INDUS BIOTECH LIMITED,PUNE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE, PUNE

Facts of the case, in brief, are that the assessee is a company engaged in manufacturing of botanical drugs, exercise physiology, active botanical ingredients and animal nutrition / pet health, etc. It filed its return of income on 31.10.2019 declaring total income of Rs.27,61,96,070/- under the normal provisions and Rs.66,04,43,182/- u/s 115JB of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The CPC in the order passed u/s 143(1)(a) of the Act proposed certain adjustments, in response to which the assessee filed a response letter dated 07.02.2020 explaining why the adjustments are unwarranted. However, disregarding the response filed by the assessee, the CPC issued an intimation u/s 143(1) of the Act wherein the following adjustments were made to the income of the assessee calculating under the normal provisions of the Act:

Before the Ld. Addl./JCIT(A) the assessee inter-alia submitted that the expenditure of Rs.1,17,25,562/- relates to the IPO expenses in respect of abandoned / aborted project which is revenue in nature. It was submitted that there was no enduring benefit as a result of such aborted expenditure. The decision of the Hon’ble Bombay High Court in the case of Nimbus Communication Ltd. vide was relied upon before the Ld. Addl./JCIT(A). It was further submitted that the adjustment was made by the CPC due to variation between the value reported by the tax auditor in Form No.3CD to that of the entry in the ITR. It was submitted that the auditor in column No.21(a)(2) had qualified that the IPO cost of Rs.1,17,25,562/- to be capital in nature.

However, the Ld. Addl./JCIT(A) was not satisfied with the arguments advanced by the assessee and dismissed the grounds raised before him on this issue by observing as under: “4.3.3 When the Tax Auditor had categorised and qualified the impugned expenditure to be capital in nature, the same is not allowable as per the provisions of s.37(1). The Appellant failed to undertake the corresponding adjustment in the ITR and hence the CPC accomplished this task by making the adjustment u/s. 143(1)(a)(iv). 4.3.4 The Appellant has relied on a plethora of case laws to impress that the claim of expenditure is correct and does not fall within the purview of Explanation to S.37(1). However, it is apprised to the Appellant that the issue under adjudication in the present appeal is not with regard to the correctness of the claim of expenditure, but whether the CPC was right in making this adjustment of Rs.1.17 crores when the same was qualified by the Accountant for disallowance, but omitted to be added back in the return of income as business profits. 4.3.5 In this regard, it is concluded that when there is a mismatch between the corresponding item as per column 21(a) (2) of Form no.3CD and Schedule BP of e-filed ITR, the corresponding difference has to be necessarily added to the total income as adjustment u/s.143(1). This adjustment undertaken by the CPC adheres to the provisions of S.143(1)(a)(iv) of the Act. In all the case laws relied upon, the action of the Assessing officer in disallowing the claim of expenditure was contested, but none of them relate to the adjustment made by CPC while the Audit report has qualified its disallowance. Therefore, these decisions rendered in an altogether different context are not found applicable to the facts of the case under consideration and hence not taken cognizance. 4.3.6 As stated earlier, the ground of appeal is confined, as to whether the adjustment made by CPC u/s.143(1) is in order or otherwise. On verification of the Audit Report in form no.3CD, more particularly Column no.21(a), the CPC cannot be erred for having undertaken this adjustment as there is a stark difference between the values reported by the CA and the values incorporated in the return of income. Under such circumstances, the adjustment made by the CPC is upheld and the corresponding ground of appeal is dismissed.”

Aggrieved with such order of the Ld. Addl./JCIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:

The ground of appeal No.1 being general in nature is dismissed.

The grounds of appeal No.2 and 3 relate to the order of the Ld. Addl./JCIT(A) in confirming the disallowance of Rs.1,17,25,562/- made by the Assessing Officer in relation to the IPO expenditure for abandoned / aborted project u/s 37 of the Act.

Referring to the details of the public issue expenses the Ld. Counsel for the assessee drew the attention of the Bench to the same which are as under:

The Ld. Counsel for the assessee drew the attention of the Bench to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Nimbus Communication Ltd. vide order dated 08.12.2011 and submitted that the Hon’ble High Court in the said decision has upheld the decision of the Tribunal where it has been held that where the assessee had incurred expenditure of Rs.87,21,675/- towards initial public offer of shares, since it had to abort the proposed public issue, the expenditure in question was a loss and as no enduring benefit had accrued to the assessee, it should be allowed as a revenue expenditure.

The Ld. Counsel for the assessee relied on the following decisions: i) Hon’ble Bombay High Court judgment in the case of CIT vs. M/s. Essar Oil Limited vide ITA (Lodg) No.921 of 2006, order dated 16.10.2008 ii) Nimbus Communications Ltd. vs. ACIT (2010) 38 SOT 246 (MUM) iii) Aurangabad Electricals Ltd. vs. DCIT vide order dated 18.06.2021 iv) DCIT vs. Kumar Urban Development Ltd. and cross appeal vide & 2175/PUN/2016, order dated 14.08.2019 v) M/s. Go Airlines (India) Limited vs. DCIT vide ITA No.3789/Mum/2018, order dated 25.01.2021

The Ld. DR on the other hand while supporting the order of the Ld. Addl./JCIT(A) submitted that why the assessee uploaded the report once the auditor did not agree with the proposition of the assessee treating such IPO expenses as revenue in nature.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. Addl./JCIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the CPC in the instant case made disallowance of Rs.1,17,25,562/- due to variation between the value reported by the tax auditor in Form No.3CD to that of entry in ITR. We find although the assessee submitted before the Ld. Addl./JCIT(A) that the expenditure on account of abandoned / aborted IPO is revenue expenditure in view of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Nimbus Communication Ltd (supra), the Ld. Addl./JCIT(A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs.

In our opinion and under the facts and circumstances of the case, the Ld. Addl./JCIT(A) is not justified in upholding the order of the Assessing Officer especially when the issue stands decided in favour of the assessee by the decision of the Hon’ble jurisdictional High Court. We find the Hon’ble Bombay High Court in the case of CIT vs. Nimbus Communication Ltd. (supra) has held as under: “2. The finding of fact recorded by the Income Tax Appellate Tribunal is that there is dispute that the assessee has in fact incurred the expenditure and that on account of the aborted public issue offer, no new asset has come into existence and consequently there is no question of the assessee getting any enduring benefit. With the approval of SEBI, the assessee was to increase the share capital and thereby promote its business activity. However, the same got aborted due to reasons beyond its control. In these circumstances, in view of the decision of this Court in the case of Commissioner of Income Tax V/s. M/s. Essar Oil Limited, Income Tax Appeal (L) No.921 of 2006 decided on 16th October 2008, in our opinion, no fault can be found with the decision of the Income Tax Appellate Tribunal in allowing the aborted share issue expenditure under Section 37 of the Income Tax Act, 1961.”

We find the Co-ordinate Bench of the Tribunal in the case of Aurangabad Electricals Ltd. vs. DCIT (supra) has directed the Assessing Officer to allow the expenditure of abandoned IPO as revenue expenditure by observing as under: “9. We heard the rival submissions and perused the material on record. The issue in the present appeal is squarely covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of Nimbus Communication Ltd. (supra) wherein the Hon’ble Jurisdictional High Court following its earlier decision in the case of M/s. Essar Oil Limited (supra) confirmed the decision of the Tribunal allowing the aborted IPO expenditure as revenue expenditure u/s 37 of the Act. Similarly, the Hon’ble Madras High Court in the case of Tamilnadu Magnesite Ltd. vs. ACIT, 95 Taxmann.com 239 held that the expenditure incurred for setting up of new project viz. Chemical Beneficiation Plant which is abandoned following State Government Order is allowable as revenue expenditure by holding as follows :- “20. To decide the substantial questions of law framed for consideration, we would have to apply the proper test, which would distinguish capital and revenue expenditure. This question came up for consideration before the Hon'ble Supreme Court in Empire Jute Co. Ltd. (referred supra). It was pointed out that from time to time cases have evolved various tests for distinguishing between capital and revenue expenditure, but, no test is paramount or conclusive. Further, there is no all-embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. It was pointed out that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. After referring to the decision of Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it was held that it would be misleading to suppose that, in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all".

Further, it was held that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It was pointed out that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.

Further, it was held that another test, which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the case of John Smith & Son v. Moore 12 TC 266, where the learned Law Lord drew the distinction between fixed capital and circulating capital by holding that fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change.

Bearing the above legal principles in mind, we proceed to examine the facts of the instant case. It is not in dispute that the Chemical Beneficiation Plant was already established by TIDCO and on account of their not being able to achieve the desired result, the assessee was invited to take over the project, as the assessee possessed expertise in the field. This is how the assessee stepped into the project and by turn of events, the Government granted approval during the year 1998.

As could be seen from the order passed by the CIT (A), the assessee had entered into an arrangement with TIDCO as well as with IDBI and fixed the project cost with a debt equity ratio, which was approved by the Government of Tamil Nadu and thereafter, steps were taken to acquire land, import machinery etc. In the meantime, 12 years had passed by and the project had not taken off. The IDBI had withdrawn from the project, as it was found to be unviable and another co-promoter viz., M/s. Khaltan Supermag Limited was brought in and a joint sector company was formed with the assessee subject to certain conditions. However, the said co- promoter, M/s. Khaltan Supermag Limited expressed inability to be a part of the project and after 12 years, the Government took a decision to sell the project and consequently, cancelled the allotment of 47 acres of land in favour of the assessee. The above facts clearly demonstrate that the assessee though had entered into arrangement with the banks and co- promoters and took action for acquisition of land, import of machineries, etc., no new venture was established by the assessee. The venture, which was to be taken over by the assessee and operated did not fructify, not on account of the conduct of the assessee, but on account of the decision of the Government of Tamil Nadu. In our considered view, the decision of the Government of Tamil Nadu to sell the project is a very important fact, which has to be borne in mind to decide as to whether the expenditure incurred by the assessee was capital or revenue in nature.

The Assessing Officer fell in error in going by the fact that the expenditure was incurred from the capital account forgetting that the test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled.

The High Court of Delhi in Indo Rama Synthetics Ltd. (supra) held that if the expenditure is incurred for starting a new business, which was not carried out by the assessee earlier, then such expenditure was held to be capital in nature. However, if the expenditure incurred is in respect of the same business, which is already carried on by the assessee, even if it is for the expansion of the business, viz., to start a new unit, which is same as earlier business and there is unity of control and a common fund, then such an expense is to be treated as business expenditure and in such a case whether it is a new business/asset would become a relevant factor.

It is further held that if there is no creation of new asset, then the expenditure incurred would be revenue in nature. However, if the new asset comes into existence, which is of enduring benefit, then such expenditure would be capital in nature.

The Hon'ble Delhi High Court took note of the decision of the Gauhati High Court in Dy. CIT v. Assam Asbestos Ltd. [2003] 263 ITR 357/132 Taxman 808. The High Court of Calcutta in the case of Binani Cement Ltd. (supra), considered a case where the Tribunal disallowed the expenditure allegedly incurred by the assessee for preparing feasibility study report and capital work-in-progress in the earlier years but written off during the previous year, since the proposed project was abandoned. The Court affirmed the view taken by the CIT (A), where it was held that the company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the purpose of business and it was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business and that stage having not reached and no asset having come into existence, the capital work-in-progress had to be written off as such.

In the case of Asia Power Projects (P.) Ltd. (supra), the High Court of Karnataka held that, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off under Section 37(1) read with 28 of the Income Tax Act, 1961.

Insofar as the abandoned feature films are considered, a Division Bench of this Court in the case of Tiruvengadam Investments (P.) Ltd. v. Asstt. CIT [2016] 95 CCH 0024, referring to a circular issued by the CBDT in Circular No.16/2015 dated 06.10.2015, held that film production expenses of abandoned films should be treated as revenue expenditure. This decision was followed in the case of Asia Power Projects P. Ltd. (supra).

The learned counsel for the Revenue strenuously contended that a new project had emerged and it is immaterial whether machinery was reduced to scrap and ordered to be sold and what is required to be seen is that the expenditure was incurred from the capital account.

In our considered view, reliance placed on the decision of this Court in the case of E.I.D. Parry (India) Ltd. (supra) and the Kerala High Court in the case of Malabar & Pioneer Hosiery (P.) Ltd. (supra) is of little avail, as in both cases, it was for a new project, in contra distinction with the factual position in the case on hand. Therefore, those decisions are factually distinguishable. Heavy reliance was placed on the decision of this Court in the case of Mascon Technical Services Ltd. (supra).

At the first blush it appears that the decision would help the case of the revenue, but on a closer reading it proves otherwise. The question was whether the assessee was justified in seeking for bifurcation of the expenses incurred into capital and revenue. The Division Bench referred to the decision in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC). In the case of Brooke Bond India Ltd. (supra), it was held that expenditure, in connection with the additional issue of shares, paid to the Registrar of Companies by way of filing fee and hence, has no application. The Division Bench held that the decision in the case of Brooke Bond India Ltd. (supra) would have no application to the facts of the case, as the expenditure incurred by the assessee were shown in the books of accounts as towards issue expenses incurred during the year and they found there was no justifiable ground to dissect one part of the expenditure as revenue expenditure and another part as capital expenditure. As pointed out by the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra), we cannot take a decision sans facts and the factual position as set out in the preceding paragraph would clearly show that the abandoned project was not a new one and it was a decision taken by the Government after about 12 years after the petitioner was invited to take over the project, which was already in existence, as they were an expert in the same line of business. Therefore, on facts, we find that the CIT (A) was perfectly right in deleting the addition and holding that the expenditure was revenue not capital expenditure. We may point out that the decision in the case of Ideal Cellulura Ltd. (supra) was also a case where the expenditure was incurred to bring into existence a new asset, which is not so in the case on hand. Therefore, the said decision is also distinguishable on facts.”

Similar view has been held by the Co-ordinate Benches of the Tribunal in various other decisions of the Bench relied upon by the Ld. Counsel for the assessee in the paper book.

So far as the observations of the Ld. Addl./JCIT(A) that when there is mismatch of corresponding item as per column 21(a)(2) of Form No.3CD and Schedule BP of e-filed ITR, the corresponding difference has to be necessarily added to the total income as adjustment u/s 143(1) of the Act is concerned, we find the Mumbai Bench of the Tribunal in the case of Kalpesh Synthetics (P.) Ltd. vs. DCIT (2022) 195 ITD 142 (Mumbai-Trib.) has held that the Assessing Officer could not make disallowance based on observations made in tax audit report that payments were made after due date specified under respective Acts. The relevant observations read as under:

In view of the detailed discussions above, we are of the considered view that the impugned adjustment in the course of processing of return under section 143(1) is vitiated in law, and we delete the same. As we hold so, we make it clear that our observations remain confined to the peculiar facts before us, that our adjudication is confined to the limited scope of adjustments which can be carried out under section 143(1) and that we see

In view of the above discussion and relying on various other decisions cited before us, we set aside the order of the Ld. Addl./JCIT(A) and direct the Assessing Officer to delete the disallowance of Rs.1,17,25,562/- on account of IPO cost u/s 37(1). The first issue raised by the assessee in grounds of appeal No.2.1 to 3.1 is accordingly allowed.

The ground of appeal No.4 relates to the grant of credit of DDT amounting to Rs.1,52,65,049/- u/s 115-O of the Act.

The Ld. Counsel for the assessee at the outset submitted that since no credit was given, a direction may be given to the Assessing Officer to follow the due procedure. The Ld. DR has no objection. Accordingly, we restore this issue to the file of the Assessing Officer with a direction to verify the record and give appropriate credit of the DDT as per fact and law. Needless to say, the Assessing Officer shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. We hold and direct accordingly. The grounds of appeal No.4.1 to 4.2 raised by the assessee are accordingly allowed for statistical purposes.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes.