M/s. Microlabs Limited, Bangalore V. ACIT, Bangalore

ITA 704/BANG/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0552 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 22-09-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 22-05-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JASON P BOAZ
• Keywords: Capital expenditure; Set aside
• Section: 80HHC; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.704/BANG/2008 ASSESSMENT YEAR : 2001-02 M/S. MICROLABS LIMITED, NO.27, RACE COURSE ROAD, BANGALORE 560 001. : APPELLANT VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 12(1), BANGALORE. : RESPONDENT APPELLANT BY : SHRI S. PARTHASARATHI RESPONDENT BY : SHRI JASON P. BOAZ O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL OF MICRO LABS LIMITED MANUFACTURER S OF PHARMACEUTICAL FORMULATIONS IS DIRECTED AGAINST T HE CIT(A)-LTU FOR THE ASSESSMENT YEAR 2001-02. 2. IN ITS GROUNDS OF APPEAL, THE ASSESSEE HAS RAISE D SEVEN GROUNDS OF APPEAL, OUT OF WHICH, GROUND NOS:1 AND 7 ARE GENERA L AND NOT SPECIFIC AND, THEREFORE, THEY DO NOT SURVIVE FOR ADJUDICATION. THE REMAINING GROUNDS, FOR THE SAKE OF CLARITY, ARE REFORMULATED AS UNDER: ITA NO.704/B/08 PAGE 2 OF 8 (I) THE CIT(A)-LTU FAILED TO APPRECIATE THAT THE PRODUC TS WERE NOT MANUFACTURED BY PONDICHERRY UNIT AND, THEREFORE, NO EXPENDITURE WAS APPORTIONABLE TO THIS UNIT UNDER THE HEAD EXP ENDITURE; - WITHOUT PREJUDICE, HE OUGHT TO HAVE APPRECIATED THA T NO EXPENDITURE WAS RELATABLE (APPORTIONABLE) TO PONDIC HERRY UNIT; (II) WITHOUT PREJUDICE, THE CIT(A) OUGHT TO HAVE APPRECI ATED THAT THE R&D EXPENSES CLAIMED AND INCLUDED IN THE CAPITAL EX PENDITURE OF RS.99.15 LAKHS WHICH WAS REQUIRED TO BE EXCLUDED EV EN IF THE APPORTIONMENT OF THE EXPENDITURE WAS REQUIRED TO BE MADE; & (III) THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE CLAIM OF THE ASSESSEE THAT DEDUCTION U/S 80HHC OF THE ACT WAS TO BE GRANTED ON THE ELIGIBLE BUSINESS PROFITS AND NOT ON THE ELI GIBLE BUSINESS PROFITS LESS DEDUCTION U/S 80-IB OF THE ACT; - THE RATIO AS LAID DOWN BY THE HONBLE SUPREME COU RT IN THE CASE REPORTED IN 292 ITR 1 WAS RELEVANT AS THE LAW AS IN TERPRETED BY THE HONBLE COURT AND THAT THE ORDER OF THE SPECIAL BENCH WAS NOT APPLICABLE. 3. THE ASSESSEE HAD FURNISHED ITS ROI, ADMITTING A TOTAL INCOME OF RS.8.62 CRORES FOR THE AY UNDER DISPUTE WHICH WAS S UBJECTED TO SCRUTINY AND THE ASSESSMENT IN QUESTION WAS CONCLUDED ON 23/ 12/03 ON THE RETURNED INCOME. ON A VERIFICATION OF THE RECORDS IN A SUO MOTO ACTION, THE CIT, B-III FOUND THAT DEDUCTIONS U/S 80HHC AND 80- IB ALLOWED BY THE AO IN THE ASSESSMENT ORDER WERE NOT IN CONFORMITY WITH TH E PROVISIONS WHICH, IN HIS VIEW, WERE PREJUDICIAL TO THE INTERESTS OF REVE NUE AND, THUS, SET ASIDE THE ASSESSMENT U/S 263 OF THE ACT WITH A DIRECTION TO THE RE-DO THE ASSESSMENT (I) BY ALLOWING DEDUCTION U/S 80HHC AFTER TAKING INTO C ONSIDERATION OF S.80-IB(13) RWS 80-IA(9) OF THE ACT; & ITA NO.704/B/08 PAGE 3 OF 8 (II) BY ALLOWING DEDUCTION U/S 80-IB AFTER APPORTIONING PART OF THE EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT IN RESPECT OF PONDICHERRY UNIT. 3.1. IN COMPLIANCE, THE AO RECOMPUTED THE DEDUCTIONS (I) U/S 80HHC AFTER REDUCING THE DEDUCTION ALLOWED U/S 80-IB FROM THE ELIGIBLE PROFITS OF THE BUSINESS AND ALLOWED TH E DEDUCTION U/S 80-IB AFTER APPORTIONING A PART OF EXPENDITURE INCU RRED IN RESPECT OF RESEARCH AND DEVELOPMENT. THUS, HE RECOMPUTED T HE DEDUCTION U/S 80HHC AT RS.39.16 LAKHS AS AGAINST RS.1.56 CROR ES CLAIMED; AND (II) RECOMPUTED THE DEDUCTION U/S 80-IB AT RS.26.30 CROR ES AFTER APPORTIONING A PART OF RESEARCH AND DEVELOPMENT EXP ENSES TO PONDY UNIT. IN THE RESULT, HE ADDED BACK - RS.1.17 CRORES BEING EXCESS CLAIMS U/S 80 HHC - RS.1.36 CRORES BEING EXCESS CLAIMS U/S 80-IB - WITH AN OBSERVATION THAT THE ASSESSEE DID NOT PRODUCE ANY E VIDENCE TO PROVE THAT THE PONDY UNIT DID NOT DERIVE ANY BENEFI T FROM RESEARCH AND DEVELOPMENT ACTIVITY. 4. AGGRIEVED, THE ASSESSEE TOOK UP THESE ISSUES BEF ORE THE CIT(A) FOR REDRESSAL. AFTER CONSIDERING THE SPIRITED ARGUMENT S OF THE ASSESSEE, THE LD. CIT(A) HAD DEALT WITH THE TWIN ISSUES AS UNDER: I. DEDUCTION U/S 80-IB : (I) DISPUTING THE ASSESSEES CONTENTION THAT THE APPORT IONMENT OF R& D EXPENDITURE TO ITS PONDY UNIT WAS NOT REQUIRED TO BE DONE IN VIEW OF THE FACT THAT THE SAID UNIT DID NOT BENEFIT BY R & D DURING THE YEAR UNDER CONSIDERATION, THE CIT(A) COUNTERED IT BY STATING THAT THE WORK DONE BY THE R & D UNIT WAS A CONTINUO US PROCESS AND IT IS FOR THE BENEFIT OF ALL THE UNITS OF THE A SSESSEE. JUST BECAUSE ONE UNIT DID NOT MANUFACTURE ANY OF THE PRO DUCTS DEVELOPED BY THE R & D UNIT DURING THE YEAR DOES NO T MEAN THAT THE EXPENDITURE INCURRED WITH REGARD TO THE R & D U NIT ARE NOT ATTRIBUTABLE TO SUCH UNIT OF THE ASSESSEE. IT WAS AN ADMITTED FACT THAT THE PONDY UNIT HAD IN FACT PRODUCED TWO PRODUC TS DEVELOPED BY THE R & D UNIT, THOUGH DEVELOPED IN THE EARLIER YEARS. THUS, HE ITA NO.704/B/08 PAGE 4 OF 8 JUSTIFIED THE AOS ACTION OF APPORTIONING THE R & D EXPENDITURE TO PONDY UNIT WHILE COMPUTING THE PROFITS OF THE SAID UNIT. (II) WITH REGARD TO THE ASSESSEES OBJECTION TO THE APPO RTIONMENT MADE BY THE AO ON THE BASIS OF THE PROFITS EARNED B Y EACH OF ITS UNITS, THE CIT(A) WAS OF THE VIEW THAT THE AO HAD N OT DISCUSSED ON THIS IN THE ASSESSMENT ORDER NOR HAD IT BEEN COMMEN TED UPON BY HIM IN THE REMAND REPORT. THE APPORTIONMENT OF R & D EXPENSES HAD BEEN MADE ON THE BASIS OF PROFITS OF THE UNITS. WHEN ALL OTHER COMMON EXPENSES HAVE BEEN APPORTIONED ON THE BASIS OF TURNOVER, IT WAS NOT PROPER ON THE PART OF THE AO TO APPORTIO N ONLY THE R & D EXPENSES ON THE BASIS OF THE PROFITS OF EACH OF T HE UNITS AND, THUS, DIRECTED THE AO TO APPORTION THE SAME ON THE BASIS OF THE TURNOVER OF THE UNITS, IF THE OTHER COMMON EXPENSES HAVE APPORTIONED LIKEWISE. (III) DISAGREEING WITH THE CONTENTION REGARDING EXCLUSION OF CAPITAL EXPENDITURE OF RS.99.15 LAKHS WHICH WAS INCLUDED IN THE R & D EXPENSES, WHILE APPORTIONING THE SAME, THE CIT(A) W AS OF THE VIEW THAT WHATEVER EXPENDITURE THAT HAD BEEN CONSIDERED WHILE COMPUTING THE BUSINESS PROFITS OF THE ASSESSEE, HAS TO BE TAKEN INTO CONSIDERATION FOR APPORTIONMENT, EVEN THOUGH SUCH A N EXPENDITURE WOULD NOT HAVE BEEN ALLOWED BUT FOR THE PROVISIONS OF S.35(1)(IV) AND THE AO WAS DIRECTED TO APPORTION T HE ENTIRE EXPENSES OF RS.1.99 CRORES RELATING TO R & D. II. DEDUCTION U/S 80-HHC : THE ASSESSEES CONTENTION OF NOT TO REDUCE THE REL IEF ALLOWED U/S 80-IB FROM THE BUSINESS PROFITS WHILE COMPUTING THE DEDUCTION U/S 80HHC WAS NEGATIVED BY THE CIT(A) FOLLOWING THE FI NDING OF THE HONBLE ITAT, CHENNAI SPECIAL BENCH IN THE CASE OF ASST. CIT V. ROGINI GARMENTS REPORTED IN 294 ITR 15 WHEREIN I T WAS RULED THAT THE RELIEF U/S 80-IA TO BE DEDUCTED FROM PROFI TS AND GAINS OF BUSINESS BEFORE COMPUTING RELIEF U/S 80HHC . 5. NOT FINDING FAVOUR WITH THE STAND OF THE LD. CIT (A)-LTU ON THE ABOVE ISSUES, THE ASSESSEE HAS COME UP WITH THE PRE SENT APPEAL. THE LD. A.R. CONTENTIONS REVOLVED AROUND WHAT HAD BEEN REIT ERATED BEFORE THE CIT(A). TO STRENGTHEN HIS ARGUMENTS, HE HAD FURNIS HED A PAPER BOOK CONTAINING 1 41 PAGES WHICH CONSISTS OF, INTER AL IA, COPIES OF (I) WRITTEN ITA NO.704/B/08 PAGE 5 OF 8 SUBMISSION FILED BEFORE THE CIT(A); (II) ORDER OF T HE ITAT IN THE CASE OF MICRO NOVA PHARMACEUTICALS LTD., ETC. 5.1. ON THE OTHER HAND, THE LD. D.R HAD FULLY END ORSED THE JUDICIOUS VIEW TAKEN BY THE LD.CIT(A) WHILE DECIDING THE ISSU ES WHICH ARE NOW UNDER DISPUTE. TO DRIVE HOME HIS POINT, HE HAD PLACED ST RONG RELIANCE ON THE FOLLOWING CASE LAWS: (I) LEBEN LABORATORIES LTD. V. DCIT (2007) 294 ITR (A.T ) 1 ITAT, MUMBAI; (II) ASST. CIT V. ROGINI GARMENTS (2007) 294 ITR (A.T) 1 5 ITAT, CHENNAI; (III) BUSH BOAKE ALLEN (INDIA) LTD. V. ACIT (2005) 273 IT R 152 (MAD); (IV) ASST. CIT V. HINDUSTAN MINT AND AGRO PRODUCTS P.LTD . (2009) 315 ITR (AT) 401 (DELHI) [SB] 6. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS, CAREFULLY PERUSED THE RELEVANT RECORDS, PAPER BOOK FURNISHED BY THE L D. A R AND ALSO THE CASE LAWS ON WHICH THE RIVAL PARTIES HAVE PLACED TH EIR FAITH. 6.1. WITH REGARD TO THE ASSESSEES CONTENTION THAT SINCE NO PRODUCTS WAS MANUFACTURED BY ITS PONDICHERRY UNIT, NO EXPEND ITURE WAS APPORTIONABLE TO THIS UNIT UNDER THE HEAD EXPENDIT URE, IN OUR CONSIDERED VIEW, DOESNT HOLD ANY CONVICTION. AS RIGHTLY POIN TED OUT BY THE LD. CIT(A), THE WORK DONE BY THE R & D UNIT WAS A CONTINUOUS PR OCESS AND IT WAS FOR THE BENEFIT OF ALL THE UNITS OF THE ASSESSEE. JUST BECAUSE ONE UNIT HAD NOT MANUFACTURED ANY OF THE PRODUCTS DEVELOPED BY THE R & D UNIT DURING THE YEAR DOESNT MEAN THAT THE EXPENDITURE INCURRED WIT H REGARD TO THE R & D UNIT WERE NOT ATTRIBUTABLE TO SUCH UNIT OF THE ASSE SSEE. ITA NO.704/B/08 PAGE 6 OF 8 6.1.1. IN FACT, IT WAS CONCEDED BY THE ASSESSE E ITSELF THAT THE PONDICHERRY UNIT HAD IN FACT PRODUCED TWO PRODUCTS DEVELOPED BY THE R & D UNIT, THOUGH, DEVELOPED IN THE PRECEDING YEARS. WE ARE, THEREFORE, OF THE UNANIMOUS VIEW THAT THE AOS ACTION OF APPORTIONING THE R & D EXPENDITURE TO THE PONDY UNIT WHILE COMPUTING THE P ROFITS OF THE SAID UNIT IS FULLY JUSTIFIABLE AND ALSO THE STAND OF THE LD. CIT(A) ON THIS COUNT IS SUSTAINED. 6.2. IN RESPECT OF THE ASSESSEES OTHER CONTENTI ON THAT THE R & D EXPENSES OF RS.1.99 CRORES INCLUDE CAPITAL EXPENDIT URE OF RS.99.15 LAKHS FORMING PART OF DEDUCTION U/S 35(1)(IV) OF THE ACT, THE SAME SHOULD NOT BE CONSIDERED FOR APPORTIONMENT, WE FIND THAT THE LD.C IT(A) WAS MAGNANIMOUS IN HIS VIEW THAT WHEN ALL OTHER COMMON EXPENSES HAVE BEEN APPORTIONED ON THE BASIS OF TURNOVER, IT WAS N OT PROPER TO APPORTION ONLY THE R & D EXPENSES ON THE BASIS OF THE PROFITS OF EACH OF THE UNITS AND JUDICIOUSLY DIRECTED THE AO TO APPORTION THE SA ME ON THE BASIS OF THE TURNOVER OF THE UNITS, IF THE OTHER COMMON EXPENSES HAVE APPORTIONED LIKEWISE. 6.3. WE ARE IN FULL AGREEMENT WITH THE CIT(A)S E NDEAVOUR THAT WHATEVER EXPENSE/EXPENDITURE THAT HAS BEEN CONSIDE RED WHILE COMPUTING THE BUSINESS PROFITS OF THE APPELLANT, HAS TO BE TA KEN INTO CONSIDERATION FOR APPORTIONMENT, EVEN THOUGH SUCH AN EXPENDITURE WOUL D NOT HAVE BEEN ALLOWED BUT FOR THE PROVISIONS OF S.35(1)(IV). ACCORDINGLY, WE STAND BY THE CIT (A)S ACTION IN DIRECTING THE AO TO APPORTI ON THE ENTIRE EXPENSES OF RS.1.99 CRORES RELATING TO R & D. IT I S ORDERED ACCORDINGLY. ITA NO.704/B/08 PAGE 7 OF 8 6.3.1. TURNING TO THE CLAIM OF THE ASSESSEE THA T THE DEDUCTION U/S 80HHC OF THE ACT WAS TO BE GRANTED ON THE ELIGIBLE BUSINESS PROFITS AND NOT ON THE ELIGIBLE BUSINESS PROFITS LESS DEDUCTION U/S 80-IB OF THE ACT, THE LEGAL PRECEDENTS ON THIS POINT ARE CLARIFIED BY THE HONB LE I.T.A.T. (CHENNAI SPECIAL BENCH), IN THE CASE OF ACIT V. ROGINI GARMENTS REPORTED IN 294 ITR (A.T) 15, WHEREIN IT WAS OBSERVED THUS IN VIEW OF THE SPECIFIC RESTRICTION PROVIDED UNDER SECTION 80-IA(9), THE DEFINITION OF BUSINESS PROFIT AS CONTAINED IN CLAUS E (BAA) OF THE EXPLANATION BELOW SECTION 80HHC(4C) HAS TO BE CONSTRUED IN THE LIGHT OF THE RESTRICTIONS. CIRCULAR NO.772, DATED DECEMBER 23, 1998 [SEE (1999 ) 235 ITR (ST.)35] NOWHERE SUGGESTS THAT MORE THAN 100 PR CENT DEDUCTI ON ON THE SAME PROFIT CAN BE GRANTED TO THE ASSESSEE UNDER VARIOUS SECTIO NS ENUMERATED IN CHAPTER VI-A. SECTION 80HHC IS PART OF CHAPTER VI-A . THE DEDUCTION CANNOT BE ALLOWED IGNORING THE RESTRICTIVE CLAUSE C ONTAINED IN SECTION 80- IA(9). THE RESTRICTIVE CLAUSE IN SECTION 80-IA MAK ES IT ABUNDANTLY CLEAR THAT WHEREVER DEDUCTION UNDER ANY OTHER SECTION OF CHAPT ER VI-A(C) IS CLAIMED, THE COMPUTATION WILL BE SUBJECT TO THE RESTRICTIONS LAID DOWN IN SECTION 80- IA(9). THERE IS ABSOLUTELY NO AMBIGUITY ON THIS AS PECT. RELIEF UNDER SECTION 80-IA SHOULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS BEFORE COMPUTING RELIEF UNDER SECTION 80HHC OF THE ACT. THEREFORE, THE RELIEF UNDER SECTION 80-IA SHOULD BE DEDUCTED FROM PROFITS AND GAINS OF BUSINESS BEFORE COMPUTING RELIEF UNDER SECTION 80HHC. 6.3.2. YET AN ANOTHER FINDING, THE HONBLE I.T.A.T . DELHI SPECIAL BENCH IN THE CASE OF ACIT V. HINDUSTAN MINT AND AGRO PRODUCTS P.LTD REPORTED IN (2009) 315 ITR (AT) 401 (DELHI) [SB] HA D OBSERVED THAT, THE DEDUCTION TO BE ALLOWED UNDER ANY OTHER PROVISION O F CHAPTER VI-A OF THE INCOME-TAX ACT, 1961, WITH THE HEADING C IS TO BE REDUCED BY THE AMOUNT OF DEDUCTION ALLOWED UNDER SECTION 80-IB OR SECTION 80-IA OF THE ACT. ITA NO.704/B/08 PAGE 8 OF 8 6.3.3. IN THE LIGHT OF THE FINDINGS OF THE HONBLE TRIBUNALS REFERRED SUPRA, WE ARE OF THE CONSIDERED OPINION THAT THE CA SE LAWS ON WHICH THE LD. A.R PLACED RELIANCE ARE OF NO HELP TO THE ASSESSEE. 6.3.4. IN VIEW OF THE FOREGOING FACTS AN D CIRCUMSTANCES OF THE ISSUE, WE ARE OF THE UNANIMOUS VIEW THAT THE AO WAS JUSTIFIED ON THIS COUNT . IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF OCTOBER, 2009. SD/- SD/- ( K.P.T. THANGAL ) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMB ER BANGALORE, DATED, THE 30 TH OCTOBER, 2009. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.