DCIT, Hyderabad V. M/s Nagarjuna Agrichem ltd., Hyderabad

ITA 997/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61889 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 18-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 09-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: C P RAMASWAMY
• Keywords: Depreciation
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER. ITA NO.997/HYD/2010 : ASSESSMENT YE AR 2003-04 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 16(1), HYDERABAD V/S M/S. NAGARJUNA AGRICHEM LTD., HYDERABAD (PAN - AAACN 6932 H) (APPELLANT) (RESPONDENT) AND ITA NO.1032/HYD/2010 : ASSESSMENT Y EAR 2003-04 M/S. NAGARJUNA AGRICHEM LTD., HYDERABAD (PAN - AAACN 6932 H) V/S DY. COMMISSIONER OF INCOME-TAX CIRCLE 16(1), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.P.RAMASWAMY DEPARTMENT BY : SHRI V.SRINIVAS DATE OF HEARING 30 4.2012 DATE OF PRONOUNCEMENT 4.5.2012 O R D E R PER D.KARUNAKARA RAO, ACCOUNTANT MEMBER: THESE ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 2 003-04. THEY ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)V, HYDERABAD DATED 20.4.2010. SINCE COMMON ISSUES ARE INVOLVED, THESE APPEALS ARE BEING DISPOSED OFF WITH THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 2 REVENUES APPEAL: ITA NO.997/HYD/2010 : ASSESSMENT YE AR 2003-04 2. EFFECTIVE GROUNDS OF THE REVENUE IN THIS APPEAL READ AS FOLLOWS- 1. THE CIT(A) ERRED IN LAW AND IN FACTS IN HOLDING THAT THE PRODUCT DEVELOPM ENT EXPENDITURE OF RS.56,73,388 IS ALLOWABLE U/S. 35(1) OF THE I.T. I.T. ACT 2. THE CIT(A) OUGHT TO HAVE CONFIRMED THE DISALLOW ANCE OF EXPENDITURE OF RS.56,73,388 CLAIM ED AS THERE IS NO CLAIM IN RESPECT OF SUCH EXPENDITURE TO BE ALLOWABLE U/S. 35 OF THE I.T. ACT. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSE E CLAIMED DEDUCTION OF RS.56,73,488 BEING PROJECT DEVELOPMENT EXPENDITURE. THE ASSESSING OFFICER HELD THAT THE SAID EXPENDITURE GA VE ENDURING BENEFIT TO THE ASSESSEE AND ACCORDINGLY DISALLOWED THE ASSESSE ES CLAIM FOR DEDUCTION OF THE SAID AMOUNT IN THE COMPUTATION OF INCOME. HOWEVER, THE ASSESSING OFFICER ALLOWED DEPRECIATION THEREON TREATING THE SAID EXPENDITURE AS OF CAPITAL NATURE, AND ALLOWED THE S AME AT 25%, WHICH IS THE RATE APPLICABLE TO PLANT AND MACHINERY. 3. ON APPEAL, INITIALLY, HOLDING THE VIEW THAT DE PRECIATION WAS NOT ALLOWABLE ON THE EXPENDITURE OF RS.56,73,388, P ROPOSED ENHANCEMENT OF ASSESSMENT, AND ISSUED SHOW-CAUSE NOTICE IN THAT BEHALF. HOWEVER, IN THE IMPUGNED ORDER ULTIMATELY PASSED, HELD THAT THE EXPENDITURE IN QUESTION WOULD BE COVERED UNDER S.35 OF THE ACT. H E ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO VERIFY OF THE FULFILLMENT OF OTHER CONDITIONS, SUCH AS APPROVAL OR REGISTRATION OF THE INSTITUTIONS TO WHOM PAYMENTS IN QUESTION HAVE BEEN MADE, STIPULATED IN S.35 OF THE ACT. 4. AGGRIEVED BY THE ORDER OF THE CIT(A), REVENUE P REFERRED THE PRESENT APPEAL BEFORE US. ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 3 5. DURING THE PROCEEDINGS BEFORE US, THE LEARNED D EPARTMENTAL REPRESENTATIVE FOR THE REVENUE SUBMITTED THAT THE C IT(A) WRONGLY ALLOWED THE CLAIM OF THE ASSESSEE RELATING TO PRODU CT DEVELOPMENT EXPENDITURE AMOUNTING TO RS.56,73,388 UNDER S.35(1) OF THE ACT. FURTHER, HE RELIED ON THE ORDER OF THE ASSESSING OF FICER. 6. PER CONTRA, THE LEARNED COUNSEL FOR THE ASSESSE E EXPLAINED THE NATURE OF THE BUSINESS OF THE ASSESSEE, VIZ. MANUFA CTURING OF INSECTICIDES AND IMPRESSED UPON THE NEED FOR CONTINUOUS SCIENT IFIC RESEARCH AS PART OF THE PROBE FOR DISCOVERY OF NEW PRODUCTS. FURTH ER, THE LEARNED COUNSEL READ OUT THE CONTENTS OF PARA 3.7 AND 3.8 OF THE IM PUGNED ORDER OF THE CIT(A) TO DEMONSTRATE THE IMPORTANCE OF INCURRING OF THE IMPUGNED EXPENDITURE AMOUNTING TO RS.56,73,388 ON SCIENTIFIC RESEARCH. HE SUBMITTED THAT THE RECIPIENTS OF MAJOR PORTION OF EXPENDITURE ARE INSTITUTIONS/UNIVERSITIES. 5. WE HEARD THE PARTIES AND PERUSED THE MATERIAL A VAILABLE ON RECORD. THE PAPER BOOK FILED BY THE ASSESSEE ESSE NTIALLY CONTAINS THE DETAILS OF THE PRODUCT DEVELOPMENT EXPENDITURE ALON GWITH THE SUPPORTIVE DOCUMENTS AND BILLS. ON A PERUSAL OF PAGE 1 OF THE PAPER-BOOK, IT IS NOTICED THAT PAYMENTS WERE MADE TO UNIVERSITIES AND INSTITUTIONS TOWARDS TESTING CHARGES, FIELD TRIALS, CHEMICAL TESTS, DIS EASE CONTROLS, BIO-EFFICACY TEST, CHEMICALS ETC. THE TOTAL AMOUNT EXPENDED WO RKS OUT TO RS.56,76,389, AND IT HAS TWO COMPONENTS, NAMELY, PA YMENTS MADE TO UNIVERSITIES/INSTITUTIONS OF RS.21,81,750 AND PAYM ENTS MADE TOWARDS CHEMICALS OF RS.34,91,639. WE HAVE ALSO PERUSED THE TEST REPORTS/CONTROL REPORTS SUBMITTED BY THE INSTITUTIONS/UNIVERSITIES. IN OUR CONSIDERED OPINION, THE AMOUNT IN QUESTION WAS INCURRED TOWARD S SCIENTIFIC RESEARCH ONLY. IN ANY EVENT, IT IS NOT THE CASE OF THE REVE NUE THAT THE AMOUNT IN ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 4 QUESTION WAS NOT EXPENDED ON SCIENTIFIC RESEARCH. W E HAVE PERUSED THE PROVISIONS OF S.35(1) AND THE RELEVANT PORTION THE REOF IS EXTRACTED BELOW- EXPENDITURE ON SCIENTIFIC RESEARCH. 35. (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RES EARCH, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED ( I ) ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPIT AL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE 66 BUSINESS. EXPLANATION. .. AS ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE FIND THAT THERE IS NO VIOLATION OF ANY PROVISION OF THE ACT BY THE ASS ESSEE AND THE ARGUMENTS OF THE LEARNED COUNSEL HAVE TO BE ACCEPTE D. FURTHER, WE HAVE ALSO PERUSED PARA 3.7 AND 3.8 OF THE ORDER OF THE C IT(A), AND FIND THE SAME TO BE REASONABLE. NOTHING HAS BEEN BROUGHT OU T BY THE LEARNED DEPARTMENTAL REPRESENTATIVE BEFORE US TO SHOW THAT THE FINDINGS GIVEN BY THE CIT(A) ARE NO CORRECT. THE SAID PARAS 3.7 AND 3 .8 OF THE ORDER OF THE CIT(A) READ AS UNDER- 3.7. NOW, LOOKING AT THE NATURE OF EXPENDITURE, T HE APPELLANT HAS CLEARLY STATED THE EXPENDITURE WAS IN CURRED AS A PART OF RESEARCH IN THE DEVELOPMENT OF NEW PRODUCTS THR OUGH THE CONDUCT OF THE TRIAL TESTS TO ASCERTAIN THE EFFICA CY OF THE PRODUCTS AND ITS SAFETY TO HUMAN AND ANIMALS. AS PART OF THE DEVELOPM ENT OF NEW PRODUCTS OR NEW MOLECULES THROUGH RESEARCH, FIELD TRIALS ARE VERY ESSENTIAL. A PRODUCT CAN BE SAID TO BE CO MPLETE IN TERMS OF RESEARCH AND DEVELOPMENT ONLY AFTER THE FIELD TR IALS ARE CONDUCTED. THE APPELLANT HAS STATED THAT THIS IS A PART OF RESEARCH. THE SPECIFIC ARGUMENTS OF THE APPELLANT ON THIS ISS UE SUBMITTED DURING THE EARLIER APPEAL PROCEEDINGS ARE AS BELOW- .. 3.8. FROM AN ANALYSIS OF THE ABOVE FACTS AND CIRCUM STANCES, IT IS CLEAR THAT THE CONDUCT OF EFFICACY AND SAFETY TESTS WITH REGARD TO NEW MOLECULES IS THE FINAL STAGE OF RESEARCH INTO S UCH NEW PRODUCTS BEFORE THEY CAN BE STATED TO BE FULLY DEVE LOPED. THEREFORE, I HOLD THAT SUCH EXPENDITURE WOULD BE CO VERED UNDER SECTION 35 OF THE ACT. THIS WILL ALSO BE IN LINE WI TH THE OBSERVATION ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 5 OF THE HONBLE ITAT IN PARA 7 OF THEIR AFOREMENTION ED ORDER, FROM WHICH THIS APPEAL HAS EMANATED. WE HAVE ALSO NOTICED THAT IN THE LINE OF BUSINESS O F THE ASSESSEE, I.E. DEVELOPMENT OF THE INSECTICIDES, THERE IS REQUIREME NT OF CONTINUOUS ACTIVITIES OF RESEARCH AND DEVELOPMENT OF THE CHEMI CAL PRODUCTS/INSECTICIDES AND THEY HAVE TO BE SENT TO T HE FIELD FOR TRIAL/TESTS AS PER THE GOVERNMENTAL REGULATIONS EXISTING IN OUR COUNTRY. FOR THIS PURPOSE, THE ASSESSEE NEEDS TO INCUR EXPENDITURE ON THE APPROVED INSTITUTIONS/UNIVERSITIES AS DONE BY THE IN THE INS TANT CASE. THEREFORE, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT(A) IS FAIR AND REASONABLE AND DOES NOT CALL FOR ANY INTERFERENCE. WE ACCORDINGLY UPHOLD THE SAME, REJECTING THE GROUNDS OF THE REVENUE.. 6. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ASSESSEES APPEAL: ITA NO.1032/HYD/2010 : ASSESSMENT Y EAR 2003-04 7. GROUNDS NO.1, 5 AND 6 ARE GENERAL AND DO NOT CA LL FOR SEPARATE ADJUDICATION. THROUGH GROUNDS NO.2 AND 3, ASSESSEE MERELY SUPPORTS THE ORDER OF THE CIT(A), IN THE CONTEXT OF THE APPEAL OF THE REVENUE CONTESTING THE ACTION OF THE FIRST APPELLAT E AUTHORITY IN ACCEPTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE AMOUNT OF RS.56,73,388, BEING PRODUCT DEVELOPMENT EXPENDITURE UNDER S.35 OF THE ACT. AS SUCH, THESE GROUNDS ALSO DO NOT CALL FOR SEPARATE ADJUDIC ATION, IN VIEW OF OUR DECISION GIVEN IN ITA NO.997/HYD/2010. 8, THAT LEAVES GROUND NO.4 ONLY FOR OUR CONSIDERA TION. THE SAID GROUND NO.4 READS AS UNDER- 4. WITHOUT PREJUDICE TO GROUND NO.3 ABOVE, THE LEA RNED CIT(APPEALS) ERRED IN TREATING EXPENDITURE INCURRED ON PRODUCT DEVELOPMENT AS NOT ELIGIBLE FOR DEDUCTION IN TERMS OF SECTION 37. ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 6 HE OUGHT TO HAVE ALLOWED THAT PORTION OF THE EXPEND ITURE, WHICH DOES NOT QUALIFY FOR DEDUCTION U/S. 35, UNDER SECTI ON 37 AS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 9. THIS GROUND HAS GENESIS IN PARA 3.6 OF THE IMPU GNED ORDER, WHEREIN THE CIT(A) HELD THAT AN EXPENDITURE INCURRE D BY THE ASSESSEE CANNOT BE SIMULTANEOUSLY FALL WITHIN THE PURVIEW O F S.37 AS WELL AS S.35 OF THE ACT. THE CIT(A) MADE THE ABOVE ASSERTION W HILE GRANTING RELIEF TO THE ASSESSEE UNDER S.35(1) OF THE I.T. ACT FURTHER , HE ALLOWED THE CLAIM OF THE ASSESSEE UNDER S.35(1), WHILE REFERRING THE MATTER TO THE ASSESSING OFFICER FOR VERIFYING THAT THE RECIPIENT S IN QUESTION ARE DULY APPROVED OR NOT. IN OTHER WORDS, OUT OF THE TOTAL SUM OF RS.56,73,389, THE CIT(A) HAS DIRECTLY ALLOWED THE CLAIM TO THE TU NE OF RS.34,91,639 WITHOUT ANY STRINGS ATTACHED, AND HIS VERIFICATION DIRECTION WAS ONLY WITH REFERENCE TO THE ALLOWABILITY OF THE PAYMENTS MADE TO UNIVERSITIES AND INSTITUTIONS, WHICH ARE TO THE TUNE OF RS.21,81,750 /-. NOTHING IS BROUGHT TO OUR NOTICE BY THE PARTIES THAT SOME UNIVERSITIES /INSTITUTIONS WERE NOT APPROVED BY THE GOVERNMENT AND THEREFORE, INELIGIBL E FOR CLAIM OF DEDUCTION IN THAT REGARD. AT THIS JUNCTURE, WE HAV E CONSIDERED THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATI VE THAT ADJUDICATION ON THESE ISSUES AT THIS POINT OF TIME, VIZ. BEFORE ANY ORDER PASSED BY THE ASSESSING OFFICER IN PURSUANCE OF THE DIRECTIONS OF THE CIT(A), IS PREMATURE, AND ONLY BECOMES AN ACADEMIC EXERCISE A ND FIND MERIT IN IT. IT IS THE OPINION OF LEARNED DEPARTMENTAL REPRESENT ATIVE THAT THE ASSESSEE MAY RAISE THIS ISSUE AT APPROPRIATE TIME T HROUGH APPROPRIATE CHANNEL, AFTER REJECTION IF ANY OF THE PAYMENTS MAD E TO THE UNIVERSITIES/INSTITUTIONS, BY THE ASSESSING OFFICER . WE FIND MERIT IN THE VIEW OF THE LEARNED DEPARTMENTAL REPRESENTATIVE. O THERWISE, IN PRINCIPLE, THE DEDUCTION UNDER S.37 OF THE ACT IN R ESPECT OF ANY CLAIMS SHOULD BE ALLOWED, IF THE CONDITIONS SPECIFIED IN S .37 ARE FULLY COMPLIED BY THE ASSESSEE. THEREFORE, WE ARE OF THE OPINION THA T THIS GROUND, AT THIS POINT OF TIME, IS MERELY ACADEMIC AND ON THAT GROUN D, IT IS DISMISSED AS ACADEMIC. ITA NO.997 & 1032/HYD/2010 M/S. NAGARJUNA AGRICHEM LTD. HYDERAB AD 7 7. IN THE RESULT, ASSESSEES APPEAL IS DISMISSED. 8. TO SUM UP, APPEAL OF THE REVENUE AS WELL AS THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 4.5.2012 SD/- SD/- ( SAKTIJIT DEY ) ( D.KARUNAKARA RAO ) JUDICIAL MEMBER. ACCOUNTANT MEMBER. DT/- 4 TH MAY, 2012 COPY FORWARDED TO: 1. M/S. NAGARJUNA AGRICHEM LTD., C/O. DR.C.P.RAMASWAMY, ADVOCATE, FLAT NO.303, GITANJALI APTS., PLOT NO.108, SRINAGAR COLONY, HYDERABAD-500 072. 2. DY. COMMISSIONER OF INCOME - TAX CIRCLE 16(1), HYDERABAD 3. 4. COMMISSIONER OF INCOME - TAX(APPEALS) - V HYDERABAD COMMISSIONER OF INCOME-TAX IV, HYDERABAD 5 . THE DEPARTMENTAL REPRESENTATIVE, ITAT HYDERABAD B.V.S.