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Facts
The assessee is challenging the order disallowing a deduction of Rs. 10,70,08,883/- for expenses incurred in its Bio-Pharma division. The CIT(A) had confirmed the disallowance, stating that no commercial activity was shown and the expenses should be capitalized.
Held
The Tribunal held that both the AO and CIT(A) had failed to conduct independent inquiries and had relied heavily on previous orders. The Tribunal found that the CIT(A)'s order lacked application of mind and set aside the order.
Key Issues
Whether the expenses incurred in the Bio-Pharma division are eligible for deduction under Section 35(2AB) or should be capitalized, and whether the lower authorities conducted proper inquiry.
Sections Cited
35(2AB), 143(3), 263, 250
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: HON’BLE SHRI MANU KUMAR GIRI & HON’BLE SHRI AMITABH SHUKLA
Assessment Years: 2013-14 Pochiraju Industries Limited, Assistant Commissioner of No.1/102, Satyamangalam Village, Income Tax, Tummanapalli Post, Hosur, Circle-1(1), Tamil Nadu-635 102. Hosur. [PAN: AAACP3640A] (प्रत्यर्थी/Respondent) (अपीलार्थी/Appellant) अपीलार्थी की ओर से/ Assessee by : Mr.T.S.Lakshmi Venkataraman, FCA प्रत्यर्थी की ओर से /Revenue by : Mr.Bipin C.N, CIT सुनवाई की तारीख/Date of Hearing : 09.09.2025 घोषणा की तारीख /Date of Pronouncement : 14.11.2025 आदेश / O R D E R PER AMITABH SHUKLA, A.M :
This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA / NFAC / S / 250 / 2024-25 / 1073554133(1) dated 21.02.2025 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment year 2013-14. The reference to the word “Act” in this order hereinafter shall mean the Income Tax Act, 1961 as amended from time to time.
2.0 The issues contested by the assessee through its grounds appeal in this case are disallowance of deduction u/s 35(2AB) of the Act and of Rs.10,70,08,883/- comprising expenses incurred in its Bio pharma division. The appellant assessee is thus assailing the order dated 21.02.2025 of the Ld.CIT(A). At the outset, it is noted that through its submissions dated 28.06.2025 the appellant assessee has that its ground of appeal no.4 qua disallowance of its claim of deduction u/s 35(2AB) of the Act may be deemed as withdrawn. Accordingly, the ground of appeal no.4 of the assessee concerning disallowance of its claim of deduction u/s 35(2AB) of the Act is dismissed. 3.0 The Ld.AR explained us the brief factual matrix of the case. In this case order u/s 143(3) of the Act was passed on 31.03.2016. Subsequently, this order was exposed to revisionary proceedings u/s 263 of the Act by Ld.PCIT through its order dated 08.03.2018. In the impugned order it was, inter-alia, held that the expenses u/s 35(2AB) claimed by the assessee as revenue expenses were not allowable because the assessee was not found to be carrying on any business of manufacture or production of any article or thing. The allowance of expenditure of Rs.10,70,08,883/- was ordered to be considered for readjudication de novo by the Ld.AO. The impugned order u/s 263 was not contested by the assessee before this tribunal. In appeal u/s 250 the Ld.CIT(A) confirmed the order of Ld.AO holding as under: - Page - 2 - of 6 “…..Considering the facts & circumstances of the case as discussed in para 6.1 of Assessing Officer and summarized as under:
1. 1. No commercial activity was shown by 'Bio-Pharma' Division of the Appellant company during the relevant period or during the revision proceedings as noted by the Assessing Officer.
2. Appellant has itself confirmed above facts as discussed in para 6.1 of AO. "On the contrary, the assessee itself has confirmed that the bank had seized all the properties of the company under she SARFEASI Act and started auctioning the same and consequently there are no operations of the company and management is putting all its efforts to settle the bank and revive the operations, which means that no commercial production could be started by the assessee in bio-pharma division even as on the date of hearing i.e. 19.04.2018".
1. In these circumstances, any expenditure incurred by the assessee for producing new products and setting up new division requires to be capitalized and the same are not allowable as deduction. 7.Accordingly, the appeal of the appellant is devoid of any merit & hence dismissed. In the result, the appeal is therefore, dismissed….”.
4.0 The Ld Counsel for the appellant has submitted that the lower authorities have not understood facts properly and that therefore the order of Ld.CIT(A) deserves to be set aside. It was argued that non- contest of the order u/s 263 would not confirm the veracity of averments raised therein by the revenue authorities. The Ld.Counsel has vehemently argued that the appellant assessee is a limited company having audited accounts available in public domain. Citing reference to the Annual Report of the assessee for AY-2012-13 and 2013-14, copies of which placed on record, it was argued that the Pharma division and the Bio Pharma division are one division. Thus, reference was invited to sales figures disclosed for the year ended 31.03.2023 as disclosed in Page - 3 - of 6 annual report for AY-2012-13 amounting to Rs.1088,580,324/-. It was further agitated that the Ld.CIT(A) has not passed a speaking order through an independent application of mind and that therefore the same be set aside. 5.0 Per contra, the Ld.DR relied upon the order of lower authorities. It was contested that no commercial sales has been show in Bio division. The Ld.DR also argued that non-contest of order u/s 263 is an acceptance of observations raised by the Revenue. 6.0 We have heard rival submissions in the light of material available on records. The order of the Ld.AO u/s 143(3) r.w.s. 263 indicates that the same was passed placing total reliance on the order u/s 263. Accordingly, it was concluded that the impugned expenses claimed by the assessee cannot be allowed and deserved to be capitalized. In support of its conclusions, the Ld.AO placed reliance on the decision of Hon’ble Madras High Court as at 257 ITR 253 as relied by Ld.PCIT during revisionary proceedings. The order of the Ld.AO thus suffers from the basic deficiency of Ld.AO not conducting any independent enquiry of his own. The order of Ld.CIT(A) supra extracted hereinabove also indicates that the Ld.First Appellate Authority has fallen short of adequate discharge of his judicial responsibilities, in as much as he has summarily dismissed assessee’s appeal by placing total reliance upon the order of the Ld.AO. As a senior quasi-judicial authority it was Page - 4 - of 6 expected from him to have analyzed the entire issue by his own independent application of mind and examination of records which was not done. We have also noted that the appellant assessee also cannot escape the blame of callous cooperation with the lower authorities. The Ld.AO in para 6 of his order has indicated towards deficient compliance from the assessee. Be that as it may be, we are of the view that interest of justice would be met if the matter is remitted back to the Ld.CIT(A) for readjudication of the matter de novo. Accordingly, we set aside the order of Ld.CIT(A) appeal with the directions to readjudicate the matter in accordance with law and after giving due opportunity of being heard to the assessee. He will be at liberty to obtain any remand report from the Ld.AO, if deemed necessary. The assessee through para 3 and 4 of his written submissions dated 28.06.2025 himself admitted that an amount of Rs.2,47,05,928/- claimed by the assessee under head research and development (and which is part of overall claim of expenditure of Rs.10,70,08,833/- ) is not allowable on account of pending approval from Department of Scientific and Research. The Revenue authorities may like to keep this in mind while considering the issue of allowance of Rs.10,70,08,833/- claimed by the assessee u/s 35(2AB) of the Act. The assessee shall be bounden to compliance all the statutory notices issued by the lower authorities. Any non-compliance on the part of the Page - 5 - of 6 assessee may be adversely viewed. Accordingly, ground of appeal no.2,3 & 5 raised by the assessee are allowed for statistical purposes. 7.0 In the result, the appeal of the assessee is partly allowed. Order pronounced on 14th , November-2025 at Chennai. Sd/- Sd/- (मनु कुमार धिरर) (अधमताभ शुक्ला) (MANU KUMAR GIRI) (AMITABH SHUKLA) न्याधयक सदस्य / Judicial Member लेखा सदस्य /Accountant Member चेन्नई/Chennai, धदनांक/Dated: 14th , November-2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai/Coimbatore/Madurai/Salem. 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF
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