BAYER CROP SCIENCE LTD, MUMBAI V. Addl CIT 10(3), MUMBAI

ITA 7818/MUM/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0287 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 18-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN KUMAR
• Assessee Lawyers: PARAS S SAVLA
• Keywords: Gift; Opportunity of being heard
• Section: 143(3); 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & SHRI PAWAN SINGH (JM) I.T.A. NO. 7818 /MUM/20 11 (ASSESSMENT YEAR 20 07 - 08 ) BAYER CROPSCIENCE LIMITED BAYER HOUSE, CENTRAL AVENUE, HIRANANDANI GARDENS, POWAI MUMBAI - 4 00 076. PAN : AAACB9651K V S . ADDL. CIT - 10(3) AAYAKAR BHAVAN 4 TH FLOOR M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) A SSESSEE BY SHRI PARAS S. SAVLA DEPARTMENT BY S HRI SUMAN KUMAR DATE OF HEARING 8 . 0 2 . 201 8 DATE OF PRONOUNCEMENT 16 . 0 2 . 201 8 O R D E R PER B.R. BASKARAN (AM) : - THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 14.9.2011 PASSED BY THE ASSESSING OFFICER U/S. 143(3) READ WITH SECTION 144C(13) OF THE ACT AND IT RELATES TO A.Y. 2007 - 08. 2. THE ASSES SEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF INSECTICIDES AND OTHER CHEMICALS USED FOR PLANT PROTECTION PURPOSE. 3. FIRST ISSUE URGED BY THE ASSESSEE RELATES TO DISALLOWANCE OF CLUB MEMBERSHIP FEES OF RS. 1,13,475/ - . THE ASSESSING OFFICER NOTICED T HAT THE ASSESSEE HAS INCURRED A SUM OF RS. 10,94,202/ - AS CLUB EXPENSES WHICH INCLUDED ANNUAL SUBSCRIPTION CHARGES OF RS. 9,80,727/ - AND COST OF SERVICES OF RS. 1,13,475/ - . THE ASSESSING OFFICER PROPOSED TO DISALLOW ENTIRE AMOUNT. HOWEVER , LEARNED DRP HELD THAT ENTRANCE FEES AND ANNUAL SUBSCRIPTION CHARGES AMOUNTING TO RS.9,80,727/ - IS ALLOWABLE AS DEDUCTION. FOR THIS PURPOSE, LEARNED DRP PLACED RELIANCE ON THE DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVATOR CO. (INDIA) LTD. VS. CIT (195 ITR 682) AND CIT VS. SAMTEL COLOR LTD. (326 ITR 425)(DEL). WITH REGARD TO COST 2 OF SERVICES OF RS. 1,13,475/ - , LEARNED DRP NOTICED THAT THE ASSESSEE DID NOT FURNISH ANY SPECIFIC EVIDENCE TO SHOW THAT THE SAME WA S INCURRED FOR THE BUSINESS PURPOSE S . ACCORDINGLY, LEARNED DRP SUSTAINED THE DISALLOWANCE OF RS . 1,13,475/ - . 4. LEARNED AR SUBMITTED THAT THE MATTER MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER IN ORDER TO FIND OUT WHETHER THE ABOVE SAID SUM OF RS. 1,13,475/ - WERE INCURRED BY THE EM PLOYEES FOR BUSINESS PURPOSE OR NOT. LEARNED DR DID NOT OBJECT TO THE PLEA PUTFORTH BY LEARNED AR. 5. HAVING REGARD TO THE SUBMISSIONS MADE, WE RESTORE THIS ISSUE FOR EXAMINING THE CLAIM OF RS. 1,13,475/ - TO THE FILE OF THE ASSESSING OFFICER. THE A SSESSEE IS DIRECTED TO FURNISH NECESSARY DETAILS RELATING TO THIS EXPENDITURE. AFTER CONSIDERING THE SAME , THE ASSESSING OFFICER MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 6. THE N EXT ISSUE CONTESTED BY THE ASSESSEE RELATES TO DISALLOWANCE MADE U/S. 1 4A OF THE ACT. 7. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 313.32 LAKHS AND CLAIMED THE SAME AS EXEMPT. THE ASSESSEE, HOWEVER, DID NOT DISALLOW ANY AMOUNT U/S.14A OF THE ACT. THE ASSESSING OFFICER PROPOSED TO INVOK E PROVISIONS OF RULE 8D FOR COMPUTING DISALLOWANCE U/S. 14A OF THE ACT. THE ASSESSEE SUBMITTED THAT THE INVESTMENTS HAVE BEEN MAINLY MADE IN ITS SUBSIDIARY AND ASSOCIATES COMPANIES AND FURTHER OWN FUND S AVAILABLE WITH IT IS IN FAR EXCESS OF VALUE OF INVEST MENT S . THE ASSESSEE ALSO SUBMITTED THAT IT HAS INCURRED A SUM OF RS. 4,3 5,000/ - AS ADMINISTRATIVE COST FOR TREASURY ACTIVITY OF THE COMPANY. ACCORDINGLY, THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT DISALLOWANCE MAY BE RESTRICTED TO RS. 4,15,00 0/ - . THE ASSESSING OFFICER DID NOT ACCEPT THE SAME AND HE PROPOSED TO COMPUTE DISALLOWANCE AS PER RULE 8D. HOWEVER, LEARNED DRP PARTIALLY ACCEPTED THE CONTENTION S OF THE ASSESSEE. ACCORDINGLY, THE ASSESSING OFFICER COMPUTED THE DISAL LOWANCE UNDER RULE 8D A T RS.10. 55 LAKHS. THE LEARNED AR 3 SUBMITTED THAT OWN FUNDS AVAILABLE WITH THE ASSESSEE IS IN FAR EXCESS OF VALUE OF INVESTMENT S AND HENCE AS PER THE DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDF BANK LTD. (366 ITR 505) , NO DISALLOWANCE O UT OF INTEREST EXPENDITURE IS CALLED FOR. HE SUBMITTED THAT THE ASSESSING OFFICER HAS COMPUTED THE DISALLOWANCE OUT OF INTEREST EXPENDITURE AT RS. 5,57,455/ - , WHICH NEEDS TO BE DELETED. THE LEARNED AR SUBMITTED THAT THE ASSESSING OFFICER HAS COMPUTED THE D ISALLOWANCE OUT OF ADMINISTRATIVE EXPENSES AT RS. 4,98,008/ - AS PER PROVISIONS OF RULE 8D(III). HE SUBMITTED THAT THE PROVISIONS OF RULE 8D IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION AS PER DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (328 ITR 81) . HE SUBMITTED THAT THE ASSESSEE HAS MADE INVESTMENT S MAINLY IN THE SUBSIDIARY AND ASSOCIATE CONCERNS AND ALSO IN THE UNITS OF MUTUAL FUNDS . A CCORDINGLY HE SUBMITTED THAT THE DISALLOWANCE OF RS. 4.15 LA KHS OFFERED BY THE ASSESSEE WOULD MEET THE REQUIREMENT S OF SECTION 14A OF THE ACT. HE FURTHER SUBMITTED THAT AO HAD MADE IDENTICAL ADDITION IN AY 2006 - 07 IN THE HANDS OF THE ASSESSEE, BUT ENTIRE ADDITION HAS BEEN DELETED BY THE ITAT, VIDE ITS ORDER DATED 2 5.5.2016 PASSED IN ITA NO. 7978/MUM/2010. 8. WE HEARD LEARNED DR AND PERUSED THE RECORD. WE NOTICED THAT THE ASSESSEE HAS MADE INVESTMENT MAINLY IN THE UNITS OF MUTUAL FUNDS AND ALSO IN THE SUBSIDIARY COMPANIES. FURTHER THE HON'BLE BOMBAY HIGH COURT HAS HELD IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) THAT PROVISIONS OF RULE 8D WILL NOT APPLY TO A.Y. 2007 - 08 AND EARLIER YEARS . HOWEVER, THE HON'BLE BOMBAY HIGH COURT HA S HELD IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) THAT DISALLOWANCE U/S. 14A OF THE ACT HAS TO BE COMPUTED IN REASONABLE MANNER FOR A.Y. 2007 - 08 AND EARLIER YEARS. WE ALSO NOTICE THAT THE OWN FUNDS AVAILABLE WITH THE ASSESSEE WAS RS.28662/ - LAKHS AND RS.33500/ - LAKHS RESPECTIVELY AS ON 1.4.2006 AND 31.3.2007 . THE INVESTMENTS HELD BY THE ASSESSEE ON THOSE DATES WERE RS.400 LAKHS AND RS.1591/ - LAKHS RESPECTIVELY. HENCE THERE IS MERIT IN THE CONTENTIONS OF THE ASSESSEE THAT THERE IS NO REQUIREMENT FOR MAKING ANY DISALLOWANCE OUT OF INTEREST EXPENDITURE AS PER THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK 4 LTD (SUPRA). THERE IS NO DIRECT EXPENSES LIABLE TO BE DISALLOWED U/S 14A OF THE ACT. THE ASSESSEE SUBMITTED THAT THE EXPENDITURE INCURRED FOR ITS TREASURY DIVISION WAS RS. 4,35,00 0/ - ONLY. HENCE DISALLOWANCE, IF ANY, IS REQUIRED TO BE MADE OUT OF ADMINISTRATIVE EXPENSES ONLY. HENCE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE DISALLOWANCE OF RS.4 . 15 LAKHS OFFERED BY THE ASSESSEE U/S. 14A OF THE ACT FOR THE YEAR UNDER CONSIDERATION WOULD MEET THE REQUIREMENT OF SECTION 14A OF THE ACT. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE ASSESSING OFFICER ON THIS ISSUE AND DIRECT HIM TO RESTRICT THE DISALLOWANCE U/S. 14A OF THE ACT TO RS.4.15 LAKHS. 9. THE N EXT ISSUE URGED BY THE ASSESSEE RELATES TO P RODUCT TRIAL EXPENSES OF RS. 292.03 LAKHS CLAIMED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE SAME BY HOLDING THAT THE PRODUCT TRIAL EXPENSE S INCURRED BY THE ASSESS EE ARE CAPITAL IN NATURE AND HENCE NOT ALLOWABLE U/S. 37(1) OF THE ACT. BEFORE LEARNED DRP, ASSESSEE RELIED ON FOLLOWING CASE LAW S IN ORDER TO CONTEND THAT THE PRODUCT TRIAL EXPENSES ARE REVENUE IN NATURE. ACIT VS. MEDICAMEN BIOTECH (1SOT 347) (DEL) DCIT VS. MAX INDIA LTD. (105 TTJ 1002)(A SR) ESCORTS LTD. VS. ACIT (104 ITD 427)(DEL) CIT VS. KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. (182 ITR 62) THE ASSESSEE ALSO CONTEN DED THAT IT HAS INCURRED EXPENSES TOWARDS MAKING PAYMENT TO APPROVED SCIENTIFIC RESEARCH ASSOCIATIONS FOR CONDUC TING TEST OF THE PRODUCT MANUFACTURED BY THE ASSESSEE. ACCORDINGLY, THE ASSESSEE CLAIMED THAT THE PAYMENTS SO MADE TO THE APPROVE D SCIENTIFIC RESEARCH ASSOCIATIONS ARE ELIGIBLE FOR WEIGHTED DEDUCTION @ 125% U/S. 35(1)(II) OF THE ACT. LEARNED DRP WAS CONVIN CED WITH THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY GAVE FOLLOWING DIRECTIONS: - 9.4 DRP HAS CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE AO'S FINDINGS AND OBSERVATIONS AND THE ASSESSEES SUBMISSIONS INCLUDING THE CASE LAW CITED AB OVE. CONSIDERING THAT THE EXPENDITURE INCURRED IS ONLY IN THE 5 COURSE OF EXISTING BUSINESS AND EXISTING LINE OF BUSINESS, AND THAT THE PRODUCT TRIAL RUNS DOES NOT BRING INTO EXISTENCE ANY NEW BUSINESS ASSET [AS THE TESTED PRODUCT MAY OR MAY NOT BE INTRODUCE D IN THE MARKET) AND THE NATURE OF EXPENDITURE BEING ONLY THE TESTING THE TOXICITY AND THE SUITABILITY FOR APPLICATION IN THE INDIAN MARKET AND EXPENDITURE ALSO INCLUDES CONTRIBUTIONS/PAYMENTS MADE TO APPROVED SCIENTIFIC RESEARCH INSTITUTIONS, DRP IS OF TH E VIEW THAT THE EXPENDITURE INCURRED IS REVENUE IN NATURE. ALL THE FOUR DECISIONS CITED ABOVE FULLY SUPPORT SUCH VIEW. THE EXPENDITURE INCURRED IS ALLOWABLE AS DEDUCTION EITHER UNDER SECTION 35(L)(II) TO THE EXTENT THE RELEVANT CONDITIONS ARE FULFILLED AND THE BALANCE AS DEDUCTION U/S.37. HENCE THE ASSESSEE'S CLAIM FOR DEDUCTION IS APPROVED. THE PROPOSED ADDITION SHOULD BE DROPPED/DELETED 1 0 . THE GRI EVA NCE BEFORE US IS THAT THE ASSESSING OFFICER DID NOT GRANT WEIGHTED DEDUCTION AS PER PROVISIONS OF SECTION 35(1)(II) OF THE ACT , I.E., HE HAS ALLOWED THE CLAIM U/S 37(1) OF THE ACT . WE NOTICED THAT LEARNED DRP HAS DIRECTED THE ASSESSING OFFICER TO EXAMINE THE CLAIM OF THE ASSESSEE U/S. 35(1)(II) OF THE ACT. HOWEVER, WE DO NOT FIND ANY DISCUSSION ABOUT THE SAME IN THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE CLAIM OF THE ASSESSEE FOR WEIGHTED DEDU CTION U/S. 35(1)(II) OF THE ACT IN TERMS OF PROVISION S OF THAT SECTION BY AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD. 11 . THE N EXT ISSUE CONTESTED BY THE ASSESSEE RELATES TO DISALLOWANCE OF GIFT EXPENSES. THE ASSESSEE CLAIMED A SUM OF RS. 15.56 LAKHS AS GIFT EXPENSES IN RESPECT OF GIFTS GIVEN TO THE EMPL OYEES, DEALERS, CUSTOMERS AND BUSINESS ASSOCIATES AND ALSO NOMINAL GIFTS GIVEN TO THE GO VERNMENT OFFICIALS IN THE FORM OF SWEET BOXES ON VARIOUS FESTIVAL OCCASIONS. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE REASONING THAT THERE IS NO COMMERCIAL EXPE DIENCY IN GIVING GIFTS AND FURTHER GIFTS GIVEN TO THE GOVERNMENT OFFICIALS ARE NOT ALLOWABLE AS PER SECTION 37 OF THE ACT. 14. BEFORE LEARNED DRP, THE ASSESSEE PLACED RELIANCE ON FOLLOWING DECISIONS TO CONTEND THAT AFTER DELETION OF SECTION 37(2) ENTERTA INMENT EXPENDITURE IS ALLOWABLE AS DEDUCTION. 6 PUNJAB POWER PACKS LTD. VS. DCIT (71 ITD 163) CIT VS. VARINDER AGRO CHEMICALS LTD. (205 CTR 334)(P&H) 1 5 . LEARNED DRP NOTICED THAT THE CUSTOMARY GIFTS GIVEN THE ON THE OCCASION OF FESTIVALS OF REASONABLE NA TURE HAS BEEN HELD TO BE ALLOWABLE IN THE ABOVE SAID TWO CASES. SINCE THE ASSESSEE DID NOT FURNISH DETAILS OF GIFT EXPENSES, LEARNED DRP DIRECTED THE ASSESSING OFFICER TO ALLOW 25% OF THE CLAIM OF RS.15.56 LAKHS AND DISALLOW REMAINING AMOUNT. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 11.67 LAKHS AND THE ASSESSEE IS AGGRIEVED BY THE SAME. 16 . WE HEARD THE PARTIES AND PERUSED THE RECORD. LEARNED AR SUBMITTED THAT THE GIFTS GIVEN BY THE ASSESSEE TO ITS EMPLOYEES, DEALERS AND BUSINESS ASSOCI ATES ON A CUSTOMARY BASIS DURING FESTIVALS IN ORDER TO PROMOTE CORDIAL RELATIONSHIP S, WHICH IN TURN WOULD PROMOTE BUSINESS OF THE ASSESSEE. HE SUBMITTED THAT IT IS A MARKETING STRATEGY FOLLOWED BY THE ASSESSEE AND HENCE THE EXPENDITURE IS ALLOWABLE AS DEDU CTION. THE LEARNED AR AG RE E D THAT NOMINAL GIFTS GIVEN TO THE GOVERNMENT OFFICIALS IN THE FORM OF SWEET BOXES MAY BE DISALLOWED. 17 . WE HEARD LEARNED DR AND PERUSED THE RECORD. IT HAS BEEN HELD IN THE CASE OF VARINDER AGRO CHEMICALS LTD. (SUPRA) THAT CUSTO MARY GIFTS OF REASONABLE NATURE GIVEN ON THE OCCASION OF FESTIVALS CAN BE ALLOWED AS DEDUCTION. WE NOTICED THAT LEARNED DRP HAS DIRECTED THE ASSESSING OFFICER TO ALLOW ONLY 25% OF THE AMOUNT CLAIMED BY THE ASSESSEE. IN OUR VIEW, THE SAME APPEARS TO BE VERY LOW , SINCE MAJOR PORTION OF GIFTS HAVE BEEN GIVEN TO EMPLOYEES AND CUSTOMERS . HOWEVER, GIFTS GIVEN TO THE GOVERNMENT OFFICIALS ARE AGAINST THE PROVISIONS OF LAW AND HENCE THE SAME IS REQUIRED TO BE DISALLOWED. HENCE , ON CONSPECTUS OF THE MATTER, WE ARE OF THE VIEW THAT THE DISALLOWANCE MAY BE RESTRICTED TO 2 0 % OF THE AMOUNT OF RS. 15.56 LAKHS. ACCORDINGLY, WE MODIFY THE ORDER PASSED BY THE ASSESSING OFFICER AND DIR ECT HIM TO RESTRICT THE DISALLOWANCE TO 2 0 % OF RS. 15.56 LAKHS. 7 18 . OTHER GROUNDS RELATING T O LEVYING OF PENALTY AND INTEREST ARE CONSEQUENTIAL IN NATURE. 19 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 16 . 0 2 .201 8 . SD/ - SD/ - (PAWAN SINGH ) (B.R.BASKARAN) JUDIC IAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 16 / 0 2 / 20 1 8 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// SENIOR P RIVATE S ECRETARY PS ITAT, MUMBAI