ACIT, Circle-3(2), Hyderabad V. M/s. Sri Krishna Drugs Ltd, Hyderabad

ITA 2126/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61830 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 26-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Depreciation; Proportionate interest; Notional interest; Capital expenditure
• Section: 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 2126/HYD/2011 ASSESSMENT YEAR 2007-08 THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-3(2) HYDERABAD VS. M/S. SRI KRISHNA DRUGS LTD., HYDERABAD PAN: AADCS4050Q ASSESSEE RESPONDENT APPELLANT BY: SHRI M.S. RAO RESPONDENT BY: SHRI S. RAMA RAO DATE OF HEARING: 1 1.0 4 .2012 DATE OF PRONOUNCEMENT: 11.04.2012 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-IV, HYDERABAD DATED 20.09.2011 FOR AS SESSMENT YEAR 2007-08. 2. THE FIRST GROUND IN THIS APPEAL IS GENERAL IN NATUR E AND NEEDS NO ADJUDICATION. 3. THE SECOND GROUND RAISED BY THE REVENUE IS AS UNDER : ' THE LEARNED CIT(A) ERRED IN HOLDING THAT UNRECOGNISED GRATUITY FUND IS ALLOWABLE U/S. 37(1), WHEN THE CASE IS HIT BY THE PROVISIONS OF SECTION 40A(9) AND ESPECIALLY WHEN THE ASSESSEE FAILED TO COMPLY WITH THE PROVISIONS OF SECTION 36(1)(V).' 4. AFTER HEARING BOTH THE SIDES, WE FIND THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE I N I.T.A. NO. 198/HYD/2011 IN ASSESSEES OWN CASE FOR A.Y. 2006-0 7 ORDER DATED 16.12.2011 WHEREIN THIS TRIBUNAL HELD AS FOLL OWS: '3. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT SIMILAR ISSUE CAME UP FOR CONSIDERATIO N I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 2 IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 IN I.T.A. NO. 349/HYD/2006. THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE ITS ORDER DATED 15.2.2008 BY HOLDING AS FOLLOWS: '4. WE HAVE CONSIDERED RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE GROUP GRATUITY SCHEME WAS NOT RECOGNISED BY THE COMMISSIONER OF INCOME-TAX. THIS FACT IS NOT IN DISPUTE. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SEC. 36(1)(V) OF THE INCOME- TAX ACT. SEC. 36(1)(V) READS AS FOLLOWS: '36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 .... (V) ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND CREATED BY HIM FOR THE EXCLUSIVE BENEFIT OF HIS EMPLOYEES UNDER AN IRREVOCABLE TRUST.' WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS OF SEC. 37 OF THE INCOME-TAX ACT. SEC. 37 PROVIDES FOR DEDUCTION OF EXPENDITURE NOT BEING IN THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE, BUT LAID OUT AND EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, WHILE COMPUTING INCOME CHARGEABLE TO TAX. THE MAIN CONTENTION OF THE REVENUE IS THAT UNDER SEC. 36(1)(V), THE PAYMENT MADE BY THE ASSESSEE AS EMPLOYER COULD BE ALLOWED ONLY IN RESPECT OF APPROVED GRATUITY FUND. SINCE THE GROUP GRATUITY SCHEME IS NOT APPROVED BY THE CIT, ACCORDING TO THE REVENUE, IT CANNOT BE ALLOWED. HOWEVER, THE CONTENTION OF THE ASSESSEE IS THAT IN VIEW OF THE JUDGEMENT OF THE MADRAS HIGH COURT IN THE CASE OF PREMIER COTTON SPINNING MILLS LTD. (SUPRA) AND THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 3 THE CASE OF WARNER HINDUSTAN LTD. (SUPRA), IT HAS TO BE ALLOWED. 5. WE HAVE CAREFULLY GONE THROUGH THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA). IN THE CASE BEFORE THE JURISDICTIONAL HIGH COURT, THE PROVIDENT FUND WAS NOT APPROVED BY THE CIT. THE ANDHRA PRADESH HIGH COURT AFTER REFERRING TO THE JUDGEMENT OF THE BOMBAY HIGH COURT IN TATA IRON & STEEL CO. LTD. V. D.V. BAPAT, ITO (1975) 101 ITR 292, AND THE JUDGEMENT OF THE SUPREME COURT IN METAL BOX COMPANY OF INDIA LTD. VS. THE WORKMEN (1969) 73 ITR 53, HELD THAT THE AMOUNT PAID TOWARDS AN UNAPPROVED GRATUITY FUND CAN BE DEDUCTED UNDER SEC. 37 OF THE I.T. ACT, THOUGH NOT UNDER SEC. 36(1)(V). IN VIEW OF THIS JUDGEMENT OF THE JURISDICTIONAL HIGH COURT, IN OUR OPINION, EVEN IF ANY PAYMENT IS MADE TO AN UNAPPROVED GRATUITY FUND, IT HAS TO BE ALLOWED UNDER SEC. 37. BY RESPECTFULLY FOLLOWING THE BINDING JUDGEMENT OF ANDHRA PRADESH HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA), WE UPHOLD THE ORDER OF THE CIT(A).' IN VIEW OF THE ABOVE DISCUSSION, WE DISMISS THE GROUND TAKEN BY THE REVENUE.' 5. IN VIEW OF THE ABOVE DECISION OF THIS TRIBUNAL, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 6. GROUND NO. 3 BY THE REVENUE IS AS FOLLOWS: THE LEARNED CIT(A) ERRED IN ALLOWING THE ASSESSEE'S APPEAL WITH REGARD TO DISALLOWANCE OF PROPORTIONATE INTEREST ON THE INVESTMENTS MADE AND LOANS ADVANCED TO ITS SUBSIDIARY. 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERI AL ON RECORD. WE FIND SIMILAR ISSUE CAME FOR CONSIDER ATION BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN I.T.A. NO. 198/HYD/2011 FOR A.Y. 2006-07 ORDER DATED 16.12.201 1 I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 4 WHEREIN THIS TRIBUNAL ANSWERED THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE, WHICH READS AS FO LLOWS: 'WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS SEEN FROM THE ORD ER OF THE CIT(A) SIMILAR ISSUE CAME UP FOR CONSIDERATI ON BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03 TO 2005-06 WHEREIN THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING AS FOLLOWS: '6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IF THE ASSESSEE DIVERTED ITS INTEREST BEARING FUNDS TO THE SISTER CONCERN FOR ANY PURPOSE OTHER THAN BUSINESS PURPOSE, THEN THIS IMPUGNED INTEREST TO BE DISALLOWED. IN OTHER WORDS, IF THE ASSESSEE USED THE SISTER CONCERN AS A CONDUIT TO DIVERT INTEREST BEARING FUNDS TO THE PERSONAL ADVANTAGE ANY DIRECTOR OR RELATIVE OF DIRECTORS OF THE ASSESSEE COMPANY, THEN THIS INTEREST TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THE PAYMENT OF INTEREST IS GENUINE. FURTHER, ONCE IT IS BORNE OUT OF THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST OR LESS INTEREST WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THAT EXTENT ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED U/S 36(1)(III) OF THE ACT. SUCH BORROWINGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. IN SUCH CIRCUMSTANCES, THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON THE BORROWINGS TO THE EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS OR OTHER PERSONS WITHOUT INTEREST. THE ESTABLISHMENT OF NEXUS OF FUNDS BORROWED VIS- A-VIS THE FUNDS DIVERTED TOWARDS SISTER CONCERNS ON INTEREST FREE BASIS IS CONCERNED, IN OUR VIEW, THAT THE ONUS OF PROVING THE NEXUS OF FUNDS AVAILABLE WITH THE ASSESSEE I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 5 WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTEREST IS ON THE ASSESSEE. THE PROVISIONS OF SEC. 36(1)(III) OF THE ACT PROVIDES FOR DEDUCTION OF INTEREST ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION HE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE, THE SAME WERE USED FOR BUSINESS PURPOSE. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERN AT NO INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON FRESH BORROWINGS AND PENDING LOANS ON WHICH THE ASSESSEE INCURRING INTEREST LIABILITY, STILL THERE IS A JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON BUSINESS PURPOSE AND ACCORDINGLY, SUCH INTEREST PAYMENT CANNOT BE ALLOWED AS A DEDUCTION. HOWEVER, IN THE PRESENT CASE, AS SEEN FROM FINANCIAL STATEMENT OF ASSESSEES, THERE IS AVAILABILITY OF OWN FUND AND RESERVE AND SURPLUS IN THE IMPUGNED ASSESSMENT YEARS. THESE FUNDS ARE MORE THAN SUFFICIENT TO MAKE INVESTMENT IN THE SUBSIDIARY COMPANY. THIS CAN BE SEEN FROM THE FOLLOWING TABLE: (A) FINANCIAL YEAR 2000-01 2001-02 20 02-03 (B) FUNDS AVAILABLE FOR UTILIZATION AFTER CONSIDERING THE IMPUGNED INVESTMENT (RS. IN LAKHS) 151.21 135.66 29.27 (C) LOANS FROM BANKS 109.58 84.96 (D) INVESTMENT MADE IN FIXED ASSETS 236.38 179.7 4 18.94 (E) INVESTMENT MADE IN 195.00 56.35 M/S. SUVISION 7. IN OUR OPINION, THE ASSESSEE USED ITS OWN NON INTEREST BEARING FUNDS AND THERE IS NO COST TO THE ASSESSEE AND IT IS A BUSINESS DECISION TAKEN BY THE ASSESSEE TO MAKE AN INVESTMENT IN SUBSIDIARY COMPANY AND THAT EVEN IF IT IS RESULTED IN NO INCOME TO THE ASSESSEE, THE NOTIONAL INTEREST CANNOT BE DISALLOWED ON THE REASON THAT THE ASSESSEE SHOULD HAVE USED ITS NON INTEREST BEARING I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 6 FUNDS FOR THE PURPOSE OF ITS OWN BUSINESS PURPOSE INSTEAD USING BORROWED FUNDS FOR ITS BUSINESS. THE ASSESSING OFFICER CANNOT SIT IN THE ARM CHAIR OF THE BUSINESS MEN AND DECIDE WHAT THE ASSESSEE HAS TO DO TO MAXIMIZE HIS PROFIT. IN OUR OPINION, THE JUDGEMENT RELIED BY THE ASSESSEES COUNSEL IN THE CASE OF M/S SA BUILDER CITED SUPRA SUPPORTS THE ASSESSEES CLAIM. ACCORDINGLY THIS GROUND TAKEN BY THE ASSESSEE IS ALLOWED.' IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS IS SUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE.' 8. IN VIEW OF THE ABOVE DECISION OF THE CO-ORDINATE BE NCH, THE GROUND BY THE REVENUE IS DISMISSED. 9. GROUND NO. 4 BY THE REVENUE READS AS UNDER: 'THE LEARNED CIT(A) ERRED IN ALLOWING DEPRECIATION ON INTANGIBLE ASSETS.' 10. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERI AL ON RECORD. WE FIND SIMILAR ISSUE CAME FOR CONSIDER ATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN I.T.A. NO. 198/HYD/2011 FOR A.Y. 2006-07 ORDER DATED 16.12.201 1 WHEREIN THIS TRIBUNAL ANSWERED THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE, WHICH READS AS FO LLOWS: '15. WE HAVE HEARD BOTH THE PARTIES. IN THIS CASE THE ASSESSEE PURCHASED 3,13,119 SHARES OF M/S. ARANDY LABORATORIES LTD. FOR A COST OF RS. 14,55,21,444 THAT IS WORKED OUT TO RS. 464.74 PER SHARE. BY THIS, THE ASSESSEE ACQUIRED THE ENTIRE ASSETS AND LIABILITIES OF THE ABOVE COMPANY. HOWEVER, THERE WAS EXCESS OF LIABILITIES OVER THE ASSETS WHICH WORKS OUT TO RS. 5,57,38,146. ACCORDING TO THE ASSESSEE THIS NOTHING BUT THE VALU E OF TECHNICAL KNOW-HOW OF BULK DRUGS, VALUE OF LICENCES, SALE AGREEMENT WITH MNC HELD BY THE ASSESSEE AND OTHER BUSINESS AND COMMERCIAL RIGHTS WHICH ARE INTANGIBLE ASSETS LIKE GOODWILL AND THE SAME IS CLASSIFIED AS GOODWILL IN THE BOOKS OF ACCO UNT AS PER THE PROVISIONS OF SECTION 32(1)(II) OF THE A CT. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE HAS I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 7 NOT PRODUCED THE BREAK UP DETAILS OF THE INTANGIBLE ASSETS AND THE ASSESSEE NOT ACQUIRED ANY BUSINESS OR COMMERCIAL RIGHTS SIMILAR TO THAT OF TECHNICAL KNOWHOW, PATENTS, TRADEMARKS, ETC. AND DENIED THE DEPRECIATION ON THE SAME. WE HAVE EXAMINED THE FACTS OF THE PRESENT CASE. IN THIS CASE THERE IS N O DISPUTE REGARDING ACQUISITION OF ALL THE ASSETS AND LIABILITIES OF THE ARANDY LABORATORIES LTD. AND THE LIABILITY OF THE ARANDY LABORATORIES LTD., IS EXCES S OVER THE ASSETS OF THE SAID COMPANY. THE DIFFERENT BETWEEN THESE TWO ITEMS IS CALLED AS GOODWILL BY TH E ASSESSEE. THIS REPRESENTS THE RIGHTS ACQUIRED BY T HE ASSESSEE WHICH IS NOTHING BUT COMMERCIAL RIGHTS, TECHNICAL KNOWHOW, PATENTS, LICENCES, BUSINESS AND COMMERCIAL RIGHTS. THERE IS NO NOMENCLATURE GIVEN IN THE BOOKS OF ACCOUNT TO THE INTANGIBLE RIGHTS ACQUI RED BY THE ASSESSEE IS IRRELEVANT FOR ASCERTAINING THE REAL NATURE OF THE TRANSACTION. THE TRUE NATURE OF THE ASSETS WHICH ARE ACQUIRED BY THE ASSESSEE IS BUSINESS AND COMMERCIAL RIGHTS WHICH IS NOTHING BUT GOODWILL ON WHICH THE ASSESSEE IS ENTITLED FOR DEPRECIATION U/S. 32(1)(II) OF THE ACT. THERE IS N O DISPUTE IN THIS CASE REGARDING THE PAYMENT OF RS. 14,55,21,444 AND THE TOTAL VALUE OF THE TANGIBLE ASSETS IS LESSER THAN RS. 5,57,38,146 AND THIS IS NOTHING BUT INTANGIBLE ASSETS IN THE FORM OF TECHNI CAL KNOWHOW, COPY RIGHT, TRADEMARK, LICENCES, FRANCHISEES AND THE CLAIM OF DEPRECIATION ON THESE ITEMS IS ADMISSIBLE AND IT FITS WITHIN THE DESCRIPT ION OF SECTION 32(1)(II) OF THE ACT. OUR VIEW IS SUPPO RTED BY THE VARIOUS JUDGEMENTS RELIED ON BY THE ASSESSEE'S COUNSEL. ACCORDINGLY THIS GROUND OF THE REVENUE IS DISMISSED.' 11. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, THIS GROUND OF THE REVENUE IS DISMISSED. 12. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH APRIL, 2012. SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 11 TH APRIL, 2012 I.T.A. NO. 2126/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ==================== 8 COPY FORWARDED TO: 1. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 3(2), 7 TH FLOOR, 'B' BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERA BAD. 2. M/S. SRI KRISHNA DRUGS LTD., C - 4, INDUSTRIAL AREA, UPPAL, HYDERABAD. 3. THE CIT(A) - IV, HYDERABAD. 4. THE CIT - III, HYDERABAD. 5 . THE DR B BENCH, ITAT, HYDERABAD TPRAO