DCIT, Circle-17(1), Hyd, Hyderabad V. Divi's Laboratories Ltd., Hyderabad, Hyderabad

ITA 1223/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6293 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-08-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 19-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PALLAVI AGARWAL
• Assessee Lawyers: S RAMA RAO
• Keywords: Gift; Business expenditure
• Section: 143(3); 115JB; 37

Judgement Text

ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER & SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1220/HYD/2015 (A.Y. 2010-11) M/S. DIVIS LABORATORIES LTD HYDERABAD PAN: AAACD 6745 J VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 17(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.1223/HYD/2015 (ASSESSMENT YEAR: 2010-11) DY. COMMISSIONER OF INCOME TAX, CIRCLE 17(1) HYDERABAD VS. M/S. DIVIS LABORATORIES LTD HYDERABAD PAN: AAACD 6745 J (APPELLANT) (RESPONDENT) FOR REVENUE : SMT. PALLAVI AGARWAL, DR FOR ASSESSEE : SHRI S. RAMA RAO DATE OF HEA R ING : 16.08.2016 DATE OF PRONOUNCEMENT : 02 .0 9 .2016 O R D E R PER SMT. P. MADHAVI DEVI, J.M. BOTH ARE CROSS APPEALS FOR THE A.Y 2010-11. THESE APPEALS ARE AGAINST THE ORDER OF THE CIT (A) IN CON FIRMING THE DISALLOWANCE MADE BY THE AO OF THE EXPENDITURE INCU RRED TOWARDS HOSPITALITY EXTENDED TO THE DIGNITARIES, SU PPLIERS AND MAJOR CUSTOMERS VISITING THE MANUFACTURING UNITS OF THE ASSESSEE COMPANY SITUATED IN REMOTE PLACES OF ANDHRA PRADESH AND ALSO ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 2 OF 7 THE EXPENDITURE INCURRED TOWARDS THE WELFARE OF THE STAFF AND VILLAGERS RESIDING IN SURROUNDING PLACES OF THE MAN UFACTURING UNIT OF THE ASSESSEE COMPANY. THE 3 RD GROUND OF APPEAL RAISED BY THE ASSESSEE IS AGAINST THE ORDER OF THE AO IN NOT ALLOWING THE TAX CREDIT U/S 115JB OF THE ACT OF RS.6,73,55,700 AS AG AINST RS.5,94,48,985 CONSIDERING THAT THE SURCHARGE AND E DUCATION CESS ARE PART OF THE TAXES FOR ALL PURPOSES. THE AS SESSEE HAS ALSO RAISED AN ADDITIONAL GROUND OF APPEAL FOR THIS PURP OSE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY ENGAGED IN MANUFACTURE OF ACTIVE PHARMA INGREDIENTS AND INTERMEDIATES, FILED ITS E-RETURN OF INCOME FOR THE A.Y 2010-11 ON 04.10.2010 DECLARING A TOTAL INCOME OF RS.105,86,26 ,470. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S 92CA (3 ) OF THE INCOME TAX ACT, THE AO OBSERVED THAT THE ASSESSEE H AS DEBITED AN AMOUNT OF RS.12,40,092 TOWARDS ENTERTAINMENT EXP ENDITURE AND A SUM OF RS.56,93,239 TOWARDS PUBLIC RELATION E XPENDITURE WHICH INCLUDES SALARIES OF TEACHERS ENGAGED AND SCH OLARSHIPS TO THE STUDENTS AND FURNITURE TO THE SCHOOLS AND VILLA GE PANCHAYAT, GIFTS TO THE VILLAGERS, POLIO PROGRAMMES ETC. AO DI SALLOWED 10% OF ENTERTAINMENT EXPENDITURE ON AN ESTIMATE BASIS HOLD ING THAT THE SAME IS AGAINST THE PUBLIC POLICY AND IS NOT ALLOWA BLE U/S 37 OF THE I.T. ACT. AS REGARDS PUBLIC RELATION EXPENDITUR E, AO HELD THAT ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 3 OF 7 THIS IS IN THE NATURE OF CHARITY AND IS NOT INCURRE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFO RE, IS NOT ALLOWABLE U/S 37 OF THE I.T. ACT. THEREFORE,HE DISA LLOWED THE PUBLIC RELATION EXPENDITURE OF RS.56,93,239. FURTHE R, WHILE CONSIDERING THE ASSESSEES CLAIM OF DEDUCTION U/S 1 0A OF THE I.T. ACT, THE AO EXCLUDED THE FREIGHT, INSURANCE AND COM MUNICATION EXPENSES ONLY FROM THE EXPORT TURNOVER. AGGRIEVED B Y THE ABOVE ADDITIONS, ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO GRANTED PARTIAL RELIEF TO THE ASSESSEE BY DIRECTING THE AO TO EXCLDE FREIGNT, INSURANCE AND COMMUNICATION CHARGES BOTH F ROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. AS REGAR DS THE OTHER TWO ADDITIONS, THE CIT (A) CONFIRMED THE ADDITIONS. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT (A), THE REVENUE IS IN APPEAL BEFORE US, WHILE THE ASSESSEE IS IN APPEAL AGAINST THE ADDITIO NS CONFIRMED BY THE CIT (A). 3. AS REGARDS THE REVENUES APPEAL, IT WAS ADMITTE D THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF TAT A ELXSI LTD. 349 ITR 98 (KARN.) WHEREIN THE HON'BLE HIGH COURT H ELD THAT IF ANY EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVE R, THEN IT SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. SI NCE THE ORDER OF THE CIT (A) IS IN CONSONANCE WITH THE SAID DECIS ION OF THE ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 4 OF 7 HON'BLE HIGH COURT, WE DO NOT SEE ANY REASON TO INT ERFERE WITH THE SAME AND ACCORDINGLY THE REVENUES APPEAL IS DI SMISSED. 4. AS REGARDS ASSESSEES APPEAL, WE FIND THAT GROU ND NO.2 IS AGAINST THE ADHOC DISALLOWANCE OF 10% OF THE EXP ENDITURE INCURRED TOWARDS ENTERTAINMENT AND HOSPITALITY. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSE E IS HAVING TWO MANUFACTURING UNITS IN THE REMOTE PARTS OF THE STATE AND SINCE THE OFFICIALS AND THE CUSTOMERS FACE DIFFICUL TY IN VISITING THE MANUFACTURING UNIT, THE ASSESSEE HAS TO PROVIDE THE SERVICES SUCH AS ACCOMMODATION, TEA AND SNACKS ETC. HE SUBMI TTED THAT THE AO DISALLOWED THE ENTIRE EXPENDITURE WHEREAS TH E CIT(A) HAS RESTRICTED IT TO 10%. ACCORDING TO THE LEARNED COUN SEL FOR THE ASSESSEE, THE ENTIRE EXPENDITURE IS FOR THE PURPOSE OF BUSINESS ONLY AND THEREFORE, IS ALLOWABLE U/S 37 OF THE I.T. ACT. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE CIT(A) HAS, IN FACT, ACCEPTED THAT CERTAIN PART OF THE EXPENDITURE IS FOR THE PUR POSES OF THE BUSINESS OF THE ASSESSEE. HE HAS RESTRICTED THE DIS ALLOWANCE TO 10% OF THE EXPENDITURE ON THE GROUND THAT SOME OF T HE EXPENDITURE ARE TIPS TO THE OFFICIALS AND ARE AGAIN ST THE PUBLIC ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 5 OF 7 POLICY. THE ASSESSEE HAS NOT PRODUCED THE DETAILS O F THE EXPENDITURE WHICH HAS BEEN CONSIDERED BY THE AO AND THE CIT (A) TO BE IN THE NATURE OF THE TIPS TO THE OFFICIAL S. SINCE THE DETAILS OF THE EXPENDITURE ARE NOT BEFORE US, WE ARE NOT AB LE TO APPRECIATE THE ASSESSEES CONTENTIONS ABOUT THE SAI D EXPENDITURE ALSO BEING IN THE NATURE OF BUSINESS EXPENDITURE. A S RIGHTLY HELD BY THE AUTHORITIES BELOW, TIPS GIVEN TO THE OFFICIA LS ARE AGAINST PUBLIC POLICY AND ARE NOT ALLOWABLE AS BUSINESS EXP ENDITURE U/S 37 OF THE I.T. ACT. 6. IN THE RESULT GROUND NOS. 2 & 3 OF THE ASSESSEE ARE REJECTED. 7. AS REGARDS GROUND NO.4, WE FIND THAT THE ASSESS EE HAS FILED DETAILS OF ALL THE EXPENDITURE AT PAGES 25 TO 31 OF THE PAPER BOOK. ON PERUSAL OF THE SAME, IT IS SEEN THAT THE P AYMENTS HAVE BEEN MADE BY WAY OF CHEQUES AS WELL AS CASH AND MOS T OF THE EXPENDITURE IS TOWARDS VARIOUS SOCIAL ACTIVITIES CA RRIED OUT IN THE SURROUNDING VILLAGES. SOME OF THE EXPENDITURE ALSO IS TOWARDS THE SCHOOL BAGS AND UNIFORMS TO VARIOUS STUDENTS OF THE VILLAGES AND SCHOLARSHIPS TO MERIT STUDENTS. AO AND THE CIT (A) HAVE DISALLOWED THESE EXPENSES BY HOLDING THAT THEY ARE IN THE NATURE OF CHARITY AND ARE NOT FOR THE BUSINESS PURPOSES OF THE ASSESSEE, WHILE IT IS THE CONTENTION OF THE ASSESSEE THAT THE ASSESSEE HAVING ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 6 OF 7 INSTALLED THE MANUFCTURING UNIT IN THE REMOTE AREAS HAS TO PROVIDE FOR SUCH FACILITIES TO THE STAFF AND PUBLIC LIVING IN THE NEARBY VILLAGES IN ORDER TO CARRY ON ITS ACTIVITIES EFFICIENTLY AND PEACEFULLY. WE FIND THAT THE ASSESSEES CONTENTIONS ARE AGGREABLE TO AN EXTENT, BUT WHAT IS THE PERCENTAGE WHICH IS N OT FOR THE BUSINESS PURPOSES CANNOT BE BIFURCATED. IN VIEW OF THE SAME WE DEEM IT FIT AND PROPER TO DISALLOW 20% OF THE EXPEN DITURE AS NOT INCURRED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. THE ASSESSEE GETS RELIEF OF 80% OF THE EXPENDITURE INCURRED BY T HE ASSESSEE. 8. IN THE RESULT GROUND NO.4 IS PARTLY ALLOWED. 9. AS REGARDS GROUND NO.5, WHICH IS ADDITIONAL GRO UND OF APPEAL, WE DEEM IT FIT AND PROPER TO REMAND THE SAM E TO THE AO FOR GRANTING OF CONSEQUENTIAL RELIEF TO THE ASSESSE E IF ANY, IN ACCORDANCE WITH LAW. 10. IN THE RESULT, REVENUE APPEAL IS DISMISSED AND ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 02 ND SEPTEMBER, 2016. SD/- SD/- (B.RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 02 ND SEPTEMBER, 2016. VNODAN/SPS ITA NO 1223 OF 2015 DIVIS LABORATORIES LTD HYDERABA D PAGE 7 OF 7 COPY TO: 1. DY.COMMISSIONER OF INCOME TAX, CIRCLE 17(1) 6 TH FLOOR, B BLOCK IT TOWERS, AC GUARDS, HYDERABAD 2. M/S.DIVIS LABORATORIES LTD, 7-1-77/E/1/303 DIVI TO WERS DK ROAD, AMEERPET, HYDERABAD 3. CIT(A) -5 HYDERABAD 4. PR. CIT -5 HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER