ACIT -3(1)(2), MUMBAI vs. HIKAL LTD., MUMBAI

PER OM PRAKASH KANT, AM

These two appeals by the Revenue have been preferred against the order dated 25/01/2016 and 14/10/2016 passed by the Ld. Commissioner of Income Tax (Appeals) –8, Mumbai [in short, the Ld. CIT(A)] for A.Y. 2010-11 and 2011-12. As identical issues are

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raised in these appeals, therefore same were heard together and raised in these appeals, therefore same were heard together and raised in these appeals, therefore same were heard together and disposed off by way of this common order for convenienc of this common order for convenience and avoid of this common order for convenienc repetition of facts.

*On the facts and *On the facts and circumstances of the case and in law, the Ld. circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s14A of the IT Act CIT(A) erred in deleting the disallowance u/s14A of the IT Act CIT(A) erred in deleting the disallowance u/s14A of the IT Act at Rs.86,60,051/ at Rs.86,60,051/- made by the AO in the normal computation made by the AO in the normal computation of income and us 115JB of the IT. Act without of income and us 115JB of the IT. Act without appreciating the appreciating the fact that the assessee ha fact that the assessee has neither established that no part of s neither established that no part of interest bearing fund as well as expenses so claimed has found interest bearing fund as well as expenses so claimed has found interest bearing fund as well as expenses so claimed has found its way into the its way into the investments in Mutual Funds/Shares nor investments in Mutual Funds/Shares nor adduced any documentary evidences during the course of adduced any documentary evidences during the course of adduced any documentary evidences during the course of assessment proceedings before the a O" assessment proceedings before the a O"

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of interest on bank accounts dividend and misc. income totaling of interest on bank accounts dividend and misc. income totaling of interest on bank accounts dividend and misc. income totaling to Rs.178.75 lakhs by holding the interest to Rs.178.75 lakhs by holding the interest income claimed by ncome claimed by the assessee was neither accru the assessee was neither accrued from such activity nor ed from such activity nor derived from the activities of the EOU unit relying on the derived from the activities of the EOU unit relying on the derived from the activities of the EOU unit relying on the decision of Hon'ble for Supreme Court in the case of Pandiyan decision of Hon'ble for Supreme Court in the case of Pandiyan decision of Hon'ble for Supreme Court in the case of Pandiyan Chemicals vs. CIT, 129 Taxman 539." Chemicals vs. CIT, 129 Taxman 539."

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never be offered for income tax in any of the earlier assessment never be offered for income tax in any of the earlier assessment never be offered for income tax in any of the earlier assessment year.

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1961 [in short “the Act”] after claimin 1961 [in short “the Act”] after claiming entire business income of g entire business income of Rs.12,87,29,134/- for set off agains for set off against the brought forward losses t the brought forward losses and unabsorbed depreciation. The Book Profit u/s. 115JB of the and unabsorbed depreciation. The Book Profit u/s. 115JB of the and unabsorbed depreciation. The Book Profit u/s. 115JB of the Act was declared at Rs. Act was declared at Rs.59,48,35,167/-. The case of the assessee . The case of the assessee was selected for scrutiny and statutory notices were issued and was selected for scrutiny and statutory notices were issued and was selected for scrutiny and statutory notices were issued and served upon the assessee company. In served upon the assessee company. In the assessment completed the assessment completed u/s. 143(3) of the Act u/s. 143(3) of the Act on 31/03/2013, the Assessing Officer made , the Assessing Officer made various various additions additions and and computed computed the the total otal Income Income at at Rs.28,52,31,345/- under normal provisions of under normal provisions of the Act and Book the Act and Book Profit at Rs.60,34,95,220/ 60,34,95,220/- u/s. 115JB of the Act. S u/s. 115JB of the Act. Since the tax determined on Book Profit u/s. 115JB was higher than that under determined on Book Profit u/s. 115JB was higher than that under determined on Book Profit u/s. 115JB was higher than that under the normal provisions of the Act, the Book Profit determined at Rs. the normal provisions of the Act, the Book Profit determined at Rs. the normal provisions of the Act, the Book Profit determined at Rs. 60,34,95,220/- was taken as the Total Income for the income tax was taken as the Total Income for the income tax was taken as the Total Income for the income tax purpose. Aggrieved by various additions made by the Assessing purpose. Aggrieved by various additions made by purpose. Aggrieved by various additions made by Officer, the assessee company preferred appeal before the Ld. CIT(A) Officer, the assessee company preferred appeal before the Officer, the assessee company preferred appeal before the on various grounds who partly allowed the appeal of the assessee. on various grounds who partly allowed the appeal of the assessee. on various grounds who partly allowed the appeal of the assessee. Aggrieved by the order of the ld. CIT(A), the Aggrieved by the order of the ld. CIT(A), the Revenue Revenue is in appeal before us.

peal relates to the deletion of the 4. The ground No.1 of the ap .1 of the appeal relates to the dele disallowance of Rs.86,60,051/ 86,60,051/- made u/s. 14A of the Act in the made u/s. 14A of the Act in the normal provisions of the Act and u/s. 115JB of the Act. normal provisions of the Act and u/s. 115JB of the Act. normal provisions of the Act and u/s. 115JB of the Act.

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14A of the Act in its return of income. The Assessing Officer in its return of income. The Assessing Officer in its return of income. The Assessing Officer rejected the plea of the assessee that no expenditure was incurred rejected the plea of the assessee that no expenditure rejected the plea of the assessee that no expenditure in relation to earning exempt in relation to earning exempt income. He observed that the assessee income. He observed that the assessee company had made substantial investment in equities which stood made substantial investment in equities which stood made substantial investment in equities which stood at Rs. 18.16 crores and the assessee claimed interest of Rs. 34.83 at Rs. 18.16 crores and the assessee claimed interest of Rs. 34.83 at Rs. 18.16 crores and the assessee claimed interest of Rs. 34.83 crores on borrowed funds. The assessee crores on borrowed funds. The assessee did not establish that no not establish that no part of interest beari part of interest bearing fund had been utilised for investments in been utilised for investments in shares/mutual funds. Further, the investment decisions are shares/mutual funds. Further, the investment decisions are shares/mutual funds. Further, the investment decisions are complex in nature requiring substantial market research, analysis, complex in nature requiring substantial market research, analysis, complex in nature requiring substantial market research, analysis, etc. which lead to incurrence of various administrative expenses as etc. which lead to incurrence of various administrative expenses as etc. which lead to incurrence of various administrative expenses as well. Accordingly, he invoked the provisions of section 14A of the , he invoked the provisions of section 14A of the , he invoked the provisions of section 14A of the Act and applied the computation mechanism provided in Rule 8D of Act and applied the computation mechanism provided in Rule 8D of Act and applied the computation mechanism provided in Rule 8D of the Income Tax Rules the Income Tax Rules,1962 [in short, “the Rules”]. However, the ld. However, the ld. CIT(A) deleted the disallowance u/s. 14A on the ground that 98% of CIT(A) deleted the disallowance u/s. 14A on the ground that 98% of CIT(A) deleted the disallowance u/s. 14A on the ground that 98% of the investment is made in appellant’s own subsidiary foreign investment is made in appellant’s own subsidiary foreign investment is made in appellant’s own subsidiary foreign companies for the purpose of holding controlling stake in the group companies for the purpose of holding controlling stake in the group companies for the purpose of holding controlling stake in the group concerns which are also not covered within the scope of section 14A concerns which are also not covered within the scope of section 14A concerns which are also not covered within the scope of section 14A of the Act and that no new investments are made in the year under of the Act and that no new investments are made in the year und of the Act and that no new investments are made in the year und consideration whereas the dividend income earned is incidental and consideration whereas the dividend income earned is incidental and consideration whereas the dividend income earned is incidental and miniscule.

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during the course of assessment proceedings before the Assessing during the course of assessment proceedings before the Assessing during the course of assessment proceedings before the Assessing Officer. He argued that the onus is on argued that the onus is on the assessee to prove that no the assessee to prove that no interest bearing funds have been utilised in making investments interest bearing funds have been utilised in making investments interest bearing funds have been utilised in making investments yielding exempt income and that no expenses at all have been yielding exempt income and that no expenses at all have been yielding exempt income and that no expenses at all have been incurred towards earning of exempt income. Accordingly, he incurred towards earning of exempt income. Accordingly, he incurred towards earning of exempt income. Accordingly, he submitted that the decisions relied upon submitted that the decisions relied upon by the ld. CIT(A) in his by the ld. CIT(A) in his order and that by the ld. Counsel of the assessee in the course of order and that by the ld. Counsel of the assessee in the course of order and that by the ld. Counsel of the assessee in the course of hearing are not applicable and on distinguished facts. In rebuttal, hearing are not applicable and on distinguished facts. In rebuttal, hearing are not applicable and on distinguished facts. In rebuttal, the ld. Counsel of the assessee argued that the dividend earned by the ld. Counsel of the assessee argued that the dividend earned by the ld. Counsel of the assessee argued that the dividend earned by the assessee company is only the assessee company is only incidental and miniscule. Further, the incidental and miniscule. Further, the investments was made out of own funds investments was made out of own funds – Share Capital of Rs. Share Capital of Rs. 16.44 crores and Reserves & Surplus of Rs. 382.60 crores against 16.44 crores and Reserves & Surplus of Rs. 382.60 crores against 16.44 crores and Reserves & Surplus of Rs. 382.60 crores against the investments of Rs. 18.16 crores. Even the dividend was directly the investments of Rs. 18.16 crores. Even the dividend the investments of Rs. 18.16 crores. Even the dividend credited to the appella credited to the appellant’s bank account and no actual expenditure nt’s bank account and no actual expenditure was incurred in relation to earning of exempt income. The ld. incurred in relation to earning of exempt income. The ld. incurred in relation to earning of exempt income. The ld. Counsel of the assessee also requested to restrict the disallowance Counsel of the assessee also requested to restrict the disallowance Counsel of the assessee also requested to restrict the disallowance to the extent of exempt income only. to the extent of exempt income only.

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settled by the Hon’ble Supreme Court in the case of South Indian settled by the Hon’ble Supreme Court in the case of settled by the Hon’ble Supreme Court in the case of Bank Ltd. (2021) 438 ITR 1 (SC) Ltd. (2021) 438 ITR 1 (SC) that presumption can be drawn that presumption can be drawn that the investments were made out of own funds where adequate that the investments were made out of own funds where adequate that the investments were made out of own funds where adequate such funds are available with the assessee and that no such funds are available with the assessee and that no such funds are available with the assessee and that no disallowance u/r. 8D(2)(ii) could be made. Further, we agree with e u/r. 8D(2)(ii) could be made. Further, we agree with e u/r. 8D(2)(ii) could be made. Further, we agree with the argument of the ld. Counsel of the assessee that the the argument of the ld. Counsel of the assessee that the the argument of the ld. Counsel of the assessee that the disallowance u/s. 14A of the Act is to be restricted to the extent of disallowance u/s. 14A of the Act is to be restricted to the extent of disallowance u/s. 14A of the Act is to be restricted to the extent of exempt income only as held in as held in even assessee’s own case by Hon’ble even assessee’s own case by Hon’ble Mumbai Tribunal in A.Y.2008 ribunal in A.Y.2008-09 (ITA No. 5387/Mum/2012) No. 5387/Mum/2012) and 2009-10 (ITA No. 5388 and 5372/Mum/2012) No. 5388 and 5372/Mum/2012). The relevant finding The relevant finding is reproduced as under: is reproduced as under:

“7.2 The Id. CIT(A) in principle upheld the disallowance made 7.2 The Id. CIT(A) in principle upheld the disallowance made 7.2 The Id. CIT(A) in principle upheld the disallowance made u/s.14A of the Act by applying the Rule 8D (2) of the R u/s.14A of the Act by applying the Rule 8D (2) of the R u/s.14A of the Act by applying the Rule 8D (2) of the Rules but directed the Id. AO to exclude foreign investments while directed the Id. AO to exclude foreign investments while directed the Id. AO to exclude foreign investments while computing disallowance thereon. computing disallowance thereon. Against this order of the Id. Against this order of the Id. CIT(A), we find Revenue has not preferred any appeal and only CIT(A), we find Revenue has not preferred any appeal and only CIT(A), we find Revenue has not preferred any appeal and only the assessee has preferred the appeal on the ground that the assessee has preferred the appeal on the ground that the assessee has preferred the appeal on the ground that disallowance cannot exceed exempt income. We find that this nce cannot exceed exempt income. We find that this nce cannot exceed exempt income. We find that this issue is no longer res integra in view of the decision of the issue is no longer res integra in view of the decision of the issue is no longer res integra in view of the decision of the Hon'ble Supreme Court in the case of Maxopp Investments Hon'ble Supreme Court in the case of Maxopp Investments Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 IT 640 wherein it has been held that reported in 402 IT 640 wherein it has been held that reported in 402 IT 640 wherein it has been held that disallowance u/s.14A of the Act ca disallowance u/s.14A of the Act cannot exceed exempt income. nnot exceed exempt income. The Id. AO is hereby directed to restrict the disallowance The Id. AO is hereby directed to restrict the disallowance The Id. AO is hereby directed to restrict the disallowance u/s.14A of the Act only to the extent of exempt income. u/s.14A of the Act only to the extent of exempt income. u/s.14A of the Act only to the extent of exempt income. Accordingly, the ground No.9 raised by the assessee is Accordingly, the ground No.9 raised by the assessee is Accordingly, the ground No.9 raised by the assessee is allowed.”

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7.1 Respectfully, following Respectfully, following Tribunal (supra), we direct , we direct the the Assessing Officer to restrict the disallowance u/s. 14A of the Act to Assessing Officer to restrict the disallowance u/s. 14A of the Act to Assessing Officer to restrict the disallowance u/s. 14A of the Act to the extent of exempt income of Rs. 34,600/ the extent of exempt income of Rs. 34,600/- in the form of dividend in the form of dividend income only.

7.2 Further, disallowance of expenses u/s 115JB of the Act for disallowance of expenses u/s 115JB of the Act for disallowance of expenses u/s 115JB of the Act for earning exempted income i earning exempted income is concerned, the Tribunal (supra) in AY s concerned, the Tribunal (supra) in AY 2008-09 and 2009-10 has restored the issue to the file of the 10 has restored the issue to the file of the 10 has restored the issue to the file of the Assessing Officer following the finding of Special Bench of Tribunal Assessing Officer following the finding of Special Bench of Tribunal Assessing Officer following the finding of Special Bench of Tribunal in Vireet Investments reported in 165 ITD 27. The relevant finding in Vireet Investments reported in 165 ITD 27. The relevant finding in Vireet Investments reported in 165 ITD 27. The relevant finding of the Tribunal (supra) is reproduced as under: supra) is reproduced as under:

“8. The ground No.11 raised by the assessee is challenging The ground No.11 raised by the assessee is challenging The ground No.11 raised by the assessee is challenging the disallowance made u/s.14A of the Act while computing the disallowance made u/s.14A of the Act while computing the disallowance made u/s.14A of the Act while computing book profits u/s.115JB of the Act. The facts relevant for book profits u/s.115JB of the Act. The facts relevant for book profits u/s.115JB of the Act. The facts relevant for adjudication of this ground is already detailed by adjudication of this ground is already detailed by adjudication of this ground is already detailed by us in ground No.9 above. We find that the Special Bench of Delhi Tribunal in No.9 above. We find that the Special Bench of Delhi Tribunal in No.9 above. We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 had the case of Vireet Investments reported in 165 ITD 27 had the case of Vireet Investments reported in 165 ITD 27 had categorically held that the computation mechanism provided in categorically held that the computation mechanism provided in categorically held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed in Clause (f) of Rule 8D(2) of the Rules cannot be imputed in Clause (f) of Rule 8D(2) of the Rules cannot be imputed in Clause (f) of Explanation 1 to Section 115 JB (2) of the Act. However, the Explanation 1 to Section 115 JB (2) of the Act. However, the Explanation 1 to Section 115 JB (2) of the Act. However, the actual expenses debited in the profit and loss account is actual expenses debited in the profit and loss account is actual expenses debited in the profit and loss account is required to be identified by the Id.AO as relatable to earning of required to be identified by the Id.AO as relatable to earning of required to be identified by the Id.AO as relatable to earning of exempt income. For this purpose, we deem it fit to set aside exempt income. For this purpose, we deem it fit to set aside exempt income. For this purpose, we deem it fit to set aside ground No.11 to the file of Id. AO for denovo adiudication and 11 to the file of Id. AO for denovo adiudication and 11 to the file of Id. AO for denovo adiudication and decide the same in the light of decision of Special Bench of decide the same in the light of decision of Special Bench of decide the same in the light of decision of Special Bench of Delhi Tribunal in the case of Vireet Investment decision reported Delhi Tribunal in the case of Vireet Investment decision reported Delhi Tribunal in the case of Vireet Investment decision reported in 165 ITD 27. in 165 ITD 27. Accordingly, the ground No. 11 raised by the Accordingly, the ground No. 11 raised by the assessee is allo assessee is allowed for statistical purposes.”

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7.3 Respectfully, following the Tribunal (supra) the issue in , following the Tribunal (supra) the issue in , following the Tribunal (supra) the issue in dispute in the year under consideration in the year under consideration, is restored to the file of , is restored to the file of the Assessing Officer for adjudi Assessing Officer for adjudication following the direction of Tribunal following the direction of Tribunal (supra). The ground ound No. 1 of the Appeal is partly allowed for No. 1 of the Appeal is partly allowed for statistical purposes.

(i) Manpower cost (ii) Turnover/Sales (iii) Fixed asset of each unit/plant. Fixed asset of each unit/plant.

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9.1 In the opinion of the Assessing Officer, the method of In the opinion of the Assessing Officer, the method of In the opinion of the Assessing Officer, the method of allocating allocating expenditure expenditure based based on on different different parameters parameters was inconsistent and concluded that the allocation of expenses was not inconsistent and concluded that the allocation of expenses inconsistent and concluded that the allocation of expenses in the proportion of turnover ratio of EOU and Non-EOU units. in the proportion of turnover ratio of EOU and Non in the proportion of turnover ratio of EOU and Non Accordingly, he also rejected the books of accounts. Further, in Accordingly, he also rejected the books of accounts. Further, in Accordingly, he also rejected the books of accounts. Further, in respect of allocation of R&D expen respect of allocation of R&D expenses between EOU and Non ses between EOU and Non-EOU units, he observed that while on one hand the assessee boasts of units, he observed that while on one hand the assessee boasts of units, he observed that while on one hand the assessee boasts of cutting edge R&D to make its product world R&D to make its product world-class and on other class and on other hand, it has not allocated adequate expenditure of R&D to the EOU hand, it has not allocated adequate expenditure of R&D to the EOU hand, it has not allocated adequate expenditure of R&D to the EOU units. Accordingly, he concluded th units. Accordingly, he concluded that the R&D expenses should be at the R&D expenses should be apportioned between EOU and Non apportioned between EOU and Non-EOU units in the ratio EOU units in the ratio of turnover. At para 10 of the assessment order, the Assessing Officer At para 10 of the assessment order, the Assessing Officer At para 10 of the assessment order, the Assessing Officer has reallocated the Head Office expenses and R&D expenses has reallocated the Head Office expenses and R& has reallocated the Head Office expenses and R& between the EOU and Non between the EOU and Non-EOU units based on the respective EOU units based on the respective turnover and thereby reduced the claim of the assessee u/s. 10B of turnover and thereby reduced the claim of the assessee u/s. 10B of turnover and thereby reduced the claim of the assessee u/s. 10B of the Act. However, the ld. CIT(A) allowed the appeal on this issue on the Act. However, the ld. CIT(A) allowed the appeal on this issue on the Act. However, the ld. CIT(A) allowed the appeal on this issue on the premise that the assessee has been maintaining separate record the premise that the assessee has been maintaining the premise that the assessee has been maintaining of expenditure on R&D and other heads pertaining to each unit of expenditure on R&D and other heads pertaining to each unit of expenditure on R&D and other heads pertaining to each unit and, therefore, claim of expenses is based on factual. Further, this and, therefore, claim of expenses is based on factual. Further, this and, therefore, claim of expenses is based on factual. Further, this system of allocation has been consistently followed since A.Y. 2002- system of allocation has been consistently followed since A.Y. 2002 system of allocation has been consistently followed since A.Y. 2002 03 and even accepted by the 03 and even accepted by the Department.

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method of allocation was appropriate. Hence, the Assessing Officer hod of allocation was appropriate. Hence, the Assessing Officer hod of allocation was appropriate. Hence, the Assessing Officer has rightly rejected the books of accounts and the reallocation done rejected the books of accounts and the reallocation done rejected the books of accounts and the reallocation done for the head office expenses and R&D expenses by the Assessing for the head office expenses and R&D expenses by the Assessing for the head office expenses and R&D expenses by the Assessing Officer be upheld.

“3.1. We have heard the rival submissions and perused the 3.1. We have heard the rival submissions and perused the 3.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee materials available on record. We find that the assessee materials available on record. We find that the assessee company is engaged in the business of manufacturing and company is engaged in the business of manufacturing and company is engaged in the business of manufacturing and export of agro chemicals & export of agro chemicals & drug intermediates. The assessee is drug intermediates. The assessee is having the following manufacturing units : having the following manufacturing units :-

 MAHAD MAHAD – Manufacturing agrochemicals TALOJA Manufacturing agrochemicals TALOJA – Manufacturing agrochemicals in an Export Oriented Unit Manufacturing agrochemicals in an Export Oriented Unit Manufacturing agrochemicals in an Export Oriented Unit  (EOU) and claiming deduction u/s 10B of the Act (EOU) and claiming deduction u/s 10B of the Act (EOU) and claiming deduction u/s 10B of the Act  PANOLI PANOLI – Manufacturing pharma products of lactam & pharma products of lactam & cydohexidine in an Export Oriented Unit (EOU) and cydohexidine in an Export Oriented Unit (EOU) and cydohexidine in an Export Oriented Unit (EOU) and claiming deduction u/s 10B of the Act claiming deduction u/s 10B of the Act

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 PANOLI PANOLI – Manufacturing agrochemicals for local markets Manufacturing agrochemicals for local markets in NonEOU in NonEOU  BANGALORE BANGALORE – Manufacturing pharma products for Manufacturing pharma products for export in an Export Orient export in an Export Oriented Unit (EOU) and claiming ed Unit (EOU) and claiming deduction u/s 10B of the Act deduction u/s 10B of the Act  BANGALORE (R&D) BANGALORE (R&D) - Company is doing Research & Company is doing Research & Development (R&D) in Non Development (R&D) in Non-EOU for in-house pharma house pharma products products  DOMBIVALI DOMBIVALI – Company is having incineration plant Company is having incineration plant which is nonoperational for last 3 years which is nonoperational for last 3 years  BANGALORE (Non NGALORE (Non-EOU) – In this plant, Company does In this plant, Company does solvent recovery process for its Bangalore (EOU) and it solvent recovery process for its Bangalore (EOU) and it solvent recovery process for its Bangalore (EOU) and it was purchased in September 2005 was purchased in September 2005

3.2. We find that the assessee company had while submitting 3.2. We find that the assessee company had while submitting 3.2. We find that the assessee company had while submitting its return of income computed the taxable income of EOU for its return of income computed the taxable income of EOU for its return of income computed the taxable income of EOU for which deduction u/s 10B which deduction u/s 10B of the Act was claimed and of the Act was claimed and separately computed taxable income for other Non separately computed taxable income for other Non separately computed taxable income for other Non-EOU units. We find that the assessee had disclosed net taxable income of We find that the assessee had disclosed net taxable income of We find that the assessee had disclosed net taxable income of Rs. 3,09,61,809/ Rs. 3,09,61,809/- which was set off against the carried which was set off against the carried forward business losses of forward business losses of earlier years and ultimately earlier years and ultimately declared NIL income in the return of income. We find that the declared NIL income in the return of income. We find that the declared NIL income in the return of income. We find that the Head Office Expenses of the assessee were allocated amongst Head Office Expenses of the assessee were allocated amongst Head Office Expenses of the assessee were allocated amongst various industrial undertakings on the basis of average gross various industrial undertakings on the basis of average gross various industrial undertakings on the basis of average gross block block block of of of assets, assets, assets, turnover turnover turnover and and and manpower manpower manpower emp employed. emp Accordingly, the allocation of head office expenses made by the Accordingly, the allocation of head office expenses made by the Accordingly, the allocation of head office expenses made by the assessee are as under: assessee are as under:- Taloja Taloja 35.84% Mahad Mahad 18.21% Panoli Panoli 13.79%

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R&D 4.63% Bangalore EOU Bangalore EOU 27.53% 3.3. We find that the ld AO without finding fault with the 3.3. We find that the ld AO without finding fault with the 3.3. We find that the ld AO without finding fault with the workings of the assessee workings of the assessee and without passing a speaking and without passing a speaking order, directly proceeded to allocate the head office expenses order, directly proceeded to allocate the head office expenses order, directly proceeded to allocate the head office expenses on the basis of turnover as under: on the basis of turnover as under:- Mahad Mahad Rs 3,05,39,860.37 Rs 3,05,39,860.37 Taloja Taloja Rs 5,99,73,967.17 Rs 5,99,73,967.17 Panoli Non EOU Panoli Non EOU Rs 2,30,97,963.36 Rs 2,30,97,963.36 Panoli EOU Panoli EOU Rs 77,75,378.24 Bangalore EOU Bangalore EOU Rs 4,62,66,133.29 Rs 4,62,66,133.29 R & D R & D Rs 78,63,136.46 Rs 17,55,16,438.90 Rs 17,55,16,438.90 3.4. We find that the assessee before the ld CITA had pleaded 3.4. We find that the assessee before the ld CITA had pleaded 3.4. We find that the assessee before the ld CITA had pleaded that expenditure at CBD office are not in relation to specific unit that expenditure at CBD office are not in relation to specific unit that expenditure at CBD office are not in relation to specific unit as it is incurred as a common expenditure for as it is incurred as a common expenditure for all the units as a all the units as a whole. Accordingly, such expenditure has been allocated by the Accordingly, such expenditure has been allocated by the Accordingly, such expenditure has been allocated by the assessee on the basis of certain scientific ratio i.e average of assessee on the basis of certain scientific ratio i.e average of assessee on the basis of certain scientific ratio i.e average of gross block of the units, sales of the units and manpower gross block of the units, sales of the units and manpower gross block of the units, sales of the units and manpower employed in the respective units. The same basis wa employed in the respective units. The same basis wa employed in the respective units. The same basis was followed by the assessee consistently since so many years which had by the assessee consistently since so many years which had by the assessee consistently since so many years which had been accepted by the revenue in the past. It was pleaded that been accepted by the revenue in the past. It was pleaded that been accepted by the revenue in the past. It was pleaded that the ld AO simply allocated the CBD expenses on the basis of the ld AO simply allocated the CBD expenses on the basis of the ld AO simply allocated the CBD expenses on the basis of turnover , by ignoring the criteria of gross block of assets and turnover , by ignoring the criteria of gross block of assets and turnover , by ignoring the criteria of gross block of assets and manpower employed in the respective units without any basis. manpower employed in the respective units without any basis. manpower employed in the respective units without any basis. The assessee tried to justify its basis of allocation by stating The assessee tried to justify its basis of allocation by stating The assessee tried to justify its basis of allocation by stating that all the units are though operational but at a different level that all the units are though operational but at a different level that all the units are though operational but at a different level of age of operationality and that the adoption of turnover of age of operationality and that the adoption of turnover of age of operationality and that the adoption of turnover criteria would be lopsided as certain units are capital intensive teria would be lopsided as certain units are capital intensive teria would be lopsided as certain units are capital intensive and labour intensive. Therefore, the assessee company had and labour intensive. Therefore, the assessee company had and labour intensive. Therefore, the assessee company had adopted the balanced approach by taking the average of gross adopted the balanced approach by taking the average of gross adopted the balanced approach by taking the average of gross

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block of assets, turnover and manpower employed in the block of assets, turnover and manpower employed in the block of assets, turnover and manpower employed in the respective units fo respective units for the purpose of allocation of common r the purpose of allocation of common expenses. It was pleaded that the result of the allocation of expenses. It was pleaded that the result of the allocation of expenses. It was pleaded that the result of the allocation of common expenses on the basis of turnover had resulted in the common expenses on the basis of turnover had resulted in the common expenses on the basis of turnover had resulted in the reduction in the profit of EOU unit of Rs 27,92,178/ reduction in the profit of EOU unit of Rs 27,92,178/ reduction in the profit of EOU unit of Rs 27,92,178/- and consequently resulted in reduction of consequently resulted in reduction of loss of Non EOU unit by loss of Non EOU unit by the same amount. Despite these contentions, the ld CITA simply the same amount. Despite these contentions, the ld CITA simply the same amount. Despite these contentions, the ld CITA simply upheld the action of the ld AO without giving any independent upheld the action of the ld AO without giving any independent upheld the action of the ld AO without giving any independent findings. We find that since the allocation basis of common findings. We find that since the allocation basis of common findings. We find that since the allocation basis of common expenditure has been rejected by the lower aut expenditure has been rejected by the lower authorities without horities without any basis and by totally ignoring the various contentions raised any basis and by totally ignoring the various contentions raised any basis and by totally ignoring the various contentions raised thereon in respect of each of the behaviour of various units and thereon in respect of each of the behaviour of various units and thereon in respect of each of the behaviour of various units and the past assessments framed in the hands of the assessee u/s the past assessments framed in the hands of the assessee u/s the past assessments framed in the hands of the assessee u/s 143(3) of the Act. The copies of various assessm 143(3) of the Act. The copies of various assessm 143(3) of the Act. The copies of various assessment orders passed in the case of the assessee in earlier years are as passed in the case of the assessee in earlier years are as passed in the case of the assessee in earlier years are as under:-

Asst Year 2002 Asst Year 2002-03 – 143(3) dt 18.2.2005 – Pg 227 of Paper Pg 227 of Paper Book

143(3) rws 147 dt 31.12.2009 143(3) rws 147 dt 31.12.2009- Pg 235 of paper book Pg 235 of paper book

Asst Year 2003 Asst Year 2003-04 – 143(3) dt 10.1.2006 – Pg 245 of Paper Pg 245 of Paper Book 143(3) rws 147 dt 31.12.2009 143(3) rws 147 dt 31.12.2009 – Pg 249 of Paper book Pg 249 of Paper book

Asst Year 2004 Asst Year 2004-05 – 143(3) dt 23.2.2006 – Pg 258 of Paper Pg 258 of Paper Book 143(3) rws 147 dt 31.12.2009 Book 143(3) rws 147 dt 31.12.2009 – Pg 261 of paper book Pg 261 of paper book

Asst Year 2005 Asst Year 2005-06 – 143(3) dt 31.12.2007 – Pg 276 of Paper Pg 276 of Paper Book

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Hence, we are Hence, we are inclined to grant relief to the assessee by inclined to grant relief to the assessee by applying the principle of consistency and in the absence of applying the principle of consistency and in the absence of applying the principle of consistency and in the absence of change in facts change in facts change in facts during during during the the year the year year under consideration. under consideration. under consideration. Accordingly, the reduction in profit of EOU unit of Rs. Accordingly, the reduction in profit of EOU unit of Rs. Accordingly, the reduction in profit of EOU unit of Rs. 27,92,178/- and consequential reduction of loss of Non EOU loss of Non EOU unit by the same amount is hereby reversed and relief is unit by the same amount is hereby reversed and relief is unit by the same amount is hereby reversed and relief is granted to the assessee. Accordingly, the Ground No. 2 raised granted to the assessee. Accordingly, the Ground No. 2 raised granted to the assessee. Accordingly, the Ground No. 2 raised by the assessee is allowed. by the assessee is allowed.”

11.1 As regards the allocation of R&D expenses, he drew our As regards the allocation of R&D expenses, he drew our As regards the allocation of R&D expenses, he drew our attention to the fact that attention to the fact that identical issue in assessee’s own case is identical issue in assessee’s own case is decided by the Mumbai Tribunal in A.Y. 2006-07(ITA No. decided by the Mumbai Tribunal in A.Y. 2006 decided by the Mumbai Tribunal in A.Y. 2006 5385/Mum/2012), , which has been further followed in AY , which has been further followed in AY , which has been further followed in AY 2007-08 and 2008-09. The relevant extract from the ITAT order for A.Y. The relevant extract from the ITAT order for A.Y. The relevant extract from the ITAT order for A.Y. 2006-07 is reproduced as under: 07 is reproduced as under:-

4.1. We have heard the rival submissions and perused the 4.1. We have heard the rival submissions and perused the 4.1. We have heard the rival submissions and perused the materials available on record. During the year under materials available on record. During the year under materials available on record. During the year under consideration, the assessee had claimed deduction u/s 35(1)(iv) consideration, the assessee had claimed deduction u/s 35(1)(iv) consideration, the assessee had claimed deduction u/s 35(1)(iv) of the Act towards capital expenditure on research and of the Act towards capital expenditure on research and of the Act towards capital expenditure on research and development to the tune of development to the tune of Rs. 1,47,44,014/-. The assessee . The assessee also claimed deduction u/s 35(2AB) of the Act towards in house also claimed deduction u/s 35(2AB) of the Act towards in house also claimed deduction u/s 35(2AB) of the Act towards in house research and development expenses to the tune of Rs. research and development expenses to the tune of Rs. research and development expenses to the tune of Rs. 4,30,14,243/ 4,30,14,243/-. . We We find find that that the the assessee assessee has has units units manufacturing pharma products and agro chemicals and out manufacturing pharma products and agro chemicals and out manufacturing pharma products and agro chemicals and out of which, some units are eligible for deduction u/s 10B of the Act. which, some units are eligible for deduction u/s 10B of the Act. which, some units are eligible for deduction u/s 10B of the Act. The details of units eligible for deduction u/s 10B of the Act The details of units eligible for deduction u/s 10B of the Act The details of units eligible for deduction u/s 10B of the Act have already been tabulated supra. During the course of have already been tabulated supra. During the course of have already been tabulated supra. During the course of assessment proceedings, the ld AO sought an explanation as to assessment proceedings, the ld AO sought an explanation as to assessment proceedings, the ld AO sought an explanation as to

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why R&D expenses should not be attributed to EOU units D expenses should not be attributed to EOU units D expenses should not be attributed to EOU units where deduction u/s 10B of the Act has been claimed. It is not deduction u/s 10B of the Act has been claimed. It is not deduction u/s 10B of the Act has been claimed. It is not in dispute that the assessee is entitled for deduction u/s 10B of in dispute that the assessee is entitled for deduction u/s 10B of in dispute that the assessee is entitled for deduction u/s 10B of the Act for the respective units and the dispute lies only in the the Act for the respective units and the dispute lies only in the the Act for the respective units and the dispute lies only in the computation computation figure thereon. We find that the assessee had figure thereon. We find that the assessee had furnished a letter from Ministry of Science & Technology furnished a letter from Ministry of Science & Technology furnished a letter from Ministry of Science & Technology recognising in house R&D unit of assessee. The evidence in this recognising in house R&D unit of assessee. The evidence in this recognising in house R&D unit of assessee. The evidence in this regard is enclosed in page 140 of the paper book filed before regard is enclosed in page 140 of the paper book filed before regard is enclosed in page 140 of the paper book filed before us. We find that the assess us. We find that the assessee had submitted before the lower ee had submitted before the lower authorities that it took around 5 to 7 years to develop a product authorities that it took around 5 to 7 years to develop a product authorities that it took around 5 to 7 years to develop a product and chances of success were very low. It was also submitted and chances of success were very low. It was also submitted and chances of success were very low. It was also submitted that R & D unit was a standalone unit having its own that R & D unit was a standalone unit having its own that R & D unit was a standalone unit having its own customers and capable of generating indepen customers and capable of generating independent revenue. The dent revenue. The assessee had billed separately to its customers in the said unit assessee had billed separately to its customers in the said unit assessee had billed separately to its customers in the said unit and generated revenue which are enclosed in pages 144 to 193 and generated revenue which are enclosed in pages 144 to 193 and generated revenue which are enclosed in pages 144 to 193 of the paper book filed before us. Accordingly, the assessee of the paper book filed before us. Accordingly, the assessee of the paper book filed before us. Accordingly, the assessee pleaded that there is no need to allocate R&D expen pleaded that there is no need to allocate R&D expen pleaded that there is no need to allocate R&D expenditure to other units as R&D unit is a separate unit by itself capable of other units as R&D unit is a separate unit by itself capable of other units as R&D unit is a separate unit by itself capable of generating independent revenue having its own customers. generating independent revenue having its own customers. generating independent revenue having its own customers.

4.2. However, without prejudice to the said argument, the 4.2. However, without prejudice to the said argument, the 4.2. However, without prejudice to the said argument, the assessee submitted that maximum 5% of expenses and assessee submitted that maximum 5% of expenses and assessee submitted that maximum 5% of expenses and depreciation of depreciation of R&D unit may be allocated to Bangalore EOU R&D unit may be allocated to Bangalore EOU unit.

4.3. We find that these submissions did not hold any water 4.3. We find that these submissions did not hold any water 4.3. We find that these submissions did not hold any water and the ld AO observed that assessee was not allocating and the ld AO observed that assessee was not allocating and the ld AO observed that assessee was not allocating expenses of R&D unit to EOU unit in order to claim higher expenses of R&D unit to EOU unit in order to claim higher expenses of R&D unit to EOU unit in order to claim higher deduction u/s 10B of the Act. We deduction u/s 10B of the Act. We find that the ld AO also did find that the ld AO also did not accept the Bangalore R &D unit as a standalone unit as not accept the Bangalore R &D unit as a standalone unit as not accept the Bangalore R &D unit as a standalone unit as

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assessee had claimed deduction u/s 35(2AB)(1) of the Act and assessee had claimed deduction u/s 35(2AB)(1) of the Act and assessee had claimed deduction u/s 35(2AB)(1) of the Act and in the opinion of the ld AO, the deduction u/s 35(2AB) of the Act in the opinion of the ld AO, the deduction u/s 35(2AB) of the Act in the opinion of the ld AO, the deduction u/s 35(2AB) of the Act could be claimed only by a company manuf could be claimed only by a company manuf could be claimed only by a company manufacturing or producing any drugs etc. The ld AO further noted that the producing any drugs etc. The ld AO further noted that the producing any drugs etc. The ld AO further noted that the Bangalore Bangalore R&D R&D unit unit had had generated generated revenue revenue of of Rs. Rs. 4,09,20,348/ 4,09,20,348/- against claim of deduction u/s 35(1)(iv) of the against claim of deduction u/s 35(1)(iv) of the Act for Rs. 1,47,44,014/ Act for Rs. 1,47,44,014/- and deduction u/s 35(2AB) of the Act and deduction u/s 35(2AB) of the Act for Rs.4,30,14,243/ for Rs.4,30,14,243/-. Accordingly, the ld AO held that the . Accordingly, the ld AO held that the Bangalore R &D unit was not a standalone unit and allocat Bangalore R &D unit was not a standalone unit and allocat Bangalore R &D unit was not a standalone unit and allocated expenses to the extent of Rs.2,86,76,162/ expenses to the extent of Rs.2,86,76,162/- to different EOU to different EOU units. We find that the ld AO further held that deduction u/s units. We find that the ld AO further held that deduction u/s units. We find that the ld AO further held that deduction u/s 35(1)(iv) of the Act with respect to R&D expenses of 35(1)(iv) of the Act with respect to R&D expenses of 35(1)(iv) of the Act with respect to R&D expenses of Rs.1,47,44,014/ Rs.1,47,44,014/- and deduction u/s 35(2AB) of the Act of and deduction u/s 35(2AB) of the Act of Rs.4,30,14,243/ Rs.4,30,14,243/- was to be reduced from the profits of EOU to be reduced from the profits of EOU units. This action of the ld AO was confirmed by the ld CITA. units. This action of the ld AO was confirmed by the ld CITA. units. This action of the ld AO was confirmed by the ld CITA.

4.4. We find from the perusal of the financial statements of the 4.4. We find from the perusal of the financial statements of the 4.4. We find from the perusal of the financial statements of the assessee enclosed in the paper book filed before us, R & D unit assessee enclosed in the paper book filed before us, R & D unit assessee enclosed in the paper book filed before us, R & D unit is an independent unit hav is an independent unit having its own separate plant and ing its own separate plant and situated in a different location. The activity carried out in the situated in a different location. The activity carried out in the situated in a different location. The activity carried out in the said R&D unit is totally different from that carried out at the said R&D unit is totally different from that carried out at the said R&D unit is totally different from that carried out at the other units i.e research for developing new products and other units i.e research for developing new products and other units i.e research for developing new products and processes. The said R&D unit has a sep processes. The said R&D unit has a separate electric meter, arate electric meter, has independent staff, unit requires independent inputs or raw has independent staff, unit requires independent inputs or raw has independent staff, unit requires independent inputs or raw materials etc. Separate books of accounts are maintained for materials etc. Separate books of accounts are maintained for materials etc. Separate books of accounts are maintained for this R &D unit so as to deduce the division wise profitability. this R &D unit so as to deduce the division wise profitability. this R &D unit so as to deduce the division wise profitability. The said unit does not need any support from a The said unit does not need any support from any of the other ny of the other units and can function independently having its own customers units and can function independently having its own customers units and can function independently having its own customers and capable of generating independent revenue on its own. and capable of generating independent revenue on its own. and capable of generating independent revenue on its own.

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Hence expenditure of R&D unit cannot be apportioned to EOU Hence expenditure of R&D unit cannot be apportioned to EOU Hence expenditure of R&D unit cannot be apportioned to EOU units which has no connection with R&D unit. units which has no connection with R&D unit.

4.5. We further 4.5. We further find that similar claim of the assessee was find that similar claim of the assessee was accepted by the revenue in the past scrutiny assessments. The accepted by the revenue in the past scrutiny assessments. The accepted by the revenue in the past scrutiny assessments. The details of the same are asunder: details of the same are asunder:-

“Asst Year 2002 “Asst Year 2002-03 – 143(3) dt 18.2.2005 143(3) dt 18.2.2005 – Pg 227 of Paper Book Paper Book

We find that the ld AO had accepted R& D Unit at We find that the ld AO had accepted R& D Unit at We find that the ld AO had accepted R& D Unit at Bangalore as a separate unit and deduction u/s 10B of angalore as a separate unit and deduction u/s 10B of angalore as a separate unit and deduction u/s 10B of the Act was not disturbed by the ld AO except for other the Act was not disturbed by the ld AO except for other the Act was not disturbed by the ld AO except for other income and miscellaneous income. income and miscellaneous income.

Asst Year 2002 Asst Year 2002-03 - 143(3) rws 147 dt 31.12.2009 143(3) rws 147 dt 31.12.2009- Pg 235 of paper book 235 of paper book

We find that in this assessment, deductio We find that in this assessment, deduction claimed u/s n claimed u/s 10B of the Act was adjusted only in respect of Taloja unit 10B of the Act was adjusted only in respect of Taloja unit 10B of the Act was adjusted only in respect of Taloja unit of the assessee which has nothing to do with the of the assessee which has nothing to do with the of the assessee which has nothing to do with the Bangalore Pharma unit and R &D unit apart from making Bangalore Pharma unit and R &D unit apart from making Bangalore Pharma unit and R &D unit apart from making disallowance u/s 14A of the Act. disallowance u/s 14A of the Act.

Asst Year 2003 Asst Year 2003-04 – 143(3) dt 10.1.2006 143(3) dt 10.1.2006 – Pg 245 of Paper Book Paper Book

The division wise profitability statement is enclosed in The division wise profitability statement is enclosed in The division wise profitability statement is enclosed in page 244 of the paper book filed before us. We find that page 244 of the paper book filed before us. We find that page 244 of the paper book filed before us. We find that the ld AO had accepted R& D Unit at Bangalore as a the ld AO had accepted R& D Unit at Bangalore as a the ld AO had accepted R& D Unit at Bangalore as a separate unit and deduction u/s 10B of the Act was not separate unit and deduction u/s 10B of the Act was not separate unit and deduction u/s 10B of the Act was not disturbed by the l disturbed by the ld AO except for other income and d AO except for other income and miscellaneous income. miscellaneous income.

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Asst Year 2003 Asst Year 2003-04- 143(3) rws 147 dt 31.12.2009 143(3) rws 147 dt 31.12.2009 – Pg 249 of Paper book 249 of Paper book

We find that in this assessment, deduction claimed u/s We find that in this assessment, deduction claimed u/s We find that in this assessment, deduction claimed u/s 10B of the Act was adjusted only in respect of Taloja unit 10B of the Act was adjusted only in respect of Taloja unit 10B of the Act was adjusted only in respect of Taloja unit of the assesse of the assessee which has nothing to do with the e which has nothing to do with the Bangalore Pharma unit and R &D unit apart from making Bangalore Pharma unit and R &D unit apart from making Bangalore Pharma unit and R &D unit apart from making disallowance u/s 14A of the Act. Asst Year 2004-05 – disallowance u/s 14A of the Act. Asst Year 2004 disallowance u/s 14A of the Act. Asst Year 2004 143(3) dt 23.2.2006 143(3) dt 23.2.2006 – Pg 258 of Paper Book We find that Pg 258 of Paper Book We find that the ld AO had accepted R& D Unit at Bangalore as a the ld AO had accepted R& D Unit at Bangalore as a the ld AO had accepted R& D Unit at Bangalore as a separat separate unit and deduction u/s 10B of the Act was not e unit and deduction u/s 10B of the Act was not disturbed by the ld AO except for other income and disturbed by the ld AO except for other income and disturbed by the ld AO except for other income and miscellaneous income. miscellaneous income.

Asst Year 2004 Asst Year 2004-05 - 143(3) rws 147 dt 31.12.2009 143(3) rws 147 dt 31.12.2009 – Pg 261 of paper book 261 of paper book

We find that in this reopened assessment, the ld AO We find that in this reopened assessment, the ld AO We find that in this reopened assessment, the ld AO sought to make allocation of total expenses of R&D unit sought to make allocation of total expenses of R&D unit sought to make allocation of total expenses of R&D unit to Bangalore EOU after observing that assessee itself to Bangalore EOU after observing that assessee itself to Bangalore EOU after observing that assessee itself had allocated 5% of total expenses thereon. Accordingly, had allocated 5% of total expenses thereon. Accordingly, had allocated 5% of total expenses thereon. Accordingly, the ld AO made adjustment of allocati the ld AO made adjustment of allocation of expenses by on of expenses by allocating Bangalore R&D Unit expenses, deduction u/s allocating Bangalore R&D Unit expenses, deduction u/s allocating Bangalore R&D Unit expenses, deduction u/s 35(1)(iv) of the Act expenses between Pharma EOUs and 35(1)(iv) of the Act expenses between Pharma EOUs and 35(1)(iv) of the Act expenses between Pharma EOUs and Bangalore R&D unit on the basis of turnover. But we find Bangalore R&D unit on the basis of turnover. But we find Bangalore R&D unit on the basis of turnover. But we find that this entire reopened assessment was ultimately that this entire reopened assessment was ultimately that this entire reopened assessment was ultimately quashed by this tribu quashed by this tribunal, against which , according to ld nal, against which , according to ld AR, no further appeal was preferred by the revenue AR, no further appeal was preferred by the revenue AR, no further appeal was preferred by the revenue before the Hon’ble High Court. The ld DR also was not before the Hon’ble High Court. The ld DR also was not before the Hon’ble High Court. The ld DR also was not able to provide any evidence in this regard before us. able to provide any evidence in this regard before us. able to provide any evidence in this regard before us. Hence the entire allocation of expenses made by the ld Hence the entire allocation of expenses made by the ld Hence the entire allocation of expenses made by the ld

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AO stood ultimately quashed by the tribunal and had tood ultimately quashed by the tribunal and had tood ultimately quashed by the tribunal and had reached finality thereon. reached finality thereon.

Asst Year 2005 Asst Year 2005-06 – 143(3) dt 31.12.2007 143(3) dt 31.12.2007 – Pg 276 of Paper Book Paper Book

We find that the ld AO had accepted R& D Unit at We find that the ld AO had accepted R& D Unit at We find that the ld AO had accepted R& D Unit at Bangalore as a separate unit and deduction u/s 10B of Bangalore as a separate unit and deduction u/s 10B of Bangalore as a separate unit and deduction u/s 10B of the Act was no the Act was not disturbed by the ld AO except for other t disturbed by the ld AO except for other income and miscellaneous income.” income and miscellaneous income.”

4.5.1. We find from the past behaviour of the department in the 4.5.1. We find from the past behaviour of the department in the 4.5.1. We find from the past behaviour of the department in the income tax scrutiny assessments of the assessee, the revenue income tax scrutiny assessments of the assessee, the revenue income tax scrutiny assessments of the assessee, the revenue had not sought to disturb the contentions of the assess had not sought to disturb the contentions of the assess had not sought to disturb the contentions of the assessee with regard to this impugned issue. No addition or disallowance regard to this impugned issue. No addition or disallowance regard to this impugned issue. No addition or disallowance could be made merely based on the concession given by the could be made merely based on the concession given by the could be made merely based on the concession given by the assessee on without prejudice basis that 5% of R &D expenses assessee on without prejudice basis that 5% of R &D expenses assessee on without prejudice basis that 5% of R &D expenses could be allocated to other units. There is no estoppel against could be allocated to other units. There is no estoppel against could be allocated to other units. There is no estoppel against the statute. There is no basis also for the said allocation to be atute. There is no basis also for the said allocation to be atute. There is no basis also for the said allocation to be carried out. No contrary evidence has been brought on record carried out. No contrary evidence has been brought on record carried out. No contrary evidence has been brought on record by the ld DR before us at the time of hearing. Hence we are not by the ld DR before us at the time of hearing. Hence we are not by the ld DR before us at the time of hearing. Hence we are not inclined to accede to the request of the ld DR that atleast 5% of inclined to accede to the request of the ld DR that atleast 5% of inclined to accede to the request of the ld DR that atleast 5% of expenses should be subject matter of allocation to other units. ses should be subject matter of allocation to other units. ses should be subject matter of allocation to other units. There is absolutely no change in the facts and circumstances of There is absolutely no change in the facts and circumstances of There is absolutely no change in the facts and circumstances of the case during the year under consideration and hence the the case during the year under consideration and hence the the case during the year under consideration and hence the revenue having accepted the stand of the assessee in earlier revenue having accepted the stand of the assessee in earlier revenue having accepted the stand of the assessee in earlier years has to years has to strictly abide by the principle of consistency. strictly abide by the principle of consistency. Reliance in this regard has been rightly placed by the ld AR on Reliance in this regard has been rightly placed by the ld AR on Reliance in this regard has been rightly placed by the ld AR on the following decisions : the following decisions :-

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a) Decision of Hon’ble Jurisdictional High Court in the case of a) Decision of Hon’ble Jurisdictional High Court in the case of a) Decision of Hon’ble Jurisdictional High Court in the case of CIT vs Macbrout Engineering (P) Ltd reported in 232 CIT vs Macbrout Engineering (P) Ltd reported in 232 CIT vs Macbrout Engineering (P) Ltd reported in 232 Taxman 406 (Bom) ;

b) Decision of Hon’ble Delhi High Court in the case of CIT vs b) Decision of Hon’ble Delhi High Court in the case of CIT vs b) Decision of Hon’ble Delhi High Court in the case of CIT vs EHPT India P Ltd reported in 350 ITR 41 (Del) which is directly EHPT India P Ltd reported in 350 ITR 41 (Del) which is directly EHPT India P Ltd reported in 350 ITR 41 (Del) which is directly addressed on the method of allocation of expenses based on addressed on the method of allocation of expenses based on addressed on the method of allocation of expenses based on manpower deployed in each unit; manpower deployed in each unit;

c) Decision of Hon’ble Gujarat High Court in the case of CIT vs c) Decision of Hon’ble Gujarat High Court in the case of CIT vs c) Decision of Hon’ble Gujarat High Court in the case of CIT vs Torrent Pharmaceuticals Ltd reported in 393 ITR 625 (Guj) Torrent Pharmaceuticals Ltd reported in 393 ITR 625 (Guj) Torrent Pharmaceuticals Ltd reported in 393 ITR 625 (Guj) which is directly addressed on the point of independent which is directly addressed on the point of independent which is directly addressed on the point of independent research centre and also on the point of expenditure of R&D research centre and also on the point of expenditure of R&D research centre and also on the point of expenditure of R&D unit which is elig unit which is eligible for deduction u/s 35(1)(iv) of the Act need ible for deduction u/s 35(1)(iv) of the Act need not be reduced from profits ; not be reduced from profits ;

d) Decision of Hon’ble Jurisdictional High Court in the case of d) Decision of Hon’ble Jurisdictional High Court in the case of d) Decision of Hon’ble Jurisdictional High Court in the case of Zandu Pharmaceuticals Works Ltd vs CIT reported in 350 ITR Zandu Pharmaceuticals Works Ltd vs CIT reported in 350 ITR Zandu Pharmaceuticals Works Ltd vs CIT reported in 350 ITR 366 (Bom) 4.5.2. Respectfully following the aforesaid 366 (Bom) 4.5.2. Respectfully following the aforesaid 366 (Bom) 4.5.2. Respectfully following the aforesaid decisions, we hold that there is no need to allocate expenses of Rs we hold that there is no need to allocate expenses of Rs we hold that there is no need to allocate expenses of Rs 2,86,76,162/ 2,86,76,162/- to EOU units and that assessee would be eligible to EOU units and that assessee would be eligible for deduction u/s 35(1)(iv) of the Act of Rs 1,47,44,014/ for deduction u/s 35(1)(iv) of the Act of Rs 1,47,44,014/ for deduction u/s 35(1)(iv) of the Act of Rs 1,47,44,014/- and the same need not be allocated to EOU units. the same need not be allocated to EOU units.

4.6. With regar 4.6. With regard to yet another contention of the ld AO that d to yet another contention of the ld AO that deduction u/s 35(2AB) of the Act could be claimed only by a deduction u/s 35(2AB) of the Act could be claimed only by a deduction u/s 35(2AB) of the Act could be claimed only by a company manufacturing or producing products, we find that the company manufacturing or producing products, we find that the company manufacturing or producing products, we find that the said section 35(2AB) of the Act does not restrict the research said section 35(2AB) of the Act does not restrict the research said section 35(2AB) of the Act does not restrict the research and development only with and development only with respect to the products already in respect to the products already in existence. From the bare reading of the Explanation to Section existence. From the bare reading of the Explanation to Section existence. From the bare reading of the Explanation to Section 35(2AB) of the Act, we find that ‘expenditure on scientific 35(2AB) of the Act, we find that ‘expenditure on scientific 35(2AB) of the Act, we find that ‘expenditure on scientific

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research’, in relation to drugs and pharmaceuticals, shall research’, in relation to drugs and pharmaceuticals, shall research’, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinic include expenditure incurred on clinical drug trial, obtaining al drug trial, obtaining approval from any regulatory authority under any Central, approval from any regulatory authority under any Central, approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent State or Provincial Act and filing an application for a patent State or Provincial Act and filing an application for a patent under the Patents Act, 1970. It is not in dispute that the under the Patents Act, 1970. It is not in dispute that the under the Patents Act, 1970. It is not in dispute that the assessee is already engaged in manufacturing pharma assessee is already engaged in manufacturing pharma assessee is already engaged in manufacturing pharma products. Accordingly, the assessee would be entitled for products. Accordingly, the assessee would be entitled for products. Accordingly, the assessee would be entitled for deduction u/s 35(2AB) of the Act. deduction u/s 35(2AB) of the Act.

4.7. In view of the aforesaid observations, we hold that 4.7. In view of the aforesaid observations, we hold that 4.7. In view of the aforesaid observations, we hold that allocation of expenses of Rs 2,86,76,162/ allocation of expenses of Rs 2,86,76,162/- to EOU units, to EOU units, allocation of deduction u/s allocation of deduction u/s 35(1)(iv) of the Act 35(1)(iv) of the Act of Rs 1,47,44,014/ 1,47,44,014/- and allocation of deduction u/s 35(2AB) of the and allocation of deduction u/s 35(2AB) of the Act of RS 4,30,14,243/ Act of RS 4,30,14,243/- to other units is not warranted in the to other units is not warranted in the peculiar facts and circumstances of the instant case. peculiar facts and circumstances of the instant case. peculiar facts and circumstances of the instant case.”

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allocation, which has been rejecte allocation, which has been rejected by the Assessing Officer and he d by the Assessing Officer and he has applied allocation key allocation key of sales turnover. The second issue in The second issue in dispute is regarding allocation of Research & Development ( ute is regarding allocation of Research & Development ( ute is regarding allocation of Research & Development (R & D) expenses , which according to the assessee need not to be allocated, expenses , which according to the assessee need not to be allocated, expenses , which according to the assessee need not to be allocated, as R & D unit work on as R & D unit work on standalone basis and do not assist to EOU standalone basis and do not assist to EOU units, whereas according to the Assessing Officer R & D expenses units, whereas according to the Assessing Officer R & D expenses units, whereas according to the Assessing Officer R & D expenses have benefited the assessee by by way of increased exports of EOU have benefited the assessee by by way of increased exports of EOU have benefited the assessee by by way of increased exports of EOU units.

12.1 Regarding the al allocation of Head office expenses, the assessee location of Head office expenses, the assessee referred to submissions dated 17/01/20 submissions dated 17/01/2015 filed before the Ld. CIT(A) (avaialbale on PB 131 to 189 ) and submitted that the avaialbale on PB 131 to 189 ) and submitted that the avaialbale on PB 131 to 189 ) and submitted that the assessee company during the year incurred common expenditure of assessee company during the year incurred common expenditure of assessee company during the year incurred common expenditure of ₹109,19,13,378/- whic which has been allocated following the hybrid following the hybrid method (consisting of three different criteria of fixed asset of each consisting of three different criteria of fixed asset of each consisting of three different criteria of fixed asset of each plant, turnover and manpower) and allocated the expenditure into plant, turnover and manpower) and allocated the expenditure into plant, turnover and manpower) and allocated the expenditure into the broad category of manufacturing units, which was worked out the broad category of manufacturing units, which was worked out the broad category of manufacturing units, which was worked out to ₹61,00,52,004/-for for EOU units enjoying exemption under section ying exemption under section and ₹48,18,61,374/- for non-EOU units. The 10B of the Act and EOU units. The assessee contended that this method of allocation of head office assessee contended that this method of allocation of head office assessee contended that this method of allocation of head office expenses was being followed consistently from assessment year expenses was being followed consistently from assessment year expenses was being followed consistently from assessment year 2003-04 onwards and which has been accepted by the 04 onwards and which has been accepted by the Income-tax 04 onwards and which has been accepted by the Department. On perusal perusal Of the paperbook, detailed allocation for detailed allocation for the year under consideration has not been found however basis of consideration has not been found however basis of consideration has not been found however basis of allocation from assessment year 2006 allocation from assessment year 2006-07 to assessment year 2009 07 to assessment year 2009- 10 is available on pape 10 is available on paperbook page 217 to 220. The way 217 to 220. The way, the

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assessee has applied key of allocation e has applied key of allocation, can be seen from the average be seen from the average percentage worked out for each unit by averaging their fixed assets, percentage worked out for each unit by averaging their percentage worked out for each unit by averaging their sales turnover and manpower sales turnover and manpower. For ready reference, the statement of . For ready reference, the statement of allocation of head office expenses (CBD) for assessment year 2006 ation of head office expenses (CBD) for assessment year 2006- ation of head office expenses (CBD) for assessment year 2006 07 on paperbook page 217 is on paperbook page 217 is extracted as under:

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13.1 Before us the Ld. counsel Ld. counsel of the assessee submitted that the of the assessee submitted that the method followed in past and accepted by the Department method followed in past and accepted by the Department method followed in past and accepted by the Department consistently, cannot be deviated in absence of justification as to consistently, cannot be deviated in absence of justification as to consistently, cannot be deviated in absence of justification as to why the said method could not be accepted. In support of the why the said method could not be accepted. In why the said method could not be accepted. In relied on the decision of Hon’ble Delhi contention the Ld. counsel Ld. counsel relied on the decision of High Court in the case of CIT Vs EHPT India High Court in the case of CIT Vs EHPT India Private Limited Private Limited (2013) 350 ITR 41(Delhi) (2013) 350 ITR 41(Delhi).

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13.2 In the case of EHTP India Private Limited (supra), the issue in In the case of EHTP India Private Limited (supra), the issue in In the case of EHTP India Private Limited (supra), the issue in dispute is regarding allocation of indirect expenses among STP and ng allocation of indirect expenses among STP and ng allocation of indirect expenses among STP and non-STP units. The assessee followed “ units. The assessee followed “head Count” as key for head Count” as key for allocation of indirect expenses, whereas according to the revenue of indirect expenses, whereas according to the revenue of indirect expenses, whereas according to the revenue “turnover” should be basis for allocation of indirect expenses. In the “turnover” should be basis for allocation of indirect expenses. In the “turnover” should be basis for allocation of indirect expenses. In the case also there was a contention on behalf of the assessee that the there was a contention on behalf of the assessee that the there was a contention on behalf of the assessee that the assessee allocated expenses on headcount following consistent located expenses on headcount following consistent located expenses on headcount following consistent allocation key. The Hon’ble Delhi High Court (supra) held that allocation key. The Hon’ble Delhi High Court (supra) held that allocation key. The Hon’ble Delhi High Court (supra) held that though there is no fixed formula though there is no fixed formula as which allocation key which allocation key, whether it is headcount or turnover could be applied across the cases and it is headcount or turnover could be applied across the cases and is headcount or turnover could be applied across the cases and depends on case to case, however as far as issue of consistency is depends on case to case, however as far as issue of consistency is depends on case to case, however as far as issue of consistency is concerned, the regular method followed should not be disturbed concerned, the regular method followed should not be disturbed concerned, the regular method followed should not be disturbed without a just cause. The relevant finding of th without a just cause. The relevant finding of the Hon’ble Delhi High e Hon’ble Delhi High Court in reproduced as under: Court in reproduced as under:

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basis of the ratio which the export turnover bears to the total basis of the ratio which the export turnover bears to the total basis of the ratio which the export turnover bears to the total turnover. What we are concerned herein is the stage before turnover. What we are concerned herein is the stage before turnover. What we are concerned herein is the stage before that. We are c that. We are concerned herein with the method by which the oncerned herein with the method by which the indirect or common expenses indirect or common expenses - expenses which are incurred expenses which are incurred for both the exempt and taxable units for both the exempt and taxable units - are to be apportioned are to be apportioned between the two units. To apply the formula prescribed in between the two units. To apply the formula prescribed in between the two units. To apply the formula prescribed in sub-section (4) may be appropriat section (4) may be appropriate in a given case e in a given case considering its peculiar facts. But applying the same formula considering its peculiar facts. But applying the same formula considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the to all cases of apportionment without having regard to the to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be history of assessments and other relevant factors may not be history of assessments and other relevant factors may not be justified.

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accepted by the d accepted by the department for a number of years. However, epartment for a number of years. However, for the assessment years 1991 for the assessment years 1991-92 to 1997-98 the Assessing 98 the Assessing Officer took the view that the discount on the chits should be Officer took the view that the discount on the chits should be Officer took the view that the discount on the chits should be assessed every year, taking into account the number of assessed every year, taking into account the number of assessed every year, taking into account the number of instalments paid and remaining to be p instalments paid and remaining to be paid. The contention of aid. The contention of the assessee was that the method adopted by him has been the assessee was that the method adopted by him has been the assessee was that the method adopted by him has been consistently accepted in the past and there was no consistently accepted in the past and there was no consistently accepted in the past and there was no justification for any departure. Accepting the submission, the justification for any departure. Accepting the submission, the justification for any departure. Accepting the submission, the Supreme Court held as under: Supreme Court held as under:

"As stated above, we are concerne "As stated above, we are concerned with the assessment d with the assessment years 1991-92 to 1997 92 to 1997-98. In the past, the Department had 98. In the past, the Department had accepted the completed contract method and because of such accepted the completed contract method and because of such accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the acceptance, the assessee, in these cases, have followed the acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of same method of accounting, particularly in the context of same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs discount. Every assessee is entitled to arrange its affairs discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department and follow the method of accounting, which the Department and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the has earlier accepted. It is only in those cases where the has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the Department records a finding that the method adopted by the Department records a finding that the method adopted by the assessee resul assessee results in distortion of profits, the Department can ts in distortion of profits, the Department can insist on substitution of the existing method. Further, in the insist on substitution of the existing method. Further, in the insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced present cases, we find from the various statements produced present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of before us, that the entire exercise, arising out of change of before us, that the entire exercise, arising out of change of method from the complet method from the completed contract method to deferred ed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not revenue expenditure, is revenue neutral. Therefore, we do not revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High wish to interfere with the impugned judgment of the High wish to interfere with the impugned judgment of the High Court."

In the light of the observations of the Supreme Court in In the light of the observations of the Supreme Court in In the light of the observations of the Supreme Court in Hukum Chand Mills Ltd. (supra), in a case where alternative Hukum Chand Mills Ltd. (supra), in a case where alternative Hukum Chand Mills Ltd. (supra), in a case where alternative

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methods of apportionment of the expenses are recognized methods of apportionment of the expenses are recognized methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can and there is no statutory or fixed formula, the endeavour can and there is no statutory or fixed formula, the endeavour can only be towards appro only be towards approximation without any great precision ximation without any great precision or exactness. If such is the endeavour, it can hardly be said or exactness. If such is the endeavour, it can hardly be said or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits. On the contrary, that there is an attempt to distort the profits. On the contrary, that there is an attempt to distort the profits. On the contrary, as we have already pointed out, distortion of profits may as we have already pointed out, distortion of profits may as we have already pointed out, distortion of profits may arise if the consistently adopted arise if the consistently adopted and accepted method of and accepted method of apportionment is sought to be disturbed in a few years, apportionment is sought to be disturbed in a few years, apportionment is sought to be disturbed in a few years, especially in a case such as the present one where the especially in a case such as the present one where the especially in a case such as the present one where the deduction under deduction under Section 10A is available over a period of ten is available over a period of ten years and only in some years the method of apportionment nd only in some years the method of apportionment nd only in some years the method of apportionment of income is disturbed. In other words, there is no "just In other words, there is no "just of income is disturbed. cause" made out for abandoning the past method.” cause" made out for abandoning the past method.” cause" made out for abandoning the past method.”

(emphasis supplied externally) (emphasis supplied externally)

13.3 Thus, if a just cause is made out then the past method could Thus, if a just cause is made out then the past method could Thus, if a just cause is made out then the past method could be disturbed. To err is human but there cannot be any justification To err is human but there cannot be any justification To err is human but there cannot be any justification n error. Hon’ble Supreme Court Hon’ble Supreme Court in the case for perpetuating an error. of Distributors (Baroda) (P) Ltd. vs. Union of India (Baroda) (P) Ltd. vs. Union of India (1985) 47 (Baroda) (P) Ltd. vs. Union of India CTR (SC) 349 : (1985) 155 ITR 120 (SC) CTR (SC) 349 : (1985) 155 ITR 120 (SC), observed as follows : , observed as follows :

"To perpetuate an error is no heroism. To rectify it is the "To perpetuate an error is no heroism. To rectify it is the "To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this, we derive comfort compulsion of judicial conscience. In this, we derive comfort compulsion of judicial conscience. In this, we derive comfort and strength from wise a and strength from wise and inspiring words of Justice nd inspiring words of Justice Bronson in Pierce vs. Delameter : 'a Judge ought to be wise Bronson in Pierce vs. Delameter : 'a Judge ought to be wise Bronson in Pierce vs. Delameter : 'a Judge ought to be wise enough to know that he is fallible, and, therefore, ever ready enough to know that he is fallible, and, therefore, ever ready enough to know that he is fallible, and, therefore, ever ready to learn; great and honest enough to discard all mere pride of to learn; great and honest enough to discard all mere pride of to learn; great and honest enough to discard all mere pride of opinion and follow the truth wherever it opinion and follow the truth wherever it may lead; and may lead; and courageous enough to acknowledge his errors.'" courageous enough to acknowledge his errors.'"

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13.4 When we examine the facts of the instant case When we examine the facts of the instant case When we examine the facts of the instant case in view of the above decisions, we find that fixed asset base and labour headcount we find that fixed asset base and labour headcount we find that fixed asset base and labour headcount has been considered by the assessee for allocation in addition to the has been considered by the assessee for allocation in addition to the has been considered by the assessee for allocation in addition to the key of turnover to show that method applied by the assessee is key of turnover to show that method applied by the assessee is key of turnover to show that method applied by the assessee is more scientific which takes into account the operational ability and more scientific which takes into account the operational ability and more scientific which takes into account the operational ability and labour-intensive operation of the units. However we do not intensive operation of the units. However we do not intensive operation of the units. However we do not understand as how the age of the fixed asset understand as how the age of the fixed asset (value (value of the WDV) or No. of labour employed in a unit will impact allocation of head office No. of labour employed in a unit will impact allocation of head office No. of labour employed in a unit will impact allocation of head office expenses amongst the unit expenses amongst the units. The age of the fixed assets or lab The age of the fixed assets or labour expenses will impact the profitability of the respective unit but that expenses will impact the profitability of the respective unit but that expenses will impact the profitability of the respective unit but that cannot be a criteria for allocating various head office expenses cannot be a criteria for allocating various head of cannot be a criteria for allocating various head of amongst the units. The assessee has provided details composition The assessee has provided details composition The assessee has provided details composition of the head office expenses before us, which are av head office expenses before us, which are available on Paper ailable on Paper Book page 32. The expenses consist of personnel cost of Book page 32. The expenses consist of personnel cost of Book page 32. The expenses consist of personnel cost of ₹12,54,44,014/-, other expenses of , other expenses of ₹14,89,95,863/ 14,89,95,863/- and Finance charge ₹26,38,33,237/ 26,38,33,237/-; depreciations ₹1,12,71,812/ 1,12,71,812/-. The total of these expenses of ₹54,95,44,917/ 54,95,44,917/- has been added for has been added for the losses under other income of ( under other income of (-)₹54,23,68,460/- thus making total head thus making total head office expenses to ₹109,19,13,377/ 109,19,13,377/-. For example, if For example, if we presume that head office expenses consist of salary of directors, Chief expenses consist of salary of directors, Chief expenses consist of salary of directors, Chief financial officer etc. then allocation amongst unit s then allocation amongst unit should be on the hould be on the basis of work hours they have put for each unit. Further, the basis of work hours they have put for each unit. Further, the basis of work hours they have put for each unit. Further, the finance expenses consist expenses consist of finance cost and interest ect. and interest ect., then same should be allocated in the proportion of same should be allocated in the proportion of the capital or the the capital or the funds utilized by various various units. Similarly, the allocation of the other units. Similarly, the allocation of the other

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expenses under the head expenses under the head office expenses depends on the nature of expenses depends on the nature of expenses and no uniform criteria of average of the percentage of expenses and no uniform criteria of average of the percentage of expenses and no uniform criteria of average of the percentage of fixed assets, sales and manpower could be applied. In our opinion, fixed assets, sales and manpower could be applied. In our opinion, fixed assets, sales and manpower could be applied. In our opinion, the formula applied by the assessee is not scientific in any manner. pplied by the assessee is not scientific in any manner. pplied by the assessee is not scientific in any manner. Though there is no statutory formula for allocation of head office Though there is no statutory formula for allocation of head Though there is no statutory formula for allocation of head expenses, but the legislature has applied formula of the “turnover” expenses, but the legislature has applied formula of the expenses, but the legislature has applied formula of the for computing the profit for the purpose of deduction or exemption, for computing the profit for the purpose of deduction or exemptio for computing the profit for the purpose of deduction or exemptio in various sections of the in various sections of the Act, wherever profit of units eligible for wherever profit of units eligible for exemption or deduction has not been separately accounted in the exemption or deduction has not been separately accounted in the exemption or deduction has not been separately accounted in the books of accounts. Therefore, in the facts and circumstances of the Therefore, in the facts and circumstances of the Therefore, in the facts and circumstances of the case, we feel it appropriate to restore this issue back to the file of appropriate to restore this issue back to the file of appropriate to restore this issue back to the file of the Assessing Officer, for deciding a sessing Officer, for deciding afresh, with the direction to the fresh, with the direction to the assessee to provide complete detail of head office expenses of assessee to provide complete detail of head office expenses of assessee to provide complete detail of head office expenses of ₹109,19,13,378/-. The Assessing Officer . The Assessing Officer is the is then will decide application of the appropriate appropriate allocation key depending on the allocation key depending on the nature of the expenses and the contribution of said expenses in nature of the expenses and the contribution of said expenses in nature of the expenses and the contribution of said expenses in operation of various units. operation of various units.

13.5 As far as research and development expenses is concerned, As far as research and development expenses is concerned, As far as research and development expenses is concerned, the contention of the assessee the contention of the assessee is that R & D unit at Banglore is unit at Banglore is operating on stand-alone basis alone basis and generating its revenue from its generating its revenue from its activity of research and development, and therefore no allocation of activity of research and development, and therefore no allocation of activity of research and development, and therefore no allocation of R&D expenses to the export oriented unit is required. The relevant R&D expenses to the export oriented unit is required. R&D expenses to the export oriented unit is required. submission of the assessee filed submission of the assessee filed before the Ld. CIT(A), available on before the Ld. CIT(A), available on page 111 of the paperbook is reproduced as under: page 111 of the paperbook is reproduced as under:

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“2.3 The Research and Development unit at Bangalore is The Research and Development unit at Bangalore is The Research and Development unit at Bangalore is independent and standalone unit generating revenue by independent and standalone unit generating revenue by independent and standalone unit generating revenue by itself by sale of product developed inhouse. The formulation itself by sale of product developed inhouse. The formulation itself by sale of product developed inhouse. The formulation developed by the Research and Development unit at developed by the Research and Development unit at developed by the Research and Development unit at Bangalore is not at all dealt with by other units of the Bangalore is not at all dealt with by other units of the Bangalore is not at all dealt with by other units of the appellant company. The appellant company submits that the appellant company. The appellant company submits that the appellant company. The appellant company submits that the unit wise quantity details of all the finished goods produced unit wise quantity details of all the finished goods produced unit wise quantity details of all the finished goods produced and sold during the year by t and sold during the year by the appellant company to he appellant company to evidence that the product sold by the R & D unit at evidence that the product sold by the R & D unit at evidence that the product sold by the R & D unit at Bangalore are not at all dealt with by any other unit of the Bangalore are not at all dealt with by any other unit of the Bangalore are not at all dealt with by any other unit of the appellant company. appellant company.

2.4 The appellant company has R & D unit as a separate 2.4 The appellant company has R & D unit as a separate 2.4 The appellant company has R & D unit as a separate and independent unit at Bangalore in the natu and independent unit at Bangalore in the nature of research re of research and development facility. and development facility. The appellant company has The appellant company has engaged the dedicated team in respect of research and engaged the dedicated team in respect of research and engaged the dedicated team in respect of research and development. The appellant company as such, carrying out development. The appellant company as such, carrying out development. The appellant company as such, carrying out independent research activity at Bangalore. The appellant independent research activity at Bangalore. The appellant independent research activity at Bangalore. The appellant company has been doi company has been doing customs synthesis work right from ng customs synthesis work right from the time it acquired the unit. The research and development the time it acquired the unit. The research and development the time it acquired the unit. The research and development unit has an independent source of income. The appellant unit has an independent source of income. The appellant unit has an independent source of income. The appellant company has intent to develop the IP (Intellectual Property company has intent to develop the IP (Intellectual Property company has intent to develop the IP (Intellectual Property Rights) which has the gestation period of m Rights) which has the gestation period of minimum 3 to 7 inimum 3 to 7 years. It requires a lot of efforts to develop the business as years. It requires a lot of efforts to develop the business as years. It requires a lot of efforts to develop the business as any entrepreneur would carry out the research work with the any entrepreneur would carry out the research work with the any entrepreneur would carry out the research work with the appellant company cautiously. appellant company cautiously.

2.6 It takes a long period before they could grant the It takes a long period before they could grant the It takes a long period before they could grant the appellant company the research wor appellant company the research work independently. In k independently. In order to gain the confidence in the appellant company's order to gain the confidence in the appellant company's order to gain the confidence in the appellant company's

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activity, the customers start with small cost research activity activity, the customers start with small cost research activity activity, the customers start with small cost research activity and series of such gaining experience the customers would and series of such gaining experience the customers would and series of such gaining experience the customers would start evaluating bigger projects. start evaluating bigger projects.

2.7 It is further submit 2.7 It is further submitted that the appellant company has ted that the appellant company has carried out the research work in respect of the various carried out the research work in respect of the various carried out the research work in respect of the various formulations and as part of small research which has been formulations and as part of small research which has been formulations and as part of small research which has been sold to the various clients. In fact, the various formulations in sold to the various clients. In fact, the various formulations in sold to the various clients. In fact, the various formulations in respect of which the research was carried respect of which the research was carried out by Bangalore out by Bangalore unit are not at all dealt with by other units of the appellant unit are not at all dealt with by other units of the appellant unit are not at all dealt with by other units of the appellant company. The Bangalore unit has carried out the research company. The Bangalore unit has carried out the research company. The Bangalore unit has carried out the research into various formulations. Therefore, it cannot be said that into various formulations. Therefore, it cannot be said that into various formulations. Therefore, it cannot be said that the research and development activity carried out by research and development activity carried out by research and development activity carried out by Bangalore unit is dedicated to the other units of the appellant alore unit is dedicated to the other units of the appellant alore unit is dedicated to the other units of the appellant company.

2.8 The Bangalore unit as explained above is an The Bangalore unit as explained above is an The Bangalore unit as explained above is an independent unit carrying out research formulations and independent unit carrying out research formulations and independent unit carrying out research formulations and developing several innovative and cost effective process. The developing several innovative and cost effective process. The developing several innovative and cost effective process. The company has engaged company has engaged the professional scientific competence the professional scientific competence team and has made the investment in world class scientist team and has made the investment in world class scientist team and has made the investment in world class scientist and laboratory instrumentation. The Bangalore research and and laboratory instrumentation. The Bangalore research and and laboratory instrumentation. The Bangalore research and development unit is known for its expertise in discovery development unit is known for its expertise in discovery development unit is known for its expertise in discovery research, analytical method development, sy research, analytical method development, sy research, analytical method development, synthesis of impurities etc. Therefore, the contention of the Learned impurities etc. Therefore, the contention of the Learned impurities etc. Therefore, the contention of the Learned Assessing Officer that the Bangalore unit is not a standalone Assessing Officer that the Bangalore unit is not a standalone Assessing Officer that the Bangalore unit is not a standalone unit is against the facts and without any base. unit is against the facts and without any base.”

13.6 In this regard, we may like to reproduce a part of the In this regard, we may like to reproduce a part of the In this regard, we may like to reproduce a part of the submission of the assessee dated 21 assessee dated 21st Nov. 2014 filed before the Ld. . 2014 filed before the Ld.

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CIT(A), which is available on paperbook pages 79 to 130. On page CIT(A), which is available on paperbook pages 79 to 130. On page CIT(A), which is available on paperbook pages 79 to 130. On page 80 to 81 of the paperbook, the assessee has provided details of the 80 to 81 of the paperbook, the assessee has provided details of the 80 to 81 of the paperbook, the assessee has provided details of the operation activity of various units as under: operation activity of various units as under:

“Mahad - The unit was set Up in 1988 for the man The unit was set Up in 1988 for the manufacture The unit was set Up in 1988 for the man of intermediates for of intermediates for agrochemicals. It can handle complex agrochemicals. It can handle complex chemistries involving chlorination, nitration, chemistries involving chlorination, nitration, hydrogenation hydrogenation etc. the main products are 3.5 DCA, MCA, Diuron and etc. the main products are 3.5 DCA, MCA, Diuron and etc. the main products are 3.5 DCA, MCA, Diuron and Isoproturun. The costing of the products are being done on ucts are being done on the absorption method and under this method all the costs the absorption method and under this method all the costs the absorption method and under this method all the costs are allocated on to the quantities produced. The unit is are allocated on to the quantities produced. The unit is are allocated on to the quantities produced. The unit is making positive contribution but due to the plant being very making positive contribution but due to the plant being very making positive contribution but due to the plant being very old, having low margin and product being available easily old, having low margin and product being available easily old, having low margin and product being available easily in the market also due to high fixed cost it is running in losses. the market also due to high fixed cost it is running in losses. the market also due to high fixed cost it is running in losses.

Taloja - This is a fully integrated plant to manufacture This is a fully integrated plant to manufacture This is a fully integrated plant to manufacture Thiabendazole and is an Export Oriented Unit. The product is Thiabendazole and is an Export Oriented Unit. The product is Thiabendazole and is an Export Oriented Unit. The product is sold to Syngenta Crop Protection AG with whom company sold to Syngenta Crop Protection AG with whom company sold to Syngenta Crop Protection AG with whom company have a buy back have a buy back arrangement.

R & D Center at Bangalore: R & D Center at Bangalore: - The appellant company has The appellant company has developed Research and Development units at Bangalore for developed Research and Development units at Bangalore for developed Research and Development units at Bangalore for development development development of of of various various various pharma pharma pharma products products products and and and also also also developing know developing know-how for third parties on project assignment how for third parties on project assignment basis.

Therefore, the Therefore, the Research and Development centre is treated Research and Development centre is treated as standalone unit generating income itself by sale of as standalone unit generating income itself by sale of as standalone unit generating income itself by sale of products developed by it. products developed by it.

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The R & D centre is located at 32/1 Kalenaagrahara, The R & D centre is located at 32/1 Kalenaagrahara, The R & D centre is located at 32/1 Kalenaagrahara, Bannerghatta, Bangalore 560076 having state of art Bannerghatta, Bangalore 560076 having state of art Bannerghatta, Bangalore 560076 having state of art facilities and offers the fol facilities and offers the following services. The letter dated lowing services. The letter dated 14.03.2005 was issued by the Ministry of Science and 14.03.2005 was issued by the Ministry of Science and 14.03.2005 was issued by the Ministry of Science and Technology Department of Scientific and Industrial Research Technology Department of Scientific and Industrial Research Technology Department of Scientific and Industrial Research granting recognition of in granting recognition of in-house R&D unit. The Ministry of house R&D unit. The Ministry of Science and Technology, Department of Scientific I Science and Technology, Department of Scientific I Science and Technology, Department of Scientific Industrial Research New Delhi granted the recognition of in Research New Delhi granted the recognition of in Research New Delhi granted the recognition of in-house R & D unit to the appellant company vide letter dated 07.12.2007 D unit to the appellant company vide letter dated 07.12.2007 D unit to the appellant company vide letter dated 07.12.2007

This center is a standalone unit generating income itself by This center is a standalone unit generating income itself by This center is a standalone unit generating income itself by sales of product developed and by transferring the know sales of product developed and by transferring the know sales of product developed and by transferring the know- how developed by it. oped by it.

Panoli - The plant is located in Gujarat and production The plant is located in Gujarat and production The plant is located in Gujarat and production activities activities activities inclus inclus inclus manufacture manufacture manufacture of of of agrochemicals agrochemicals agrochemicals and and and formulation of Ekalux and Nuvan. formulation of Ekalux and Nuvan.

Panoli Panoli EOU EOU- manufactures manufactures the the pharma pharma intermediate intermediate Gabapentine lactum. Gabapentine lactum.

Bangalore Pharma Bangalore Pharma - The Bangalore EOU unit manufactures The Bangalore EOU unit manufactures bulk API like Gabapentin, Acebutolol, Gemfibrozil etc. It bulk API like Gabapentin, Acebutolol, Gemfibrozil etc. It bulk API like Gabapentin, Acebutolol, Gemfibrozil etc. It exports Gabapentin to US and Canada markets. exports Gabapentin to US and Canada markets.”

on page, 109 of the paperbook, the assessee has 13.7 Further on page, 109 of the paperbook, the assessee has on page, 109 of the paperbook, the assessee has provided detail of the R&D activity carried out by the R & D provided detail of the R&D activity carried out by the provided detail of the R&D activity carried out by the Bangalore unit. The relevant paragraph is reproduced as under: Bangalore unit. The relevant paragraph is reproduced as under: Bangalore unit. The relevant paragraph is reproduced as under:

“2.2 The R & D centre is located at 32/1 Kalenaagrahara, 2.2 The R & D centre is located at 32/1 Kalenaagrahara, 2.2 The R & D centre is located at 32/1 Kalenaagrahara, Bannerghatta, Bangalore 560076 having state of art Bannerghatta, Bangalore 560076 having state of art Bannerghatta, Bangalore 560076 having state of art

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facilities and offers the following services. The letter dated facilities and offers the following services. The letter dated facilities and offers the following services. The letter dated 14.03.2005 was 14.03.2005 was issued by the Ministry of Science and issued by the Ministry of Science and Technology Technology - Department of Scientific and Industrial Department of Scientific and Industrial Research granting recognition of in Research granting recognition of in-house R&D unit. house R&D unit.

 Synthesis of Intermediates and APIs. Synthesis of Intermediates and APIs.  Process Development. Process Development.  Troubleshooting and optimization of process Troubleshooting and optimization of process Troubleshooting and optimization of process  State of th State of the art labs with supporting analytical e art labs with supporting analytical capabilities capabilities  Highly qualified PhD scientists and 38 M. Sc chemists Highly qualified PhD scientists and 38 M. Sc chemists Highly qualified PhD scientists and 38 M. Sc chemists with many years of experience are working. with many years of experience are working. with many years of experience are working.  Approved by DSIR Approved by DSIR

The Ministry of Science and Technology, Department of The Ministry of Science and Technology, Department of The Ministry of Science and Technology, Department of Scientific Industrial Research New De Scientific Industrial Research New Delhi granted the lhi granted the recognition of in recognition of in-house R'& D unit to the appellant company house R'& D unit to the appellant company vide letter dated 07.12.2007. The copy of the letter alongwith vide letter dated 07.12.2007. The copy of the letter alongwith vide letter dated 07.12.2007. The copy of the letter alongwith the terms and condition of recognition of R & D in the terms and condition of recognition of R & D in the terms and condition of recognition of R & D in-house unit is also furnished. The Ministry of Science and Technolo is also furnished. The Ministry of Science and Technolo is also furnished. The Ministry of Science and Technology has also extended the recognition upto 31.03.2015 vide letter has also extended the recognition upto 31.03.2015 vide letter has also extended the recognition upto 31.03.2015 vide letter dated 26.03.2010. dated 26.03.2010.

In view of the above recognitions it can be observed that the In view of the above recognitions it can be observed that the In view of the above recognitions it can be observed that the research and development activity carried out at Bangalore research and development activity carried out at Bangalore research and development activity carried out at Bangalore units is a standalone and independent unit. The units is a standalone and independent unit. The units is a standalone and independent unit. The terms and condition on the basis of which the approval granted by the condition on the basis of which the approval granted by the condition on the basis of which the approval granted by the Ministry of Science and Technology suggest that such Ministry of Science and Technology suggest that such Ministry of Science and Technology suggest that such conditions are peculiar to the independent units who carries conditions are peculiar to the independent units who carries conditions are peculiar to the independent units who carries out the actual research, process developed by the unit. out the actual research, process developed by the unit. out the actual research, process developed by the unit.

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Therefore, the a Therefore, the allocation of the research and development llocation of the research and development expenditure of each of the undertakings on the basis of the expenditure of each of the undertakings on the basis of the expenditure of each of the undertakings on the basis of the respect units turnover is not justifiable. respect units turnover is not justifiable.

Out of the 14 products which are developed in our R&D 3 to Out of the 14 products which are developed in our R&D 3 to Out of the 14 products which are developed in our R&D 3 to 4 have been commercialized at our USDA approved plan 4 have been commercialized at our USDA approved plan 4 have been commercialized at our USDA approved plant and other products are being supplied to small scale and other products are being supplied to small scale and other products are being supplied to small scale companies as sale. The increase in R&D in this center has companies as sale. The increase in R&D in this center has companies as sale. The increase in R&D in this center has helped in increase in exports, reduction in trouble shooting, helped in increase in exports, reduction in trouble shooting, helped in increase in exports, reduction in trouble shooting, scale up of process and product development. The details The details scale up of process and product development. of R&D programmers/proje of R&D programmers/projects were

1) Gabapentin cost reduction Gabapentin cost reduction 2) FDEB new process development FDEB new process development 3) Donepezil new process development Donepezil new process development 4) Triprolidine cost reduction Triprolidine cost reduction 5) Ondensetron cost reduction Ondensetron cost reduction 6) Quetiapine new process development Quetiapine new process development The The The R&D R&D R&D center center center has has has developed developed developed following following following new new new products/process during products/process during the last three years

1) FDEB 2) Decoquinate Decoquinate 3) Bupropion Bupropion 4) Venlafaxine Venlafaxine 5) Donepezil Donepezil 6) Quetiapine Quetiapine 7) HBP 167 HBP 167 8) Indole derivative Indole derivative 9) Levetiracetam Levetiracetam

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13.8 On perusal of the above submission of the assessee On perusal of the above submission of the assessee On perusal of the above submission of the assessee reproduce in para 13.6 above, we find that the Panoli EOU unit is engaged in we find that the Panoli EOU unit is engaged in we find that the Panoli EOU unit is engaged in manufacturing of pharma intermediate namely “ pharma intermediate namely “ pharma intermediate namely “Gabapentine Lactum”. On the other hand, the R&D tum”. On the other hand, the R&D projects taken by the R & D projects taken by the R & D unit reproduced above in para 13.7 reproduced above in para 13.7 includes project on includes project on “Gabapentin cost reduction”. Whe When we examine, both these factual information n we examine, both these factual information provided by the assessee we find that the R&D unit is carrying out provided by the assessee we find that the R&D unit is carrying out provided by the assessee we find that the R&D unit is carrying out the project of reduction in cost of Gabapentine eduction in cost of Gabapentine, which is one of the , which is one of the product manufactured by the EOU unit. In such circumstances, the product manufactured by the EOU unit. In such circumstances product manufactured by the EOU unit. In such circumstances contention of the assessee that R&D unit is not engaged in research contention of the assessee that R&D unit is not engage contention of the assessee that R&D unit is not engage and development of EOU EOU units is a false submission and need to be units is a false submission and need to be thoughly examined by way of issuing commission by the Assessing by way of issuing commission by the Assessing by way of issuing commission by the Assessing Officer to a Scientific Officer Scientific Officer dealing with Pharma p dealing with Pharma product. In view of above, we feel it appropriate to restore of above, we feel it appropriate to restore this issue of allocation of this issue of allocation of R&D expenses amongst various unit to the file of the expenses amongst various unit to the file of the expenses amongst various unit to the file of the Ld. Assessing Officer for deciding a Officer for deciding afresh. It is needless to mention that the fresh. It is needless to mention that the assessee shall be afforded adequate o be afforded adequate opportunity of being heard. pportunity of being heard.

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16.1 However, the ld. CIT(A) However, the ld. CIT(A) deleted the said addition of Rs. he said addition of Rs.9,816/-. Aggrieved with this, the Aggrieved with this, the Revenue is in appeal before us. is in appeal before us.

Hikal Ltd. 41 ITA Nos. 2320/M/2016 & 803/M/2017 ITA Nos. 2320/M/2016 & 803/M/2017

 CIT v. Hewlett Packard Global Soft CIT v. Hewlett Packard Global Soft Ltd. [2018] 403 ITR 453 (Kar.) Ltd. [2018] 403 ITR 453 (Kar.)  Odisha Power Generation Corporation Ltd. v. ACIT [2022] 215 dtrr Odisha Power Generation Corporation Ltd. v. ACIT [2022] 215 dtrr Odisha Power Generation Corporation Ltd. v. ACIT [2022] 215 dtrr (Ori) 73 18. We have heard the rival contentions and perused the We have heard the rival contentions and perused the We have heard the rival contentions and perused the relevant material on record. It is the contention of the ld. Counsel of the material on record. It is the contention of the ld. Counsel of the material on record. It is the contention of the ld. Counsel of the assessee that this issue of interest income is to be included in issue of interest income is to be included in issue of interest income is to be included in computing the income of EOU unit and deduction be granted u/s. computing the income of EOU unit and deduction be granted u/s. computing the income of EOU unit and deduction be granted u/s. 10B of the Act accordingly, 10B of the Act accordingly, as the issue is covered by the decision of covered by the decision of the assessee’s own case for various years as discussed above. the assessee’s own case for various years as discussed above. the assessee’s own case for various years as discussed above.

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However, from the available records, we are unable to hold as to the available records, we are unable to hold as to the available records, we are unable to hold as to how the said interest income is earned out of fixed deposits kept as how the said interest income is earned out of fixed deposits kept as how the said interest income is earned out of fixed deposits kept as a margin for letter of credits or bank guarantees. a margin for letter of credits or bank guarantees. During the course During the course of the hearing, the Ld. counsel Ld. counsel of the assessee was asked to provi of the assessee was asked to provide correlation of interest received with each deposit and to show that correlation of interest received with each deposit and to show that correlation of interest received with each deposit and to show that the deposit was placed for bank guarantee the deposit was placed for bank guarantee for the purpose of the for the purpose of the business. However, it was submitted that matter being more than . However, it was submitted that matter being more than . However, it was submitted that matter being more than 10 years old, the relevant records were not available immediately for 10 years old, the relevant records were not available im 10 years old, the relevant records were not available im such correlation. In the circumstances, such correlation. In the circumstances, we feel it appropriate to e feel it appropriate to restore this issue to the file of Assessing Officer to verify the actual restore this issue to the file of Assessing Officer to verify the actual restore this issue to the file of Assessing Officer to verify the actual nature of the transaction and follow the guiding principles of the nature of the transaction and follow the guiding principles of the nature of the transaction and follow the guiding principles of the orders of Hon’ble Mumbai ITAT in ass orders of Hon’ble Mumbai ITAT in assessee’s own case essee’s own case, accordingly. Hence, this ground of appeal of the revenue is allowed for statistical Hence, this ground of appeal of the revenue is allowed for statistical Hence, this ground of appeal of the revenue is allowed for statistical purposes.

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(i) statements of Shri Rajendra S. Bhimrajka, Shri Subhash statements of Shri Rajendra S. Bhimrajka, Shri Subhash statements of Shri Rajendra S. Bhimrajka, Shri Subhash SamwarmalBhimrajka, SamwarmalBhimrajka, Shri Shri Mukesh Mukesh S. S. Bhimrajka Bhimrajka recorded on oath on 16.07.2011 along with affidavit recorded on oath on 16.07.2011 along with affidavit recorded on oath on 16.07.2011 along with affidavit dated 18.07.2011 of Shri Rajendra S. Bhimrajka and dated 18.07.2011 of Shri Rajendra S. Bhimrajka and dated 18.07.2011 of Shri Rajendra S. Bhimrajka and affidavit dated 16.07.2011 of Shri Nitin L. Kamble, who affidavit dated 16.07.2011 of Shri Nitin L. Kamble affidavit dated 16.07.2011 of Shri Nitin L. Kamble were managing the affairs of M/s. Jupiter Multitrade Pvt. were managing the affairs of M/s. Jupiter Multitrade Pvt. were managing the affairs of M/s. Jupiter Multitrade Pvt. Ltd. (ii) Statement Statement of of Shri Jalpesh Haritkumar Haritkumar Thakkar, Thakkar, proprietor of M/s. Pawan Enterprises and Manager & son proprietor of M/s. Pawan Enterprises and Manager & son proprietor of M/s. Pawan Enterprises and Manager & son of Shri Haritkumar of Shri Haritkumar Jayantilal Thakkar, who is proprietor Jayantilal Thakkar, who is proprietor of M/s. Varah Laxmi Sales Agency recorded on oath on of M/s. Varah Laxmi Sales Agency recorded on oath on of M/s. Varah Laxmi Sales Agency recorded on oath on 08.12.2010, 08.12.2010, 08.12.2010, and and and statement statement statement of of of Shri Shri Shri PragneshGaurishankar Meh PragneshGaurishankar Mehta, who was managing affairs ta, who was managing affairs of M/s. Varah Laxmi Sales Agency recorded on oath on of M/s. Varah Laxmi Sales Agency recorded on oath on of M/s. Varah Laxmi Sales Agency recorded on oath on 06.01.2011. 06.01.2011.

20.1 In the aforesaid statements, the persons whose statements In the aforesaid statements, the persons whose statements In the aforesaid statements, the persons whose statements were recorded have categorically admitted that they have indulged were recorded have categorically admitted that they have indulged were recorded have categorically admitted that they have indulged in the activity of issuing bogus in the activity of issuing bogus bills against certain percentage of bills against certain percentage of commission besides other confessions related to issue of bogus commission besides other confessions related to issue of bogus commission besides other confessions related to issue of bogus bills. In the assessment completed, the Assessing Officer found that bills. In the assessment completed, the Assessing Officer found that bills. In the assessment completed, the Assessing Officer found that adequate evidences in support of the claim of alleged fixed assets adequate evidences in support of the claim of alleged fixed assets adequate evidences in support of the claim of alleged fixed assets have not been furnish have not been furnished by the assessee and even the assessee and even the assessee failed to produce any of the suppliers of th failed to produce any of the suppliers of those fixed assets. se fixed assets. Accordingly, he disallowed the depreciation of Rs. 16,34,030/- on Accordingly, he disallowed the depreciation of Rs. 16,34,030/ Accordingly, he disallowed the depreciation of Rs. 16,34,030/ such fixed assets. Aggrieved the said disallowance, the assessee such fixed assets. Aggrieved the said disallowance, the assessee such fixed assets. Aggrieved the said disallowance, the assessee

Hikal Ltd. 44 ITA Nos. 2320/M/2016 & 803/M/2017 ITA Nos. 2320/M/2016 & 803/M/2017

preferred appeal befor preferred appeal before the ld. CIT(A), who gave relief to the e the ld. CIT(A), who gave relief to the assessee. Aggrieved by this, the revenue is in appeal before us. assessee. Aggrieved by this, the revenue is in appeal before us. assessee. Aggrieved by this, the revenue is in appeal before us.

 Details of purchase of fixed assets Details of purchase of fixed assets  Copies of receipt of goods Copies of receipt of goods  Copy of bank statements Copy of bank statements  Purchases being not made through any broker Purchases being not made through any broker  Goods purchased are not sold to any party. Goods purchased are not sold to any party.

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22.1 The ld. Counsel The ld. Counsel submitted that the Assessing Officer having submitted that the Assessing Officer having accepted the purchases from M/s. Jupiter Multitrade Pvt. Ltd. for accepted the purchases from M/s. Jupiter Multitrade Pvt. Ltd. for accepted the purchases from M/s. Jupiter Multitrade Pvt. Ltd. for A.Y. 2009-10, the said order being final, no disallowance could be 10, the said order being final, no disallowance could be 10, the said order being final, no disallowance could be made with respect to assets purchased in the earlier year and on made with respect to assets purchased in the earlier year and on made with respect to assets purchased in the earlier year and on which deprecation was claimed during the year. As regards the ion was claimed during the year. As regards the ion was claimed during the year. As regards the purchase of fixed assets during the year, the assessee drew purchase of fixed assets during the year, the assessee drew purchase of fixed assets during the year, the assessee drew attention to the various documentary evidences filed before the attention to the various documentary evidences filed before the attention to the various documentary evidences filed before the Assessing Officer and that he has not disproved any evidence that Assessing Officer and that he has not disproved any evidence that Assessing Officer and that he has not disproved any evidence that Good Receipt notes Good Receipt notes prepared at the factory at Mahad was prepared at the factory at Mahad was fabricated. The Assessing Officer has merely acted on his own The Assessing Officer has merely acted on his own The Assessing Officer has merely acted on his own suspicion and assumptions. In this regard, reliance is placed on the suspicion and assumptions. In this regard, reliance is placed on the suspicion and assumptions. In this regard, reliance is placed on the decision of Hon’ble Bombay High Court in the case of PCIT v. decision of Hon’ble Bombay High Court in the case of decision of Hon’ble Bombay High Court in the case of Rishabdev Tachnocable Ltd. Tachnocable Ltd. (2020) 424 ITR 338 (Bom) (2020) 424 ITR 338 (Bom). Assessing Officer also also sought to rely on statement of third parties sought to rely on statement of third parties but no opportunity to cross examine them was given to the assessee but no opportunity to cross examine them was given to the assessee but no opportunity to cross examine them was given to the assessee which is against the principles of natural justice in view of which is against the principles of natural justice in view of which is against the principles of natural justice in view of Andaman Timber Industries v. CCE Andaman Timber Industries v. CCE (Civil Appeal No. 4228 of (Civil Appeal No. 4228 of 2006) followed by the Hon’ble Bombay High Court in followed by the Hon’ble Bombay High Court in H.R.Mehta v. followed by the Hon’ble Bombay High Court in ACIT (2016) 387 ITR 561 (Bom.) ACIT (2016) 387 ITR 561 (Bom.)

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8.7 In view of the above discussion, the claim of depreciation 8.7 In view of the above discussion, the claim of depreciation 8.7 In view of the above discussion, the claim of depreciation @ 15% (including additional depreciation @ 20%) for les @ 15% (including additional depreciation @ 20%) for les @ 15% (including additional depreciation @ 20%) for less than 180 days to the tune of ₹5,58,481/- (₹299352 in respect of 180 days to the tune of 299352 in respect of Jupiter Multitrade Pvt. Ltd + ₹2,59,130 in respect of Varah Jupiter Multitrade Pvt. Ltd + 2,59,130 in respect of Varah Laxmi Sales Agency) in respect of non Laxmi Sales Agency) in respect of non-genuine purchases is genuine purchases is held to be bogus and is considered merely accommodation held to be bogus and is considered merely accommodation held to be bogus and is considered merely accommodation entries with a view to evade the tax. Also, the entries with a view to evade the tax. Also, the assessee has assessee has purchased Plant & Machinery from Jupiter Multitrade Pvt. purchased Plant & Machinery from Jupiter Multitrade Pvt. purchased Plant & Machinery from Jupiter Multitrade Pvt. Ltd. in F.Y.2008 Ltd. in F.Y.2008-09 in respect of which depreciation of 09 in respect of which depreciation of ₹10,75,549/ 10,75,549/- @ 15% has also been claimed during the year @ 15% has also been claimed during the year under consideration on opening W.D.V. of 3 71,70,328/ under consideration on opening W.D.V. of 3 71,70,328/ under consideration on opening W.D.V. of 3 71,70,328/- thereof. The same thereof. The same is also required to be disallowed as is also required to be disallowed as incurred in respect of non incurred in respect of non-genuine purchases. It leads to genuine purchases. It leads to disallowance of ₹16,34,030/- (5,58,481 + 10,75,549) on disallowance of (5,58,481 + 10,75,549) on account account account of of of bogus bogus bogus purchases/expenditure. purchases/expenditure. purchases/expenditure. Penalty Penalty Penalty proceedings u/s.271(1)(c) of the proceedings u/s.271(1)(c) of the IT Act are initated separ IT Act are initated separately for furnishing inaccurate particulars of income, thereby for furnishing inaccurate particulars of income, thereby for furnishing inaccurate particulars of income, thereby concealment of income chargeable to tax. concealment of income chargeable to tax.

(Addition: ₹16,34,030/ 16,34,030/-)

23.1 Thus, we find that the disallowance consist of two amounts. we find that the disallowance consist of two amounts. we find that the disallowance consist of two amounts. The first amount of The first amount of ₹5,58,481/- which is the depreciation in the depreciation in relation to purchase in the year under consideration. The second relation to purchase in the year under consideration. The second relation to purchase in the year under consideration. The second amount of depreciation amounting to amount of depreciation amounting to ₹10,75,549/ 549/-relates to purchase of plant and machinery in financial year 2008-09 i.e. purchase of plant and machinery in financial year 2008 purchase of plant and machinery in financial year 2008 assessment year 2009 assessment year 2009-10.

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23.2 We find that reven We find that revenue has not brought on record that purchase ue has not brought on record that purchase corresponding to the corresponding to the depreciation disallowed of Rs.10,75, depreciation disallowed of Rs.10,75,549/-, have been held as nongenuine in assessment year 2009-10 and have been held as nongenuine in assessment year 2009 have been held as nongenuine in assessment year 2009 unless the purchase of said plant and machinery is not held as unless the purchase of said plant and machinery is not held as unless the purchase of said plant and machinery is not held as non-genuine in assessment genuine in assessment year 2009-10, depreciation on the said 10, depreciation on the said amount cannot be disallowed on the WDV of said plant and amount cannot be disallowed on the WDV of said plant and amount cannot be disallowed on the WDV of said plant and machinery in the year under consideration. The deletion of machinery in the year under consideration. The deletion of machinery in the year under consideration. The deletion of disallowance to the extent of disallowance to the extent of ₹10,75,549/- is accordingly, accordingly, upheld. Regarding the amount of Regarding the amount of ₹5,58,481/-, we find that the Assessing , we find that the Assessing the assessee to file confirmation from those parties or Officer asked the assessee to file confirmation from those the assessee to file confirmation from those produce them for verification of the fact produce them for verification of the fact of supplying those goods to of supplying those goods to the assessee, which have been , which have been claimed by the assessee a claimed by the assessee as installed as plant and machinery, however neither the assessee provided as plant and machinery, however neither the assessee provided as plant and machinery, however neither the assessee provided there current addresses not produce them before the Assessing there current addresses not produce them before the Assessing there current addresses not produce them before the Assessing Officer for verification. In such circumstances the claim of the Officer for verification. In such circumstances the claim of the Officer for verification. In such circumstances the claim of the assessee for producing assessee for producing them for cross-examination is no examination is not justified because it is the assessee because it is the assessee who claimed the depreciation on the depreciation on the goods and therefore it is primary goods and therefore it is primary onus of the assessee to of the assessee to substantiate the expenses of depreciation claimed engine failure to the expenses of depreciation claimed engine failure to the expenses of depreciation claimed engine failure to do so, he cannot shift its shift its onus to the Assessing Office to the Assessing Officer. In the facts and circumstances of the case nces of the case, we set aside the finding of the Ld. , we set aside the finding of the Ld. CIT(A) on the issue in dispute and uphold the disallowance made by CIT(A) on the issue in dispute and uphold the disallowance made by CIT(A) on the issue in dispute and uphold the disallowance made by the Assessing Officer of the depreciation to the extent of the Assessing Officer of the depreciation to the extent of the Assessing Officer of the depreciation to the extent of ₹5,58,481/-. The ground of the . The ground of the Revenue is accor accordingly allowed partly.

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Hikal Ltd. 49 ITA Nos. 2320/M/2016 & 803/M/2017 ITA Nos. 2320/M/2016 & 803/M/2017

the ld. CIT(A) who deleted the said disallowance. Aggrieved by the the ld. CIT(A) who deleted the said disallowance. Aggrieved by the the ld. CIT(A) who deleted the said disallowance. Aggrieved by the same, revenue is in appeal before us. same, revenue is in appeal before us.

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holders would redeem the bonds. Hence, premium became certain holders would redeem the bonds. Hence, premium became certain holders would redeem the bonds. Hence, premium became certain during the year under consideration. He relied on the decision of during the year under consideration. He relied on the decision of during the year under consideration. He relied on the decision of Tungabhadra Industries Ltd. 76 Taxman 185 (Kolkata) wherein Tungabhadra Industries Ltd. 76 Taxman 185 (Kolkata) Tungabhadra Industries Ltd. 76 Taxman 185 (Kolkata) it is held that premium on redemption of debentures is allowable it is held that premium on redemption of debentures is allowable it is held that premium on redemption of debentures is allowable deduction. He further argued that merely because assessee deduction. He further argued that merely because assessee deduction. He further argued that merely because assessee adjusted premium out of Securities Premium account in its books adjusted premium out of Securities Premium account in its books adjusted premium out of Securities Premium account in its books would not mean that the same is not allowable as a deduction for would not mean that the same is not allowable as a deduction for would not mean that the same is not allowable as a deduction for which he relied on Kedarnath Jute Mgs. Co. Ltd. v. CIT (1971) 82 Kedarnath Jute Mgs. Co. Ltd. v. CIT (1971) 82 Kedarnath Jute Mgs. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and United Commercial Bank v. CIT 240 ITR 335 United Commercial Bank v. CIT 240 ITR 335 United Commercial Bank v. CIT 240 ITR 335 (SC). He also drew our attention to the decision of the Hon’ble . He also drew our attention to the decision of the Hon’ble . He also drew our attention to the decision of the Hon’ble Supreme Court in the case of Metal Box Company of India Ltd. v. Metal Box Company of India Ltd. v. Supreme Court in the case of Their Workmen (1969) 73 ITR 53 (SC) orkmen (1969) 73 ITR 53 (SC) have held that have held that “Contingent liabilities discounted and valued as necessary, can be taken into liabilities discounted and valued as necessary, can be taken into liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be account as trading expenses if they are sufficiently certain to be account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated capable of valuation and if profits cannot be properly estimated capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a thout taking them into consideration. An estimated liability under a thout taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is scheme of gratuity, if properly ascertainable and its scheme of gratuity, if properly ascertainable and its discounted, is deductible from the gross receipts while preparing the discounted, is deductible from the gross receipts while preparing the discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in profit and loss account. This is recognised in trade circles and there trade circles and there is nothing int eh Bonus Act which prohibits such a practice. Such a is nothing int eh Bonus Act which prohibits such a practice. Such a is nothing int eh Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be provision provides for a known liability of which the amount can be provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed determined with substantial accuracy. It cannot, therefore, be termed determined with substantial accuracy. It cannot, therefore, be termed a “reserve”. Therefore, t a “reserve”. Therefore, the estimated liability for the year on account he estimated liability for the year on account of scheme of gratuity should be allowed to be deducted from the of scheme of gratuity should be allowed to be deducted from the of scheme of gratuity should be allowed to be deducted from the

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gross profits. The allowance is not restricted to the actual payment of gross profits. The allowance is not restricted to the actual payment of gross profits. The allowance is not restricted to the actual payment of gratuity during the year.” gratuity during the year.”

27.1 He further stated that the second proviso He further stated that the second proviso to section 40(a)(ia) to section 40(a)(ia) provides that if the assessee is not deemed to be an assessee in provides that if the assessee is not deemed to be an assessee in provides that if the assessee is not deemed to be an assessee in default, then, the assessee shall be deemed to have deducted and default, then, the assessee shall be deemed to have deducted and default, then, the assessee shall be deemed to have deducted and paid the tax on such sum on the date of furnishing the return of paid the tax on such sum on the date of furnishing the return of paid the tax on such sum on the date of furnishing the return of income and would be eligible for deduct income and would be eligible for deduction. Reliance in this regard Reliance in this regard is also placed on the decision of Hon’ble Bombay High Court in the is also placed on the decision of Hon’ble Bombay High Court in the is also placed on the decision of Hon’ble Bombay High Court in the case of PCIT v. Perfect Circle India Pvt. Ltd. (2019) 13 ITR -OL 78 case of PCIT v. Perfect Circle India Pvt. Ltd. (2019) 13 ITR case of PCIT v. Perfect Circle India Pvt. Ltd. (2019) 13 ITR (Bom). The ld. Counsel submits that as the assessee has not been The ld. Counsel submits that as the assessee has not been The ld. Counsel submits that as the assessee has not been deemed to be in default, de deemed to be in default, deduction of premium is allowable and duction of premium is allowable and merely because TDS was deducted and paid in subsequent year, merely because TDS was deducted and paid in subsequent year merely because TDS was deducted and paid in subsequent year would not disentitle the assessee of deduction of premium. would not disentitle the assessee of deduction of premium. would not disentitle the assessee of deduction of premium.

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No. 8614/Mum/2011 No. 8614/Mum/2011 for assessment year 2007-08, wherein the 08, wherein the Tribunal observed as under: observed as under:

“36. The assessee claimed 1/5th of FCCB premium 36. The assessee claimed 1/5th of FCCB premium 36. The assessee claimed 1/5th of FCCB premium amounting to ₹12,80,23,824/- and 1/5th of the FCCB issued amounting to and 1/5th of the FCCB issued expenses amounting to ₹98,97,774/- as deduction. The AO expenses amounting to as deduction. The AO noticed from the annual report of the assessee that it has noticed from the annual report of the assessee that it has noticed from the annual report of the assessee that it has adjusted an amount of ₹5,04,08,369/- under the head adjusted an amount of under the head expenses related to issue of FCCB in the balance sheet expenses related to issue of FCCB in the balance sheet expenses related to issue of FCCB in the balance sheet against securities premium account in AY 2006 against securities premium account in AY 2006-07. The AO 07. The AO required the assessee to explain how it is allowable as required the assessee to explain how it is allowable as required the assessee to explain how it is allowable as revenue revenue revenue expenditure. expenditure. expenditure. The The The AO AO AO after after after considering considering considering the the the explanation of the ass explanation of the assessee noted that the FCCB issued is essee noted that the FCCB issued is capital expenditure in nature and cannot be allowed under capital expenditure in nature and cannot be allowed under capital expenditure in nature and cannot be allowed under section 37 of the Act. According to AO, the premium of section 37 of the Act. According to AO, the premium of section 37 of the Act. According to AO, the premium of redemption is neither due nor incurred during the year and it redemption is neither due nor incurred during the year and it redemption is neither due nor incurred during the year and it is just a provision for liability arising in is just a provision for liability arising in future. Accordingly, future. Accordingly, the AO disallowed the claim of deduction and the assessee the AO disallowed the claim of deduction and the assessee the AO disallowed the claim of deduction and the assessee carried the matter to DRP, who also confirmed by holding carried the matter to DRP, who also confirmed by holding carried the matter to DRP, who also confirmed by holding that the FCCB premium of redemption is just a provision for that the FCCB premium of redemption is just a provision for that the FCCB premium of redemption is just a provision for liability arising in future and therefore agreed that the AO liability arising in future and therefore agreed that the AO liability arising in future and therefore agreed that the AO i.e. premium of redemption cannot be allowed as deduction premium of redemption cannot be allowed as deduction premium of redemption cannot be allowed as deduction because the expenditure is neither fructified or ascertained. because the expenditure is neither fructified or ascertained. because the expenditure is neither fructified or ascertained. Aggrieved, now assessee is in appeal before Tribunal. Aggrieved, now assessee is in appeal before Tribunal. Aggrieved, now assessee is in appeal before Tribunal.

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an interest rate of 0.5% p.a. and are redeemable o an interest rate of 0.5% p.a. and are redeemable o an interest rate of 0.5% p.a. and are redeemable on April 19, 2010 at 136.78 percent of the Principal amount. Further, 2010 at 136.78 percent of the Principal amount. Further, 2010 at 136.78 percent of the Principal amount. Further, these bonds are convertible into shares by Bond holders on these bonds are convertible into shares by Bond holders on these bonds are convertible into shares by Bond holders on or after May 18, 2005. The total issue expenses relating to or after May 18, 2005. The total issue expenses relating to or after May 18, 2005. The total issue expenses relating to the issue of FCCB is USD $ 10,77,926 claimed in equal the issue of FCCB is USD $ 10,77,926 claimed in equal the issue of FCCB is USD $ 10,77,926 claimed in equal installments o installments over a period of 5 years. Further, we find that ver a period of 5 years. Further, we find that these Bonds may be redeemed only in full, at any time on or these Bonds may be redeemed only in full, at any time on or these Bonds may be redeemed only in full, at any time on or after 18th April 2008 but before April 19th 2010 with a after 18th April 2008 but before April 19th 2010 with a after 18th April 2008 but before April 19th 2010 with a redemption premium of 68% p.a. As on 31 redemption premium of 68% p.a. As on 31′ December 2005 ′ December 2005 the additional amount (including excha the additional amount (including exchange fluctuation) which nge fluctuation) which is payable on redemption was provided for under Debenture is payable on redemption was provided for under Debenture is payable on redemption was provided for under Debenture Redemption Reserve with a corresponding adjustment to Redemption Reserve with a corresponding adjustment to Redemption Reserve with a corresponding adjustment to Securities Premium. Further, none of the bonds were offered Securities Premium. Further, none of the bonds were offered Securities Premium. Further, none of the bonds were offered for conversion as on 31st March 2007. Further, the FCCB for conversion as on 31st March 2007. Further, the FCCB for conversion as on 31st March 2007. Further, the FCCB issue expenses have been allowed as a deduction in the expenses have been allowed as a deduction in the expenses have been allowed as a deduction in the Company’s own case for the AY 2006 Company’s own case for the AY 2006-07. Based on GAAP 07. Based on GAAP principles, the premium needs to be accrued; consequently principles, the premium needs to be accrued; consequently principles, the premium needs to be accrued; consequently the liability has been accrued in the books in the year of the liability has been accrued in the books in the year of the liability has been accrued in the books in the year of receipt of FCCB funds. Premium on re receipt of FCCB funds. Premium on redemption amounting to demption amounting to USD 16 Million has been accrued in the financials for the USD 16 Million has been accrued in the financials for the USD 16 Million has been accrued in the financials for the year ending 31 December 2005 based on the office circular. year ending 31 December 2005 based on the office circular. year ending 31 December 2005 based on the office circular. The liability is crystallized in the year of issue; however, it is The liability is crystallized in the year of issue; however, it is The liability is crystallized in the year of issue; however, it is discharged in the year of redemption. discharged in the year of redemption.

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Company for the purposes of its business. Hence the liability Company for the purposes of its business. Hence the liability Company for the purposes of its business. Hence the liability to pay the additional amount would therefore be revenue to pay the additional amount would therefore be revenue to pay the additional amount would therefore be revenue expenditure. The additional amount is nothing but an interest expenditure. The additional amount is nothing but an interest expenditure. The additional amount is nothing but an interest computed at 6. computed at 6.8% p.a. We find that the assessee also relied 8% p.a. We find that the assessee also relied on the decision of Hon’ble Bombay High Court in the case of on the decision of Hon’ble Bombay High Court in the case of on the decision of Hon’ble Bombay High Court in the case of CIT vs. SM Holding and Finance Pvt. Ltd. 2003 264 ITR 370 CIT vs. SM Holding and Finance Pvt. Ltd. 2003 264 ITR 370 CIT vs. SM Holding and Finance Pvt. Ltd. 2003 264 ITR 370 Bombay. Before the Hon’ble Bombay High Court in the Bombay. Before the Hon’ble Bombay High Court in the Bombay. Before the Hon’ble Bombay High Court in the question raised was regarding the claim question raised was regarding the claim of 1/5th of premium of 1/5th of premium of redeemable debentures and the question referred before of redeemable debentures and the question referred before of redeemable debentures and the question referred before the Hon’ble High Court was as under: the Hon’ble High Court was as under: – “Whether, on the “Whether, on the facts and in the circumstances of the case and in law, the facts and in the circumstances of the case and in law, the facts and in the circumstances of the case and in law, the Hon’ble Tribunal has erred in deleting the addition of Rs. Hon’ble Tribunal has erred in deleting the addition of Rs. Hon’ble Tribunal has erred in deleting the addition of Rs. 54,75,000 made on account of 1/5th (1/10th) of premium on 5,000 made on account of 1/5th (1/10th) of premium on 5,000 made on account of 1/5th (1/10th) of premium on the redeemable debentures without considering the fact that the redeemable debentures without considering the fact that the redeemable debentures without considering the fact that no liability had accrued during the year under appeal and it no liability had accrued during the year under appeal and it no liability had accrued during the year under appeal and it was a contingent liability which was payable only after the was a contingent liability which was payable only after the was a contingent liability which was payable only after the expiry of 10 years an expiry of 10 years and directed the Assessing Officer to d directed the Assessing Officer to follow the decision of Supreme Court in the case of Madras follow the decision of Supreme Court in the case of Madras follow the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802(SC) where facts of the case are different from those of 802(SC) where facts of the case are different from those of 802(SC) where facts of the case are different from those of Supreme Court’s decision?” And Hon’ble H Supreme Court’s decision?” And Hon’ble High Court has held igh Court has held in Para 5 as under: in Para 5 as under:-

“5. We do not find any merit in the above arguments “5. We do not find any merit in the above arguments “5. We do not find any merit in the above arguments advanced on behalf of the Department. Firstly, we have gone advanced on behalf of the Department. Firstly, we have gone advanced on behalf of the Department. Firstly, we have gone through the records and proceedings (R & P). In the entire R through the records and proceedings (R & P). In the entire R through the records and proceedings (R & P). In the entire R & P, there is nothing to indicate alterati & P, there is nothing to indicate alterations of terms and ons of terms and conditions during the subsistence of the issued convertible conditions during the subsistence of the issued convertible conditions during the subsistence of the issued convertible debentures during the assessment year in question. debentures during the assessment year in question. debentures during the assessment year in question. Secondly, in the annual reports of the company and also in Secondly, in the annual reports of the company and also in Secondly, in the annual reports of the company and also in

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the audit reports given by the auditors, it has been certified the audit reports given by the auditors, it has been certified the audit reports given by the auditors, it has been certified that zero ero ero interest interest interest unsecured unsecured unsecured redeemable redeemable redeemable convertible convertible convertible debentures of Rs. 100 each redeemable after 10 years at a debentures of Rs. 100 each redeemable after 10 years at a debentures of Rs. 100 each redeemable after 10 years at a premium of 100 per cent had been issued during the premium of 100 per cent had been issued during the premium of 100 per cent had been issued during the assessment year in question. There is no reason for us to assessment year in question. There is no reason for us to assessment year in question. There is no reason for us to discard this note of the auditor. Even in t discard this note of the auditor. Even in the assessment he assessment order, no reasons have been given by the Assessing Officer order, no reasons have been given by the Assessing Officer order, no reasons have been given by the Assessing Officer for discarding this note of the auditors. Lastly, we may point for discarding this note of the auditors. Lastly, we may point for discarding this note of the auditors. Lastly, we may point out that even assuming for the sake of argument that the out that even assuming for the sake of argument that the out that even assuming for the sake of argument that the borrower had a discretion to change the terms of the issued borrower had a discretion to change the terms of the issued borrower had a discretion to change the terms of the issued debentures, there is nothing in the record to show that during entures, there is nothing in the record to show that during entures, there is nothing in the record to show that during the assessment year in question the borrower had exercised the assessment year in question the borrower had exercised the assessment year in question the borrower had exercised such a discretion. In the absence of factual matrix, we have such a discretion. In the absence of factual matrix, we have such a discretion. In the absence of factual matrix, we have no option but to confirm the judgment of the Tribunal. In our no option but to confirm the judgment of the Tribunal. In our no option but to confirm the judgment of the Tribunal. In our view, the judg view, the judgment of this Court in the case of Taparia Tools ment of this Court in the case of Taparia Tools Ltd. (supra) is applicable to this case. In our view, the Ltd. (supra) is applicable to this case. In our view, the Ltd. (supra) is applicable to this case. In our view, the judgment of the Supreme Court in the case of Madras judgment of the Supreme Court in the case of Madras judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) is also applicable. Industrial Investment Corpn. Ltd. (supra) is also applicable. Industrial Investment Corpn. Ltd. (supra) is also applicable.

28.1 Being, issue in dispute before us identical to the issue decided Being, issue in dispute before us identical to the issue decided Being, issue in dispute before us identical to the issue decided by the Tribunal (supra) (supra) above, respectfully following the finding of lly following the finding of the Tribunal, we uphold the finding of the Ld. CIT(A) on the issue in , we uphold the finding of the Ld. CIT(A) on the issue in , we uphold the finding of the Ld. CIT(A) on the issue in dispute. The ground raise dispute. The ground raised by the Revenue is accordingly dismissed accordingly dismissed

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Yokogawa India Limited (2017) 391 ITR 274 (SC) in support of Yokogawa India Limited (2017) 391 ITR 274 (SC) Yokogawa India Limited (2017) 391 ITR 274 (SC) his contentions. He accordingly prayed that following the above his contentions. He accordingly prayed that following the above his contentions. He accordingly prayed that following the above decisions, the Assessing Officer decisions, the Assessing Officer might be directed to allow be directed to allow deduction u/s. 10B of the Act without setting off the losses of Non deduction u/s. 10B of the Act without setting off the losses of Non deduction u/s. 10B of the Act without setting off the losses of Non EOU unit and that direction be given to him to allow the carry OU unit and that direction be given to him to allow the carry OU unit and that direction be given to him to allow the carry forward of losses of Non EOU unit as per provisions of law. forward of losses of Non EOU unit as per provisions of law. forward of losses of Non EOU unit as per provisions of law.

“5.6.3 The Hon'ble Income Tax Tribunal vide order dated 5.6.3 The Hon'ble Income Tax Tribunal vide order dated 5.6.3 The Hon'ble Income Tax Tribunal vide order dated 10/07/2010 permitted and held that the business losses of the 10/07/2010 permitted and held that the business losses of the 10/07/2010 permitted and held that the business losses of the non eligible unit, whose income is not eligible for exemption non eligible unit, whose income is not eligible for exemption non eligible unit, whose income is not eligible for exemption under section 10B of the Income Tax Act cannot be set off under section 10B of the Income Tax Act cannot be set off under section 10B of the Income Tax Act cannot be set off against the profit of the undertaking eligible for deduction against the profit of the undertaking eligible for deduction against the profit of the undertaking eligible for deduction under section under section 10B for the purpose of determining the deduction purpose of determining the deduction under section 10B of the Act. Therefore, denying of the carry under section 10B of the Act. Therefore, denying of the carry under section 10B of the Act. Therefore, denying of the carry forward of losses of Non forward of losses of Non-EOU unit is not justifiable.” EOU unit is not justifiable.”

33.1 The relevant finding of the nding of the Coordinate Bench of the of the Tribunal in ITA No. 5386/MU M/20 No. 5386/MU M/2012 for assessment year 2007 12 for assessment year 2007-08 is reproduced as under: reproduced as under:

“24. We have considered the rival submissions and perused the 24. We have considered the rival submissions and perused the 24. We have considered the rival submissions and perused the material available on record. We find that the Co material available on record. We find that the Co material available on record. We find that the Co-ordinate

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Bench of Tribunal in assessee’s own case in M/s Hikal Ltd. v/s Bench of Tribunal in assessee’s own case in M/s Hikal Ltd. v/s Bench of Tribunal in assessee’s own case in M/s Hikal Ltd. v/s ACIT, in ITAs No. ACIT, in ITAs No. 1039 & 1040/ Mum./2007, vide order dated 1039 & 1040/ Mum./2007, vide order dated 16/07/2010, for assessment year 2003 16/07/2010, for assessment year 2003-04 and 2004 and 2004-05, while deciding similar issue in favour of assessee, observed as deciding similar issue in favour of assessee, observed as deciding similar issue in favour of assessee, observed as under:

“34. This issue is covered by the decision of the Madras “34. This issue is covered by the decision of the Madras “34. This issue is covered by the decision of the Madras Special Bench in the case of Scientific Atlanta India Special Bench in the case of Scientific Atlanta India Special Bench in the case of Scientific Atlanta India Technology Pvt. Ltd. v/s ACIT. The question before the Technology Pvt. Ltd. v/s ACIT. The question before the Technology Pvt. Ltd. v/s ACIT. The question before the Special Bench was as follows: “Whether the business Special Bench was as follows: “Whether the business Special Bench was as follows: “Whether the business losses of a non losses of a non-eligible unit whose income is not eligible come is not eligible for deduction u/s 10A of the Act, have to be set off for deduction u/s 10A of the Act, have to be set off for deduction u/s 10A of the Act, have to be set off against the profits of the undertaking eligible for against the profits of the undertaking eligible for against the profits of the undertaking eligible for deduction u/s 10A for the purpose of determining the deduction u/s 10A for the purpose of determining the deduction u/s 10A for the purpose of determining the allowable deduction u/s 10A of the Act? allowable deduction u/s 10A of the Act?

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33.2 Further in ITA No. 5387/Mum/ No. 5387/Mum/2012, the Coordinate Bench Coordinate Bench in the case of the assessee for assessment year 2008 the case of the assessee for assessment year 2008-09, foll 09, following the decision of the Hon’ble Supreme Court in the case of CIT Vs decision of the Hon’ble Supreme Court in the case of CIT Vs decision of the Hon’ble Supreme Court in the case of CIT Vs Yokogawa India Limited (supra) directed to a Yokogawa India Limited (supra) directed to allow deduction under llow deduction under section 10B of the Act Act without setting of the losses of without setting of the losses of non EOU units. The relevant fi units. The relevant finding of the Tribunal (supra) is Tribunal (supra) is reproduced as under:

“2.3. Further, we find that the said view is also covered by the 2.3. Further, we find that the said view is also covered by the 2.3. Further, we find that the said view is also covered by the decision of the Hon decision of the Hon‟ble Supreme Court in the case of CIT vs. ‟ble Supreme Court in the case of CIT vs. Yokogawa India Ltd., reported in (2017) 145 DTR 1 (SC) dated Yokogawa India Ltd., reported in (2017) 145 DTR 1 (SC) dated Yokogawa India Ltd., reported in (2017) 145 DTR 1 (SC) dated 16/12/2016. Respectively following the aforesaid 16/12/2016. Respectively following the aforesaid 16/12/2016. Respectively following the aforesaid judicial precedents, we direct the ld. AO to allow deduction u/s.10B of precedents, we direct the ld. AO to allow deduction u/s.10B of precedents, we direct the ld. AO to allow deduction u/s.10B of the Act without setting off of the losses of non the Act without setting off of the losses of non-EOU units. The EOU units. The ld. AO is further directed to allow the carry forward of losses of ld. AO is further directed to allow the carry forward of losses of ld. AO is further directed to allow the carry forward of losses of non-EOU units in accordance with the law. Accordingly EOU units in accordance with the law. Accordingly, the EOU units in accordance with the law. Accordingly ground Nos. 1 & 2 raised by the assessee are allowed. ground Nos. 1 & 2 raised by the assessee are allowed. ground Nos. 1 & 2 raised by the assessee are allowed.”

33.3 Respectfully following the above finding, we uphold the order following the above finding, we uphold the order following the above finding, we uphold the order of the Ld. CIT(A) on the issue in dispute and accordingly the ground of the Ld. CIT(A) on the issue in dispute and accordingly the ground of the Ld. CIT(A) on the issue in dispute and accordingly the ground No. seven and eight of the appeal of the No. seven and eight of the appeal of the Revenue are dismissed. are dismissed.

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appreciating the fact that the assessee has neither established appreciating the fact that the assessee has neither established appreciating the fact that the assessee has neither established that no part of interest that no part of interest-bearing fund as well as expenses so bearing fund as well as expenses so claimed has found its way into the investments in Mutual claimed has found its way into the investments in Mutual claimed has found its way into the investments in Mutual Funds/ Shares nor adduced any documentary evidences ds/ Shares nor adduced any documentary evidences ds/ Shares nor adduced any documentary evidences during the course of assessment proceedings before the A.O." during the course of assessment proceedings before the A.O." during the course of assessment proceedings before the A.O."

5.1.1 The first ground of appeal relates to disallowances us 5.1.1 The first ground of appeal relates to disallowances us 5.1.1 The first ground of appeal relates to disallowances us 14A of Income Tax Act 1961 r.w. Rule 8D amounting to Rs 14A of Income Tax Act 1961 r.w. Rule 8D amounting to Rs 14A of Income Tax Act 1961 r.w. Rule 8D amounting to Rs 86,60,051/-. The assessing officer has dealt with this issue at . The assessing officer has dealt with this issue at . The assessing officer has dealt with this issue at para 4 of his assessment order dated 31.03.2013. He observed para 4 of his assessment order dated 31.03.2013. He observed para 4 of his assessment order dated 31.03.2013. He observed

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that the appel that the appellant had shown dividend income amounting to lant had shown dividend income amounting to Rs. 34,600/ Rs. 34,600/- which was exempt us 10 (34). Further, the which was exempt us 10 (34). Further, the assessing officer notes that the appellant stated that it had assessing officer notes that the appellant stated that it had assessing officer notes that the appellant stated that it had investment of Rs. 18.16 crore as on 31.03.2010 and there was investment of Rs. 18.16 crore as on 31.03.2010 and there was investment of Rs. 18.16 crore as on 31.03.2010 and there was no addition of no addition of investment during FY 2009-10. The appellant 10. The appellant had also stated to the assessing officer that there was no had also stated to the assessing officer that there was no had also stated to the assessing officer that there was no expenditure incurred in relation to such income. expenditure incurred in relation to such income.

5.1.2 The assessing officer observed that the appellant had The assessing officer observed that the appellant had The assessing officer observed that the appellant had claimed Rs. 34.83 claimed Rs. 34.83 crore as interest on borrowed funds. He crore as interest on borrowed funds. He observed that the appellant had not established that no part of ved that the appellant had not established that no part of ved that the appellant had not established that no part of interest-bearing fund had found its way into the investments bearing fund had found its way into the investments bearing fund had found its way into the investments which were giving tax exempt dividend. He further observed which were giving tax exempt dividend. He further observed which were giving tax exempt dividend. He further observed that investment decisions are very complex and must have that investment decisions are very complex and must have that investment decisions are very complex and must have involved certain adm involved certain administrative costs and, therefore, it is not inistrative costs and, therefore, it is not correct to say that no expenditure was incurred in making the correct to say that no expenditure was incurred in making the correct to say that no expenditure was incurred in making the investment. He has proceeded to then make disallowance investment. He has proceeded to then make disallowance investment. He has proceeded to then make disallowance under section 14 A r.w.Rule 8D. under section 14 A r.w.Rule 8D.

5.1.3 I find that the following facts have not been at all 5.1.3 I find that the following facts have not been at all 5.1.3 I find that the following facts have not been at all disputed by the assessing officer and are in fact supported by uted by the assessing officer and are in fact supported by uted by the assessing officer and are in fact supported by the financial statements and other documents available to the the financial statements and other documents available to the the financial statements and other documents available to the assessing officer during the course of assessment proceedings: assessing officer during the course of assessment proceedings: assessing officer during the course of assessment proceedings:

i. 98% of the investment is made in appellant's own 98% of the investment is made in appellant's own 98% of the investment is made in appellant's own subsidiary and foreign subsidiary and foreign companies for the purpose of companies for the purpose of holding controlling stake in the group concerns. holding controlling stake in the group concerns. holding controlling stake in the group concerns. ii. Investment of Rs. 2.6 crores is in equity shares of a Investment of Rs. 2.6 crores is in equity shares of a Investment of Rs. 2.6 crores is in equity shares of a foreign company Jiangsu Chemstar Chemical Co. Ltd., foreign company Jiangsu Chemstar Chemical Co. Ltd., foreign company Jiangsu Chemstar Chemical Co. Ltd., China and not covered within the scope of disallowance China and not covered within the scope of disallowance China and not covered within the scope of disallowance under section 14A under section 14A.

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iii. During the year, the appellant company has not made During the year, the appellant company has not made During the year, the appellant company has not made any new investment which would result in exempt any new investment which would result in exempt any new investment which would result in exempt income. income. iv. As on 31.03.2010 the appellant's interest As on 31.03.2010 the appellant's interest-free own funds free own funds in form of Share Capital and Reserves and Surplus stood in form of Share Capital and Reserves and Surplus stood in form of Share Capital and Reserves and Surplus stood at Rs. 3 99.05 crores. at Rs. 3 99.05 crores. v. The divide The dividend receipt is directly credited to ECS system nd receipt is directly credited to ECS system through bank accounts and the expenditure items shown through bank accounts and the expenditure items shown through bank accounts and the expenditure items shown in the appellant's profit and loss account are directly in the appellant's profit and loss account are directly in the appellant's profit and loss account are directly related to the business of the company. related to the business of the company. vi. During the year the appellant has incurred finance During the year the appellant has incurred finance During the year the appellant has incurred finance charges o charges of Rs. 34.83 crores which includes heads like f Rs. 34.83 crores which includes heads like bank charges, bank guarantee commission, interest on bank charges, bank guarantee commission, interest on bank charges, bank guarantee commission, interest on packing credit, interest on overdue bills et cetera. All packing credit, interest on overdue bills et cetera. All packing credit, interest on overdue bills et cetera. All these items of interest charges are directly relatable to these items of interest charges are directly relatable to these items of interest charges are directly relatable to the appellant's business. the appellant's business.

5.1.4 Although, i Although, in the past, applicability of section 14A of the n the past, applicability of section 14A of the Act as well Rule 8D Act as well Rule 8D of the I-T Rules have been subject matter of T Rules have been subject matter of numerous litigations and disputes, over the years, the numerous litigations and disputes, over the years, the numerous litigations and disputes, over the years, the provisions provisions provisions have have have benefitted benefitted benefitted from from from the the the light light light of of of judicial judicial judicial interpretations from various judic interpretations from various judicial authorities, both in this ial authorities, both in this jurisdiction as well as elsewhere in the country. The essence of jurisdiction as well as elsewhere in the country. The essence of jurisdiction as well as elsewhere in the country. The essence of the said provisions have been distilled by those Hon'ble Courts the said provisions have been distilled by those Hon'ble Courts the said provisions have been distilled by those Hon'ble Courts to the extent that the scope for subjective interpretation is to the extent that the scope for subjective interpretation is to the extent that the scope for subjective interpretation is practically ended and lower judicia practically ended and lower judicial authorities have to abide l authorities have to abide by the principles laid down by higher authorities. The facts of by the principles laid down by higher authorities. The facts of by the principles laid down by higher authorities. The facts of each case have to be put through the filter of judicial each case have to be put through the filter of judicial each case have to be put through the filter of judicial pronouncements to reach a decision that is in conformity with pronouncements to reach a decision that is in conformity with pronouncements to reach a decision that is in conformity with the tenet of judicial discipline. the tenet of judicial discipline.”

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35.1 The issue in dispute raised being exactly identical to the issue sue in dispute raised being exactly identical to the issue sue in dispute raised being exactly identical to the issue raised in assessment year 2010 raised in assessment year 2010-11, therefore following our finding 11, therefore following our finding in assessment year 2010 in assessment year 2010-11, the Ld. Assessing Officer is directed to Assessing Officer is directed to restrict the disallowance u/s 14A of the Act disallowance u/s 14A of the Act to the extent of to the extent of exempted income of exempted income of ₹45,950/- earned by the assessee during the earned by the assessee during the year under consideration. The ground of the appeal of the Revenue year under consideration. The ground of the appeal of the year under consideration. The ground of the appeal of the is accordingly allowed partly. accordingly allowed partly.

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Order pronounced Order pronounced in the Open Court/under Rule 34(4 under Rule 34(4) of the ITAT Rules, 1963 on the ITAT Rules, 1963 on 28/12/2022. Sd/- Sd/- - (RAHUL CHAUDHARY RAHUL CHAUDHARY) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 28/12/2022 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 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, BY ORDER, //True Copy// (Sr. Private Secretary) (Sr. Private Secretary) ITAT, Mumbai ITAT, Mumbai