Nabros Pharma Pvt. Ltd., Ahmedabad V. DCIT, Circle 3(1)(1), Ahmedabad

ITA 2757/AHD/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4349 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 07-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside
• Section: 10B

Judgement Text

ITA NO. 2757/AHD/2017 NABROS PHARMA PVT LTD VS. DCIT ASSESSMENT YEAR: 2007-08 PAGE 1 OF 4 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR VP AND RAJPAL YADAV JM] ITA NO. 2757/AHD/2017 ASSESSMENT YEAR: 2007-08 NABROS PHARMA PVT LTD ..................AP PELLANT 3 RD FLOOR, NABROS HOUSE, B/H BRITISH LIBRARY, LAW GARDEN, AHMEDABAD 380 006 [PAN : AAACN 7886 N] VS. DY. COMMISSIONER OF INCOME-TAX ...........................RESPONDENT CIRCLE 3 (1)(1), AHMEDABAD APPEARANCES BY: BANDISH SOPARKAR, FOR THE APPELLANT MUDIT NAGPAL, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : 15.03.2019 DATE OF PRONOUNCING THE ORDER : 15.03.2019 O R D E R PER PRAMOD KUMAR, VP: 1. THE PETITION SEEKING AN EARLY HEARING OF THIS AP PEAL WAS FIXED BEFORE US TODAY. WHEN THE SAID PETITION CAME UP FOR HEARING AND OUR ATTENTION WAS INVITED TO THE FACT THAT THE GRIEVANCE RAISED IN THIS APPEAL, ON MERITS , IS COVERED BY A CO-ORDINATE BENCH ORDER DATED 01.11.2018 IN ASSESSEES OWN CASE, WE P UT IT TO THE PARTIES WHETHER APPEAL ITSELF CAN BE DISPOSED OF TODAY. IN RESPONS E TO THIS SUGGESTION, AND AFTER GOING THROUGH THE CO-ORDINATE BENCH DECISION, LEARN ED DEPARTMENTAL REPRESENTATIVE WAS GRACIOUS ENOUGH TO ACCEPT THE SUGGESTION. WE, THEREFORE, HEARD THE APPEAL TODAY ITSELF. 2. THE APPEAL IS DIRECTED AGAINST ORDER DATED 11 TH OCTOBER 2017 PASSED BY THE CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 14 3(3) R.W.S. 147 OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2007-08. 3. GRIEVANCE OF THE APPELLANT, AS PRESSED BEFORE US , IS THAT LEARNED CIT(A) ERRED IN LAW AND ON FACTS CONFIRMING REWORKING OF EXEMPTI ON UNDER SECTION 10B BY ASSESSING OFFICER REDUCING PROFIT OF ELIGIBLE UNIT BY REDUCING PROFIT OF ELIGIBLE UNIT BY RS.33,08,149/- INVOKING PROVISIONS OF SECTION 10B(7 ) R.W.S. 80IA(10) OF THE ACT. 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. ITA NO. 2757/AHD/2017 NABROS PHARMA PVT LTD VS. DCIT ASSESSMENT YEAR: 2007-08 PAGE 2 OF 4 5. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY TH E CO-ORDINATE BENCH DECISION (SUPRA) WHEREIN, ON ADMITTEDLY MATERIALLY IDENTICAL FACTS, THE CO-ORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS:- 4. WHEN THE MATTER WAS CALLED FOR HEARING, THE LEA RNED AR FOR THE ASSESSEE INSISTED THAT THE ACTION OF THE REVENUE IS NEITHER SUSTAINABLE ON THE JURISDICTIONAL POINT NOR ON MERITS OF THE ADDITION. THE LEARNED AR SIMULTANEOUSLY SUBMITTED THAT WHERE THE TRIBUNAL IS CONVINCED WITH THE SUBSTANTIVE ISSUE ON MERITS, THE ADJUDICATION ON LE GAL GROUND MAY NOT BE NECESSARY. ADDRESSING THE ISSUE ON MERITS, THE LEAR NED AR POINTED OUT THAT THE ASSESSEE IS A MANUFACTURER OF PHARMACEUTICAL PR ODUCTS AND HAS DERIVED INCOME FROM 100% EXPORT ORIENTED UNIT WHICH IS ELIG IBLE FOR DEDUCTION UNDER S.10B OF THE ACT. THE ASSESSEE ALSO DERIVES INCOME FROM OTHER NON-ELIGIBLE UNIT AS WELL. MAKING REFERENCE TO THE ASSESSMENT OR DER AS WELL AS THE FIRST APPELLATE ORDER, THE LEARNED AR SUBMITTED THAT IT I S THE CASE OF THE REVENUE THAT THE DIRECTORS/SHAREHOLDERS OF THE ASSESSEE COM PANY HAVE ADVANCED HUGE AMOUNT OF INTEREST FREE FUNDS TO THE ASSESSEE COMPANY RUNNING INTO CRORES DURING THE PERIOD OF EXEMPTION/DEDUCTION CLA IMED BY THE ASSESSEE COMPANY UNDER S.10B OF THE ACT IN RESPECT OF ELIGIB LE UNIT. IT WAS SUBMITTED THAT IT IS THE CASE OF THE REVENUE THAT BY PROVIDIN G INTEREST FREE FUNDS TO THE ASSESSEE COMPANY AND BY NOT CHARGING INTEREST THERE ON, THE PROFITS OF THE ELIGIBLE UNIT UNDER S.10B OF THE ACT HAS BEEN ARTIF ICIALLY JACKED UP. THE LEARNED AR THUS POINTED OUT THAT PROVISIONS OF SECTION 10B( 7) R.W.S. 80IA(10) OF THE ACT WAS APPLIED AND THE AO TOOK A VIEW THAT THE AVA ILABILITY OF INTEREST FREE FUNDS OF LARGE AMOUNTS TO THE ASSESSEE COMPANY BY T HE DIRECTOR/SHAREHOLDER WAS AN ARRANGEMENT TO SHOW MORE THAN ORDINARY PROFI TS BY THE ASSESSEE COMPANY TO ENABLE THE ASSESSEE COMPANY TO CLAIM DED UCTION ON LARGE PROFITS UNDER S.10B OF THE ACT. THE AO ACCORDINGLY COMPUTED NOTIONAL COSTS TOWARDS INTEREST ON SUCH INTEREST FREE FUNDS MADE AVAILABLE BY THE DIRECTORS/SHAREHOLDERS TO THE COMPANY AND ASSUMED T HAT TO BE AN ORDINARY EXPENDITURE FOR THE PURPOSES OF DETERMINATION OF OR DINARY PROFITS IN TERMS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. THE N OTIONAL INTEREST EXPENDITURE ATTRIBUTABLE TO ELIGIBLE UNIT AMOUNTING TO RS.41,54 ,153/- WAS ACCORDINGLY REDUCED FROM THE DEDUCTION AVAILABLE TO THE ASSESSE E COMPANY AND AS A COROLLARY, THE TAXABLE INCOME OF THE ASSESSEE COMPA NY WAS INCREASED TO THIS EXTENT. IN THIS BACKGROUND, THE LEARNED AR REFERRED TO THE FINANCIAL STATEMENT AS ANNEXED IN THE PAPER BOOK AND SUBMITTED THAT WHI LE THE DEDUCTION UNDER S.10B OF THE ACT WAS CLAIMED FROM AY 2007-08, THE D IRECTORS/SHAREHOLDERS OF THE ASSESSEE COMPANY HAD PROVIDED INTEREST FREE FUN DS OF SIMILAR TYPE IN THE EARLIER FINANCIAL YEARS AS WELL. THE FUNDS OF THE D IRECTORS/SHAREHOLDERS WERE ALSO FOUND TO BE THEIR OWN AND WERE NOT BORROWED BY THEM TO, IN TURN, PROVIDE INTEREST FREE LENDING TO THE COMPANY. THE LEARNED A R SUBMITTED THAT 80IA(10) OF THE ACT DOES NOT CONTEMPLATE PROVIDING FOR EXPEN SES ON NOTIONAL BASIS WHICH HAS NOT BEEN INCURRED BY THE ASSESSEE COMPANY AT ALL. THE LAW DOES NOT OBLIGE THE ASSESSEE TO INCUR EXPENSES. THE LEAR NED AR ALSO POINTED OUT THAT THE ISSUE IS NO LONGER RES INTEGRA AND COVERED BY THE DECISION OF THE CO- ORDINATE BENCH OF TRIBUNAL IN THE CASE OF ITO VS. G ILVERT ISPAT ITA NO. 345/CHD/2011. 5. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE OBSERVATIONS MADE BY THE CIT(A) CONCLUDING THE ISSUE AGAINST THE ASSESSE E. ITA NO. 2757/AHD/2017 NABROS PHARMA PVT LTD VS. DCIT ASSESSMENT YEAR: 2007-08 PAGE 3 OF 4 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE CENTRAL ISSUE INVOLVED IN THE CAPTIONED APPEAL IS WHETHER AN 'ARR ANGEMENT' OF BUSINESS TRANSACTED BETWEEN THE ASSESSEE AND ITS DIRECTORS/S HAREHOLDERS CAN BE INFERRED WHEREBY THE ASSESSEE EARNED MORE THAN ORDI NARY PROFITS AS CONTEMPLATED UNDER S. 10B(7) R.W.S. 80IA(10) OF THE ACT. AN INTEGRAL QUESTION WOULD ALSO ARISE AS TO WHETHER THE CHARGE OF INTERE ST ON MONEY LENT BY THE DIRECTORS/SHAREHOLDERS CAN BE SAID TO BE AN ACTIVIT Y FALLING WITHIN THE SCOPE OF THE EXPRESSION 'BUSINESS TRANSACTED BETWEEN THEM' A S CODIFIED IN SECTION 80IA(10) OF THE ACT. 6.1 SECTION 10B OF THE ACT ESSENTIALLY PROVIDES FOR TAX INCENTIVE IN THE FORM OF DEDUCTION OF PROFITS AND GAINS DERIVED FROM EXPORT OF ARTICLES OR THINGS ETC. BY VIRTUE OF SUB-SECTION 7 OF SECTION 10B OF THE ACT, FETTERS IMPOSED UNDER S.80IA (10) OF THE ACT ARE APPLICABLE WHILE DETERMINING DE DUCTION UNDER S.10B OF THE ACT. SECTION 80IA(10), IN TURN, SEEKS TO NEGATE AN ARTIFICIAL INFLATION IN PROFITS DUE TO SOME BUSINESS ARRANGEMENTS WITH AN OBJECT TO CLAIM HIGHER DEDUCTION. SECTION 80IA(10) ENABLES THE AO TO SUBST ITUTE THE ORDINARY AND REASONABLE PROFITS FOR THE PURPOSES OF DEDUCTION UN DER S.10B OF THE ACT IN CERTAIN CIRCUMSTANCES. 6.2 AS POINTED OUT ON BEHALF OF THE ASSESSEE AND AS BORNE OUT FROM THE ORDERS OF THE AUTHORITIES BELOW, IT IS APPARENT THAT THE A SSESSEE HAD PROVIDED INTEREST FREE FUNDS OF SUBSTANTIAL AMOUNTS EVEN PRIOR TO FIN ANCIAL YEAR 2006-07 (AY 2007-08) WHEN THE DEDUCTION UNDER PROVISIONS OF SEC TION 10B OF THE ACT WAS FIRST AVAILED. SECONDLY, DIRECTORS/SHAREHOLDERS HAV E UTILIZED THEIR OWN FUNDS FOR LENDING TO THE ASSESSEE COMPANY ALBEIT INTEREST FREE. NEEDLESS TO SAY, THE CORPORATE VEIL EXISTS BETWEEN THE SHAREHOLDERS AND THE COMPANY. THE EXTRA PROFIT ALLEGEDLY EARNED BY THE CORPORATE COMPANY OW ING TO SUCH INTEREST FREE FUNDS CANNOT BE RETURNED TO THE COFFERS OF ITS SHAR EHOLDERS WITHOUT INCURRING DIVIDEND TAX ETC. EVEN UNDER INCOME TAX LAWS. BESID ES, WE FIND IT MANIFEST THAT THE CHARGING OF INTEREST OR OTHERWISE ON FUNDS PROVIDED BY THE DIRECTORS/SHAREHOLDERS TO THE ASSESSEE COMPANY CANN OT FALL WITHIN THE SWEEP OF EXPRESSION 'BUSINESS TRANSACTED BETWEEN THEM' AS CONTEMPLATED UNDER S.80IA(10) OF THE ACT. THE AFORESAID EXPRESSION IMP LIEDLY INDICATES TRANSACTION IN THE COURSE OF 'BUSINESS ACTIVITY'. A MERE DIVERS ION OF FUNDS IN THE FORM OF INTEREST FREE LENDING BY SHAREHOLDERS TO ITS COMPAN Y DO NOT PARTAKE THE CHARACTER OF A BUSINESS TRANSACTION. WE ARE ALIVE T O THE FACT THAT WHILE ALLEGING 'ARRANGEMENT', THE AO HAS NARRATED CIRCUMSTANCES LI KE WITHDRAWAL OF INTEREST FREE FUNDS IMMEDIATELY ON THE COMPLETION OF ELIGIBL E PERIOD FOR AVAILING BENEFIT UNDER S.10B OF THE ACT. NO DOUBT, SUCH CIRCUMSTANCE S BRING SOME DISQUIET. HOWEVER, SUCH CIRCUMSTANCES CANNOT BE REGARDED AS O VERWHELMING FOR THE PURPOSES OF GRAVE ALLEGATION OF ARRANGEMENT CONTEMP LATED UNDER S. 80IA(10) OF THE ACT. WE THUS FIND THAT THE REVENUE HAS MIS-DIRECTED ITSELF IN LAW AS WELL AS ON FACTS IN ARTIFICIALLY COMPUTING T HE NON-EXISTENT INTEREST COSTS AND THUS DENYING THE DEDUCTION UNDER S.10B OF THE A CT ELIGIBLE TO THE ASSESSEE. THE ACTION OF THE REVENUE IS WHOLLY UNSUS TAINABLE IN LAW AND DESERVES TO BE SET ASIDE AND CANCELLED. WHILE DOING SO, WE ALSO NOTE THAT SIMILAR ISSUE HAD CROPPED UP IN THE CASE OF GILVERT ISPAT (SUPRA) ALSO WHICH WAS ANSWERED IN FAVOUR OF THE ASSESSEE. CONSEQUENTL Y, THE ORDER OF THE CIT(A) ON THE AFORESAID ISSUE IS SET ASIDE AND THE AO IS DIRECTED TO EXCLUDE THE AFORESAID ADJUSTMENT FOR THE PURPOSES OF DETERM INATION OF PROFITS OF THE ASSESSEE COMPANY UNDER S.10B OF THE ACT. ITA NO. 2757/AHD/2017 NABROS PHARMA PVT LTD VS. DCIT ASSESSMENT YEAR: 2007-08 PAGE 4 OF 4 7. RESULTANTLY, APPEAL OF THE ASSESSEE IS ALLOWED O N MERITS ON THIS SCORE. 6. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE CO-ORDINATE BENCH. RESPECTFULLY FOLLO WING THE SAME, WE UPHELD THE PLEA OF THE ASSESSEE AND DELETE THE IMPUGNED REDUCTION O F 10B RELIEF BY RS.33,08,149/-. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 7. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TERM S INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 15 TH MARCH, 2019 SD/- SD/- RAJPAL YADAV PRAMOD KUMAR (JUDICIAL MEMBER) (VICE PRESIDENT) AHMEDABAD, THE 15 TH DAY OF MARCH, 2019 **BT COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD 1. DATE OF DICTATION: ....ORDER PREPARED AS PER TH E THREE PAGES MANUSCRIPTS OF HONBLE VP WHICH ARE ATTACHED HEREWITH THE APPEAL FILE..15.03.2019.. .. 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: .... 15.03.2019............ 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR . P.S./P.S.: 15.03.2019....... . 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: ... 15.03.2019.... 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK : 15.03.2019 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK : . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER : 8. DATE OF DESPATCH OF THE ORDER: ......