M/S. NICHOLAS PIRAMAL INDIA LTD.,MUMBAI vs. ACIT CIR. - 7(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH MUMBAI BEFORE SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM ITA No.3927/Mum/2006 (Assessment Year :2002-03) M/s. Piramal Enterprises Ltd. Vs. Addl. Commissioner of Income Tax (Formerly known as Piramal Circle 7(1), Aayakar Bhavan Healthcare Ltd.,) Mumbai - 400020 (Before known as Nicholas Piramal India Ltd.,) Piramal Tower, Ganpatrao Kadam Marg Lower Parel, Mumbai-400013 PAN/GIR No.AAACN4538P (Appellant) .. (Respondent) ITA No.4066/Mum/2006 (Assessment Year :2002-03) Addl. Commissioner of Vs. M/s. Piramal Enterprises Ltd. Income Tax (Formerly known as Piramal Healthcare Circle 7(1), Aayakar Ltd.,) Bhavan (Before known as Nicholas Piramal India Mumbai - 400020 Ltd.,) Piramal Tower, Ganpatrao Kadam Marg Lower Parel, Mumbai-400013 PAN/GIR No.AAACN4538P (Appellant) .. (Respondent) Assessee by Shri Ronak Joshi Revenue by Shri Kumar Padmapani Bora Date of Hearing 29/11/2019 Date of Pronouncement 20/02 /2020 आदेश / O R D E R PER M. BALAGANESH (A.M): These cross appeals in ITA Nos.3927/Mum/2006 & 4066/Mum/2006 for A.Y.2002-03 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XIX, Mumbai in appeal No.CIT(A)XIX/IT-104/05-06 dated 31/03/2006 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2005 by the ld. Addl. Commissioner of Income Tax, Range 7(1), Mumbai (hereinafter referred to as ld. AO).

2 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

3 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

We have heard rival submissions and perused the materials available on record. We find that the assessee during the year under consideration claimed deduction of Rs.61,24,779/- towards expenditure incurred on computer software. The assessee capitalised this amount in its books of accounts but claimed it as an expenditure in the computation of income. The ld. AO did not agree to the divergent stand taken by the assessee and proceeded to capitalise the said expenditure and granted depreciation @60% while completing the assessment. The assessee responded that the said expenditure comprises of expenditure of Rs.61.25 lakhs on account of Adope Pagemaker, License Fees for Web Speed transactions, Pay Roll software, Lotus notes etc. The ld. AO observed that this expenditure would be giving enduring benefit to the assessee in the capital field and accordingly requires to be capitalised. The ld. CIT(A) restricted the claim of depreciation to 25% as against 60% granted by the ld. AO. The ld. CIT(A) observed that depreciation chart as provided in the Appendix of Income Tax rules stipulated that if computer was purchased along with enabling software, then both computer as well as software would be eligible for depreciation @60%. However, if the software is purchased separately then, for the purpose of following depreciation, the same will not fall in Clause (5) of Schedule-III of Appendix-I. Accordingly, he held that the software license purchased by the assessee falls into the category of intangible asset and therefore, it is eligible for depreciation at 25%. Aggrieved, the assessee is in appeal before us.

4.1. We find that this issue has been the subject matter of adjudication by this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.1257/Mum/2014 & 1486/Mum/2014 dated 07/05/2019 wherein it was held as under:-

4 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

“9. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall advert to the issues assailed by the assessee in the present appeal in a chronological manner, as under: Disallowance of software expenses: Rs.14,00,800/- 10. The assessee had during the year under consideration debited certain purchase of software license as a revenue expenditure, under the head “Repairs – Computers – Others”, as under: REPAIRS – COMPUTERS – OTHERS A/C CODE 6286120 (B) Purchase & implementation of Rs. 5,40,000 “Sapphire‟ software used by Quality Control Department Purchase of Lotus notes web access Rs. 98,000 licenses from Lauren Information Technologies Purchase of Rs. 6,02,000 Lotus notes web access licenses from Lauren Information Technologies Purchase of Anti Virus Software from Rs. 1,60,000 Softcell Technologies Rs.14,00,800 Total

The A.O holding a conviction that the purchase of the aforesaid software licenses was in the nature of a capital expenditure, thus restricted the entitlement of the assessee towards claim of depreciation @ 25% of its value. In support of his aforesaid conviction, the A.O while concluding as hereinabove, was of the view that as a software license was a depreciable intangible asset under Sec.32(1)(ii) of the I.T Act, therefore, the same was only entitled for depreciation @ 25% under Part B of the depreciation schedule in the Appendix-1 of the I-T Rules 1962. In fact, the A.O observed that the treatment of the expenditure on purchase of computer software was to be looked into in the light of the amendment of Sec. 32 w.e.f 01.04.1998, which provided for grant of depreciation on knowhow, patent, copyrights, trade mark, license etc. acquired on or after 01.04.1998. It was observed by the A.O that as the purchase of computer software was in the nature of purchase of knowhow and a license to use the software, therefore, the explanation of the assessee that the expenditure incurred on the purchase of the same was in the nature of a revenue expenditure did not merit acceptance. 11. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. We find that the issue that expenses incurred

5 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

by an assessee on purchase of a software which brought greater efficiency in functioning of its business had been held by the Hon’ble High Court of Bombay in the case of PCIT Vs. Holicin Services (South Asia) Ltd. (2018) 93 Taxmann.com 270 (Bom), as allowable as a revenue expenditure. Further, the Hon’ble High Court of Bombay in the case of CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom) had observed that the expenditure incurred by an assessee on purchase of a software which facilitated its trading operations or enabled the management to conduct its business more efficiently or more profitably would not form part of the profit making apparatus of the assessee and would be allowable as a revenue expenditure. Also, we find that a similar view had also been taken by the Hon’ble High Court of Delhi in the case of CIT Vs. Amway India Enterprises (2012) 346 ITR 341 (Del). In the aforesaid case, it was observed by the High Court that the expenditure incurred by the assessee on purchase of software application and payment made for acquiring license to use those applications was to be allowed as a revenue expenditure. In the backdrop of the aforesaid settled position of law, we are of the considered view that as the aforesaid software purchased by the assessee did not form part of its profit making apparatus and only facilitated carrying its business more efficiently, therefore, the same was rightly claimed by it as a revenue expenditure. We thus in terms of our aforesaid observations direct the A.O to allow the software expenses of Rs.14,00,800/- as claimed by the assessee. The Ground of Appeal No. 1 is allowed.’

4.2. Respectfully following the decision of this Tribunal in assessee‟s own case, we direct the ld. AO to grant deduction of expenditure on account of software in the sum of Rs.61,24,779/- and accordingly, the Ground No. I raised by the assessee is allowed.

5.1. We have heard rival submissions. We find that the ld. AO had recorded in the assessment order that in the tax audit report, the Tax Auditor mentioned that assessee is following EXCLUSIVE method of accounting for MODVAT with regard to inventory, purchases and consumption. The assessee vide letter dated 29/11/2004 had also

6 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

contended that the aforesaid treatment had no impact on the profit at all. The ld. AO observed that unutilised balance of MODVAT credit on stock in trade is reflected in the balance sheet as an asset amounting to Rs.152.83 lakhs and as per the proviso of Section 145A of the Act, the unutilised MODVAT needs to be included in the value of closing stock. During the course of assessment proceedings, the assessee, without prejudice, claimed that the amount which was added to the closing stock in A.Y.2001-02 on similar lines as above i.e. Rs.86.56 lakhs should be allowed as part of the opening stock in A.Y.2002-03. This claim of the assessee was allowed by the ld. AO by increasing the opening stock to the extent of Rs.86.56 lakhs and the net addition on account of unutilised MODVAT credit was made by the ld. AO at Rs.66,27,443/-. This action of the ld. AO was upheld by the ld. CIT(A). We find that this issue was the subject matter of adjudication by this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA Nos.1257/Mum/2014 & 1486/Mum/2014 dated 07/05/2019 wherein it was held as under:-

“Adjustment of Inventory as per Sec. 145A : Rs. 1,16,08,088 21. We shall now advert to the contention of the ld. A.R that the A.O/DRP had erred in re-computing the value of the “closing stock‟ at Rs. 15,982.73 lacs as against Rs. 14,834 lacs and “opening stock‟ at Rs. 14,367.65 lacs as against Rs. 13,335 lacs, on the ground that the assessee is following exclusive method of accounting for MODVAT with regards to its inventory. It is the claim of the ld. A.R that irrespective of whether the assessee follows Inclusive or Exclusive method of valuation of stock, the amount of unutilized MODVAT shall have no bearing on the profits of the assessee. We find that the assessee had before the lower authorities objected to the aforesaid addition as was sought to be made by the A.O on three counts viz. (i) that requirement of valuing the purchases, sales and inventories for the purpose of determining the income under the head “Profits and gains of business or profession” was contrary to the accounting principles laid down by Accounting Standard-2 (for short “AS- 2”); (ii). that the ICAI had issued “Guidance Note on Tax Audit under Section 44AB of the I-T Act”, which specifically requires the formats in which information as regards the valuation of purchases, sales and inventories under both inclusive and exclusive method are to be presented,

7 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

and the same provides that irrespective of the methods being followed, the net impact on the profit and loss will be nil; and (iii). that irrespective of whether the assessee follows Inclusive or Exclusive method of valuation of stock, the amount of unutilized MODVAT credit will have no impact on the profits of the assessee. Apart there from, the assessee had also objected to the calculation of the “closing stock‟ and „opening stock‟ by the A.O by multiplying the stock value by the ratio of purchases (including excise) and purchases (net of excise). It is further averred by the ld. A.R that insofar the valuation of inventories as per Sec. 145A was concerned, the raw material, packing material, stores and works-in-progress was valued at cost, while for the finished goods were valued at cost or net realisable value, whichever was lower. In fact, it is the claim of the assessee that the „cost‟ has consistently been taken at net of MODVAT credit. On the basis of the aforesaid facts, it is stated by the assessee that the element of MODVAT was neither included in the consumption nor into cost for valuation of „closing stock‟. As such, it is the claim of the assessee that as it has debited its „profit & loss a/c‟ with purchases of raw material net of MODVAT Excise duty, therefore, the valuation of „closing stock‟ of raw material was also made at cost net of such excise duty. In sum and substance, it is the claim of the assessee that the costs which have not been debited to the profit and loss account at all, cannot be used for valuation of „closing stock‟. On the basis of its aforesaid submissions, it is the claim of the assessee that the deviation on the profit of the year on account of method of valuation prescribed under Sec. 145A is Rs. Nil, which formed part of the tax audit report as “Annexure B‟. 22. We have deliberated at length on the issue under consideration and find that the assessee for the purpose of its statutory accounts had followed the AS-2 on Valuation of Inventories, and the Guidance Note on Accounting Treatment of MODVAT/CENVAT issued by the ICAI. Accordingly, the assessee had followed the exclusive method for accounting purposes. However, for the purposes of income-tax it had worked out the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by including inter alia the CENVAT credit. The adjustment required u/s 145A of the I.T Act was reflected in Clause 12(b) of the tax audit report of the assessee. As per Clause 12(b) the adjustment u/s 145A worked out at Nil. It is the claim of the assessee that the amount reflected in Clause 12(b) of the tax Audit report shall be treated as the adjustment required u/s 145A, and in support thereof had relied on the order of the ITAT, Mumbai in the case of Hawkins Cookers Ltd. Vs. ITO (2008) 14 DTR 206 (Mum). We have perused Clause 12(b) (Page 61 of „APB‟) of the Tax Audit report of the assessee and find that it is the claim of the assessee that the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by inter alia including the effect of CENVAT credit will be Nil, subject to Sec. 43B that the duty, taxes, cess etc. is paid before the „due date‟ of filing of the return of income. As the ld. D.R had submitted that the aforesaid working of the assessee would require to be verified, we

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therefore, in all fairness restore the matter to the file of the A.O for readjudication. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim before him. The Ground of appeal No. V is allowed for statistical purposes.”

5.2. Respectfully following the same, we deem it fit and appropriate, to remand this issue to the file of the ld. AO to decide the same in the light of directions issued by the Tribunal for the A.Y.2009-10 . Accordingly, the Ground No. II raised by the assessee is allowed for statistical purposes.

S.NO. Date Event & document in support Page of Paper Book (a) 8.12.2000 Resolution of Board of Directors of 162-163 . assessee company

9 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

(b) 13.12.2000 ——do-- 164 (c) 20.12.2000 Resolution of Board of Directors of M/s 166 N.P.I.L Finvest a wholly owned subsidiary (i.e. N.F.L) (d) 22.12.2000 Share purchase agreement between NPL and 167 Rhone Poulenc Ltd. (RPL) (e) 23.12.2000 Loan agreement between NFL & ICICI Bank 146-151 (0 26.12.2000 A summary of acquisition of 18 lacs equity 178 share by NFL of RPIL for a consideration of Rs. 157.50 crores (8) 6.2.2001 Public offer by NFL 179-193 (h) 7.3.2001 A summary of further 9 lacs equity shares of 178 RPIL by NFL for Rs. 78.75 crores (i) 1.4.2001 Scheme of arrangement and, explanatory note 152-159 and to the scheme 195-203 (j) 28.12.2001 Assessee's letter to ICICI bank for repayment 137-139

6.1. It is not in dispute that the loan of Rs 200 crores from ICICI Bank was availed by the assessee for the purpose of acquiring the business of RPIL which is in the pharma industry which is also duly supported by the resolutions dated 8.12.2000 and 13.12.2000 passed to this effect specifying the intention of the parties. It is not in dispute that the loan amount was utilized for purchasing 18 lakh equity shares of RPIL on 26.12.2000 for Rs 157.50 crores. Later on 6.2.2001, in accordance with takeover regulations of SEBI , the assessee company and NFL made a public offer to acquire another 9 lakh equity shares of RPIL from the existing shareholders held publicly other than promoters . We find that on

10 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

07.03.2001, as a result of the above public offer, M/s NFL purchased 9 lakh equity shares of RPIL from Public for Rs. 78.75 crores. By this acquisition, the total investment made for acquiring 27 lakh equity shares (which was 60% of paid up equity capital of RPIL) went to Rs 236.25 crores in the financial year 2000-01 relevant to Assessment Year 2001-02. In addition, a sum of Rs 3.95 crores was also incurred in connection with purchase of shares by the assessee's wholly owned subsidiary M/s NFL. Pursuant to this acquisition, RPIL became a subsidiary of NFL which itself is a wholly owned subsidiary of the appellant company. These facts are not in dispute before us. Hence it could be safely concluded that the entire borrowed funds of Rs 200 crores plus own funds were utilized for the acquisition of shares of another pharma company with the sole intention of acquiring the running business of RPIL and to expand the existing business.

6.2. It is not in dispute that with effect from 01.01.2001, in order to implement the intention of expansion of existing business under a scheme of arrangement, entire assets and liabilities of RPIL and specific assets and liabilities of NFL were amalgamated with the assessee in accordance with the provisions contained in Sections 391 to 394 of the Companies Act, 1956. We find that the said scheme of arrangement was approved by the Hon‟ble Bombay High Court vide order dated 27.09.2001. We find that pursuant to take over of specific assets and liabilities of NFL, it goes to prove beyond doubt that right from inception, it was the assessee company who had intended to acquire the shares through its subsidiary in order to enable it to expand the existing business of the company, as the aforesaid manner could alone be the method to acquire the business.

6.3. We find lot of force in the argument advanced by the ld AR that the business of RPIL, subsidiary of assessee‟s wholly owned subsidiary i.e

11 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

NFL, became the business of the assessee company pursuant to the aforesaid acquisition and accordingly it could be safely concluded that the acquisition was done to expand the existing business and on account of commercial expediency. Hence we hold that the ratio laidd own by the Hon‟ble Apex Court in the case of S.A Builders vs CIT reported in 288 ITR 1 (SC) would squarely support the case of the assessee herein.

6.4. It is not in dispute that during the year under consideration, the loan raised by NFL from ICICI Bank was discharged by the assessee alongwith the interest on 28.12.2001. When the business assets and liabilities were taken over and when those liabilities were discharged by the assessee company during the year, the business nexus thereon stands automatically proved. Hence the payment of interest on loans of Rs 27.11 crores and prepayment charges of Rs 8.62 crores for closure of the above loan raised from ICICI Bank is squarely meant for the purpose of business of the assessee and hence cannot be treated as capital expenditure. We find that the assessee had accordingly claimed in the return of income deduction of Rs. 27.11 crores and prepayment charges of Rs. 8.62 crores u/s 36(l)(iii) / 37(l) of the Act. The ld DR vehemently argued that with regard to prepayment charges, the assessee had sought to write off the same over a period of six years in its books of accounts but had claimed the entire sum as expenditure in the return of income. In this regard, the law is very well settled that the entries in the books of accounts would not be the determinative factor for computing the total income of the assessee which is to be done in accordance with the provisions of the Income Tax Act.

6.5. We find that the ld AO had treated the entire interest payment of Rs 27.11 crores and prepayment charges of Rs 8.62 crores as capital in

12 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

nature as the same was incurred pursuant to take over of a pharma company as per the scheme of arrangement. We find that in support of his conclusion, the ld AO had also observed as under:-

a) The liability of interest of Rs. 7.03 crores on the loan of Rs. 200 crores from 1CICI Bank in AY. 2001-2002 had not even been claimed as an allowable expenditure in the hands of M/s NFL as it was not incurred by NFL in the course of conduct of its business by M/s NFL.

b) After the takeover of the assets and liabilities, interest accrued on the loan amounting to Rs. 7.03 crores was debited by the assessee company in its share premium account as part of capital expenditure of Rs. 12691.59 lacs.

c) By reason of the transfer of assets and liabilities of business of M/s RPIL, the nature and, character of the liability would not change and hence an expenditure incurred in relation to such a liability is capital expenditure.

6.6. We find that the ld AR submitted that RPIL was a well reputed and profit making company engaged in manufacturing and distributing of pharmaceutical products and that the primary objective of acquiring RPIL was to strengthen the assessee‟s pharma business and substantially increase the top line and bottom line of the assessee's business and making it the leading pharmaceutical company in India. It was further submitted that, combined entity as a result of merger of RPIL with the assessee company has led to increased production, higher sales and better profits to the assessee and the assessee has in fact only benefited from the economies of scale resulting in lower cost of manufacturing, achieving better cost efficiency etc. Infact, sales have increased from

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566.76 crores to Rs. 946.48 crores i.e. increase by 67% and, operating profits increased from Rs. 87.63 crores to Rs. 133.87 crores i.e. increase by almost 53%. It was also contended that, though the loan was originally taken by NFL, for acquiring the shares of RPIL but the entire purpose was with the aim and object to acquire the business for the assessee company. The assessee has actually discharged the liabilities taken over from NFL in the nature of payment of loan and interest payable thereon pursuant to scheme of arrangement approved by the Hon‟ble Bombay High Court w.e.f. 1/4/2001. In view thereof, it was submitted that the commercial decision to acquire the business of RPIL was based on commercial expediency and business prudence and as such expenditure incurred is an eligible business deduction.

6.7. We find that the ld CITA had concluded that the borrowings were not for the purpose of business of the assessee company. The ld CITA further observed as under:-

a) The borrowing was not done by the assessee company but by the subsidiary of the assessee company; b) The business of subsidiary company was not to purchase and sell shares or acquire controlling interest or acquire company or business; c) Even the business of the assessee company is that of dealing in pharmaceuticals and not acquiring shares, controlling interest or business entities; d) Since borrowings on which interest has been paid were made and utilized for the purpose of acquisition of a capital asset i.e shares of a company and for acquiring controlling interest, hence the claim of deduction on account of interest and prepayment charges cannot be allowed u/s 37(1) of the Act also.

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6.8. We find that pursuant to merger with effect from 1.4.2001, there is no longer shares that are existing and what is reflected in the books are only business assets. Hence the argument of the ld DR that the borrowings were utilized for purchase of acquisition of shares and hence interest paid thereon would be capital expenditure deserve to be dismissed. In other words, first the acquisition of shares had happened and later the merger had happened, pursuant to which, the shares got cancelled and the business assets and liabilities got vested with the transferee company with effect from 01.04.2001. Since the appointed date is effective from 01.04.2001, the treatment given by either parties in Asst Year 2001-02 be it in books or in their income tax returns, if any, prior to merger has got no relevance.

6.9. We find that in the instant case, the expenditure on interest and prepayment charge had been incurred by the assessee to expand the existing business of the assessee company. It was submitted by the ld AR that it was with the intent of acquiring the business of M/s RPIL that, subsidiary of the assessee company had purchased shares of M/s RPIL and, since the loan had been raised for purchase of the shares of subsidiary company so as to enable the assessee company to acquire the business of M/s RPIL, hence the expenditure incurred in respect of loan raised in the instant year is a revenue expenditure u/s 36(l)(iii)of the Act. We find lot of force in the said argument of the ld AR and we accept the same.

6.10. We find that when this point was put to the ld DR, he argued that in any case, the proviso to section 36(1)(iii) of the Act would come into operation which reads as under:-

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Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalized in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use , shall not be allowed as deduction.

We find that this proviso in any case would not be applicable for the year under consideration as the same was introduced in the statute only with effect from Asst Year 2004-05 and not applicable for earlier years.

6.11. We find that the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders v CIT reported in 288 ITR 1 would be squarely applicable to the facts of the instant case. In the said case, the Hon‟ble Apex Court held as under:

"In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(l)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton Vs. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not necessity and grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g. Eastern Investments Ltd. Vs. CIT [1951] 20 ITR 1, CIT Vs. Chandulal Keshavlal and Co. [1960] 38 ITR 2 601 etc. 26. The expression "Commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet it is

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allowable as a business expenditure if it was incurred on grounds of commercial expediency. [Emphasis Supplied]

6.12. We hold that the payment of prepayment charges also partakes the character of interest . We find that there cannot be any iota of doubt that the entire transaction of acquisition of business assets by the assessee has been done on the grounds of commercial expediency and hence the entire interest payment of Rs 27.11 crores and prepayment charges of Rs 8.62 crores would be squarely allowable as deduction u/s 36(1)(iii) of the Act itself. Accordingly, the Ground No. III raised by the assessee is allowed.

7.1. We have heard rival submissions and materials available on record. We find that under the head legal and professional fees, the assessee had claimed deduction in respect of payments made to Accenture in the sum of Rs.522.97 Lakhs. The assessee submitted that payment of Accenture was mainly pertaining to successful integration of RPIL with the assessee company. The assessee submitted that this expenditure has been incurred on the grounds of commercial expediency allowable as deduction u/s.37(1) of the Act. The ld. AO however, disregarded the contentions of the assessee and disallowed the claim of the assessee by treating it as capital expenditure. The ld. CIT(A) however, observed that since this expenditure had been incurred pursuant to amalgamation of RPIL with

17 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

assessee company, the same would fall within the ambit of provisions of Section 35DD of the Act and accordingly only 1/5th of the said expenditure would be eligible for deduction. Against this action of the ld. CIT(A) both assessee as well as the revenue are in appeal before us.

7.2. We find that the genuinity of incurrence of this expenditure by way of making payment to Accenture in the total sum of Rs.522.97 lakhs is not in dispute. We find that the payment was made by the assessee to Accenture based on agreement which mandated Accenture to assess in the integration of RPIL with the assessee. As per the agreement, the NPIL management had requested Accenture to submit a proposal to ensure the realization of further value to the group through the proposed integration between NPIL and RPIL. Thus, team of Accenture consultants had conducted a detailed pre-proposal study spanning over five weeks to revive NPIL and RPIL operations with a view to identify synergy and cost reduction opportunities across the merged entity. A preliminary assessment of various opportunities identified with a focused profit improvement initiation could potentially yield in which recurring benefits of about Rs.20 to 30 Crores in the short and medium term. From the aforesaid scope of services to be rendered by Accenture, it could be seem that Accenture had purely rendered professional services by way of pre- proposal study to understand the viability of the merger by integrated operations of RPIL with NPIL and the resultant profitability that the resultant merged entity would derive in short to medium term. Hence, it is a clear case of simple professional services rendered by Accenture to the assessee which at any cost cannot be considered as a capital in nature. We find that the said expenditure has to be considered as wholly and exclusively as deduction u/s.37(1) of the Act. We hold that the provisions of Section 35DD of the Act as alleged by the ld. CIT(A) cannot

18 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

be made applicable in the instant case as admittedly the same only refers to expenses incurred pursuant to amalgamation. Hence, we direct the ld. AO to grant deduction of the said expenditure u/s.37(1) of the Act. Accordingly, the ground Nos. IV and IV(i) raised by the assessee are allowed and Ground No.4 raised by the revenue is dismissed.

Expired / Destroyed Stocks - Rs 133.40 lacs Write off of stocks on discontinuation Of Joint Venture - Rs 77.02 lacs Write off of receivables from Voltas - Rs 195.20 lacs Compensation paid to CFA‟s - Rs 63.03 lacs Closure of Hospital Products Division - Rs 210.92 lacs

Total Rs 679.67 lacs

8.1. The ld AO observed that the details filed by the assessee in this regard are very sketchy in earlier year, the expenditure relating to the Thane Factory closure expenses were disallowed. The ld AO observed that the assessee had not furnished any details in support of its claim of deduction in this regard. Accordingly, he proceeded to disallow the sum of Rs 679.67 lacs during the year under consideration also.

19 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

8.2. Before the ld CITA, the assessee requested for an opportunity to be provided to it for furnishing of details. Accordingly, the ld CITA called for a remand report from the ld AO. The assessee furnished the details that were available with it before the ld AO during the remand proceedings. The ld AO after examination of the details furnished by the assessee, furnished the remand report by observing as under:-

“10.1. Before it is argued that the deduction claimed is an allowable deduction and the same fed. As the disallowance was made by the AO for the reason of non-furnishing of the matter was referred back to the AO by the undersigned to examine the issue of allowability of expenditure of Rs. 6,79,67,000/- after being giving opportunity of being heard to the assessee and to send a report. The AO accordingly re-heard the case and has sent the report as under:- "2. The assessment of the aforesaid assessee company was completed u/s. 143(3) of the I.T. Act on 31-3-2005. In the order passed u/s. 143(3) of the IT. Act an amount of Rs. 6,79,67,000/- was disallowed on account of write off of receivable & Stock. 3. The assessee preferred an appeal against the aforesaid additions. During the course of appeal proceedings, the assessee has raised the issue of Write off of receivable & stocks. The undersigned was directed vide the above referred letter dated 31-1-2006 to carry out enquiries and submit a report. The requisite report thereon is as under:- 4. Write off of Receivables & Stock ( Rs. 6,79,67,000/-) A broad breakup of the amounts written off is as under;- 4.1. Write off of expired stock & Discontinuation )of Joint Venture (Rs. 210.50 lacs). 4.1.1. It is mentioned by the assessee company that the joint Venture with Charak Piramal Pharmaceutical was discontinued and the stock amounting lo Rs. 77.03 lakhs was written off. The assessee company was vide letter dated 3-3-2006 asked to furnish a copy of the discontinuation agreement, if any specifying the terms and conditions of the Joint Venture and its discontinuance. 4.1.2 In response, the assessee company has filed a letter dated 16-3-2006 enclosing a copy of agreement of the joint venture with M/s. Chcrak Piramal Pharmaceuticjls. The assess company has not furnished the copy of the discontinuation agreement called for. Neither has the assessee company filed any details regarding the term and conditions of the disconinuance and the subsequent write off of the stock worth Rs. 77.03 lakh; 4.1.3 As regards the stock written off amounting to Rs.1,33,46,833/-, a perusal of the details filed shows that expiry date of al number of products falls before the F. Y. 2001-02 relevant to A.Y. 2002-03. Hence, the assesses company was requested to explain as to how &to3y expired before the beginning of the relevant previous year can be written year under consideration. Further, the assesses company was also requested of the relevant portion of the stock register in respect of the stock.

20 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

4.14. In response, the assessee company has mentioned that stock worth only an significant amount of Rs.1,41,698/- expired prior to the relevant assessment year. However, the assessee company has not produced the copies of the relevant portion of the stock register in respect of the stock written off. 4.1.5 In view of the above, it is seen that the assessee company has not been able to file the necessary documentary evidence to back up its claim of write off' of 'stock worth Rs. 210.50 lakhs. In the absence of the necessary documentary evidence, the assessee company'$ /claim cannot be verified. 4.2 Settlement of outstanding dues from Voltas Ltd( 195.22 lakhs) 4.2.1 It is mentioned that on termination of the distribution arrangement with M/s. Voltas Ltd., an amount of Rs. 195.22 lakhs was written off on account of difference in reconciliation, Municipal Cess etc. Hence the assessee company was required to furnish details to prove that the amount written off has been previously offered as .income in the preceding years as per section 36(2) of the I.T. Act. 4.2.2 In response, the assessee company's representative expressed his inability to produce the relevant documents to prove that the amounts written off have been previously offered as income "in the preceding years. The assessee company's representative has submitted only the invoice number of the bills out of which certain amounts have been written off. However, the assessee company's representative has not produced any documentary evidence to back up its claim. Neither has the assessee company filed any copies of accounts to support the reconciliation of its accounts with M/s. Voltas Ltd. 4.3 Compensation for settlement of CFAs ( Rs. 63.01 lakhs) 4.3.1 It is mentioned in the write up that the compensation of Rs.63,01,709/- was paid to the CFAs for discontinuation. The compensation so paid is based on the working of average mission as well as lump sum compensation. It is further mentioned that there was lack of satisfactory performance by the CFAs. Thus, it is seen that the CFAs have been discontinued and compensation has been paid to them to reduce the costs. The discontinuation of the CFAs has given an enduring benefit to the assessee company. In view of the above the assessee company was asked to explain why the compensation paid should not be treated a capital expenses. Further '.he assessee company was also asked to explain compensation paid can be treated as an admissible expenses as no service have rendered by the CFAs in lieu of the same, during the relevant previous year. In response, the assessee company has submitted that the expenditure has been laid out wholly and exclusively for the purpose of business and as no new asset has come into existence the expenditure should be treated as revenue expenditure. 4.3.3 The assessee company’s contention are not acceptable as the CFA's have been discontinued for lack of satisfactory performance. The discontinuance has definitely given a benefit to the assessee company and the same is enduring in nature as the assessee company does not have bear the losses due to unsatisfactory performance of the CFAs. Further, the assessee has not offered any explanation as to how the compensation paid can be treated as an admissible expense as no services have been rendered by the CFAs in lieu of the same, during the relevant previous year.

21 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

4.3.4. In view of the above, the expenditure on account of discontinuance of CFA should be treated as capital expenditure. 4.4. Closure of Hospital Products Division: (Rs. 210.92 lakhs)

4.4.1. USS Subdivision:- It is mentioned that the losses in USS subdivision were on of high sales returns. A perusal of (he annexure A shows (hat the sales return of 1.56,82,89 5/- have been reduced from the total sales. However, the stock has not been increased by a corresponding amount. In view of the above, the assessee company was requested to file details of the goods returned back and their treatment in the books if accounts. In response the assessee company has submitted that the sales return, of Rs.1,56,82,695 has been reflected in the closing inventory of the assesses company at the end of the year. From what is stated above, it is seen that the loss of Rs. 1,29,90,965/-from USS subdivision has been worked out by the assesses company and without considering the effect of the sales return of Rs. 1,56,82,895/-. When the sales return is considered as a part of the closing stock of USS subdivision there is no resultant loss which has to be written off. Thus an artificial loss has been computed by the assessee company and the same has been written off. 4.4.2. STYR Subdivision:- It is mentioned that in Stryker subdivision the loss was on account of "Demonstration Stocks". The assessee company was requested to kindly furnish the details of such "Demonstration Stocks" alongwith the purpose of selling the same at a discounted price. It is mentioned by the assessee company that because of improper use and wear and tear during demonstration, the stock has to be dispose;' off at a reduced price. The assessee’s contention is found to be acceptable. 4.4.3. G2 Subdivision:- It is seen that in G2 subdivision, stocks worth Rs. 5.23,626/- have been sold at Rs. 95,361/-. The assessee company was requested to explain as to why have the stocks been sold off at 19% of its value. No submission has been made by the assessee company in this regard. 4.4.4. Apart from the above, it is seen that debtors have also been written off. Hence, the company was requested to kindly file details to show that the conditions laid down under section 36(2) of the I.T. Act are fulfilled for write off of the Debtors. The assessee company has merely staled that the sales representing the debts has already taken place in previous years. However, the assessee company has not produced any ry evidence in this regard. In view of the above, it is to be mentioned that the write off of the receivables and stock is not allowable. The details filed by the assessee's representative and '.he copy of the assessee company's submission dated 16/3/2006 is enclosed herewith for kind perusal."

8.3. The ld CITA observed that the assessee could not furnish any documentary evidences in support of its claim before the ld AO even in the remand proceedings and accordingly upheld the action of the ld AO.

8.4. We have heard the rival submissions and perused the materials available on record. We find from the details submitted in respect of amount disallowed towards Thane Factory expenses, that the same were incurred only in respect of retrenchment and related expenses which had

22 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

been consistently allowed by the ld CITA in the earlier assessment years upto Asst Year 2001-02. The assessee had filed detailed submissions dated 16.3.2006 as per the details in the paper book filed before us in response to the queries raised by the ld AO vide letter dated 3.3.2006 during the remand proceedings. We also find from the details enclosed in page 249 of the paper book I before us, that the assessee had duly furnished the details such as code, description, product line, quantity, expiry date etc. When all these details are available both before the ld AO and ld CITA, it would be unjust and unfair to conclude that no details were furnished by the assessee. Moreover, from the said details, we also find that the stocks contained only those stocks, the period of which was beyond the prescribed expiry date, thereby making the stocks unsaleable and useless. Hence the assessee being in pharmaceutical industry, has no other option but to write off the same in its books and claim the same as deduction which is a normal business loss occurring to the assessee. We find that the assessee had submitted before the lower authorities that out of total stock of Rs 133.48 lacs, entire stock had expired other than stock to the tune of Rs 1,41,698/-. We find that with regard to the observation made by the ld AO for non-furnishing of stock register by the assessee , we find that the assessee had duly adduced the reason that entire records stood destroyed in fire on 22.12.2004, evidences in support of the same are enclosed in pages 328 to 336 of paper book I. In view of these facts and circumstances, we hold that the assessee would be entitled for deduction in respect of write off of dead stocks of Rs 133.48 lacs during the year under consideration.

8.5. With regard to write off of receivables on discontinuation of joint venture with M/s Charak Health Care P Ltd amounting to Rs 77.02 lacs is concerned, we find that the assessee had entered into a joint venture

23 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

agreement dated 26.3.1999 with M/s Charak Health Care P Ltd for marketing of pharmaceutical products. The said joint venture agreement is enclosed in pages 268 to 327 of paper book I. We find that the assessee supplied stocks to joint venture company during the period 1999 to 2002 and sales were duly credited for the same and offered to tax in respective assessment years with corresponding debit to debtors account. Admittedly, the joint venture company had discontinued the business and thereby the stocks lying with it became dead. The joint venture did not pay any sum due to the assessee company and hence the debtors balance had to be written off by the assessee during the year under consideration and claim deduction towards bad debts u/s 36(1)(vii) of the Act. We find that the assessee had duly complied with the provisions of section 36(2) of the Act. It is not in dispute that the said trade debts had been duly written off as irrecoverable in the books of accounts of the assessee company. Hence it is eligible for deduction u/s 36(1)(vii) of the Act.

8.6. With regard to write off of receivables on discontinuation of distributorship arrangement with Voltas Ltd amounting to Rs 195.22 lacs, we find that the assessee company had entered into a distributorship arrangement with Voltas Limited for distribution of various vitamin premixes, veterinary products and other speciality chemicals in October 1993. The assessee supplied stocks to Voltas Ltd during the periods 1993 to 2001 and sales were duly credited for the same and offered to tax in respective assessment years with corresponding debit to debtors account. Admittedly, with effect from 1.10.2001, the distributorship arrangement was discontinued. Pursuant to this, a settlement was reached between the two parties as is evident from the settlement letter dated 23.5.2002, as a result of which, a sum of Rs 195.22 lacs was written off by the

24 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

assessee. The assessee had also furnished the invoice wise statement of the amounts written off. These details are available in pages 251 to 257 of paper book I. Since Voltas Ltd did not pay the sum due to the assessee company , it became irrecoverable pursuant to settlement letter dated 23.5.2002 as stated supra, the assessee had no other option but to write off the same which was duly done in its books. Accordingly, the assessee would be entitled for deduction u/s 36(1)(vii) of the Act in respect of the same.

8.7. With regard to compensation paid to Cost and Freight Agents (CFAs) amounting to Rs 63.01 lacs, we find that as a result of merger of RPIL with assessee company with effect from 1.4.2001, some of the CFAs of RPIL were discontinued by the assessee company as the assessee company already had existing CFAs at such locations and the fact that their performance was not satisfactory. Accordingly, the assessee company thought it fit to pay compensation to 8 CFAs as evident from page 259 of paper book I together with its workings enclosed in pages 260 to 261 of paper book I. This compensation was paid by the assessee for terminating the relationship prematurely. The case of the revenue is that this would tantamount to capital expenditure. In this regard, we find that the reliance placed by the ld AR on the decision of Hon‟ble Supreme Court in the case of Bombay Steam Navigation Co. Ltd vs CIT reported in 56 ITR 52 (SC) is very well founded. The relevant operative portion of the said judgement is reproduced hereunder:-

“The question then is whether the expenditure is of a capital nature. It is not easy ordinarily to evolve a test for ascertaining whether in a given case expenditure is capital or revenue, for the determination of the question must depend upon the facts and circumstances of each case. The Court has to consider the nature and ordinary course of business and the objects for which the expenditure is incurred. Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger

25 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit- earning process and not for acquisition of an asset or a Tight of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.”

8.8. Respectfully following the said decision, we hold that the assessee would be entitled for deduction in respect of compensation paid to CFAs amounting to Rs 63.01 lacs. The ld AO is directed accordingly to grant deduction for the same.

8.9. With regard to deduction of loss on closure of Hospital Products division amounting to Rs 210.92 lacs, we find the break-up of the same are as under:-

Loss on closure of USS Subdivision - Rs 129.01 lacs Loss on closure of STYR Subdivision - Rs 77.63 lacs Loss on closure of G2 Subdivision - Rs 4.28 lacs -------------------- Rs 210.92 lacs -------------------- 8.10. We find that the losses in USS Subdivision were on account of high sales returns, which are duly reflected in the closing inventory of the assessee company. The closing stock of inventory disclosed by the assessee has been accepted by the lower authorities in the instant case without raising any dispute thereon. It is not in dispute that the sales made in respect of these items were offered to tax in the earlier year. In any case, when the stocks come back to the assessee, the same are included in the closing inventory and hence there cannot be any grievance for the revenue. Hence there is no artificial loss as claimed by the revenue in the instant case. Hence we direct the ld AO to grant deduction towards loss on closure of USS Subdivision amounting to Rs 129.01 lacs.

26 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

8.11 With regard to loss on closure of STYR Subdivision, we find that the assessee had submitted that the same was on account of demonstration stocks which are used to demonstrate the features, efficiency, usefulness etc of the products to the customers including potential customers. These stocks obviously would lose their value over a period of time. It was submitted that on account of improper use and wear and tear of stocks, the stocks had to be disposed off at a reduced price. We further find that this explanation has been found to be acceptable by the ld AO in the remand proceedings. Then there is absolutely no basis for the ld CITA to deny the claim of deduction to the assessee in this regard. Accordingly ,we direct the ld AO to grant deduction of Rs 77.63 lacs on account of loss on closure of STYR Subdivision.

8.12 With regard to loss on closure of G2 Subdivision amounting to Rs 4.28 lacs, we find that the assessee had submitted that the stock of Rs 5,23,626/- was sold for Rs 94,361/- resulting in a loss of Rs 4.28 lacs. Since these stocks had already undergone huge wear and tear and on account of improper use , the same would not fetch the real market price and had to be sold at a much discounted price. This commercial decision of the assessee cannot be questioned by the revenue. Accordingly we direct the ld AO to grant deduction of Rs 4.28 lacs towards loss on closure of G2 Subdivision which is a genuinely incurred business loss by the assessee company.

8.13 Accordingly, the Ground Nos. V and V(i) raised by the assessee are allowed.

27 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

We have heard the rival submissions. We find that the ld AO had held that the sale of scrap, cash discount and receipt of insurance claim are not related to export business and hence deduction u/s 80HHC of the Act would not be eligible for the same. We find that cash discounts are only in respect of purchases made by the assessee company and therefore not in the nature of receipts specified in clause (baa) of Explanation to Section 80HHC of the Act. Infact pursuant to this cash discount, the value of purchases had been reduced having direct nexus with the profits of the business. We find that it has been held in the following decisions that the aforesaid receipts would be „profits of the business‟ for the purpose of computation of deduction u/s 80HHC of the Act :- a) Hon‟ble Bombay High Court in the case of CIT vs Pfizer Ltd reported in 330 ITR 62 (Bom) in respect of insurance claim. b) Hon‟ble Punjab and Haryana High Court in the case of R N Gupta Co Ltd vs CIT reported in 351 ITR 369 in respect of sale of scrap. c) Decision of Pune Tribunal in the case of ACIT vs GKN Sinter Metal P Ltd reported in 153 ITD 311 in respect of cash discount.

9.1. Respectfully following the aforesaid decisions, we decide the Ground No. VI raised by the assessee in favour of the assessee.

28 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

10.1. Brief facts of this issue relevant to the computation of capital gains are as under:-

“That on 7th of May' 2000 in financial year 2000-01 relevant to assessment year 2001-02, M/s Rhone Poulenc India Ltd. (hereinafter referred to as "RP1L") entered into a Memorandum of Understanding with M/s Grasim Industries Ltd. (hereinafter referred as "GIL"), M/s Hindalco Industries Ltd. (hereinafter referred as "HIL") and, M/s Indo Gulf Corporation Ltd. (hereinafter referred as "IGCL") for sale of land measuring 8000 sq. yard together with a building and other structures standing thereon bearing Plot No. 216 of Worli Estate of Municipal Corporation of Greater Mumbai for a consideration of Rs. 84.50 crores, which was to be paid in the following manner. a) a sum of Rs. 5,00,00,000/- (Rupees Five Crores only) to be paid on or before the execution of this Memorandum of Understanding as earnest money. b) the balance sum of Rs. 79,50,00,000/- (Rupees Seventy Nine Crores Fifty Lacs only) to be paid in stages upon the assignment and transfer of various units in the building. Standing in the said land to the Intending Purchasers, their nominees or assigns in the manner more particularly set out in the draft Agreement for Sale annexed to this Memorandum of Understanding. 1.1 It was specifically provided that, assignment and transfer shall be done by Deeds of Apartment to be executed subsequent to the Intending Vendor submitting the land. building and structures to the Maharashtra Apartment Ownership Act, 1970 and executing and registering a declaration as set out under the provisions of Section 2 and other applicable provisions of the said Act.”

10.1.1. The memorandum of understanding entered into by the parties also provided for obtaining the permission from appropriate authority under Chapter XXC of the Income Tax Act. The said approval was obtained from Appropriate Authority under Chapter XXC of the Income Tax Act. The said approval was obtained from Appropriate Authority on 07/08/2001 and thereafter on 23/11/2001, the agreement for sale of property was entered between RPIL and Grasim Industries Ltd,

29 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Hindalco Industries Ltd and Indo-gulf Corporation Ltd. As per the said agreement for sale, RPIL agreed to sale “Rhoni Poulenc House” (RPH) for total consideration of Rs.84.50 Crores. It was further provided in the aforesaid agreement that transfer of RPH property would have to be made on or before 30/09/2005.

10.1.2. Later RPIL was amalgamated with the assessee company w.e.f. 01/04/2001 and all the assets and liabilities of RPIL became assets and liabilities of the assessee company. The assessee company in the return of income filed for the A.Y.2002-03 declared long term capital gains of Rs.7,53,50,712/- in respect of sale of land of RPH worked out as under:-

Amount Particulars A mount 33,13,84,129/- Total Sale Proceeds received on transfer (partial) of RPIL House at Worli, as per Agreement dated 23.11.2001 13,25,53,652/- Sale Proceed received (pertaining to land as per Valuation Report) (40% of total sale proceeds) Fair Market Value of RPIL House as on 01.04.1981 as 8,56,00,000/- per Valuation Report 3,42,40,000/- Total Fair market Value pertaining to Land (40% of total FMV) 1,34,27,920/- Fair Market Value pertaining to Land transferred (being ratio of sale Proceeds realized to total consideration) Indexed Cost of Acquisition of Land (1,34,27,920 x 5,72,02,940/- 426/100) Long Term Capital Gain on the portion of Land sold 7,53,50,712/- (13,25,53,652 - 5,72,02,940)

30 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

10.1.3. The assessee in their notes to the computation of income with regard to the subject mentioned capital gains had stated as under:-

" During the relevant previous year, RPIL had entered into an Agreement for sale dated 23.11,2001 with Grasim Industries Limited (GIL), Hindalco Industries Limited (HIL) & Indo Gulf Corporation Limited (IGCL) for sale of RPIL House (RPIL House), situated at Worli, for a total consideration of Rs. 84.5 Crores. Pursuant to the amalgamation of RPIL with the assessee company, under the scheme of Arrangement referred in Note 1 above, the assessee company adopted and confirmed the Agreement dated 23.11.2001 entered into between RPIL and GIL, HIL & IGCL. The transfer of RPIL House is intended to be completed in installments over a period of 4 years, on or before 30.09.2005. Accordingly, part consideration of Rs. 33,13,84,129/- has been received in the previous year relevant to the current assessment year and possession of the appropriate portion of the property has been handed over. Possession of the rest of the premises has not yet been given.

For the purposes of Computation of Capital Gains the above has been considered only to the extent of the possession handed over in accordance with the provisions of Section 2(47)(v) of the Income Tax Act, 1961 and Section 53A of the Transfer of Property Act, 1882. A Valuation Report has been obtained from a Chartered Engineer to determine the Fair Market Value of the assets as on 01.04.1981 and the allocation between land and building. The Computation of Capital Gains (Long Term) on transfer of the appropriate portion of land has been accordingly computed and reflected in Schedule 3 of the Computation of Total Income. The balance of sale consideration pertaining to Building has been reduced from the block of assets in accordance with Section 43(6)(c)(b) of the Income Tax Act."

10.1.4. Out of the actual sale consideration received during the year in the sum of Rs.33.13 Crores, the assessee had adopted the sale consideration for the land portion at Rs.13.25 Crores i.e. 40% of total sale

31 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

consideration of 33.13 Crores received during the year. The remaining sum of Rs.19.98 Crores of sale consideration (33.13–13.25) was attributed towards sale consideration of building of RPH property and the same was reduced from the block at 10% amounting to Rs.1,66,73,144/- which is worked out as under:- Sr. No. Particulars Amount Total Amount 1) Opening WDV i) WDV as on 01.04.2001 31,87,76,188/- 2) Additions WDV as on 01.04.2001 of 3,54,37,462/- RPH of M/s. RPIL 51,000/- 3,54,88,462/- ii) WDV as on 01.04.2001 of M/s SPL Other Additions iii) 6,24,39,848/- 3) Total 41,67,04,498/- 4) Sales i) RPH of M/s. RPIL 19,88,30,477/- ii) Other Assets 2,86,50,000/- 22,74,80,477/- 5) WDV at close of year (3-4) 18,92,24,021/- 6) Depreciation Claimed 1,66,73,144/-

10.1.5. The assessee submitted before the ld. AO that the sale proceeds of the property was Rs. 7,897/- per sq.ft. whereas the fair market value as on 01.04.1981 had been determined on the basis of the Valuation Report @ Rs. 800/- per sq. ft. Similarly, the sale value of land was Rs. 4,740/- per sq. ft. as compared to Rs. 480/- per sq. ft. of fair market value determined as on 01.04.1981. Likewise, the corresponding

32 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

sale value and fair market value of building was Rs. 3157/- per sq. ft. and. Rs. 320/- per sq. ft. respectively.

10.1.6. Later during the course of assessment proceedings, assessee filed the revised computation of long term capital gains and arrived at the revised long term figure at Rs.11.03 Crores as against original long term gain declared at 7.53 Crores. The assessee submitted that the revised calculation of such capital gain was on account of the fact that, in the computation, sale portion of land had been incorrectly adopted at 40% instead of 60% of the aggregate sale consideration. The assessee submitted that this was also based on the Chartered Engineers Report dated 14th of October 2003. The revised computation of long term gain is as under:-

Particulars Amount Amount Total Sale Proceeds received on transfer 33,13,84,129/- (partial) of RPIL House at Worli, as per Agreement dated 23.11 .2001 Sale Proceed received (pertaining to land as 19,88,30,477/- per Valuation Report) Fair Market Value of RPIL House as n 0 1 8,56,00,000/- .04. 1 98 1 as per Valuation Report (60% of total sale proceeds) Total Fair market Value pertaining to Land 5,13,60,000/- (60%ofFMV) Fair Market Value pertaining to Land 2,01,41,880/- transferred (being Ratio of Sale Proceeds realized to total consideration) Indexed Cost of Acquisition of Land 8,58,04,410/- (2,01,41,880 X 426/100) Long Term Capital Gain on the portion of 11,30,26,067/- Land sold : (19,88,30,477-8,58,04,410)

33 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

10.1.7. Correspondingly the assessee also filed a revised depreciation chart towards building portion as under:-

Total Amount Sr. No. Particulars Amount 1) Opening WDV WDV as on 01.04. 2001 31,87,76,188/- 2) Additions WDV as on 01.04.2001 of 3,54,37,462/- RPH of M/s RPIL 3,54,88,462/- ii) WDV as on 01.04.2001 of 51,000/- M/s SPL iii) Other Additions 6,24,39,848/- 41,67,04,498/- 3) Total 4) Sales i) 13,25,53,652/- RPH of M/s RPIL 16,12,03,652/- ii) Other Assets 2,86,50,000/- 25,55,00,846/- 5) WDV at close of year (3-4) 6) Depreciation Claimed 2,33,00,826/-

10.1.8. The ld. AO while completing the assessment recomputed the long term capital gains of land at 37.97 Crores as under:-

Particulars Amount Amount Total Sale Proceeds received on transfer 84,50,00,000/- (partial) of RPIL House at Worli, as per Agreement dated 23.11 .200 1 42,25,00,000/- Sale Proceed (pertaining to land taken at 50% of total sale proceeds)

34 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Fair Market Value of RPIL House as n 8,56,00,000/- 01.04.1981 as per Valuation Report Total Fair market Value pertaining to Land 4,28,00,000/- Cost of Acquisition of Land (no indexation 4,28,00,000/- allowable) Long Term Capital Gain on the portion of 37,97,00,000 Land sold : (42,25,00,000-4,28,00,000)

10.1.9. From the above computation it could be seen that

(1) Ld. AO had allocated the sale consideration towards land and building in the ratio of 50:50.

(2) The ld. AO had considered the total sale consideration at Rs.84.50 Crores instead of 33.13 Crores which was the sale consideration actually received by the assessee during the year.

(3) The ld. AO did not grant indexation benefit on the fair market value of land as on 01/04/1981.

(4) Further the ld. AO computed the short term capital gain on sale of building of RPH property of Rs.12,78,10,122/- worked out as under:-

Sr. No. Particulars Amount Total Amount Opening WDV 1) i) WDV as on 01. 04.2001 21,34,13,284/- 2) Additions

35 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

i) 4,28,00,000/- WDV as on 01.04.2001 of RPH of M/s. RPIL ii) WDV as on 01.04.2001 of 51,000/- 4,28,51,000/- M/s SPL Other Additions 6,24,39,848/- iii) 3) Total 31,87,04,132/- 4) Sales 42,25,00,000/- i) RPH of M/s RPIL ii) Other Assets 2,40,14,254 44,65,14,254/- 5) 12,78,10,122/- SHORT TERM CAPITAL GAIN

10.2. The ld. CIT(A) upheld the action of the ld. AO in

(a) Allocating the sale consideration towards land and building in the ratio of 50:50. (b) Adopting total sale consideration of 84.50 Crores as against 33.13 Crores actually received by the assessee. (c ) However, the ld. CIT(A) granted the benefit of indexation on the actual cost of acquisition of the land which was replaced in the place of fair market value of land as on 01/04/1981 while computing the cost of acquisition for the purpose of acquisition of long term capital gains. Accordingly, the ld. CIT(A) re-computed the long term capital gains at Rs.42.10 Crores as under:-

Sale Consideration Rs. 42,25,00,000/- Cost of acquisition Rs. 3,50,000/-

36 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Indexed cost of acquisition (Rs. Rs. 14,91,000/- 3,50,000/- X 426/100) Long Term Capital Gains (Rs. Rs. 42,10,09,000/- 42,25,00,000/- 14,91,000)

10.2.1. This resulted in enhancement of the long term capital gains made by the ld. CIT(A). With regard to computation of short term capital gains on sale of building of RPH property, the ld. CIT(A) determined the same at Rs.13.51 Crores by making the enhancement of Rs.73,62,538/- worked out as under:-

Sr. No. Particulars Amount Total Amount 1) Opening WDV ') WDV as on 01. 04.2001 21,34,13,284/- 2) Additions i) 3,54,37,462/- WDV as on 01.04.2001 of RPH of M/s RPIL ii) WDV as on 01.04.2001 of 51,000/- 3,54,88,462/- M/s SPL SHORT TERM CAPITAL 6,24,39,848/- iii) GAIN 3) Total 31,13,41,594/- 4) Sales 42,25,00,000/- i) RPH of M/s RPIL ii) Other Assets 2,40,14,254 44,65,14,254/- 5) SHORT TERM CAPITAL 13,51,72,660/- GAIN

37 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

10.3. Aggrieved, both the assessee as well as revenue is in appeal before us.

10.4. We have heard rival submissions and perused the materials available on record. From the detailed facts narrated hereinabove including the enhancement made by the ld. CIT(A) on the computation of long term and short term capital gains, on sale of land and building of RPH property, the following issues arise for our consideration:-

(a) Whether the sale consideration should be adopted at Rs.84.50 Crores or Rs 33.13 Crores which was the sum actually received during the year in the facts and circumstances of the case ? (b) What would be the proper allocation of sale consideration towards land and building i.e. whether the ratio of allocation No.50:50 or 60:40 in respect of land and building respectively in the facts and circumstances of the case ? (c) Whether assessee is entitled to adopt the fair market value of land as on 01/04/1981 as cost of acquisition and claim benefit of indexation thereon while computing long term capital gains on sale of land of RPH property or the actual cost of acquisition on land and claim benefit of indexation thereon, in the facts and circumstances of the case ?

10.5. We find that as a result of agreement entered between RPIL i.e. the company which stood merged with assessee company on 01/04/2001, Grasim Industries Ltd., and Hindalco Industries Ltd., and Indo-Gulf Corporation Ltd., for sale of land measuring 8000 sq. yards together with building and other structure standing thereon for total consideration of

38 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Rs.84.50 Crores. Now, what is to be seen is whether the assessee had transferred the entire property or part of the property during the year under consideration. There is no dispute that the sale consideration of Rs.84.50 Crores represents the consideration for the whole of the property. It is the case of the ld. AR that there was no transfer of the entire property in the instant year but only transfer of part of the property. The assessee was to receive total sale consideration of Rs.84.50 Crores on transfer of property free from all encumbrances for the whole of the property. It is not in dispute that the subject mentioned property was encumbered till 31/03/2002 and hence no transfer could have been made for the same. In this regard, the following undisputed facts are relevant for our consideration:-

10.5.1. From Clause-2 of the agreement dated 23/11/2001, we find that there is a built up area on 1,07,000/- sq.ft on the land measuring 8000 sq. yards. On the aforesaid land, the assessee was in possession of 36,688 sq. ft of Carpet area and 44 car parking space described as “vendor area”. The remaining area had been let out and given on leave and license basis to various parties as per the details set out in Annexure A to the agreement dated 23/11/2001. In fact the vendor area of 36,688/- sq.ft includes 10,292/- sq. ft of warehousing area. In this regard agreements specifically contain the following:-

" It has been agreed and decided between the parties hereto that the Vendors shall prior to the execution of the Deed of Apartment in respect of Vendor Area of 36,688 sq.ft. carpet and 4 car parking spaces described at Block "A" in Annexure "A" hereto arrange to obtain entirely at their cost permission from the Municipal Corporation of Greater Mumbai through its Building Department, Planning Department as may be necessary, as also its Estate Department as also any other permission! that may be required from any other authority for use of the said warehouse area of 10,292 sq. ft. carpet for office purposes."

39 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

10.5.2. The vendor area i.e. 36688 sq.ft was transferred by the assessee to Hindalco Industries Ltd., and sale consideration received thereon was Rs.33,13,84,129/- which was duly offered for capital gains tax in the year under consideration. We find that on perusal of Clause 5 of the said agreement, the assessee had to place the purchasers in possession of the remaining area within 30 days of the dates which are set out in Annexure-A to the agreement. In other words, the perusal of Annexure-A shows that possession was to be made on or after 31/03/2002 and upto 30/09/2005. In fact it is seen that possession was to be handed over in respect of items 12-33 of the Annexure to the agreement in the second year, items 24-27 in the third year, items 28-32 in the 4th year and items 34-35 in the 5th year. We find that assessee had submitted that the instant property which was to be sold to three purchasers namely M/s. Grasim Industries Ltd., M/s. Hindalco Industries Ltd., and M/s. Indo Gulf Corporation Ltd and on perusal of the Annexure to the agreement to sell, the following details required attention:- V.No. Intending vendor A/Y Area to be Consideration in Rs. transferred (sq.ft) A Grasim Industries Ltd. 03-04 17310 156351017 Grasim Industries Ltd. 05-06 8655 78175508 TOTAL 25965 234526525 B 02-03 36688.3 331384129 Hindalco Ltd. 6607208 Hindalco Ltd. 03-04 731.5

40 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Hindalco Ltd. 04-05 4202.1 37954740

TOTAL 41621.90 375946077

C Indogulf Corporation 03-04 17310 156351017 Ltd. 05-06 4327.5 39087754

06-07 4327.6 39088658

TOTAL 25965.1 234527429

GRAND 93552 845000031 TOTAL

10.6. We find that property has been transferred to each of the aforesaid

three purchasers in various assessment years as under:-

A. GRASIM INDUSTRIES LTD S.NO Unit No. Area Amount Received 1 A-21 3900 35226399 2 A-31 3900 35226399 3 A-41 3900 35226399 4 A-51 3900 35226399 5 . 1710 15445421.1 TOTAL 17310 156351017.1

Assessment year 05-06 S.NO Unit No. Area Amount Received

I A-01 3900 35226399 2 A-ll 3900 35226399 3 855 7722710.55 TOTAL 8655 78175508.55

41 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

B. GRAND TOTAL (A) = 156351017.10 + 78175508.55 = 234526525.65 M/s Hindalco Ltd. Assessment year 02-03 S.NO Unit No. Area Amount Received i C-01 550 4967825.50 2 C-02 3350 30258573.50 3 C-13 2150 19419681.50 4 C-21 3900 35226399 5 C-31 3900 35226399 6 C-41 3900 35226399 7 C-51 3900 35226399 8 D-01 6396 57771294.36 9 D-ll 3660.2 33060427.08 10 4746.3 42870888.88 11 235.8 2129842.28

TOTAL 36688.3 331384129.1 Assessment year 03-04 S.NO Unit No. Area Amount Received 1 C-ll 600 5419446 2 131.5 1187761.92 TOTAL 731.5 6607207.92

Assessment year 04-05 S.NO Unit No. Area Amount Received

1 C-12 1150 10387271.50 2 D-12 2735.8 24710867.28 3 252.1 2277070.56 4 64.2 579531.35 TOTAL 4201.1 37954740.69

42 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

GRAND TOTAL (B) =331384129.10 + 6607207.92 + 37954740.69 = 375946077.71 C. M/s Indogulf Corporation Ltd. Assessment year 03-04 S.NO Unit No. Area Amount Received

i B-ll 3900 35226399 2 B-31 3900 35226399 3 B-41 3900 35226399 4 B-51 3900 35226399 5 1710 15445421.1 TOTAL 17310 156351017.1

Assessment year 05-06 S.NO Unit No. Area Amount Received i B-01 3900 35226399 2 427.5 3861355.28 TOTAL 4327.5 39087754.28

Assessment year 06-07 S.NO Unit No. Area Amount Received

i B-21 3900 35226399 2 427.6 3862258.52 TOTAL 4327.6 39088657.52

10.7. Based on the above, the ld. AR submitted that the assessee had

declared capital gains on sale of above properties in the respective years

as under:-

V.NO. Intending vendor A.Y Area to be Consideration Capital Gain transferred (Rs.) (Rs.) (sq.ft)

43 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

A Grasim Industries Ltd. 03-04 17310 15,63,51,017 5,13,31,390/- Grasim Industries Ltd. 05-06 8655 7,81,75,508 2,33,27,942/- TOTAL 25965 23,45,26,525 7,46,59,332/- B Hindalco Ltd. 02-03 36688.3 33,13,84,129 11,30,26,067/- Hindalco Ltd. 03-04 731.5 66,07,208 21,69,203/- 04-05 4202.1 3,79,54,740 1,20,91,392/- TOTAL 41621.90 37,59,46,077 12,72,86,662/- C Indogulf Corporation 03-04 17310 15,63,51,017 5,13,31,390/- Ltd. 05-06 4327.5 3,90,87,754 1,16,62,624/-

04-05 4327.6 3,90,88,658 1,24,53,377/-

TOTAL 25965.1 23,45,27,429 7,54,47,391/-

GRAND 93552 84,50,00,031 27,73,93,385/- TOTAL

10.8. From the above table, it could be seen that assessee had actually transferred only 36,688/- sq.ft to M/s. Hindalco Industries Ltd., during the year under consideration i.e. A.Y.2002-03. The remaining portion had been transferred to M/s.Hindalco Industries Ltd., M/s.Grasim Industries Ltd., and M/s. Indo Gulf Corporation Ltd., in subsequent years commencing from A.Yrs. 2003-04, 2004-05 and 2005-06 as tabulated hereinabove. It is not in dispute that assessee had duly offered the capital gains arising of transfer of land to the extent of 36,688/- sq.ft to M/s. Hindalco Industries Ltd in Asst Year 2002-03. We hold that the above

44 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

table clearly shows that assessee had not transferred the whole property during the A.Y.2002-03 and hence, the action of the revenue in considering the total sale consideration of Rs.84.50 Crores as full value of consideration for the property sold during the year is factually incorrect. We also find that as per Clause-5 of the agreement that assessee was entitled to receive the rent from the subject mentioned property from tenant till the possession of the respective portion of the property was handed over to the purchaser. The said rental income had been duly taxed by the department in the hands of the assessee till the time of handing over of possession. If the contention of the revenue that entire property has been transferred during the assessment year 2002-03 itself is to be accepted, then the rental income derived from such property could not be taxed in the hands of the assessee till the date of handing over of possession of the said property in favour of the purchasers. In the instant case, there is absolutely no dispute before us with regard to taxability of assessability of rental income in the hands of the assessee till the date of handing over of the possession to the purchasers. Hence, it only reflects the divergent stand taken by the revenue. We find that the ld. AR before us also drew our attention to Clauses 7,8,13,14,27,29 & 31 of the agreement to drive home the point that the whole of the property was not transferred by the assessee during the year under consideration. The said clauses are not reproduced herein for the sake of brevity. Hence,

45 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

it could be safely concluded that assessee had duly transferred only 36,688/- per sq.ft to M/s. Hindalco Industries Ltd., during the A.Y.2002- 03 for which capital gains had been duly offered to tax in the year under consideration and the remaining portions have been sold in A.Yrs 2003- 04, 2004-05 and 2005-06 for which also capital gains had been duly offered to tax by the assessee in those respective assessment years. The details of capital gain tax offered by the assessee in all these years and the assessments framed thereon are as under:-

Assessment Area Sale Capital Gain Capital Gain Remarks Year assessed u/s Sold consideration declared on Sq. Ft received Land 143(3) 2002-03 36688 33,13,84,129 11,30,26,067 37,97,00,000 10,48,31,983 2003-04 35352 31,93,09,242 10,48,31,983 Taxed on protective basis 2004-05 9202 3,79,59,750 2,45,44,769 2,45,44,769 Taxed on protective basis 3,49,90,566 2005-06 12982 11,35,13,270 3,49,90,566 Taxed on protective basis

10.9. From the above table, it could be seen that the revenue had sought to tax the capital gains in the subsequent years i.e. A.Yrs. 2003-04, 2004- 05 and 2005-06 on protective basis. In view of our aforesaid finding that only part of the property had been transferred during the year under consideration and the remaining portion being transferred only in A.Yrs. 2003-04, 2004-05 and 2005-06 by the assessee to M/s. Hindalco

46 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

Industries Ltd., M/s. Grasim Industries Ltd. and Indo-Gulf Corporation Ltd., for which capital gains had been duly offered to tax in those respective assessment years by the assessee, we direct the ld. AO to accept the said offer of capital gains on substantive basis instead of protective basis for the A.Yrs. 2003-04, 2004-05 and 2005-06.

10.10. We hold that out of the total area of Rs.1,07,000/- sq.ft, the assessee had sold only 36,688/- sq.ft to M/s. Hindalco Industries Ltd., during the assessment year 2002-03 and the remaining portion continued to be in possession of the assessee herein till the time it was handed over to the purchasers. In this regard, we find that the Co-ordinate Bench decision of this Tribunal in the case of ACIT vs. Geetadevi Pasari reported in 14 SOT 463 (Mum) which was confirmed by the Hon‟ble Jurisidictional High Court in 17 DTR 280 (Bom), supports the case of the assessee. Hence, we hold that sale consideration for transfer of RPH property should be considered only at Rs.33.13 Crores for the A.Y.2002-03. Hence the first question raised hereinabove is decided in favour of the assessee.

10.11. With regard to bifurcation of sale consideration of Rs.33.13 Crores between land and building, we find that assessee had filed revised computation of long term capital gains during the course of assessment proceedings allocating 60% of the consideration towards value of land

47 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

and remaining 40% towards building, which was substituted by the ld. AO in the ratio of 50:50 equally. We find that assessee‟s bifurcation of 60% towards land and 40% towards building is based on a valuation report obtained from a Chartered Engineer (Government registered valuer) dated 14/10/2003. From the perusal of the said valuation report enclosed in page 358 of the paper book-1 dated 23/12/2008, we find that there is proper justification for the assessee to allocate 60% of the total consideration towards value of land. We find that there is absolutely no basis for the revenue to simply take the bifurcation on sale consideration towards land and building at 50:50. Hence, we answer the second question raised hereinabove in favour of the assessee.

10.12. The next aspect of this issue is with regard to adoption of fair market value of land as on 01/04/1981 for the purpose of computation of capital gains on sale of lease hold land forming part of RPH property. We find that the following background facts would be relevant for better appreciation of the issue in dispute before us. This could be understood as under:-

 On 23/01/1946 under indenture of lease, Municipal Corporation of the City of Bombay had granted a lease of land measuring 8000 sq.yards being plot No.216 together with Buildings thereon in

48 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

perpetuity from 04/04/1938 to one Shri Haridas Kasal Chand Maniar in consideration of amount paid as set out therein and, rent of Re.1 per annum. (emphasis supplied by us).

 On 04/10/1950, Shri Haridas Kasal Chand Maniar sold the leasehold land alongwith structure thereon for a consideration of Rs.6.50 lacs to M/s. May a Baker Limited a company incorporated under the Indian Companies Act‟ 1913 in the year.

 That name of M/s. May and Baker Limited was changed from M/s. May & Baker Limited to M/s. Rhone Poulene (India) Limited (RPIL).

 That M/s. RPIL raised further super structure on the leasehold land acquired from M/s. May & Baker Limited. That the leasehold land together with the superstructure thereon was commonly known as Rhone Poulene House (RPH). It may be stated here that, in the financial statements of M/s. RPIL, leasehold land of Rs.6.50 lacs was reflected separately and, further superstructure thereon was reflected as part of “Building”, on which depreciation was also claimed.

49 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

 That entire property of RPH comprising of both leasehold land and, building thereon was agreed to be sold by M/s. RPIL to M/s. Grasim Industries Ltd, M/s. Hindalco Industries Ltd and M/s. Indo Gulf Corporation Ltd.

10.13. Since RPIL stood merged with assessee company, the assessee while determining capital gains, adopted the fair market value as on 01/04/1981 as cost of acquisition and claimed indexation thereon. The same was accepted by the ld. AO in the assessment order. However, the same was sought to be disturbed by the ld. CIT(A) by issuing enhancement notice by holding that what was transferred by RPIL to the assessee pursuant to the merger was only the lease hold rights which falls in Section 55(2)(a) of the Act and as such assessee is not entitled to substitute the actual cost of tenancy rights of Rs.6.50 lakhs with the fair market value as on 01/04/1981 by invoking Section 55(2)(b) of the Act.

10.14. We find that assessee company herein as well as M/s. RPIL were in possession of the said lease hold rights in perpetuity. We hold that the perpetual lease cannot be compared at par with normal lease. Hence, we cannot say that assessee has only acquired the tenancy rights from RPIL pursuant to merger so as to fall within the ambit of Section 55(2)(a)(i) of the Act. There is no dispute that assessee would be entitled

50 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

to enjoy the entire sale consideration of Rs.33.13 Crores received during the year under consideration at its own whims and fancy and there is no diversion of such income by over riding title warranting the need to pass on some portion of such sale consideration to any other party including the main lessor who had given perpetual lease to the assessee i.e. Municipal Corporation of City of Bombay. In other words, the assessee need not to transfer any part of its sale consideration to Municipal Corporation of City of Bombay. This itself goes to prove that assessee had not acquired any tenancy rights pursuant to perpetual lease granted by Municipal Corporation of City of Bombay on 04/04/1938 as dated supra. We find that Section 105 of Transfer of property Act 1882, defines the term “lease” as under:- "A lease of immoveable property is a transfer of right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. "

10.14.1. From the above definition, it could be inferred that lease creates right or interest in the demised property. The lease is a transfer of interest in land. The interest transferred is called “lease hold interest”. The lessor parts with his right to enjoy the property and lessee gets that rights to the execution of the lessee. Hence, the said acquisition of interest cannot be construed to be in the nature of tenancy rights. In the instant case pursuant to the perpetual lease deed conferring lease hold

51 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

rights for 999 years, the said lease deed did provide to the assessee not a mere right to use in a particular way but also ownership of control of the property. In the instant case, we hold that assessee‟s case falls under 55(2)(b) of the Act, wherein assessee is entitled to substitute the actual cost of acquisition with fair market value as on 01/04/1981.

10.15. Hence we direct the ld AO to recompute the long-term capital gains on sale of land and short term capital gains and sale of building in the light of above mentioned directions and findings. Accordingly, the ground No.VII to IX raised by the assessee and ground No.6 of the revenue are disposed off in the aforesaid manner.

11.1. We have heard the rival submissions and perused the materials available on record. We find that both the parties before us fairly agreed that this issue is already covered in favour of the assessee by the order of this Tribunal in assessee‟s own case in ITA No.1257/Mum/2014 and 1486/Mum/2014 for A.Y.2009-10 dated 07/05/2019 wherein it was held as under:-

“Disallowance of claim of depreciation on assets of BMIL and PHL: Rs. 68,75,396/- :

52 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

53 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

have perused the order of the Tribunal for A.Y. 2008-09 and finding no reason to take a different view, respectfully follow the same. Apart there from, we are also in agreement with the ld. A.R that now when the DRP while disposing off the objections filed by the assessee had specifically directed the A.O to allow claim of depreciation as was raised by the assessee in respect of BMIL, therefore, there was no reason for the A.O to have not followed such directions while passing the final assessment order u/s 143(3) r.w.s 144C(13), dated 28.01.2014. In terms of our aforesaid observations, we direct the A.O to allow the assesses claim of depreciation insofar the assets of BMIL are concerned. 19. As regards the claim of depreciation raised by the assessee on the assets of PHL which w.e.f 01.06.1996 were taken over by the assessee under a scheme of arrangement duly sanctioned by the Hon’ble High Court of Bombay, vide its order dated 14.08.1997, we find that the assessee subsequent to the takeover had taken the WDV on the basis of the Income Tax records of PHL. As is discernible from the orders of the lower authorities and admitted by the assessee in its objections raised before the DRP, though PHL had not claimed depreciation on its assets, however, the A.O while framing the assessment in its hands for A.Y 1996-97 had allowed the same. Apart there from, the assessee had during the year relevant to A.Y 1999- 2000 sold its two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) on a slump sale basis. As such, the assessee company in A.Y 1999-2000 while computing the deprecation had dropped the WDV of the aforesaid two undertakings from the respective block of assets on the date of such slump sale. As observed hereinabove, the A.O declined to accept the claim of the assessee that it was a slump sale transaction and considered the same as an itemised sale of assets. On the basis of his aforesaid observations, the A.O worked out the WDV of the block of assets by taking the values of the assets as were recorded in the books of accounts of the purchasing company, as the sale value, and reduced the same from the different block of assets. In the backdrop of his aforesaid reworking of the WDV the A.O scaled down the assesses claim of depreciation in respect of assets of PHL. 20. On a perusal of the records, we find that it is the claim of the assessee that the CIT(A) while disposing off its appeal for A.Y 1999- 2000 had observed that the sale of two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) by the assessee was rightly claimed as slump sale transaction. However, as is discernible from the order of the DRP, the issue as to whether the sale of the aforesaid two divisions was to be construed as itemized sale of assets or slump sale is pending before the ITAT in the preceding years of the assessee. Accordingly, the DRP had directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal regarding slump sale vs. itemized sale. In the backdrop of the aforesaid fact situation, now when the matter as to whether the sale of the aforesaid two divisions by the assessee is to be treated as an itemized sale or a slump sale is pending in the case of the assessee for the preceding years, therefore, we find no infirmity

54 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

in the order of the DRP who had rightly directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal. In terms of our aforesaid observations the Ground of appeal No. IV raised by the assessee is partly allowed.”

11.2. Respectfully following the same, the Ground No. 1 raised by the revenue is dismissed.

12.1. We have heard rival submissions and perused the materials available on record. We find that this payment in foreign exchange for professional services rendered in the sum of Rs.7,26,737/- was disallowed by the ld. AO on the ground that no tax was deducted at source in terms of Section 195 of the Act and consequentially disallowing the same u/s.40(a)(i) of the Act. We find that the ld. CIT(A) had deleted the said disallowance by placing reliance on the order of his predecessor passed for the A.Y.2001-02 in assessee‟s own case. We find that the case of the revenue is that pursuant to the retrospective amendment made in the Act w.e.f. 01/06/1976 in the provisions of Section 9 of the Act by way of insertion of Explanation thereon, the subject mentioned payment should be liable for deduction of tax at source. We hold that the retrospective amendment in the Act cannot fasten any TDS liability on the payer as the TDS application would lie on the payer only based on the law prevailing at the time of payment or incurrence of the expenditure. Obviously the payer i.e. assessee herein could not have pre-empted the retrospective amendment in the statute while making the payment. It is well settled that the retrospective amendment could fasten income tax liability but not

55 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

TDS liability on the payer herein. Hence, no disallowance could be made in the hands of the payer u/s.40(a)(i) of the Act based on retrospective amendment in the statute. Accordingly, the ground No.2 raised by the revenue is dismissed.

13.1. We have heard rival submissions and perused the materials available on record. We find that the assessee has made payment towards legal and professional fees to Mckinsey & Co. of Rs.1023.56 lakhs and Mehta Partners of Rs.106.98 lakhs and the same were disallowed by the ld. AO on the ground that the said expenditure is capital in nature since the benefit derived out of incurrence of the said expenditure was of enduring nature in the opinion of the ld. AO. In this regard, the ld. AR had submitted that the payments to Mehta Partners and Mckinsey & Co. were made towards formulating the strategies of NPIL, advising of R & D strategy, entry into US and European markets, improvement in sales and cost reduction etc., It was argued that these expenditure were incurred on the grounds of commercial expediency and business prudence and accordingly, wholly and exclusively incurred for the purpose of business and allowable as deduction u/s.37 of the Act. We find that the ld. CIT(A) had perused the complete details filed by the assessee before the lower authorities and had given a categorical finding as under:- “A perusal of details filed show that the services of Mckinsey & Co. were engaged for the purpose of overall improvement in the performance of the company. The scope of work to be done by Mckinsey and as per the agreement is as under:-

56 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

"The project would aim to ensure successful conversion of NPIL 's strategy into the sales force. The project would work in two phases. In the first phase, lasting 3 months, the team will lead a pilot that would include supporting a move to the revised divisions, an improvement in sales force performance through superior targeting and segmentation of doctors and launching them on the path to distinctiveness. The team will also ensure an appropriate structural and process is put into place that rolls out and maintains these initiatives, including data management and sharing across division; sales force recruiting, training and incentivisation; and front line manager empowerment. In the second phase, a smaller team will provide support to the rollout of the sales force pilot across the country, and would last approximately 3 months. As we discussed the current plan is that Nicholas will provide high quality individuals who should be relatively self standing with limited support from us at the end of phase I. Should we jointly feel at the end of Phase I that these individuals still need additional support beyond the one individual budgeted at this point, we could jointly discuss this support at that point. The project would entail a large data gathering exercise to create the national doctor database; a pilot in 3-4 centres where more details retail audits will be conducted; market research CPs/GPs; and significant field analytical to craft the divisions, the DVLs, the brand priorities and the segmentation criteria. Naturally, this would need to be led and driven by the Nicholas sales and marketing team, with dedicated resources and leverage of the sales force and trainees, with McKinsey facilitation. External resources may also be deployed to facilitate and hasten the data collection. In parallel with this, we continue to provide counselling support to the brand management and new product initiatives, to ensure appropriate speed and quality of those key initiatives. Similarly in the case of Mehta Partners the scope of services to be rendered was as under:- "1. Mehta Partners will work closely with Nicholas Piramal India Lid. management in implementing its mission and achieving its goals first by establishing an in depth understanding of Nicholas Piramal India Lid's technology platform and business structure. Mehta Partners will also assist in increasing the awareness of Nicholas Piramal India Ltd its activities within the pharmaceutical and biotechnology industry, and among investors globally.

57 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

13.2. The ld. CIT(A) had given a categorical finding that the aforesaid legal and professional fees were paid to parties for rendering professional services for improving the overall functioning of the company and consequentially to improve the revenue of the assessee company. Hence, we hold that the said expenditure is squarely allowable as revenue expenditure in terms of Section 37 of the Act. We do not find any infirmity in the action of the ld. CIT(A) granting relief to the assessee in this regard. Accordingly, the ground No.3 raised by the revenue is dismissed.

58 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

14.1. We have heard rival submissions and perused the materials available on record. We find that other income of the assessee included processing charges of Rs.3,48,64,000/- and the assessee had not reduced 90% of the said processing charges to work out the profits of the business while computing deduction u/s 80HHC of the Act. The ld. AO accordingly re-worked deduction u/s.80HHC of the Act on the premise that the said receipt is in the nature of receipt covered by the Explanation (baa) to Section 80HHC of the Act. We find that this issue is covered by the decision of Hon‟ble Supreme Court in the case of Southern Sea Foods Ltd., vs. JCIT reported in 225 CTR 256 (SC) wherein one of the questions raised before the Hon‟ble Apex Court is as under:-

“(2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the fabrication charges would form part of the profits of business of the assessee for the purpose of computation of deduction under s. 80HHC of the Act “ 14.2. The Hon‟ble Apex Court disposed off the aforesaid question by holding as under:-

“4. Insofar as the 2nd question is concerned, the question for consideration is whether the assessee is entitled to special deduction under s. 80HHC of the IT Act, 1961 in respect of the processing/fabrication charges on the goods which were ultimately exported by other exporters for whom processing was undertaken by the assessee. It is evident from the impugned order that while answering the question in favour of the assessee, the High Court has relied upon its earlier decision in the case of K.R.M. Marine Exports Ltd. vs. Asstt. CIT (2006) 201 CTR (Mad) 1 : (2007) 288 ITR 151 (Mad). In that decision it was held that freezing and processing charges would definitely form part of one of the components of business profits, as the said activity would have a direct and immediate nexus to the activity of export. The said decision also pertained to asst. yr. 1994-95. Mr. Gaurav Aggarwal learned counsel for the Revenue very fairly states that the said decision of the High Court has not been challenged by the Revenue and has thus, attained finality.

59 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

14.3. Respectfully following the same, we hold that processing charges has got direct nexus with the export activity of the assessee and the said receipt would not be in the nature of receipt covered by Explanation (baa) of Section 80HHC of the Act. Accordingly, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee in this regard. Accordingly, the ground No.5 raised by the revenue is dismissed.

Order pronounced in the open court on this 20/02/2020

Sd/- Sd/- (MAHAVIR SINGH) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 20/02 /2020 KARUNA, sr.ps Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar)

60 ITA Nos.3927/Mum/2006 & 4066/Mum/2006 M/s. Piramal Enterprises Ltd.,

ITAT, Mumbai