AGIO PHARMACEUTICLS LTD, MUMBAI V. ACIT 8(1), MUMBAI

ITA 598/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55272 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 12-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUBAL
• Assessee Lawyers: M V SUBRAMANIAN
• Keywords: Depreciation; Initiation of penalty proceedings; Revenue expenditure; Capital expenditure
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD (A. M) ITA NO.598/MUM/2010(A.Y. 2006-07) M/S. AGIO PHARMACEUTICALS LTD., A-38, NANDJYOT INDUSTRIAL ESTATE, ANDHERI KURLA ROAD, SAFED POOL, ANDHERI (E), MUMBAI 400 072 PAN: AABCA 8426A (APPELLANT) VS. THE ACIT 8(1), MUMBAI. (RESPONDENT) APPELLANT BY : SHRI M.V.SUBRAMANIAN RESPONDENT BY : SHRI M.R. KUBAL DATE OF HEARING : 12/09/2011 DATE OF PRONOUNCEMENT : 16/0 9/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 10/11/2009 OF CIT(A)-16, MUMBAI RELATING TO ASSESSMENT YEAR 20 06-07. 2. AT THE TIME OF HEARING LD. COUNSEL FOR THE ASSES SEE SUBMITTED THAT GROUND NO.1, 2 & 5 ARE IDENTICAL TO GROUND NO.1,2,& 4 RAISED BY THE ASSESSEE IN ITA NO.160/M/09 IN ASSESSEES OWN CASE FOR A.Y 2005-06 AND THE TRIBUNAL HAS ALREADY DISMISSED THESE GROUNDS IN ITS ORDER DATED 24/4/2010. IN VIEW OF THE ABOVE GROUND NO.1,2 & 5 ARE DISMISSED. 3. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOLL OWS: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) XVI ERRED IN CONFIRMING ADDITION TO THE INCOME OF THE APPELLANT DIFFERENCE OF OPENING AND CLOSING BALANC E OF UNUTILIZED ITA NO.598/MUM/2010(A.Y. 2006-07) 2 MODVAT CREDIT AMOUNTING TO RS. 19,44,526/- WHICH YO UR HONOUR IS REQUESTED TO ORDER TO DELETE. 4. FROM ANNEXURE X OF THE TAX AUDIT REPORT FILED A LONG WITH THE RETURN OF INCOME OF THE ASSESSEE, THE AO NOTICED THAT THE ASS ESSEE HAD UNUTILIZED MODVAT CREDIT TO THE TUNE OF RS. 36,70,914/-. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO E XPLAIN WHY UNUTILIZED MODVAT CREDIT SHOULD NOT BE ADDED TO THE TOTAL INCO ME U/S. 145A OF THE ACT. IN REPLY DATED 14 TH OCT. 2008, THE ASSESSEE SUBMITTED THAT IT WAS, FO R THE PURPOSE OF SECTION 145A OF THE ACT, FOLLOWING THE P ROCEDURE LAID DOWN BY THE ICAI IN ITS GUIDANCE NOTE ON ACCOUNTING TREATMENT F OR MODVAT. IT WAS SUBMITTED THAT UNUTILIZED MODVAT CREDIT CANNOT BE A DDED TO INCOME. THE AO HOWEVER DID NOT ACCEPT THE CONTENTION OF THE ASSESS EE IN VIEW OF THE SPECIFIC PROVISION OF SECTION 145A OF THE ACT. HE HELD THAT CLAUSE (B) OF SECTION 145A READ WITH EXPLANATION TO THE SAID SECTION, MAKES IT AMPLY CLEAR THAT IN THE ASSESSMENT YEAR AFTER 1.4.1999, IN THE VALUATION OF THE STOCK ANY AMOUNT OF TAX, DUTY ETC. IS REQUIRED TO BE INCLUDED NOTWITHST ANDING THE FACT WHETHER THE ASSESSEE ACQUIRES ANY RIGHT. THE UNUTILIZED MODVAT CREDIT WHICH IS THE UNUTILIZED EXCISE DUTY AMOUNT ATTRIBUTABLE TO RAW M ATERIAL FORMING PART OF THE CLOSING STOCK, WHICH THE ASSESSEE CAN TAKE CRED IT FOR PAYMENT OF EXCISE DUTY OF FINISHED GOODS, FALLS WITHIN THE AMBIT OF T HE CLAUSE (B) AND EXPLANATION TO SECTION 145A OF THE I.T. ACT. THERE FORE, AFTER 1/04/1999, UNUTILIZED MODVAT CREDIT IS REQUIRED TO BE INCLUDED IN THE VALUE OF THE CLOSING STOCK. 5. THE AO THEREFORE ADDED THE UNUTILIZED MODVAT CRE DIT TO THE TOTAL INCOME OF THE ASSESSE. THE AO HOWEVER GAVE ADJUSTM ENT BY OBSERVING THAT THE ADDITION WOULD BE MADE AFTER ADJUSTING THE OPEN ING MODVAT CREDIT WHICH WAS ADDED IN LAST ASSESSMENT YEAR, WHICH WAS WORKE D OUT AT RS. 19,44,526/-. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE AO. ITA NO.598/MUM/2010(A.Y. 2006-07) 3 6. AT THE TIME OF HEARING OF THE APPEAL IT WAS AGRE ED BY THE PARTIES THAT SIMILAR ISSUES HAVE BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.160/M/09 FOR A.Y2005-06 AND THIS TRIBUNAL HELD AS FOLLOWS: 3. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED T HE ADDITION OF RS. 6,27,664/- MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INCREASE IN THE VALUATION OF CLOSING STO CK IN RESPECT OF MODVAT CREDIT AS PER SECTION 145A. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING AND EXPOR T OF PHARMACEUTICALS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 29/10/2005 DCLARIN G TOTAL INCOME OF RS. 1,14,37,670/-. FROM THE PERUSAL OF ANNEXURE X OF THE INCOME TAX AUDIT REPORT FILED ALONG WITH THE SAID RETURN, IT WAS NOTED BY THE AO THAT THE ASSESSEE HAS UNUTILIZED MODVAT CREDIT T O THE TUNE OF RS. 17,26,389/-. ACCORDING TO HIM, AS PER THE SPECIFIC PROVISIONS CONTAINED IN SECTION 145A, THE UNUTILIZED MODVAT CR EDIT ATTRIBUTABLE TO RAW MATERIAL FORMING PART OF THE CLOSING STOCK WAS LIABLE TO BE ADDED IN THE VALUE OF CLOSING STOCK. AS THE ASSESSEE COMPAN Y HAD NOT DONE SO, HE ADDED THE UNUTILIZED MODVAT CREDIT TO THE VALUE OF THE CLOSING STOCK AND AFTER ADJUSTING THE OPENING BALANCE OF MODVAT C REDIT, THE NET ADDITION OF RS. 6,27,664/- WAS MADE BY HIM TO THE T OTAL INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) ACCEPTED THE S TAND OF THE ASSESSEE COMPANY TAKEN BY RELYING ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF ACIT VS. WMI CRANES (ITA NO.2654/M/03 D TD. 19/4/06) THAT THE WORD USED IN SECTION 145A IS INVENTORY A ND AND NOT CLOSING STOCK AND THEREFORE, IF THE ADJUSTMENT ON ACCOUNT OF UNUTILIZED MODVAT CREDIT IS MADE IN THE CLOSING STOCK, A SIMIL AR ADJUSTMENT HAS TO BE MADE TO THE VALUE OF THE OPENING STOCK. HE, HOW EVER, HELD THAT THE AO HAS ALREADY MADE THE ADJUSTMENT ON ACCOUNT OF OP ENING MODVAT CREDIT WHICH WAS ADDED IN THE LAST A.Y AND, THEREFO RE, THE ADDITION MADE BY HIM AMOUNTING TO RS. 6,27,664/- ON THIS ISS UE WAS CORRECT. HE, THEREFORE, CONFIRMED THE SAID ADDITION. 5. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS SUBMITTED THAT THE LEGAL POSITION ON THIS POINT IS NOW WELL SETTLED THAT THE ADJUSTMENT ON ACCOUNT OF UNUTILIZED MODVAT CREDIT HAS TO BE MADE TO THE OPENING STOCK AS WELL AS CLOSING STOCK AND ONLY THE NET DIFFERENCE IS TO BE ADDED TO THE TOTAL INCOME OF T HE ASSESSEE. HE HAS SUBMITTED THAT THE AO HOWEVER, HAS MADE THE ADJUSTM ENT ON ACCOUNT OF OPENING MODVAT CREDIT INSTEAD OF MAKING SUCH ADJ USTMENT ON ITA NO.598/MUM/2010(A.Y. 2006-07) 4 ACCOUNT OF UNUTILIZED MODVAT CREDIT ATTRIBUTABLE TO THE OPENING STOCK. HE HAS CONTENDED THAT A DIRECTION, THEREFORE, MAY B E GIVEN TO THE AO TO DO SUCH ADJUSTMENT AS PER THE SETTLED POSITION. SINCE THIS LIMITED RELIEF SOUGHT BY THE LD. COUNSEL FOR THE ASSESSEE I S FAIR AND REASONABLE AND THE LD. D.R ALSO HAS NOT RAISED ANY OBJECTION I N THIS REGARD, WE DIRECT THE AO TO MAKE THE ADJUSTMENT ON ACCOUNT OF UNUTILIZED MODVAT CREDIT TO THE OPENING AS WELL AS CLOSING STOCK OF R AW MATERIAL AND ADDED THE NET DIFFERENCE TO THE TOTAL INCOME OF THE ASSESSEE ON THIS ISSUE. GROUND NO.3 OF THE ASSESSEES APPEAL IS ACC ORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE D IRECT THE AO TO MAKE ADJUSTMENT ON ACCOUNT OF UNUTILIZED MODVAT TO THE O PENING AND CLOSING STOCK OF RAW MATERIAL AND ADD THE NET DIFFERENCE TO THE TOTAL INCOME OF THE ASSESSEE AS WAS DIRECTED IN A.Y 2005-06. THIS GROU ND IS CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOLL OWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A)XVI ERRED IN CONFIRMING THE DISALLOWANCE THE INSURANCE ON MOTOR CAR OF RS.1,11,778/- WITHOUT TAKING INTO THE SUBMIS SIONS BY THE APPELLANT, WHICH YOUR HONOUR IS REQUESTED TO ORDER TO DELETE. 8. THE ASSESSEE HAD CLAIMED AS DEDUCTION IN THE P&L ACCOUNT INSURANCE PREMIUM PAID ON MOTOR CAR. THE AO ON FURTHER ENQU IRY FOUND THAT THE MOTOR CAR STOOD IN THE NAME OF SHRI MADHUSUDAN RUIA , MANAGING DIRECTOR OF THE ASSESSEE. SINCE THE ASSESSEE WAS NOT OWNER OF THE MOTOR CAR THE DEDUCTION CLAIMED WAS DISALLOWED BY THE AO. 9. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT TH E CAR WAS USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND HAD BEEN SH OWN IT AS PART OF THE BLOCK OF ASSETS OF THE ASSESSEE. IT WAS ARGUED THA T ABSENCE OF OWNERSHIP IN THE NAME OF THE ASSESSEE SHOULD NOT HAVE BEEN A GRO UND FOR REJECTING THE ITA NO.598/MUM/2010(A.Y. 2006-07) 5 CLAIM OF THE ASSESSEE. IT WAS SUBMITTED THAT THE A SSESSEE WAS A DE-FACTO OWNER OF THE MOTOR CAR HAVING COMPLETE DOMINION AND CONTROL OVER THE MOTOR CAR. THE ASSESEE ALSO POINTED OUT THAT THE MOTOR C AR WAS USED BY THE EMPLOYEES FOR COMMUTING TO THE HEAD OFFICE AND GODO WNS AND ALSO FOR VISITS OF THE EMPLOYEES TO THE LOAN LICENCEES PREMISES. WE MAY ALSO INCIDENTALLY MENTION THAT THE ASSESSEE IS IN THE BUSINESS OF MAN UFACTURE OF PHARMACEUTICAL PRODUCTS. THE CIT(A) HOWEVER CONFIR MED THE ORDER OF THE AO. 10. AFTER HEARING THE PARTIES, WE ARE OF THE VIEW T HAT THE CLAIM OF THE ASSESSEE OUGHT TO HAVE BEEN ACCEPTED. THE DISALLOW ANCE HAS BEEN MADE PURELY ON THE GROUND THAT THE ASSESSEE WAS NOT THE OWNER OF THE CAR. THE LAW IS NOW WELL SETTLED THAT THE ABSENCE OF DOCUMEN T EVIDENCING OWNERSHIP IS NOT FATAL TO A CLAIM FOR DEPRECIATION ALLOWANCE. T HE VEHICLE WAS SHOWN AS ASSESSEES ASSETS IN THE BALANCE. IT WAS IN POSSES SION AND CONTROL OF THE VEHICLE. THESE FACTS WERE SUFFICIENT TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF DEPRECIATION. THE DECISIO N OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. FAZILKA DABWALI TPT CO.(P) LTD. 270 ITR 398 (P&H) AND HONBLE DELHI HIGH COURT IN T HE CASE OF CIT VS. BASTI SUGAR MILL LTD. 176 CTR 294 (DEL) SUPPORTS THE PLEA OF THE ASSESSEE THAT DEPRECIATION CAN BE ALLOWED EVEN IN THE ABSENCE OF REGISTRATION OF THE MOTOR CAR IN THE NAME OF THE ASSESSEE. FOR THE REASONS S TATED ABOVE, WE ALLOW GROUND NO.4 RAISED BY THE ASSESSEE. 11. GROUND NO.6 RAISED BY THE ASSESSEE READS AS FOL LOWS: 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) XVI ERRED IN CONFIRMING THE DISALLOW ANCE THE PROFESSIONAL FEES PAID OF RS. 4,00,000/- WHICH YOUR HONOUR IS REQUESTED TO ORDER TO DELETE. 12. THE ASSESSEE CLAIMED AS DEDUCTION A SUM OF RS. 4 LACS PAID TO PANORAMA INFRASTRUCTURE. THE PAYMENT WAS STATED TO BE A PAYMENT FOR ITA NO.598/MUM/2010(A.Y. 2006-07) 6 PROFESSIONAL FEES PAID TO THE CONSULTANT IN CONNECT ION WITH CONSULTANCY SERVICES WITH REFERENCE TO A PROPOSAL FOR SETTING U P MANUFACTURING FACILITY FOR MANUFACTURE PHARMACEUTICAL PRODUCTS AT BANGALORE. ACCORDING TO THE AO EXPENDITURE INCURRED ON ESTABLISHING A NEW PROJECT OR A NEW FACTORY IS A CAPITAL EXPENDITURE AND CANNOT BE ALLOWED AS A DEDU CTION. ON APPEAL BY THE ASSESSE, THE CIT(A) CONFIRMED THE ORDER OF THE AO. 13. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE EXPENDITURE WAS INCURRED IN CONNECTION WITH EXPANSION OF THE EX ISTING BUSINESS OF THE ASSESSEE AND OUGHT TO HAVE BEEN ALLOWED AS DEDUCTIO N. HE ALSO RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF INDARAMA SYNTHETICS, 333 ITR 18 (DEL), WHEREIN IT WAS HELD THAT EXPENDIT URE INCURRED IN ENGAGING THE SERVICES OF CONSULTANT FOR INCREASING EFFICIENC Y AND PROFITABILITY OF THE EXISTING BUSINESS OF THE ASSESSEE BY WAY OF EXPANSI ON WHICH WAS ULTIMATELY ABANDONED WAS STILL A REVENUE EXPENDITURE AND HAS T O BE ALLOWED AS REVENUE EXPENDITURE. THE HONBLE COURT REFERRED TO SEVERAL DECISION IN THIS REGARD RIGHT FROM THE DECISION IN THE CASE OF CIT VS. PRIT HVI INSURANCE COMPANY LTD., 631 ITR 632 (SC), WHEREIN THE TEST OF UNITY O F CONTROL, INTERLACING FUNDS AND COMMON MANAGEMENT WERE HELD TO BE THE TEST TO D ETERMINE AS TO WHAT WAS SAME BUSINESS. THE LD. D.R RELIED ON THE ORDER OF THE AO. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PE RUSAL OF THE ORDER OF THE AO SHOWS THAT THE ASSESSEE HAD TAKEN SPECIFIC P LEA THAT THE PROJECT WHICH WAS A PROPOSAL TO SET UP IN BANGALORE A FACTO RY FOR MANUFACTURE OF PHARMACEUTICAL PRODUCTS. THIS FACT HAS NOT BEEN DI SPUTED BY THE AO. IN SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT THE DECI SION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INDORAMA SYNTHTICS (SUPRA ) WILL BE APPLICABLE AND THE ASSESSEE WILL BE ENTITLED TO CLAIM OF DEDUCTION . WE, THEREFORE, DIRECT THAT THE DEDUCTION CLAIMED BY THE ASSESSEE MAY BE ALLOWE D. GROUND NO.6 RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. ITA NO.598/MUM/2010(A.Y. 2006-07) 7 15. GROUND NO.7 IS WITH REGARD TO LEVY OF INTEREST UNDER SECTION 234B & 234C IS PURELY CONSEQUENTIAL AND GROUND NO.8 CHALL ENGING INITIATION OF PENALTY PROCEEDINGS CANNOT BE SUBJECT MATTER OF APP EAL AGAINST THE ORDER IN QUANTUM PROCEEDINGS. 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 16 TH DAY OF SEPT., 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 16 TH SEPT.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RD BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.598/MUM/2010(A.Y. 2006-07) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 12/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 13/9/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER