SPC Lifesciences Private Limited, Vadodara V. DCIT Circle 2(1) (1), Vadodara

ITA 1628/AHD/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6364 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-07-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 30-06-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Transfer pricing; Wrong claim; Corroborative evidences; Capital expenditure; Set aside
• Section: 271(1)(c); 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND MS. MADHUMITA ROY, JUDICIAL MEMBER 1. ./ITA NO.1578/AHD/2018 2. ./ITA NO.1628/AHD/2017 ( / ASSESSMENT YEARS : 2012-13 & 2013-14) SPC LIFE SCIENCES PVT.LTD. 284/1,2,3 GIDC ESTATE MAKARPURA 390 010 / VS. DY. CIT CIRCLE-2(1)(1) VADODARA ./ ./ PAN/GIR NO. : AAJCS 0610 G ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI SURENDRA MODIANI, AR / RESPONDENT BY : SHRI MUDIT NAGPAL, SR.DR / DATE OF HEARING 12/07/2019 !'# / DATE OF PRONOUNCEMENT 25/07/2019 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTAN CE OF THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE COMMISS IONER OF INCOME TAX (APPEALS)2, VADODARA [CIT(A) IN SHORT] VIDE APPEAL NO.CIT(A)/VADODARA-2/10011/17-18 AND 10076/16-17 D ATED 18/05/2018 AND 30/05/2017 ARISING IN THE ASSESSMENT ORDERS P ASSED UNDER S.143(3) OF THE INCOME TAX ACT, 1961(HERE-IN-AFTER REFERRED TO AS 'THE ACT') DATED 19/01/2015 AND 29/02/2016 RELEVANT TO ASSESSMENT YE ARS (AYS) 2012- 13 & 2013-14 RESPECTIVELY. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 2 - SINCE THE APPEALS PERTAIN TO THE SAME ASSESSEE, THE REFORE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. FIRST, WE TAKE UP ITA NO.1578/AHD/2018 FOR AY 2012- 13 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL : 1. THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) IS AGAINST LAW AND FACTS. 2. THE LEARNED COMMISIONER (APPEALS) ERRED IN CONFIRMI NG PENALTY OF RS.820000/- UNDER SECTION 271(1)(C) OF THE INCOME-T AX ACT. YOUR APPELLANT SUBMITS THAT THE PENALTY IS NOT JUST IFIED AND PRAYS THAT THE SAME BE DELETED. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR DELETE ANY OF THE GROUNDS OF APPEAL. THE ONLY ISSUE RAISED BY THE ASSESSEE IS THAT THE L D. CIT(A) ERRED IN CONFIRMING THE PENALTY OF RS. 8,20,000/- U/S 271(1) (C) OF THE ACT. 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY A ND ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICALS BULK D RUGS. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS CLAIMED FOREIGN TRAVELLING EXPENSES AMOUNTING TO RS. 24,37,156/- ONLY. THE ASSESSEE CL AIMED THAT THE DIRECTOR, ALONG WITH HIS WIFE, HAS TRAVELLED TO DIF FERENT COUNTRIES TO EXPLORE AND DEVELOP THE BUSINESS. HOWEVER, THE AO D ISREGARDED THE CONTENTION OF THE ASSESSEE IN THE ABSENCE OF SUFFIC IENT DOCUMENTARY ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 3 - EVIDENCE. ACCORDINGLY, HE MADE THE ADDITION OF THE TRAVELLING EXPENSES INCURRED BY THE ASSESSEE IN HIS ORDER DATED 19-01-2 015 U/S 143(3) OF THE ACT. THE AO SUBSEQUENTLY ISSUED A NOTICE U/S 274 R.W.S 2 71(1)(C) OF THE ACT FOR INITIATING THE PENALTY ON THE ASSESSEE ON ACCOU NT OF FURNISHING OF INACCURATE PARTICULAR OF INCOME. THE AO FINALLY CON CLUDED THAT THE ASSESSEE HAD CLAIMED THE WRONG CLAIM FOR TRAVELLING EXPENSES BY FURNISHING THE INACCURATE PARTICULAR OF INCOME. ACC ORDINGLY, HE LEVIED THE PENALTY OF RS. 8,20,000/- BEING 100% OF THE AMOUNT OF TAX SOUGHT TO BE EVADED. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L D. CIT-A, WHO HAS CONFIRMED THE ORDER OF THE AO. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR BEFORE US FILED A PAPE R BOOK RUNNING FROM PAGES 1 TO 8 AND SUBMITTED THAT ALL THE DETAILS WIT H RESPECT TO THE FOREIGN TRAVELLING EXPENSES WERE DULY DISCLOSED IN THE INCO ME TAX RETURN. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE HAS F URNISHED INACCURATE PARTICULAR OF INCOME. THE LD. AR ALSO SUBMITTED THA T THE FOREIGN TRAVELLING EXPENSES INCURRED BY THE DIRECTORS OF TH E COMPANY COULD BE TREATED AS PERQUISITES AND THEREFORE, THE DEDUCTION FOR THE SAME CANNOT BE DENIED. ACCORDINGLY, THERE CANNOT BE ANY PENALTY U/ S 271(1)(C) OF THE ACT. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 4 - ON THE OTHER HAND, THE LD. DR BEFORE US SUBMITTED T HAT THE ASSESSEE HAD NOT TREATED THE FOREIGN TRAVELLING EXPENSES INCURRE D FOR ITS DIRECTORS AS PERQUISITES. HAD THE AMOUNT OF FOREIGN TRAVELLING EXPENSES BEEN TREATED AS PERQUISITES IN THE HANDS OF THE DIRECTORS, THEN THE SAME SHOULD HAVE BEEN OFFERED TO TAX. BUT THERE WAS NO INCOME OFFERE D BY THE DIRECTORS QUA THE TRAVELLING EXPENSES TREATING THEM AS PERQUISITE S. THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES B ELOW. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PE RUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE FACT WHETHER THE ASSESSEE HAS FURNISHED INACCURATE PARTI CULARS OF INCOME BY CLAIMING THE TRAVELLING EXPENSES INCURRED BY THE DI RECTORS OF THE COMPANY. THE WRONG CLAIM BY THE ASSESSEE FOR THE TR AVELLING EXPENSES IN THE INCOME TAX RETURN CANNOT BE EQUATED WITH INACCU RATE PARTICULAR OF INCOME. IT IS BECAUSE THERE WAS A GENUINE TRAVELLIN G EXPENSE INCURRED BY THE ASSESSEE, BUT THE SAME WAS WRONGLY CLAIMED AGAI NST THE INCOME. IN THIS REGARD, WE FIND SUPPORT AND GUIDANCE FROM THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RELIAN CE PETRO PRODUCTS LTD REPORTED IN 322 ITR 158 WHEREIN IT WAS HELD AS UNDER: A GLANCE OF PROVISION OF SECTION 271(1)( C ) WOULD SUGGEST THAT IN ORDER TO BE COVERED, THERE HAS TO BE CONCEALMENT OF THE P ARTICULARS OF THE INCOME OF THE ASSESSEE. SECONDLY, THE ASSESSEE MUST HAVE FURNISHED INACCURATE PARTICULARS OF HIS INCOME. THE INSTANT C ASE WAS NOT THE CASE OF CONCEALMENT OF THE INCOME. THAT WAS NOT THE CASE OF THE REVENUE EITHER. IT WAS AN ADMITTED POSITION IN THE INSTANT CASE THAT NO INFORMATION GIVEN IN THE RETURN WAS FOUND TO BE INC ORRECT OR INACCURATE. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 5 - IT WAS NOT AS IF ANY STATEMENT MADE OR ANY DETAIL S UPPLIED WAS FOUND TO BE FACTUALLY INCORRECT. HENCE, AT LEAST, PRIMA FACIE, THE ASSESSEE COULD NOT BE HELD GUILTY OF FURNISHING INACCURATE PARTICU LARS. THE REVENUE ARGUED THAT SUBMITTING AN INCORRECT CLAIM IN LAW FO R THE EXPENDITURE ON INTEREST WOULD AMOUNT TO GIVING INACCURATE PARTICUL ARS OF SUCH INCOME. SUCH CANNOT BE THE INTERPRETATION OF THE CONCERNED WORDS. THE WORDS ARE PLAIN AND SIMPLE. IN ORDER TO EXPOSE THE ASSESS EE TO THE PENALTY UNLESS THE CASE IS STRICTLY COVERED BY THE PROVISIO N, THE PENALTY PROVISION CANNOT BE INVOKED. BY ANY STRETCH OF IMAGINATION, M AKING AN INCORRECT CLAIM IN LAW CANNOT TANTAMOUNT TO FURNISHING OF INA CCURATE PARTICULARS. THEREFORE, IT MUST BE SHOWN THAT THE CONDITIONS UND ER SECTION 271(1)( C ) EXIST BEFORE THE PENALTY IS IMPOSED. THERE CAN BE N O DISPUTE THAT EVERYTHING WOULD DEPEND UPON THE RETURN FILED, BECA USE THAT IS THE ONLY DOCUMENT, WHERE THE ASSESSEE CAN FURNISH THE PARTIC ULARS OF HIS INCOME. WHEN SUCH PARTICULARS ARE FOUND TO BE INACCURATE, T HE LIABILITY WOULD ARISE. THE WORD 'PARTICULARS' MUST MEAN THE DETAILS SUPPLI ED IN THE RETURN, WHICH ARE NOT ACCURATE, NOT EXACT OR CORRECT, NOT A CCORDING TO TRUTH OR ERRONEOUS. IN THE INSTANT CASE, THERE WAS NO FINDIN G THAT ANY DETAILS SUPPLIED BY THE ASSESSEE IN ITS RETURN WERE FOUND T O BE INCORRECT OR ERRONEOUS OR FALSE. SUCH NOT BEING THE CASE, THERE WOULD BE NO QUESTION OF INVITING THE PENALTY UNDER SECTION 271(1)( C ). A MERE MAKING OF THE CLAIM, WHICH IS NOT SUSTAINABLE IN LAW BY ITSELF WI LL NOT AMOUNT TO FURNISHING OF INACCURATE PARTICULARS REGARDING THE INCOME OF THE ASSESSEE. SUCH CLAIM MADE IN THE RETURN CANNOT AMOU NT TO THE INACCURATE PARTICULARS THUS, WE ARE OF THE VIEW THAT ONCE THE ASSESSEE HAS FURNISHED ALL THE PARTICULARS OF EXPENSES WHICH WERE CORRECT BUT WRON GLY CLAIMED SUCH CLAIM DEDUCTION COULD NOT ATTRACT THE PENALTY. IN V IEW OF THE ABOVE, WE HOLD THAT THE ASSESSEE HAS MADE THE WRONG CLAIM FOR THE TRAVELLING EXPENSES. BUT THE WRONG CLAIM DOES NOT MEAN THAT TH E ASSESSEE HAS FURNISHED INACCURATE PARTICULAR OF INCOME. THEREFOR E IN OUR CONSIDERED VIEW, THE PENALTY LEVIED U/S 271(1)(C) OF THE ACT I S NOT JUSTIFIABLE IN THE GIVEN FACTS AND CIRCUMSTANCES. ACCORDINGLY, WE DELE TE THE PENALTY ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 6 - IMPOSED BY THE AUTHORITIES BELOW. HENCE, THE GROUN D OF APPEAL OF THE ASSESSEE IS ALLOWED. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1528/AHD/2018 FOR AY 2012-13 IS ALLOWED. COMING TO ITA NO.1628/AHD/2017 FOR AY 2013-14 6. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) IS AGAINST LAW AND FACTS. 2. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIRM ING DISALLOWANCE OF INTEREST AMOUNTING TO RS.2338126/- CONSIDERING IT A S CAPITAL EXPENDITURE. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 3. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIR MING DISALLOWANCE OF INTEREST ON ACCOUNT OF INTEREST FREE ADVANCES TO SH RI SNEHAL R. PATEL AND SHRI TEJAS R. PATEL, SUCH DISALLOWANCE CONFIRMED BE ING RS.745951/- OUT OF RS.1142076/- DISALLOWED IN ASSESSMENT ORDER. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 4. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIR MING DISALLOWANCE OF RENT TO THE EXTENT OF RS.14794,26/- UNDER SECTION 4 0A(2) OF THE INCOME-TAX ACT, 1961, CONSIDERING IT AS EXCESSIVE. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. 5. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIR MING DISALLOWANCE OF SALES PROMOTION EXPENSES TO THE EXTENT OF RS.325657 /-. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE IS NOT JUSTIFIED AND PRAYS THAT THE SAME BE DELETED. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 7 - 6. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIR MING ADDITION OF INTEREST AMOUNTING TO RS.108068/- YOUR APPELLANT SUBMITS THAT THE ADDITION IS NOT JUS TIFIED AND PRAYS THAT THE SAME BE DELETED. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR DELETE ANY OF THE GROUNDS OF APPEAL. 7. AT THE OUTSET, THE LEARNED COUNSEL FOR THE AS SESSEE SUBMITTED THAT HE HAD BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GR OUND NO. 1 AND 6. THEREFORE, WE DISMISS THE SAME AS NOT PRESSED. 8. THE 1 ST ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED C IT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS. 23,38,126 .00 ONLY BY TREATING THE SAME AS CAPI TAL IN NATURE. 9. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS INCURRED INTEREST EXPENSES OF RS. 23,38,126.00 ON THE TERM LOAN WHICH WAS UTILIZED IN THE CONSTRUCTION OF WAREHOUSE AND ADMINISTRATIVE BUILDI NG. THE ASSESSEE HAS SHOWN THE COST INCURRED ON THE CONSTRUCTION OF WARE HOUSE AND ADMINISTRATIVE BUILDING AS CAPITAL WORKING PROGRESS IN ITS BALANCE SHEET AS ON 31 MARCH 2013. THUS THE ASSESSEE DID NOT CLAIM T HE APPRECIATION ON SUCH WORK IN PROGRESS ON THE RATIONALE THAT THE SAM E WAS NOT PUT TO USE IN THE YEAR UNDER CONSIDERATION. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 8 - HOWEVER, THE AO SOUGHT CLARIFICATION FROM THE ASSES SEE FOR NOT CAPITALIZING THE INTEREST EXPENSES ON THE LOAN UTIL IZED IN THE CONSTRUCTION OF IMPUGNED WORK-IN-PROGRESS. THE ASSESSEE JUSTIFIED ITS STAND BY SUBMITTING THAT THE IMPUGNED BUILDINGS WERE READY TO USE IN THE CURRENT FINANCIAL YEAR AND AT THE SAME TIME, IT HAS STARTED THE REPAYMENT OF THE LOAN IN THE YEAR UNDER CONSIDERATION. HOWEVER, THE AO WAS NOT SATISFIED WITH THE CONTENTI ON OF THE ASSESSEE BY OBSERVING THAT - I. THE IMPUGNED ASSETS HAVE NOT BEEN PUT TO USE DURING THE YEAR. II. THERE WAS ALSO NO EVIDENCE SUGGESTING THAT THE CONS TRUCTION OF THE IMPUGNED PROPERTY WAS COMPLETED DURING THE YEAR . IN VIEW OF THE ABOVE, THE AO DISREGARDED THE CONTEN TION OF THE ASSESSEE AND ACCORDINGLY TREATED THE AMOUNT OF INTEREST AS C APITAL IN NATURE. THUS, THE AO ADDED THE AMOUNT OF INTEREST TO THE TOTAL IN COME OF THE ASSESSEE. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A). THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITTED T HAT THE CONSTRUCTION OF THE WAREHOUSE AND THE ADMINISTRATIVE BUILDING DO ES NOT REPRESENT THE EXTENSION OF THE BUSINESS. THEREFORE THE INTEREST E XPENSES NEED NOT BE CAPITALIZED IRRESPECTIVE OF THE FACT THAT THE IMPUG NED ASSETS WERE NOT PUT TO USE DURING THE YEAR. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 9 - HOWEVER, THE LEARNED CIT (A) CONFIRMED THE ORDER OF THE AO BY OBSERVING THAT THE CONSTRUCTION OF A WAREHOUSE AND ADMINISTRATIVE BUILDING DOES NOT REPRESENT THE ROUTINE ASSETS. THE REFORE THE SAME SHOULD BE CONSIDERED AS AN EXTENSION FOR THE PURPOSE OF TH E BUSINESS OF THE ASSESSEE. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) THE ASSESSEE IS IN APPEAL BEFORE US. 10. THE LEARNED AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 11 OF THE PAPER BOOK AND REITERATED THE SUBMISSI ON AS MADE BEFORE THE LEARNED CIT (A). 11. ON THE OTHER HAND, THE LEARNED DR VEHEMENT LY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 12. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE FACTS RELATI NG TO THE ISSUE ARE NOT IN DISPUTE, AND THE SAME HAS ALREADY BEEN EXPLAINED IN THE PRECEDING PARAGRAPH. THEREFORE, WE ARE NOT INCLINED TO REPEAT THE SAME FOR THE SAKE OF BREVITY AND CONVENIENCE. AT THIS JUNCTURE, WE FIND IT IMPORTANT TO REFER THE PROVISIONS OF SECTION 36 (1)(III) OF THE ACT AS APPLICABLE IN THE YEAR UNDER CONSIDERATION, WHICH READS AS UNDER: (III) THE AMOUNT OF THE INTEREST 38 PAID IN RESPECT OF CAPITAL 38 BORROWED 38 FOR THE PURPOSES OF THE BUSINESS 38 OR PROFESSION : ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 10 - 39 [ PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACC OUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUC H ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION.] A PERUSAL OF THE ABOVE PROVISION REVEALS THAT THE A MOUNT OF INTEREST ON THE BORROWED FUND USED FOR THE ACQUISITION OF AN AS SET FOR THE EXTENSION OF THE EXISTING BUSINESS NEEDS TO BE CAPITALIZED. THUS IT IS CLEAR THAT ANY EXPENDITURE BY WAY OF INTEREST ON THE BORROWED FUND UTILIZED FOR THE ACQUISITION OF CAPITAL ASSETS NEEDS NOT TO BE CAPIT ALIZED MERELY ON THE BASIS THAT SUCH CAPITAL ASSETS WERE NOT PUT TO USE IN THE RELEVANT YEAR. BUT IF THE ACQUISITION OF ASSETS RELATES TO THE EXTENSI ON OF THE BUSINESS THEN THE INTEREST EXPENSES ON THE BORROWED FUND USED FOR THE ACQUISITION OF SUCH ASSETS NEED TO BE CAPITALIZED TILL SUCH ASSETS IS P UT TO USE. IN THE CASE ON HAND, IT IS AN UNDISPUTED FACT THAT THE ASSET WAS NOT PUT TO USE IN THE YEAR UNDER CONSIDERATION. THUS THE ISSUE ARISES WHETHER SUCH ASSETS WERE ACQUIRED FOR THE EXTENSION OF THE BUSIN ESS OR NOT. IF YES, THEN THE INTEREST NEEDS TO BE CAPITALIZED. HOWEVER, THE GRIEVANCE OF THE ASSESSEE BEFORE US IS THAT THERE IS NO EXTENSION IN THE BUSINESS. AS SUCH, THE IMPUGNED BUILDINGS BEING A WAREHOUSE AND THE AD MINISTRATIVE BUILDING WERE CONSTRUCTED FOR EFFECTIVE MANAGEMENT OF THE BUSINESS WHICH CANNOT BE TERMED AS AN EXTENSION OF THE BUSIN ESS. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 11 - THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING OF PHARMACEUTICAL BULK DRUGS, AND IN OUR HUMBLE UNDERS TANDING, THERE WILL NOT BE ANY INCREASE IN THE CAPACITY OF THE PRODUCTI ON OF THE ASSESSEE AFTER THE CONSTRUCTION OF THE WAREHOUSE AND THE ADMINISTR ATIVE BUILDING. THEREFORE, IN OUR CONSIDERED VIEW THE CONSTRUCTION OF THE IMPUGNED BUILDINGS CANNOT BE TREATED AS AN EXTENSION OF THE BUSINESS AS ENVISAGED UNDER THE PROVISO TO SECTION 36(1)(III) OF THE ACT AS IT STOOD DURING THE RELEVANT PERIOD UNDER CONSIDERATION. ACCORDINGLY, W E ARE NOT CONVINCED WITH THE FINDING OF THE LEARNED CIT (A). ACCORDINGL Y, WE SET ASIDE THE ORDER OF THE LEARNED CIT (A) AND DIRECT THE AO TO D ELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSE SSEE IS ALLOWED. 13. THE 2 ND ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED C IT (A) ERRED IN CONFIRMING THE ADDITION MADE BY THE AO FOR THE I NTEREST EXPENSES AMOUNTING TO 7,45,951.00 ON ACCOUNT OF DIVERSION OF THE FUND. 14. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUN D THAT THE ASSESSEE, ON THE ONE HAND, HAS ADVANCED LOAN TO THE RELATED P ARTIES AMOUNTING TO 96,07,312.00 WITHOUT CHARGING ANY INTEREST THEREON AND ON THE OTHER HAND IT HAS INCURRED INTEREST EXPENSES OF 77,56,490.00 ON THE MONEY BORROWED BY IT. ACCORDINGLY, THE AO WORKED OUT THE AMOUNT OF INTEREST ON THE INTEREST-FREE ADVANCES AT 11,42,076 BEING 12% OF THE ADVANCES OF 96,07,312.00. ACCORDINGLY, THE AO DISALLOWED THE IN TEREST EXPENSES OF 11,42,076.00 AND ADDED TO THE TOTAL INCOME OF THE A SSESSEE. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 12 - THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A) WHO HAS PARTLY CONFIRMED THE ORDER OF THE AO BY OBSERVI NG AS UNDER: 4.2.2. I FIND THAT THERE IS NO BANK ACCO UNT IN THE ASSETS SIDE OF THE BALANCE SHEET WHICH SHOWS THAT THE APPELLANT DI D NOT HAVE POSITIVE BALANCE IN THE BANK ACCOUNT. IN FACT, THERE WERE B ORROWINGS IN THE FORM OF TERM LOAN AT RS.2.24 CRORES BESIDES SHORT TERM BORR OWING OF RS.5.60 CRORES AS ON 31.03.2013. THE SHORT TERM BORROWING ARE IN THE NATURE OF CASH CREDIT ACCOUNT/OD ACCOUNT WHICH ARE INTEREST BEARING. THE ADVANCES GIVEN TO THE RELATED PARTIES ARE FROM THIS ACCOUNT RESULTING INT O FURTHER NEGATIVE BALANCE AND ULTIMATELY THE INTEREST BURDEN. THUS, THE DIRE CT NEXUS BETWEEN THE INTEREST BEARING FUNDS AND INTEREST-FREE ADVANCES WAS EXISTI NG IN THE CASE OF APPELLANT. ACCORDINGLY, I HOLD THAT DECISION RELIED UPON BY TH E LD. AUTHORIZED REPRESENTATIVE ARE DISTINGUISHABLE ON THE FACTS. THEREFORE, IN VIEW OF THE ABOVE DISCUSSION, THE DISALLOWANCE OF INTEREST PERT AINING TO INTEREST-FREE ADVANCES GIVEN TO SHRI SNEHAL R.PATEL AND SHRI TEJA S R.PATEL IS CONFIRMED SUBJECT TO THE DIRECTION THAT INTEREST SHOULD BE CA LCULATED FROM THE ACTUAL DATE OF ADVANCE GIVEN. THE ASSESSING OFFICER IS DIRECTE D ACCORDINGLY AND HENCE GROUND NO.2 IS PARTLY ALLOWED. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) , THE ASSESSEE IS IN APPEAL BEFORE US. 15. THE LEARNED AR BEFORE US SUBMITTED THAT THE O WN FUND OF THE ASSESSEE EXCEEDS THE AMOUNT OF INTEREST-FREE ADVANC ES GIVEN TO THE RELATED PARTIES. THEREFORE IT CAN BE PRESUMED THAT THE ADVA NCE WAS MADE OUT OF THE OWN FUND OF THE ASSESSEE. ACCORDINGLY, THERE CA NNOT BE ANY DISALLOWANCE OF INTEREST EXPENSES. 16. ON THE OTHER HAND, THE LEARNER DR VEHEMENTL Y SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 13 - 17. WE HAVE HEARD THE RIVAL CONTENTIONS OF B OTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE REL EVANT EXTRACT OF THE BALANCE SHEET OF THE ASSESSEE AS ON 31 MARCH 2013 S TANDS AS UNDER: SPC LIFESCIENCES PRIVATE LIMITED BALANCE SHEET AS AT 31 ST MARCH, 2013 PARITUCLARS NOTE AS AT 31/03/2013 AMOUNT (RS.) AS AT 31/03/2013 AMOUNT (RS.) 1. EQUITY & LIABILITIES (1) SHARE HOLDERS FUND: (A) SHARE CAPITAL (B) (B) RESERVES AND SURPLUS 3 4 22,933.970.00 52,024,942.69 74,958.912.69 FROM THE ABOVE, THERE IS NO DISPUTE TO THE FACT THA T THE OWN FUND OF THE ASSESSEE EXCEEDS THE AMOUNT OF INTEREST-FREE ADVANC ES MADE TO THE RELATED PARTIES. THEREFORE PRESUMPTION CAN BE DRAWN THAT SU CH ADVANCES WERE MADE OUT OF THE OWN FUND OF THE ASSESSEE. ACCORDING LY, WE HOLD THAT THERE CANNOT BE ANY DISALLOWANCE OF INTEREST EXPENS ES ON ACCOUNT OF THE DIVERSION OF THE FUND AS ALLEGED BY THE AUTHORITIES BELOW. IN THIS REGARD, WE ALSO DRAW SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 WHEREIN IT WAS HELD AS UNDE R:- THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE TH IS PRESUMPTION IS ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 14 - ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT(A) AND TRIBUNAL. SIMILARLY, WE ALSO RELY ON THE JUDGMENT OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LTD REPORTED IN 366 ITR 505 (BOM). THE RELEVANT EXTRACT OF THE ORDER IS REPRODU CED BELOW:- WHERE ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX-FRE E SECURITIES, IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT MADE BY THE ASS ESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH ASSESSEE AND NO DISALLOWANCE WAS WARRANTED U/S 14A. SIMILARLY, WE ALSO FIND SUPPORT FROM THE JUDGMENT O F HONBLE GUJARAT HIGH COURT IN THE CASE OF UTI BANK LTD. REPORTED IN 32 TAXMANN.COM 370 WHERE THE HEADNOTE READS AS UNDER : IF THERE ARE SUFFICIENT INTEREST FREE FUNDS TO MEE T TAX FREE INVESTMENTS, THEY ARE PRESUMED TO BE MADE FROM INTEREST FREE FUN DS AND NOT LOANED FUNDS AND NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A. IN VIEW OF THE ABOVE PROPOSITION, WE HOLD THAT NO D ISALLOWANCE OF INTEREST EXPENSE CLAIMED BY THE ASSESSEE CAN BE MADE ON ACCO UNT OF INTEREST-FREE ADVANCE AS DISCUSSED ABOVE. HENCE, WE REVERSE THE O RDER OF THE AUTHORITIES BELOW. THE AO IS DIRECTED TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOW ED. 18. THE NEXT ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE EXPENSE S FOR 14,79,426.00 ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 15 - BEING A PAYMENT MADE TO THE RELATED PARTIES AS SPEC IFIED UNDER SECTION 40A(2) OF THE ACT TOWARDS THE RENT. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS PA ID RENT TO ITS ASSOCIATED ENTERPRISES FOR 29,36,990.00 (NET OF SERVICE TAX) WHICH WAS CONSIDERED EXCESSIVE AND UNREASONABLE BY THE AO TO THE TUNE OF 14,79,426.00 ONLY. THEREFORE, THE AO INVOKED THE PR OVISIONS OF SECTION 40A(2) OF THE ACT AND MADE THE DISALLOWANCE OF THE EXCESSIVE RENT. THE AMOUNT DISALLOWED WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A) BUT FAILED TO SUCCEED. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) , THE ASSESSEE IS IN APPEAL BEFORE US. 19. THE LEARNED AR BEFORE US SUBMITTED THAT THE A O HAD NOT BROUGHT ANYTHING ON RECORD EVIDENCING THAT THE ASSESSEE IS PAYING RENT, WHICH IS EXCESSIVE AND UNREASONABLE IN COMPARISON TO THE PRE VAILING MARKET RATE. ON THE OTHER HAND, THE LEARNED DR VEHEMENTLY SUPPOR TED THE ORDER OF THE AUTHORITIES BELOW. 20. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE CASE ON H AND, THE ASSESSEE HAS PAID THE RENT TO ITS ASSOCIATED ENTERPRISES AMOUNTI NG TO RS. 29,36,990.00 ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 16 - (NET OF SERVICE TAX ) ONLY. THE AO OUT OF SUCH RENT TREATED THE SUM OF 14,79,426.00 AS EXCESSIVE AND UNREASONABLE. THEREFO RE HE DISALLOWED THE SAME BY INVOKING THE PROVISIONS OF THE SECTION UNDER SECTION 40A(2) OF THE ACT. THE LEARNED CIT (A) SUBSEQUENTLY CONFIR MED THE ORDER OF THE AO. THE AO IS EMPOWERED TO MAKE THE DISALLOWANCE OF THE EXPENSES CLAIMED BY THE ASSESSEE IF FOUND UNREASONABLE/EXCESSIVE IN COMPARISON TO THE MARKET RATE UNDER SECTION 40A(2) OF THE ACT, THEN H E CAN MAKE THE DISALLOWANCE OF THE SAME. HOWEVER, THE ONUS LIES ON THE REVENUE TO JUSTIFY THAT THE RENT PAID BY THE ASSESSEE IS EXCES SIVE AND UNREASONABLE IN COMPARISON TO THE MARKET RATE. HOWEVER, IN THE CASE ON HAND, WE NOTE THAT NO SUCH EXERCISE HAS BEEN CARRIED OUT BY THE A O/LEARNED CIT (A) BY BRINGING ANY COMPARABLE CASE TO JUSTIFY THAT THE RE NT PAID BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISES IS EXCESSIVE/UNREASON ABLE. THUS IN OUR CONSIDERED VIEW, IN THE ABSENCE OF THE COMPARABLE C ASES AS ENVISAGED UNDER THE PROVISIONS OF UNDER SECTION 40A(2) OF THE ACT, WE ARE NOT INCLINED TO UPHOLD THE FINDING OF THE AUTHORITIES B ELOW. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LEARNED CIT (A) AND DIRE CT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 21. THE NEXT ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE ORDER OF THE AO BY SUSTAINI NG THE DISALLOWANCE OF 3,25,657/- ON ACCOUNT OF SALES PROMOTION EXPENSES. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 17 - THE ASSESSEE IN THE YEAR UNDER CONSIDERATION CLAIME D TO HAVE INCURRED AN EXPENSE OF 3,25,657/- ON THE PURCHASE OF GOLD COINS WHICH WER E DISTRIBUTED TO THE CUSTOMERS, CLIENTS, AND SUPPLIER S ON THE OCCASION OF DEEPAWALI FESTIVAL. THESE GOLD COINS WERE PURCHASED BY THE ASSESSEE DATED 2 NOVEMBER 2012. THE ASSESSEE DURING THE ASSE SSMENT PROCEEDINGS FAILED TO FURNISH THE DETAILS OF THE CUSTOMERS/CLIE NTS/SUPPLIERS TO WHOM SUCH GOLD COINS WERE DISTRIBUTED. THUS IN THE ABSEN CE OF SUFFICIENT DOCUMENTARY EVIDENCE, THE AO DISALLOWED THE SAME AN D ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A). THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITTED T HAT IT HAD DECLARED A NET PROFIT OF 2.56 CRORES OUT OF THE TURNOVER OF 34 CRORES. ACCORDINGLY, THE ASSESSEE SUBMITTED THAT CONSIDERING THE TURNOVE R AND THE NET PROFIT DECLARED BY IT IN COMPARISON TO THE NEGLIGIBLE AMOU NT OF IMPUGNED EXPENSES, SHOULD HAVE BEEN ALLOWED THE DEDUCTION OF SUCH EXPENSES. HOWEVER, THE LEARNED CIT (A) CONFIRMED THE ORDER OF THE AO BY OBSERVING THAT THE ASSESSEE FAILED TO FURNISH THE D ETAILS OF THE PERSONS TO WHOM SUCH GOLD COINS WERE DISTRIBUTED. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) , THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 18 - 22. THE LEARNED AR BEFORE US REITERATED THE SUBM ISSION AS MADE BEFORE THE AUTHORITIES BELOW. ON THE OTHER HAND, THE LEARN ED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PAR TIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ONUS UNDER THE S TATUTE LIES ON THE ASSESSEE TO JUSTIFY THE EXPENSES CLAIMED BY IT BASE D ON THE DOCUMENTARY EVIDENCE. AS THE ASSESSEE IN THE CASE ON HAND, FAIL ED TO FURNISH THE SUPPORTING EVIDENCE AS DESIRED BY THE AUTHORITIES B ELOW, WE CONCUR WITH THE ORDER OF THE LEARNED CIT-A. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE AUTHORITIES BELOW. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1628/AHD/2017 FOR AY 2013-14 IS PARTLY ALLOWED. 24. IN THE COMBINED RESULT, ASSESSEES APPEAL FO R AY 2012-13 IS ALLOWED, WHEREAS FOR AY 2013-14 IS PARTLY ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 25 /07/2019 SD/- SD/- (MS. MADHUMITA ROY) (WASEEM A HMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 25/07/2019 &.., .(.. / T.C. NAIR, SR. PS ITA NO.1578/AHD/2018 & ITA NO.1628/AHD/2017 SPC LIFE SCIENCES PVT.LTD. VS. DCIT ASST.YEARS 2012-13 & 2 013-14 - 19 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. )*+ , / CONCERNED CIT 4. , ( ) / THE CIT(A)-2, VADODARA 5. /01 ((*+ , *+# , ) / DR, ITAT, AHMEDABAD 6. 145 6 / GUARD FILE. / BY ORDER, / ( //TRUE COPY// / ( DY./ASSTT.REGISTRAR) $%, / ITAT, AHMEDABAD 1. DATE OF DICTATION 22.7.2019 (WORD PROCESSED BY HO NBLE AM IN HIS COMPUTER BY DRAGON) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 22.7.2019 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.25.7.2019 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 25.7.2019 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER