Rampex Labs Pvt. Ltd., Hyderabad V. DcIT, Hyderabad

ITA 1130/HYD/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1326 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Keywords: Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1130/HYD/2009 ASSESSMENT YEAR 2006-07 M/S. RAMPEX LABS PVT. LTD. HYDERABAD PAN: AACCR7394H VS. THE DCIT CIRCLE-3(1) HYDERABAD APPELLANT RESPONDENT ASSESSEE BY: SRI A. SRINIVAS REVENUE BY: SRI M.H. NAIK DATE OF HEARING: 02.01.2013 DATE OF PRONOUNCEMENT: 22.02.2013 O R D E R O R D E R O R D E R O R D E R PER CHANDRA POOJARI, AM: PER CHANDRA POOJARI, AM: PER CHANDRA POOJARI, AM: PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-IV, HYDERABAD DATED 15.5.2009. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS NOT JUSTIFIED IN DISMISSING THE APPEAL, BOTH IN LAW AND ON FACTS. 2. THE LEARNED CIT(A) IS NOT JUSTIFIED IN CONFIRMING T HE ORDER OF THE ASSESSING OFFICER REJECTING THE CLAIM OF THE APPELLANT U/S. 35(1)(IV). 3. THE LEARNED CIT(A) IS NOT JUSTIFIED IN NOT CONSIDER ING THE ALTERNATIVE PLEA OF DEDUCTION U/S. 37. 4. FOR THE GROUNDS MENTIONED ABOVE AND ANY GROUND OR GROUNDS THAT MAY BE URGED DURING THE COURSE OF HEARING, THE APPELLANT PRAYS THAT THE HONBLE INCOM E TAX APPELLATE TRIBUNAL BE PLEASED TO DIRECT THE ASSESSING OFFICER TO ALLOW THE APPELLANT'S CLAIM OF RS. 41,92,860 U/S. 35(1)(IV). IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 2 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE CLAI MED PRODUCT DEVELOPMENT EXPENSES AT RS. 41,92,860. THE ASSESSE E IS ENGAGED IN THE BUSINESS OF SUPPLY OF PHARMACEUTICALS, BULK DRUGS A ND INTERMEDIARIES TRADING. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE COMPA NY DOES NOT HAVE ANY MANUFACTURING ACTIVITY AS IT GIVES ITS ENTIRE WORKS TO OTHERS ON JOB WORK BASIS. HE FOUND THAT THOUGH THE RAW MATERIALS ARE SUPPLIED BY THE ASSESSEE AND THE PRODUCTS ARE GOT MANUFACTURED AS PER THE SPECIFICAT ION AND REQUIREMENT OF THE ASSESSEE, ALL SUCH WORK IS GOT DONE ON JOB WORK BASIS. STILL, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD SHOWN AN EXPE NDITURE OF RS. 41,92,860/- INCURRED TOWARDS PRODUCT DEVELOPMENT IN ITS P&L ACCOUNT. OUT OF THE SAME, RS. 9,01,421/- WERE DEBITED UNDER THE HEA D MISCELLANEOUS EXPENSES WRITTEN OFF IN THE COMPUTATION OF INCOME W HILE THE REMAINING AMOUNT RS. 32,91,439/- HAD BEEN REDUCED. THE TOTAL EXPENDITURE OF RS. 11,92,860/- TOWARDS PRODUCT DEVELOPMENT EXPENDITURE WAS CLAIMED U/S. 35 OF THE ACT. 4. IT WAS CONTENDED BEFORE THE ASSESSING OFFICER THAT OUT OF THE ABOVE AMOUNT, RS. 36,63,807/- HAD BEEN PAID TO M/S. SHIVA CHEMICAL INDUSTRIES. A BILL ISSUED BY THE SAID CONCERN DATED 10.10.2000 WA S ALSO SUBMITTED BY THE REPRESENTATIVE OF THE ASSESSEE. HOWEVER, THE ASSESS ING OFFICER NOTED THAT THE SAME DID NOT CONTAIN ANY VAT/APGST NO. ETC. ACCORD INGLY, HE REQUIRED THE ASSESSEE'S REPRESENTATIVE TO JUSTIFY THE SAID BILL AS ALSO TO SUBMIT THE AGREEMENT WITH BILLS/VOUCHERS IN SUPPORT OF THE CLA IM OF SUCH EXPENDITURE. DESPITE HAVING BEEN GIVEN SEVERAL OPPORTUNITIES TO ESTABLISH THE DETAILS LIKE THE USAGE OF THE KNOW-HOW AND THE SALE OF THE PRODU CT DEVELOPED, THE ASSESSEE COULD NOT JUSTIFY EITHER THE GENUINENESS O R THE EXISTENCE OF ANY AGREEMENT WITH M/S. SHIVA CHEMICAL INDUSTRIES. THE ACTUAL INVOLVEMENT OF THE SAID CONCERN IN ANY PRODUCT DEVELOPMENT COULD NOT B E PROVED SO AS TO JUSTIFY SUCH CLAIM. HE OBSERVED THAT THE ASSESSEE'S CLAIM C OULD NOT BE ALLOWED FOR THE FOLLOWING REASONS: (I) SECTION 35 STIPULATES THAT THE EXPENDITURE RELATES TO SCIENTIFIC RESEARCH BUT NOT PRODUCT DEVELOPMENT. IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 3 (II) AS PER SECTION 35(1), ANY EXPENDITURE (NOT BEING I N THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENT IFIC RESEARCH RELATING TO THE BUSINESS IS ALLOWABLE AS DEDUCTION. (III) AS PER RULE 6 (1), FOR THE PURPOSE OF CLAUSE (I) O F SUB SECTION (1) OF SUB SECTION 2(A) OF SECTION 35, THE PRESCRIBED AUTH ORITY SHALL BE THE DIRECTOR GENERAL, INCOME TAX (EXEMPTIONS) IN CONCUR RENCE WITH THE SECRETARY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, GOVT. OF INDIA. 5. ACCORDINGLY, THE ASSESSING OFFICER OBSERVED THAT FO R ALLOWING THE DEDUCTION U/S 35(1), THE ASSESSEE WAS REQUIRED TO G ET APPROVAL FROM PRESCRIBED AUTHORITY UNDER RULE 6(1), WHEREAS THE A SSESSEE FAILED TO PRODUCE ANY SUCH APPROVAL. SINCE THE ASSESSEE HAD EVEN FAIL ED TO PRODUCE THE DETAILS OF TECHNICAL KNOW-HOW GENERATED AND THE PRODUCTS DEVEL OPED USING TECHNICAL KNOW-HOW, IMPROVEMENT, QUALITY OF PRODUCTS 'ACHIEVE D IN PRODUCTION OF GOODS' ETC., THE CLAIM OF THE ASSESSEE DID NOT STAN D JUSTIFIED. HE, THEREFORE, OBSERVED THAT IN THE ABSENCE OF SUCH DETAILS, IT CO ULD NOT BE ASCERTAINED WHETHER ANY PRODUCT KNOW-HOW HAS BEEN GENERATED. A CCORDINGLY, THE TOTAL EXPENDITURE OF RS. 42,91,860 INCURRED ON PRODUCT DE VELOPMENT WAS DISALLOWED. 6. THE CIT(A) HELD THAT SINCE THE ASSESSEE HAS NOT PRO DUCED EVIDENCE REGARDING NATURE OF SERVICES RENDERED BY M /S. SHIVA CHEMICAL INDUSTRIES TO CLAIM THIS EXPENDITURE. THE ASSESSEE ALSO FAILED TO ESTABLISH AS TO HOW THE KNOW-HOW, IF AT ALL DEVE LOPED, WAS DEVELOPED BY M/S. SHIVA CHEMICAL INDUSTRIES. THE A SSESSEE FAILED TO FURNISH ANY EVIDENCE. IT IS CLEAR THAT NEITHER AT THE STAGE OF ASSESSMENT NOR DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE HAS BEEN ABLE TO ESTABLISH THE NATURE OF SERVICES RENDERED BY M/S. SHIVA CHEMICAL INDUSTRIES. EVEN DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE ONLY CONTENDED THAT IT HAD CLAIMED THE DEDUCTION FOR ALLOWANCE OF EXPENDITURE OF RS. 41,92 ,860/- U/S. 35(1)(IV). DESPITE HAVING BEEN GIVEN MORE THAN SUFFICIENT OPPO RTUNITY NO DETAILS/EVIDENCE REGARDING ITS LIABILITY TO PAY ANY AMOUNT TO THE SAID CONCERN TOWARDS SUCH EXPENSES COULD BE FURNISHED. THE ASSE SSEE COULD NOT EVEN IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 4 ESTABLISH AS TO HOW THE KNOW-HOW, IF AT ALL DEVELOP ED, WAS DEVELOPED BY M/S. SHIVA CHEMICAL INDUSTRIES ONLY. THE ASSESSEE DID NO T EVEN FILE ANY EVIDENCE TO PROVE THAT M/S. SHIVA CHEMICAL INDUSTRIES HAVE SUFF ICIENT R&D FACILITIES FOR DEVELOPING SUCH KNOW-HOW AND PRODUCT TECHNOLOGY. TH E ASSESSEE HAS NOT EVEN DEMONSTRATED WHETHER THE SAID PARTY HAD SUPPLI ED ANY SUCH KNOW-HOW TO ANY OTHER PARTY ALSO. THE ASSESSEE HAS SOUGHT TO JUSTIFY ITS CLAIM SOLELY ON THE BASIS OF A BILL AND THE FACT THAT THE PAYMENT W AS MADE BY AN ACCOUNT PAYEE CROSSED DEMAND DRAFT AFTER DEDUCTION OF TDS. HOWEVER, IT IS AN ESTABLISHED POSITION THAT MERELY BECAUSE A PAYMENT IS MADE THE EXPENDITURE CANNOT BE ACCEPTED AS HAVING BEEN INCURRED WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 7. THE CIT(A) HELD THAT THE HON'BLE SUPREME COURT IN T HE CASE OF LAXMINARAYAN MADANLAL (86 ITR 439) HAVE HELD THAT E VEN IN A CASE WHERE THERE IS AN AGREEMENT AND THE PAYMENTS ARE FOUND AS HAVIN G BEEN MADE, THE ASSESSING OFFICER IS NOT BOUND TO HOLD THAT THE PAY MENT WAS GENUINE OR WAS MADE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES. IT IS CLEAR THAT IN THE PRESENT APPEAL IT WAS THE ASSESSEE WHO HAD SOUGHT D EDUCTION OF THE EXPENDITURE OF PRODUCT DEVELOPMENT EXPENSES OF RS. 41,92,860/-. THE ONUS WAS, THEREFORE, ON THE ASSESSEE TO PROVE THAT SUCH PRODUCT DEVELOPMENT WAS INDEED DONE AND THAT IT WAS GOT DONE THROUGH THE PA RTY TO WHOM SUCH PAYMENT WAS MADE. HON'BLE SUPREME COURT IN THE CAS E OF LAXMI RATAN COTTON MILLS CO. (73 ITR 634) HAVE HELD THAT THE BU RDEN IS ON THE ASSESSEE TO PROVE THE SERVICES RENDERED BY THE OTHER PARTY. THO UGH THE SAID CASE INVOLVED THE SERVICES RENDERED BY A COMMISSION AGENT, THE SA ME PRINCIPLE APPLIES TO THE ASSESSEE'S CASE ALSO AND ACCORDINGLY THE ASSESS EE WAS OBLIGED TO PROVE THAT M/S. SHIVA CHEMICAL INDUSTRIES INDEED HAD SUFF ICIENT INFRASTRUCTURE AND FACILITIES TO CARRY OUT SUCH RESEARCH AND DEVELOPME NT, WHICH THEY HAD ACTUALLY EMPLOYED FOR DEVELOPING THE KNOW-NOW REQUIRED BY TH E ASSESSEE AND THAT SUCH KNOW HOW DEVELOPED BY THEM WAS FINALLY USED BY THEM FOR THE PURPOSE OF THEIR BUSINESS. SINCE THE ASSESSEE HAS GROSSLY F AILED IN ESTABLISHING THE SAME, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 5 ENTIRE PRODUCT DEVELOPMENT EXPENSES OF RS. 41,92,86 0/-. ACCORDINGLY THE CLAIM OF THE ASSESSEE IS REJECTED BY THE CIT(A). A GAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 8. THERE WAS A DELAY OF 88 DAYS IN FILING THIS APPEAL. THE ASSESSEE FILED A PETITION EXPLAINING THE DELAY THAT THE APPE AL PAPERS WERE GIVEN TO A CA, MR. J. ANAND BABU WHO MISSED FILING THE SA ID APPEAL. AS SUCH THE DELAY WAS CAUSED. TO THIS EFFECT THE ASSESSEE A LSO FILED AN AFFIDAVIT FROM MR. ANAND BABU CONFIRMING THAT HE HA S MISSED TO FILE THE APPEAL AND THE DELAY WAS ATTRIBUTABLE TO HIM. 9. WE HAVE GONE THROUGH THE PETITION FILED BY THE ASSE SSEE AS WELL AS THE AFFIDAVIT FILED BY MR. ANAND BABU. WE ARE CONVINCED BY THE EXPLANATION GIVEN BY BOTH THE PARTIES FOR THE D ELAY WHICH IS INADVERTENT AND WE ARE INCLINED TO CONDONE THE DELA Y AND ADMIT THE APPEAL. 10. THE LEARNED AR SUBMITTED THAT THE ASSESSEE CLAIMED EXPENDITURE OF RS. 41,92,860 TOWARDS PRODUCT DEVELO PMENT EXPENDITURE. THIS CONTAINS TWO ITEMS ONE IS RS. 36,63,807 PAID TO M/S. SHIVA CHEMICAL INDUSTRIES AND THE BALANCE AMOU NT OF RS. 5,07,274 RELATING TO OTHER PARTIES. THE ASSESSING OFFICER DOUBTED THE PAYMENT MADE TO M/S. SHIVA CHEMICAL INDUSTRIES. TH ERE IS NO DISCUSSION OF WHATSOEVER WITH REGARD TO OTHER ITEMS OF EXPENDITURE. BEING SO, THE AMOUNT OF RS. 5,07,274 IS TO BE ALLOW ED. WITHOUT PREJUDICE TO THE ABOVE HE SUBMITTED THAT NO APPROVA L IS REQUIRED U/S. 35(1)(IV) OF THE ACT OR U/S. 37 TO INCUR THIS EXPEN DITURE. THE ASSESSEE CLAIMED THE EXPENDITURE U/S. 35(1)(IV) OF THE ACT. BEING SO, IT IS TO BE ALLOWED. 11. ON THE OTHER HAND, THE LEARNED DR RELIED ON THE ORD ER OF THE CIT(A). IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 6 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE COPY OF INVOICE PRODUCED BY THE ASSESSEE WITH REGARD TO AVAILING SERVICES OF M/S. SHIVA CHEMICAL INDUSTRIES. THE COPY OF INVOICE WAS PLACE D ON RECORD AT PAGE NO. 30 OF THE PAPER BOOK WHICH IS REPRODUCED H EREIN BELOW: 13. AS SEEN FROM THE COPY OF THE INVOICE THE ASSESSEE F AILED TO ESTABLISH THE NATURE OF SERVICE RENDERED BY M/S. SH IVA CHEMICAL INDUSTRIES. WE ARE NOT CONVINCED BY THE GENUINENES S OF THE SERVICES RENDERED BY M/S. SHIVA CHEMICAL INDUSTRIES. BEING SO, WE ARE INCLINED TO HOLD THAT THIS EXPENDITURE CANNOT BE ALLOWED EIT HER U/S. 35(1)(IV) OR U/S. 37 OF THE ACT AS THE CLAIM OF THE EXPENDITU RE IS NOT PROVED. THE PRODUCTION OF ONLY COPY OF THE BILL CANNOT ENTI TLE THE ASSESSEE TO CLAIM EXPENDITURE UNLESS IT IS SUPPORTED BY EVIDENC E FOR RENDERING IT A NO. 1130/HYD/2009 M/S. RAMPEX LABS PVT. LTD. ==================== 7 SERVICE BY M/S. SHIVA CHEMICAL INDUSTRIES. IN SPIT E OF GIVING EFFECTIVE OPPORTUNITIES BY THE LOWER AUTHORITIES, THE ASSESSE E FAILED TO PROVE GENUINENESS OF THIS EXPENDITURE. BEING SO, WE ARE INCLINED TO CONFIRM THE DISALLOWANCE OF RS. 36,63,807. HOWEVER, REGARDI NG BALANCE EXPENDITURE OF RS. 5,07,274, THERE IS NO WHISPER IN THE ASSESSMENT ORDER ABOUT THE REASON FOR DISALLOWING THE SAME. T O THAT EXTENT THE ASSESSING OFFICER COMMITTED A MISTAKE AND WE AGREE WITH THE ARGUMENT OF THE ASSESSEES COUNSEL AND THE CLAIM OF THE ASSESSEE TO THAT EXTENT IS TO BE ALLOWED. ACCORDINGLY, WE DIREC T THE ASSESSING OFFICER TO ALLOW THIS EXPENDITURE TO THE TUNE OF RS . 5,07,274. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND FEBRUARY, 2013. SD/ SD/ SD/ SD/- -- - (ASHA VIJAYARAGHAVAN) (ASHA VIJAYARAGHAVAN) (ASHA VIJAYARAGHAVAN) (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER SD/ SD/ SD/ SD/- -- - (CHANDRA POOJARI) (CHANDRA POOJARI) (CHANDRA POOJARI) (CHANDRA POOJARI) ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 22 ND FEBRUARY, 2013 TPRAO COPY FORWARDED TO: 1. M/S. RAMPEX LABS PVT. LTD., C/O. M/S. CH. PARTHASA RATHY & CO., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST. NO. 1, ASHOK NAGAR, HYDERABAD-500 020. 2. THE DEPUTY CIT, CIRCLE-3(1), HYDERABAD. 3. THE CIT(A)-IV, HYDERABAD. 4. THE CIT-III, HYDERABAD. 5. THE DR A BENCH, ITAT, HYDERABAD.