Institute for Micronutrient Technology, Pune V. ACIT, Ward 2(3), Pune, Pune

ITA 747/PUN/2009

• Counselvise Citation: 74724514 RSA 2009
• Duration Of Justice: 2 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 29-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 19-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR (JM) AND SHRI G.S. PANNU (AM) ITA NO. 747/PN/2009 (ASSTT. YEAR : 2004-05) INSTITUTE FOR MICRONUTRIENT TECHNOLOGY , ... APPELLANT 1-A SHRIKRISHNA, KRISHNAKEVAL NAGAR, KONDHWA KHURD, PUNE 411 048 PAN : NOT AVAILABLE. V. ACIT, WARD 2(3), RESPONDENT PMT BUILDING, PUNE APPELLANT BY : SHRI. A.V. SONDE RESPONDENT BY : MS. ANN KAPTHUAMA ORDER PER I.C. SUDHIR, JM THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDER ON THE GROUND THAT LD CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF E XPENDITURE OF RS. 16,39,745/- ON ACCOUNT OF EXPENSES SHARING U/S. 40A(2)(B) OF THE A CT, WITH ITS ASSOCIATE COMPANY. 2. THE RELEVANT FACTS ARE THAT DURING THE YEAR, THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS. 16,39,745/- INCURRED FOR AVAILIN G THE FACILITIES AVAILABLE WITH ITS ASSOCIATE COMPANY I.E. IMT TECHNOLOGIES P.LTD. (IN SHORT IMTTPL) FOR ITS BUSINESS PURPOSE. THE A.O DISALLOWED THE CLAIM U/S. 40A(2)( B) OF THE ACT ON THE BASIS THAT THE EXPENDITURE IS FOR THE PURPOSE OF BUSINESS AND IT IS NOTHING BUT TAX EVASION TACTICS. THE LD CIT(A) HAS ALSO UPHELD THE SAME BE ING NOT SATISFIED WITH THE BASIS AND REASONS SHOWN BY THE ASSESSEE FOR QUANTIFYING THE SHARING OF THE CLAIMED EXPENDITURE OF RS. 16,39,745/- WITH ITS ASSOCIATE C OMPANY. ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 2 3. BEFORE US, THE LD. A.R HAS REITERATED THE SUBMIS SIONS MADE BEFORE THE AUTHORITIES BELOW. BEFORE THE LD CIT(A), IT WAS SU BMITTED THAT SINCE THE BEGINNING, THE STAND OF THE ASSESSEE COMPANY REMAINED THAT TH E ASSESSEE IS A RESEARCH & DEVELOPMENT ORGANIZATION. RESEARCH AND DEVELOPMENT IS AN ONGOING PROCESS AND THEREFORE, THE ASSESSEE CONTENDED THE APPROACH OF T HE A.O THAT SOURCE OF INCOME OF ASSESSEE IS LICENCE FEE BASED ON TECHNICAL KNOWH OW DEVELOPED IN THE PAST. IT WAS SUBMITTED THAT RESEARCH AND DEVELOPMENT IS A CO NTINUOUS PROCESS AND IF FOR DEVELOPING NEW PRODUCTS, THE ASSESSEE FIRM HAD TAK EN THE HELP OF ANOTHER TECHNICAL COMPANY, IT SHOULD NOT BE DISPUTED THAT THIS EXPEND ITURE IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSEE ALSO TRI ED TO DISPUTE THE OBSERVATION OF THE A.O THAT THE CLAIMED EXPENDITURE HAS BEEN INF LATED. IT WAS SUBMITTED THAT A REGULAR AGREEMENT WAS ENTERED INTO WITH IMTTPL MAKI NG IT CLEAR THEREIN THAT THE DETAILS OF THE EXPENDITURE SHOULD BE GIVEN TO THE A SSESSEE BEFORE THE YEAR-END TO MAKE THE NECESSARY PROVISIONS. IT WAS SUBMITTED THA T DURING THE YEAR UNDER CONSIDERATION, 3 NEW PRODUCTS WERE EVOLVED NAMELY POTASIUM SCHOENITE MICZINK AND SELENIT WHICH WERE TESTED BY IMTTPL AND SINCE IT NEEDED EXPERTISE AND TRAINED AND QUALIFIED PEOPLE, THE ASSESSEE AGREED TO REIMB URSE THE SALARY AND RELATED COMPONENTS OF THE TECHNICAL PEOPLE. AS A HEAD OF T HE TEAM, DR. D.P.VERMA WAS THE MANAGER OF EXPENDITURE HEAD. PROF. V. RANGNATHAN B EING TEACHER OF DR. VERMA AND THEREFORE, THE ASSESSEE HAD TAKEN HIM AS A CONSULTA NT. OUT OF THE SUPPORT TEAM, MS. ANITHA RAMDASI, THE THEN SENIOR TECHNICAL OFFIC ER WAS THE TEAM LEADER. THUS, THE TOTAL AMOUNT CAME TO RS. 16,39,745/-. IT WAS S UBMITTED THAT IN THE YEAR 03-04, THE ASSESSEE TOOK A POLICY DECISION TO CHANGE THE S TRUCTURE OF THE ORGANIZATIONS AS A PART OF CONSOLIDATION AND DECIDED TO CREATE THREE O RGANIZATIONS WITHIN THE GROUP : I) RANADEY MICRONUTRIENTS PVT. LTD. AND ITS SUBSIDI ARY COMPANIES FOR MANUFACTURING OF FERTILIZERS. II) ROHANNA AGRI LTD., AND ITS SUBSIDIARY COMPANIES FOR MARKETING OF FERTILIZERS. III) IMT TECHNOLOGIES PVT. LTD. AS RESEARCH & DEVEL OPMENT ORGANIZATION ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 3 SINCE THE DECISION WAS TAKEN FOR RESTRUCTURING, THE ONGOING R&D WORK WHICH WAS BEING DONE BY THE ASSESSEE FIRM EARLIER, WAS HANDED OVER TO IMTTPL IN THAT YEAR. THE LD. A.R SUBMITTED THAT SINCE PRODUCT DEVELOPMEN T IS A SEQUENTIAL PROCESS OF CONCEPTUALIZATION OF THOUGHTS, CONVERSION OF THAT T HOUGHT INTO TECHNOLOGY, TESTING OF THAT TECHNOLOGY TO EVOLVE A PRODUCT AND SUBSEQUENT LY TESTING OF THE PRODUCT TO MAKE IT COMMERCIALLY VIABLE. IT IS ONLY THE LAST S TAGE OF TESTING OF THE PRODUCT WHICH WAS HANDED OVER TO IMTTPL AS AN INTERIM MEASURE THE N IN THAT YEAR. SUBSEQUENTLY IN THE YEAR F.Y. 05-06 THE ASSESSEE AGAIN RESTRUCTU RED ITS WORKING AND SOLD ALL THE RIGHTS OF THE PRODUCTS ALREADY DEVELOPED TO THE RES PECTIVE COMPANIES, BOTH WITHIN THE SAME MANAGEMENT AND OUTSIDE THE MANAGEMENT. THE REFORE CURRENTLY EVEN THOUGH THE ASSESSEE ARE DOING THE FIRST THREE STAGE S OF DEVELOPMENT OF PRODUCTS, THE LAST STAGE OF TESTING THE PRODUCT IS BEING GIVE N OVER TO THAT RESPECTIVE MANUFACTURING COMPANY. THE LD. A.R. SUBMITTED THAT DR. VERMA IS NOT RELAT ED TO ASSESSEE. MARKET VALUE OF THE SERVICES RENDERED BY DR. VERMA HAS NOT BEEN DIS PUTED. THE ASSESSEE IS FULFILLING ALL THE REQUIREMENTS OF SECTION 37 OF THE ACT. THE ASSESSEE HAS PICKED UP ONLY 80% OF THE EXPENDITURE SHARED WITH THE ASSOCIATE COMPAN Y UNDER A COST SHARING ARRANGEMENT WITH THEM. HE SUBMITTED THAT SECTION 40A(1) SHOULD BE READ WITH THE PROVISIONS OF SECTION 37 OF THE ACT. HE PLACED REL IANCE ON THE FOLLOWING DECISIONS : 1) SASSON J. DAVID & CO. P. LTD., V/S. CIT, 118 ITR 26 1 (SC) 2) CIT VS. WALCHAND & CO.(P) LTD., 65 ITR 381 (SC) 3) J.K. WOOLEN MANUFACTURERS VS. CIT, 72 ITR 612 (SC) 4) BLUE MOUNTAIN ESTATE & INDUSTRIES LTD., 151 ITR 616 (MAD) 4. THE LD. D.R., ON THE OTHER HAND, TRIED TO JUSTI FY THE ORDERS OF THE AUTHORITIES BELOW ON THE ISSUE. SHE SUBMITTED THAT THE ASSESSE E HAD BEEN CHANGING ITS STAND TO ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 4 CLAIM THE EXPENDITURE IN QUESTION BEFORE THE AUTHOR ITIES BELOW. SHE SUBMITTED THAT THE ASSESSEE FOR THE FIRST TIME CAME WITH THE EXPLA NATION OF RESTRUCTURING THEORY BEFORE THE FIRST APPELLATE AUTHORITY. THE SHARING OF EXPENDITURE ARRANGEMENT HAS BEEN MADE ONLY DURING THE YEAR UNDER CONSIDERATION. IT WAS NEITHER MADE IN PAST NOR IN FUTURE. THERE WAS NO AGREEMENT OF SHARING T HE EXPENDITURE WITH THE ASSOCIATE COMPANY, BUT ONLY A LETTER DT. 4.7.2003 I N THIS REGARD WAS WRITTEN BY THE ASSESSEE TO IMTTPL. THUS, THE EXPENDITURE WAS INFL ATED AS A TAX EVASION PLANNING WHICH HAS BEEN DISCUSSED IN DETAIL BY THE LD CIT(A) IN PARA NO. 5.9 OF THE FIRST APPELLATE ORDER. 5. THE LD. A.R. REJOINED WITH THIS SUBMISSION THAT THE AUTHORITIES BELOW HAVE NOT GIVEN ANY FINDING THAT THE CLAIMED EXPENDITURE WAS BOGUS OR BENAMI PAYMENT. 6. AFTER HAVING GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW, WE FIND THAT THE SO CALLED AGREEMENT WITH IMTTPL VIDE LETTER DAT ED 4.7.2003 WAS ALSO FURNISHED BEFORE THE A.O WITH THIS SUBMISSION THAT IN EARLIER YEARS, THE ASSESSEE FIRM WAS DOING THE RESEARCH & DEVELOPMENT ACTIVITIES WHICH A RE NOW BEING UNDERTAKEN BY IMTTPL, AN ASSOCIATE COMPANY. IT WAS SUBMITTED THA T AS PER THE ARRANGEMENT AGREED UPON WITH IMTTPL, THE EXPENSES OF SALARY OF TECHNICAL STAFF AND RENT OF ACCOMMODATION MEANT FOR DR. D.P. VERMA, DIRECTOR O F IMTTPL ARE SHARED. THE DETAILS THEREOF WAS FURNISHED WHICH IS BEING REPROD UCED HEREUNDER : EXPENSES SHARING WITH IMT TECHNOLOGIES PVT. LTD. RS. 1. SALARIES OF DR. D.P. VERMA 5,30,000 2. RENT FOR DR. D.P. VERMAS RESIDENCE 1,20,000 3. EX-GRATIA (PAID TO DR. D.P. VERMA) 30,000 4. TRAVELLING AND OTHER EXPENSES OF DR. VERMA 1,92,7 45 5. SALARIES OF TECHNICAL STAFF ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 5 PROF.RANGNATHAN 40,000 MRS. A.B. RAMDASI 2,70,000 MR.A.M. SHAIWALE 96,758 MR. N.K. SALUNKHE 65,000 LAB CHEMIST 2,95,242 7,67,000 16,39,7 45 7. THE A.O HAS DISALLOWED THE CLAIMED EXPENDITURE ON THE BASIS THAT THE PAYMENT HAS BEEN MADE TO PERSON COVERED U/S. 40A(2) (B) OF THE ACT. HE HAS OBSERVED THAT THE SALARY PAID TO TECHNICAL STAFF IS ONLY RS. 7,67,000/- AND THE BALANCE AMOUNT OF RS.8,72,745/ HAS BEEN PAID TO DR. VERMA UNDER VARIOUS HEADS. THE LD CIT(A) HAS UPHELD THE SAME DEALING WITH THE ISSUE IN DETAIL. HE HAS MADE CERTAIN OBSERVATION IN PARA NO. 5.9 OF THE FIRST AP PELLATE ORDER THAT THE SO CALLED ARRANGEMENT WAS NOTHING BUT A TAX PLANNING DEVICE R ESORTED TO BY THE ASSESSEE FIRM WITH ITS GROUP COMPANY. AS PER HIM, HAD THIS LIABI LITY OF RS. 16.39 LAKHS NOT BEEN TRANSFERRED BY THE COMPANY TO THE FIRM, THE ASSESSE E FIRM WOULD HAVE BEEN LIABLE TO PAY TAX AT THE RATE OF 35% + SURCHARGE STRAIGHT AWA Y ON THIS AMOUNT OF RS. 16.39 LAKHS. HE HAS ALSO MADE OBSERVATION THAT THE LETTE R DT. 4.7.2003 STATED TO BE AN AGREEMENT IS IN FACT AN OFFER TO IMTTPL, ACCEPTANCE OF WHICH HAS NOT BEEN SHOWN. HE HAS OBSERVED FURTHER THAT THE STORY OF RESTRUCTU RING HAS BEEN STATED FOR THE FIRST TIME BEFORE HIM. SO FAR AS LETTER DT. 4.7.2003 ADD RESSED BY THE ASSESSEE TO IMTTPL REGARDING SHARING OF EXPENDITURE IS CONCERNED, OF COURSE IT CANNOT BE TERMED AS AN AGREEMENT IN ABSENCE OF CONSENT OF THE OTHER SIDE B Y ACCEPTING THE OFFER. BUT, ACCEPTANCE OF AN OFFER CAN BE INFERRED BY THE COND UCT OF THE OTHER SIDE ACTING UPON THE SAID OFFER. UNDISPUTEDLY, BEFORE INVOKING THE PROVISIONS OF SEC. 40A(2)(B) OF THE ACT, THE A.O HAS NOT GIVEN INSTANCES AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE BY WAY OF SHARING OF EXPENSES WITH ITS ASS OCIATE CO. FOR ITS BUSINESS WAS EXCESSIVE. SO FAR AS THE ARRANGEMENT OF SHARING O F EXPENSES ENTERED INTO BY THE ASSESSEE WITH IMTTPL IS CONCERNED, IT IS FOR THE AS SESSEE TO DECIDE WHETHER ANY ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 6 EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY A ND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXP ENDITURE. THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITTED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF EXPENDITURE BEING ALLOWED BY WA Y OF DEDUCTION, IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY THE LAW. THIS ISS UE VIEW BEEN EXPRESSED BY THE HONBLE SUPREME COURT IN THE CASE OF SASSOON J. DAV ID & CO. P. LTD. V/S. CIT (SUPRA). THE RELEVANT EXTRACT OF THE DECISION IS BEING REPRODUCED HEREUNDER FOR A READY REFERENCE : THE NEXT CONTENTION URGED ON BEHALF OF THE DEPART MENT WAS THAT SINCE DAVIDS AND TATAS WERE INDIRECTLY BENEFITTED BY THE RETRENCHMENT OF THE SERVICES OF THE EMPLOYEES OF THE COMPANY AND PAYMEN T OF COMPENSATION TO THEM AND SINCE THERE WAS NO NECESSITY TO RETRENCH T HE SERVICES OF ALL THE EMPLOYEES, THE EXPENDITURE IN QUESTION COULD NOT B E TREATED AS AN EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR BUS INESS PURPOSES OF THE COMPANY. IT HAS TO BE OBSERVED HERE THAT THE EXPRE SSION WHOLLY AND EXCLUSIVELY USED IN S. 10(2)(XV) OF THE ACT DOES N OT MEAN NECESSARILY. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHE R ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SU CH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE AS SESSEE CAN CLAIM DEDUCTION UNDER S. 10(2)(XV) OF THE ACT EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. IT IS RELEVANT TO REFER AT THIS STAGE TO THE LEGISLATIVE HISTORY OF S. 37 OF THE I.T. ACT, 1961, WHICH CORRESPONDS TO S. 10(2)(XV) OF THE ACT. AN ATTEMPT WAS MADE IN THE I .T. BILL OF 1961 TO LAY DOWN THE NECESSITY OF THE EXPENDITURE AS A CONDI TION FOR CLAIMING DEDUCTION UNDER S. 37. SECTION 37(1) IN THE BILL R EAD ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED. T HE INTRODUCTION OF THE WORD NECESSARILY IN THE ABOVE SECTION RESULTED IN PUBLIC PROTEST. CONSEQUENTLY, WHEN S. 37 WAS FINALLY ENACTED INTO L AW, THE WORD NECESSARILY CAME TO BE DROPPED. THE FACT THAT SOMEBODY OTHER T HAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UNDER S. 10(2)(XV ) OF THE ACT IF IT SATISFIES ITA . NO 747/PN/2009 INSTITUTE OF MICRONUTRIANT TECHNOLOGY A.Y. 2004-05 PAGE OF 7 7 OTHERWISE THE TESTS LAID DOWN BY LAW. THIS VIEW IS IN ACCORD WITH THE FOLLOWING OBSERVATIONS MADE BY THIS COURT IN CIT V. CHANDULAL KESHAVLAL & CO.[1960] 3 SCR 38 AT PAGE 48; 38 ITR 601, 610(SC) CERTAINLY, IT IS NOT THE CASE OF THE A.O THAT THE C LAIMED EXPENSES WAS BOGUS, EXCESSIVE OR BENAMI PAYMENT. WE ARE THUS OF THE VI EW THAT THE AUTHORITIES BELOW IN ABSENCE OF A FINDING THAT THE CLAIMED PAYMENT ON ACCOUNT OF THE EXPENDITURE WAS EXCESSIVE, WERE NOT JUSTIFIED IN INVOKING THE PROVI SIONS OF SEC. 40A(2)(B) OF THE ACT. WE THUS WHILE SETTING ASIDE THE ORDERS OF THE AUTH ORITIES BELOW, DIRECT THE A.O TO ALLOW THE CLAIMED EXPENDITURE U/S. 37 OF THE I.T. A CT 1967. THE GROUND IS ACCORDINGLY ALLOWED. 8. IN THE RESULT, APPEAL IS ALLOWED THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 17TH AUGUST 2011. SD/- SD/- ( G.S. PANNU ) ACCOUNTANT MEMBER ( I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 17TH AUGUST, 2011 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-II, PUNE 4. THE CIT(A)- II, PUNE 5. THE D.R. B BENCH, PUNE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE