Appeal details
Counselvise Citation
[2016] 131 COUNSELVISE.COM (IT) 3233 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 3 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-09-2016
Appeal Filed By
Assessee
Bench Allotted
F
Next Hearing Date
10-11-2014
Assessment Year
2001-2002
Appeal Filed On
29-05-2012
Judgement Text
, , F, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F, MUMBAI , , , BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.3784/MUM/2012 ASSESSMENT YEAR: 2001-02 M/S FFC AROMAS PVT. LTD. PLOT NO.A-42, STREET NO.2 MAROL INDUSTRIAL AREA ANDHERI (E) MUMBAI-400093 / VS. INCOME TAX OFFICER WARD 8(1)(4) ROOM NO.206/26 AAYAKAR BHAVAN, M.K.RD MUMBAI-40020 ( APPELLANT ) (RESPONDENT ) P.A. NO. AAA CF2119C APPELLANT BY SHRI HIRO RAI ( A R) REVENUE BY SHRI G.M. DOSS (DR) / DATE OF HEARING: 28/07/2016 / DATE OF ORDER: 09/09/2016 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST ORDER OF LD. COMMISSIONER OF INCOME TAX(APPEALS), MUMBAI- 16, {(IN SHORT CIT(A)}, DATED 15.03.2012 PASSED AGAINST OR DER GIVING EFFECT TO THE ITATS ORDER PASSED BY THE AO VIDE H IS ORDER DATED 07.12.2011. FFC 2 2. DURING THE COURSE OF HEARING, ARGUMENTS WERE MADE B Y SHRI HIRO RAI, AUTHORISED REPRESENTATIVES (AR) ON B EHALF OF THE ASSESSEE AND BY SHRI G.M. DOSS, DEPARTMENTAL REPRES ENTATIVE (DR) ON BEHALF OF THE REVENUE. 3 . BRIEF BACKGROUND AND THE FACTS OF THE CASE ARE TH AT IN THIS CASE, SCRUTINY ASSESSMENT FOR A.Y. 2001-02 WAS COMP LETED U/S. 143(3) ON 19.03.2004 BY WAY OF MAKING ADDITION OF RS.16,61,674/- ON ACCOUNT OF RESEARCH & DEVELOPMENT EXPENSE AND RS.1,15,943/- ON ACCOUNT OF TRAVELLING AND OTHE R EXPENSES THEREBY ASSESSING THE TOTAL INCOME AT RS.29,90,287/ - AS AGAINST RETURNED INCOME OF RS.12,12,670/-. AGGRIEVE D BY THE SAID ASSESSMENT, THE ASSESSEE HAD PREFERRED AN APPEAL BEFORE THE LD. CIT(A). LD. CIT(A) HAD UPHELD THE AD DITION MADE ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE ON SCIENTIFIC RESEARCH AND DELETED THE ADDITION MADE O N ACCOUNT OF TRAVELLING AND OTHER EXPENSES. SUBSEQUENTLY, THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL VIDE ORDER DATED 30.07.2008 HAD SET ASIDE THE ISSUE TO THE FILE OF THE AO TO DECIDE THE ISSUE AFTER CONSIDERING EVIDENCES WITH RESPECT TO THE INFRASTRU CTURE TO CARRY OUT NECESSARY RESEARCH WORK FOR THE DEVELOPME NT OF CITRONELLA AND OTHER RELEVANT DETAILS AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE. IN FRESH ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED ITS REPL Y. THE AO HELD THAT THE ASSESSEE HAD CLAIMED EXPENSES AS REVENUE EXPENSES UNDER THE HEAD 'RESEARCH & DEVELOPMENT EXPENSES' IN ITS PROFIT & LOSS ACCOUNT AND THAT FFC 3 NO ADDED DEDUCTION WAS CLAIMED IN THE COMPUTATION O F INCOME. THE AO FURTHER PLACED RELIANCE ON THE PROVI SIONS OF SECTION 35 OF THE ACT. THE DISALLOWANCE WAS REPEATE D IN THE ASSESSMENT ORDER AND THE AO ALSO DISCUSSED THE DISALLOWANCE U/S 35 & 37 AND MADE THE DISALLOWANCE ON BOTH COUNTS IN THIS REGARD. 3.1 . BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEF ORE LD. CIT(A) AND SUBMITTED DETAILED EXPLANATION ALONG WIT H REQUISITE EVIDENCES. DURING COURSE OF APPEAL BEFORE LD. CIT(A ), IT WAS SUBMITTED THAT THE AMOUNT WAS SPENT ON THE RESEARCH WHICH IS RELATED TO THE BUSINESS OF THE ASSESSEE CO MPANY INCURRED NOT PRIOR TO COMMENCEMENT OF ITS BUSINESS AND AS SUCH ALLOWABLE UNDER THE CLAUSE (I) OF SUB-SECTION (1) OF SECTION 35, WHICH DOES NOT REQUIRE PAYMENT AMOUNT TO A REGISTERED/APPROVED/NOTIFIED ENTITY ONLY. THE ASSES SEE FURTHER SUBMITTED THAT THE DIRECTIONS ISSUED BY THE TRIBUNAL WAS TO VERIFY WHETHER THE GBPL TO WHOM THE PAYMENT WAS MADE WAS HAVING INFRASTRUCTURE OR NOT, BUT THE AO H AD TRAVELLED BEYOND THE DIRECTIONS GIVEN BY THE TRIBUN AL. THE ASSESSEE FURTHER SUBMITTED THAT THERE ARE NUMBER OF JUDICIAL PRONOUNCEMENTS WHICH HAVE HELD THAT EVEN IF AN ASSE SSEE GETS THE WORK DONE THROUGH ANOTHER ENTITY, IT IS ST ILL ALLOWABLE AS EXPENSES. THE ASSESSEE FURTHER SUBMITTED THAT TH ERE WAS NO QUESTION OF SIPHONING OFF THE ASSESSEE COMPANY'S FU NDS AS IT WAS SHOWN TO THE AO THAT THE PAYMENTS WERE MADE IN PIECEMEAL BY THE ASSESSEE COMPANY ONLY FOR THE AFOR ESAID PURPOSES OF CULTIVATION AND PAYMENT WAS MADE AGAINS T THE ACTUAL WORK DONE AND SERVICES RENDERED BY GBPL. THE FFC 4 ASSESSEE FURTHER SUBMITTED THAT ULTIMATELY NO INCOM E WAS GENERATED BY GBPL IN THE PROCESS AND THAT THERE WAS NO CARRY FORWARD OF ANY LOSS, NOR TAXABLE PROFIT FOR T HE YEAR UNDER APPEAL, AND THUS BY DEBITING THE EXPENDITURE IN THE BOOKS OF ACCOUNT THE ASSESSEE DID NOT GET ANY TAX B ENEFITS. 3.2. LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSES SEE BUT DID NOT AGREE WITH THE SAME. IT WAS OBSERVED BY THE HIM THAT FROM THE BALANCE SHEET OF GBPL, IT WAS INDICATED TH AT THE SAID COMPANY DID NOT HAVE REQUISITE INFRASTRUCTURE TO CA RRY OUT SCIENTIFIC RESEARCH & DEVELOPMENT AND CULTIVATE LEM ON GRASS FOR CITRONELLA OIL. IT WAS FURTHER OBSERVED THAT AC TIVITY CARRIED OUT BY THE SAID COMPANY WAS PRIMARILY OF NATURE OF AGRICULTURE OPERATIONS AND NOT RELATED TO ANY SCIENTIFIC RESEAR CH WHICH DOES NOT HAVE DIRECT NEXUS WITH BUSINESS OF THE ASS ESSEE. IT WAS ALSO OBSERVED THAT THE IMPUGNED EXPENSES WERE I N FACT OF THE NATURE OF LOAN TO THE SISTER CONCERN. IT WAS AL SO OBSERVED THAT THE SAID COMPANY WAS NOT A RECOGNIZED INSTITUT ION U/S 35(1). 3.3. BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFO RE THE TRIBUNAL. DURING THE COURSE OF HEARING, LD. COUNSEL MADE DETAILED ARGUMENTS AND DREW OUR ATTENTION UPON VARI OUS PAGES OF THE PAPER BOOK TO SHOW THAT EXHAUSTIVE EVI DENCES WERE SUBMITTED IN SUPPORT OF CLAIM WHICH HAVE NOT B EEN CONSIDERED PROPERLY BY THE LOWER AUTHORITIES. HE AL SO DREW OUR ATTENTION UPON SECTION 35(1) AND CONTENDED THAT FOR THE PURPOSE OF DEDUCTION U/S 35(1), IT WAS NOT MANDATOR Y FOR THE AFORESAID COMPANY TO GET CERTIFICATION FROM ANY AUT HORITY. PER CONTRA, LD. DR RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. FFC 5 3.4. WE HAVE GONE THROUGH THE FACTS OF THIS CASE AND OR DER PASSED BY THE TRIBUNAL IN THE FIRST ROUND AS WELL A S DETAILS AND EVIDENCES SUBMITTED BY THE ASSESSEE BEFORE THE LOWE R AUTHORITIES. IT IS NOTED BY US AT THE VERY OUTSET T HAT TRIBUNAL HAD SENT THIS ISSUE BACK TO THE FILE OF THE AO WITH THE DIRECTION TO CONSIDER DETAILS AND EVIDENCES SUBMITTED BY THE ASSESSEE WITH RESPECT TO INFRASTRUCTURE AND NECESSARY RESEAR CH WORK FOR THE DEVELOPMENT OF CITRONELLA OIL BEFORE DECIDING T HIS ISSUE AFRESH. IT IS NOTED BY US THAT PERUSAL OF THE ORDER S OF THE LOWER AUTHORITIES REVEALS THAT THE DETAILS HAVE NOT BEEN PROPERLY CONSIDERED IN AN OBJECTIVE MANNER. IT WAS SHOWN TO US THAT WHATEVER DETAILS WERE REQUIRED BY LOWER AUTHORITIES , THESE WERE DULY SUBMITTED, BUT THESE HAVE BEEN IGNORED OR NOT CONSIDERED PROPERLY DUE TO FEW DOUBTS. IT IS NOTED THAT ASSESS EE HAD FILED EXHAUSTIVE SUBMISSIONS ALONG WITH REQUISITE DETAILS AND EVIDENCES BEFORE THE LD. AO. ONE OF THE REPLY FILED BEFORE THE AO WAS LETTER DATED 24.10.2011. WE FIND IT APPROPRI ATE TO REPRODUCE RELEVANT PART OF THIS LETTER AS UNDER: IN THIS CONTEXT WE SUBMIT ON BEHALF OF OUR CLIENT THAT THE LEARNED BENCH OF THE ITAT HAS REMANDED THE CASE MER ELY TO CONFIRM THAT THE INFRASTRUCTURE TO CARRY OUT NEC ESSARY RESEARCH WORK FOR THE DEVELOPMENT OF CITRONELLA WAS IN EXISTENCE. AS STATED IN OUR EARLIER LETTER AND DISC USSED IN THE HEARING FROM TIME TO TIME, THE NECESSARY AND SU FFICIENT INFRASTRUCTURE REQUIRED AT THE FIRST STAGE WAS ONLY AGRICULTURAL LAND, AGRICTURIST, SEEDS, FERTILIZERS, ADEQUATE WATER SUPPLY ETC. AS ALREADY MENTIONED IN OUR EARLI ER LETTER. ALONG WITH THIS LETTER WE ARE NOT ATTACHING PROOFS REQUIRED BY YOU FOR THE EXISTENCE OF THE INFRASTRUC TURE AS FOLLOWS: 1.BACKGROUND: THE APPELLANT HAD IN THE YEAR 1998 AND 1999 BEEN AB LE TO BAG ORDERS FROM TWO OF THE MAJOR PLAYERS IN THE SOA P FFC 6 INDUSTRY NAMELY WIPRO AND NIRMA WHICH USED CITRONELLA OIL DERIVATIVES AS RAW MATERIAL. ENCOURA GED BY THE RESPONSE RECEIVED FROM THE SOAP COMPANIES THE ASSESSEE COMPANY DECIDED TO PRODUCE ON ITS OWN, CITRONELLA OIL AND ITS DERIVATIVES ON WHICH TH E PERFUMES USED BY WIPRO AND NIRMA WERE BASED SINCE CITRONELLA OIL HAD TO BE IMPORTED, IT PROVED COSTLY . THE COMPANY HAS BEEN CARRYING OUT CONSISTENTLY SOME RESEARCH WITH A VIEW TO DEVELOP NEW PERFUMERY COMPOUNDS TO BE UTILIZED IN SOAP INDUSTRY. IN THAT CONTEXT, WE ARE ENCLOSING THE EXTRACT OF THE COPY O F THE BOOK NAMED 'SYNTHETIC PERFUMES' DETAILING THE PROCE SS OF MAKING THE CITRONELLA OIL FROM THE CITRONELLA/LE MON GRASS AS REQUIRED BY YOU. 2. INFRASTRUCTURE: WITH ABOVE IN MIND OUR CLIENT COMPANY LOOKED FOR APPROPRIATE LANE TO CARRY OUT THE ACTIVITY. SOME AGRICULTURISTS AND BIOTECHNOLOGISTS SUGGESTED THAT THE LAND AT BARAMATI IS THE BEST SUITABLE LAND FOR THE CULTIVATION OF THE LEMON GRASS. OUR CLIENT WAS INTRODUCED TO ONE SHRI NANASAHEB BHOSALE, WHO IS FROM BARAMATI AND IS AN AGRICULTURAL CONSULTANT. HE WAS CONSULTED AND LATER GIVEN THE ASSIGNMENT FOR WHICH HE WAS PAID FOR DEVELOPING LEMON GRASS. 2.1 LAND: WE ARE ENCLOSING COPIES OF THE VARIOUS COMMUNICATIO NS DONE FOR TAKING THE AGRICULTURAL LAND TOTALING TO 4 2 ACRES ON LEASE FOR THE PLANTATION OF LEMON GRASS. T HESE CULMINATED INTO ACQUISITION OF LANDS AND COPIES OF LEASE AGREEMENTS, 7/12 EXTRACTS INDICATING THAT THE PRIMA RY INFRASTRUCTURE FOR AGRICULTURAL ACTIVITY WAS IN PLA CE. ENCLOSED ALSO PLEASE FIND SOME COPIES OF THE DRAFTS/PAY ORDERS ISSUED TO PERSONS FROM WHOM AGRICULTURAL LAND TAKEN ON LEASE AND ALSO FOR AMOUNT TRANSFERRED TO THE AGRICULTURIST APPOINTED A T BARAMATI. 2.2 CONSULTANT: AS AFORESAID NANASAHEB BOSALE WAS APPOINTED AND THE COPY OF HIS APPOINTMENT LETTER, VARIOUS COMMUNC3TIO NS WITH, HIM DURING THE PERIOD OF CULTIVATION, HIS REP ORT OF DAY TO DAY ACTIVITY ETC, ARE ENCLOSED. 2.3 OPERATIONS: FFC 7 WE ARE ENCLOSING THE COPIES OF ESTIMATES, VARIOUS QUOTATIONS CALLED FOR REQUIRED AT THE VARIOUS STAGES OF THE PRODUCTION OF CITRONELLA OIL AS SUGGESTED BY THE AGRICULTURIST APPOINTED FROM TIME TO TIME. 2.4 RECURRING EXPENSES: WE ARE ALSO ENCLOSING COPIES OF MAJOR BILLS OF EXPE NDITURE TOWARDS BORE-WELL, LAYING WATER PIPELINE ETC. FROM THIS, IT CAN BE SEEN THAT THE COMPANY HAD ALL THE FACILIT IES FOR PLANTING THE REQUIRED SEEDS. WE ALSO ENCLOSE COPIES OF THE STATEMENTS OF EXPENSESIHU7ED ON SEEDS, FERTILIZERS, MANURE ETC, A ND CASH VOUCHERS ON SAMPLE BASIS TO INDICATE THE EXPENSES INCURRED FOR THE PLANTATION DONE DURING TH E CULTIVATION PERIOD. WE ARE ALSO ENCLOSING THE ATTENDANCE REGISTER OF THE VARIOUS PERSONS INVOLVED IN THE CULTIVATION ACTIVITY AS MENTIONED IS ENCLOSE D TO CONFIRM THE MANPOWER DEPLOYED FOR THE ABOVE CULTIVATION. WE WOULD LIKE TO PLACE BEFORE YOU THE FACT THAT UNFORTUNATELY A LOT OF OTHER DOCUMENTS PERTAINING T O THE YEAR UNDER ASSESSMENT MOSTLY RELATED TO THIS ACTIVITY WAS LOST IN THE WATER LOGGING ON 26TH JULY 2005 WHICH WERE STORED AT OUR OFFICE FOR BEING PRODUCED BEFORE THE AO. TO SUBSTANTIATE THIS, WE ARE ATTACHI NG HEREWITH THE COPY OF AFFIDAVIT IN THAT CONNECTION AND WE ALSO PRODUCE BEFORE YOU VARIOUS PHOTOGRAPHS TAKEN AT THE TIME OF WATER LOGGING. WE TRUST THAT THE ABOVE DETAILS AND DOCUMENTS SUBMITTED AND VARIOUS FILES, BANK STATEMENTS PRODUC E WILL SUFFICE YOUR REQUIREMENT TO CONVINCE YOU THAT THERE WAS AN ADEQUATE INFRASTRUCTURE TO CARRY OUT THE NEC ESSARY RESEARCH FOR THE DEVELOPMENT OF CITRONELLA, A PRODU CT REQUIRED BY OUR CLIENT COMPANY AND CONSEQUENTLY FOR COMPLETION OF THE SET ASIDE ASSESSMENT OF OUR ABOV E CLIENT FOR THE A.Y. 2001-02. WE TRUST THIS WILL FULFILL YO UR REQUIREMENT TO COMPLETE THE ASSESSMENT. FFC 8 3.7. IT IS NOTED THAT AFTER RECEIVING THIS LETTER, NOTH ING MORE WAS ASKED BY THE AO AND HE SIMPLY PROCEEDED TO DISA LLOW THE EXPENSES AFTER MAKING HIS OWN ANALYSIS. FIRST OF AL L, THE AO REFERRED TO AND ANALYSED THE PROVISIONS OF SECTION 35(1) (I) IN HIS OWN MANNER, AND WHEREBY HE CONCLUDED THAT THE P AYEE WAS REQUIRED TO BE CERTIFIED BY THE PRESCRIBED AUTH ORITY FOR THIS PURPOSE. IT IS NOTED BY US THAT AO HAS MISUNDERSTOO D THE PROVISIONS OF LAW IN THIS REGARD. AS PER PLAIN READ ING OF SECTION 35, THE CERTIFICATION WAS REQUIRED ONLY IF THE EXPE NDITURE WAS INCURRED BEFORE THE COMMENCEMENT OF BUSINESS. FOR A N EXPENDITURE TO BE ALLOWABLE U/S 35(1)(I) OF THE ACT , PRIMARY REQUIREMENT OF THE LAW IS THAT EXPENDITURE LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH SHOULD NOT BE CAPIT AL EXPENDITURE AND SHOULD BE RELATED TO THE BUSINESS O F THE ASSESSEE. IT IS NOBODYS CASE THAT IT IS A CAPITAL EXPENSE. IT IS NOT DISPUTED THAT THE ASSESSEE WAS ENGAGED IN THE B USINESS OF PERFUMERY COMPOUND TO BE UTILIZED IN THE SOAP INDUS TRY. IT IS ALSO NOT DISPUTED THAT CITRONELLA OIL WAS ONE OF TH E MAJOR RAW MATERIALS TO BE USED AS A NEW PERFUMERY COMPOUND TO BE USED IN THE MANUFACTURING OF SOAP. IT IS ALSO NOT DISPUT ED THAT CITRONELLA OIL IS EXTRACTED FROM A PARTICULAR VARIE TY OF LEMON GRASS. IT IS ALSO NOT DISPUTED THAT THE AFORESAID C OMPANY NAMELY GREENCLONE BIOTECH P. LTD. (GBPL) WAS SET UP BY SHRI NANASAHEB BHOSALE, WHO IS FROM BARAMATI AND IS AN AGRICULTURE CONSULTANT. UNDER THESE CIRCUMSTANCES, IN OUR OPINION, THESE EXPENSES WERE INCURRED UNDER THE GEN UINE CIRCUMSTANCES. THUS, ONLY GRIEVANCE OF THE LOWER A UTHORITIES LEFT TO BE ADDRESSED WAS WITH REGARD TO AVAILABILIT Y OF REQUISITE FFC 9 INFRASTRUCTURE OF THE SAID COMPANY. IN THIS REGARD, LD. COUNSEL DREW OUR ATTENTION UPON FEW EVIDENCES INCLUDING BIL LS OF LEMON GRASS SUPPLIED AND EVIDENCES OF PLANTING OF ITS SAP LINGS. THE COPIES OF TRANSPORTATION VOUCHERS WERE ALSO SUBMITT ED BEFORE US TO SHOW THAT ALL THESE EVIDENCES WERE BROUGHT BE FORE THE AO EVIDENCING TRANSPORTATION OF SAPLINGS AND OTHER REL ATED MATERIAL. NOTHING HAS BEEN BROUGHT ON RECORD BY THE LOWER AUTHORITIES TO REJECT THESE EVIDENCES. NO FURTHER Q UERY WAS RAISED IN THIS REGARD BY THE LOWER AUTHORITIES WHIC H WAS LEFT TO BE ADDRESSED BY THE ASSESSEE. WE FIND THAT THE DISA LLOWANCE HAS BEEN MADE WITHOUT BRINING ANY COGENT MATERIAL O N RECORD TO REJECT THE DETAILS AND EVIDENCES SUBMITTED BY TH E ASSESSEE. THE DISALLOWANCE CANNOT BE MADE ONLY ON THE GROUND THAT RESULTS OF THE RESEARCH WERE NOT SHOWN BY THE ASSES SEE DURING THE YEAR UNDER CONSIDERATION. THE BENEFIT OF RESEAR CH MAY OR MAY NOT YIELD IN THE YEAR UNDER CONSIDERATION. BUT, THAT WOULD NOT DETERMINE ALLOWABILITY OF THE EXPENSES OR OTHER WISE. THUS, TAKING INTO ACCOUNT TOTALITY OF FACTS AND CIRCUMSTA NCES OF THE CASE, THE ACTION OF LOWER AUTHORITIES IN DISALLOWIN G THESE EXPENSES WAS NOT JUSTIFIED AND THEREFORE, SAME IS R EVERSED AND AO IS DIRECTED TO ALLOW THE CLAIM OF RS.16,61,674/- 4. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER, 2016. SD/- (AMIT SHUKLA ) SD/- (ASHWANI TANEJA) ! / JUDICIAL MEMBER ' ! / ACCOUNTANT MEMBER MUMBAI; # DATED : 09/09/2016 CTX? P.S/. .. FFC 10 #$%&'(')% / COPY OF THE ORDER FORWARDED TO : 1. % &' / THE APPELLANT 2. ()&' / THE RESPONDENT. 3. * * ( % ) / THE CIT, MUMBAI. 4. * * / CIT(A)- , MUMBAI 5. -. / (01 , * % 012 , / DR, ITAT, MUMBAI 6. / 34 5 / GUARD FILE. / BY ORDER, ) -% ( //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
