DCIT, Circle-3(1), Hyderabad, Hyderabad V. RA Chem Pharma Limited, Hyderabad, Hyderabad

ITA 48/HYD/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6100 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-06-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 09-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S RAMA RAO
• Keywords: Unexplained investment; Depreciation; Opportunity of being heard; Rule of consistency; Additional evidence; Cost of acquisition; Wholly owned subsidiary; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 65/HYD/2017 ASSESSMENT YEAR: 2012-13 RA CHEM PHARMA LTD., HYDERABAD. PAN AAACI 6448M VS. INCOME TAX OFFICER, WARD 3(2), HYDERABAD. APPELLANT RESPONDENT ITA NOS. 48 & 49/HYD/2017 ASSESSMENT YEAR: 2010-11 & 2012-13 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1), HYDERABAD. VS. RA CHEM PHARMA LTD., HYDERABAD. PAN AAACI 6448M APPELLANT RESPONDENT ASSESSEE BY: SHRI S. RAMA RAO REVENUE BY: SHRI R. MOHAN REDDY DATE OF HEARING: 04/06/2018 DATE OF PRONOUNCEMENT: 08/06/2018 O R D E R PER S. RIFAUR RAHMAN, AM: ITA NOS. 65/HYD/2017 AND 49/HYD/2017 ARE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE AN D ITA NO. 48/HYD/2017 FILED BY THE REVENUE FOR AY 2010-11. AS IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLU BBED AND HEARD TOGETHER AND THEREFORE WE FIND IT CONVENIENT TO PASS A CONSOLIDATED ORDER. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 2 ITA NO. 65/HYD/2017 BY THE ASSESSEE FOR AY 2012-13 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: 1. UNEXPLAINED INVESTMENTS - DISCREPANCY IN PURCHAS ES - RS 22646910/- THE IMPUGNED ORDER HAS ERRONEOUSLY SUSTAINED THE ADDITION OF RS 226.46 LACS AS UNEXPLAINED INVESTMEN TS ON ACCOUNT OF DIFFERENCE BETWEEN THE STATEMENT OF PURCHASES SUBMITTED AT THE TIME OF ASSESSMENT AND T HE PURCHASES IN THE FINAL ACCOUNTS. 2. UNEXPLAINED INVESTMENTS - DISCREPANCY IN CREDITO R BALANCES - RS 28396925/- THE IMPUGNED ORDER HAS SUSTAINED THE ADDITION OF 283.96 LACS BEING THE DIFFERENCE BETWEEN THE CREDIT ORS' STATEMENTS AND THE CREDITORS BALANCE AS PER THE FIN AL ACCOUNTS AS UNEXPLAINED INVESTMENTS WITHOUT CONSIDERING THAT THESE AROSE ON ACCOUNT OF POST DAT ED CHEQUES. 3. NOTIONAL INTEREST ON LOAN TO WHOLLY OWNED SUBSID IARY - RS 1463729 THE COMPANY GAVE AN INTEREST FREE LOAN OF RS 121.97 LACS TO ITS WHOLLY OWNED SUBSIDIARY INDU PHARMA LTD . THE LD AO DISALLOWED A NOTIONAL INTEREST EXPENDITUR E OF RS 14.63 LACS WHICH HAS BEEN ERRONEOUSLY SUSTAINED BY IN THE IMPUGNED ORDER 4. HP INTEREST - R 34204/- THE COMPANY INCURRED HIRE PURCHASE INTEREST EXPENDITURE OF RS 34204/- FROM RELIANCE CAPITAL WHI CH IS NOT LIABLE TO TDS DEDUCTION. 5. TDS DEDUCTED AT LOWER RATE- RS 2123400 THE IMPUGNED ORDER HAS ERRONEOUSLY DISALLOWED PROPORTIONATE EXPENDITURE ON X - RAY CHARGES RS 3.0 1 LACS) AND SCREENING CHARGES (RS 1822 LACS) ON THE I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 3 GROUND THAT IT HAS NOT MET WITH TDS AT THE APPLICAB LE RATES. YOUR APPELLANT SUBMITS THAT THE LOWER DEDUCT ION OF TDS DOES NOT CALL FOR A PROPORTIONATE DISALLOWANCE OF EXPENDITURE. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, YOUR APPELLANT PRAYS THAT THIS APPEAL BE ALLOWED AND THE ORDER OF THE HON'BLE CIT (APPEALS) BE SET ASIDE. 3. BRIEFLY THE FACTS OF THE CASE ARE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BULK DRUGS AND CLINICAL RESEARCH ACTIVITIES. IT FILED RETURN OF INCOME ON 29/09/2012 , DECLARING INCOME OF RS. 21,53,61,060/- . SCRUTINY ASSESSMENT WAS PASSED U/S 143(3) ON 17/03/2015 DETERMINING THE ASS ESSED INCOME UNDER THE NORMAL PROVISIONS AT RS. 27,48,76, 726/- BY MAKING VARIOUS ADDITIONS. 4. AGAINST THE ASSESSMENT ORDER, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A) AND THE CIT(A) PASSED A N EX- PARTE ORDER DECIDING THE APPEAL BASED ON THE INFORM ATION AVAILABLE ON RECORD WHEN THE ASSESSEE FAILED TO APP EAR BEFORE HIM EVEN THOUGH THE NUMBER OF OPPORTUNITIES PROVIDE D. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE DISPOSE OF THE APPEAL GROUND-WISE AS UNDER: 6. AS REGARDS GROUND NO. 1 PERTAINING TO THE ADDITI ON OF RS. 2,2646,910/- TOWARDS DISCREPANCY IN PURCHASES, THE AO OBSERVED THAT AS PER THE INVENTORY, THE PURCHASES W ERE RS. 95,37,45,924/-, WHEREAS, AS PER P&L ACCOUNT, THE PU RCHASES WERE RS. 93,10,99,014/-, THEREFORE, THE INVESTMENT IN EXCESS PURCHASES OF RS. 2,26,46,910/- WAS TREATED AS UNEXP LAINED INVESTMENT REJECTING THE EXPLANATION OF THE ASSESSE E THAT THE DIFFERENCE BETWEEN THE FIGURES WAS ON ACCOUNT OF OT HER COSTS THAT ARE ALSO ACCOUNTED AS PART OF PURCHASE COST SU CH AS FREIGHT, INWARD, CUSTOMS DUTIES, LOADING ETC. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 4 6.1 THE CIT(A) CONFIRMED THE ACTION OF THE AO BY HO LDING THAT THOUGH IN GROUNDS OF APPEAL OF THE ASSESSEE CL AIMED THAT DIFFERENCE IN PURCHASES IS DUE TO FREIGHT, INWARD, CUSTOMS DUTY, LOADING, UNLOADING ETC., THE RELEVANT DETAILS OF SUCH PAYMENTS ARE NOT AVAILABLE ON RECORD, THEY DO NOT F ORM PART OF P&L A/C ALSO AND, THEREFORE, ASSESSEE FAILED TO REC ONCILE THE FIGURES. 6.2 BEFORE US, THE LD. AR SUBMITTED A RECONCILIATIO N STATEMENT WHICH IS PART OF PAPER BOOK (REFER PAGE 1 79). HE BROUGHT TO OUR NOTICE THAT AO HAS NOT CONSIDERED TH E EXPENSES RELATING TO IMPORTS AND INTER UNIT TRANSACTIONS. HE PRAYED THAT THIS MAY BE CONSIDERED. 6.3 THE LD. DR RELIED ON THE ASSESSMENT ORDER. 6.4 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. AS THE ASSESSEE HAS SUBMITTED A RECONCILIATION STATEMENT HIGHLIGHTING THE DIFFERENC E BETWEEN THE PURCHASES RECORDED IN P&L A/C AND STOCK REGISTE R, IT NEEDS VERIFICATION, THEREFORE, WE REMIT THIS ISSUE TO THE FILE OF AO TO VERIFY THE CLAIM OF THE ASSESSEE AND CONSIDER THE S AME AFTER GIVING PROPER OPPORTUNITY OF BEING HEARD. THIS GROU ND IS ALLOWED FOR STATISTICAL PURPOSES. 7. AS REGARDS GROUND NO. 2 PERTAINING TO THE ADDITI ON OF RS. 2,8396,925/- TOWARDS DISCREPANCY IN CREDITOR BALANC ES, THE AO OBSERVED THAT THE AS PER THE LIST OF SUNDRY CREDITO RS SUBMITTED BY THE ASSESSEE, THE SUNDRY CREDITORS WERE RS. 36,8 5,55,847/- WHEREAS AS PER THE BALANCE SHEET THE SUNDRY CREDITO RS WERE RS. 39,69,52,772/-. THE AO, THEREFORE CONSIDERED TH E DIFFERENCE OF RS. 2,83,96,925/- AS UNEXPLAINED CRED IT. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 5 7.1 THE CIT(A) CONFIRMED THE ADDITION REJECTING TH E SUBMISSION OF THE ASSESSEE THAT THE DIFFERENCE IN S UNDRY CREDITORS IS DUE TO NON-ADJUSTING OF POST DATED CHE QUES IN RESPECTIVE CREDITORS BALANCES ON THE GROUND THAT NO SUCH DETAILS WERE SUBMITTED EITHER DURING ASSESSMENT OR DURING APPEAL PROCEEDINGS. 7.2 BEFORE US, THE LD. AR SUBMITTED THAT THE DIFFE RENCE IS DUE TO ISSUE OF POST DATED CHEQUES AND THE SAME WAS NOT REPRESENTED PROPERLY BEFORE THE AO AND CIT(A). 7.3 THE LD. DR RELIED ON THE ORDER OF AO. 7.4 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. SINCE THE ASSESSEE HAS NOT PROP ERLY SUBMITTED THE INFORMATION BEFORE AO AND NOT PROPERL Y REPRESENTED BEFORE LD. CIT(A), THIS ISSUE NEEDS TO BE VERIFIED BY AO AFRESH CONSIDERING ADDITIONAL EVIDENCE SUBMIT TED BEFORE US AND ACCORDINGLY, WE REMIT THIS ISSUE BACK TO AO TO VERIFY THE SAME AFTER GIVING PROPER OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. THIS GROUND IS TREATED AS ALLOWED FOR ST ATISTICAL PURPOSES. 8. AS REGARDS GROUND NO. 3, ADDITION OF RS. 14,63,7 29/- TOWARDS NOTIONAL INTEREST ON LOAN TO WHOLLY OWNED S UBSIDIARY, THE AO OBSERVED THAT ON PERUSAL OF BALANCE SHEET, I T IS REVEALED THAT THE ASSESSEE COMPANY HAD GIVEN LOANS TO ITS SISTER CONCERNS FROM THE INTEREST BEARING FUNDS BOR ROWED FROM BANKS. HE OPINED THAT THE DIVERSION OF FUNDS TO THE SISTER CONCERNS ATTRACTS DISALLOWANCE OF INTEREST PROPORTI ONATE TO THE LOAN AMOUNT. HE, THEREFORE, HELD THAT AS THE ASSESS EE COMPANY HAD GIVEN A LOAN OF RS. 1,21,97,738/- TO IT S SISTER I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 6 CONCERN AND NO INTEREST IS RECEIVED, THE INTEREST A T 12% ON RS. 1,21,97,738/-, WHICH COMES TO RS. 14,63,792/- WAS D ISALLOWED FROM THE INTEREST CLAIMED BY THE ASSESSEE. 8.1 THE CIT(A) CONFIRMED THE ADDITION BY OBSERVING THAT THOUGH THE ASSESSEE CLAIMED THAT THE AMOUNT WAS GIV EN TO WHOLLY OWNED SUBSIDIARIES IN THE COURSE OF BUSINESS TO PROTECT THE VALUE OF INVESTMENTS IN SUBSIDIARIES, NO DETAIL S WERE SUBMITTED AS TO WHAT ARE THE SHARES HELD BY THE ASS ESSEE IN SUBSIDIARIES, NATURE OF BUSINESS OF SUBSIDIARY COMP ANIES ETC. 8.2 BEFORE US, THE LD. AR SUBMITTED THAT ASSESSEE G RANTED INTEREST FREE ADVANCE TO ITS WHOLLY OWNED SUBSIDIAR Y IN THE COURSE OF BUSINESS. IT IS DONE IN THE INTEREST OF T HE SUBSIDIARY, IT AMOUNTS TO INVESTMENTS IN ORDER TO PROTECT THE S HARE HOLDING INTEREST. THIS ISSUE IS SQUARELY COVERED BY THE HON BLE SUPREME COURT DECISION IN THE CASE OF SA BUILDERS. 8.3 THE LD. DR RELIED ON THE ORDER OF AO. 8.4 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE NOTICE THAT ASSESSEE HAS GIV EN ADVANCE TO ITS WHOLLY OWNED SUBSIDIARIES IN THE COU RSE OF BUSINESS. WE ALSO NOTICE THAT ASSESSEE HAS HUGE RES ERVES AT ITS DISPOSAL TO THE EXTENT OF RS. 48.99 CRORES AND ALSO EMPLOYED BORROWED FUNDS. WHEN THE ASSESSEE HAS HUGE RESERVES IN ITS DISPOSAL AND DIVERTS RS. 1.22 CRORE S TO ITS WHOLLY OWNED SUBSIDIARIES, THE AO CANNOT LINK THE T RANSACTION WITH THE BORROWED FUNDS. THE WHOLLY OWNED SUBSIDIAR IES ARE THE EXTENSION OF THE ASSESSEE COMPANY. IT CAN DIVER T FUNDS TO ITS SUBSIDIARY TO PROTECT THE INTEREST OF THE SHARE HOLDING. IT IS IN LINE WITH THE RATIO LAID DOWN IN THE CASE OF SA BUILDERS I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 7 (SUPRA) EVEN IT CAN DIVERT THE BORROWED FUNDS. FOR THE SAKE OF CLARITY, IT IS REPRODUCED AS UNDER: WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINIO N THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED T O IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT C ANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SIST ER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES ( WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIO US THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIA RY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SU BSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUS INESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE E NTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. RESPECTFULLY, FOLLOWING THE SAID RATIO, WE DELETE T HE DISALLOWANCE OF RS. 14,63,792/- MADE BY THE AO TOWA RDS INTEREST. 9. AS REGARDS GROUND NO. 4 PERTAINING TO THE ADDITI ON OF RS. 34,204/- ON ACCOUNT OF HIRE PURCHASE INTEREST EXPEN DITURE, THE AO DISALLOWED THE SAID AMOUNT BEING THE PAYMENT MAD E TO RELIANCE CAPITAL ON THE GROUND THAT NO TDS WAS DEDU CTED. 9.1 THE CIT(A) CONFIRMED THE ADDITION ON THE GROUND THAT THERE WAS NO EVIDENCE ON RECORD REGARDING THE NATUR E OF TRANSACTION TO VERIFY WHETHER THE SAME IS LIABLE TO TDS OR NOT. 9.2 BEFORE US, THE LD. AR SUBMITTED THAT IT IS HIRE PURCHASE INTEREST WHICH IS NOT LIABLE TO TDS DEDUCTION. 9.3 THE LD. DR RELIED ON THE ORDERS OF REVENUE AUTH ORITIES. 9.4 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE NOTICE THAT ASSESSEE HAS MAD E I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 8 PAYMENT TO RELIANCE CAPITAL AND NOT DEDUCTED TDS AN D IT CLAIMS THAT IT IS RELATING TO HIRE PURCHASE TRANSAC TION, FOR WHICH TDS PROVISION WILL NOT APPLY. WE NOTICE THAT THERE IS NO MUCH DISCUSSION ABOUT THIS ISSUE IN ASSESSMENT ORDER, AG AIN THIS NEEDS VERIFICATION. WE DIRECT THE AO TO VERIFY THE SAME AND IF IT IS FOUND THAT IT IS HIRE PURCHASE TRANSACTION, W HICH IS EXEMPT AS PER CBDT INSTRUCTION NO. 1425, DATED 16/11/1981. THEREFORE, IT MAY BE ALLOWED. THIS GROUND IS ALLOWE D FOR STATISTICAL PURPOSES. 10. AS REGARDS THE ADDITION OF RS. 21,23,400/- PERT AINING TO TDS DEDUCTION AT LOWER RATE, THE AO DISALLOWED THE SAID AMOUNT ON THE GROUND THAT THE ASSESSEE HAS NOT MET WITH TDS AT THE APPLICABLE RATES. 10.1 THE CIT(A) CONFIRMED THE ADDITION. 10.2 BEFORE US, THE LD. AR SUBMITTED THAT AO INVOKE D SECTION 40(A)(IA) ERRONEOUSLY ON THE GROUND THAT SUCH EXPEN SES WERE MET WITH TDS AT A LOWER RATE INSTEAD OF AT THE APPL ICABLE RATE. 10.3 THE LD. DR RELIED ON THE ORDER OF AO. 10.4 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL ON RECORD. WE NOTICE THAT AO HAS DISALLOWE D THE EXPENDITURE BY OBSERVING THAT ASSESSEE HAS DEDUCTED TAX ON PART OF AMOUNT OF EXPENSES CLAIMED AND AGAIN HE OBS ERVES THAT ASSESSEE WILL NOT BE TREATED AS TDS COMPLIED W HEN TAX DEDUCTED AT SOURCE PARTLY AND AT IRRELEVANT RATE OR IN APPLICABLE RATE. AT THE SAME TIME, LD. CIT(A) OBSER VES THAT AS PER INFORMATION ON RECORD, IT IS NOT THE CASE OF SH ORT DEDUCTION OF TDS, IT IS THE CASE OF NOT DEDUCTING TDS ON SOME PAYMENT. AGAIN THIS ALSO NEEDS VERIFICATION AND IF IT IS SHO RT DEDUCTION, I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 9 AO CANNOT INVOKE SECTION 40(A)(IA) AND FURTHER, ASS ESSEE IS NOT HELD TO BE ASSESSEE IN DEFAULT. IN CASE IT IS F OUND THAT IT IS THE CASE OF NON-COMPLIANCE WITH THE TDS PROVISION, AO MAY BE JUSTIFIED WITH HIS ACTION. ACCORDINGLY, THE ISSU E IS REMITTED TO THE FILE OF THE AO. THIS GROUND IS ALLOWED FOR S TATISTICAL PURPOSES. APPEALS BY THE REVENUE FOR AY 2010-11 AND 2012-13 11. IN THESE TWO APPEALS, THE REVENUE HAS RAISED TH E FOLLOWING GROUNDS OF APPEAL, WHICH ARE COMMON IN BO TH THE APPEALS UNDER CONSIDERATION: 1. THE LD. CIT (A) ERRED BOTH IN LAW AND ON FACTS OF THE CASE. 2. THE LD. CIT (A) ERRED IN DELETING THE DISALLOWAN CE OF AMORTIZATION OF EXPENDITURE CLAIMED OF RS.33,85,779 /- 3. THE LD. CIT (A) ERRED IN NOT CONSIDERING THE FAC T BROUGHT ON RECORD BY THE ASSESSING OFFICER THAT THE ASSESSEE IS NOT ELIGIBLE FOR CLAIM OF DEDUCTION EIT HER THROUGH AMORTIZATION OF EXPENDITURE OR BY WAY OF CLAIMING DEPRECIATION. 4. THE LD. CIT (A) OUGHT TO HAVE CONSIDERED THE FAC T THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS NOT INCURRED IN THE RELEVANT PREVIOUS YEAR AND DOES NOT FALL IN THE AMBIT OF PROVISIONS OF SECTION 35D OR 35DD. 5. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIM E OF HEARING. 12. THE BRIEF FACTS OF THE CASE AS TAKEN FROM AY 20 10-11, ARE THAT THE ASSESSEE INCURRED AN EXPENDITURE OF RS . 129.85 LAKHS DURING AY 2007-08 AND 2008-09 TOWARDS RESEARC H AND DEVELOPMENT AND BEGAN AMORTISING THE SAME FROM AY 2 009-10 ONWARDS @ 20% PER ANNUM. INVENTIS DRUG DELIVERY SY STEM PVT. LD. WAS MERGED WITH THE ASSESSEE COMPANY DURIN G FY 2008-09 RELEVANT TO AY 2009-10 AND THIS COMPANY INC URRED AN AMOUNT OF RS. 39.43 LAKHS TOWARDS PRODUCT DEVELOPME NT I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 10 EXPENDITURE DURING AY 2005-06 & 2006-07 AND STARTED AMORTISING THE EXPENDITURE @ 10% FROM AY 2007-08 ON WARDS. BOTH THE COMBINED EXPENSES WERE AMORTIZED BY THE AS SESSEE AND CLAIMED THE SAME AS UNDER: S.NO. AY AMOUNT CLAIMED % OF AMORTIZATION NAME OF THE COMPANY 1 2007-08 394357 10% INVENTIS 2 2008-09 394357 10% INVENITS 3 2009-10 4174494 20%(*) ASSESSEE 4 2010-11 3385779 20% OF RS. 16928893 (RS. 12985327 + 3943566) ASSESSEE COMPANY (*) 20% OF RS. 1,29,85,327/- = RS. 25,97,065 20% OF RS. 39,43,566/- = RS. 7,88,713/- 10% OF RS. 39,43,566/- = RS. 3,94,356/- (AS INVENTIS CLAIMED ONLY 10% IN AY 2007-08 THE BALANCE 10% IS CLAIMED NOW) 10% OF RS. 39,43,566/- = RS. 3,94,356/- (AS INVENTIS CLAIMED ONLY 10% IN AY 2008-09 THE BALANCE 10% IS CLAIMED NOW) TOTAL = RS. 41,74,494/- ============ 12.1 THE AO DISALLOWED THE AMORTIZATION EXPENSES OF RS. 35,89,413/- ON THE FOLLOWING REASONS: A) SEC. 35D REFERS TO AMORTIZATION OF PRELIMINARY EXPENSES AND SECTION 35DD REFERS TO AMORTIZATION OF EXPENSES IN CASE OF AMALGAMATION OR DEMERGER. WHEREAS IN THE INSTANT CASE THE AMORTISED EXPENDITU RE WAS INCURRED TOWARDS RESEARCH AND DEVELOPMENT THEREFORE THE SAME CANNOT BE ALLOWED EITHER UNDER SEC.350 OR 3500. (B) THE EXPENDITURE DOES NOT PERTAIN TO THE PREVIOU S YEAR 2009-10, THEREFORE THE SAME CANNOT BE ALLOWED U/S 35( 1) OR U/S 37. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 11 (C) ALTERNATIVE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE RESULTED IN AN INTANGIBLE ASSET AND DEPRECIATION SHOULD BE ALLOWED U/S 32 IS ALSO REJEC TED AS NO SUCH CLAIM WAS MADE IN EARLIER YEARS. 13. ON APPEAL, BEFORE THE CIT(A), THE ASSESSEE SUBM ITTED AS UNDER: (A) THE AMORTIZATION OF EXPENSES IN ASSESSEE'S OWN CASE FOR A. Y .2009-10 WAS ALLOWED BY ASSESSING OFF ICER IN SCRUTINY ASSESSMENT U/S 143(3) DATED 29.12.2011. (B) SIMILARIY AMORTIZATION OF EXPENSES CLAIMED IN INVENTIS FOR A.Y.2006-07 (U/S.143(3) DATED 18.12.20 08) & 2007-08 ( U/S.143(3) DATED 31.12.2009) WERE ALSO ALLOWED. (C) THE EXPENSES INCURRED FOR RESEARCH AND DEVELOPM ENT RESULTED IN KNOWHOW WHICH ENHANCED THE PROFIT EARNI NG CAPACITY RESULTING IN ENDURING BENEFIT, THEREFORE S UCH EXPENDITURE IS CAPITAL IN NATURE AND DEPRECIATION S HOULD BE ALLOWED. RELIANCE IS PLACED ON LARSEN AND TOUBRO VS CIT (2012) TAXPUB (DT) 2928 J K SYNTHETICS (1994) 2 07 ITR 985 (D) THE SAME EXPENDITURE WAS ALLOWED IN EARLIER YEA R, CONSISTENT TREATMENT SHOULD BE ADOPTED BY THE ASSESSING OFFICER. RELIANCE IS PLACED ON RADHA SOAM I SATSANG VS CIT (1992) 193 ITR 321 ( SC) (E) THE DEFERRED REVENUE EXPENDITURE WAS HELD ALLOWABLE IN THE FOLLOWING CASES. MADRAS INDUSTRIAL INVESTMENT CORP. ( 1997) 225 ITR 802 ( SC) TAPARIA TOOLS (2015) 327 ITR 605 CIT VS SANCO TRANS LTD (2006) 284 ITR 51 ( MADRAS) 14. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, DIRECTED THE AO TO ALLOW THE DEFERRED REV ENUE EXPENDITURE OF RS. 33,85,779/- BY OBSERVING AS UNDE R: 6. THE INFORMATION ON RECORD IS CAREFULLY CONSIDERE D. THE APPELLANT INCURRED THE EXPENSES TOWARDS RESEARCH AN D DEVELOPMENT AS MENTIONED AT PARA (3).THE CLAIM MADE IN P&L ACCOUNT IS RS. 35,89,413 AND NOT RS. 33,85,779. THE ASSESSING OFFICER DID NOT DOUBT THE GENUINENESS OF I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 12 THE EXPENDITURE. THE ASSESSING OFFICER OBSERVED THA T THE EXPENDITURE IS NOT ALLOWABLE U/S 32/35(1)/ 35D/ 35DD /37 FOR THE REASONS MENTIONED AT PARA (4). THE APPE LLANT INCURRED THE EXPENSES AND ACCORDING TO HIM THE RESU LT OF SUCH EXPENSES SHALL ACCRUE OVER A PERIOD OF FIVE YE ARS. ACCORDINGLY HE HAS BEEN CLAIMING THE EXPENSES @20%. THOUGH THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN INCOME TAX ACT, 1961, THE SAME IS WE LL ACCEPTED ACCOUNTING PRINCIPLE AS HELD BY THE HON'BL E SUPREME COURT IN CASE OF MADRAS INDUSTRIAL INVESTME NT CORPORATION WHEREIN THE HON'BLE SUPREME COURT HELD THAT 'ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABIL ITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES , THE PAYMENT WAS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE IS CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY OVER THE ENTIRE PERIOD AND HENCE THE EXPENDITURE WAS ALLOWED TO THE CLAIM OR SPREAD OVER THE PERIOD OF THE DEBENTURES. FURTHER IN THE CASE OF RADHA SOAMI SATSANG VS CIT ( CITED SUPRA ) THE HON'BLE SUPREME COURT OBSERVED TH AT 'IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING T HE DEPARTMENT TO TAKE A DIFFERENT VIEW FROM THAT TAKEN IN EARLIER PROCEEDINGS, THE QUESTION OF THE EXEMPTION OF THE ASSESSEE APPELLANT SHOULD NOT HAVE BEEN REOPENED. STRICTLY SPEAKING, RES JUDICATA DOES NOT APPLY TO INCOMETAX PROCEEDINGS. THOUGH, EACH ASSESSMENT YEAR BEING A UNIT, WHAT WAS DECIDED IN ONE YEAR MIGHT NO T APPLY IN THE FOLLOWING YEAR; WHERE A FUNDAMENTAL AS PECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS H AS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTI ES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPRO PRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR.' THEREFORE THIS EXPENDITURE TO BE ALLOWED FULLY IN T HE YEAR OF INCURRING OR ALTERNATIVELY ON DEFFERED BASIS OVE R A PERIOD OF TIME. KEEPING IN VIEW THE PRINCIPLE OF CONSISTENCY THE ASSESSING OFFICER IS DIRECTED TO AL LOW DEFERRED REVENUE EXPENDITURE OF RS. 33,85,779. SINC E THE FIRST GROUND OF APPEAL IS ALLOWED, THE ALTERNAT IVE GROUND OF APPEAL REGARDING ALLOWING DEPRECIATION BECOMES INFRUCTUOUS AND TREATED AS DISMISSED. 15. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE I S IN APPEAL BEFORE US. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 13 16. LD. DR SUBMITTED THAT THE CLAIM OF THE ASSESSEE IS NOT PROPER AS THE EXPENSES ARE NOT IN REVENUE IN NATURE AND ALSO ASSESSEE HAS NOT PROVED THAT IT IS IN CAPITAL EXPEN DITURE. IN BOTH COUNTS, IT CANNOT BE ALLOWED AS ALLOWABLE EXPE NDITURE. ACCORDINGLY, HE RELIED ON THE ASSESSMENT ORDER. 17. LD. AR SUBMITTED THAT THESE EXPENSES ARE REVENU E EXPENDITURES AND BROUGHT TO OUR NOTICE THE DETAILS OF EXPENSES, WHICH IS PLACED ON RECORD AT PAGE 123 OF PAPER BOOK. HE SUBMITTED THAT AO IS NOT DISPUTING THE FAC T THAT IT IS R&D EXPENDITURE AND AO ANALYSED THIS ISSUE IN THE L IGHT OF SECTION 35D & 35DD. THE ASSESSEE NEVER CLAIMED THE DEDUCTION U/S 35D OR 35DD. IT IS DEFERRED REVENUE EXPENDITURE, WHICH IS ALLOWABLE AS EXPENDITURE BY R ELYING ON MADRAS INDUSTRIAL INVESTMENT (SUPRA) CASE. 18. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. AS SUBMITTED BEFORE US, THE ASS ESSEE HAS INCURRED R&D EXPENSES AND ON EVALUATION, IT WAS FOU ND THAT IT HAS ENDURING BENEFIT SPREAD OVER TO NEXT FIVE YEAR S. ACCORDINGLY, CLAIMED DEDUCTION @ 20%. IT IS NOT THE CASE OF AO THAT THE EXPENSES WERE NOT INCURRED BUT WHETHER IT IS ALLOWABLE AS EXPENDITURE U/S 35D OR 35DD OR CAN IT BE ALLOWED AS CAPITAL EXPENDITURE TO QUALIFY FOR DEDUCTION U/S 32. EVEN THOUGH, ASSESSEE HAS NOT REPRESENTED PROPERLY BEFOR E LD. CIT(A), BUT, THE LD. CIT(A) HAS ANALYSED THE ISSUE IN LIGHT OF DECISIONS IN THE CASE OF MADRAS INDUSTRIAL INVESTME NT (SUPRA) AND RADHA SOAMI SATSANG (SUPRA) AND CAME TO THE CON CLUSION THAT IT IS ALLOWABLE EXPENDITURE. CONSIDERING THE O VERALL FACTS OF THE MATTER, THE CONCLUSION DRAWN BY THE LD. CIT( A) IS PROPER, PARTICULARLY, ON THE MATTER OF CONSISTENCY. THEREFO RE, GROUND RAISED BY THE REVENUE IS ACCORDINGLY REJECTED. I.T.A. NOS. 65, 48 & 49/HYD/2017 RA CHEM PHARMA LTD., HYD. 14 19. IN THE RESULT, ASSESSEES APPEAL IN ITA NO. 65/ HYD/2017 IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUE APP EALS IN ITA NOS. 48 & 49/HYD/2017 ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 8 TH JUNE, 2018. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 8 TH JUNE, 2018 KV COPY FORWARDED TO: 1. RA CHEM PHARMA LTD., PLOT NO. 26 27, TIE BALANAG AR, BALANAGAR, HYDERABAD 500 037. 2. ITO WARD 3(2), HYDERABAD. 3 DCIT, CIRCLE 3(1), HYD 4. CIT(A) - 3, HYDERABAD 5. PR. CIT - 3, HYDERABAD 6. THE DR, ITAT, HYDERABAD 7. GUARD FILE