Appeal details
Counselvise Citation
[2011] 134 COUNSELVISE.COM (IT) 5369 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
10 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
04-07-2011
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
05-05-2011
Assessment Year
2006-2007
Appeal Filed On
24-08-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL: B BENCH: CH ANDIGARH BEFORE SHRI D K SRIVASTAVA, AM AND MS. SUSHMA CHOWL A, JM ITA NO. 1105/CHANDI/2010 ASSESSMENT YEAR: 2006-07 TORQUE PHARMACEUTICALS PVT. LTD. V. ADDL . C.I.T. R-1, PLOT NO. 693, INDUSTRIAL AREA PHASE II C HANDIGARH CHANDIGARH PAN: AABCT 1244 P APPELLANT BY: SHRI ANIL KUMAR BATRA RESPONDENT BY: SMT. SARITA KUMARI, DR ORDER D K SRIVASTAVA: THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL PRODUCTS. IN THE YE AR UNDER APPEAL, THE ASSESSEE HAD TWO MANUFACTURING UNITS; ONE LOCATED AT DERA BA SSI IN THE STATE OF PUNJAB THE INCOME OF WHICH WAS TAXABLE AND THE OTHER ONE AT BA DDI IN THE STATE OF HIMACHAL PRADESH THE INCOME OF WHICH WAS ENTITLED TO SPECIAL RELIEF U/S 80IC AND THEREFORE NON-TAXABLE. IT FILED ITS RETURN OF INCOME ON 4.12. 2006 RETURNING NIL INCOME. IT WAS SELECTED FOR SCRUTINY. AFTER SCRUTINY, THE ASSESSIN G OFFICER (AO IN SHORT) COMPLETED THE ASSESSMENT U/S 143(3) OF THE INCOME-TAX ACT ON 19.12.2008 ASSESSING THE TOTAL INCOME OF THE ASSESSEE-COMPANY AT RS.77,54,33 1/- AFTER MAKING CERTAIN ADDITIONS/DISALLOWANCES. ON APPEAL, THE LD. CIT(A), BY HER APPELLATE ORDER DATED 31.5.2010, HAS CONFIRMED MOST OF THE ADDITIONS/DISA LLOWANCES MADE BY THE AO AGAINST WHICH THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. 2. GROUND NO. 1 TAKEN BY THE ASSESSEE READS AS UNDE R:- 1 THE LD. CIT(A) HAS ERRED IN SUSTAINING THE ADDIT ION OF RS. 22,91,117/- BEING DISALLOWANCE OF EXPENSES IN VIOLATION OF SEC 40(A)(IA) OF THE INCOME- TAX ACT WITHOUT PROPERLY APPRECIATING THE FACTS, SU PPORTING EVIDENCE AND SUBMISSIONS PLACED ON RECORD. THE CLAIM BE ALLOWED AND THE ADDITION BE DELETED. 3. BRIEFLY STATED, THE FACTS GIVING RISE TO THE AFO RESAID GROUND OF APPEAL ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION FOR A SUM O F RS.22,91,170/- BEING EXPENDITURE TOWARDS FREIGHT OUTWARD. THE AO NOTICED THAT THE IMPUGNED SUM WAS TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 2 2 PAID WITHOUT DEDUCTION OF TAX AT SOURCE. HE THEREFO RE CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE IMPUGNED SUM SHOULD NOT BE DI SALLOWED IN TERMS OF SECTION 40(A)(IA). IN REPLY, THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE AMOUNT IN QUESTION WAS NOT DISBURSED BY IT BUT BY ITS DISTRIB UTORS AND HENCE THE ASSESSEE WAS NOT REQUIRED TO DEDUCT THE TAX AT SOURCE. THE A O HOWEVER DID NOT AGREE WITH THE AFORESAID SUBMISSIONS FOR THE DETAILED REASONS GIVEN BY HIM IN THE ASSESSMENT ORDER WHICH HAVE BEEN SUMMARIZED IN PARAGRAPH 6 OF THE APPELLATE ORDER PASSED BY THE LD. CIT(A). 4. AGGRIEVED BY THE IMPUGNED DISALLOWANCE MADE BY T HE AO, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). HE HAS DISPOSED OFF THE ISSUE UNDER APPEAL WITH THE FOLLOWING OBSERVATIONS: 8. I HAVE PERUSED THE ASSESSMENT ORDER, ASSESSMENT RECORD, WRITTEN SUBMISSIONS, COPY OF AGREEMENT, LEDGER ACCOUNT SHOW ING FREIGHT OUTWARDS AND HEARD THE CONTENTIONS. CLAUSE 6 & 7 OF THE AGREEMENT FOR DISTRIBUTORSHIP OF THE APPELLANT COMPANY WITH DISTRIBUTORS (M/S SI TARAM ENTERPRISES) AS READS AS UNDER: 6. THE PRICE SHALL BE ORIGINAL SELLING PRICE EXCLUDIN G FREIGHT. THE COMPANY SHALL ENGAGE THE TRANSPORTER ON BEHALF OF T HE DISTRIBUTORS AND DISTRIBUTOR IS REQUIRED TO MAKE THE PAYMENT TO TRANSPORTER ON RECEIPT OF GOODS WITHIN THE FRAMEWORK OF LAW. 7. IN ORDER TO KEEP ALL INDIA UNIFORMITY OF PRICES OF PRODUCTS THE FREIGHT CHARGES SHALL BE REIMBURSED IN THE FORM OF CREDIT NOTES AFTERWARDS. 9. I HAVE OBSERVED THAT AS PER THE TERMS OF AGREEM ENT WITH THE DISTRIBUTORS, THE ASSESSEE WAS TO ENGAGE THE TRANSP ORTER AND LATER WAS TO REIMBURSE THE FREIGHT PAID BY DISTRIBUTORS BY WAY O F CREDIT NOTE. IT IS QUITE CLEAR THAT THE PAYMENTS ARE ONLY MADE BY THE DISTRI BUTORS BY WAY OF CREDIT NOTE. IT IS QUITE CLEAR THAT THE PAYMENTS ARE ONLY MADE BY THE DISTRIBUTORS AFTER THEY SATISFY THEMSELVES REGARDING THE CONDITI ON OF GOODS RECEIVED. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 3 3 SINCE THE APPELLANT COMPANY KNOWS BEFOREHAND THAT F REIGHT CHARGES WILL HAVE TO BE REIMBURSED, THEY SURELY NEGOTIATE THE RA TES TO BE GIVEN TO THE TRANSPORTERS. THOUGH THE APPELLANT CONTENDED THAT DEDUCTION OF TA X AT SOURCE WAS THE LIABILITY OF THE DISTRIBUTORS, BU T I HAVE OBSERVED THAT HARDLY ANY DISTRIBUTOR HAS DEDUCTED TDS AS PER CONFIRMATIONS ATTACHED. 10. IN FACT, THE PROVISIONS OF SECTION 194C FIX TH E RESPONSIBILITY FOR DEDUCTION OF TDS FROM OUT OF PAYMENTS OF FREIGHT ON THE PERSON MAKING THE PAYMENT. HERE RIGHT FROM THE BEGINNING, THE ASSESSE E KNEW THAT PAYMENT OF FREIGHT WAS HIS LIABILITY WHICH WAS ULTIMATELY P AID BY WAY OF REIMBURSEMENT. IN MY VIEW THE LIABILITY WAS OF THE APPELLANT BUT IN CASE THE DISTRIBUTORS HAD DEDUCTED THE TAX, THEN TO AVOID DO UBLE DEDUCTION ON THE SAME AMOUNT, ASSESSEES LIABILITY WOULD HAVE CEASED , BUT TO SAY THAT IT WAS THE LIABILITY OF THE DISTRIBUTORS IN THE FIRST INST ANCE IS SEEMINGLY INCORRECT. 11. THE PROVISIONS OF SECTION 194C HAVE TO BE COMP LIED WITH UNDER ALL CIRCUMSTANCES AND THE PERSON ENGAGING THE TRANSPORT ERS IS MORE LIABLE SINCE DISTRIBUTORS ARE ONLY PAYING ON HIS BEHALF. T HE PLEA ON THIS GROUND OF APPEAL IS NOT ACCEPTED AND THE ADDITION OF RS.22,91 ,117/- IS CONFIRMED SUBJECT TO ADJUSTMENT OF THE AMOUNT OF TDS DEDUCTED BY SOME OF THE DISTRIBUTORS. 12. I RELY UPON THE FOLLOWING DECISIONS IN SUPPORT OF MY DECISION ON THIS ISSUE: HON'BLE SUPREME COURT IN THE CASE OF ASSOCIATE CEME NT COMPANY LTD. V. CIT (1979) 120 ITR 444. HON'BLE ITAT CHANDIGARH BENCH IN THE CASE OF PARTAP HOON V. ADDL CIT, RANGE-1, CHANDIGARH IN ITA NO. 536/CHANDI/2009 . 5. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, IT WAS SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO AGREEMENTS WITH ITS DISTR IBUTORS BY WHICH THE ASSESSEE- TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 4 4 COMPANY WAS REQUIRED TO MEET THE ENTIRE FREIGHT EXP ENSES ON DISTRIBUTION OF ITS PRODUCTS SO AS TO MAINTAIN UNIFORMITY IN THEIR PRIC ES THROUGHOUT THE COUNTRY. HE FURTHER SUBMITTED THAT IT WAS THE ASSESSEE-COMPANY, WHICH HAD ENGAGED THE TRANSPORTERS, NEGOTIATED THEIR RATES/FREIGHT CHARGE S, LOADED ITS PRODUCTS AND THEREAFTER DISPATCHED THE CONSIGNMENTS TO ITS DISTR IBUTORS LOCATED ALL OVER THE COUNTRY. ACCORDING TO HIM, THE ARRANGEMENT BETWEEN THE ASSESSEE-COMPANY AND ITS DISTRIBUTORS WAS THAT THE DISTRIBUTORS WOULD PA Y FREIGHT CHARGES ON RECEIPT OF CONSIGNMENTS AND THEREAFTER THE ASSESSEE WOULD ISSU E CREDIT NOTE IN FAVOUR OF DISTRIBUTORS. IN THIS CONNECTION, HE REFERRED TO TH E AGREEMENT EXECUTED BETWEEN THE ASSESSEE-COMPANY AND THE DISTRIBUTORS. RELEVANT CLAUSES OF THE SAID AGREEMENT FORM PART OF THE ORDER OF CIT(A), WHICH H AVE ALREADY BEEN REPRODUCED EARLIER IN THIS ORDER. HE FURTHER SUBMITTED THAT FR EIGHT CHARGES WERE ACTUALLY PAID BY THE DISTRIBUTORS AND NOT BY THE ASSESSEE-COMPANY AND THEREFORE THE ASSESSEE- COMPANY WAS NEITHER REQUIRED TO DEDUCT THE TAX AT S OURCE U/S 194C OUT OF SUCH PAYMENTS MADE BY THE DISTRIBUTORS NOR THE PROVISION S OF SECTION 40(A)(IA) WERE APPLICABLE TO IT. HIS NEXT SUBMISSION WAS THAT THE DISTRIBUTORS HAD ALREADY DEDUCTED THE TAX AT SOURCE AND PAID THE SAME AND TH EREFORE THE PROVISIONS OF SECTION 40(A)(IA) WERE NOT APPLICABLE TO THE CASE O F THE ASSESSEE FOR THAT REASON ALSO. HE ALSO REFERRED TO THE JUDGMENT IN TRANSMISS ION CORPORATION OF AP LTD. V. CIT, 239 ITR 587 (SC) FOR THE PROPOSITION THAT THE OBLIGATION OF THE DEDUCTOR TO DEDUCT TAX AT SOURCE IS LIMITED ONLY TO THE APPROPR IATE PROPORTION OF INCOME CHARGEABLE UNDER THE INCOME-TAX ACT. 6. IN REPLY, THE LD. DR SUPPORTED THE ORDER PASSED BY THE AO/CIT(A). 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CON SIDERED THEIR SUBMISSIONS. THE AO HAS MADE THE IMPUGNED DISALLOWANCE U/S 40(A) (IA) ACCORDING TO WHICH ANY AMOUNT PAYABLE TO A CONTRACTOR OR SUB-CONTRACTO R, BEING RESIDENT, FOR CARRYING OUT ANY WORK, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B OF THE INCOME-TAX ACT AND SUCH TAX HAS NOT BEEN DEDUCTED O R, AFTER DEDUCTION, HAS NOT BEEN PAID WITHIN THE PRESCRIBED PERIOD, SHALL NOT B E DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 5 5 THE OBJECT OF SECTION 40(A)(IA) IS TO ENSURE THAT T HE EXPENSES OF THE NATURE SPECIFIED THEREIN ARE ALLOWED DEDUCTION IN COMPUTIN G BUSINESS INCOME U/S 28 ONLY WHEN TAX REQUIRED TO BE DEDUCTED AT SOURCE OUT OF S UCH PAYMENTS IS DEDUCTED AND PAID TO THE GOVERNMENT. THUS SECTION 40(A)(IA) IS A STATUTORY DEVICE TO ENSURE COMPLIANCE WITH THE PROVISIONS OF LAW RELATING TO D EDUCTION OF TAX AT SOURCE. IF AN ASSESSEE SEEKS DEDUCTION OF EXPENSES OF THE NATURE SPECIFIED IN SECTION 40(A)(IA), HE MUST SATISFY THE PRESCRIPTION OF SECTION 40(A)(I A) IN THAT HE MUST DEDUCT TAX AT SOURCE OUT OF SUCH PAYMENTS AND PAY THE SAME TO THE GOVERNMENT. THE RELEVANT QUESTION IS THEREFORE WHETHER THE ASSESSEE WAS REQU IRED TO DEDUCT THE TAX AT SOURCE U/S 194C OUT OF IMPUGNED PAYMENTS AND, IF SO , WHETHER IT HAD DEDUCTED THE SAME AND PAID TO THE GOVERNMENT. 8. ACCORDING TO SECTION 194C, ANY PERSON RESPONSIBL E FOR PAYING ANY SUM TO ANY RESIDENT FOR CARRYING OUT ANY WORK IN PURSUAN CE OF A CONTRACT SHALL, AT THE TIME OF CREDIT OF SUCH SUM TO THE ACCOUNT OF THE CO NTRACTOR OR AT THE TIME OF PAYMENT IN CASH OR BY ISSUE OF A CHEQUE OR DRAFT, W HICHEVER IS EARLIER, DEDUCT TAX AT SOURCE OUT OF SUCH PAYMENTS. EXPLANATION III(IV) (C) TO SECTION 194C INCLUDES CARRIAGE OF GOODS OR PASSENGERS BY ANY MODE OF TRA NSPORT OTHER THAN BY RAILWAYS WITHIN THE EXPRESSION WORK. 9. AS ALREADY STATED EARLIER, THE ASSESSEE-COMPANY HAD ENTERED INTO AGREEMENT WITH ITS DISTRIBUTORS UNDER WHICH THE ASS ESSEE WAS REQUIRED TO MEET THE EXPENSES TOWARDS FREIGHT OUTWARD SO AS TO MAINT AIN UNIFORMITY IN PRICES OF ITS PRODUCTS THROUGHOUT THE COUNTRY. PERUSAL OF THE MAT ERIALS AVAILABLE ON RECORD SHOWS THAT THE ASSESSEE-COMPANY NOT ONLY ENGAGED/HI RED THE TRANSPORTERS FOR CARRIAGE OF ITS PRODUCTS BUT ALSO NEGOTIATED THE RA TES/FREIGHT CHARGES WITH THE TRANSPORTERS AND THEREAFTER LOADED AND TRANSPORTED ITS PRODUCTS TO THE PREMISES OF THE DISTRIBUTORS. IT WAS THUS THE ASSESSEE-COMPANY WHICH ENTERED INTO AGREEMENTS WITH TRANSPORTERS FOR CARRIAGE OF GOODS AND THEREBY COMMITTED IT-SELF TO PAY THE AGREED FREIGHT CHARGES TO THE TRANSPORTE RS. THOUGH THE FREIGHT WAS INITIALLY PAID BY THE DISTRIBUTORS AT THE INSTANCE OF THE ASSESSEE-COMPANY, THE FACT REMAINS THAT THE DISTRIBUTORS WERE MERELY PAYING FO R AND ON BEHALF OF THE TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 6 6 ASSESSEE-COMPANY. THEY HAD NEITHER ENGAGED THE TRAN SPORTERS NOR OTHERWISE LIABLE TO PAY FREIGHT CHARGES TO THE TRANSPORTERS N OR ACTUALLY PAID THEM OUT OF THEIR OWN RESOURCES. IN LAW, IT WAS THE ASSESSEE-COMPANY WHICH WAS REQUIRED TO PAY FREIGHT CHARGES WHICH WERE ALSO ACTUALLY PAID BY TH E ASSESSEE THROUGH THE DISTRIBUTORS BY VIRTUE OF AGREEMENTS BETWEEN THE AS SESSEE AND ITS DISTRIBUTORS. THE DISTRIBUTORS WERE ACTING MERELY AS AGENTS OF TH E ASSESSEE AND MAKING THE PAYMENT OF FREIGHT CHARGES ON BEHALF OF THE ASSESSE E. BESIDES, THE VERY FACT THAT THE ASSESSEE HAD CLAIMED THE IMPUGNED EXPENSES AS D EDUCTION SHOWS THAT THE ASSESSEE-COMPANY WAS NOT ONLY LIABLE TO MEET THE SA ME BUT HAD ALSO ACTUALLY MET THE SAME. IT CANNOT THEREFORE BE ACCEPTED THAT THE ASSESSEE WAS NOT REQUIRED TO PAY FREIGHT CHARGES OR THAT IT HAD NOT PAID THEM. T HE MERE FACT THAT THE PAYMENT WAS MADE BY THE DISTRIBUTORS ON BEHALF OF THE ASSES SEE WILL NOT ALTER THE TRUE NATURE, CHARACTER AND SUBSTANCE OF THE TRANSACTION. ALL THE REQUIREMENTS OF SECTION 194C ARE FULFILLED. THEREFORE IT WAS THE STATUTORY RESPONSIBILITY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE OUT OF SUCH PAYMENTS AND PAY T HE SAME TO THE GOVERNMENT. IN THIS VIEW OF THE MATTER, THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE THAT THE DISTRIBUTORS WERE REQUIRED TO DEDUCT TAX AT SOU RCE OUT OF IMPUGNED PAYMENTS IS REJECTED. SINCE THE ASSESSEE HAS FAILED TO DEDUC T TAX AT SOURCE OUT OF IMPUGNED PAYMENTS IN TERMS OF SECTION 194C, THE LD. CIT(A) H AS RIGHTLY CONFIRMED THE IMPUGNED DISALLOWANCE MADE BY THE AO IN TERMS OF SE CTION 40(A)(IA). 10. IN SUPPORT OF HER DECISION, THE LD. CIT(A) HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN PRATAP HOON V. ADDL. CIT, ITA NO. 536/CHANDI/2009 AND THE JUDGMENT OF THE HONBLE SUPREME COURT IN ASSOCIATE CEMENT COMPANY LTD. V. CIT, 120 ITR 444 (SC) IN SUPPORT OF HER DECISION. O N PERUSAL OF THE AFORESAID DECISIONS, WE FIND THAT THE LD. CIT(A) HAS RIGHTLY RELIED UPON THEM IN SUPPORT OF HER DECISION. 11. THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE T HAT THE DISTRIBUTORS HAD DEDUCTED TAX AT SOURCE OUT OF SUCH PAYMENTS AND THE REFORE THE AO WAS NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE DOES NOT CARRY ANY FORCE FOR SEVERAL TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 7 7 REASONS. ONE, SECTION 40(A)((IA) FIXES THE RESPONSI BILITY ON THE ASSESSEE (AND NONE ELSE) CLAIMING DEDUCTION OF EXPENSES TO DEDUCT TAX AT SOURCE AND DEPOSIT THE SAME WITH THE GOVERNMENT. THE AFORESAID STATUTORY C ONDITION IS NOT SATISFIED IN THE PRESENT CASE AND THEREFORE THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION OF THE IMPUGNED EXPENSES. TWO, AS HELD BY THE CIT(A), DISTRIBUTORS HAVE NOT DEDUCTED TAX AT SOURCE. THREE, THE JUDGMENT IN TRAN SMISSION CORPORATION OF AP LTD. V. CIT, 239 ITR 587 (SC) REFERRED TO BY THE LD . AUTHORIZED REPRESENTATIVE IS INAPPLICABLE TO THE FACTS OF THE CASE AND ALSO FOR THE REASON THAT IT HAS NOT BEEN RENDERED IN THE CONTEXT OF SECTION 40(A)(IA). 12. IN VIEW OF THE FOREGOING, GROUND NO. 1 IS DISMI SSED. 13. GROUND NO. 2 TAKEN BY THE ASSESSEE IS AS UNDER: - 2 THE LD. CIT(A) HAS ERRED IN SUSTAINING THE ADDIT ION OF RS. 3,70,836/- BEING THE AMOUNT OF INTEREST HAVING NOT BEEN PAID T O THE BANK WITHIN THE STIPULATED PERIOD AS CONTEMPLATED U/S 43B R. W. EXP LANATION 3D OF THE INCOME-TAX ACT. THE ADDITION IS DELETED. 14. BRIEFLY STATED, THE FACTS GIVING RISE TO THE AF ORESAID GROUND OF APPEAL ARE THAT THE ASSESSEE WAS ENJOYING OVER DRAFT LIMIT IN ITS CC ACCOUNT WITH CENTURION BANK OF PUNJAB, CHANDIGARH IN RESPECT OF WHICH INTE REST AMOUNTING TO RS.3,70,836/- WAS CHARGED BY THE BANK BUT WAS NOT P AID BY THE ASSESSEE TO THE BANK AND CONSEQUENTLY CONVERTED INTO LOAN ACCOUNT. THE AO THEREFORE DISALLOWED THE IMPUGNED INTEREST CLAIMED IN THE P & L ACCOUNT KEEPING IN VIEW OF THE PROVISIONS OF SECTION 43-B READ WITH EXPLANATION 3D . ON APPEAL, THE LD. CIT(A) HAS CONFIRMED THE ORDER PASSED BY THE LD. CIT(A) WITH T HE FOLLOWING OBSERVATIONS: 16 I HAVE PERUSED THE ASSESSMENT ORDER, ASSESSMENT RECORDS, WRITTEN SUBMISSIONS AND HEARD THE CONTENTIONS. I HAVE GONE THROUGH THE COPY OF CC ACCOUNT WHICH IS IN THE ASSESSMENT RECORDS. THIS ACCOUNT IS FOR THE PERIOD 12.5.2004 TO 31.3.2006. IN THIS ACCOUNT, THE RE ARE DEBITS ONLY SHOWING AMOUNTS DRAWN AND INTEREST CHARGED BY BANK. THIS CLEARLY SHOWS THAT THE INTEREST CHARGED BY THE BANK WAS NOT PAID TILL 31.3.2006. THE TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 8 8 ASSESSEE HAS NOT FILED ANY BANK STATEMENT FROM 1.4. 2006 TO THE DUE DATE OF FILING OF RETURN. THE PROVISIONS OF SECTION 43B HAVE BEEN VIOLATED AND THE AO HAS RIGHTLY DISALLOWED THE CLAIM OF PAYMENT OF I NTEREST. THIS GROUND OF THE APPELLANT IS DISMISSED, CONFIRMING THE ADDITION OF RS. 370,836/-. 15. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A) , THE ASSESSEE IN NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD FI LED COPY OF ITS BANK ACCOUNT BEFORE THE LD. CIT(A) AND THEREFORE THE LD. CIT(A) IS INCORRECT IN HER OBSERVATIONS THAT THE ASSESSEE HAD NOT FILED ANY BANK STATEMENT FROM 1.4.2006 TO THE DATE OF FILING OF RETURN OF INCOME AND THEREBY IN COMING TO THE CONCLUSION THAT THE PROVISIONS OF SECTION 43B WERE VIOLATED. IN SUPPORT OF HIS SUBMISSIONS, HE HAS PLACED COPY OF THE ASSESSEES BANK ACCOUNT AT PP. 2 5 TO 31 OF THE PAPER BOOK FILED BEFORE THIS TRIBUNAL. HE URGED THAT THE MATTER SHOU LD BE RESTORED TO THE FILE OF LD. CIT(A) TO ENABLE HIM TO VERIFY THE FACTUAL POSITION AND THEREAFTER PASS AN APPROPRIATE ORDER IN THIS BEHALF IN CONFORMITY WITH LAW. 16. IN REPLY, THE LD. DR SUPPORTED THE ORDER PASSED BY THE AO/CIT(A). 17. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. THE IMPUGNED DISALLOWANCE HAS BEEN MADE U/S 43B REA D WITH EXPLANATION 3D. ACCORDING TO EXPLANATION 3D, DEDUCTION OF ANY SUM B EING INTEREST PAYABLE UNDER CLAUSE (E) OF SEC 43B, SHALL BE ALLOWED IF SUCH INT EREST HAS BEEN ACTUALLY PAID AND ANY INTEREST REFERRED TO IN THAT CLAUSE WHICH HAS B EEN CONVERTED INTO THE LOAN OR ADVANCE SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY P AID. ACCORDING TO THE PROVISO TO SEC 43B, ANY AMOUNT WHICH HAS ACTUALLY BEEN PAID BY THE ASSESSEE ON OR BEFORE THE DUE DATE FOR FURNISHING THE RETURN OF IN COME U/S 139(1) IN RESPECT OF THE PREVIOUS YEAR IN WHICH LIABILITY TO PAY SUCH SU M WAS INCURRED AS AFORESAID AND THE EVIDENCE OF SUCH PAYMENT IS FURNISHED BY THE AS SESSEE ALONG WITH SUCH RETURN. 18. PERUSAL OF THE ORDER PASSED BY THE LD. CIT(A) S HOWS THAT SHE HAS PROCEEDED ON THE BASIS THAT THE ASSESSEE HAS NOT FILED ANY BA NK STATEMENT FROM 1.4.2006 TO THE DUE DATE FIXED FOR FILING OF RETURN U/S 139. TH E CASE OF THE ASSESSEE, ON THE TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 9 9 OTHER HAND, IS THAT IT HAS FILED COPY OF BANK ACCOU NT FOR THE AFORESAID PERIOD BEFORE THE LD. CIT(A). IN THE INTEREST OF JUSTICE, IT IS CONSIDERED APPROPRIATE TO SET ASIDE THE ORDER PASSED BY THE LD. CIT(A) AND RESTOR E THE MATTER TO HIS FILE WITH THE DIRECTION TO VERIFY THE POSITION AND THEREAFTER DIS POSE OFF THE MATTER IN CONFORMITY WITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF HEA RING TO BOTH THE PARTIES. WE ORDER ACCORDINGLY. GROUND NO. 2 IS TREATED AS ALLOW ED FOR STATISTICAL PURPOSES. 19. GROUND NO. 3 TAKEN BY THE ASSESSEE READS AS UND ER: 3 THE LD. CIT(A) HAS ERRED IN SUSTAINING THE ADDIT ION OF RS. 67,420/- BEING AN AMOUNT PAID AS LABOUR CHARGES TO M/S KIRAN ENTERPRISES, IN VIOLATION OF SEC 40(A(IA). THE ADDITION BE DELETED. 20. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. AT THE TIME OF HEARING, THE LD. AUTHORIZED REPRESEN TATIVE FOR THE ASSESSEE DID NOT PRESS THE AFORESAID GROUND. IN THIS VIEW OF THE MAT TER, GROUND NO. 3 TAKEN BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 21 GROUND NO.4 TAKEN BY THE ASSESSEE READS AS UNDER :- 4 THE LD. CIT(A) HAS ERRED WITHOUT APPRECIATING TH E FACTS AND CIRCUMSTANCES OF THE CASE, ERRED IN SUSTAINING THE CAPITALIZATION OF INTEREST OF RS. 5,92,980/- U/S 36(I)(III) OF INCOME-TAX ACT IN THE HANDS OF BADDI UNIT. THE ADDITION BE DELETED. 22. THE FACTS GIVING RISE TO THE AFORESAID GROUND O F APPEAL ARE THAT THE PROFITS AND GAINS OF THE UNIT LOCATED AT BADDI, HP WERE ELI GIBLE FOR SPECIAL RELIEF U/S 80IC AND THEREFORE NON-TAXABLE WHILE PROFITS AND GAINS O F THE UNIT LOCATED AT DERA BASSI IN PUNJAB WERE TAXABLE. THE AO NOTICED THAT UNIT AT BADDI BECAME OPERATIONAL ON 1.1.2006. THE AO FURTHER NOTICED THAT THE TOTAL PRO JECT COST OF BADDI UNIT WAS RS.7,16,94,940/-. ON INQUIRY, THE ASSESSEE EXPLAINE D THAT THE SAID COST OF PROJECT OF BADDI UNIT WAS MET OUT OF LOAN AMOUNTING TO RS. 3.00 CRORES TAKEN FROM SIDBI AND THE REMAINING COST OF PROJECT WAS MET OUT OF SU RPLUS OF EARLIER YEARS, INTEREST- FREE SECURED BORROWINGS, FUNDS FROM CURRENT ASSETS, ETC., AVAILABLE WITH DERA BASSI UNIT. THE ASSESSEE FURTHER EXPLAINED BEFORE THE AO THAT INTEREST RELATING TO THE TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 10 10 SAID LOAN OF RS.3 CRORES TAKEN FROM SIDBI FOR SETTI NG UP BADDI UNIT HAD BEEN CAPITALIZED IN THE HANDS OF BADDI UNIT. THE ASSESSE E CLAIMED BEFORE THE AO THAT THE REMAINING COST OF PROJECT WAS MET OUT OF INTERN AL RESOURCES OF DERA BASSI UNIT AND HENCE THERE WAS NO QUESTION OF CAPITALISING ANY INTEREST OVER AND ABOVE WHAT THE ASSESSEE HAD ALREADY CAPITALIZED IN THE HANDS O F BADDI UNIT. THE AO PROCEEDED TO EXAMINE THE CLAIM OF THE ASSESSEE. ON SCRUTINY OF ACCOUNTS, THE AO FOUND THAT THE FUNDS WERE PROVIDED BY DERA BASSI UN IT TO BADDI UNIT. HE ACCORDINGLY WORKED OUT THE DAY TO DAY BALANCE OF BA DDI UNIT AS APPEARING IN THE BOOKS OF DERA BASSI UNIT UP-TO 31.12.2005, WHICH IS ANNEXED AS ANNEXURE A-4 TO THE ASSESSMENT ORDER. THE AO NOTICED THAT THERE WAS ALWAYS A DEBIT BALANCE IN THE ACCOUNT OF BASSI UNIT AS APPEARING IN THE BOOKS OF DERA BASSI UNIT. HE THEREFORE INFERRED THAT BADDI UNIT WAS CONSISTENTLY ENJOYING FUNDS BELONGING TO DERA BASSI UNIT THROUGH DIVERSION OF INTEREST-BEARI NG FUNDS FROM DERA BASSI UNIT TO BADDI UNIT FOR SETTING UP THE UNIT AT BADDI. FOR TH E REASONS GIVEN IN THE ASSESSMENT ORDER, HE FELT THAT DERA BASSI UNIT HAD DIVERTED ITS INTEREST BEARING FUNDS TO BADDI UNIT UP-TO 31.12.2005 ON WHICH THE A O WORKED OUT INTEREST AT RS.582,625/-. SINCE INTEREST-BEARING FUNDS DIVERTED FROM DERA BASSI UNIT WERE UTILISED BY BADDI UNIT BEFORE THE COMMENCEMENT OF I TS PRODUCTION WITH EFFECT FROM 1.1.2006, THE AO CAPITALISED THE INTEREST AMOUNTING TO RS.5,82,625/- IN RESPECT THEREOF AND CAPITALISED THE SAME IN THE HANDS OF BA DDI UNIT. WHILE DOING SO, THE AO ALSO TOOK NOTE OF THE FACT THAT THE PROFITS OF B ADDI UNIT IN THE YEAR UNDER APPEAL WERE SHOWN AT RS.35.92 LAKHS AGAINST TURNOVE R OF RS.4.67 CRORES GIVING NET PROFIT RATE OF 7.54% IN THE YEAR UNDER APPEAL AS AG AINST PROFITS OF RS.45.11 LAKHS AGAINST TOTAL TURNOVER OF RS.19.65 CRORES GIVING NE T PROFIT OF 2.3% SHOWN IN RESPECT OF DERA BASSI UNIT, WHICH TOO WAS MANUFACTU RING EXACTLY IDENTICAL PRODUCTS LIKE BADDI UNIT. THE AO INFERRED THAT THE ASSESSEE WAS TRYING TO SUPPRESS THE TAXABLE INCOME OF DERA BASSI UNIT BY NOT ALLOCATING /CAPITALISING THE CORRECT AMOUNT OF INTEREST TO BADDI UNIT. IN THIS VIEW OF THE MATT ER, THE AO CAPITALISED THE INTEREST AMOUNTING TO RS.582,625/- IN THE HANDS OF BADDI UNI T. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 11 11 23. ON APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO WITH THE FOLLOWING OBSERVATIONS: 25. I HAVE PERUSED THE ASSESSMENT ORDER, WRITTEN S UBMISSIONS, ASSESSMENT RECORD AND HEARD RIVAL CONTENTIONS ALONG WITH CASES RELIED UPON. I FIND THAT THE APPELLANT HAS SUBMITTED THAT IT HAS INVESTED RS.7,26,94,940/- IN THE BADDI UNIT. TO FUND THE PRO JECT, THE APPELLANT RAISED RS.3 CRORES FROM SIDBI AND BALANCE AMOUNT WAS FUNDE D BY DERA BASSI UNIT. 26. FROM THE PERUSAL OF FINANCIAL STATEMENT OF DERA BASSI UNIT, I FIND THAT THE APPELLANT RAISED ADDITIONAL WORKING CAPITAL LOA N OF RS.2 CRORES FROM THE BANK WHILE THE TURNOVER OF THE DERABASSI UNIT DID N OT INCREASE IN PROPORTION TO THE ADDITIONAL WORKING CAPITAL RAISED. IN OTHER WORDS, AT A TOTAL WORKING CAPITAL OF RS.89,22,851/- ON 31.3.2005, TURNOVER OF DERABASSI UNIT WAS 277695543/- FOR THE PREVIOUS ASSESSMENT YEAR 2005-0 6. ON THE OTHER HAND, DURING THE YEAR UNDER CONSIDERATION, THE WORKING CA PITAL LIMIT WAS INCREASED FROM RS.89.22 LACS TO RS.272.28 LACS WHILE THE TURN OVER FOR THE YEAR UNDER CONSIDERATION REDUCED FROM RS.277.69 LACS TO RS.196 .57 LACS. IT IS GENERALLY ACCEPTED BUSINESS PRINCIPLE THAT WORKING CAPITAL LO AN IS RAISED TO INCREASE THE TURNOVER WHILE IN THE INSTANT CASE, THE TURNOVE R ON THE CONTRARY HAS COME DOWN WHILE WORKING CAPITAL LOAN INCREASED 3 TI MES. IT SHOWS THAT FUNDS FOR DERABASSI UNIT WERE DIVERTED TO BADDI UNI T FOR PURPOSE OF SETTING UP THE PROJECT RATHER THAN UTILIZING THE SAME FOR I NCREASE IN SALE/PURCHASE OF DERABASSI UNIT. 27. THE ASSESSING OFFICER HAS CALCULATED THE INTERE ST ON THE FUNDS UTILIZED BY BADDI UNIT ON DAYS PRODUCT METHOD, WHIC H IS WELL ACCEPTED METHOD FOR CALCULATING INTEREST ON THE FUNDS ON DAI LY BASIS. THEREFORE I HOLD THAT THE INTEREST CAPITALIZED/DISALLOWED AMOUNTING TO RS. (55,87,625/- + RS.2,52,051/- + RS.2,053/-) HAS BEEN CORRECTLY DONE . 28. IT IS EVIDENT THAT THE APPELLANT HAS FUNDED THE BALANCE AMOUNT OF PROJECT INVESTMENT. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 12 12 29. FURTHER, I DO NOT FIND ANY MERIT IN HE SUBMISSI ONS OF THE APPELLANT REGARDING THE FUNDING OF THE PROJECT IN EXCESS OF T HE CAPITAL INVESTMENT MADE OVER THE TERM LOAN RAISED. IN OTHER WORDS, THE APPELLANT MADE A TOTAL INVESTMENT OF RS.7.17 CRORES WHILE THE APPELLANT RA ISED JUST RS.5 CRORES FROM SIDBI. APPELLANT FAILED TO PRODUCE ANY EVIDENC E HOW THE BALANCE AMOUNT WAS FUNDED. 24. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A) , THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, HE HAS FILED DETAILS OF SOURCES OF FUNDING OF BADDI UNIT, A COPY OF WHICH WAS EARLIER FILED BEFORE THE LD. CIT(A). REFERRING TO THE AFORESAID DETAILS, THE LD. AUTHORI ZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT TOTAL PROJECT COST OF BADDI UNIT WAS RS.7,16,94,940/- OUT OF WHICH LOAN AMOUNTING TO RS.3.00 CRORES ALONE WAS TAKEN FROM SIDBI AND THE REMAINING COST WAS MET OUT OF SURPLUS OF EARLIER YE ARS, INTEREST-FREE BORROWINGS, FUNDS FROM CURRENT ASSETS, ETC. HE ALSO INVITED OUR ATTENTION TO THE DETAILS OF CAPITALIZATION OF EXPENSES ON BADDI UNIT UPTO 31.3. 2005, COPY OF WHICH WAS EARLIER FILED BEFORE THE LD. CIT(A). PERUSAL OF THE AFORESA ID DETAILS SHOWS THAT LOAN OF RS. 3.00 CRORES TAKEN FROM SIDBI ALONE WAS UTILISED TO PARTLY MEET THE TOTAL COST OF PROJECT OF BADDI UNIT ON WHICH INTEREST WAS PAID. 25. IN REPLY, THE LD. DR SUPPORTED THE ORDER PASSED BY THE AO/CIT(A). 26. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. FOR THE SAKE OF CLARITY, THE ISSUE UNDER APPEAL NEE DS TO BE BROUGHT INTO FOCUS. THE AO HAS NOT DISALLOWED INTEREST FOR WANT OF COMMERCI AL EXPEDIENCY IN DIVERTING FUNDS INCLUDING INTEREST-BEARING FUNDS FROM DERA BA SSI UNIT (A TAXABLE UNIT) TO BADDI UNIT (A NON-TAXABLE UNIT) FOR SETTING UP BADD I UNIT BEFORE COMMENCEMENT OF COMMERCIAL PRODUCTION IN BADDI UNIT. WHAT THE AO HA S DONE IS THAT HE HAS ALLOCATED THE FUNDS INCLUDING INTEREST-BEARING FUND S DIVERTED BY THE ASSESSEE FROM ITS DERA BASSI UNIT TO BADDI UNIT AND CAPITALIZED T HE INTEREST ON SUCH FUNDS IN TERMS OF THE PROVISO TO SECTION 36(1)(III) AS SUCH FUNDS WERE UTILIZED FOR SETTING UP BADDI UNIT BEFORE IT STARTED COMMERCIAL PRODUCTION. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 13 13 27. AS STATED EARLIER, THE PROFITS OF BADDI UNIT AR E ELIGIBLE FOR SPECIAL RELIEF U/S 80IC AND THEREFORE NON-TAXABLE WHILE THE PROFITS OF DERA BASSI UNIT ARE TAXABLE. BOTH THE UNITS, NAMELY, BADDI UNIT AND DERA BASSI U NIT ARE ENGAGED IN PRODUCTION OF EXACTLY IDENTICAL PRODUCTS UNDER THE SAME MANAGE MENT. QUITE OBVIOUSLY, THE NET PROFIT MARGIN OF BOTH THE UNITS CANNOT BE SIGNI FICANTLY DIFFERENT FROM EACH OTHER. IT IS STATED IN THE ASSESSMENT ORDER THAT TH E ASSESSEE HAS SHOWN NET PROFIT RATE OF 7.5% FROM BADDI UNIT WHILE IT HAS SHOWN NET PROFIT RATE OF 2.3% FROM DERA BASSI UNIT. IT IS QUITE EVIDENT THAT THE ASSESSEE H AS SHOWN SUBSTANTIALLY HIGHER RATE OF NET PROFIT OF 7.54% IN RESPECT OF BADDI UNI T THAN NET PROFIT RATE OF 2.3% ALONE SHOWN IN RESPECT OF DERA BASSI UNIT. THE CASE OF THE AO IS THAT THE ASSESSEE HAS DELIBERATELY SHOWN HIGHER RATE OF NET PROFIT IN RESPECT OF BADDI UNIT AS IT WAS NON-TAXABLE THAN THE NET PROFIT RATE RECORDED IN RE SPECT OF DERA BASSI UNIT AS THE PROFITS OF DERA BASSI UNIT WERE TAXABLE. ACCORDING TO THE AO, THE MODUS OPERANDI OF THE ASSESSEE WAS TO DIVERT MOST OF THE EXPENSES RELATING TO BADDI UNIT TO DERA BASSI UNIT SO AS TO SHOW HIGHER RATE OF NET PROFIT AS IT WAS NON-TAXABLE. IT IS THE CASE OF THE AO THAT TOTAL PROJECT COST OF BADDI UNI T WAS MET NOT ONLY OUT OF LOAN OF RS.3.00 CRORES TAKEN FROM SIDBI BUT ALSO BY DIVERTI NG INTEREST-BEARING FUNDS AVAILABLE WITH DERA BASSI UNIT AND THEREFORE THE FU NDS SO DIVERTED TO BADDI UNIT WERE REQUIRED TO BE ALLOCATED TO BADDI UNIT AND CON SEQUENTLY THE ELEMENT OF INTEREST RELATING TO SUCH FUNDS DIVERTED FROM DERA BASSI UNIT TO BADDI UNIT WAS ALSO REQUIRED FIRST TO BE ALLOCATED TO AND THEREAFTER CA PITALIZED IN THE HANDS OF BADDI UNIT IN TERMS OF THE PROVISO TO SECTION 36(1)(III) AS SUCH FUNDS WERE UTILIZED IN CAPITAL FIELD FOR MEETING THE COST OF PROJECT OF BA DDI PROJECT BEFORE THE COMMENCEMENT OF COMMERCIAL PRODUCTION IN BADDI UNIT . THE CASE OF THE ASSESSEE, ON THE OTHER HAND, IS THAT IT HAD BORROWED RS.3 CRO RES ALONE FROM SIDBI TO PARTLY MEET THE COST OF PROJECT OF BADDI UNIT AND THEREFOR E HAD CAPITALIZED INTEREST RELATING THERETO IN THE HANDS OF BADDI UNIT. ACCORD ING TO THE ASSESSEE, THE AO WAS NOT JUSTIFIED IN ALLOCATING THE BALANCE AMOUNT OF T OTAL COST OF PROJECT OF BADDI UNIT TO BADDI UNIT AND IN CAPITALIZING INTEREST ON SUCH FUNDS IN THE HANDS OF BADDI UNIT TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 14 14 AS SUCH FUNDS WERE PROVIDED TO BADDI UNIT BY DERA B ASSI UNIT OUT OF ITS INTEREST- FREE FUNDS. 28. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE BROUGHT ON RECORD AND MORE PARTICULARLY THE FINDINGS RECORDED BY THE CIT( A) IN PARAGRAPHS 26-29 IN HER APPELLATE ORDER (REPRODUCED ABOVE), IT IS QUITE OBV IOUS THAT THE PROJECT COST OF THE BADDI UNIT WAS MET NOT ONLY BY THE LOAN OF RS.3.00 CRORES TAKEN FROM SIDBI FOR SETTING UP THE PROJECT AT BADDI BUT ALSO BY INTERES T-BEARING FUNDS AND OTHER FUNDS DIVERTED FROM DERA BASSI UNIT TO BADDI UNIT. IT IS FOR THIS REASON THAT DEBIT BALANCE WAS CONTINUOUSLY STANDING IN THE ACCOUNTS OF BADDI UNIT AS APPEARING IN THE BOOKS OF DERA BASSI UNIT, WHICH MEANS THAT FUNDS WERE DIV ERTED FROM DERA BASSI UNIT TO MEET THE COST OF PROJECT OF BADDI UNIT. IT IS ALSO NOT IN DISPUTE THAT DERA BASSI UNIT HAD TAKEN INTEREST-BEARING LOANS AMOUNTING TO RS. 2 CRORES IN THE YEAR UNDER APPEAL. TOTAL AMOUNT OF INTEREST-BEARING FUNDS IN T HE ACCOUNTS OF DERA BASSI UNIT STOOD AT RS.272.28 LAKHS. THE ASSESSEE HAD TO BORRO W FUNDS FOR DERA BASSI UNIT TO MEET THE PROJECT COST OF BADDI UNIT AND ALSO TO SUP PLEMENT THE FUNDS OF DERA BASSI UNIT WHICH STOOD DEPLETED BY THE FUNDS DIVERT ED TO BADDI UNIT. IF THERE HAD BEEN NO DIVERSION OF FUNDS INCLUDING INTEREST-BEARI NG FUNDS OF RS.272.28 LAKHS FROM DERA BASSI UNIT TO BADDI UNIT, THERE WOULD HAV E BEEN NO OCCASION TO BORROW OR RETAIN INTEREST-BEARING FUNDS OF SUCH MAGNITUDE IN DERA BASSI UNIT. ON THE FACTS BROUGHT ON RECORD BY THE AO/CIT(A), IT IS QUITE OBV IOUS THAT FUNDS INCLUDING INTEREST-BEARING FUNDS WERE DIVERTED FROM DERA BASS I UNIT FOR SETTING UP THE PROJECT AT BADDI AND THEREFORE INTEREST ALLOCABLE T O SUCH FUNDS WAS LIABLE TO BE ALLOCATED TO AND CAPITALIZED IN THE HANDS OF BADDI UNIT IN TERMS OF THE PROVISO TO SECTION 36(1)(III) AS SUCH FUNDS WERE UTILIZED IN C APITAL FIELD FOR MEETING THE COST OF PROJECT OF BADDI UNIT BEFORE THE COMMENCEMENT OF CO MMERCIAL PRODUCTION IN BADDI UNIT. THE ACTION OF THE AO IN ALLOCATING THE IMPUGN ED FUNDS TO BADDI UNIT AND CONSEQUENTLY HIS FURTHER ACTION IN ALLOCATING INTER EST THEREON TO BADDI UNIT AND CAPITALIZING THE SAME IN TERMS OF THE PROVISO TO SE CTION 36(1)(III) IS IN ORDER. 29. THE SUBMISSION OF THE ASSESSEE THAT THE PROJECT COST OF THE BADDI UNIT WAS MET PARTLY BY LOAN OF RS. 3.00 CRORES TAKEN FROM SI DBI AND THE REMAINING AMOUNT TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 15 15 FROM INTERNAL ACCRUALS OR INTEREST-FREE FUNDS AND T HEREFORE THE AO WAS NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE, CANNOT BE ACCE PTED. IN CIT V. ABHISHEK INDUSTRIES, 286 ITR 1 (P&H), THE HONBLE JURISDICTI ONAL HIGH COURT HAS HELD THAT ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS, ETC. DO NOT HAVE ANY DIFFERENT COLOUR. WHATEVER ARE THE REC EIPTS IN THE BUSINESS, THEY HAVE THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SE PARATE IDENTIFICATION. SOURCES HAVE NO CONCERN WHATSOEVER. THOUGH THE AFORESAID JU DGMENT HAS BEEN RENDERED IN THE CONTEXT OF SECTION 36(1)(III), THE OBSERVATI ONS OF THE HONBLE HIGH COURT AS REFERRED TO ABOVE ARE QUITE APPOSITE ON THE FACTS A ND IN THE CIRCUMSTANCES OF THE CASE BEFORE US. BADDI UNIT AND DERA BASSI UNIT ARE SISTER UNITS OF THE SAME ASSESSEE. DERA BASSI UNIT HAS DIVERTED PART OF ITS FUNDS INCLUDING INTEREST-BEARING FUNDS TO BADDI UNIT. THE FUNDS SO TRANSFERRED HAVE COST. IF THE FUNDS DIVERTED ARE BORROWED FUNDS, THEN THE COST IS INTEREST PAID BY T HE UNIT DIVERTING ITS FUNDS. IF IT IS ITS OWN MONEY (E.G., INTERNAL ACCRUALS, ETC.), T HE COST IS THE AMOUNT OF INTEREST FOREGONE BY THE UNIT DIVERTING ITS FUNDS. QUITE OBV IOUSLY, NOT ONLY THE FUNDS SO TRANSFERRED BY DERA BASSI UNIT TO BADDI UNIT BUT AL SO INTEREST THEREON WOULD NEED TO BE ALLOCATED TO BADDI UNIT OTHERWISE THE PROFITS OF BADDI UNIT, WHICH ARE EXEMPT FROM TAX, WOULD STAND INFLATED WHILE THE PROFITS OF TAXABLE UNIT BEING DERA BASSI UNIT WOULD STAND ARTIFICIALLY SUPPRESSED. IN THIS V IEW OF THE MATTER, THE ACTION OF THE AO/CIT(A) IN ALLOCATING THE IMPUGNED FUNDS AND INTEREST THEREON TO BADDI UNIT AND THEREBY CAPITALISING THE SAME IN TERMS OF THE P ROVISO TO U/S 36(1)(III) IS HELD TO BE IN ORDER. GROUND NO. 4 TAKEN BY THE ASSESSEE IS DISMISSED. 30. GROUND NO. 5 TAKEN BY THE ASSESSEE READS AS UND ER: 5 THE LD. CIT(A) HAS ERRED IN SUSTAINING THE REDUC TION OF CLAIM U/S 80IC OF THE INCOME-TAX ACT FROM RS.35,92,729/- TO R S.4,66,595/-. THE CLAIM OF THE APPELLANT BE ACCEPTED. 31. BRIEFLY STATED, THE FACTS GIVING RISE TO GROUND NO. 5 ARE THAT THE ASSESSEE HAD INCURRED SEVERAL EXPENSES WHICH WERE COMMON TO BOTH THE UNITS. DETAILS OF SUCH EXPENSES ARE GIVEN IN THE ASSESSMENT ORDER AS WELL AS THE APPELLATE ORDER TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 16 16 PASSED BY THE FIRST APPELLATE AUTHORITY. SINCE THE EXPENSES WERE COMMON TO BOTH THE UNITS AND BOTH THE UNITS WERE ENGAGED IN PRODUC ING EXACTLY IDENTICAL PRODUCTS, THE AO PROPOSED TO ALLOCATE COMMON EXPENSES ON PRO- RATA BASIS TO BOTH THE UNITS SO AS TO CORRECTLY WORK OUT THE PROFITS IN RESPECT OF TAXABLE UNIT, I.E., DERA BASSI UNIT AND EXEMPT UNIT, I.E., BADDI UNIT. AFTER HEARI NG THE ASSESSEE, THE AO WORKED OUT THE TOTAL COMMON EXPENSES AT RS.2,08,89,444/- O UT OF WHICH HE ALLOCATED RS.40,77,619/- TO BADDI UNIT AS AGAINST RS.12,14,05 0/- ALLOCATED BY THE ASSESSEE, FOR THE REASONS GIVEN IN THE ASSESSMENT ORDER. ON A PPEAL, THE LD. CIT(A) HAS CONFIRMED THE ACTION OF THE AO WITH THE FOLLOWING O BSERVATIONS:- 31. I FIND THAT THE ASSESSEE IN HIS SUBMISSIONS HA S STATED THAT MOST OF THE PRODUCTS MANUFACTURED IN DERABASSI UNIT AND BAD DI UNIT ARE ALMOST THE SAME. FURTHER, I FIND THAT THE EXPENDITURE WHICH AR E INDIRECT BY NATURE SUCH AS SALARIES, DIRECTOR REMUNERATION, PRINTING AND ST ATIONERY, POST AND TELEGRAPH, LEGAL AND PROFESSIONAL CHARGES, RENT, ET C. ARE COMMON WHICH ARE INCURRED FOR THE BUSINESS AS A WHOLE AND NOT WITH R ESPECT TO A PARTICULAR UNIT. 32. I AM OF THE VIEW THAT COMMON EXPENDITURE MUST H AVE BENEFITED BOTH THE UNITS AND BENEFITS ARE GENERALLY TRANSLATED IN TERMS OF REVENUE EARNED BY RESPECTIVE UNITS. FOR INSTANCE, A SUM OF RS. 27, 02,256/- WAS INCURRED IN R&D EXPENSE OUT OF WHICH RS. 26,52,787/- WAS DEBITE D TO DERABASSI UNIT AND BALANCE OF RS. 49,469/- WAS DEBITED TO BADDI UN IT. SINCE THE APPELLANT HAS ADMITTED THAT PRODUCTS MANUFACTURES ARE COMMON, A REASONABLE CONCLUSION CAN BE DRAWN THAT BOTH THE UNITS DERIVED ALMOST SIMILAR BENEFITS FROM R&D. I FIND THAT ALLOCATION OF EXPENDITURE ON THE BASIS OF TURNOVER/REVENUE IS THE MOST ACCEPTABLE METHOD. THE CONTENTION OF THE ASSESSEE THAT BADDI UNIT OPERATED FOR 3 MONTHS DOES NOT HAVE ANY MERIT FOR THE REASON THAT THE PERIOD EFFECT HAS ALREADY BEEN TAKEN INTO CONSIDERATION AS TURNOVER OF BADDI UNIT IS FOR 3 MONTHS ONLY AND THEREFORE ALLOCATION DONE BY THE AO IS BASED ON 3 MONTHS TURNOVER FOR BADDI U NIT AND 12 MONTHS TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 17 17 TURNOVER FOR DERABASSI UNIT. AS SUCH, NO FURTHER AD JUSTMENT IS REQUIRED AS THE EFFECT OF PERIOD HAS ALREADY BEEN TAKEN INTO CO NSIDERATION . 33. FURTHER WHEN NATURE OF THE PRODUCTS ARE COMMON, THEN SIGNIFICANT DIFFERENCE IN THE NET PROFIT RATES OF BADDI UNIT (7 .54%) AND DERABASSI UNIT (2.3%) CORROBORATE THE FACT THAT ALLOCATION OF EXPE NSES WAS NOT PROPER. 34. IN VIEW OF THE ABOVE DISCUSSION, THE ACTION TAK EN BY THE AO BY REDUCING THE CLAIM U/S 80IC FROM RS.35,92,729/- TO RS.4,66,595/- IS CONFIRMED. 32. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A) , THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT COMMON EXPENSES WER E NOT LIABLE TO BE ALLOCATED TO BADDI UNIT AS THE ACCOUNTS WERE SEPARATELY PREPA RED FOR BADDI UNIT IN WHICH SUCH EXPENSES WERE NOT SHOWN. HE FURTHER SUBMITTED THAT THE ACCOUNTS OF BADDI UNIT WERE NOT REJECTED BY THE AO AND HENCE THE AO W AS NOT JUSTIFIED IN ALLOCATING THE COMMON EXPENSES ON PRO-RATA BASIS TO BADDI UNIT . ACCORDING TO HIM, THE AO OUGHT TO HAVE INVOKED SECTION 142(2A) OF THE INCOME -TAX ACT IF HE WANTED TO MAKE THE IMPUGNED ALLOCATION. HE ALSO REFERRED TO T HE PROVISIONS OF SECTION 80IC(7); 80IA (5); AND PROVISO THE SECTION 80IA(8) IN SUPPORT OF HIS SUBMISSIONS. 33. IN REPLY, THE LD. DR SUPPORTED THE ORDER PASSED BY THE AO/CIT(A). 34. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. AS ALREADY STATED EARLIER, BOTH THE UNITS, NAMELY, BADDI UNIT AND DERA BASSI UNIT, ARE ENGAGED IN THE PRODUCTION OF EXACTLY IDENTICAL PRODUCTS. THE ASSESSEE- COMPANY HAS INCURRED COMMON EXPENSES DETAILS OF WHI CH HAVE BEEN GIVEN IN THE ASSESSMENT ORDER AS WELL AS IN THE ORDER OF LD. CIT (A). WE HAVE PERUSED THEM. IN OUR VIEW, THE ASSESSEE HAS INCURRED SEVERAL EXPENSE S HIGHLIGHTED BY THE AO/CIT(A) IN THEIR RESPECTIVE ORDERS, WHICH ARE COM MON TO BOTH THE UNITS. IF SUCH EXPENSES, WHICH ARE COMMON TO BOTH THE UNITS, ARE A LLOCATED TO ONE UNIT ALONE, IT WILL ARTIFICIALLY REDUCE THE PROFITS OF THAT UNIT A ND THEREBY INCREASE THE PROFITS OF THE OTHER UNIT TO WHICH SUCH EXPENSES ARE NOT ALLOC ATED. WHAT IS TAXABLE OR TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 18 18 EXEMPT FROM TAX IS PROFIT AND NOT ARTIFICIALLY INFL ATED OR DEFLATED PROFITS. COMMON EXPENSES ARE THEREFORE REQUIRED TO BE ALLOCATED ON PRO-RATA BASIS TO BOTH THE UNITS. THE LD. CIT(A) HAS CORRECTLY APPRECIATED THE FACTUAL AND LEGAL ASPECTS OF THE CASE WHILE DECIDING THE ISSUE UNDER APPEAL. 35. THE PLEA OF THE ASSESSEE THAT THE AO WAS NOT JU STIFIED IN ALLOCATING COMMON EXPENSES ON PRO-RATA BASIS TO BADDI UNIT OVE R AND ABOVE THOSE SHOWN IN THE BOOKS OF BADDI UNIT WITHOUT REJECTING THE BOOKS OF BADDI UNIT, HAS NO SUBSTANCE. THE AO HAS NEITHER DOUBTED THE CORRECTNE SS OF THE EXPENDITURE NOR HAS DISALLOWED THE SAME ON THAT BASIS. IT IS NOT A CASE OF DISALLOWANCE OF EXPENSES. IT IS A CASE OF MERE ALLOCATION OF COMMON EXPENSES TO BOTH THE UNITS. THEREFORE THERE WAS NO NECESSITY FOR SPECIFICALLY R EJECTING THE BOOKS AS SUCH. WHAT THE AO HAS DONE IS TO ALLOCATE COMMON EXPENSES ON PRO-RATA BASIS TO BOTH THE UNITS. BY IMPLICATION, HE HAS NOT ACCEPTED THE ALLOCATION OF COMMON EXPENSES AS RECORDED IN THE BOOKS OF THE ASSESSEE INCLUDING THOSE OF BADDI UNIT. THE ASSESSEE HAS PLACED NO MATERIAL BEFORE US TO SHOW T HAT THE IMPUGNED EXPENSES ARE NOT COMMON TO BOTH THE UNITS OR THAT THEY EXCLU SIVELY RELATE TO DERA BASSI UNIT. 36. THE REFERENCE MADE BY THE LD. AUTHORIZED REPR ESENTATIVE FOR THE ASSESSEE TO SECTION 80IC(7); 80IA (5); AND PROVISO THE SECTI ON 80IA(8) IS COMPLETELY MISPLACED FOR THE REASON THAT WHAT IS ENTITLED TO R ELIEF U/S 80IC(1) IS PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN ENTERPRISE F ROM SPECIFIED BUSINESS. PROFITS REPRESENT EXCESS OF REVENUE OVER EXPENDITURE. THERE FORE ALL EXPENSES, WHETHER DIRECT OR INDIRECT OR COMMON, WOULD REQUIRE PROPER ALLOCATION. THIS IS INHERENT IN THE SCHEME OF SECTION 80IC(1) BY WHICH PROFITS AND PROFITS ALONE ARE ENTITLED TO RELIEF. THEREFORE THE ACTION OF THE ASSESSEE IN ALL OCATING COMMON EXPENSES TO TAXABLE UNIT ALONE IS INCORRECT. SINCE THE ASSESSEE HAS INCURRED COMMON EXPENSES FOR BOTH THE UNITS, THE AO HAS RIGHTLY ALL OCATED THEM ON PRO-RATA BASIS TO BOTH THE UNITS INSTEAD OF ALLOCATING TO ONE UNIT AL ONE. 37. IN VIEW OF THE FOREGOING, WE CONFIRM THE ORDER PASSED BY THE CIT(A) IN THIS BEHALF. GROUND NO. 5 TAKEN BY THE ASSESSEE IS DISMI SSED. TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 19 19 38. GROUND NO. 6 TAKEN BY THE ASSESSEE READS AS UND ER:- 6 THE LD. CIT(A) HAS WITHOUT APPRECIATING, THE FAC TS SUBMISSION AND EVIDENCE PLACED ON RECORD, ERRED IN SUSTAINING THE ADDITION OF RS. 6,05,187/- BEING EXPANSES INCURRED ON INWARD FREIGH T CHARGES IN VIOLATION OF SEC 40(A)(IA) OF THE INCOME-TAX ACT. THE CLAIM OF T HE ASSESSEE BE ALLOWED. 39. BRIEFLY STATED, THE FACTS GIVING RISE TO THE AF ORESAID GROUND OF APPEAL ARE THAT THE AO DISALLOWED A SUM OF RS. 6,05,187/- BEIN G THE EXPENSES ON FREIGHT INWARD CLAIMED BY THE ASSESSEE, IN TERMS OF SECTION 40(A)(IA) IN RESPECT OF BADDI UNIT. ON APPEAL, THE LD. CIT(A) HAS CONFIRMED THE A CTION OF THE AO WITH THE FOLLOWING OBSERVATIONS: 46. I HAVE PERUSED THE ASSESSMENT ORDER, SUBMISSIO NS AND MATERIAL ON RECORD AND I FIND THAT IT IS EVIDENT FROM THE TABLE -2 (AT PAGE 5, PAGE-3 UNDER GROUND NO.1 OF THIS APPELLATE ORDER) THAT THE CLAIM OF THE APPELLANT THAT PAYMENT EXCEEDING RS.50,000/- TO A SINGLE TRA NSPORTER WAS NOT MADE IS INCORRECT. FURTHER THE APPELLANT FAILED TO PLACE ON RECORD ANY MATERIAL OR EVIDENCE TO CONTRADICT THE FINDING OF THE ASSESSING OFFICER THAT FREIGHT INWARD CHARGES PAID TO EACH TRANSPORTER WERE LESS T HAN RS.50,000/- IN A YEAR. 47. IT IS IMPORTANT TO NOTE THAT PROVISIONS OF SECT ION 194C(3)(I) HAVE BEEN AMENDED W.E.F. 01.10.2004 T INCLUDE THE INSTAN CES WHERE THE AGGREGATE OF THE AMOUNTS CREDITED OR PAID OR LIKELY TO BE CREDITED OR PAID DURING THE YEAR EXCEEDS RS.50,000/-. SINCE IN THIS CASE, TOTAL AMOUNT CREDITED DURING THE YEAR EXCEEDS RS.50,000/-, THE P ROVISIONS OF SECTION 194C ARE ATTRACTED. THE SUM OF RS.6,05,187/- DISALL OWED U/S 40()(IA) OF THE INCOME TAX ACT IS THEREFORE CONFIRMED 40. WE HAVE HEARD BOTH THE PARTIES. THE LD. CIT(A) HAS GIVEN COGENT REASONS FOR CONFIRMING THE IMPUGNED DISALLOWANCE. THE ASSES SEE HAS NOT BEEN ABLE TO SHOW AS TO HOW THE ORDER PASSED BY THE CIT(A) IS ER RONEOUS. IN THIS VIEW OF THE TORQUE PHARMACEUTICALS PVT. LTD., CHD. V. ADDITIONA L CIT ITA NO.1105/CHANDI/2010 20 20 MATTER, THE ORDER OF THE CIT(A) IN THIS BEHALF IS C ONFIRMED. GROUND NO. 6 IS DISMISSED. 41. GROUND NO.7 TAKEN BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE CIT(A) CONFIRMING LEVY OF INTEREST U/S 234B/234C/23 4D. AT THE TIME OF HEARING, IT WAS FAIRLY SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE LEVY OF INTEREST IS CONSEQUENTIAL AD MANDATORY. LD. CIT(A) HAS REFERRED TO THE JUDGMENTS OF THE HONBLE JURISDICTIONAL HIGH COURT AND SUPREME COURT IN SUPPORT OF HER DECISION. WE ARE IN AGREEMENT WITH HER DECISION AND THEREFORE CONFIRM HER ORDER IN THIS BEHALF. GROUND NO.7 IS DISMISSED. 42. IN VIEW OF THE FOREGOING, THE APPEAL FILED BY T HE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 4 TH JULY 2011 SD/- SD/- (SUSHMA CHOWLA) (D K SRIVASTAVA) JUDICIAL MEMBER ACCOUNTANT ME MBER CHANDIGARH: THE 4TH JULY 2011 SURESH COPY TO: 1. THE APPELLANT, M/S TORQUE PHARMACEUTICALS PVT. L TD, CHANDIGARH 2. THE RESPONDENT, ADDL CIT, R-1, CHANDIGARH 3. THE CIT(A), CHANDIGARH 4. THE LD. CIT, CHANDIGARH 5. THE D.R, INCOME-TAX DEPARTMENT, CHANDIGARH ASSISTANT REGISTRAR, ITAT, CHANDIGARH
