SPC LIFESCIENCES PRIVATE LIMITED,VADODARA vs. DCIT CIRCLE 2(1) (1), VADODARA

आदेश / O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER:

1. The captioned appeals have been filed at the instance of the Assessee against the separate orders of the Commissioner of Income Tax (Appeals)–2, Vadodara [CIT(A) in short] vide appeal no.CIT(A)/Vadodara-2/10011/17-18 and 10076/16-17 dated 18/05/2018 and 30/05/2017 arising in the assessment orders passed under s.143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 19/01/2015 and 29/02/2016 relevant to Assessment Years (AYs) 2012- 13 & 2013-14 respectively.

& SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 2 - Since the appeals pertain to the same assessee, therefore, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

First, we take up for AY 2012-13 The assessee has raised the following grounds of appeal :

2. The learned Commisioner (Appeals) erred in confirming penalty of Rs.820000/- under section 271(1)(c) of the Income-tax Act. Your Appellant submits that the penalty is not justified and prays that the same be deleted. Your appellant craves leave to add to, alter, amend or delete any of the grounds of appeal.

The only issue raised by the assessee is that the Ld. CIT(A) erred in confirming the penalty of Rs. 8,20,000/- u/s 271(1)(c) of the Act.

The aggrieved assessee preferred an appeal to the Ld. CIT-A, who has confirmed the order of the AO.

“A glance of provision of section 271(1)(c ) would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The instant case was not the case of concealment of the income. That was not the case of the revenue either. It was an admitted position in the instant case that no information given in the return was found to be incorrect or inaccurate.

& SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 5 - It was not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars. The revenue argued that submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income. Such cannot be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. Therefore, it must be shown that the conditions under section 271(1)(c ) exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. The word 'particulars' must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars”

Thus, we are of the view that once the assessee has furnished all the particulars of expenses which were correct but wrongly claimed such claim deduction could not attract the penalty. In view of the above, we hold that the assessee has made the wrong claim for the travelling expenses. But the wrong claim does not mean that the assessee has furnished inaccurate particular of income. Therefore in our considered view, the penalty levied u/s 271(1)(c) of the Act is not justifiable in the given facts and circumstances. Accordingly, we delete the penalty & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 6 - imposed by the authorities below. Hence, the ground of appeal of the assessee is allowed.

1. The order of the learned Commissioner (Appeals) is against law and facts.

2. The learned Commissioner (Appeals) erred in confirming disallowance of interest amounting to Rs.2338126/- considering it as capital expenditure. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.

3. The learned Commissioner (Appeals) erred in confirming disallowance of interest on account of interest free advances to Shri Snehal R. Patel and Shri Tejas R. Patel, such disallowance confirmed being Rs.745951/- out of Rs.1142076/- disallowed in Assessment Order. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.

4. The learned Commissioner (Appeals) erred in confirming disallowance of rent to the extent of Rs.14794,26/- under section 40A(2) of the Income-tax Act, 1961, considering it as excessive. Your Appellant submits that the disallowance is not justified and prays that the same be deleted.

5. The learned Commissioner (Appeals) erred in confirming disallowance of sales promotion expenses to the extent of Rs.325657/-. Your Appellant submits that the disallowance is not justified and prays that the same be deleted. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 7 -

6. The learned Commissioner (Appeals) erred in confirming addition of interest amounting to Rs.108068/- Your Appellant submits that the addition is not justified and prays that the same be deleted. Your appellant craves leave to add to, alter, amend or delete any of the grounds of appeal.

7. At the outset, the learned counsel for the assessee submitted that he had been instructed by the assessee not to press ground No. 1 and 6. Therefore, we dismiss the same as not pressed.

8. The 1st issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance of interest expenses amounting to Rs. 23,38,126 .00 only by treating the same as capital in nature.

However, the AO was not satisfied with the contention of the assessee by observing that - i. The impugned assets have not been put to use during the year. ii. There was also no evidence suggesting that the construction of the impugned property was completed during the year.

In view of the above, the AO disregarded the contention of the assessee and accordingly treated the amount of interest as capital in nature. Thus, the AO added the amount of interest to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A).

The assessee before the learned CIT (A) submitted that the construction of the warehouse and the administrative building does not represent the extension of the business. Therefore the interest expenses need not be capitalized irrespective of the fact that the impugned assets were not put to use during the year. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 9 - However, the learned CIT (A) confirmed the order of the AO by observing that the construction of a warehouse and administrative building does not represent the routine assets. Therefore the same should be considered as an extension for the purpose of the business of the assessee. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.

At this juncture, we find it important to refer the provisions of section 36 (1)(iii) of the Act as applicable in the year under consideration, which reads as under: (iii) the amount of the interest 38 paid in respect of capital 38 borrowed 38 for the purposes of the business 38 or profession : & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 10 - 39[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] A perusal of the above provision reveals that the amount of interest on the borrowed fund used for the acquisition of an asset for the extension of the existing business needs to be capitalized. Thus it is clear that any expenditure by way of interest on the borrowed fund utilized for the acquisition of capital assets needs not to be capitalized merely on the basis that such capital assets were not put to use in the relevant year. But if the acquisition of assets relates to the extension of the business then the interest expenses on the borrowed fund used for the acquisition of such assets need to be capitalized till such assets is put to use.

In the case on hand, it is an undisputed fact that the asset was not put to use in the year under consideration. Thus the issue arises whether such assets were acquired for the extension of the business or not. If yes, then the interest needs to be capitalized. However, the grievance of the assessee before us is that there is no extension in the business. As such, the impugned buildings being a warehouse and the administrative building were constructed for effective management of the business which cannot be termed as an extension of the business. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 11 - The assessee is engaged in the business of manufacturing of pharmaceutical bulk drugs, and in our humble understanding, there will not be any increase in the capacity of the production of the assessee after the construction of the warehouse and the administrative building. Therefore, in our considered view the construction of the impugned buildings cannot be treated as an extension of the business as envisaged under the proviso to section 36(1)(iii) of the Act as it stood during the relevant period under consideration. Accordingly, we are not convinced with the finding of the learned CIT (A). Accordingly, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

13. The 2nd issue raised by the assessee is that the learned CIT (A) erred in confirming the addition made by the AO for the interest expenses amounting to ₹7,45,951.00 on account of diversion of the fund.

14. The AO during the assessment proceedings found that the assessee, on the one hand, has advanced loan to the related parties amounting to ₹96,07,312.00 without charging any interest thereon and on the other hand it has incurred interest expenses of ₹77,56,490.00 on the money borrowed by it. Accordingly, the AO worked out the amount of interest on the interest-free advances at ₹11,42,076 being 12% of the advances of ₹96,07,312.00. Accordingly, the AO disallowed the interest expenses of ₹11,42,076.00 and added to the total income of the assessee. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 12 - The aggrieved assessee preferred an appeal to the learned CIT (A) who has partly confirmed the order of the AO by observing as under: “4.2.2. ………… I find that there is no bank account in the assets side of the Balance Sheet which shows that the appellant did not have positive balance in the bank account. In fact, there were borrowings in the form of term loan at Rs.2.24 crores besides short term borrowing of Rs.5.60 crores as on 31.03.2013. the short term borrowing are in the nature of cash credit account/OD Account which are interest bearing. The advances given to the related parties are from this account resulting into further negative balance and ultimately the interest burden. Thus, the direct nexus between the interest bearing funds and interest-free advances was existing in the case of appellant. Accordingly, I hold that decision relied upon by the Ld. Authorized Representative are distinguishable on the facts. Therefore, In view of the above discussion, the disallowance of interest pertaining to interest-free advances given to Shri Snehal R.Patel and Shri Tejas R.Patel is confirmed subject to the direction that interest should be calculated from the actual date of advance given. The Assessing Officer is directed accordingly and hence Ground No.2 is partly allowed.”

Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

“SPC LIFESCIENCES PRIVATE LIMITED BALANCE SHEET AS AT 31ST MARCH, 2013 PARITUCLARS NOTE As At As At 31/03/2013 31/03/2013 Amount (Rs.) Amount (Rs.) 1. EQUITY & LIABILITIES (1) SHARE HOLDERS’ FUND: (a) Share Capital 3 22,933.970.00 (b) (b) Reserves and Surplus 4 52,024,942.69 74,958.912.69” From the above, there is no dispute to the fact that the own fund of the assessee exceeds the amount of interest-free advances made to the related parties. Therefore presumption can be drawn that such advances were made out of the own fund of the assessee. Accordingly, we hold that there cannot be any disallowance of interest expenses on account of the diversion of the fund as alleged by the authorities below. In this regard, we also draw support and guidance from the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- “The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 14 - established considering the finding of fact both by the CIT(A) and Tribunal”.

Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:-

“Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”

Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : “If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.

In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of interest-free advance as discussed above. Hence, we reverse the order of the authorities below. The AO is directed to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

18. The next issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance of the expenses for ₹ 14,79,426.00 & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 15 - being a payment made to the related parties as specified under section 40A(2) of the Act towards the rent.

The assessee in the year under consideration has paid rent to its associated enterprises for ₹ 29,36,990.00 (net of service tax) which was considered excessive and unreasonable by the AO to the tune of ₹14,79,426.00 only. Therefore, the AO invoked the provisions of section 40A(2) of the Act and made the disallowance of the excessive rent. The amount disallowed was added to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A) but failed to succeed.

Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

The AO is empowered to make the disallowance of the expenses claimed by the assessee if found unreasonable/excessive in comparison to the market rate under section 40A(2) of the Act, then he can make the disallowance of the same. However, the onus lies on the Revenue to justify that the rent paid by the assessee is excessive and unreasonable in comparison to the market rate. However, in the case on hand, we note that no such exercise has been carried out by the AO/learned CIT (A) by bringing any comparable case to justify that the rent paid by the assessee to the associated enterprises is excessive/unreasonable. Thus in our considered view, in the absence of the comparable cases as envisaged under the provisions of under section 40A(2) of the Act, we are not inclined to uphold the finding of the authorities below. Accordingly, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

21. The next issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of ₹3,25,657/- on account of sales promotion expenses. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 17 - The assessee in the year under consideration claimed to have incurred an expense of ₹3,25,657/- on the purchase of gold coins which were distributed to the customers, clients, and suppliers on the occasion of Deepawali festival. These gold coins were purchased by the assessee dated 2 November 2012. The assessee during the assessment proceedings failed to furnish the details of the customers/clients/suppliers to whom such gold coins were distributed. Thus in the absence of sufficient documentary evidence, the AO disallowed the same and added to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A).

The assessee before the learned CIT (A) submitted that it had declared a net profit of ₹ 2.56 crores out of the turnover of ₹34 crores. Accordingly, the assessee submitted that considering the turnover and the net profit declared by it in comparison to the negligible amount of impugned expenses, should have been allowed the deduction of such expenses.

However, the learned CIT (A) confirmed the order of the AO by observing that the assessee failed to furnish the details of the persons to whom such gold coins were distributed.

Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us. & SPC Life Sciences Pvt.Ltd. vs. DCIT Asst.Years – 2012-13 & 2013-14 - 18 -

We have heard the rival contentions of both the parties and perused the materials available on record. The onus under the statute lies on the assessee to justify the expenses claimed by it based on the documentary evidence. As the assessee in the case on hand, failed to furnish the supporting evidence as desired by the authorities below, we concur with the order of the learned CIT-A. Accordingly, we do not find any reason to interfere in the order of the authorities below. Hence, the ground of appeal of the assessee is dismissed.