The ACIT, Circle-8, Ahmedabad V. M/s. Torrent Pharmaceuticals Ltd., Ahmedabad

ITA 1869/AHD/2009

• Counselvise Citation: 186920514 RSA 2009
• Duration Of Justice: 2 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 17-04-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 04-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KARTAR SINGH
• Assessee Lawyers: S N SOPARKAR SRAR
• Keywords: Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI, A.K.GARODIA, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO.1869 & 1881/AHD/2009 ASSESSMENT YEAR:2005-06 ACIT, CIRCLE-8, AHMEDABAD TORRENT PHARMACEUTICALS LTD. NR. DINESH HALL, OFF ASHRAM ROAD, AHMEDABAD PAN NO.AAACT5456A V/S . V/S . TORRENT PHARMACEUTICALS LTD. TORRENT HOUSE, OFF ASHRAMA ROAD, AHMEDABAD ADDL. CIT RANGE-8, AHMEDABAD (APPELLANT) .. (RESPONDENT) /BY ASSESSEE SHRI S.N.SOPARKAR, SR-AR /BY REVENUE SHRI KARTAR SINGH, CIT-DR /DATE OF HEARING 17-04-2012 /DATE OF PRONOUNCEMENT 31-05-2012 O R D E R PER KUL BHARAT, JUDICIAL MEMBER:- THESE ARE CROSS-APPEALS ONE FILED BY THE REVENUE AND ANOTHER FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORD ER OF LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD DATED 27-03- 2009 FOR THE ASSESSMENT YEAR 2005-06. FIRST WE TAKE UP REVENUES APPEAL IN ITA NO.1869/AH D/2009. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL:- ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 2 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF GARDEN EXPENSES OF RS.27,06,563/-. 2. THE LD. CIT(A) HAS ERRED IN LA AND ON FACTS IN D ELETING THE DISALLOWANCE OF WEIGHTED EXPENDITURE ON R & D EXPEN SES OF RS.1,03,25,000/- 3. THE FACTS IN BRIEF ARE THAT ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL ITEMS. THE ASSESSEE-COMPANY HAS FILED ITS RETURN OF INCOME DECLARING TOTAL INCO ME OF RS.12,79,35,253/-. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AN D THE ASSESSMENT PROCEEDINGS WAS INITIATED BY ISSUING NOTICE U/S.143 (2) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). THE AS SESSMENT PROCEEDING WAS COMPLETED ON 28-12-2008. THE ASSESSING OFFICER MADE FOLLOWING DISALLOWANCES:- (I) EXPENDITURE CAPITALIZED IN ACCOUNTS CLAIMED U/S .37 RS. 25,20,000/- (II) DISALLOWANCE OF GARDEN EXPENSES RS. 27,06,563/- (III) DISALLOWANCE OF R & D EXPENDITURE RS. 1,86,24,000/- (IV) DIS OF U/S. 14 OF THE I.T. ACT RS. 3,00,000/- AGAINST THESE DISALLOWANCES, ASSESSEE FILED APPEAL BEFORE LD. CIT(A). LD. CIT(A) FOLLOWING THE ORDER OF PREDECESSOR IN A.Y 20 04-05 DIRECTED THE ASSESSING OFFICER TO ALLOW WEIGHTED DEDUCTION OF RE CURRING EXPENSES RELATED TO BUILDING OF RS.38.33 LAKH, MUNICIPAL TAX OF RS.9.21 LAKH AND SALARY TO DR. C. DUTT OF RS.75.97 LAKH. HENCE, THE DISALLOWANCE OF W EIGHTED DEDUCTION ON MOTOR CAR EXPENSES INTEREST ETC. WAS CONFIRMED. HOW EVER, ACCEPTING ALTERNATIVE SUBMISSION OF THE ASSESSEE ALLOWED DEPR ECIATION ON MOTOR CAR AND INTEREST EXPENSES CAPITALIZED. HOWEVER, THE DISALLO WANCE MADE U/S 14A OF THE ACT WAS CONFIRMED. AGAINST THE ORDER OF LD. CIT(A) BOTH REVENUE AND ASSESSEE HAS FILED CROSS APPEAL BEFORE THIS TRIBUNA L. 4. GROUND NO.1 IS AGAINST DELETION OF DISALLOWANCE OF GARDEN EXPENSES OF RS.27,06,563/-. LD. CIT-DR STRONGLY SUPPORTED THE O RDER PASSED BY ASSESSING OFFICER AND SUBMITTED THAT LD. CIT(A) HAS WRONGLY D ELETED THE DISALLOWANCE ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 3 MADE BY ASSESSING OFFICER. ON THE CONTRARY, LD. AUT HORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THIS ISSUE IS SQU ARELY COVERED IN FAVOUR OF ASSESSEE IN ITA NO.4356/AHD/2007 ORDER DATED 31-01-2011 BY THE CO- ORDINATE BENCH. LD. AR SUBMITTED HONBLE ITAT HAS F OLLOWED THE DECISION RENDERED IN RESPECT OF A.Y. 2004-05. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND THE JUDGMENT CITED BY THE PARTIES. THERE IS NO DISPUTE THAT THE FACTS IN THE PRESENT CASE ARE IDENTICAL WITH THE FACTS OF THE CASE PERTAINING TO A.Y. 2004-05. WE HAVE PERUSED THE ORDER OF THE HONBLE C O-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.4356/AHD/2007 (SUPRA) . THE HONBLE TRIBUNAL FOLLOWING THE DECISION OF CO-ORDINATE BENCH IN ITA NO.1347/AHD/2007 FOR A.Y. 2003-04 DISMISSED THE GROUND OF APPEAL RAISED BY RE VENUE. IN VIEW OF THE FACT THAT ISSUE HAS ALREADY BEEN DECIDED BY HONBLE CO-ORDINATE BENCH IN ITA NO. 4356/AHD/2007 FOR A.Y. 2004-05 AND ITA NO.1347/ AHD/2007 FOR A.Y. 2003-04 IN ASSESSEES OWN CASE. RESPECTFULLY FOLLOW ING THE ORDER OF THE CO- ORDINATE BENCH, THIS GROUND OF REVENUES APPEAL IS DISMISSED. 6. ANOTHER EFFECTIVE GROUND AS RAISED BY THE REVENU E IS WITH REGARD TO DELETING THE DISALLOWANCE OF WEIGHTED EXPENSES ON R & D OF RS.1,03,25,000/-. LD. CIT-DR SUBMITTED THAT ORDER PASSED BY LD. CIT(A ) IS ERRONEOUS. ON THE CONTRARY, LD. AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE SUBMITTED THAT WEIGHTED DEDUCTION ON RS.33.33 EXPENSES RELATING TO REPAIRING BUILDING EXPENSES RS.9.01 LAKH MUNICIPAL TAX PAID BY THE ASS ESSEE AND RS.75.97 LAKH, SALARY TO MR. C DUTTA HAS BEEN ALLOWED IN THE EARLI ER YEAR. LD. AR SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF AS SESSEE IN ITA NO.3569/AHD/2004 A.Y. 2001-02. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIALS AVAILABLE ON RECORD AND JUDGMENT CITED BY THE PARTIES. SO FAR THE DISALLOWANCE WITH REGARD TO R&D, BUILDING, MUNICIPAL TAX AND SALARY T O DR. C. DUTT ARE CONCERNED ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 4 THIS ISSUE HAS BEEN DECIDED BY THE HONBLE CO-ORDIN ATE BENCH IN ITA NO.3569/AHD/2004 (SUPRA) IN FAVOUOR OF ASSESSEE. IN VIEW OF THE MATTER, WE DO NOT FIND ANY INFIRMITY INTO THE ORDER PASSED BY LD. CIT(A). HENCE, THIS GROUND OF REVENUES APPEAL IS DISMISSED. 8. IN THE RESULT, REVENUES APPEAL IS DISMISSED. NOW WE TAKE UP ASSESSEES APPEAL IN ITA NO1881/AHD/ 2009. 9. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.63,00,000 WHIC H WAS CLAIMED BY THE ASSESSEE ON REVENUE ACCOUNT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN NOT UPHOLDING THE ASSESSEES CLAIM FOR DEDUCTION IN A SUM OF RS.1,24,48,500 BEING 150% WEIGHTED DEDUCTION U/S. 3 5(2AB) IN RESPECT OF CAPITAL EXPENDITURE ON MOTOR CARS AND INTEREST T OTALING RS.82,99 LACS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.3 LACS MADE BY THE ASSESSING OFFICER BY PURPORTEDLY INVOKING THE PROVISIONS OF SECTION 1 4A. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN NOT UPHOLDING THE ASSESSEES CONTENTION THAT IT WAS NOT AT ALL A FIT CASE FOR LEVY OF INTEREST U/S. 234D AND FOR WITHDRAWAL O F INTEREST U/S. 244A. 10. FIRST GROUND IS WITH REGARD TO CONFIRMING THE D ISALLOWANCE OF RS.63 LAKH WHICH WAS CLAIMED BY ASSESSEE ON REVENUE ACCOUNT. T HE CONTENTION OF ASSESSEE BEFORE LD. CIT(A) WAS THAT THE ASSESSEE-CO MPANY HAD ENTERED INTO AN AGREEMENT WITH IBM. IN PURSUANCE OF THIS AGREEME NT, IBM WOULD UNDERTAKE TO STUDY THE EXISTING BUSINESS SYSTEM AND COME WITH SOLUTIONS AS REQUIRED BY AN ENTERPRISE RESOURCE PLANNING (ERP FOR SHORT) PRO VIDED BY SAP. IT WOULD ALSO TRAIN PEOPLE SO THAT DATA MIGRATION FROM LEGAC Y SYSTEM TO SAP WOULD SMOOTH AND TRAIN PEOPLE IN THE RUNNING OF THE ERP S YSTEM. TOTAL PAYMENTS MADE TO IBM AMOUNTING TO RS.63 LAKH. IT WAS SUBMITT ED BEFORE LD. CIT(A) THAT ERP EXPENDITURES ARE ESSENTIALLY REVENUE IN NATURE WHICH ARE RELATED TO UPGRADING ITS PRESENT ACCOUNTING SOFTWARE AND ENTIR E EXERCISE OF GOING FOR ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 5 ERP FOR SMOOTH FUNCTIONING OF THE ORGANIZATION. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SUBMISSION OF ASSESSEE WAS NOT C ONSIDERED IN RIGHT PERSPECTIVE BY LD. CIT(A). HE SUBMITTED THAT THE EX PENDITURE AS CLAIMED BY ASSESSEE ARE REVENUE IN NATURE IN VIEW OF VARIOUS J UDICIAL PRONOUNCEMENTS IN THIS REGARD. LD. AR SUBMITTED THAT THIS ISSUE IS DE CIDED IN FAVOUR OF ASSESSEE IN ASSESSEES OWN CASE IN ITA NO.4343/AHD/2007 ORDER DATED 31-01-2011. LD. AR FURTHER SUBMITTED THAT IN IDENTICAL FACTS, T HE HONBLE BOMBAY HIGH COURT HAS DECIDED THIS ISSUE IN FAVOUR OF ASSESSEE IN TAX APPEAL NO.4176 OF 2009 DATED 04-07-2011 IN THE CASE OF CIT V. M/S. RAYCHEM RPG LTD. ON THE CONTRARY, LD. CIT-DR SUPPORTED THE ORDERS OF AUTHOR ITIES BELOW. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIALS AVAILABLE ON RECORD AND THE JUDGMENTS CITED BY THE RIVAL PART IES. WE FIND THAT HONBLE CO-ORDINATE BENCH HAS DECIDED THIS ISSUE IN PARA-47 IN ASSESSEES OWN CASE IN ITA NO.4343/AHD/2007 (SUPRA), WHICH REPRODUCED AS UNDER:- 47. WE FIND THAT THE REVENUE HAS RELIED ON THE DEC ISION OF THIS TRIBUNAL DELHI BENCH IN THE CASE OF ESCORTS LTD. V ACIT (2007) 104 ITD 427 (DEL), WHEREIN THE EXPENDITURE ON SOFTWARE IS CONSI DERED AS CAPITAL IN NATURE BY HOLDING THAT WHERE THE ASSESSEE ACQUIRES ERP BUSINESS SOFTWARE WITH UNLIMITED USERS OF LICENCE AND EXPEND ITURE INCURRED ON ACQUISITION OF SOFTWARE BY WAY OF OUTRIGHT PURCHASE IS TO BE CONSIDERED AS CAPITAL IN NATURE. BUT IN THE PRESENT CASE, THE FACTS ARE ENTIRELY DIFFERENT AND IT IS NOT THE ALLEGATION OF THE REVEN UE FROM THE ASSESSING OFFICERS STAGE TILL NOW THAT THE ASSESSEE HAS ACQU IRED THIS SOFTWARE FOR UNLIMITED USER OF LICENCE AND THIS IS OUTRIGHT PURC HASE. THE REVENUE ALSO RELIED ON THE DECISION OF HONBLE RAJASTHAN HI GH COURT IN THE CASE OF CIT V. ARAWALI CONSTRUCTIONS CO. (P) LTD. (2003) 259 ITR 30 (RAJ) BUT THE FACTS IN THAT CASE ARE ALSO IN REGARD TO DISTIN GUISHABLE AS IN THAT CASE THE SOFTWARE WAS AN OUTRIGHT PURCHASE OF COMPU TER PROGRAMME WHICH RELATES TO TECHNICAL KNOW-HOW. WE FIND THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING AS TO THE FACT TH AT WHETHER EXPENDITURE ON COMPUTER SOFTWARE GIVES AN ENDURING BENEFIT TO A N ASSESSEE, THE DURATION OF TIME FOR WHICH THE ASSESSEE RIGHT TO US E THE SOFTWARE BECOMES RELEVANT. ACCORDINGLY WE ARE OF THE VIEW TH AT IN CASE THE SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVA TION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER OR SAY LES S THAN 2 YEARS, IT MAY BE TREATED AS REVENUE EXPENDITURE. HENCE, WE FIND T HAT THE CIT(A) HAS RECORDED A CATEGORICAL FINDING THAT THE SOFTWARE PR OGRAMME WITHOUT ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 6 WHICH THE COMPUTER CANNOT WORK AND WITH THE ADVANCE MENT OF TECHNOLOGY, THE PROGRAMME CHANGES DURING SHORT PERI OD AND THIS CHANGE IS REQUIREMENT OF THE BUSINESS OF THE ASSESS EE I.E. SHARE BROKING. ACCORDINGLY, WE DELETE THE ADDITION CONFIR MED BY CIT(A) AND THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED.. FURTHER THE HONBLE BOMBAY HIGH COURT IN TAX APPEAL NO.4176 OF 2009 IN THE CASE OF M/S. RAYCHEM RPG LTD. (SUPRA), HAS AFFIRMED THE VIEW OF ITAT SPECIAL BENCH WHICH HAS HELD THAT THE EXPENDITURE I NCURRED ON ERP IS OF REVENUE IN NATURE. RESPECTFULLY FOLLOWING THE AFORE MENTIONED DECISION, WE ALLOW THIS GROUND OF ASSESSEES APPEAL. 12. NEXT GROUND OF ASSESSEES APPEAL WITH REGARD TO UPHOLDING THE ASSESSEES CLAIM FOR DEDUCTION IN A SUM OF RS.1,24, 48,500/- BEING 150% WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT IN RESP ECT OF CAPITAL EXPENDITURE ON MOTOR CARS AND INTEREST TOTALING TO RS.82.99 LAK H. 13. LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT LD. CIT(A) ERRED IN UPHOLDING THE ASSESSEES CLAIM FOR DEDUCTION U/S. 35(2AB) OF THE ACT. IT IS SUBMITTED THAT THE MOTOR CARS PROVID ED TO EMPLOYEES IN THE CADRE OF AGM AND ONCE THE SALARY TO THE EMPLOYEES AS PROV IDED DURING THE COURSE OF EMPLOYMENT IS ALSO ALLOWABLE. ON THE CONTRARY, L D. CIT-DR SUPPORTED THE ORDERS PASSED BY LD. CIT(A) AND VEHEMENTLY ARGUED T HAT SAME IS NOT ALLOWABLE FOR WEIGHTED DEDUCTION. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIALS AVAILABLE ON RECORD. WE FIND THAT LD. CIT(A) HAS RETURNED THE FINDING OF FACT IN PARA-5.3 OF HIS ORDER, WHICH IS REPRODUCED HEREINBELOW:- 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E APPELLANTS SUBMISSIONS CAREFULLY. SIMILAR ISSUE AROSE IN EARLI ER YEARS AND FOLLOWING THE FINDING OF C.I.T.(APPEALS) IN A.Y. 2004-05, I D IRECT THE AO TO ALLOW WEIGHTED DEDUCTION ON RECURRING EXPENSES RELATED TO BUILDING OF RS.38.33 LACS, MUNICIPAL TAXES OF RS.9.21 LACS AND SALARY TO DR. C. DUTT OF RS.75.97 LAC TOTALING TO RS.123.51 LACS. HOWEVER , WEIGHTED DEDUCTION IS NOT ALLOWED ON MOTOR CAR EXPENSES OF RS.44.54 LA CS AND INTEREST ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 7 EXPENDITURE OF RS.38.45 LACS TOTALING TO RS.82.99 L ACS, AS THE SAID EXPENDITURE WAS NOT INCURRED FOR RESEARCH PURPOSES. THE APPELLANT HAS ALTERNATIVELY CLAIMED IN GROUND 4.1 THAT DEPRECIATI ON IN RESPECT OF MOTOR CAR AND INTEREST CAPITALISED SHOULD BE ALLOWED. THI S CLAIM IS IN ORDER, HENCE I DIRECT THE AO TO ALLOW DEPRECIATION ON RS.8 2.99 LAKHS CONSISTING OF CAR AND INTEREST CAPITALIZED. 14.1 IN THE LIGHT OF THESE FACTS AS HAS BEEN NOTED BY LD. CIT(A) IN THE ABOVE PARA, WE EXAMINE THE APPLICABILITY OF VARIOUS CONTE NTIONS RAISED BY LD. AR OF THE ASSESSEE. FIRST CONTENTION OF LD. AR OF THE ASS ESSEE IS THIS THAT SINCE THE SALARY TO EMPLOYEE IS ELIGIBLE FOR DEDUCTION U/S 35 (2AB) OF THE ACT, ACQUISITION OF MOTOR CAR FOR THOSE EMPLOYEES SHOULD ALSO BE CON SIDERED AS ELIGIBLE FOR THIS BENEFIT. WE DO NOT FIND ANY MERIT IN THIS CONTENTIO N OF LD. AR OF THE ASSESSEE. SIMPLY BECAUSE OF THIS REASON THAT MOTOR CARS ARE P URCHASED FOR PROVIDING TO THE EMPLOYEES OF RESEARCH & DEVELOPMENT WING OF THE ASSESSEE, IT CANNOT BE ACCEPTED THAT THE EXPENDITURE IS INCURRED ON IN-HOU SE SCIENTIFIC RESEARCH & DEVELOPMENT. IN OUR CONSIDERED OPINION, THE PRIMARY CONDITION TO THE SATISFIED BY THE ASSESSEE FOR BEING ELIGIBLE FOR THIS WEIGHTE D DEDUCTION IS THIS THAT THE EXPENDITURE WAS INCURRED ON IN-HOUSE RESEARCH & DEV ELOPMENT AND THEN ONLY, IT CAN BE ACCEPTED THAT, EXPENDITURE ON MOTOR CAR I S ALSO ELIGIBLE FOR SUCH DEDUCTION. WE WOULD LIKE TO OBSERVE THAT THE PERQUI SITE VALUE OF THE CAR BEING EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY ON RUN NING AND MAINTENANCE OF CAR ETC CAN BE EQUATED WITH SALARY PAYMENT TO TH E EMPLOYEES BUT NOT THE COST OF CAR PROVIDED TO THE EMPLOYEES FOR TRAVELING . EXPENDITURE ON PURPOSE OF CAR CANNOT BE ACCEPTED AS EXPENDITURE WHETHER CAPIT AL OR REVENUE INCURRED ON IN-HOUSE RESEARCH & DEVELOPMENT. IN OUR CONSIDERED OPINION, CAPITAL EXPENDITURE FOR EQUIPMENTS TO BE USED FOR IN-HOUSE RESEARCH IS ELIGIBLE FOR THIS BENEFIT BUT NOT THE MOTOR CAR BECAUSE WHETHER THE E MPLOYEES CAME INTO CAR PROVIDED BY THE EMPLOYER OR BY PUBLIC TRANSPORT OR HIRED CAR HAS NO BEARING ON IN-HOUSE RESEARCH & DEVELOPMENT. ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 8 14.2 NOW, WE EXAMINE THE APPLICABILITY OF THE JUDGM ENT OF HONBLE APEX COURT CITED BY THE LD. AR OF THE ASSESSEE REPORTED IN 209 CTR (STATUTE) 89 CASE, THE ISSUE INVOLVED WAS REGARDING DEDUCTION U/ S 35 (1)(IV) OF THE ACT. WHEN WE EXAMINE THE PROVISIONS OF SECTION 35(1)(IV) OF THE ACT, WE FIND THAT THESE ARE MATERIALLY DIFFERENT FROM THE PROVISIONS OF U/S. 35(2AB) OF THE ACT BECAUSE IN SECTION 35(1), THERE IS NO CONDITION THA T THE EXPENDITURE ON SCIENTIFIC RESEARCH HAS TO BE INCURRED ON IN-HOUSE RESEARCH & DEVELOPMENT FACILITIES AND THERE, ALL EXPENDITURES INCURRED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS IS ELIGIBLE FOR DEDUCTION U/S. 35(1) A ND IN CLAUSE (IV) OF SECTION 35(1) IS COVERED THE EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE AND HENCE, IN THIS CLAUSE ALSO, THERE IS NO CONDITION THAT SUCH COST HAS BEEN INCURRED ON IN-HOUSE SCIENTIFIC RESEARCH FACILITIES AS IN SECTION 35(2AB ) OF THE ACT AND BECAUSE OF THIS REASON, THIS JUDGMENT IS NOT APPLICABLE IN THE PRESENT CASE. 14.3 IN VIEW OF ABOVE DISCUSSION, WE FIND THAT THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE ON PURCHASE OF MOTOR CARS CANNOT BE CONSIDERED AS EXPENDITURE INCURRED BY THE ASSESSEE ON IN-HOUSE RE SEARCH & DEVELOPMENT AND THEREFORE, THE SAME IS NOT ELIGIBLE FOR WEIGHTE D DEDUCTION U/S. 35(2AB) OF THE ACT. SIMILARLY, CAPITALIZED INTEREST ON PURCHAS E OF CAR IS ALSO NOT ELIGIBLE FOR THIS BENEFIT FOR SAME REASONS BECAUSE IT IS EQUAL O R SIMILAR TO COST OF CAR. HENCE, THIS GROUND IS REJECTED. 15. NEXT GROUND IS AGAINST THE DISALLOWANCE MADE U/ S 14A OF THE ACT. LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE DISALL OWANCE MADE MERELY ON THE BASIS OF ESTIMATION OF ADMINISTRATIVE EXPENSES EARNED TO TAX FREE INCOME. LD. AR RELIED UPON THE JUDGMENT OF HONBLE KERALA H IGH COURT IN THE MATTER OF CIT V. CATHOLIC SYRIAN BANK LTD. & ORS. (2011) 237 CTR 164 (KEL). ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 9 ON THE CONTRARY, LD. CIT-DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD. WE FIND THAT LD. CIT(A) HAS GIVEN A CATEGOR ICAL FINDING IN PARA-6.3 OF HIS ORDER, SAME IS REPRODUCED HEREINBELOW:- 6.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE AR OF THE APPELLANT. HOWEVER, I AM NOT IN AGREEMENT WITH THE CONTENTION OF THE APPELLANT THAT EARNING OF DIVIDEND INCOME DO ES NOT REQUIRE ANY SPECIFIC/SPECIAL ADMINISTRATIVE EFFORTS, AS EVEN WH ERE COMPANY PRESUMES TO HAVE NOT INVESTED IN SINGLE PENNY OF MO NEY IN SHARES /SCRIPTS, COMPANY WOULD HAVE TO PAY SALARY TO ITS E MPLOYEES. I FIND FORCE IN THE OBSERVATION OF THE AO THAT CERTAIN ADMINISTR ATIVE EFFORTS WERE NECESSARILY REQUIRED FOR EARNING THE EXEMPT INCOME. HENCE, I AM OF THE OPINION THAT THE DISALLOWANCE OF RS.3 LAKHS MADE BY THE ASSESSING OFFICER IS QUIRE JUSTIFIED AND THIS GROUND IS DISMI SSED. WE FIND THAT CASE LAW CITED BY LD. AR IN THE MATTER OF CATHOLIC SYRIAN BANK LTD.& ORS. (SUPRA), WHEREIN THE HONBLE KERALA HIGH COURT HAS HELD THAT SO FAR AS DISALLOWANCE OF ADMINISTRATIVE EXPENSE IS CONCER NED, THERE IS NO PRECIOUS FORMULA OR PROPORTIONATE DISALLOWANCE, NO DISALLOWA NCE CALLED FOR, FOR PROPORTIONATE ADMINISTRATIVE COST, ATTRIBUTABLE TO EARNING OF TAX FREE INCOME UNTIL RULE 8D OF THE I.T. RULE, 1962 CAME INTO FORC E. IT IS FURTHER HELD THAT THE PROPORTIONATE DISALLOWANCE U/S. 14A SHOULD BE LIMIT ED TO ONLY INTEREST LIABILITY AND NOT OVERHEAD OR ADMINISTRATIVE EXPENDITURE, WHI CH SHOULD BE CONSIDERED FOR DISALLOWANCE UNDER RULE 8D OF THE I.T. RULE, 19 62 FROM 2007-08. RESPECTFULLY FOLLOWING THE RATIO IN THE CASE OF CATHOLIC SYRIAN BANK LTD.& ORS. (SUPRA) WE HEREBY DELETE THE ADDITION MADE ON ACCOU NT OF ADMINISTRATIVE EXPENSES. THIS GROUND OF ASSESSEES APPEAL IS ALLOW ED. 17. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALL OWED. ITA NO.1869 & 1881/AHD/2009 A.Y. 2005-06 ACIT CIR-8, ABD V. TORRENT PHARMACEUTICALS LTD. PAGE 10 18. IN COMBINED RESULT, REVENUES APPEAL IN ITA NO.1869/AHD/2009 IS DISMISSED AND THAT OF ASSESSEES APPEAL IN ITA NO.1881/AHD/2009 IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE. SD/- SD/- (A.K.GARODIA) (KUL BHARAT) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, *DKP - 31/05/2012 '#$ % & ' ' ' ' ())*+, ())*+, ())*+, ())*+, '-+ '-+ '-+ '-+ / COPY OF ORDER FORWARDED TO:- 1. ',/* 01 / APPELLANT 2. (2301 / RESPONDENT 3. %)4 3 35 / CONCERNED CIT 4. 3 35- ',/* / CIT (A) 5. +7 8/3 ()))4, 3 ',/*/3 ')4, '#$ % / DR, ITAT, AHMEDABAD 6. 8 ;< = >* / GUARD FILE. BY ORDER/ ' , /TRUE COPY/ ?,/# 3 , / 3 ',/*/3 ')4, '#$ % & STRENGTHEN PREPARATION & DELIVERY O F ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 17/05, 28/05, 30/05 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE NO 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 17/05, 18/05 4) DATE OF CORRECTION 28/05, 5) DATE OF FURTHER CORRECTION 29/05, 30/05 6) DATE OF INITIAL SIGN BY MEMBERS 30/05 7) ORDER UPLOADED ON 31/05 8) ORIGINAL DICTATION PAD-PART HAS BEEN ENCLOSED IN THE FILE YES 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON 31/05