DCIT (LTU) -1, MUMBAI vs. LUPIN LTD, MUMBAI

The assessee-company is engaged in the business of manufacture and sale pharmaceutical products. The assessment of the year under consideration was completed by the Assessing Officer u/s. 143(3) of the Act by making certain additions. The appeal filed by the assessee before learned CIT(A) was 2 M/s. Lupin Limited partly allowed. Hence both the parties have filed these appeal before us challenging the decision rendered against each of them.

First we take up the appeal filed by the assessee. The first issue urged by the assessee relates to the disallowance of deduction claimed under the head “provision of leave encashment”. The AO disallowed the same by invoking the provisions of sec. 43B(f) of the Act. The Ld CIT(A) also confirmed the same.

Learned AR submitted that an identical issue was considered by the Coordinate Bench of the Tribunal in assessee’s own case relating to A.Y. 2007- 08 in & 4338/Mum/2011 and the Tribunal, vide its order dated 17.2.2016, restored this matter to the file of the Assessing Officer with the direction to decide the issue in the light of the decision rendered by Hon'ble Supreme Court in the case of M/s. Exide Industries Ltd. & Another (SLP No.22889/2008). We noticed that Hon'ble Supreme Court has passed the following order in the SLP No.22889/2008:- “Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if section 43B(f) is non the Statute Book but at the same time it would be entitled to make a claim in its returns”.

Even though the assessing officer did make a reference to the above said order of Hon’ble Supreme Court, the Ld A.R submitted that the assessee should be given benefits as observed by the Hon’ble Apex Court in the matter of interest and penalty. Accordingly, consistent with the view taken by the Coordinate Bench in assessee’s own case relating to A.Y. 2007-08, we restore this matter to the file of the Assessing Officer with the direction to examine this issue afresh in accordance with the decision rendered by Hon'ble Supreme Court, referred (supra).

The next issue urged by the assessee relates to disallowance of employees contribution to ESIC and Labour welfare fund.

Learned AR submitted that the assessee has paid the employees contribution to ESIC and labour welfare fund before the due date of filing the return of income and hence no disallowance is called for in view of the decision of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transport (368 ITR 749). On the contrary, the Ld D.R placed reliance on the provisions of sec. 36(1)(va) of the Act and submitted that the Ld CIT(A) was justified in confirming the disallowance. He submitted that the plea of the assessee to allow deduction on the basis of decision of Hon’ble High Court was a new plea made before the AO during the course of assessment proceedings.

Having heard rival submissions, we are of the view that the claim of the assessee is required to be allowed in view of the binding decision of Hon'ble Jurisdictional High Court (referred above), since the assessee has paid the employees contribution before the due date for filing return of income. Accordingly, we set aside the order passed by learned CIT(A) on this issue and direct the Assessing Officer to allow claim of the assessee.

The next issue contested by the assessee relates to “Excise duty refund” received by the assessee. Both the parties are challenging the decision rendered by Ld CIT(A) on this issue. The assessee has set up an unit in Jammu & Kashmir and as per the Industrial Policy introduced by State Government and Central Government, the assessee obtained excise duty refund of ` 7.50 crores. The assessee treated the same as capital receipt. The Assessing Officer did not accept the claim of the assessee and accordingly held that excise duty refund is a revenue receipt. The Assessing Officer also took the view that excise duty refund cannot be considered to be a profit derived from the manufacturing activity i.e. the first degree link is not available to this receipt. Accordingly the Assessing Officer, by placing reliance on the decision rendered by Hon'ble Supreme Court in the case of Liberty India Ltd. Vs. CIT

The Learned counsel appearing for the assessee submitted that identical issue was considered by Hon'ble J&K High Court in the case of Shree Balaji Alloys (2011) 333 ITR 335 and Hon'ble High Court has held that excise refund received by that assessee, on identical circumstances, is capital in nature. He further submitted that the decision rendered by Hon'ble J&K High Court has since been upheld by Hon'ble Supreme Court in very same case reported in (2016) 138 DTR 36.

We have heard learned Departmental Representative on this issue and perused the record. According to Ld A.R, this issue is squarely covered by the decision rendered by Hon’ble J & K High Court in the case of Shree Balaji Alloys (supra). However, the Ld D.R submitted that there is some confusion about the quantum of deduction and also the parity of facts between the assessee’s case and the case of Shree Balaji Alloys (supra) need to be examined. We find merit in the submissions of Ld D.R. Accordingly, in our view, this issue requires fresh consideration at the end of the Assessing Officer in order to find out parity of the facts between the assessee’s case and the case of the Shree Balaji Alloys that was decided by Hon'ble J&K High Court. Accordingly, we set aside the order passed by learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer with the direction to examine the parity of the facts and if it is found to be so, then follow the decision rendered by Hon'ble J&K High Court in the said case since the decision rendered By Hon'ble J&K High Court has been upheld by Hon'ble Supreme Court. The assessee is also free to make fresh submissions before

The next issue relates to disallowance of Rs.2.56 crores relating to mark to market loss. The assessee provided for loss arising on the outstanding derivative contracts on foreign exchange on account of valuation done as at the year end. The AO accepted the actual loss/profit arising on maturity of foreign exchange forward contract as business transactions. However, in respect of provision made for loss on account of valuation, the AO took the view the same is not allowable in view of the Instruction No.3/2010 dated 23/3/2010 and accordingly rejected the claim of the assessee. The Ld CIT(A) also confirmed the same.

We heard the parties on this issue. We notice that the assessee is entering into forward contracts as soon as it receives orders from its clients. Pending the execution of the contract, the assessee has valued its forward contracts as at the year end and has provided for the loss as per the Accounting principles and Accounting standards. The ld A.R submitted that the Hon’ble Bombay High Court, in the case of CIT Vs. M/s D. Chetan & Co. (ITA No.278 of 2014 dated 01-10-2016), has followed its decision rendered in the case of CIT Vs. Badridas Gauridas (P) Ltd (2004)(134 Taxman 376), wherein it was held that the forward contract in foreign exchange, when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity. The Ld A.R submitted that the assessing officer has accepted the actual loss arising on maturity of the foreign exchange forward contracts, but disallowed the valuation made in respect of outstanding forward contracts. Since the forward contracts in foreign exchange has been held to be a business activity and since the Accounting standards and Accounting principles mandates revaluation of the outstanding contracts, the assessee has valued the forward contracts in foreign exchange and provided the loss in the books of account. Accordingly he submitted that 6 M/s. Lupin Limited the loss provided by the assessee should be allowed as deduction. He submitted that the loss so provided is reversed on the first day of the succeeding year.

A specific query was put to Ld A.R as to whether the sales invoice raised by the assessee and the forward contract in foreign exchange are composite transactions or separate transactions. The Ld A.R submitted that both are to be treated as composite transaction. It was pointed out to Ld A.R that a forward contract in foreign exchange taken to hedge the export sales would not result in loss at any point of time, since the loss in one wing of transaction would be offset by the gain in other wing of transaction. Accordingly, the Ld A.R was asked to justify the valuation of forward contract in foreign exchange. The Ld A.R submitted that the assessee would be entering into forward contract in foreign exchange immediately on finalization of contract. He submitted that the sales bills (export) have not been raised in respect of these forward contracts. Hence the assessee has valued the outstanding forward contracts as on the date of Balance sheet. He submitted that the sales bills pertaining to the outstanding forward contracts have been raised subsequently from the year 2012 onwards.

We heard Ld D.R and perused the record. Having heard rival submissions, we are of the view that there is merit in the submissions made by the Ld A.R. The forward contract in foreign exchange has been held to be the business activity and the assessee has entered into the forward contracts upon receipt of orders from its foreign clients. Since the export bills have not been raised as on the date of Balance Sheet, the assessee was required to value the outstanding forward contracts, which is in accordance with the requirements of accounting standards and accounting principles. Accordingly, we are of the view that the loss claimed on valuation of outstanding forward contracts is allowable as deduction. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of the assessee.

In the appeal of the revenue, the solitary issue urged relates to the deduction allowed by Ld CIT(A) u/s 80IB of the Act on the Excise duty refund. This issue has been set aside to the file of the AO for his fresh consideration, while dealing with the ground urged by the assessee on the very same receipt. Hence we restore this matter to the file of the AO for examining the same afresh.

In the result, the appeal of the assessee and revenue are treated as allowed for statistical purposes.