/-. 6. BEING AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEF ORE THE LEARNED CIT(A). BEFORE THE LEARNED CIT(A), THE ONLY ISSUE RAISED IS WITH REGARD TO A DISALLOWANCE OF RS.20,83,600/- MADE BY THE AO OUT O F THE TOTAL R&D EXPENSES OF RS.40,52,138/- CLAIMED AGAINST THE PROF ITS OF CHOPANKI UNIT. ON PERUSAL OF THE ASSESSMENT ORDER, IT WAS FOUND BY THE LEARNED CIT(A) THAT 3 THE ASSESSEE COMPANY HAS TWO MANUFACTURING UNITS LO CATED AT SAMBA, JAMMU AND AT CHOPANKI IN ALWAR DISTRICT OF RAJASTHAN. TH E SAMBA UNIT WAS ELIGIBLE FOR DEDUCTION UNDER SEC. 80IB OF THE ACT A ND DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CLAIMED A DEDUCTION OF RS.11,28,10,743/-. ON EXAMINATION OF THE BOOKS OF ACCOUNTS, IT WAS NOT ICED BY THE AO THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C OMPANY HAS INCURRED AN EXPENDITURE OF RS.40,52,138/- ON R&D ACTIVITIES AND HAD DEBITED THE SAME TO THE PROFIT & LOSS ACCOUNT OF CHOPANKI UNIT ONLY. THE AO WAS OF THE VIEW THAT THE BENEFITS OF R&D WERE AVAILABLE FOR BOTH TH E UNITS AND THEREFORE, DEBITING THE ENTIRE EXPENDITURE AGAINST THE PROFITS OF CHOPANKI UNIT, WHICH IS NOT ELIGIBLE FOR DEDUCTION UNDER SEC. 80IB OF THE A CT, WAS NOT JUSTIFIED. THEREFORE, THE AO HELD THAT THE EXPENSES INCURRED O N ACCOUNT OF R&D WERE REQUIRED TO BE ALLOCATED TO BOTH THE UNITS PROPORTI ONATELY ON THE BASIS OF TOTAL TURNOVER OF THE RESPECTIVE UNITS. 7. CONSIDERING THE SUBMISSIONS MADE ON BEHALF OF TH E ASSESSEE AND FINDINGS GIVEN BY THE AO, THE LEARNED CIT(A) OBSERV ED AS UNDER:- 3. THE SUBMISSIONS MADE ON BEHALF OF THE APPELLANT AND FINDINGS RECORDED BY THE LD. AO HAVE BEEN CAREFULLY PERUSED. ON CONSIDERATION, I FIND THAT THE CLAIM OF THE APPE LLANT THAT BOTH THE MANUFACTURING UNITS ARE ENGAGED IN MANUFAC TURING OF ITEMS DISTINCTLY SEPARATE AND DIFFERENT FROM EACH O THER AND NO COMMON ITEMS OF PESTICIDES/INSECTICIDES ARE MANUFAC TURED BY THEM HAS NOT BEEN FOUND TO BE CORRECT. IN THE COUR SE OF APPELLATE PROCEEDINGS, AN ATTEMPT WAS MADE TO IDENT IFY THE 4 ITEMS WHICH ARE MANUFACTURED AT BOTH THE UNITS AND IT WAS FOUND THAT THERE ARE MANY ITEMS WHICH ARE COMMONLY MANUFACTURED AT BOTH THE SITES. THEREFORE, THE LD. COUNSEL FOR THE APPELLANT WAS REQUESTED TO FURNISH QUANTITATIVE DETAILS OF PRODUCTION OF COMMON ITEMS SO AS TO HAVE AN IDEA AB OUT THE TOTAL QUANTITY OF COMMON PRODUCTS MANUFACTURED AT B OTH THE UNITS. ON A PERUSAL OF DETAILS FILED BY THE LD. CO UNSEL, IT WAS FOUND THAT THE TOTAL PRODUCTION OF COMMON ITEMS BET WEEN THE TWO UNITS WAS IN THE RATIO OF 32.26 IN CHOPANKI UNI T TO 63.47% AT SAMBA UNIT. THEREFORE, THE FINDINGS OF THE LD. AO THAT RESEARCH AND DEVELOPMENT EXPENSES OF RS.40,52,138 W ERE COMMON/EQUALLY BENEFICIAL TO BOTH THE UNITS DESERVE TO BE SUSTAINED. 3.1 HOWEVER, AS REGARDS ALLOCATING EXPENSES BETWEEN BOTH THE UNITS, I FIND THAT THE DISALLOWANCE MADE BY THE LD. AO IS DEFINITELY ON A HIGHER SIDE. THE LD. COUNSEL FOR T HE APPELLANT COMPANY CLAIMS THAT OUT OF TOTAL PRODUCTION OF 8229 756.980 THE PRODUCTION OF COMMON ITEMS AT CHOPANKI UNIT WAS 108 4289 (IN TERMS OF QUANTITY) WHICH WORKS OUT TO 13.18% OF THE TOTAL PRODUCTION. THUS, AS PER THE LD. COUNSEL ONLY 13.1 8% OF RS.40,52,138 REQUIRES TO BE CONSIDERED FOR ALLOCATI ON BETWEEN CHOPANKI UNIT AND SAMBA UNIT. HOWEVER, ON CONSIDER ATION, I FIND THAT SUCH AN ARITHMETICAL CALCULATION ON THE B ASIS OF ITEMWISE PRODUCTION, PROBABLY, MAY NOT LEAD US TO A NY JUSTIFIABLE AND LOGICAL CONCLUSIONS. AFTER ALL, IT IS A MATER OF COMMON KNOWLEDGE/EXPERIENCE THAT RESEARCH CONDUCTED IN CONNECTION WITH AN INDIVIDUAL ITEM OF INSECTICIDES/ PESTICIDES WOULD IN ONE WAY OR THE OTHER BENEFIT THE ENTIRE MA NUFACTURING PROCESS ITSELF. THEREFORE, I AM OF THE VIEW THAT I T WILL BE MORE LOGICAL AND EQUITABLE, IF 25% OF RS.40,52,138/- IS TREATED TO HAVE BEEN INCURRED IN CONNECTION WITH THE SAMBA UNI T LOCATED AT JAMMU. THEREFORE, THE AO IS DIRECTED TO DISALLO W ONLY 25% OF RS.40,52,138 AND GRANT NECESSARY RELIEF TO THE A PPELLANT IN TERMS OF PROPORTIONATE INCREASE IN DEDUCTION U/S 80 IB OF THE IT ACT, 1961. 5 8. IN THE CROSS OBJECTION, THE ASSESSEE HAS CHALLEN GED THE CIT(A)S ORDER RAISING FOLLOWING GROUNDS:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ACTION OF THE LD CIT(A) IS IMPROPER AND UNJUSTIFIED IN CONFIRMING THE DISALLOWANCE OF RS.10,13,035/- OUT OF TOTAL R & D E XPENSES OF RS.40,52,138/- WHICH IS EXCESSIVE AND AGAINST THE W ORKING SUBMITTED BY THE APPELLANT CO. BEFORE HIM TO RESTRI CT THE SAME AT RS.3,40,417/- ONLY. AS SUCH, IT IS HUMBLY PRAYE D THAT THE SAME MAY BE RESTRICTED TO RS.3,40,417/- AGAINST THE PROFIT OF CHOPANKI UNIT. 2. THAT THE APPELLANT CO. DURING THE COURSE OF APPE LLATE PROCEEDINGS BEFORE LD CIT(A) REQUESTED AND PRAYED T O RESTRICT THE DISALLOWANCES OF R & D EXPENSE AT RS.3,40,417/- (SAY RS.3,41,000/-) PERTAINING TO SAMBHA UNIT OUT OF TOT AL DISALLOWANCE OF RS.20,83,600/- MADE BY THE A.O. AGA INST THE PROFITS OF CHOPANKI UNIT. 9. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y PERUSED THE ORDERS OF THE AUTHORITIES BELOW. 10. THE ISSUE INVOLVED IN THE REVENUES APPEAL AND THE ISSUE INVOLVED IN CROSS OBJECTION FILED BY THE ASSESSEE IS CO-RELATED BEING RELATED TO THE ASSESSEES CLAIM OF DEDUCTION OF RS.40,52,138/- ON ACCOUNT OF R&D ACTIVITY AGAINST THE PROFIT OF CHOPANKI UNIT ONLY, THOUGH TH E ASSESSING OFFICER ALLOCATED THE AFORESAID EXPENDITURE BETWEEN CHOPANK I UNIT AND SAMBA UNIT IN PROPORTION TO THE TOTAL TURNOVER OF THE RESPECTI VE UNITS AGAINST WHICH, THE LEARNED CIT(A) HAS ALLOCATED THE AFORESAID EXPENSES BETWEEN CHOPANKI UNIT AND SAMBA UNIT BY OBSERVING THAT IF 25% OF TOTAL EX PENDITURE IS TREATED TO 6 HAVE BEEN INCURRED IN CONNECTION WITH SAMBA UNIT, I T WILL BE MORE LOGICAL AND EQUITABLE. IN THE PRESENT CASE, THE DETAILS OF AREAS OR FIELD OR THE ITEMS IN RESPECT OF WHICH, R&D ACTIVITY HAS BEEN CARRIED OUT BY THE ASSESSEE, HAVE NOT BEEN FURNISHED BEFORE US. FROM THE DETAILS FIL ED BY THE ASSESSEE, IT IS NOT CLEAR REGARDING ACTUAL R&D EXPENSES INCURRED WITH R EFERENCE TO THE VARIOUS ITEMS MANUFACTURED BY THE ASSESSEE IN BOTH THE UNIT S. THE ASSESSEE HAS SUBMITTED BEFORE US THE QUANTITATIVE DETAIL OF PROD UCTION OF COMMON PRODUCTS MANUFACTURED AT BOTH THE UNITS CHOPANKI AN D SAMBA, AND HAS ALLOCATED THE EXPENDITURE ONLY TO THE COMMON PRODUC TS MANUFACTURED AT BOTH THE UNITS. THE ASSESSEE HAS NOT GIVEN ANY BASIS OR DETAILS AS TO WHY THE R&D EXPENDITURE HAS BEEN ALLOCATED TO PRODUCTION OF COM MON PRODUCTS AT BOTH THE UNITS I.E. CHOPANKI AND SAMBA, AND WHY IT SHOUL D NOT HAVE BEEN ALLOCATED TO ALL THE PRODUCTS MANUFACTURED AT CHOPA NKI AS WELL AS SAMBA UNIT. THE DETAILS OF R&D ACTIVITIES ITEM-WISE AND PRODUCT-WISE HAVE NOT BEEN FURNISHED BY THE ASSESSEE. IN OTHER WORDS, TH E ASSESSEE HAS NOT FURNISHED THE DETAILS ABOUT THE PRODUCTS OR THE ITE MS IN RESPECT OF WHICH R&D ACTIVITIES WERE CARRIED OUT, AND THEIR CORRESPO NDING EXPENSES INCURRED DURING THE YEAR UNDER CONSIDERATION. THEREFORE, TH E METHOD ADOPTED BY THE ASSESSEE BY ALLOCATING THE R&D EXPENSES ONLY TO THE COMMON PRODUCTS MANUFACTURED AT CHOPANKI AND SAMBA UNITS CANNOT BE ACCEPTED AT THIS STAGE. 7 THE TOTAL EXPENDITURE INCURRED BY THE ASSESSEE, HAS BEEN SHOWN AT RS.40,52,138/-, OUT OF WHICH, THE ASSESSEE ALLOCATE D THE SUM OF RS.5,34,072/- TO THE COMMON PRODUCTS MANUFACTURED AT BOTH THE UNI TS I.E. AT CHOPANKI AND SAMBA. IN OTHER WORDS, THE BALANCE AMOUNT OF RS.35 ,18,066/- OUT OF THE TOTAL EXPENSES OF RS.40,52,138/- HAS BEEN CLAIMED B Y THE ASSESSEE TO BE INCURRED ONLY AGAINST THE PRODUCTS MANUFACTURED AT CHOPANKI WITHOUT GIVING ANY DETAILS OF R&D EXPENSES PRODUCT-WISE OR ITEM-WI SE. THE ASSESSEES CLAIM THAT SUM OF RS.5,34,072/- ON ACCOUNT OF R&D E XPENSES HAS BEEN INCURRED ONLY IN RESPECT OF THE COMMON PRODUCTS MAN UFACTURED AT CHOPANKI AND SAMBA UNITS IS NOT SUPPORTED BY ANY EVIDENCES. THE ASSESSEE HAS NOT ALLOCATED THE BALANCE EXPENSES OF RS.35,18,066/- TO ALL OTHER PRODUCTS MANUFACTURED AT BOTH THE UNITS, BUT HAS ALLOCATED T HE SAME EXCLUSIVELY TO CHOPANKI UNIT, IN SUPPORT OF WHICH, NO DETAILS HAVE BEEN FURNISHED BY THE ASSESSEE BEFORE US. THEREFORE, THE ASSESSEES METH OD OF WORKING THAT ONLY THE SUM OF RS.3,40,417/- OUT OF RS.40,52,138/-, IS RELATABLE TO SAMBA UNIT, CANNOT BE ACCEPTED, UNLESS THE DETAILS OF R&D ACTIV ITIES ARE EXAMINED AND VERIFIED. IN ABSENCE OF DETAILS, THE AO HAS ALLOCA TED THE EXPENSES IN PROPORTION TO THE TURNOVER OF BOTH THE UNITS, WHICH IN OUR CONSIDERED OPINION, WILL BE JUSTIFIED IF THE ASSESSEE FAILS TO PROVE AN D ESTABLISH THAT THE R&D EXPENSE WERE INCURRED ONLY IN RESPECT OF THE PRODUC TS MANUFACTURED AT 8 CHOPANKI UNIT, AND PORTION THEREOF CAN ONLY BE ALLO CATED TO SAMBA UNIT ONLY IN RESPECT OF COMMON PRODUCTS MANUFACTURED AT BOTH THE UNITS. THE MATTER INVOLVED, THEREFORE, NEEDS A THOROUGH EXAMINATION A ND VERIFICATION. AFTER EXAMINING THE AREA OF ACTIVITIES OR ITEMS IN RESPEC T OF WHICH R&D ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE DURING THE YEAR UN DER CONSIDERATION, THE AO SHALL DECIDE THE ISSUE. THE AO SHALL PROVIDE REASO NABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL BE AT LIBERTY TO PRODUCE ALL OTHER EVIDENCES AND DETAILS BEFORE THE AO IN SUPPOR T OF THE CLAIM THAT R&D EXPENSES WERE TOTALLY INCURRED IN RESPECT OF THE PR ODUCTS MANUFACTURED AT CHOPANKI UNIT, AND ONLY THE PROPORTIONATE EXPENSES INCURRED FOR THE COMMON PRODUCTS MANUFACTURED AT BOTH THE UNITS, CAN BE ALLOCATED BETWEEN THE TWO UNITS. THE MATTER SHALL REMAIN WIDE OPEN B EFORE THE AO FOR HIS ADJUDICATION AS PER LAW AND IN THE LIGHT OF THE FAC TS AND CIRCUMSTANCES OF THE CASE. WE ORDER ACCORDINGLY. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTION FILED BY THE ASSESSEE, ARE TREATED TO BE ALLOWED FOR A ST ATISTICAL PURPOSE. 12. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 12 TH OCTOBER, 2011. SD/- SD/- (SHAMIM YAHYA) (C.L. SETHI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 12 TH OCTOBER, 2011. 9 ITA NOS.2334/DEL/2010 & CO NO.226/DEL/2010 COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT