DCIT, NEW DELHI vs. M/S OZONE PHARMACEUTICALS LTD.,, NEW DELHI

Without prejudice to the above ground and having regard to the facts and circumstances of the case, deduction u/s 80IC should have been allowed on the amount of income assessed by Ld. AO.

Without prejudice to the above ground and having regard to the facts and circumstances of the case, deduction u/s 80IC should have been allowed on the amount of income assessed by Ld. AO.

From the aforesaid grounds of appeal, it emerges out that the assessee has challenged sustenance of following additions by the ld. CIT(A) in all the three assessment years under consideration :

The Revenue by way of aforesaid grounds, has challenged the impugned orders for deletion of following additions in all these years under consideration :

For the sake of convenience and brevity, we first take up the appeals of the assessee. The first issue common in all the appeals of assessee is with respect to deduction u/s. 80IC. We take up the facts from appeal for A.Y. 2008- 09, which are similar to other appeals barring the amount of additions.

Before us, the ld. counsel for the assessee, reiterating the submissions made before the ld. CIT(A), submitted that the aforesaid amounts pertain to the business activities of the assessee carried out at Guwahati and as such the denial of deduction u/s. 80IC on such incomes is not justified. However, the ld. AR of the assessee further submitted in his written synopsis on this issue as under :

Having considered the rival submissions and perused the entire material available on record, we find that the ld. authorities below have mainly based their conclusions on the basis of decision of Hon’ble Supreme Court in the case of Liberty India vs. CIT (2009) 317 ITR 218. The contention of the assessee has been that the claim of assessee u/s. 80IC included interest subsidy, insurance subsidy and similar incomes which are inextricably linked to the business of the assessee and therefore, the deduction u/s. 80IC is available to the assessee on such income in view of the decision in the case of CIT vs. Meghalaya Steels Ltd. (supra) where the Hon’ble Court has given due consideration to their earlier decision in the case of Liberty India vs. CIT (supra). This recent decision of Hon’ble Apex Court was not available at the time of assessment proceedings. As per submissions of the assessee, the subsidies in respect of insurance, interest and sales tax remission were given by the Assam Government which are incidental to the business of the assessee. Besides, the assessee has also given the details of income allocated to its Head Office as under :

The second issue involved in appeals of assessee for A. Yrs. 2009-10 and 2010-11 is with respect to disallowance u/s. 14A . The brief facts of the issue are that the assessee had made investment in shares of Rs. 3.14 crores in equity, units of mutual funds and preference share capital of companies in A.Y. 2009-10 and of Rs. 85,15,314/- in A.Y. 2010-11, out of which the assessee earned dividend income of Rs.2,775/- and Rs.1606/- respectively. Since the assessee had earned exempt income out of aforesaid investments, the AO observed that the assessee was required to disallow expenditure in relation to such investment, the income from which does not form part of the total income. The contention of the assessee has been that since all the above investments were made out of deployment of internal accruals of the company, i.e. own funds, no expenditure was incurred by the assessee for earning exempt income, as no borrowed funds were utilized in such investments. The AO, however, concluded that the assessee has made substantial investment for maintenance of which, it is essential to incur expenditure. He accordingly disallowed expenditure u/s. 14A, as noted above, after calculating the same as per formula prescribed u/r. 8D of the IT Rules. In appeal before the ld. CIT(A), the first appellate authority, after considering detailed written submissions of the assessee, deleted the disallowance calculated u/r. 8D(2)(ii), but confirmed the disallowance calculated u/r. 8D(2)(iii) in both the years, thereby giving relief to the assessee of Rs. 9,00,103/- and Rs.13,44,711/- respectively for the A.Yrs. 2009-10 and 2010- 11.

The ld. AR, reiterating the submissions made before the ld. CIT(A), further submitted a written synopsis stating that the disallowance should be limited to the extent of exempt income in view of the decision of Delhi High Court in Joint Investment vs. CIT, 372 ITR 694. It was also submitted that in case disallowance out of expenses incurred relating to the unit eligible for deduction u/s. 80IC is sustained, deduction u/s. 80IC may be allowed with regard to the enhanced profit as per CBDT Circular No. 37/16 dated 02.11.2016.

The ld. DR, on the other hand, supporting the orders of the Assessing Officer, submitted at the outset that the ld. CIT(A) was not justified in giving partial relief to the assessee without considering the findings reached by the Assessing Officer on this score. It was submitted that in order to make investment and to manage it, it requires high skilled personnel and decisions and therefore, management expenditure incurred in such investments cannot be ruled out. The assessee had failed to the details to substantiate its contention that only own fund was utilized in the investments. The assessee has also paid interest during the year, therefore, the AO has rightly disallowed expenditure u/s. 14A by applying the provisions of Rule 8D.

We have heard the rival submissions and have gone through the entire material on record. We noted from the order of the ld. CIT(A) that the assessee had invested in shares etc., income from which does not form part of the total income. It is also noticed from assessee’s submissions made before CIT(A) that assessee has also earned Rs.28,73,189.85 as profit from partnership firm, namely M/s. Ozone Architectural Products from investment of Rs.1,83,87,130/- in A.Y. 2009-10. The share of profit from firm falls u/s. 10 and exempt from tax. This fact has not been considered by the ld. CIT(A) while examining the contention of the assessee that he had earned exempt income only to the extent of Rs.2,725/-. However, the assessee has not declared in his written submission before the CIT(A) nor before us whether said exempt income was received by the assessee in A.Y. 2010-11 or not. Once, the assessee had earned substantial exempt income out of investments made in the partnership firm, the contention of the assessee that he had earned exempt income of Rs.2725/- is nothing but misleading one.

Adverting to the calculations made u/r. 8D(2)(ii), we find that the assessee had substantial mixed funds comprising of internal and external funds to take care of the impugned investments. Therefore, the ld. CIT(A) was justified to delete the disallowances made as per Rule 8D(2)(ii). However, while going through the calculation of disallowance made u/r. 8D(2)(iii) by the AO, it is not clear whether average value of investment taken pertains to such investment, from which the assessee had earned exempt income or not. It is also not clear whether the investment made in the partnership firm for earning exempt income is considered in it or not. In presence of these facts, this issue also deserves to be remitted back to the Assessing Officer for deciding the same afresh after examining true facts and figures of investments, as narrated above and after considering the decision of Hon’ble Jurisdictional High Court in the case of Joint Investment vs. CIT, 372 ITR 694 (Del). While deciding this issue, the AO shall also consider the alternative plea of the assessee that in case disallowance out of expenses incurred relating to the eligible unit for deduction u/s. 80IC is sustained, the assessee is entitled to deduction u/s. 80IC with regard to the enhanced profit as per CBDT Circular 37/2016 dated 2nd November, 2016. Accordingly, grounds Nos. 3 & 4 for A.Y. 2009-10 and 5 & 6 for A.Y. 2010-11 are allowed for statistical purposes. Ground No. 5 in A.Y. 2009-10 and Ground No.7 in A.Y. 2010-11 also stand decided as per our above discussion.

The last issue involved in assessee’s appeal for A.Y. 2010-11 is disallowance of interest on FNCR. On this issue, the contention of the assessee as made in the written synopsis is that the assessee is maintaining books on mercantile basis and the interest on FCNR loan was paid on 09.08.2010, i.e., before due date of filing of return of income and accordingly, this amount may be allowed as per section 43B of the Act and necessary directions may be given for verification by the Assessing Officer. He also sought relief as per CBDT Circular No. 37/2016 dated 02.11.2016 in case any disallowance with respect to eligible unit is sustained.

The ld. DR supported the orders of the lower authorities.

After hearing both the sides and perusing the record, we find that as per assessee the interest on FCNR was paid on 09.08.2010 before filing the return of income (date of filing of return mentioned in asst. order as 31.03.2012) and as such, this amount is allowable u/s. 43B of the Act. This fact requires verification at the stage of AO. In case the contention of the assessee is found correct, then this amount would be allowable u/s. 43B of the Act and in case it is found otherwise, the AO shall examine the disallowance on the anvil of CBDT Circular No. 37/2016 dated 02.11.2016, as contended by the assessee also in alternate. Accordingly, this issue is also restored to the file of AO to decide it afresh after giving reasonable opportunity of hearing to the assessee. Accordingly, ground No. 3 for A.Y. 2010-11 is also allowed for statistical purposes.

In the result, all the appeals of assessee are allowed for statistical purposes.

Now, we come to the appeals of Revenue. The first common issue involved in all the three years is with respect to deletion of additions made on account of Sales Promotion Expenses of Rs.1,11,55,261/-, Rs.1,22,37,690/- and Rs.1,21,42,231/- respectively. We first take up the appeal for A.Y. 2008- 09.

The brief facts of the issue are that the assessee company has two units – one at Baddi and other at Guwahati. Gauhati unit of the assessee company is engaged in the business of manufacturing of medicines and that of Baddi is in manufacturing and sale of medicines. The profits derived by the assessee from its Guwahati units are eligible for deduction u/s. 80IC of the IT Act. In the assessment proceedings, the AO noticed that the assessee had debited Rs.14,87,36,813/- under the head sales promotion and incentives in the PL account. On being asked for information and details alongwith justification of these expenses, the assessee submitted the details of Sale Promotion expenses where TDS was applicable. It was also stated that these expenses consist of many heads and are booked in thousands of accounts. It was also stated that it is not possible to attach copies of all the accounts and that incurring of these expenses is imperative to ascertain continuous growth of the company. The AO was not satisfied with the assessee’s reply and observed that bills/vouchers relating to sales promotion expenses were not furnished fully. He, therefore, made lump sum disallowance of 7.5% of such expenses claimed, amounting to Rs. 1,11,55,261/-. In appeal, the ld. CIT(A) deleted the addition after considering detailed submissions made and various case laws cited by the assessee. The ld. CIT(A) while deleting the impugned addition stated that the AO has not pointed out any specific expenditure which were not vouched of genuine.

The ld. DR supported the order of the AO and submitted that complete bills and vouchers were not produced before the AO and some of the expenditure were also incurred in cash. Mere tax deduction at source does not prove actual expenditure incurred for the business purposes.

The ld. AR of the assessee, on the other hand, reiterated the submissions made before the ld. CIT(A) and supported the impugned order. He also submitted written synopsis before us, stating that the expenditure is wholly and exclusively for the purpose of business and identical disallowance was made in assessee’s own case in A.Y. 2006-07 and the Tribunal deleted the disallowance. In alternate, it was submitted that in case disallowance out of expenses incurred relating to the unit eligible for deduction u/s. 80IC is sustained, deduction u/s. 80IC may be allowed with regard to the enhanced profit as per Circular No. 37/2016 dated 02.11.2016.

After hearing both the parties we find that before the ld. CIT(A), it was emphatically submitted by the ld. Counsel for the assessee that complete books of accounts along with complete bills and vouchers were produced before the AO. However, on perusal of the assessment order, it reveals that the AO has categorically averred that complete bills/vouchers were not produced. It was also stated before the ld. CIT(A) that the assessee has brought complete accounts alongwith complete bills/vouchers and requested the CIT(A) to verify at his own or to get them verified from the AO. But while deleting the entire addition, the findings recorded by ld. CIT(A), nowhere demonstrate that the impugned expenditure were verified by the ld. CIT(A) from bills/vouchers alleged to have been produced before him or any remand report was called for from the Assessing Officer so as to get them verified. This was incumbent upon the ld. CIT(A) to call for the remand report of the AO, particularly when the AO had observed non-production of complete bills/vouchers in the assessment proceedings. Therefore, deletion of addition made by the ld. CIT(A) does not appear justified for want of verification. We, accordingly, remit this issue back to the file of AO for deciding it afresh after making proper and thorough verification of the expenditure from the books of assessee as well as from bills and supporting vouchers thereof. The assessee is required to furnish complete books of account and bills/vouchers before the AO for verification. The AO is also directed to examine the alternative contention of assessee that in case disallowance out of expenses incurred relating to the unit eligible for deduction u/s. 80IC is sustained, then the deduction u/s. 80IC may be considered with regard to enhanced profit as per Circular No. 37/2016 dated 02.11.2016. Needless to say, the assessee shall be given reasonable opportunity of being heard. In view of our this discussion, ground No. 1 in A.Y. 2008-09 and 09-10 and ground No. 2 in A.Y. 2010-11 are allowed for statistical purposes.

Regarding next issue involved in appeal for A.Y. 2008-09, we find that the AO has made addition of Rs.82,200/- on account of excess depreciation claimed @ 60% by the assessee on computer UPS. This issue stand already decided by Hon’ble Jurisdictional High Court in the case CIT vs. BSES Rajdhani Powers Ltd. dated 31.08.2010 in ITA No. 1266/2010. Respectfully following the decision of Hon’ble Court, we do not find any justification to interfere with the order of ld. CIT(A) on this count. Accordingly, ground No. 2 in appeal for A.Y. 2008-09 is dismissed.

Ground No. 3 relates to foreign traveling expenditure of Rs.7,69,757/- incurred by Managing director Shri S.C. Sehgal along with Mr. Praveen Kumar Ms. Neeta, employee of the company. The AO disallowed these expenditures on the premise that the assessee failed to establish any business exigency in this regard. The ld. CIT(A) deleted the addition on the reasoning that the AO did not specify the expenditure without any bill/voucher.

The ld. DR submitted that since the assessee failed to prove any business exigency to conduct foreign travel with other employees, the AO was justified to disallow the same.

The ld. AR, on the other hand, reiterated the submissions made before the ld. CIT(A) and supported the impugned order. In alternate, it was submitted that in case these expenditures are disallowed, the assessee’s enhanced profit for eligible unit may be considered for deduction u/s. 80IC as per CBDT Circular No. 37/2016 dated 02.11.2016.

After considering the submissions of both the parties, we find substance in the contention of assessee. It is not the case of the AO that the impugned expenditure were not supported by any evidence or were not open for verification. Secondly, the submissions made before the ld. CIT(A) were also that the assessee had invested in M/s. Ozone Research Frontier Ltd. in USA, in which research in respect of protein sequence was being carried out and also visited China to attend the Trade Fair. These submissions of assessee do not stand controverted by the ld. DR. Therefore, it cannot be said that the aforesaid visits were made for the purpose other than business. We, therefore, reject this ground.

The next issue involved in appeal of Revenue for A.Y. 2009-10 is with regard to deletion of disallowance u/s. 14A amounting to Rs.9,00,103/-. This issue is covered by our decision on ground No. 3 & 4 of assessee’s appeal for A.Y. 2009-10, whereby the impugned issue has been restored back to the file of AO. Accordingly, the present issue also stands remitted back to the AO on the similar terms. Thus, ground No. 2 of Revenue’s appeal for A.Y. 2009-10 stands allowed for statistical purposes.

In Revenue’s appeal for A.Y. 2010-11, ground No. 1 pertains to deletion of addition of Rs.13,86,656/- made on account of deduction u/s. 80IC. In the assessment proceedings, the AO noticed that the assessee had disclosed total sales of Rs.55,54,17,290/- from its Gauhati Unit and claimed deduction on profits u/s. 80IC at Rs.1,45,58,026/-. The AO further noticed that the assessee had purchased medicines of Rs.5,29,03,667/- from M/s. Ozone Ayurvedics. In this regard, the assessee submitted written reply as under :

While the ld. DR supported the order of the AO, the ld. AR of the assessee reiterated the submissions made before the ld. CIT(A) and relied on the findings of first appellate authority.

We have heard both the parties and perused the entire material on record. The submissions made before the ld. CIT(A) on behalf of the assessee on this issue read as under :

On the strength of above submission, the assessee has claimed that the AO while disallowing the deduction u/s. 80IC, has wrongly treated the above purchases and sales of manufactured medicines by the eligible unit of Guwahati, whereas the fact is that the aforesaid purchase and sales were made in the trading unit of assessee and not in the account of eligible unit of assessee. This fact needs verification at the stage of Assessing Officer. In case the above purchase and sales of manufactured medicine is found to have been made by assessee’s trading unit, no disallowance can be made on the profit of eligible unit on this count, but if it is found otherwise, the AO shall be at liberty to decide the issue in accordance with law, as it is an admitted fact that the impugned purchases and sale pertain to the Ayurvedic Medicines which were not manufactured by assessee, but by its sister concern M/s. Ozone Ayurvedics. Accordingly, this issue is remitted back to the AO for deciding it afresh in the light of above verification. Needless to say, the assessee shall be given reasonable opportunity of being heard.

The last issue involved in appeal of the Revenue for A.Y. 2010-11 is with respect to Sales Promotion Expenses in the name of sister concern amounting to Rs.52,20,590/- made by the AO and deleted by the ld. CIT(A). The brief facts relating to this issue are that in the assessment proceedings, the AO noted that the assessee had claimed sales promotion expenses in the profit & loss account to the tune of Rs.16,18,96,408/-, out of which a sum of Rs.5,22,05,896/- had been paid to the following parties, which are relatives as per section 40A(2)(b) of the IT Act :

The ld. DR supported the order of the AO and submitted that the assessee failed to prove that the payment made for services/goods were at arm’s length, which was the primary onus of the assessee not being discharged. Therefore, the AO was justified to make the adhoc addition. The case law relied by assessee is not applicable.

The ld. AR on the other hand, reiterated the submissions made before the CIT(A) and submitted that the ld. CIT(A) has rightly deleted the addition after considering the written submissions of the assessee. It was further submitted that the onus to prove that the impugned expenditure were excessive or unreasonable was on the Assessing officer, which he failed to discharge while making the adhoc addition. Reliance is placed on the decision in the case of S.K. Engineering vs. JCIT, 103 ITD 97 (Bang. Tribunal) and ACIT vs. Bombay Real Estate Developers Co. Pvt. Ltd. (64 DTR 137) and Anurag Agarwal vs. ACIT, ITA No. 497/Agra/2015. In alternate, the ld. Counsel submitted that in case any addition is sustained on this head, the enhanced profit of eligible unit may be considered for deduction u/s. 80IC in terms of Circular No. 37/2016 dated 02.11.2016.

We have considered the rival submissions and have gone through the material on record and we find substance in the contention of the assessee that once, the AO alleges that the impugned payments to related entities were not in arm’s length, the onus was on the AO to prove the same, which he failed to discharge. It is not in dispute that the impugned payments were made for sales Promotion of the assessee company. In the instant case, the AO has failed to bring any material on record to prove that such expenditure made by the assessee are excessive or unreasonable as contemplated u/s. 40A(2)(b) of the Act. The assessee had produced complete details with respect to these payments before the AO, as noted by the ld. CIT(A) in the impugned order. We, therefore, do not find any justification to interfere with the decision of ld. CIT(A) while deleting this addition u/s. 40A(2)(b). It is however, stated that the payments made by assessee to its associate concerns worth Rs.5,22,05,896/- were included in the total sales promotion expenses of Rs.16,18,96,408/- claimed by the assessee, of which 7.5% has already been disallowed by the AO for want of proper bills/vouchers etc. and that issue has been remitted back by us to the AO for fresh decision. Therefore, while deciding that issue, the AO is directed to reduce this payment of Rs.5,22,05,896/- from the total Sales Promotion expenses of Rs.16,18,96,408/- and then if any disallowance is made with respect to the eligible unit of assessee, the resultant enhanced profit of such eligible unit may be considered for deduction u/s. 80IC. Accordingly, this ground of Revenue is dismissed.

No other issue is involved in all these appeals.

In the result, the appeals of assessee are allowed for statistical purposes and those of Revenue are partly allowed for statistical purposes.