ACIT, CIRCLE 5(1),, CHANDIGARH vs. M/S VENUS REMEDIES LTD.,, CHANDIGARH

O R D E R Manoj Kumar Aggarwal (Accountant Member) 1.1 Aforesaid appeal for Assessment Year (AY) 2006-07 has come up for hearing before us pursuant to the directions of Hon’ble Punjab & Haryana High Court in revenue’s appeal ITA No.81-2012 dated 25-07-2024 wherein following substantial questions of law were determined: - 1. Weather on the facts and in the circumstances of the case, the Hon’ble ITAT was right in upholding the decision of Ld. CIT(A) who directed the AO to reallocate the expenses on sales ratio and to reduce the addition to Rs.142.24 Lacs as against the addition of Rs.7,61,96,306/- on account of unexplained expenditure u/s 69C?

1.3 In terms of these directions, we proceed to adjudicate question nos. 2 & 3 as raised by the revenue. On this aspect, Ld. AR advanced arguments and referred to various documents on record. The written submissions have also been filed. The Ld. CIT-DR also advanced arguments supporting the orders of lower authorities. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Chronology of Events 2.1 In the return of income, the assessee claimed deduction u/s 80IC for Rs.876.27 Lacs in respect of its Baddi Unit. The assessee was having another unit at Panchkula. The assessee is stated to be engaged in manufacturing and trading of pharmaceutical products. The Ld. AO doubted Assessment Year: 2006-07 assessee’s claim u/s 80IC on the ground that Baddi Unit generated profit rate of 59.95% as against 11.78% as reflected by Panchkula Unit. The assessee was questioned on the same. Though the assessee supported its claim, Ld. AO did not agree with the claim of the assessee. One of the observations, in para-5 of the assessment order, was that the assessee transferred its R&D equipment for Rs.219.56 Lacs from Panchkula Unit to Baddi Unit on 31-03-2006. The Baddi Unit reflected Plant & Machinery for Rs.196.28 Lacs besides R&D equipment for Rs.219.56 as stated to be transferred from Panchkula Unit. The total installed Plant & Machinery at Baddi unit was for Rs.415.85 Lacs out of which 52% (Rs.219.56 Lacs) Plant & Machinery was transferred from old Panchkula Unit. As per Ld. AO, the assessee could not furnish proof of newly purchased machinery as transported to Baddi and also could not establish installation of machineries at Baddi unit. The assessee also failed to furnish GRs and freight bills to establish transportation of machinery at Baddi. The Ld. AO held that transfer of Machinery from old Unit to new unit was not permissible as per sub-section (4) of Sec.80IC of the Act which provides that the undertaking or enterprise should notbe formed by transfer to a new business of machinery or plant previously used for any purpose. As per Explanation-2 to Sec.80IA(3) (as applicable to this section also), such transfer could not exceed 20% of total value of Plant & Machinery used in the business. Therefore, at least 80% of the Machinery should be newly purchased whereas in assessee’s case, 52% of the Machinery was transferred from old unit to new unit and therefore the assessee was not entitled for the said Assessment Year: 2006-07 benefit u/s 80IC. Finally, the impugned deduction was denied to the assessee. 2.2 In the alternative, Ld. AO went on to examine higher profit of approx. 60% as reflected by the assessee against Baddi Unit. The Baddi unit started manufacturing from November, 2005 whereas Panchkula unit was well established since 1991. After examining the books of accounts, Ld. AO observed many discrepancies. Finally, the deduction u/s 80IC was denied and Ld. AO estimated profit rate of 12% for Baddi Unit and disallowed excess expenditure as claimed by the assessee against Baddi unit u/s 69C. The excess expenditure worked out to be Rs.761.96 Lacs. 2.3 During first appeal, the assessee’s submissions were subjected to remand proceedings. The Ld. AO furnished remand report on 31-03-2009 which was confronted to the assessee. The assessee contended that separate books were maintained for both the units. The ledger relating to Baddi Unit which was impounded was still lying in the custody of Ld. AO. At many places, Ld. AO discussed about transfer entries from one unit to another which prove the fact that separate books were maintained for both the units. Separate books were also furnished before Ld. CIT(A) on 30-03- 2009. The complete books along with bills / vouchers were again produced before Ld. AO on 06-04-2009 which were duly verified by Ld.AO. 2.4 On the issue of Plant & Machinery, the assessee contended that the Plant & Machinery of Baddi unit was duly supported by documents / vouchers. Separate books were maintained for each of the unit. The file containing all original invoices, transport receipts and all other related documents relating to R&D equipment were duly furnished before Ld. AO Assessment Year: 2006-07 as well as before Ld. CIT(A). The list of R&D equipment and all copies of bills / transportation bills and other documents relating thereto were duly submitted to Ld. AO for further verification. The attention was drawn to the fact that the place of destination of the R&D equipment as mentioned in the invoices and LRs and other documents was Baddi (HP) proving that the equipment were new and originally transported and installed at Baddi unit only. 2.5 Another remand report was received from Ld. AO on 15-04-2009. The Ld. AO observed that the assessee purchased R&D equipment from M/s Yuhua Asia Group Ltd., China. Upon enquiry from website, it was nowhere mentioned that the said entity was engaged in manufacturing and sale of R&D equipment. The assessee also could not produce evidence in the form of RBI’s sanction for import of R&D equipment. 2.6 The assessee again contended that all the entries relating to purchase of R&D equipment were in the books of Head Office which were transferred to Baddi Unit at the year-end because the equipment pertained to Baddi unit. The books containing such details were furnished to Ld. AO. The ledger account and bank books were also furnished for verification. There was no requirement of RBI sanction for import of R&D equipment. The confirmed copies from the suppliers were also furnished in support of purchases transactions. The facts mentioned on the website would not be conclusive proof in view of evidences placed on record particularly the confirmation of the supplier i.e., M/s Yuhua Asia Group Ltd. certifying that the payment was duly received by them against equipment as supplied to the assessee’s Baddi Unit as per Bills numbers as mentioned herein. A Assessment Year: 2006-07 note had been given at the bottom declaring that the products sold to the assessee were not manufactured by them but they were trading into these products as per the requirement of the customers. The assessee thus duly discharged its onus by placing on record all the relevant documents and therefore, the objections of Ld. AO had no basis. 2.7 The adjudication of Ld. CIT(A) is contained in para-16 onwards. The Ld. CIT(A) concurred that the assessee had produced books of accounts along with vouchers before AO as well as before him. The hearing was conducted in the presence of AO who also went through the books of account. The assessee contended that the entries of R&D equipment were wrongly passed in the books of Head Office due to clerical error. The same was transferred to Baddi unit by way of transfer entry. Though the asset was shown in the books of Head Office, however, there was reference of fixed asset, Baddi. The same would show that the equipment belonged to Baddi Unit only. The assessee furnished copy of invoices which bear the address of Baddi unit only. The assessee also furnished copy of transport receipt wherein the consignee had been mentioned as ‘Baddi’. The assessee furnished copies of transporters’ bills in respect of all the items. In every voucher, there was mention of Baddi unit. Therefore, the assessee had given sufficient material to prove that R&D equipment belonged to Baddi Unit only and this was also transferred to Baddi unit. All these documents were confronted to the AO who raised a new issue by putting a doubt on the supplier. The assessee also placed on record sufficient material from the website to show that the supplier was a genuine entity. Therefore, Ld. AO was not justified in rejecting the books of account and Assessment Year: 2006-07 denying deduction u/s 80IC. Therefore, the action of Ld. AO in rejecting books of accounts was reversed and it was held that the assessee would be entitled for deduction u/s 80IC. 2.8 The Ld. CIT(A), thereafter, went on to adjudicate the quantum of deduction that would be available to the assessee. The assessee, in its various replies, refuted the allegation of Ld. AO. The adjudication of Ld. CIT(A) is contained in para-32 onwards. It was held by Ld. CIT(A) that assessee did not apportion certain expenses between the two units in a rational way. There were common expenditure which were to be allocated on the basis of sales ratio. This expenditure was in the nature of rate, fees & taxes, salary & other benefits, employees’ compensation expenses, legal & professional expenses, postage, telex and telegram, auditor’s fees, directors’ remuneration, other corporate expenses, remuneration of R&D staff, R&D expenses, material used for development of new products. The R&D expenses as incurred by the assessee would benefit the Baddi unit also. The Baddi unit progressed primarily on account of R&D activity as conducted by the assessee. The counsel for the assessee agreed that allocation of common expenses in sales ratio would be a reasonable basis. The assessee, in fact, allocated certain expenses in sales ratio other than interest which was allocated on actual basis. The assessee furnished working of expenses in the sale ratio which resulted into allocation of more expenditure in Baddi unit to the extent of Rs.129.71 Lacs. If the financial expenses are allocated in the ratio of investment instead of sales ratio as allocated by the assessee, the said figure would work out to be Rs.142.24 Lacs. The working of the same has been tabulated at para-40 of the Assessment Year: 2006-07 impugned order. The same was accepted by Ld. CIT(A) and the profit of Baddi unit was reduced to that extent. Finally, the appeal was partly allowed. 2.9 The adjudication of Ld. CIT(A) led to revenue’s appeal to Tribunal vide ITA No.742/Chandi/2009 and assessee’s cross-objections CO No.51/Chandi/2009 which stood disposed-off on 21-11-2011. In cross- objection, the assessee objected to reduction in profit to the extent of Rs.142.24 Lacs. However, the assessee withdrew its objection and thus, this matter attained finality so far as the assessee is concerned. However, the revenue assailed this issue before Hon’ble High Court wherein the issue was admitted as question no.1 and the same has finally been settled in assessee’s favor. Thus, this issue has attained finality for all purposes. 2.10 The revenue, by way of other grounds before Tribunal, primarily raised the issue of deduction u/s 80IC for Rs.876.27 Lacs and disallowance of unexplained expenditure u/s 69C for Rs.761.96 Lacs. The same was adjudicated by the bench as under: - 6. Aggrieved by the aforesaid addition, the assessee filed appeal before the ld. CIT(A). After taking into account all the relevant aspects of the case, the ld. CIT(A) held that the NP rate in respect of Baddi unit was higher than the Panchkula unit due to the fact that the assessee had not properly allocated the expenditure. In this view of the matter, he proceeded to allocate the expenses as under: - “40 Keeping in view all the material on record, I am of the view that the assessee should have apportioned the expenses in sales ratio. The assessee has given a working wherein the expenses to the extent of Rs.142.24 lacs will be reduced in respect of Panchkula unit. The same is reproduced as under:- (Rs. in lacs) Particulars H.O Panchkula Baddi Total Sales -- 7661.42 1545.82 9207.25 (%) 83.21 16.79 100.00 Administration expenses -- 315.37 28.43 353.80 Selling & Distribution (except excise duty) -- 198.06 13.97 212.03 R&D Expenses -- 87.86 -- 87.86 Capital expenditure on R&D u/s 35(2) -- 300.67 -- 300.67 Deferred revenue expenditure on R&D u/s 35(2) -- 155.36 -- 155.36 Assessment Year: 2006-07 -- 1057.32 42.40 1099.72 Percentage (%) -- 96.14 3.86 100.00 Expenditure in sales ratio -- 915.08 184.64 1099.72 Difference (142.24) 142.24 -- 41. Reliance is placed on the decision of Hon’ble ITAT in the case of Coral Telecom Ltd in ITA No. 203/Chandigarh/2005 (copy placed at Annexure -9) has upheld the application of apportionment of expenses in the ratio of sales. The Hon’ble ITAT has discussed this issue from para 15 to 27 of its order. 42 The AO has not made addition on account of reallocation of expenses in respect of Baddi unit and Panchkula unit. The AO has adopted an alternative method i.e. estimating the method of Baddi unit @ 12% for the purpose of making the addition. In this method, the AO did not take into account the factor of excise duty of Rs. 7,12,73,558/- which is a major factor of rejection of profit in respect of Panchkula unit whereas the Baddi unit is exempt from excise duty. In my view, it is proper to reallocate the expenses on sales ratio and the addition on account of Rs. 142.24 lacs would be made in respect of Panchkula unit and to that extent the profit of Baddi unit would get reduced.