ACIT,Circle-10, Kolkata, Kolkata V. East India Pharmaceuticals Ltd., Kolkata

ITA 770/KOL/2012

• Counselvise Citation: 77023514 RSA 2012
• Duration Of Justice: 1 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 14-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SINGH
• Assessee Lawyers: SANJAY BHATTACHARYA F
• Keywords: Depreciation; Opportunity of being heard; Revenue expenditure; Capital expenditure

Judgement Text

I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 1 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA B BENCH, KOLKATA CORAM : SHRI R.S. SYAL, (ACCOUNTANT MEMBER) AND SHRI GEORGE MATHAN (JUDICIAL MEMBER) I.T.A. NO.: 770/KOL./ 2012 ASSESSMENT YEAR : 2008-2009 ASSISTANT COMMISSIONER OF INCOME TAX,.............. ...............APPELLANT CIRCLE-10, KOLKATA, P-7, CHOWRINGHEE SQUARE, 3 RD FLOOR, KOLKATA-700 069 -VS.- EAST INDIA PHARMACEUTICALS LTD.,.............. .RESPONDENT 6, LITTLE RUSSEL STREET, KOLKATA-700 071 [PAN : AAACE 5779 P] APPEARANCES BY: SHRI AJAY KUMAR SINGH, CIT, SR. D.R., FOR THE DEPAR TMENT SHRI SANJAY BHATTACHARYA, F.C.A., FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : NOVEMBER 21, 2013 DATE OF PRONOUNCING THE ORDER : NOVEMBER 22 ND , 2013 O R D E R PER R.S. SYAL : 1. THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORD ER DATED 1 ST FEBRUARY, 2012 PASSED BY LD. COMMISSIONER OF INCOME TAX (APPEALS)-XII, KOLKATA IN RELATION TO THE ASSESSMENT YEAR 2008-09. 2. FIRST GROUND OF THE APPEAL IS AGAINST DELETION O F ADDITION ON ACCOUNT OF FOREIGN TOUR EXPENSES. BRIEFLY STATED FACTS OF THIS GROUND ARE THAT THE ASSESSEE INCURRED CERTAIN FOREIGN TRAVELLING EXPENS ES. ON THE PERUSAL OF THE DETAILS, IT WAS OBSERVED, INTER ALIA, BY THE AS SESSING OFFICER THAT SHRI I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 2 DIPANKAR DUTTA GUPTA, DIRECTOR OF THE ASSESSEE-COMP ANY HAD GONE ON FOREIGN TOUR AS PRESIDENT OF INDIA CHEMICAL COUNCIL . A SUM OF RS.8.40 LAKHS WAS INCURRED ON THIS VISIT. THE ASSESSING OFF ICER OBSERVED THAT SINCE SUCH EXPENSES HAVE NO NEXUS WITH THE CARRYING ON OF THE DAY-TO-DAY ACTIVITIES OF THE BUSINESS, THE SAME WAS LIABLE TO BE DISALLOWED. THIS RESULTED INTO AN ADDITION OF RS.8.40 LAKHS, APART FROM CERTAIN OTHER ADDITIONS OUT OF FOREIGN TRAVELLING EXPENSES AMOUNT ING TO RS.3,00,857/-. THE LD. CIT(APPEALS) DELETED THE DISALLOWANCE FOR F OREIGN TOUR EXPENSES OF RS.8.40 LAKHS AND SUSTAINED THE ADDITION OF RS.3 ,00,857/-. THE REVENUE IS IN APPEAL AGAINST SUCH DELETION OF DISALLOWANCE. 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT SHRI DIPANK AR DUTTA GUPTA, DIRECTOR OF THE ASSESSEE-COMPANY WENT ON FOREIGN TO UR IN THE CAPACITY OF THE PRESIDENT OF INDIAN CHEMICAL COUNCIL. THE SAID TOUR WAS UNDERTAKEN ON THE BASIS OF AN INVITATION FROM ASSOCIQUIM- BRAZ ILLIAN ASSOCIATION OF CHEMICALS AND PETROCHEMICALS DISTRIBUTORS. AS THE A SSESSEE IS ENGAGED IN THE BUSINESS OF PHARMACEUTICALS, THE ASSOCIATION OF THE DIRECTOR WTH THE CHEMICAL COUNCIL CANNOT BE SAID TO BE ALIEN TO THE BUSINESS. FURTHER, THE LD. CIT(APPEALS) HAS RECORDED A CATEGORICAL FINDING THAT SHRI DIPANKAR DUTTA GUPTA ALSO EXPLORED THE PROSPECTS OF EXPORT O F THE ASSESSEES PRODUCTS ABROAD. THIS FINDING HAS NOT BEEN CONTROVE RTED BY LD. D.R. WITH ANY MATERIAL WORTH THE NAME. IT IS OBSERVED THAT SH RI DIPANKAR DUTTA GUPTA UNDERTOOK THE FOREIGN TOUR, ALBEIT AS PRESIDENT OF THE INDIAN I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 3 CHEMICAL COUNCIL, BUT WAS REPRESENTING THE COMPANY IN HIS CAPACITY AS DIRECTOR. THE FURTHER FACT THAT HE EXPLORED THE PRO SPECTS OF EXPORT OF ASSESSEES PRODUCTS ABROAD CLEARLY POINTS OUT THAT IT WAS A PURELY COMMERCIAL AND BUSINESS TOUR. IN OUR CONSIDERED OPI NION, NO EXCEPTION CAN BE FOUND TO THE VIEW CANVASSED BY THE FIRST APP ELLATE AUTHORITY IN DELETING THIS ADDITION. THIS GROUND FAILS. 4. THE SECOND GROUND IS AGAINST DELETION OF DISALLO WANCE OF EXPENSES RELATING TO DURGAPUR UNIT, WHICH WAS INOPERATIVE DU RING THE RELEVANT PERIOD. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION TOWARDS CERTAIN EXPENSES IN CONNECTION WI TH DURGAPUR UNIT. THESE EXPENSES INCLUDED PAYMENT MADE TO BARODA DYE CHEM FOR OUTSOURCING IN RESPECT OF THE ASSESSEES BUSINESS C ARRIED ON AT DURGAPUR UNIT, WHICH WAS SUSPENDED FOR COMPLETE UP-GRADATION OF PRODUCTION AND QUALITY CONTROL FACILITIES. APART FROM THAT, THE AS SESSEE ALSO INCURRED CERTAIN EXPENSES, WHICH WERE APPORTIONED TO THE DUR GAPUR UNIT BY THE COST AUDITORS. THE ASSESSEE ALSO CLAIMED DEPRECIATI ON AND DIRECT EXPENSES INCURRED IN RESPECT OF DURGAPUR UNIT. THE ASSESSING OFFICER DISALLOWED SUCH EXPENSES INCLUDING DEPRECIATION AND THE AMOUNT PAID TO BARODA DYE CHEM TOTALLING RS.4,05,98,926/- ON THE PREMISE THAT THE SAID UNIT WAS NOT IN OPERATION. THE LD. CIT(APPEALS) DEL ETED THE DISALLOWANCE. 5. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD, IT IS RELEVANT TO OBSERVE THAT THE ASSESSEE-COMPANY AT THE MATERIAL TIME HAD TWO UNITS, VIZ. DURGAPUR UNIT AND BEHALA UNIT. DUE I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 4 TO UP-GRADATION OF PRODUCTION AND QUALITY CONTROL F ACILITIES, THE PRODUCTION WORK AT DURGAPUR UNIT WAS TEMPORARILY SU SPENDED. IN ORDER TO CONTINUE THE BUSINESS, THE ASSESSEE OUTSOURCED T HE RELEVANT PRODUCTS FROM M/S. BARODA DYE CHEM ON PAYMENT OF CERTAIN FEE S. THE FACT REMAINS THAT DURGAPUR UNIT IS ONE OF THE UNITS OF THE ASSES SEE-COMPANY. WE FAIL TO APPRECIATE AS TO HOW ANY EXPENDITURE INCURRED IN RE LATION TO THE TEMPORARILY SUSPENDED UNIT CAN BE DISALLOWED WHEN T HE OTHER UNIT OF THE ASSESSEE-COMPANY IS WORKING. IT IS RELEVANT TO APPR ECIATE THE DIFFERENCE B BETWEEN THE TWO SITUATIONS, VIZ., ONE IN WHICH THE BUSINESS OF THE ASSESSEE COMPANY IS PERMANENTLY OR FOR A FAIRLY LON GER PERIOD IS CLOSED AND THE OTHER IN WHICH ONLY ONE OF THE UNITS IS TEM PORARILY CLOSED. ONE CANNOT CONSIDER THE ASSESSEE AS CLOSED IN A LATER CASE TO DENY DEDUCTION FOR EXPENSES. IT IS BUT NATURAL THAT BOTH THE UNITS WERE OF THE SAME COMPANY WITH COMMON MANAGEMENT AND INTER-MINGLING O F THE FUNDS. THE HONBLE SUPREME COURT IN THE CASE OF VEECUMSEES VS. CIT (1996) 220 ITR 185 (SC) HAS HELD THAT IF THERE IS A COMPOSITE BUSI NESS, THERE CAN BE NO DENIAL OF DEDUCTION IN RESPECT OF EXPENSES OF ONE U NIT WHICH IS NOT OPERATING, WHEN THERE IS UNITY OF CONTROL OF BOTH T HE UNITS. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE DUR GAPUR UNIT WAS VERY MUCH PART AND PARCEL OF THE ASSESSEE-COMPANY. IN OU R CONSIDERED OPINION, THE EXPENSES IN RESPECT OF SUCH A TEMPORARILY CLOSE D BUSINESS CAN NOT BE DISALLOWED. IN SO FAR AS THE QUESTION OF DEPRECIATI ON IN RESPECT OF THE ASSETS OF DURGAPUR UNIT IS CONCERNED, WE FIND THAT THERE IS A PLETHORA OF JUDGMENTS ALLOWING DEPRECIATION ON THE PASSIVE USER OF ASSETS. FURTHER, I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 5 WHEN A PARTICULAR ASSET HAS ENTERED INTO A BLOCK OF ASSETS, THERE CAN BE NO QUESTION OF DISALLOWING DEPRECIATION ON SUCH ASSET ON ISOLATION BASIS BY HOLDING THAT SUCH AN ASSET WAS NOT USED FOR THE TIM E BEING. RECENTLY, THE HONBLE DELHI HIGH COURT IN THE CASE OF NATIONAL TH ERMAL POWER CORPORATION LIMITED VS.- CIT [2013] 357 ITR 253 (D ELHI) HAS REITERATED ITS OPINION EARLIER GIVEN IN THE CASE OF CAPITAL B US SERVICE (P) LTD. VS.- CIT [1980] 123 ITR 404 (DELHI) THAT THE DEPRECIATIO N IS PERMISSIBLE WHEN ASSET IS KEPT READY FOR USE BUT IS NOT ACTUAL USED. IN OTHER WORDS, THE PASSIVE USER OF THE ASSETS HAS BEEN HELD TO BE GOOD ENOUGH FOR ENTITLEMENT TO THE CLAIM OF DEPRECIATION. SIMILAR V IEW HAS ALSO BEEN EXPRESSED BY SEVERAL HONBLE HIGH COURTS INCLUDING THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS.- PEPSU R OAD TRANSPORT CORPORATION [2002] 253 ITR 303 (P&H) AND HONBLE KE RALA HIGH COURT IN THE CASE OF CIT VS.- GEO TTECH CONSTRUCTION CORPOR ATION[2000] 244 ITR 452 (KERALA). IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(APPEALS) WAS JU STIFIED IN ALLOWING DEDUCTION FOR EXPENSES AND DEPRECIATION IN RESPECT OF DURGAPUR UNIT. THIS GROUND IS NOT ALLOWED. 6. LAST GROUND OF THE APPEAL IS AGAINST ALLOWING DE DUCTION ON ACCOUNT OF EXPENSES ON `RESEARCH WORK BY TREATING IT AS RE VENUE IN NATURE AND NOT AS CAPITAL. FACTS OF THIS GROUND ARE THAT THE A SSESSEE INCURRED RESEARCH WORK EXPENSES AMOUNTING TO RS.5,63,972/- W HICH WERE CLUBBED WITH OTHER EXPENSES UNDER THE HEAD MISCELLANEOUS E XPENSES. THE I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 6 ASSESSING OFFICER DISALLOWED MISCELLANEOUS EXPENSES OF RS.13,81,414/-, INCLUDING THE RESEARCH WORK EXPENSES AMOUNTING TO R S.5,63,972/-. THIS DISALLOWANCE WAS MADE BY HOLDING THAT SUCH EXPENSES WERE NOT OF THE REVENUE IN NATURE. THE LD. CIT(APPEALS) DELETED THE SAID DISALLOWANCE. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT SECTION 35(1)(I) P ROVIDES DEDUCTION IN RESPECT OF ANY EXPENDITURE (NOT BEING IN THE NATUR E OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RES EARCH RELATED TO THE BUSINESS. CLAUSE (IV) OF SECTION 35(1) PROVIDES DE DUCTION IN RESPECT OF EXPENDITURE OF CAPITAL NATURE INCURRED ON SCIENTIFI C RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUBJECT TO ITS ADMISSIBILITY UNDER SUB-SECTION (2). SUB-SECTION (2), IN TURN, PROVIDE S THAT WHERE SUCH CAPITAL EXPENDITURE IS INCURRED AFTER 31.03.1967, T HE WHOLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR S HALL BE DEDUCTED FOR THAT PREVIOUS YEAR. PROVISO TO THIS CLAUSE PROVIDES THAT NO DEDUCTION SHALL BE ADMISSIBLE UNDER THIS CLAUSE IN RESPECT OF ANY E XPENDITURE INCURRED ON THE ACQUISITION OF ANY LAND. WHEN WE READ SUB-SECTI ON (1) IN JUXTAPOSITION TO SUB-SECTION (2) TO SECTION 35, IT BECOMES MANIFE ST THAT ENTIRE REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH IS ADMISSIBLE FO R DEDUCTION AND THE CAPITAL EXPENDITURE, TO THE EXTENT IT IS NOT INCURR ED ON THE ACQUISITION OF ANY LAND, IS ALSO DEDUCTIBLE IN THE YEAR OF INCURRI NG ITSELF. 8. ON THE PERUSAL OF THE SO-CALLED DETAILS FIL ED BY THE ASSESSEE, WE FIND THAT THERE ARE CERTAIN SHORTCOMINGS, INASMUCH AS, F IRSTLY, THE TOTAL OF THE I.T.A. NO.: 770/KOL./2012 ASSESSMENT YEAR : 2008-09 PAGE 1 OF 7 7 EXPENDITURE SO CLAIMED DOES NOT COME UP TO THE AMOU NT OF DEDUCTION AT RS.5.63 LAKHS AND SECONDLY, IT IS NOT BORNE OUT AS TO WHETHER SUCH EXPENDITURE INCLUDES CERTAIN DISALLOWABLE EXPENSES WITHIN THE MEANING OF SECTION 35. IN OUR CONSIDERED OPINION, THE ENDS OF JUSTICE WOULD BE ADEQUATELY MET IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFF ICER. WE ORDER ACCORDINGLY AND DIRECT HIM TO DECIDE THIS ISSUE AFR ESH AS PER LAW AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 9. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND DAY OF NOVEMBER, 2013. SD/- SD/- GEORGE MATHAN R.S. SYAL (JUDICIAL MEMBER) (ACC OUNTANT MEMBER) KOLKATA, THE 22 ND DAY OF NOVEMBER, 2013 COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.