DCIT 15(3)(1), MUMBAI vs. ZYDUS NYCOMED HEALTHCARE PVT. LTD, NAVI MUMBAI

This is an appeal filed by the revenue. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-24 [in short ‘CIT(A)’], Mumbai and arises out of the assessment order u/s 143(3)(ii) of the Income Tax Act 1961, (the ‘Act’).

The grounds of appeal

We have heard the rival submissions and perused the relevant materials on record. We find that the same issue arose in AYs 2003-04 to 2005-06 (supra). The Tribunal held as under: “20. The increase in gross profit rate for the years under consideration as compared to that of A.Y. 2002-03 which was taken by the AO as the year of ordinary profits thus was properly explained by the assessee and keeping in view the said explanation which was based on the relevant facts and figures, we are of the view that the ld. CIT(A) was fully justified in holding that the profits of the assessee company from its eligible business for the years under consideration could not be regarded as more than the ordinary profits which are expected to rise in such eligible business so as to attract the provisions of section 80IA(10) of the Act. In our opinion, the AO, therefore, was not justified in invoking the provisions of section 80IA(10) of the Act to restrict the deduction claimed by the assessee u/s 10B of the Act and the ld. CIT(A) is fully justified in deleting the addition made by the AO by restricting the claim of the assessee for deduction u/s 10B of the Act in all the three years under consideration. 21. It is also pertinent to note that APAG, Germany was a joint venture partner in the assessee company having 50% share only and it is difficult to comprehend as to how and why it will enter into any sort of arrangement to allow the assessee company to make more than ordinary profits at its own cost knowing fully well that the benefit of such arrangement as a result of any excess profit could be shared by it only to the extent of 50% with the balance 50% going to the other joint venture party. In the case of Digital Equipment India Ltd. vs. DCIT, (2006) 103 TTJ (Bang.) 359 cited on behalf of the assessee before the ld. CIT(A), a similar issue was involved wherein the deduction claimed by the joint venture company was restricted by the Revenue Authorities by invoking the provisions of section 80I(9) which are analogues to the provisions of section 80IA(10) of the Act and the addition made on this M/s Zydus Nycomed Tribunal holding that the Digital Group Worldwide, the overseas joint venture partner will not pay any undue sum to the joint venture which it could not recoup entirely to the exclusion of others. It was also held that mere substantial profit by itself would not give rise to a conclusion that there could be any such arrangement to produce more than the ordinary profits to the assessee from eligible business.

As already noted, a different course was adopted by the AO while making the addition on the similar issue in A.Y. 2005-06 by treating the alleged extra ordinary profits as unexplained expenditure of the assessee on the ground that cost of sales to that extent was not shown by the assessee in the books of account. Accordingly, the addition was made by him to the total income of the assessee u/s 69-C of the Act. As already held by us on the basis of comparative gross profit working of the eligible business of the assessee company, there was no case of more than normal profit earned by the assessee in A.Y. 2005-06 as compared to A.Y. 2002-03 as alleged by the AO and whatever increase in the gross profit rate was there in A.Y. 2005-06 as compared to A.Y. 2002-03, the same was satisfactorily explained by the assessee. It therefore follows that there was no case of any cost of sales incurred by the assessee outside the books of account which could be treated as unexplained expenditure by invoking the provisions of section 69-C of the Act. Moreover, as rightly contended by the ld. counsel for the assessee for invoking the provisions of section 69-C of the Act, the onus is on the AO to establish that the relevant expenditure was actually incurred by the assessee and there is nothing brought on record by the A.O. to discharge this onus.

For the reasons given above, we uphold the impugned orders of the ld. CIT(A) deleting the addition made by the AO by restricting the claim of the assessee for deduction u/s 10B of the Act invoking the provisions of section 80IA(10)/69-C of the Act in all the years under consideration and dismiss ground No. 3 of the Revenue’s appeal for A.Y. 2003-04, and ground No. 1 of the Revenue’s appeals for assessment years 2004-05 and 2005-06.”