KHANDELWAL LABORATORIES P.LTD, MUMBAI V. CIT 6, MUMBAI

ITA 2765/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3147 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2014
• Court: TRIBUNAL
• Department Lawyers: SANJAY BAHADUR
• Assessee Lawyers: ANUJ KISNADWALLA
• Keywords: Capital asset; Gift; Business income; Audit objection; Transactions in derivatives; Earning of tax free income; Tax effect; Capital receipt; Revenue expenditure
• Section: 43B; 143(3); 14A; 115JB; 37(1); 37; 263; 2; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI R. C. SHARMA , ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ./ I.T.A. NO. 2765/MUM/2014 ( / ASSESSM ENT YEAR: 2009 - 10 ) KHANDELWAL LABORATORIES PVT. LTD. 49/78, D. LAD PATH, CHINCHPOKLI, MUMBAI - 400 033 / VS. CIT - 6, 5 TH FLOOR, AAYAKAR BHAWAN, MUMBAI ./ ./ PAN/GIR NO. AAACK 4225 E ( / APPELLANT ) : ( / RESP ONDENT ) / APPELLANT BY : SHRI VIJAY MEHTA & SHRI ANUJ KISNADWALLA / RESPONDENT BY : SHRI SANJAY BAHADU R / DATE OF HEARING : 12.05.2016 & ./ I.T.A. NO. 2702/MUM/2014 ( / ASSESSMENT YEAR: 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. 49/78, D. LAD PATH, CHINCHPOKLI, MUMBAI - 400 033 / VS. CIT - 6 , 5 TH FLOOR, AAYAKAR BHAWAN, MUMBAI ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI VIJAY MEHTA / RESPONDENT BY : SHRI SANJAY BAHADU R DATE OF HEARING : 1 1 .05.2016 DATE OF PRONOUNCEMENT : 23 .06.2016 2 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT / O R D E R PER R. C. SHARMA, A. M.: TH ESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT PASSED U/S. 263 FOR THE ASSESSMENT YEAR S (A.YS.) 2009 - 10 AND 2010 - 11. COMMON GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN BOTH THE YEAR UNDER CONSIDERATION. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN THE A.Y. 2009 - 10: 1. ON THE FACTS AND CIRCUMS TANCES OF THE CASE, THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX IS BAD IN LAW, VOID AB INITIO WITHOUT JURISDICTION AS THE ORDER U/S. 263 IS PASSED BY THE LD. CIT ON THE BASIS OF AUDIT OBJECTION MEMO DT: 02/04/2013. 2. ON THE FACTS AND CIRCUMS TANCES OF THE CASE, THE ORDER PASSED U/S 263 OF THE ACT BY LD. CIT MAY BE QUASHED AND SET ASIDE ON THE GROUND THAT THE LD . CIT DID NOT CONSIDER THE ARGUMENT TAKEN BY THE APPELLANT THAT THE ORDER PASSED BY THE A O U/S 143(3) IS NEITHER ERRONEOUS NOR PREJUDIC IAL TO THE INTEREST OF THE REVENUE. 2.1 THAT ALL THE ISSUES RAISED BY THE L D CIT, A POSSIBLE VIEW HAS BEEN TAKEN BY THE ASSESSING OFFICER WHILE PASSING THE ORDER U/S 143(3). HENCE NEITHER THE ORDER IS PREJUDICIAL NOR ERRONEOUS TO THE INTEREST OF REVENUE . 2.2 THE LD CIT OUGHT TO HAVE HELD THAT THE ORDER PASSED BY THE A O WAS NEITHER ERRONEOUS NOR PREJUDICIAL OF THE INTEREST OF REVENUE IN RESPECT OF THE FOLLOWING ISSUES IN THE LIGHT OF DETAILS/DOCUMENTS AND SUBMISSION MADE BEFORE HIM DURING THE ASSESSMEN T PROCEEDING: O STT EXPENSES OF RS. 1 9.42,671/ - [FOR DISALLOWANCE U/S 14A VIS - - VIS RULE 8D] O INTEREST EXPENSES OF RS.2,00,83,931/ - FOR DISALLOWANCE U/S 14A VIS - A - VIS RULE 8D (NET OF INTEREST RECEIVED). O SALE OF BRANDS FOR RS.115,88,77,800/ - O DELAYED PAYM ENT OF PF AND ESIC OF RS.27,79,2711 - [EMPLOYEES' CONTRIBUTION]. O CL INICAL SUPPORT EXPENSES RS.186,72 ,348/ - O APPLICABILITY OF SEC.94(7) AND 94(8) ON SALE OF SHARES/MUTUAL FUND O COMPUTATION OF PROFIT U/S 115JB OF THE ACT 3 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT 2. SIMILAR GROUNDS HAVE BEEN TAKEN F OR THE A.Y. 2010 - 11: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX IS BAD IN LAW, VOID AB INITIO WITHOUT JURISDICTION AS THE ORDER U/S 263 IS PASSED BY THE LD. CIT ON THE BASIS OF AUDIT OBJECTION M EMO DT: 02/04/2013. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED U/S 263 BY LD. CIT - 6 MAY BE QUASHED AND SET ASIDE ON THE GROUND THAT THE LD CIT DID NOT CONSIDER THE ARGUMENT TAKEN BY THE APPELLANT THAT THE ORDER PASSED BY THE ASSES SING OFFICER U/S 143(3) IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2.1 THAT ON ALL THE ISSUES RAISED BY THE L D CIT, A POSSIBLE VIEW HAS BEEN TAKEN BY THE ASSESSING OFFICER WHILE PASSING THE ORDER U/S 143(3). HENCE NEITHER THE O RDER IS PREJUDICIAL NOR ERRONEOUS TO THE INTEREST OF REVENUE. 2.2 THE LD CIT OUGHT TO HAVE HELD THAT THE ORDER PASSED BY THE AO WAS NEITHER ERRONEOUS NOR PREJUDICIAL OF THE INTEREST OF REVENUE IN RESPECT OF THE FOLLOWING ISSUES IN THE LIGHT OF DETAILS/D OCUMENTS AND SUBMISSION MADE BEFORE HIM DURING THE ASSESSMENT PROCEEDING: STT EXPENSES OF RS.7,06,432/ - [FOR DISALLOWANCE U/S 14A VIS - A - VIS RULE 8D] INTEREST EXPENSES OF RS.2,96,41,520 / - [FOR DISALLOWANCE U/S 14A VIS - A - VIS RULE 8D] CLI NICAL SUPPOR T EXPENSES OF RS.31 ,36,884/ - CAPITAL GAIN ON SALE OF LAND AND BUILDING. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF PHARMACEUTICAL DRUGS AND MOLECULES. AFTER ASSESSMENTS WERE COMPLETED U/S.143(3), THE CIT INVOKED HIS JURISDICTION U/S. 263. D URING THE COURSE OF PROCEEDINGS U/S. 263, THE CIT OBSERVED THAT T HE ASSESSEE HAS INCURRED STT EXPENSES TO THE TUNE OF RS.19,42,671/ - . THIS HA S BEEN DEBITED UNDER THE HEAD 'MISCELLANEOUS EXPENSES'. NO E NQUIRY H AS BEEN CARRIED OUT IN THIS REGARD. THE BIFURCATION O F MISCELLANEOUS E XPENSES IS AVAILABLE ON RECORD BUT THESE DETAILS HAVE NOT BEEN EXAMINED PROPERLY BY THE A.O. THE AO WAS REQUIRED TO CONSIDER HOW MUCH S T T 4 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT HAS BEEN PAID FOR F & O TRANSACTIONS AND HOW MUCH STT HAS BEEN PAID ON ACCOUNT OF PURCHASE AND SALE OF L & T SHARES WHICH WERE ON DELIVERY BASIS. THE AO OUGHT TO HAVE CONSIDERED THESE DETAILS FOR PROPER WORKING OF CAPITA LOSS ON L& T SHARES AS WELL AS BUSINESS INCOME FROM F & O. THE ASSESSING OFFICER MERELY ACTED IN A MECHANICAL FASHION IN ACCEPTING THE CLAIM OF ASSESSEE WITH REGARD TO LOSS ON L& T SHARES AND ALSO PROFITS FROM F& O TRANSACTIONS. EVEN FOR WORKING OUT DISALLOWANCE U/S 14A R .W RULE 8D PER TAINING TO EXEMPT INCOME THE A O OUGHT TO HAVE GATHERED THESE BASIC DETAILS. THE DISALLOWANCE UNDER THE HEAD 'DIRECT EXPENSES' UNDER RULE 8 D HINGED UPON COLLECTING THIS VITAL INFORMATION . IF THIS INFORMATION WAS NOT THERE A.O OUGHT TO HAVE CONSIDERED ENTIRE AMO UNT OF S T T (RS.19,42,671 / - ) AS DIRECT EXPENSES FOR DISALLOWANCE U/S 14A R.W RULE 8 D OF THE ACT. 4. IN RESPECT OF INTEREST EXPEN SES , THE CIT OBSERVED THAT THE AO FAILED TO CONSIDER THE FACT THAT ASSESS EE HAS DEBITED INTEREST AMOUNT OF RS.2,00,83,931/ - EVEN THOUGH THIS IS LESSER THA N LAST YEAR, IT WAS THE DUTY OF THE AO TO VERIFY HOW T HE BORROWED FUNDS HAS BEEN UTILIZED. THE SOURCE OF INVESTMENT IN F&O TRANSACTIONS (MARGIN MONEY & MARK TO MARKET AMOUNT ETC) AND FOR L& T SHARES WAS REQUIRED TO BE EXAMINED. FURTHER, HOW MUCH OUT OF THE INTEREST BORROWED FUNDS HAS BEEN UTILIZED TO EARN EXEMPT INCOME WAS ALSO HIGHLY RELEVANT ENQUIRY. THE DISALLOWANCE U/S 14 A R.W. RULE 8 D CANNOT BE WORKED OUT IN ABSENCE OF THESE BASIC DETAILS. 5. WITH REGARD TO N ET TING OF INTEREST, THE CIT OBSERVED THAT T HE A.O ALSO WORKED OUT 'NET INTEREST' PAID FOR WORKING OUT DISALLOWANCE U/S 14A. THIS IS HIGHLY DEBATABLE. THERE IS NOTHING ON RECORD TO JUSTIFY ADOPTING THIS METHODOLOG Y. THE A.O . IT SEEMS SIMPLY WENT BY VERSION OF ASSESSEE . 6. WITH RESPECT TO THE SALE OF BRANDS THE CIT OBSERVED THAT THE A SSESSEE DID S ELL TWO BRANDS DURING THE YEAR AND RECEIVED SUM OF RS.1, 15,88,77,800/ - (INCLUDING KNOWHOW FEE AND NON COMPLETE FEE). THE A O WAS REQUIRED TO EXAMINE ON WHAT DATE THESE FUNDS BECAME AVAILABLE WITH THE ASSESSEE AND HOW THESE WERE UTILIZED. AS PER 5 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT CIT T HE AO OUGHT TO HAVE EXAMINED WHETHER THESE TWO BRANDS WERE REGISTERED UNDE R TRADE MARKS ACT AND ALSO UNDER THE COPY RIGHTS ACT. IT IS SEEN FROM P ERUSA L OF AGREEMENT FOR SALE OF BRANDS THAT TRADE MARKS WERE TO BE ASS IGNED TO BUYER FOR R S.113.97 CRORES. TH E A.O . OUGHT TO HAVE VERIFIED WHETHER RELEVANT REGIS TRATION O F COPY RIGHT AND TRADE MARKS WITH THE OFFICE OF CONTROLLER GENERAL OF PATENTS, DESIGNS & TRADEMARKS(CGPDTM) HAS BEEN DONE OR NOT. IT IS DIFFICULT TO BELIEVE THAT SUCH IMPORTANT INTELLECTUAL PROPERTY RIGHTS WOULD BE ALLOWED TO REMAIN UNPROTECTED FROM COP Y RIGHT AND TRADE MARK INFRINGEMENT. IF THESE ARE REGISTERED TRADEMARK OR R E GISTERED UNDER TH E COPY RIGHT ACT THEN THE CONSIDERATION FOR ASSIGNMENT OF TRADE M AR KS COULD BE JUSTIFIED. IN ABSENCE OF SUCH EVIDENCE IT WOULD AMOUNT TO SHOWING BUSINESS INCOME AS CAPITAL GAINS. VERY LITTLE AMOUNT IT SEEMS HAVE BEEN OFFERED FOR TAX AS BUSINESS INCOME FOR KNOWHOW FEE AND NON COMPLETE FEE AND A BNORMALLY HIGH AMOUNT AS C APITAL GAINS WITH REGARD TO ASSIGNMENT OF TRADE MARKS HAS BE EN SHOWN. THE A.O WAS REQUIRED TO EXAMINE THESE VITAL ASPECTS BY INDEPENDENTLY GETTING OPINION AS TO VALUATION OF TRADE MARKS & KNOW HOW FEE ETC. A S PER CIT, T HE AO WAS ALSO REQUIRED TO EXAMINE TH E CLAIM OF THE ASSESSEE THAT THESE BRANDS/ TRADE MARKS WERE GENERATED/DEVELOPED BY THE ASSESSEE ITSELF AND NOT PURCHASED BY VERIFYING WITH RESPECT TO EXPENDITURE INCURRED IN THE EARLIER YEARS FOR REGISTRATION OF TRADE MARKS AND COPY RIGHT BRAND BUILDING AND WHETHER THESE WERE CLAIMED AS REVENUE EXPENDITURE OR TREATED AS C APITAL EXPENDITURE. WITHOUT MAKING ANY RELEVANT INQUIRY THE AO ACCEPTED THE CLAIM OF THE ASSESSEE. 7. WITH REGARD TO THE EXPENSES INCURRED ON CLINICAL SUPPORT, THE CIT OBSERVED THAT THE AO ALSO FAILED TO CONSIDER NATURE OF EXPENSES INCURRED UNDER THE HEA D 'CLINICAL SUPPORT EXPENSES' WITHOUT CALLING FOR THESE DETAIL THE AO CANNOT NOT COME TO ANY DEFINITE CONCLUSION WHETHER THE EXPENDITURE INCURRED WOULD FALL WITHIN THE MISCHIEF 6 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT SOUGHT TO BE PLUGGED UNDER EXPLA NATION TO SECTION 37 OF THE ACT, I.E. WHETHER EXPENDITURE IS OF INADMISSIBLE NATURE AS PER THE CIRCULAR N O .5/2012 ISSUED BY THE MEDICAL COUNSI L OF INDIA P ROHIBITING EXPENDITURE INCURRED BY PHARMACEUTICAL COMPANIES WHICH IS IN THE NATURE OF FREE BEES GIVEN TO / ENJOYED BY MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATIONS THE AO HAS ALLOWED THE EXPENDITURE OF RS.1,86,72.348 / - WITHOUT VERIFYING WHAT SORT OF EXPENDITURE HAS BEEN INCURRED UNDER THIS HEA D. 8. WITH REGARD TO THE D EDUCTION CLAIM E D ON ACCOUNT OF PAYMENT OF PPF/ESIC, THE CIT OBSERVED THAT THE AO ALSO ALLOWED DEDUCTION OF RS.27,79,271/ - BEING DELAYED PAYMENT OF PPF/ESIC. THE AO OUGHT TO HAVE CONSIDERED THE FACT THAT SECTION 43B DOES NOT APP L Y TO PAYMENTS MADE U/S 36(1)(VA) OF THE ACT . NEEDLESS TO SAY, AO WITHOUT EXAMINING TILE RELEVANT PROVISIONS THE A.O ALLOWED THE CLAIM OF THE ASSESSEE. IT IS THE CONTRIBUTION OF THE EMPLOYER TOWARDS PPF, SUPERANNUATION FUND, ETC. WHICH WILL BE COVERED BY SECTION 43 B OF THE ACT BUT NOT THE CONTRIBUTI ON OF THE EMPLOYEES. WITHOUT EXAMINING THESE FACTS AO ALLOWED THE CLAIM OF DEDUCTION EVEN WHEN PAYMENTS WERE DELAYED [VIOLATION OF SECTION 36(1)(VA) OF THE ACT] AND THE ISSUE WAS NOT COVERED U/S 43 B OF THE A CT. 9. WITH REGARD TO THE SALE OF L & T SHARES, THE CIT OBSERVED THAT THE SALE OF L & T SHARES IMMEDIATELY AFTER DECLARATION OF BONUS SHARE WAS INTEND TO REDUCE THE TAXABLE INCOME AND THE AO HAS FAILED TO EXAMINE THESE ASPECTS. 10. THE CIT ALSO OBSERVED THAT THE A.O HAS NOT WORKED OUT ANY PROFIT U/S 1 15JB OF THE ACT. IT SEEMS THAT A.O SIMPLY WENT BY CLAIM OF THE ASSESSEE IN THE FOOTNOTE OF THE COMPUTATION THAT WORKING U/S 115JB OF THE ACT HAS NOT B EEN PROVIDED. THESE FALLACIOUS THE AO OUGHT TO HAVE CONSIDERED THE ADJUSTMENT REQUIRED AS PER LAW TO THE B OOK PROFIT TO DECIDE WHETHER TAX UNDER THE NORMAL PROVISION IS MORE THAN THE TAX 7 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT PAYABLE U / S 115JB OF THE ACT. IN THE PRESENT CASE, THE DISALLOWANCE MA D E U /S. 14A AS WELL AS THE AMOUNT CREDITED IN THE CAPITAL RESERVE WITH REGARD TO PROFIT ON SALE OF 2 BRAN DS TO THE TUNE OF RS .112.26 CRORES OUGHT TO HAVE BEEN ADDED TO THE BOOK LOSS TO ARRIVE AT THE ADJUSTED BOOK PROFIT U/S 115JB OF THE A CT. 11. WITH RESPECT TO EACH AND EVERY QUARRY SO RAISED BY CIT AS STATED ABOVE, T HE ASSESSEE HAS FILED DETAILED REPLY ALON G WITH DOCUMENTARY EVIDENCE , HOWEVER, BEING NOT CONVINCED BY THE REPLY OF THE ASSESSEE, THE CIT DIRECTED THE A.O. TO FRAME FRESH ASSESSMENT ORDER. 12. THE LD. AR ARGUED THAT THE A.O. AFTER MAKING THE PROPER ENQUIRY HAS MADE THE RELEVANT ADDITION/DISALLOW ANCE. MERELY BECAUSE THE A. O . HAS NOT REPRODUCED EACH AND EVERY REPLY FILED BY THE ASSESSEE AND TAKEN A CONSCIOUS DECISION AFTER JUDICIAL DELIBERATION CAME TO THE LEGAL LY TENABLE VIEW CANNOT BE FAULTED ONLY BECAUSE CIT WA S OF THE VIEW THAT SOME OTHER VIEW WAS ALSO POSSIBLE. THE LD. AR ALSO INVITED OUR ATTENTION TO THE DETAILED REPLIE S FILED BY ASSESSEE ALONG WITH EVIDENCES WITH RESPECT TO EACH AND EVERY QUARRY OF AO AND CONTENDED THAT BEFORE SETTING ASIDE THE ORDER OF AO FOR DOING FRESH ASSESSMENT . CIT SHOU LD HAVE CONSIDERED THE JUSTIFICATION S O FILED BY THE ASSESSEE ALONG WITH DOCUMENTARY EVIDENCES. THE LD. AR ALSO PLACED ON RECORD THE ORDER GIVING EFFECT PASSED BY THE A.O. U/S. 143(3) R/W S. 263 TO CONTEND THAT THE ASSESSING OFFICER HAS ALSO NOT PROPERLY A PPRECIATED THE DIRECTION OF THE CIT AND BLINDLY MADE THE ADDITION. 13. ON MERITS IT WAS ARGUED BY LD. AR THAT ISSUE WITH REGARD TO DISALLOWANCE OF INTEREST U/S.14A, WHEN THE ASSESSEE IS HAVING SUFFICIENT INTEREST FREE FUNDS IS SQUARELY COVERED BY THE DEC ISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITIES, 178 TAXMANN 135. ACCORDINGLY NO INFIRMITY CAN BE FOUND IN THE ORDER OF AO INSOFAR AS ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH ITS AS WELL AS FUNDS 8 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT RECEIVED ON SA LE OF BRANDS WHICH WAS INTEREST FREE. OUR ATTENTION WAS INVITED TO THE FUNDS RECEIVED ON SALE OF BRANDS AMOUNTING TO RS.113 CRORES WHICH WAS INTEREST FREE AND OUT OF WHICH ASSESSEE HAS USED THE FUNDS AS INVESTMENT IN SECURITIES. AS PER THE LD. AR SINCE NO INTEREST BEARING FUNDS WERE INVESTED, THE ORDER OF AO CANNOT BE SAID TO BE ERRONEOUS FOR NOT DISALLOWING INTEREST. 14. WITH REGARD TO SALE OF BRAND BEING TREATED BY CIT(A) AS BUSINESS RECEIPTS, IT WAS CONTENDED BY LD. AR THAT ISSUE IS COVERED IN FAVOUR O F THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2000 - 2001, ORDER DATED 1 ST MARCH, 2007, WHEREIN THE TRIBUNAL HELD THAT PROFIT ON SALE OF BRAND IS CAPITAL RECEIPT AND NOT BUSINESS RECEIPT. AS PER LD. AR IN VIEW OF THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE DECIDED IN ITS FAVOUR AND REVENUE HAS ALSO NOT FILED ANY FURTHER APPEAL TO THE HIGH COURT, THE DECISION TAKEN BY THE AO TO THE EFFECT THAT PROFIT ON SALE OF BRANDS WERE LIABLE TO LONG TERM CAPITAL GAINS, CANNOT B E SAID TO BE ERRONEOUS AND THE SAME WAS ONE OF THE PLAUSIBLE VIEW CORRECTLY TAKEN BY THE AO. 15. WITH REGARD TO DISALLOWANCE OF CLINICAL SUPPORT EXPENSES, LD. AR PLACED ON RECORD ORDER OF THE COORDINATE BENCH IN THE CASE OF SYNCOM FORMULATIONS INDIA LD. , ITA NO.6429&6428/MUM/2012, ORDER DATED 23 - 12 - 2015, WHEREIN IT WAS HELD THAT CBDT CIRCULAR FOR DISALLOWANCE OF CLINICAL SUPPORT EXPENSES IS APPLICABLE FROM ASSESSMENT YEAR 2013 - 2014 AND SINCE THE RELEVANT ASSESSMENT YEARS ARE 2009 - 2010 & 2010 - 2011, NO DIS ALLOWANCE CAN BE MADE BY TAKING THE HELP OF THIS CIRCULAR. IN VIEW OF THE DECISION OF COORDINATE BENCH, LD. AR ARGUED THAT THE VIEW TAKEN BY THE AO IS ONE OF THE PLAUSIBLE VIEW AND CANNOT BE SAID TO BE ERRONEOUS. 1 6 . ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDER OF THE CIT PASSED U/S. 263 AND CONTENDED THAT THE AO HAS NOT MADE FULL AND PROPER ENQUIRY WITH REGARD TO THE POINTS 9 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT OF INCOME AND EXPENSES AS POINTED OUT BY THE LD. CIT IN HIS ORDER U/S. 263 , THEREFORE NO FAULT CAN BE FOUND IN THE ORDER OF CIT . 1 7 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDER PASSED BY THE CIT U/S. 263 A ND THE ORDER BY THE ASSESSING OFFICER U/S.143(3) AS WELL AS ORDER PASSED BY AO GIVING EFFECTED TO THE ORDER OF THE CIT U/S. 2 6 3. WE HAD ALSO C ONSIDERED THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE BEFORE THE A.O. DURING THE ORIGINAL ASSESSMENT PROCEEDING AS WELL AS BEFORE THE CIT IN REPLY TO QUARRIES SO RAISED BY HIM WHILE PASSING THE ORDER U/S. 263 RESPECTIVELY . WE HAVE ALSO CONSIDERED JUDICIA L PRONOUNCEMENTS CITED BY LD. AR AND LD. DR DURING THE COURSE OF HEARING BEFORE US , WITH REFERENCE TO THE FACTUAL MATRIX OF THE CASE. 18 . FROM THE RECORD, WE FOUND THAT I N THE AUDIT CONDUCTED BY THE INTERNAL AUDIT PARTY ON 02.04.2013, CERTAIN OBJECTIONS WERE RAISED IN AS MUCH AS, ACCORDING TO THEM, THERE WAS 'INCORRECT DISALLOWANCE OF EXPENSES U/S. 14A R.W.R. 8D OF IT. RULES AMOUNTING TO RS. 30,74,312/ - ', UNDER - ASSESSMENTS DUE TO THE TREATMENT OF PROFITS FROM SALE OF BRANDS OF RS. 112,26,98,800/ - AS CAPITAL GAIN, ALLOWANCE OF CLINICAL SUPPORT EXPENSES OF RS. 1,86,72,348/ - . IN ADDITION, ACCORDING TO THE AUDIT PARTY, SHORT - TERM CAPITAL LOSS OF RS.41,38,87,308/- WERE TO BE IGNORED IN VIEW OF SS. 94(7) AND 94(8) OF THE ACT AND THERE WAS ALSO INCORRECT COMPUTATION OF BOOK PROFITS. ARMED WITH THE REPORT OF THE AUDIT PARTY, THE COMMISSIONER OF INCOME - TAX ISSUED A NOTICE U/S. 263 OF THE ACT SETTING ASIDE THE ASSESSMENT COMPLETED U/S. 143(3) OF THE ACT AND DIRECTING THE AO TO RE - DO THE SAME DE NOVO ON THE AFORESAID ISS UES. REJECTING THE OBJECTIONS FILED, THE CIT PASSED HIS ORDER U/S. 263 OF THE ACT ON 31.03.201 4. IN THIS ORDER THE CIT D I RECTED THE ASSESSI NG OFFICER TO EXAMINE: I) WHETHER STT EXPENSES WERE INCURRED ON F & O TRANSACTIONS OR SALE OF L&T SHARES; 10 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT II) I NTEREST EXPENSES OF RS. 2,00,83,931/ - TO FIND OUT WHETHER THERE WAS DIRECT USE OF BORROWED FUNDS BY THE ASSESSE E FOR THE PURPOSE OF INVESTMENT IN SHARES; III) THE CORRECTNESS OF THE TREATMENT GIVEN TO THE AMOUNT OF RS.112,66,38,753/ - RECEIVED ON SALE OF BRANDS AS CAPITAL GAIN AS AGAINST BUSINESS INCOME THOUGH IT WAS NOT AN ISSUE IN THE SHOW CAUSE NOTICE ISSUED; IV) ASSESSABILITY OF THE AMOUNT OF RS. 1,86,72,348/ - CLAIMED UNDER THE HEAD CLINICAL SUPPORT SERVICES; V) APPLICABILITY OF THE PROVISIONS OF S . 94(7) AND 94(8) OF THE ACT ON SALE OF SHARES/MUTUAL FUND; AND VI) THE COMPUTATION OF PROFIT U/S. 115JB OF THE ACT. 1 9 . FROM THE RECORD WE FOUND THAT THE A.O. HAS DISALLOWED A SUM OF RS.7,65,641/ - U/S.143(3) ORDER AS PER RULE 8D U/S.14A. THE STT PAID OF RS.19,42,671/ - IS AGAINST THE DERIVATIVE ( F & O) TRANSACTIONS AND PURCHASE AND SALE OF SHARES THE BREAK UP IS AS UNDER: F & O RS. 4,63,247/ - SALE AND PURCHASE OF SHARES RS.14,79,424/ - TOTAL RS.19,42,671/ - PROFIT ON SALE OF F & O TRANSACTION IS AMOUNTING TO RS.22,62,70,605/ - WHICH IS SHOWN AS A TAXABLE INCOME. THEREFORE THE STT PAID ON THE DERIVATIVE TRANSACTIONS IS ALLOWABLE AS AN EXPENDITURE W.E.F. AY 09 - 10 AS AMENDED BY THE FINANCE ACT, 2008. THE STT PAID ON SALE OF SHARES OF L & T, THE COM PANY HAS MADE A LOSS ON THESE SHARES AT RS.14,37,81,950/ - WHICH WAS OFFSET WITH THE CAPITAL GAINS. THEREFORE IF THE SAME IS TO BE CONSIDERED FOR 14A DISALLOWANCE, THEN IT IS TO BE REDUCED FROM THE COMPUTATION OF THE CAPITAL GAIN BEING DIRECT EXPENDITURE FO R EARNING THE CAPITAL GAIN S. THEREFORE DISALLOWANCE UNDER THIS SECTION IS NOT PREJUDICIAL TO THE INTEREST OF REVENUE 11 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT BE I N G NO TAX EFFECT. ACCORDINGLY, THERE IS NO JUSTIFICATION FOR THE DIRECTION ISSUED BY CIT FOR DISALLOWANCE OF STT U/S. 14A. 20 . WITH RE GARD TO CITS DIRECTION FOR DISALLOWANCE INTEREST, WE FOUND THAT THE ASSESSEE COMPANY HAS PAID INTEREST OF RS.2,00,83,931/ - WHICH HAS BEEN DEBITED TO P&L A/C . DURING THIS YEAR THE ASSESSEE HAS ALSO RECEIVED THE INTEREST ON DEPOSITS FROM BANKS AND OTHERS AT RS1,56,65,399/ - . NET INTEREST OF RS 48,18,532 / - IS REQUIRED TO BE CONSIDERED FOR DISALLOWANCE U/S. 14A. THE SAME VIEW WAS TAKEN IN ITAT MUMBAI, IN THE CASE OF MORGAN STANLEY INDIA SECURITIES PVT LTD VIS ACIT AND I TAT AHEMDABAD IN THE CASE ITO VS. KARNAVA TI PETROCHMEM PVT LTD. THUS THE VIEW TAKEN BY AO REGARDING NETTING OF INTEREST IS A POSSIBLE AND LEGALLY TENABLE VIEW WHICH CANNOT BE FAULTED BY CIT. FROM THE RECORD, WE ALSO FOUND THAT D URING THE YEAR THE IN TEREST PAID ON THE LOANS TAKEN WAS FOR THE PURPO SE OF BUSINESS ACTIVITIES ON BANK OVERDRAFT LIMIT . INTEREST WAS RECEIVED ON THE DEPOSITS FROM THE CUSTOMERS, FROM SHAREHOLDERS AND DIRECTORS AND THE BANK COMMISSION IS FOR OTHER CHARGES AND NOT ANY EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPTED INCOME. 21 . WE ALSO FOUND THAT AS PER BALANCE - SHEET PLACED ON RECORD I NVESTMENT AS ON 31/3/09 IS RS.1 5,91,91,128/ - . HOWEVER, T HE INCREASE IN INVESTMENT IS OUT OF THE FUND RECEIVED ON SALE OF BRAND OF RS.113 CRORES I.E. INTEREST - FREE. NO INTEREST BEARING FUND S HAS BEEN INVESTED FOR EARNING THE EXEMPTED INCOME. AS THE INVESTMENT IS MADE AFTER THE RECEIPT OF THE SALE PROCEEDS OF BRAND I.E. INTEREST - FREE FUND. THE UTILIZATION OF THE INTEREST - FREE FUND IS FOR INVESTMENT. THEREFORE THE INTEREST BEARING FUND HAS NOT BEEN UTILIZED FOR MAKING INVESTMENTS AND THE INVESTMENTS ARE MADE OUT OF THE INTEREST - FREE FUND AVAILABLE WITH THE COMPANY BY WAY OF SHARE CAPITAL AND RESERVES & SURPLUS WHICH STOOD AT RS.89.75 CRORES AS ON 31/3/09. 12 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT 22 . AS PER THE DECISION OF BOMBAY HIGH COUR T IN THE CASE OF RELIANCE UTILITY REPORTED IN 178 T AXMAN 135 WHEREBY IF THE COMPANY'S FUNDS ARE INTEREST FREE MORE THAN THE INVESTMENTS THE QUESTION OF DISALLOWING INTEREST U/S.14A DOES NOT ARISE . ACCORDINGLY THERE IS NO MERIT IN CITS ORDER DIRECTING DISA LLOWANCE OF INTEREST U/S. 14A. IN VIEW OF THE SUFFICIENCY OF OWN FUNDS, NO DISALLOWANCE IS WARRANTED. WE DIRECT ACCORDINGLY. 2 3 . WITH REGARD TO THE OBSERVATION OF CIT REGARDING THE TREATMENT OF AMOUNT RECEIVED ON SALE OF BRANDS WE FOUND THAT DU RING THE Y EAR THE COMPANY SOLD ITS TWO MEDICAL BRAND(S) 'ANAFORTHAN' AND CEFI' A GREEMENT(S) OF THE SAME ARE PLACED ON RECORD ACCORDING TO WHICH THE ASSESSEE RECEIVED ONE TIME AMOUNT WHICH WAS CREDITED TO THE CAPITAL RESERVE ACCOUNT AT RS.112 .26 C RS. SINCE THE BRAN D DID NOT COST ANYTHING, THE COMPANY OFFERED THE SAME AS LONG TERM CAPITAL GAI N S . THE OBJECTION OF THE CIT WAS THAT I NSTEAD OF CHARGING THE CAPITAL GAIN THE SAID SUM SHOULD HAVE BEEN TAXED AS BUSINESS INCOME. 2 4 . WE HAD CAREFULLY GONE THROUGH TH E TERMS O F THE AGREEMENT , WHERE AS PER CLAUSE ( 3 ) , T HE COMPANY HAD DURING THE YEAR SOLD TWO OF ITS BRAND GROUPS ANAFORTAN AND CEFI FOR CONSIDERATION OF RS.115,88,77,800 / - . THIS INCLUDES RS.91,00, 000/ - AS KNOW HOW FEE AND RS.1 , 00,00,000/ - TOWARDS NON COMPETE FEE . AFT ER ADJUSTING RS.170,79,000 / - FOR LEGAL AND PROFESSIONAL SERVICES THE BALANCE OF R S.112.26,98,800/ - WHICH W AS A RECEIPT OF CAPITAL NATURE WA S TRANSFERRED TO RESERVE AND SURPLUS A /C . THE NON COMPETE FEES OF RS.100,00,000 / - AND RS.91, 00,000/ - FOR KNOW HOW HAV E BEEN ACCOUNTED AND OFFERED AS BUSINESS INCOME. THE BRAND 'ANAFORTHAN' AND 'CEFI' ARE THE APPARATUS OF THE BUSINESS, THEY ARE THE TOOLS OF THE BUSINESS, AND THEY ARE THE CAPITAL ASSET OF THE COMPANY BUILT OVER THE PERIOD OF TIME AND IN FACT THEY ARE NOT S TOCK - IN - TRADE OF COMPANY. THE COMPANY DOES NOT DEALS IN THE BRANDS AS A TRADERS. 13 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT 2 5 . PROVISIONS OF SECTION 55(2)(E) WHICH DEALS WITH THE COMPUTATIO N OF INCOME FROM CAPITAL GAINS RE ADS AS UNDER: A) IN RELATION TO A CAPITAL ASSET, BEING GOODWILL OF A BUSI NESS [O R A TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSINESS] [ OR A RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING] [ OR RIGHT TO CARRY 011 ANY BUSINESS], TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LOOM HOURS, - (I) IN THE CASE OF ACQUISITIO N OF SUCH ASSET BY THE ASSESSEE BY PURCHASE FROM A PREVIOUS OWNER, MEANS THE AMOUNT OF THE PURCHASE PRICE; AND (II) IN ANY OTHER CASE [ NOT BEING A CASE FALLING UNDER SUB - CLAUSES (I) TO (IV) OF SUB - SECTION (1) OF SECTION 491, SHALL BE TAKEN TO BE NIL ; ONCE THE ACT ITSELF, TAKES THE SALE OF THE GOODWILL, TRADEMARK, BRAND NAME, AS LIABLE TO CAPITAL GAIN S THE QUESTION OF CHARGING THE SAME AS BUSINESS INCOME DO NOT ARIS ES. 2 6 . IN VIEW OF THE ABOVE SETTLED LEGAL POSITION WHERE APPARATUS OF THE BUSINESS IS S OLD , IT IS THE SALE OF CAPITAL ASSET AND NOT STOCK - IN - TRADE. AS PER THE PROVISIONS OF THE ACT AS EXISTED PRIOR TO 1995 W HERE THE COST OF THE ACQUISITION COULD NOT BE ASCERTAIN ED IN THE CASE OF GOODWILL , TRADE MARK, OR BRAND THE SAME WAS NOT TAXABLE BUT TH E LEGISLATURE IN ITS OWN WISDOM TAXED THE SALE OF BRAND ETC AS CAPITAL GAIN U/ S . 55(2) OF THE A CT . THUS, THE ASSESSEE HAS CORRECTLY OFFERED THE TAX ON SALE OF BRAND AS LTCGS INSOFAR AS BRANDS W AS DEVELOPED BY THE ASSESSEE COMPANY AND NOT PURCHASED. FROM TH E RECORD WE ALSO FOUND THAT AS PER A GREEMENT DATED 15.04.2008 FOR SALE OF BRAND , SEPARATE C ONSIDERATION HAS BEEN ASSIGNED T O TRADE - MARKS, KNOWHOW FEE AND NON - COMPETE FEE . THE SAID TRADEMARKS WERE DULY REGISTERED AND SAID FACT HAS ALSO BEEN ACCEPTED BY THE CIT ON PG. 9 OF HIS ORDER. THE SAID BRANDS ARE CAPITAL ASSETS OF THE COMPANY BUILT OVER A PERIOD OF TIME, I.E. THE BRAND WAS DEVELOPED BY THE COMP ANY ITSELF AND NOT PURCHASED. WE ALSO FOUND THAT ALL THE AGREEMENTS WERE PLACED BEFORE THE 14 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT CIT. THE ASSESSEE H AS ALSO FILED SUBMISSION BEFORE THE CIT TO JUSTIFY THE VALUE ASSIGNED TOWARDS TRADE - MARKS, KNOWHOW FEE AND NON - COMPETE FEE. IT IS ALSO RELEVANT TO MENTION HERE THAT A SIMILAR NATURE OF SALE OF BRAND WAS MADE BY ASSESSEE IN A.Y. 2000 - 01 WHEREIN THE ASSESSEE HAD TREATED THE SALE OF BRAND AS INCOME FROM CAPITAL GAIN AND THE TREATMENT GIVEN BY ASSESSE E WAS UPHELD BY THE HON'BLE TRIBUNAL IN ASSESSEE'S OWN CASE FOR A.Y. 2000 - 01 VIDE ORDER DATED 15.3.2007. ACCORDINGLY NO FAULT CAN BE FOUND IN AOS ORDER TREATING T HE SALE PROCEEDS OF BRAND AS CAPITAL RECEIPTS LIABLE TO TAX AS LONG TERM CAPITAL GAINS. NO WHERE C IT HAS POINTED OUT AS TO HOW THE TREATMENT GIVEN BY ASSESS E E WAS ERRONEOUS, I.E. NOT AS PER LAW AND AS A RESULT OF WHICH PREJUDICE WAS CAUSED TO REVENUE. THE CIT HAS MERELY ASKED THE ASSESSING OFFICER TO LOOK INTO THE MATTER WITHOUT POINTING OUT ANY MISTAKE OR PREJUDICE CAUSED TO REVENUE. HE HAS SIMPLY DIRECTED THE ASSESSING OFFICER, WITHOUT SATISFYING HIMSELF, TO VERIFY WHETHER THE BIFURCATION MADE BY ASSESSE E WAS WITH A VIEW TO REDUCE TAX OR NOT. 2 7 . IN VI E W OF THE ABOVE, WE DO NOT FOUND ANY INFIRMITY FOR OFFERING THE TAX ON SALE OF BRANDS AS LTCG. THERE IS NO MERIT IN CITS OBSERVATION FOR TREATING THE SAME AS BUSINESS INCOME. WE DIRECT ACCORDINGLY. 2 8 . WIT H REGARD TO THE CLAIM OF CLINICAL SUPPORT EXPENSES, FROM THE DETAILS FILED BEFORE CIT , WE FOUND THAT THESE EXPENSES ARE INCURRED WHILE LAUNCHING THE NEW PRODUCT IN THE MARKET AND ALSO FOR EXISTING PRODUCT FOR OBTAINING THE FEEDBACK FROM THE MARKET AND TO G ET IN TOUCH WITH THE DOCTORS OF ALL INDIA TO ASSEMBLE THE DATA BASE DEMOGRAPHICALLY, TERRITORIALLY, ETC. I T IS NORMAL FEATURE FOR ANY PHARMACEUTICAL COMPANY TO OBTAIN THE DATA, FEEDBACK FROM THE MEDICAL FRATERNITY AND IT IS A NECESSARY EXPENDITURE FOR THE COMPANY TO MAINTAIN THE BUSINESS RELATIONSHIP WITH THE CUSTOMER IN TU RN WITH THE MEDICAL FRATERNITY. THE CIRCULAR OF M EDICAL COUNCIL OF INDIA AS REFERRED BY THE CI T SPEAKS ABOUT THE GIFT, TRAVEL FACILITY, HOSPITAL, MONEY GRANTED HOWEVER NO NE OF THESE FACI LITIES ARE GIVEN BY ASSESSEE . IN FACT, WHATEVER THE SEPARATE 15 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT EXPENDITURE ARE INCURRED BY THE ASSESSEE WAS IN RELATION TO GATHER THE DATA MAKING AWARE OF THE PRODUCT OF THE COMPANY AND REMAINING IN THE MARKET. FROM THE ORDER OF CIT WE OBSERVE THAT NO WHERE THE CIT HAS POINTED OUT AS TO HOW THE TREATMENT GIVEN BY ASSESSE E WAS ERRONEOUS, I.E. NOT AS PER LAW AND AS A RESULT OF WHICH PREJUDICE WAS CAUSED TO REVENUE. THE CIT HAS MERELY ASKED THE ASSESSING OFFICER TO LOOK INTO THE MATTER WITHOUT POINTING OUT ANY M ISTAKE OR PREJUDICE CAUSED TO REVENUE. HE HAS SIMPLY DIRECTED THE ASSESSING OFFICER, WITHOUT SATISFYING HIMSELF, TO VERIFY WHETHER THE BIFURCATION MADE BY ASSESS E E WAS WITH A VIEW TO REDUCE TAX OR NOT. FROM THE RECORD WE FOUND THAT T HE D ETAILS WITH REGARD TO CLINICAL SUPPORT EXPENSES WERE VERIFIED BY THE A O IN THE ORIGINAL ASSESSMENT PROCEEDINGS. SINCE THE A O WAS SATISFIED WITH THE DETAILS FURNISHED BY ASSESS E E VIDE LETTER DATED 15.12.2011, NO ADDITION WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF CLINICA L SUPPORT EXPENSES. 2 9 . WITH REGARD TO THE EXPLANATION TO S. 37(1) OF THE ACT, THE CIT HAS NOWHERE POINTED OUT AS TO HOW THE SAID EXPLANATION WILL BE APPLICABLE TO THE ASSESSE. IN SO FAR AS THE DIRECTION ISSUED TO DISALLOW THE SAID PAYMENT ON THE BASIS OF CIRCULAR NO. 5/2012 (F. NO. 225/142/2012 - ITAII) DATED 01.08.2012 ISSUED BY THE INCOME TAX DEPARTMENT, GOVERNMENT OF INDIA AFTER CONSIDERING THE GUIDELINES ISSUED BY THE MEDICAL COUNCIL OF INDIA AND AS PER EXPLANATION TO S. 37 OF THE ACT, WE FOUND THAT T HIS VERY ISSUE WAS CONSIDERED BY A CO - ORDINATE BENCH OF THIS HON'BLE TRIBUNAL IN THE CASE OF SYNCOM FORMULATIONS (I) LTD. V. DCIT IN ITA NOS. 6429 AND 6428/MUM/2012 FOR AYS. 2010 - 11 AND 2011 - 12 DATED 23.12.2015 AND IT WAS HELD THAT THE SAID CIRCULAR WAS AP PLICABLE FROM AY. 2013 - 14 ONLY. THE RELEVANT ASSESSMENT YEAR S UNDER CONSIDERATION ARE A.YS. 2009 - 10 AND 2010 - 11. ACCORDINGLY , THE CIRCULAR IS NOT APPLICABLE TO THE YEARS UNDER CONSIDERATION WHICH HAS BEEN MADE APPLICABLE ONLY FROM A.Y. 2013 - 14 ONLY. THUS T HERE IS NO MERIT IN CITS DIRECTION FOR DISALLOWING CLINICAL SUPPORT EXPENSES. 16 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT 30 . NOW C O M ING TO THE APPLICABILITY OF THE PROVISIONS OF SECTION 94(7) AND 94(8) ON SALE OF SHARES/MUTUAL FUNDS. 31 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT TH E CAPITAL LOSS ARISING OUT ON SALE OF L & T SHARES WAS TREATED BY CIT AS APPARATUS TO REDUCE THE TAXABLE INCOME. THE CIT FOUND THAT THE SHARES OF L & T WERE PURCHASED JUST PRIOR TO DECLARATION OF BONUS AND THEN IMMEDIATELY AFTER DECLARATION OF BONUS IN THE RATION OF , SELLING THE ORIGINAL SHARES PURCHASED AT LOSS. AS PER CIT THIS CLEARLY SHOWS THAT CAPITAL LOSS ARISING O N L & T SHARES DEFIES ANY ECONOMIC LOGIC AND THAT THESE TRANSACTIONS WERE UNDERTAKEN SOLELY TO REDUCE THE TAXABLE INCOME. 32 . FOR BET TER UNDERSTANDING OF PROVISION OF SECTION 94(8) WE REPRODUCE THE SAME AS UNDER: (8) WHERE - (A) ANY PERSON BUYS OR ACQUIRES ANY UNITS WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; (B) SUCH PERSON IS ALLOTTED ADDITIONAL UNITS WITHOUT ANY P AYMENT ON THE BASIS OF HOLDING OF SUCH UNITS ON SUC H DATE; (C) SUCH PERSON SELLS OR TRANSFERS ALL OR ANY OF THE UNITS REFERRED TO IN CLAUSE (A) WITHIN A PERIOD OF NINE MONTHS AFTER SUCH DATE, WHILE CONTINUING TO HOLD ALL OR ANY OF THE ADDITIONAL UNITS R EFERRED TO IN CLAUSE (B), THEN, THE LOSS, IF ANY, ARISING TO HIM ON ACCOUNT OF SUCH PURCHASE AND SALE OF ALL OR ANY OF SUCH UNITS SHALL BE IGNORED FOR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX AND NOTWITHSTANDING ANYTHING CONTAINED IN ANY OT HER PROVISION OF THIS ACT, THE AMOUNT OF LOSS SO IGNORED SHALL BE DEEMED TO BE THE COST OF PURCHASE OR ACQUISITION OF SUCH ADDITIONAL UNITS REFERRED TO IN CLAUSE (B) AS ARE HELD BY HIM ON THE DATE OF SUCH SALE OR TRANSFER.] 17 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT EXPLANATION. - FOR THE PURPOSES OF THIS SECTION, - (A) 'INTEREST' INCLUDES A DIVIDEND; (AA) 'RECORD DATE' MEANS SUCH DATE AS MAY BE FIXED BY -- (I) A COMPANY FOR THE PURPOSES OF ENTITLEMENT OF THE HOLDER OF THE SECURITIES TO RECEIVE DIVIDEND; OR (II) A MUTUAL FUND OR THE ADMINISTRATOR OF THE SPECIFIED UNDERTAKING OR THE SPECIFIED COMPANY AS REFERRED TO IN THE EXPLANATION TO CLAUSE (35) OF SECTION 10, FOR THE PURPOSES OF ENTITLEMENT OF THE HOLDER OF THE UNITS TO RECEIVE INCOME, OR ADDITIONAL UNIT WITHOUT ANY CONS IDERATION, AS THE CASE MAY BE; (B) 'SECURITIES' INCLUDES STOCKS AND SHARES; (C) SECURITIES SHALL BE DEEMED TO BE SIMILAR IF THEY ENTITLE THEIR HOLDERS TO THE SAME RIGHTS AGAINST THE SAME PERSONS AS TO CAPITAL AND INTEREST AND THE SAME REMEDIES FOR THE ENFORCEMENT OF THOSE RIGHT S, NOTWITHSTANDING ANY DIFFERENCE ILL THE TOTAL NOMINAL AMOUNTS OF THE RESPECTIVE SECURITIES OR IN THE FORM IN WHICH THEY ARE HELD OR IN THE MANNER IN WHICH THEY CAN BE TRANSFERRED; (D) 'UNIT' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (B) OF THE EXP LANATION TO SECTION 115AB. AS PER THE ABOVE SECTION, SHORT TERM CAPITAL LOSS INCURRED WHEN UNITS (AND NOT SHARES) ARE PURCHASED WITHIN 3 MONTHS PRIOR TO THE DATE ON WHICH ADDITIONAL UNITS ARE ALLOTTED AND SUBSEQUENTLY ARE SOLD WITHIN 9 MONTHS AFTER THE D ATE WHILE HOLDING ON TO ALL OR ANY OF THE ADDITIONAL UNITS ALLOTTED , IS NOT TO BE ALLOWED TO THE EXTENT OF THE MARKET VALUE OF THE ADDITIONAL UNITS AS ON THE DATE THE Y ARE ALLOTTED. UNITS AS REFERRED TO IN THE ABOVE SECTION MEANS UNITS OF A MUTUAL FUND AS SPECIFIED IN SECTION 10(23D) OF THE ACT. HOWEVER IN THE ASSESSEE'S CASE, THE ASSESSEE HAD PURCHASED SHARES OF L&T LTD ON WHICH BONUS SHARES WERE RECEIVED AND WHICH WERE SOLD SUBSEQUENTLY. 18 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT THEREFORE THE PROVISIONS OF SECTION 94(8) ARE NOT APPLICABLE AS SHAR ES ARE PURCHASED & SO LD. 3 3 . NOW COMING TO THE OBSERVATION MADE BY THE CIT WITH RESPECT TO DIVIDEND STRIPPING U/S. 94(7) OF RS.2,44,39,308/ - . FOR BETTER CLARITY WE REPRODUCE THE PROVISION OF SECTION 94(7) AS UNDER: '(7) WHERE - (A) ANY PERSON BUYS OR A CQUIRES ANY SECURITIES OR UNIT WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; (B) SUCH PERSON SELLS OR TRANSFERS - (I) SUCH SECURITIES WITHIN A PERIOD OF THREE MONTHS AFTER SUCH DATE; OR ( II SUCH UNIT WITHIN A PERIOD O F NINE MONTHS AFTER SUCH DATE; (C) THE DIVIDEND OR INCOME ON SUCH SECURITIES OR UNIT RECEIVED OR RECEIVABLE BY SUCH PERSON IS EXEMPT, THEN, THE LOSS, IF ANY, ARISING TO HIM ON ACCOUNT OF SUCH PURCHASE AND SALE OF SECURITIES OR UNIT, TO THE EXTENT SUCH LOSS DOES NOT EXCEED THE AMO UNT OF DIVIDEND OR INCOME RECEIVED OR RECEIVABLE ON SUCH SECURITIES OR UNIT, SHALL BE IGNORED FOR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX. AS PER THE ABOVE SECTION, SHORT TERM CAPITAL LOSS INCURRED WHEN SHARES/U NITS ARE PURCHASED WITHIN 3 MONTHS PRIOR TO THE DATE ON WHICH DIVIDEND IS DECLARED AND SUBSEQUENTLY ARE SOLD WITHIN 3 MONTHS/9 MONTHS RESPECTIVELY AFTER THE RECORD DATE IS NOT TO BE ALLOWED TO THE EXTENT OF THE DIVIDEND RECEIVED ON THOSE SHARES/UNITS. HOWEVER IN THE ASSESSEE'S CASE, THOUGH THE UNITS ARE SOLD WITHIN 9 MONTHS FROM THE DATE ON WHICH DIVIDEND IS RECEIVED, THE SAME WERE PURCHASED (19/9/2008) BEYOND 3 MONTHS PRIOR (27/9/2008) TO THE DATE OF DECLARATION OF DIVIDEND (26/12/2008). THEREFORE THE PROVISIONS OF SECTION 94(7) ARE NOT APPLICABLE AS BOTH THE CONDITIONS 19 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT MUST BE SATISFIED TOGETHER FOR THE PROVISIONS TO APPLY. IN ASSESSEES CASE THE PURCHASE IS PRIOR TO 3 MONTHS FROM THE RECOR D DATE. 3 4 . FROM THE RECORD WE ALSO FOUND THAT D URING THE COURSE OF ORIGINAL ASSESSMENT PROCEE DINGS, COMPLETE DETAILS WERE GIVEN TO THE ASSESSING OFFICER WITH REGARD TO WORKING OF CAPITAL GAINS ON SALE OF SHARES AND UNITS. ON PERUSAL OF THE SAID DETAILS, IT CAN BE SEEN THAT THE ASSESSE E PURCHASED UNITS ON 19.09.2008 AND SOLD THE SAME ON 26.12.2008. THE DIVIDEND ON THE SAID UNITS WAS DECLARED ON 26.12.2008. TH OUGHT THE UNITS WERE SOLD WITHIN NINE MONTHS FROM THE DATE ON WHICH DIVIDEND HAS BEEN RECEIVED, SINCE THEY WERE PURCHASED MORE THAN THREE MONTHS PRIOR TO DATE OF DECLARATION OF DIVIDEND , THE PRO VISIONS OF S. 94(7) OF THE ACT WILL NOT AP PLY. 3 5 . WITH REGARD TO CITS OBSERVATION REGARDING LOSS INCURRED ON SALE OF L & T SHARES, THOUGH THE CIT AGREES THAT THE PROVISION OF SECTION 94 ( 8) WILL NOT APPLY TO THE SHARES. THE ASSESSE IS FREE TO CARRY OUT T AX PLANNING WITHIN THE PROVISIONS OF LAW. A SIMILAR ARGUMENT WAS RAISED BY THE D EPARTMENT BEFORE THE HON'BLE SUPREME COURT IN CASE OF CIT V S . WALFO RT SHARES AND STOCK BROKERS LTD (326 ITR 1) WHEREIN, EVEN AFTER CONSIDERING THE DECISION IN THE CASE OF MCDOW ELL & CO. LTD., IT WAS HELD BY SUPREME COURT THAT MERE TAX PLANNING WITHOUT ANY MOTIVE TO AVOID TAXES IS NOT A COLOURABLE DEVICE. 3 6 . IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT IN CITS DIRECTION FOR APPLYING PROVISION OF SECTION 94(7) AND 94(8) OF T HE IT ACT FOR DISALLOWING LOS S INCURRED ON L & T SHARES. 3 7 . ISSUES WITH REGARD TO THE DELAYED PAYMENT OF PF AND ESI AND COMPUTATION OF BOOK PROFIT U/S. 115JB WAS NOT PRESSED BY THE LD. AR, THE SAME ARE THEREFORE DISM ISSED IN LIMINE AS NOT PRESSED. 38 . I N THE RESULT, THE ASSESSEES APPEAL FOR A.Y. 2009 - 10 IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE . 20 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT ITA NO. 2702/MUM/2014 (A.Y. 2010 - 11) 3 9 . IN THIS ORDER ALSO THE CIT HAS ALLEGED FOR DISALLOWANCE STT EXPENSES AND DISALLOWANCE OF INTEREST UNDER RULE 8D, CLINICAL EXPENSES AND CAPITAL GAINS AND SALE ON LAND AND BUILDING. 40 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE ORDER OF THE CIT PASSED U/S. 263 AS WELL AS THE ORDER BY THE A.O. U/S. 143(3), AS WELL AS THE ORDER PASSED U/S.143(3) R/W S. 263 AS WELL AS REPLY FILED BY THE ASSESSEE BEFORE THE A.O. AND THE CIT. F ROM THE RECORD WE FOUND THAT T HE RETURN OF INCOME FOR THE CAPTIONED ASSESSMENT YEAR WAS E - FILED ON 30.09.2010 DECLARING TOTAL INCOME OF RS.18,54,501/ - IN WHICH SCRUTINY PROCEED INGS COMMENCED WITH ISSUANCE OF STATUTORY NOTICE U/S. 143(2) OF THE ACT DATED 02.09.2011. IN COURSE OF THE ENSUED PROCEEDINGS, A REVISED COMPUTATION DECLARING A LOSS OF RS. 46,21,76,813/ - WAS FILED AS IT WAS NOTICED THAT WHILE CALCULATING LONG TERM CAPITAL GAIN ON SALE OF LAND, INADVERTENTLY, NO INDEXATION WAS CLAIMED ON THE COST OF LAND. W HATEVER DETAILS AND/OR INFORMATION WERE REQUISITIONED FOR COMPLETION OF THE ASSESSMENT WERE DULY SUBMITTED WHICH FACT HAS ALSO BEEN ACKNOWLEDGED BY A O IN THE ORDER DATED 2 0.03.2012 PASSED U/S, 143(3) OF THE ACT, WHEREIN THE LOSS WAS DETERMINED AT RS. 45,89,04,220/ - AS AGAINST DECLARED LOSS OF RS. 46,21,76,813/ - . 41 . I N THE AUDIT CONDUCTED BY THE INTE RNAL AUDIT PARTY ON 02.04.2013, C ERTAIN OBJECTIONS WERE RAISED IN AS MUCH AS , ACCORDING TO THEM, THERE WAS 'INCORRECT DISALLOWANCE OF EXPENSES U/S. 14A R.W.R. 8 D AMOUNTING TO RS. 24,39,606/ - , UNDER - AS SESSMENTS TO THE EXTENT OF RS. 31,36,884/ - AS A RESULT OF ACCEPTANCE OF THE CLAIM FOR 'CLINICAL SUPPORT EXPENSES OF RS. 31,36,884/ - AND U/S. 115JB OF THE ACT. ARMED WITH THE REPORT OF THE AUDIT PARTY T HE CIT PASSED ORDER U/S. 263 DATED 31.3.2015 . THE CIT, IN HIS ORDER PASSED U/S. 263 OF THE ACT, DIRECTED THE ASSESSING OFFICER TO EXAMINE: 21 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT I) WHETHER STT EXPENSES WERE INCURRED ON F & O TRA NSACTIONS OR SALE OF L&T SHARES. II) WHETHER THERE WAS DIRECT USE OF BORROWED FUNDS BY THE ASSESSE E FOR PURPOSE OF INVESTMENT IN SHARES. III) THE NATURE OF EXPENSES INCURRED UNDER CLINICAL SUPPORT SERVICES. IV) THE COMPUTATION OF CAPITAL GAIN WITH REG ARD TO THE 'COMPOSITE SALE OF FACTORY BUILDING WITH LAND'. A PERUSAL OF SUB - PARA (I) OF PARAGRAPH NO. 2 OF THE IMPUGNED ORDER WOULD REVEAL THAT THE DIRECTION GIVEN BY THE C IT, IN SO FAR AS STT OF RS. 7,06,432/ - , WAS TO EXAMINE FOR WHICH TRANSACTIONS STT W AS PAID AND WAS CLAIMED AS EXPENDITURE. THE ASSESSING OFFICER IN THE ORDER PASSED U/S 143(3) R.W.S. 263 OF THE ACT DISALLOWED THE STT EXPENSES AND THE SAME WERE ADDED TO THE TOTAL INCOME OF THE ASSESS E E. AS PER THE DIRECTIONS OF THE C IT, THE ASSESSING OFFI CER ALSO EXAMINED THE ISSUE OF DISALLOWANCE U/S 14A R.W.R. 8 D OF THE ACT. WHILE COMPUTING DISALLOWANCE OF DIRECT EXPENDITURE INCURRED FOR THE PURPOSE OF INVESTMENT AS PER RULE 8D(2)(I), THE ASSESSING OFFICER AGAIN CONSIDERED THE SAID AMOUNT OF STT PAID LEA DING TO DOUBLE DISALLOWANCE OF THE SAME AMOUNT I.E. I) DISALLOWANCE OF STT IN THE MAIN COMPUTATION OF INCOME II) DISALLOWANCE OF STT WHILE COMPUTING DISALLOWANCE U/S 14A R.W.R 8 D OF THE ACT BY CONSIDERING SUCH AMOUNT AS DIRECT EXPENSES FOR THE PURPOS E OF MAKING DISALLOWANCE U /S. 14A R.W.R. 8 D OF I T. RULES. 42 . IN VIEW OF THE ABOVE, WE DIRECT THE A.O. TO DELETE THE DOUBLE DISALLOWANCE SO MADE. 4 3 . WITH REGARD TO THE DISALLOWANCE OF INTEREST U/S.14A R/W RULE 8D, WE FOUND THAT THE CIT HAD DIRECTED THE ASSESSING OFFICER TO ASCERTAIN AS TO WHETHER THERE WAS DIRECT USE OF BORROWED FUNDS OR NO T. AS PER THE STATEMENT OF AVAILABILITY OF OWN FUNDS GIVEN BEFORE THE LOWER AUTHORITIES WHICH IS PLACED ON RECORD, WE FOUND THAT OWN FUNDS OF THE ASSESSEE WAS SUFFICIE NT TO COVER UP THE VALUE OF THE INVESTMENTS, HENCE NO INTEREST 22 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT DISALLOWANCE CAN BE MAD E AS PER THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HDFC BANK 3 66 IT R 505 AND RELIANCE UTILITY REPORTED IN 178 T AXMAN 135 . W E DIRECT ACCORDI NGLY. 4 4 . WITH REGARD TO THE DISALLOWANCE OF CLINICAL SUPPORT EXPENSES , AS PER THE REASONING GIVEN IN A.Y. 2009 - 10, WE DO NOT FIND ANY MERIT FOR APPLYING THE CBDT CIRCULAR NO. 5/2012 DATED 01.8.2012 TO THE A.Y. 2010 - 11 UNDER CONSIDERATION. FOLLOWING THE REASONING GIVEN HEREIN ABOVE, THERE IS NO MERIT FOR THE DISALLOWANCE OF CLINICAL SUPPORT EXPENSES OF RS.31,36,884/ - . I N RESPECT OF COMPUTATION OF CAPITAL GAINS WITH REGARD TO THE COMPOSITE SALE OF FACT ORY BUILDING WITH LAND, THE CIT OBSERVED THAT SINCE THE CONSIDERATION RECEIVED WAS FOR THE FACTORY BUILDING ALONG WITH LAND, THERE WAS NO JUSTIFICATION FOR THE ASSESSING OFFICER TO ALLOW THE INDEXATION ON LAND AND IN COMPUTING THE GAIN S AS LONG - TERM CAPITAL GAIN. 4 5 . THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT HAD IN THE CASE OF CIT V. CITIBANK NA (261 ITR 57 0) WHEREIN IT WAS HELD THAT FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS, LAND AND BUILDING ARE TWO SEPARATE AND DISTINCT ASSETS, THEREFOR E PROFIT ARISING FROM SALE OF LAND WAS REQUIRED TO BE CONSIDERED AS LONG TERM CAPITAL GAINS, WHEREAS PROFIT ARISING FROM SALE OF BUILDING WAS REQUIRED TO BE CONSIDERED AS SHORT TERM CAPITAL GAINS. FU RTHER WE FOUND THAT THE SAID FINDING WAS REPEATED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V. CADBURY INDIA LTD. (229 TAXMAN 5) AND BY THE HON'BLE DELHI HIGH COURT IN CIT V. I. K. INTERNATION AL (P) LTD. [206 TAXMAN 622 (DEL ] . IN VIEW OF THE ABOVE, WE DIRECT THE A.O. TO DECIDE THE ISSUE AFRESH IN TERMS OF THE JUDICIAL PRONOUNCEMENT DISCUSSED HEREINABOVE. 4 6 . IN THE RESULT, BOTH THE ASSESSEES APPEALS ARE ALLOWED IN PART IN TERMS INDICATED HEREIN ABOVE. 23 ITA NO S . 2765 & 2702/MUM/2014 (A.YS. 2009 - 10 & 2010 - 11) KHANDELWAL LABORATORIES PVT. LTD. VS. CIT ORDER PRONOUNCED IN THE OPEN COURT ON J UNE 23 , 201 6 SD/ - SD/ - ( AMARJIT SINGH ) ( R. C. S HARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI ; / DATED : 23 . 0 6 .201 6 . . ./ ROSHANI , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI