SOLVAY PHARMA INDIA LTD,MUMBAI vs. DCIT RG 2(1), MUMBAI

The appellant, M/s. Solvy Pharma India Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 09.02.2017 passed by Commissioner of Income Tax (Appeals)-3, Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 2010-11 on the grounds inter alia that :- “1. On the facts and in circumstances of the case and in law, the learned Commissioner of Income-tax, Appeals - 3, Mumbai ('learned CIT(A}') has erred in confirming the disallowance of Rs. 6,64,090/- 2 M/s. Solvy Pharma India Ltd.

Briefly stated facts necessary for adjudication of the controversy at hand are : assessee is into the business of manufacturing through third parties online licensee basis and trading in pharmaceutical formulations. During the scrutiny proceedings the Assessing Officer (AO) noticed that the assessee has earned dividend income of Rs.62,75,000/- without attributing any expenses for earning the dividend income. However, assessee filed his profit working vide letter dated 06.03.2014 showing suo- moto disallowance by the assessee to the tune of Rs.2,46,566/- under section 14A of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). Declining the contentions raised by the assessee the AO proceeded to invoke the provisions contained under section 14A read with rule 8D and computed the disallowance as under: 0 1) Expenditure directly related to exempt income 2) 0 Expenditure not directly attributable (A X B/C) 1/2% of average value of 3) 6, 64 ,090 investment 6 ,64 ,090 Amount disallowed u/s.14A

Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the appeal.

Assessee raised one new ground No.2 before the Ld. CIT(A) which issue Assessee has never taken before the AO seeking adjustment under section 145A of the Act by arguing that the AO has erred in not reducing sum of Rs.2,79,53,438/- being adjustment in terms of section 145A of the Act which the Ld. CIT(A) has also 5 M/s. Solvy Pharma India Ltd.

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Undisputedly the assessee has earned dividend income of Rs.62,75,000/- during the year under consideration. It is also not in dispute that the assessee has made suo-moto disallowance of Rs.2,46,566/- under section 14A of the Act. The AO being not satisfied with the claim made by the assessee proceeded to compute the disallowance by invoking provisions contained under section 14A read with rule 8D of the Act.

During the assessment proceedings the assessee has provided working of disallowance, vide letter dated 06.03.2014 available at page 28 to 30, under section 14A of the Act available at page 31 of the paper book which is as under: SOLVAY PHARMA INDIA LIMITED (Now merged with Abbott India Limited) AY 2010-11 Disallowance u/s. 14A of the Income-Tax Act, 1961 Sl. Name of Proportionate Time No. Salary Sec.l4A No. the person time spent Spent of Cost disallowance who per month per days devotes (In Hrs.) year spent time in per Investment year activity (8 hrs. per 6 M/s. Solvy Pharma India Ltd.

It is the case of the assessee that the assessee has suo-moto allocated proportionate administration expenses amounting to Rs.1,09,494/- over and above the employee cost amounting to Rs.1,37,072/- attributable to earning exempt income, which fact has not been considered by the AO who has rather mechanically invoked the provisions contained under section 14A read with rule 8D of the Act. The Ld. A.R. for the assessee also contended that the AO has also not established any nexus between the expenditure disallowed and exempt income which ought to be restricted to proportionate expenditure. It is also the case of the assessee that he has not made any investments in equity shares rather made investments in the mutual funds.

We have perused the schedule No.4 of investment forming part of the balance sheet available at page 7 of the paper book 7 M/s. Solvy Pharma India Ltd.

Consequently, we are of the considered view that the AO as well as the Ld. CIT(A) have erred in invoking the provisions contained under section 14A read with rule 8D of the Act without looking into the working of disallowance made by the assessee and without considering the fact that investment during the year under consideration has been made only in two mutual fund schemes for which assessee has suo-moto made disallowance of Rs.2,46,566/-. So we direct to delete the disallowance made by the AO of the and confirmed by the Ld. CIT(A) under section 14A of the Act. So ground No.1 is determined in favour of the assessee.

Undisputedly, in the last year closing stock was not taken up as opening stock and under such circumstances in the earlier years Tribunal in assessee’s own case given a direction to the AO to decide the issue as per decision rendered by Hon’ble Bombay High Court in case of CIT vs. Mahalaxmi Glass Works (P) Ltd. 318 ITR 0116 by returning following findings: “8. We have carefully gone through the orders of the authorities below. We find force in the contention of the Ld. Counsel. The facts in issues are squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Jurisdictional High Court in the case of Mahalaxmi Glass Works (supra) wherein the Hon'ble High Court has held as under: "Accounts-Valuation of stock-Adjustment of unutilized Modvat credit to the opening stock to give effect to S. 145A, if there is any change in the closing stock at the end of the year then there must necessarily be a corresponding adjustment made in the opening stock of that year- This would not amount to giving double benefit to the assessee and would be necessary to compute the true and correct profit for the purpose of assessment- Further, before the Tribunal the departmental representative did not object to the assesse's plea that the value of stock of earlier year should be taken as opening stock- This also forfeits assessee's plea." 9. The Hon'ble High Court has followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs Mahavir Aluminium Ltd, 297 ITR 77. A similar decision was taken by the Tribunal Mumbai Bench in the case of Rm Ratn Wires Ltd. in and 8503/M/2011 wherein the Tribunal has followed another decision of the Co-ordinate Bench in the case of R.R, Kabel Ltd 66 DTR (Trib)(Mum), The relevant part of the decision read as under: We find that in the case of the sister concern of the assesses, R,R. Kabel (supra) oflTATMumbai has held as under: In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the 9 M/s. Solvy Pharma India Ltd.

So in view of the matter we are of the considered view that the order passed by the Ld. CIT(A) is not sustainable and as such to decide the issue in entirety, is restored to the file of AO to decide afresh after providing opportunity of being heard to the assessee in the light of the decision rendered by Hon’ble Bombay High Court in case of CIT vs. Mahalaxmi Glass Works (P) Ltd. (supra). So ground No.2 is decided in favour of the assessee for statistical purposes.

This ground has not been pressed by the assessee during the course of adjudication, hence the same is dismissed.

Additional Ground No.2 is qua the claim for refund of excess dividend distribution tax paid under section 115-O in respect of dividend paid to non resident shareholders to the extent such tax paid exceed the tax rate prescribed under the relevant tax treaty. The Ld. A.R. for the assessee in support of his argument contended that on this issue Special Bench has already been constituted by the 10 M/s. Solvy Pharma India Ltd.

In view of what has been discussed above, appeal filed by the assessee is partly allowed for statistical purposes.