NATCO PHARMA LIMITED,HYDERABAD vs. ACIT., CIRCLE-5(1), HYDERABAD

4 ITA.No.853/Hyd./2024 f. Excess contribution to Gratuity Fund by Employer (Rule 103 of the IT Rules). g. Large deductions claimed under section 80/801A/8018/B01C as compared to Turnover. h. Large deduction claimed u/s.35(2AA), 35(2AB), 35(CCC) & 35(CCD). i. Large amount not credited to Profit and Loss Account as per schedule AOI of return. j. Expenditure debited to P & L for earning Exempt Income is very less in comparison to the Investments made to earn exempt income. k. Non-compliance to Income Computation & Disclosure Standards. l. Foreign Remittance made to person(s) located in low tax jurisdiction countries (Business ITR)

2.1. The Assessing Officer issued various statutory notices u/sec.143(2), 142(1) and show cause notices and also conducted video conferencing.

5 ITA.No.853/Hyd./2024 2.2. The Assessing Officer u/sec.92CA(1) of the Act dated 31.12.2021 referred the matter to Transfer Pricing Officer [in short “TPO] in respect of international transactions and Specified Domestic Transactions reported by the assessee company for the impugned assessment year 2020-2021.

2.3. The TPO issued notice dated 19.01.2022 u/sec.92CA of the Act and also show cause notice to the assessee company calling for documentation maintained by it as prescribed u/sec.92D(3) of the Act. The assessee company submitted the relevant documents before the TPO time and again as called for.

2.4. The observation of the TPO with respect to determination of ALP price of interest income on delayed trade receivables are that the assessee company has huge outstanding receivables from it’s AEs and the assessee company followed Transactional Net Marginal Method [in short “TNMM”]. It was the contention of the assessee company that receivables are arising out of international

6 ITA.No.853/Hyd./2024 transactions which have been concluded to be at arm's length. It was further submitted that receivables/payables by themselves do not constitute a separate international transaction since the arm's length price of the corresponding international transactions have already been determined and thus are not subject to any separate benchmarking. The TPO, therefore, called for the assessee company to furnish invoice-wise ageing details of outstanding receivables in respect of all invoices raised during the FY 2019-20 as well as the invoices which were raised in the previous FYs but remained unpaid on the opening day of the current FY 2019-20. As seen from the information submitted, the TPO noted that some of the invoices were realized beyond the credit period allowed as per inter-company agreement. He, therefore, issued show cause notice dated 27.05.2023 stating that why the comparability analysis of the assessee company should not be rejected for the reason that it is a settled principle that ‘receivables’ very well fall under the definition of ‘international transaction’ and when the same is a separate

7 ITA.No.853/Hyd./2024 international transaction, the same needs to be benchmarked separately by applying most appropriate method. Accordingly, the trade receipts from AEs beyond credit period were proposed to treat the delayed receipts as “unsecured loans” advanced to the AEs for the period of delay. Further, the TPO called the assessee company to show cause as to why the receivables after allowing a credit period of 60 days should not be charged interest @ SBI Short Term Deposit rate [i.e., month-wise] as applicable during the F.Y. 2019-2020.

2.4.1. In response to the said show cause notice, the assessee company filed it’s objections dated 01.06.2023 against imposition of interest on outstanding receivables summarily on following points :

2. No interest is being charged by assessee to third parties and vice versa.

8 ITA.No.853/Hyd./2024 3. Incorrect treatment of delayed payments as unsecured loans advance to AE.

5. Benefit of working capital adjustment.

6. Consider the credit period as 180 days.

7. Credit period allowed as per policy of RBI.

9 ITA.No.853/Hyd./2024 "Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business"

2.4.3. The TPO by relying the above provisions of the Act noted that it was crystal clear that 'receivable' which has arisen during the course of business constitutes an International transaction. The TPO also relied on the decision of Coordinate Bench of Delhi Tribunal in case of Bechtel India Pvt. Ltd vs., ACIT in ITA.No.6530/Del/2016 16-05-2017 wherein the Tribunal has debated many of the objections raised by assessee company in the present case such as i) whether 'receivables' is a separate International transaction, ii) whether re-characterization of receivables permitted, iii) whether separate adjustment for receivables is required once working capital adjustment has been allowed, iv) whether adjustment on account of receivables is not warranted unless profitability of comparable companies is higher after adjustments. The TPO after relying on 10 ITA.No.853/Hyd./2024 decisions of (1) Ameriprise India Pvt Ltd vs., ACIT 2015-TII- 347-ITAT-Delhi-TP (2) Techbooks India International Pvt Ltd vs. DCIT (supra) (3) Judgment of Hon’be Bombay High court in case of CIT vs., Patni Computer Systems Ltd (2013) 215 Taxmann 108 (4) Logix Micro Systems Ltd., vs. ACIT ITA.Nos.423 & 524/Bang./2009 dated 07.10.2010 held that SBI short term deposit rates is considered as appropriate CUP to determine ALP of ‘outstanding receivables’. The TPO also issued summons to SBI u/sec.133(6) of the Act to furnish the deposit rates for 15-45 days; 46-90 days and 91-180 days and computed the short term deposit of SBI for F.Y. 2019-2020 i.e., A.Y. 2020-2021 as appropriate CUP after allowing a credit period of 150 days from the date of invoice raised by the assessee company and determined the total ‘interest on delayed receivables at Rs.51,58,205/- and proposed the adjustment under this head.

2.5. While making the TP adjustment with respect to transfer of APIs from Mekaguda Unit to Guwahati Unit, the TPO noted that the assessee company had voluntarily applied the margin @ 12.44% and submitted that the said

11 ITA.No.853/Hyd./2024 margin falls within the arm's length range of 12.20% to 20.50% as proposed by the TPO and hence no adjustment is warranted. However, the TPO has disagreed to the said proposition. He noted that the taxpayer has transferred APIs of Rs.5,60,44,808/- from Mekaguda Unit to Guwahati Unit on book value/cost to cost basis. In other words the taxpayer/Mekaguda unit has applied zero margin while transferring the APIs. The TPO pointed-out that had it been the case that the assessee company had applied the said margin of 12.44% at the time of transfer to Guwahati Unit itself, then the taxpayer can claim that the same is within arm's length range. But in this case, it is only in the return of income, the assessee company offered voluntary adjustment @12.44%. Since the taxpayer has applied zero margin while transferring the APIs, the question of falling within the range does not arises. The TPO further noted that as per the per the provisions of Sec.92C(2) the benefit/ tolerance band of +/-3%, if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken

12 ITA.No.853/Hyd./2024 does not exceed 3% of the later. For the sake of clarity, the provisions of sec.92C(2) is reproduced hereunder :

“Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent. of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price.] [ Substituted by Act 33 of 2009, Section 41, for proviso (w.e.f. 1.10.2009).]”

2.5.1. The TPO after considering the provisions of sec.92C(2) of the Act noted that the benefit of +/- 3% as provided u/s.92C(2) is available only on the price at which SDT has actually been undertaken i.e., Rs.5,60,44,808/- only. Though the above provisions are in relation to transactions where arm's length price shall be taken to be the arithmetical mean of such prices, but the same logic equally applies to the subject transactions also wherein arm's length price is determined on the basis of range concept i.e., 35th percentile and 65th percentile. The TPO

13 ITA.No.853/Hyd./2024 also noted that the instant issue is squarely covered by the decision of Coordinate Bench of Hyderabad Tribunal in the case of M/s.Tecumseh Products India Pvt Ltd, Hyderabad in wherein Hon'ble ITAT categorically held that for availing the benefit of the threshold limit of (+)/(-) 5% or 3%, the actual transaction undertaken by assessee should be the base and not revised transaction reported by making suo-moto adjustment. The TPO accordingly rejected the contentions of the assessee and determined the ALP of the subject transaction i.e., transfer of APIs from Mekaguda Unit to Guwahati Unit at Rs.13,44,437/- and identical adjustment on account of transfer of APIs from Kothur Unit to Guwahati Unit at Rs.36,90,011/-.

2.6. The TPO accordingly determined the total adjustments u/sec.92CA of the Act with respect to interest on delayed receivables at Rs.51,58,205/-; adjustment on account of transfer of APIs from Mekaguda Unit to Guwahati Unit at Rs.13,44,437/- and adjustment on account of transfer APIs from Kothur Unit to Guwahati Unit

14 ITA.No.853/Hyd./2024 at Rs.36,90,011/- totalling to Rs.1,01,92,653/- vide order dated 30.06.2023 passed u/sec.92CA(3) of the Act.

4. Aggrieved by the Draft Assessment Order of the Assessing Officer, the assessee company filed it’s objections before the DRP. However, the DRP after considering the objections of the assessee company confirmed the TP adjustment of Rs.1,01,92,653/- duly observing that the TPO had made the impugned addition after providing sufficient opportunity to the assessee and there is no violation of 15 ITA.No.853/Hyd./2024 principles of natural justice. With respect to disallowance of 100% revenue expenditure incurred for scientific research though not approved by the DSIR amounting to Rs.15,79,54,772/- for a weighted deduction, the DRP noted that the DSIR vide Form 3CL dated 16.08.2022 granted approval for Rs.1,25,56,14,290/- in relation to revenue expenditure including clinical trial and Rs.22,94,06,000/- in relation to capital expenditure. However, the DSIR did not grant approval for Rs.17,10,38,280/- [i.e., Revenue expenditure amounting to Rs.15,79,54,772/- and Capital expenditure amounting to Rs.1,30,83,508/-]. The contention of the assessee company before the DRP was that disallowance made by the Assessing Officer should be limited to 50% of the unapproved revenue expenditure. The DRP after considering the provisions of sec.35(2AB) of the Act noted that the plea of assessee to limit the unapproved revenue expenditure @ 50% is not tenable as Section 35(2AB) does not have any scope for partial deduction of any kind as claimed by the assessee company. Further, as per sec.35(2AB), either a deduction of 150% is allowed or no 16 ITA.No.853/Hyd./2024 deduction can be allowed if the DSIR does not approve the expenditure. Accordingly, the DRP rejected the contentions of the assessee and confirmed the order of the Assessing Officer. Similar observations were made on the alternative claim on a portion of unapproved capital expenditure of Rs.1,30,83,508 as deduction u/sec.35(1)(iv) of the Act as it is not permissible u/sec.35(2AB) of the Act.

4.1. The DRP also confirmed the order of the Assessing Officer on account of disallowance of expenditure relatable to exempt income at Rs.30,53,792/- u/sec.14A r.w. Rule 8D of the Act observing that the Assessing Officer has disallowed by computing the indirect expenditure being administrative and other indirect expenses after invoking Rue 8D(2)ii) of the I.T. Rules, 1962 which has been affirmed by the Coordinate Bench of the Mumbai Tribunal in the case of ACIT vs. Uma Polymers ltd., Tax Publishers [2015] 4564 (Mum.-Tribu.).

4.2. The DRP allowed the claim of deduction u/sec.80G of the Act to the assessee company with a direction to the Assessing Officer to grant the relief of 17 ITA.No.853/Hyd./2024 deduction u/sec.80G provided these donations are not forming part of CSR expenditure and the donations are eligible for deduction u/sec.80G.

4.2.1. Similarly, with respect to rejecting the deduction u/sec.80G in respect of donation which was inadvertently missed at the time of hearing, the DRP noted by relying on Judgment of Hon’ble Supreme Court in the case of Goetz India Ltd., 284 ITR 323 (SC) held that a deduction can be claimed if return has been filed only by way of filing revised return and that the Assessing Officer has no jurisdiction to entertain claim made otherwise and accordingly, noted that the Assessing Officer has not committed error by rejecting the claim of assessee.

4.3. With regard to the addition of Rs.6,14,336/- u/sec.41(1) of the Act stating that the vendors have written off the bad debt pertaining to the assessee as a receivable, the DRP noted that since the vendors have written-off the receivables from the assessee as bad debts, the assessee’s liability to pay these outstandings has ceased to exist. Since

18 ITA.No.853/Hyd./2024 the assessee company has not provided any evidence to show that the liabilities are paid-off, as per sec.41(1) of the Act, the assessee is liable to pay taxes on the liability that has ceased to exist. Accordingly, the objection of the assessee on this ground is rejected.

4.4. In pursuance to the directions of the DRP dated 25.06.2024 passed u/sec.144C(5) of the Act, the Assessing Officer passed his Final Assessment Order by determining the total income of the assessee at Rs.4,29,85,54,380/- vide order dated 05.07.2024 passed u/sec,.143(3) r.w.s.144C(13) r.w.s.144B of the Act.

1. “On the facts and in the circumstances of the case, the Id.AO/DRP erred in disallowing the 150% of the revenue expenditure of Rs.23,69,32,158 incurred for scientific research, on the premise that the relevant expenditure is not approved by the DSIR, whereas the actual expenditure of Rs.15,79,54,772 is otherwise allowable under section 37(1) of the Act as the same was spent for 19 ITA.No.853/Hyd./2024 business purposes. The Id. AO/DRP ought to have limited the disallowance u/s 35(2AB) of the Act to the extent of weighted deduction of 50% of the revenue expenditure ie Rs.7,89,77,386 in as much as the Appellant is otherwise entitled to claim 100% of the revenue expenditure dehors application of section 35(2AB) of the Act, under section 37(1) of the Act.

2. The Id. AO/DRP failed to appreciate the alternate submission of the Appellant, and erred in holding that the provisions of section 35(2AB) of the Act, does not admit partial deduction. The authorities below failed to appreciate that the alternate claim has been raised under section 37(1) of the Act, and that the provisions of section 35(2AB) of the Act do not in any manner curtail the claim of expenditure once it is found that the Appellant is not entitled to deduction under section 35[2AB) of the Act.

3. On the facts and in the circumstances of the case, the Id. AO/DRP erred in disallowing Rs.1,96,25,262 being 150% of the capital expenditure not approved by the DSIR. The Id. AO/DRP ought to have appreciated that the amount of Rs.1,30,83,508 being the capital expenditure not approved by DISR is allowable otherwise under section 35(1)(iv), and therefore disallowance should have been restricted to Rs.65,41,754.

20 ITA.No.853/Hyd./2024 4. The Id. AO/DRP failed to appreciate the alternate submission of the Appellant, and erred in holding that the provisions of section 35(2AB) of the Income Tax Act, does not admit partial deduction. The authorities below failed to appreciate that the alternate claim was allowed in the Appellant's own case for the Ay 2017-18 and therefore should have allowed even for the asst. year under consideration.

5. On the facts and in the circumstances of the case the Id. AO/DRP erred in disallowing Rs.30,53,792 by invoking provisions of section 14A of the Act read with Rule 8D of the Rules as against the correct amount of Rs.5,32,046. Without prejudice, and at any rate, the Id.AO/DRP ought to have appreciated that the disallowance under section 14A of the Act cannot exceed the exempt income of Rs.4,99,429/-, earned by the Assessee during the relevant previous year.

6. The Id. AO/DRP erred in law and on facts in rejecting the request of the Appellant for allowing deduction of Rs.2,50,000 under section 80G of the Act in respect of donation of Rs.5,00,000 made to Inga Health Foundation, which was inadvertently missed out while filing return of income.

7. The Id. AO/DRP erred on facts and in law in making addition of Rs.6,14,336 under section 41(1) of the Act on the alleged ground that the Vendors have written off of the said amount. The Id. AO/DRP have not appreciated

21 ITA.No.853/Hyd./2024 the fact that the assessee has not defaulted in making payments to concerned vendors as in once case it is a running account and in the other case there is purchase return where the vendor is required to refund the advance to the assessce.

For these and other grounds that may be urged with the Hon'ble Tribunal, it is prayed that the appeal may be allowed”.

22 ITA.No.853/Hyd./2024 research, expenditure incurred to earn exempt income, donations given for R & D work u/sec.80G and vendors written-off the sum in their books of accounts which has been disallowed by the lower authorities without appreciating the documents placed on record from time to time as called by them. He submitted that with respect of DSIR expenditure, the Assessing Officer made addition of Rs.15,79,54,772/- without appreciating the fact that the assessee is eligible for 100% exemption on R & D activities and his request to restrict the said expenditure to 50% has been denied by the Assessing Officer and confirmed by the DRP which is not sustainable in the eye of law. In fact, the DSIR itself grants/approves for permission of 150% on R & D and simply because certain capital expenditure of Rs.1,30,83,508/- were not approved by the DSIR, making the entire sum of Rs.15,79,54,772/- is arbitrary without considering the plea of the assessee company to limit the R & D expenditure @ 50% i.e., at Rs.7,89,77,386/-. This act of the authorities below diminishes the interest on R & D sector. He, accordingly, submitted that the total deduction

23 ITA.No.853/Hyd./2024 on R & D shall be limited to 50%. He further drew the attention of the Bench that even the revenue and capital expenditure incurred by the assessee company on R & D are allowable expenditure u/sec.35(1) and 35(1)(iv) of the Act respectively and as such, the entire expenditure claimed by the assessee on account of R & D are allowable expenditure even if some of the expenditure are not approved by the DSIR u/sec.35(2AB) of the Act. Therefore, the orders of the authorities below are not sustainable in the eye of law. He accordingly pleaded that the expenditure claimed by the assessee on account of R & B may please be allowed in the interest of justice.

6.1. Learned Counsel for the Assessee submitted that the authorities below disallowed the expenditure of Rs.30,53,792/- by invoking the provisions of sec.14A read with Rule 8D of the Rues as against the correct sum of Rs.5,32,046/- incurred on exempt income. He drew the attention of the Bench that u/sec.14A of the Act the expenditure incurred on exempt income cannot exceed Rs.4,99,429/- during the relevant previous year. Therefore,

24 ITA.No.853/Hyd./2024 the orders of the authorities cannot be sustainable in the eye of law.

6.2. Learned Counsel for the Assessee submitted that the assessee company has given donations of Rs.5 lakhs and pleaded for deduction of Rs.2.50 lakhs u/sec.80G of the Act which are inadvertently missed while filing the return of income. Since the same are not claimed in the return of income, the authorities below denied the claim of deduction u/sec.80G of the Act. He submitted that there is no dispute with respect to donations given by the assessee company and in such an event when the donee’s confirmation is available, the Assessing Officer ought to call the donee and allow the claim of assessee u/sec.80G of the Act.

6.3. Learned Counsel for the Assessee submitted that the vendors viz., Trane Technoogies India Private Limited and Propix Technologies Private Limited have written off a sum of Rs.6,14,336/- u/sec.41(1) of the Act and the lower authorities had made the impugned addition without considering the fact that the assessee has not defaulted in 25 ITA.No.853/Hyd./2024 making payments to concerned vendors as in one case it is a running account and in the other case there is a purchase return where the vendor is required to refund the advance to the assessee.

6.5. In a nutshell, the Learned Counsel for the Assessee pleaded that the above disallowances/additions of variations made by the lower authorities are not in accordance with law without properly appreciating the documents placed on record and the provisions of the Act. He submitted that R & D expenditure, expenses incurred on exempt income, donations given for R & D work and sums written off by vendors are well within the ambit of Income Tax Act and are eligible deductions which are righty claimed by the assessee company. He accordingly, submitted that the grounds raised by the assessee company in the instant appeal be allowed in the interest of substantial justice.

27 ITA.No.853/Hyd./2024 8. We have heard the rival submissions of both the parties, perused the orders of the authorities below and material available on record. The issues involved in the present appeal are (i) expenditure incurred on Scientific and Research u/sec.35(2AB) (ii) expenditure incurred to earn exempt income u/sec.14A r.w. Rule 8D of I.T. Rules (iii) deduction claimed u/sec.80G and (iv) cessation of liability u/sec.41(1) of the Act. We are adjudicating the above issues as under.

9. The Assessing Officer disallowed weighted deduction claim u/sec.35(2AB) @ 150% on Scientific and Research expenditure incurred in in-house Research and Development facility on the ground that Competent Authority i.e., DSIR has certified the amount to the extent of Rs.1,25,56,14,290/- in relation to revenue expenditure which includes clinical trials and Rs.22,94,06,000/- in relation to capital expenditure and the balance of revenue expenditure of Rs.15,79,54,772/- and capital expenditure of Rs.1,30,83,508/- was un-certified by the DSIR which means the said expenditure was not incurred for the purpose of R

28 ITA.No.853/Hyd./2024 & D. It was the argument of the assessee that the Assessing Officer and the DRP never disputed the fact that the assessee has incurred R & D expenditure. Further, the said expenditure is not quantified and certified by the DSIR. Otherwise, there is no dispute about the nature and expenditure being revenue in nature and also capital expenditure incurred towards scientific research as specified u/sec.35(1) and 35(1)(iv) of the Income Tax Act, 1961, respectively. We find that although there is no details as to why the Competent Authority i.e., DSIR is not approved certain expenditure but on perusal of the nature of expenditure submitted by the assessee we find that the assessee has incurred various expenditure including ‘Validation Batches’ expenditure which is nothing but expenditure incurred towards manufacturing of pharmaceutical products after the R & D is completed for the purpose of analysing it’s efficacy and stability. Once this is done, some quantity from the batch is sent to Contract Research Organisation [“CRO”] along with innovator product which is called Reference Listed Drug [“RLD”] for 29 ITA.No.853/Hyd./2024 establishing the equivalence of the product with reference to Listed Drug. Since the assessee has incurred expenditure for manufacturing validity batches of pharmaceutical products and the same has been utilized for R & D purpose, in our considered opinion, even though it is not certified by the DSIR, the nature of expenditure being scientific and research cannot be altogether ruled-out. Since the expenditure claimed by the assessee is revenue in nature and also for scientific and research purposes, in our considered opinion, even if the said expenditure is not certified u/sec.34(2AB), but the same can be allowed as deduction u/sec.35(1)(i) of the Act, wherein it has been clearly says that any expenditure incurred on scientific and research but not in the nature of capital expenditure should be allowed as deduction. Since the expenditure incurred by the assessee in the instant appeal is in the nature of revenue expenditure like raw material required for manufacturing of pharmaceutical products for validation batches, AMC and testing charges, charges in respect of various asset employed in the business, repairs and 30 ITA.No.853/Hyd./2024 maintenance and also staff welfare expenses and general administrative expenses are revenue in nature, in our considered view, the same needs to be allowed as deduction u/sec.35(1)(i) of the Income Tax Act, 1961. This principle is supported by the decision of Hon’ble High Court of Madras in the case of CIT vs. M/s. Rajapalayam Mills Ltd., [2019] 265 Taxman 209 (Mad.) wherein it has been clearly held that since the spending of the expenditure for scientific research itself is not even disputed by the Revenue, the Appellate Authorities have righty allowed claim u/sec.35(1) of the Income Tax Act, 1961. Therefore, we are of the considered view that the Assessing Officer/DRP erred in disallowing the expenditure incurred for the purpose of R & D only on the basis of certificate issued by DSIR is incorrect. Thus, we direct the Assessing Officer to allow deduction towards actual scientific research expenditure incurred by the assessee in respect of revenue expenditure of Rs.15,79,54,772/- u/sec.35(1)(i) of the Act and restrict disallowance u/sec.35(2AB) to the extent of 50% weighted deduction claimed by the assessee.

31 ITA.No.853/Hyd./2024 9.1. Coming back to capital expenditure, the assessee has incurred capital expenditure of Rs.1,30,83,508/- for the purpose of scientific research. The said expenditure is not in the nature of expenditure incurred on the acquisition of land or property. Therefore, even though the capital expenditure is not certified by the DSIR u/sec.35(2AB) of the Act, but it was the expenditure incurred for the purpose of scientific research. Therefore, in our considered view, any capital expenditure incurred for the purpose of scientific research can be allowed as deduction u/sec.35(1)(iv) of the Income Tax Act, 1961. In this case, the assessee has furnished details of expenditure and on perusal of the expenditure, we find that the expenditure incurred by the assessee for scientific purpose and not being in the nature of land or building, but other plant and machinery and equipment necessary for carrying-out scientific research work. Therefore, in our considered view, the Assessing Officer/DRP is erred in disallowing capital expenditure incurred for the purpose of R & D only on the ground that there is no provision u/sec.35(2AB) to allow un-certified by 32 ITA.No.853/Hyd./2024 the DSIR as deduction. Since, the nature of expenditure is not disputed by the Assessing Officer/DRP, in our considered view, the same needs to be allowed u/sec.35(1)(iv) of the Income Tax Act, 1961. Therefore, we direct the Assessing Officer to allow actual capital expenditure amounting to Rs.1,30,83,508/- u/sec.35(1)(iv) of the Income Tax Act, 1961 and disallow weighted deduction claimed u/sec35(2AB) of the Act.

36 ITA.No.853/Hyd./2024 and these two accounts are running accounts and, therefore, any unanimous action of the other party cannot be regarded as recovery of bad debt which is taxable u/sec.41(1) of the Act. We find that Assessing Officer has made additions only on the ground that other party have written-off the amount receivable from the assessee as bad debt, otherwise not proved the case of application of sec.41(1) of the Act which says that any amount write-off as ‘bad debt’ and subsequently recovered by the assessee is taxable as ‘business profit’. Unless the Assessing Officer proves that assessee has derived benefit by way of ‘cessation liability’, no addition can be made u/sec.41(1) of the Act. Since the Assessing Officer has not made-out the case of benefit derived by the assessee, the addition cannot be sustained in the hands of the assessee. Thus, we direct the Assessing Officer to delete the addition made u/sec.41(1) of the Act.

37 ITA.No.853/Hyd./2024

Order pronounced in the open Court on 19.02.2025.