Genesis Organics Private Limited, Vadodara V. The Income Tax Officer, Ward-1(1)(3), Vadodara

ITA 2440/AHD/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 1824 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2005-2006
• Appeal Filed On: 18-12-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S S SHUKLA
• Keywords: Set aside
• Section: 143(3); 37(1); 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ./ ITA NOS. 2440-2441/AHD/2018 / ASSTT. YEARS: 2005-06 & 2006-07 M/S GENESIS ORGANICS PVT. LTD., 284/1,2,3, G.I.D.C. ESTATE, MAKARPURA, VADODARA-390010. PAN: AABCG5635R VS. I.T.O, WARD-1(1)(3), VADODARA. (APPLICANT) (RESPONDENT) ASSESSEE BY : SHRI SURENDRA MODIANI, A.R REVENUE BY : SHRI S.S. SHUKLA, SR.D.R /DATE OF HEARING : 16/06/2021 /DATE OF PRONOUNCEMENT: 28/06/2021 /O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-1, VADODARA, OF EVEN DATED 13/11/2018 ARISING IN THE MATTER OF ASSESSMENT ORDER PASSED UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (HERE-IN-AFTER REFERRED TO AS 'THE ACT') RELEVANT TO THE ASSESSMENT YEARS 2005-2006 & 2006-07. ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 2 2. FIRST WE TAKE UP ITA NO. 2440/AHD/2018 FOR A.Y. 2005-06 FOR THE PURPOSE OF ADJUDICATION. 3. THE ONLY ISSUE RAISED BY THE ASSESSEE IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 14,24,354.00 OUT OF THE TOTAL DISALLOWANCE OF RS. 28,48,709.00 MADE BY THE AO INSTEAD OF GIVING 100% RELIEF. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF TRADING IN INTERMEDIATE DRUGS, CHEMICALS AND PHARMACEUTICALS. IT WAS CONTENDED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS THAT IT RECEIVES ORDERS FROM THE OVERSEAS CUSTOMERS TO SUPPLY THE GOODS WITH CERTAIN SPECIFICATIONS SUCH AS PURITY OF THE GOODS, MOISTURE CONTENTS, YIELDS WEIGHT ETC. TO MATCH THE SPECIFICATIONS OF THE CUSTOMERS, THE ASSESSEE HAS TO CONDUCT A LOT OF RESEARCH IN THE LABORATORIES ON THE PRODUCTS TO BE SUPPLIED TO SUCH CUSTOMERS. THE SPECIFICATIONS PROVIDED BY THE CUSTOMER ARE NOT SETTLED IN ONE ATTEMPT, RATHER THE TECHNICAL STAFF OF THE ASSESSEE HAS TO UNDERGO FOR NUMBER OF ATTEMPTS TO REACH SUCH LEVEL OF THE SPECIFICATIONS. IT IS BECAUSE THE ASSESSEE IS GETTING THE ORDERS OF DIFFERENT PRODUCTS FOR THE DIFFERENT SPECIFICATIONS. ACCORDINGLY THERE ARE DIFFERENT SPECIFICATION OF THE PRODUCTS TO BE SUPPLIED FOR WHICH THE ASSESSEE HAS TO MONITOR THE PRODUCTS ON REGULAR BASIS. THUS IT IS THE ONGOING PROCESS FOR CONDUCTING SUCH RESEARCH AND DEVELOPMENT ACTIVITIES ON THE PRODUCTS TO BE SUPPLIED TO THE CUSTOMERS. AS SUCH THE ASSESSEE IS NOT ENGAGED MERELY SIMPLE TRADING ACTIVITY. THE ASSESSEE HAS TO MAINTAIN THE STANDARDS OF THE PRODUCT SPECIFICATIONS. ACCORDINGLY THE ASSESSEE SUBMITTED THAT IT HAS INCURRED A SUM OF RS. 28,48,708.00 UNDER THE RESEARCH AND DEVELOPMENT ACTIVITY. 4.1 IT WAS ALSO CONTENDED THAT THOUGH THE ASSESSEE HAS GIVEN NOMENCLATURE OF SUCH EXPENSES UNDER THE HEAD RESEARCH AND DEVELOPMENT BUT IT HAS CLAIMED THE DEDUCTION OF SUCH EXPENSES UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT AND NOT UNDER SECTION 35 OF THE ACT. ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 3 4.2 IT WAS ALSO POINTED OUT BY THE ASSESSEE THAT ITS RESEARCH AND DEVELOPMENT UNIT WAS SUBSEQUENTLY NOTIFIED/RECOGNIZED BY THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (DSIR) AFTER CARRYING OUT THE AUDIT OF THE RESEARCH ACTIVITIES CARRIED OUT BY IT (THE ASSESSEE) IN THE LAST 3 PREVIOUS YEARS. THUS THE ACTION OF THE ASSESSEE THAT IT IS CARRYING OUT THE RESEARCH AND DEVELOPMENT ACTIVITY CANNOT BE DOUBTED. 4.3 HOWEVER, THE AO BEING DISSATISFIED WITH THE CONTENTION OF THE ASSESSEE FOUND THAT THE ASSESSEE IS NOT CARRYING OUT ANY ACTIVITY WHICH CAN BE CALLED AS RESEARCH AND DEVELOPMENT ACTIVITY. IT IS BECAUSE THERE WAS THE SPOT VERIFICATION AT THE PREMISES OF THE ASSESSEE AND THE REPORT OF SUCH VERIFICATION PERTAINING TO THE ASSESSMENT YEAR 2004-05 SUGGEST THAT THE ACTIVITIES OF THE ASSESSEE ARE RELATED TO TESTING AND SAMPLING OF THE PRODUCTS TO BE SUPPLIED TO THE CUSTOMERS. 4.4 THE AO, ON THE BASIS OF THE ASSESSMENT FOR THE AY 2004-05 HAS ALSO OBSERVED THAT THE RESEARCH AND DEVELOPMENT ACTIVITIES HAS BEEN CARRIED OUT BY THE SISTER CONCERN NAMELY SNEHAL PHARMA CHEM WHICH IS ALSO ENGAGED IN MANUFACTURING ACTIVITY. SIMILAR, THE EXPENSES WERE ALSO DISALLOWED BY THE AO IN THE ASSESSMENT PROCEEDINGS 2004-05 ON THE REASONING THAT SUCH EXPENSES HAVE BEEN INFLATED WHICH ARE BOGUS IN NATURE IN THE GARB OF RESEARCH AND DEVELOPMENT ACTIVITIES 4.5 KEEPING IN VIEW OF THE ABOVE FACTS, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR RS. 28,48,709.00 AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 5. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE LEARNED CIT (A). 5.1 THE ASSESSEE BEFORE THE LEARNED CIT (A) REITERATED THE SUBMISSIONS AS MADE BEFORE THE AO DURING THE ASSESSMENT PROCEEDINGS. THE LEARNED CIT (A) CALLED FOR THE REMAND REPORT FROM THE AO WHO IN TURN VIDE LETTER DATED 3 OCTOBER 2018 SUBMITTED THAT THE EXPENSES INCURRED BY THE ASSESSEE ARE GENUINE BUT THE SAME DO NOT RELATE TO THE RESEARCH AND DEVELOPMENT ACTIVITY. ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 4 5.2 THE ASSESSEE IN RESPONSE TO SUCH REMAND REPORT SUBMITTED THAT IT HAS MADE ITS CLAIM NOT UNDER SECTION 35 OF THE ACT BUT UNDER THE PROVISIONS OF SECTION 37 OF THE ACT. 5.3 THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE REMAND REPORT OF THE AO FOUND THAT THE OUTCOME OF RESEARCH AND DEVELOPMENT FACILITY MAINTAINED BY THE ASSESSEE HAS BEEN UTILIZED BY THE GROUP COMPANIES IN THE MANUFACTURING PROCESS OF THE PHARMACEUTICAL PRODUCTS. FURTHERMORE, THERE WAS NO EVIDENCE AVAILABLE ON RECORD SUGGESTING THAT THE ASSESSEE HAS PURCHASED THE GOODS FROM THE SISTER CONCERN AT THE LOWER RATE. ACCORDINGLY THE LEARNED CIT (A) HELD THAT THE RESEARCH AND DEVELOPMENT ACTIVITIES HAVE NOT BEEN CARRIED OUT EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEE. THEREFORE, ALL THE EXPENDITURES CLAIMED BY THE ASSESSEE UNDER RESEARCH AND DEVELOPMENT ACTIVITIES CANNOT BE ALLOWED TO IT FOR DEDUCTION UNDER SECTION 37 OF THE ACT. THUS THE LEARNED CIT (A) RESTRICTED THE DISALLOWANCE TO THE TUNE OF 50% I.E. AMOUNTING TO RS. 14,24,354.00 ONLY. HENCE THE LEARNED CIT (A) ALLOWED THE APPEAL OF THE ASSESSEE IN PART. 6. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LEARNED AR BEFORE US SUBMITTED THAT THERE IS NO MANDATE UNDER THE PROVISIONS OF SECTION 37 OF THE ACT THAT THERE SHOULD BE ANY BENEFIT OUT OF THE EXPENSES INCURRED BY THE ASSESSEE. THE EXPENSES WERE INCURRED EXCLUSIVELY FOR THE BUSINESS PURPOSE, SO THE SAME SHOULD BE ALLOWED. 8. ON THE OTHER HAND THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 9. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS THE 2 ND ROUND OF LITIGATION BEFORE US. THE ITAT ON ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 5 THE PREVIOUS OCCASION HAS SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR DE NOVO ADJUDICATION. THE FOLLOWING UNDISPUTED FACTS EMERGE FROM THE PRECEDING DISCUSSION: I. THE ASSESSEE HAS CLAIMED THE DEDUCTION OF THE RESEARCH AND DEVELOPMENT EXPENSES UNDER SECTION 37 OF THE ACT AND NOT UNDER SECTION 35 OF THE ACT. II. THE GENUINENESS OF THE EXPENSES HAVE BEEN ADMITTED BY THE AO IN THE REMAND REPORT DATED 20-09-2018. 9.1 IN THE LIGHT OF THE ABOVE DISCUSSION THE LIMITED CONTROVERSY THAT ARISES FOR OUR ADJUDICATION WHETHER THE ASSESSEE HAS INCURRED THE IMPUGNED EXPENSES WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AS MANDATED UNDER THE PROVISIONS OF SECTION 37 OF THE ACT. IN THE CASE ON HAND THE ASSESSEE IS HARPING UPON THAT THE EXPENSES IN QUESTION ARE GENUINE AS ADMITTED BY THE REVENUE AND THEREFORE THE SAME SHOULD BE ALLOWED AS DEDUCTION. HOWEVER, THE LEARNED CIT (A) HAS GIVEN VERY CLEAR-CUT FINDING THAT THE EXPENSES IN DISPUTE HAVE BEEN INCURRED BY THE ASSESSEE BUT ITS OUTCOME HAS BEEN USED BY THE GROUP AS A WHOLE. THUS, THE ASSESSEE HAS NOT AVAILED THE BENEFIT OF THE IMPUGNED EXPENSES IN ENTIRETY AND THEREFORE THE ENTIRE EXPENSES CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME OF THE ASSESSEE. ACCORDINGLY, THE LEARNED CIT (A) HAS ALLOWED THE RELIEF TO THE ASSESSEE TO THE TUNE OF 50% OF THE TOTAL EXPENSES INCURRED UNDER THE HEAD RESEARCH AND DEVELOPMENT ACTIVITIES. 9.2 THE PROVISIONS OF SECTION 37(1) OF THE ACT MANDATES THAT THE ASSESSEE CAN CLAIM THE DEDUCTION IF THE EXPENSES HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. IN THE EVENT THE CONDITIONS STIPULATED UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT ARE NOT COMPLIED WITH, THEN THE ASSESSEE CANNOT CLAIM THE DEDUCTION UNDER THE SECTION. 9.3 THE FINDING OF THE LEARNED CIT (A) HAS NOT BEEN CONTROVERTED BY THE LEARNED AR AT THE TIME OF HEARING AND THEREFORE THE GENUINENESS OF THE EXPENSES CANNOT BE A CRITERIA FOR ALLOWING THE DEDUCTION UNDER SECTION 37(1) OF THE ACT IN THE GIVEN FACTS AND CIRCUMSTANCES. ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 6 9.4 IT IS ALSO IMPORTANT TO NOTE THAT THE ASSESSEE ITSELF IN THE SUBMISSION MADE BEFORE THE AO DATED 20 MARCH 2018 HAS ADMITTED AS UNDER: IT IS SUBMITTED THAT THE PRODUCTS DEVELOPMENT OR IMPROVED BASED ON APPELLANTS RESEARCH ACTIVITIES (OR ACTIVITIES RELATING TO THE EXPENDITURE UNDER CONSIDERATION) ARE MANUFACTURED BY THE GROUP CONCERN ACCORDING TO THE APPELLANTS SPECIFICATIONS, PURCHASED BY THE APPELLANT AND EXPORTED 9.5 IN RESPECT OF THE ABOVE SUBMISSION OF THE ASSESSEE, THE LEARNED CIT (A) IN HIS ORDER HAS GIVEN HIS FINDINGS AS UNDER: IT HAS BEEN ALSO CLAIMED BY THE LD.A.R THAT THE OUTCOME OF R & D FACILITY HAS BEEN UTILIZED BY THE GROUP COMPANIES FOR MANUFACTURING OF THE PHARMACEUTICAL PRODUCTS PURCHASED BY THE APPELLANT FOR EXPORT PURPOSES. THUS, FROM THE ABOVE MENTIONED FACTS, IT IS CLEAR THAT THE RESULTS OF THE R &S HAVE ACTUALLY BEEN UTILIZED BY THE GROUP CONCERNS AND THERE IS NO EVIDENCE THAT THE SAME WAS USED EXCLUSIVELY FOR THE PURPOSES OF PRODUCTS PURCHASED BY THE APPELLANT AND NOT FOR THE PURCHASES MADE BY ANY OTHER CONCERN FROM THE MANUFACTURING ENTITY. IT IS ALSO NOT ESTABLISHED AS TO WHETHER AFTER INCURRING THE EXPENDITURE ON R & D, THE APPELLANT HAS PURCHASED PRODUCTS FROM THE SISTER CONCERN AT LOWER RATE. 9.6 AT THIS JUNCTURE, WE ALSO FIND IMPORTANT TO REFER THE FINDING OF THE LEARNED CIT (A) FOR THE ASSESSMENT YEAR 2004-05 IN SUPPORT OF THE CONTENTION OF THE LEARNED CIT (A) FOR THE YEAR UNDER CONSIDERATION. THE RELEVANT FINDING OF THE LEARNED CIT (A) FOR THE ASSESSMENT YEAR 2004-05 READS AS UNDER: THE CORRESPONDENCE SUBMITTED IN THE PAPER BOOK ALSO SUGGEST THAT THE R &D ACTIVITIES ARE PERHAPS CARRIED OUT BY THE SISTER CONCERN SNEHAL PHARMA CHEM WHICH IS ALSO THE MANUFACTURING CONCERN AND THE MOST LOGICAL ENTITY TO HOUSE R &D CENTRE. 9.7 THE ABOVE FACTS HAVE NOT BEEN CONTROVERTED BY THE LEARNED AR FOR THE ASSESSEE AT THE TIME OF HEARING. THUS IT IS TRANSPIRED THAT R & D FACILITY WAS NOT EXCLUSIVELY USED BY THE ASSESSEE FOR ITS OWN ACTIVITIES. THUS, WE DO NOT FIND ANY MERIT IN THE ARGUMENT ADVANCED BY THE LEARNED AR FOR THE ASSESSEE. HENCE WE CONCUR WITH THE FINDING OF THE AUTHORITIES BELOW. THUS THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 9.8 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED. ITA NOS2440-2441/AHD/2018 ASSTT. YEARS 2005-06 & 2006-07 7 10. COMING TO ITA NO. 2441/ AHD/2018 FOR A.Y. 2005-06, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL: THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIRMING DISALLOWANCE TO THE EXTENT OF RS.1274441/- (50% OF RS.2548883/- IN RESPECT OF EXPENDITURE CLAIMED AS EXPENDITURE ON RESEARCH ACTIVITIES. 11. AT THE OUTSET WE NOTE THAT IDENTICAL GROUND WAS RAISED BY THE ASSESSEE IN ITS OWN CASE BEARING ITA NO.2440/AHD/2018 CORRESPONDING TO A.Y. 2005-06 WHICH HAS BEEN DECIDED AGAINST THE ASSESSEE VIDE PARAGRAPH NO. 9 OF THIS ORDER. FOR THE DETAILED DISCUSSION PLEASE REFER THE ABOVE MENTIONED PARAGRAPH NUMBER OF THIS ORDER. ACCORDINGLY, WE HOLD THAT FINDING GIVEN IN ABOVE PARAGRAPHS WILL MUTATIS MUTANDIS APPLY HERE IN THIS CASE ALSO. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 12. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED . ORDER PRONOUNCED IN THE COURT ON 28/06/2021 AT AHMEDABAD. SD/- SD/- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (TRUE COPY) AHMEDABAD; DATED 28/06/2021 MANISH