2012 (6) TMI 13 - AT - Income Tax

Tribunal Grants Relief to Assessee on Expense Disallowance & Deductions

Cadila Healthcare Ltd. Versus Additional Commissioner of Income-tax, Range - 1

Cadila Healthcare Ltd. Versus Additional Commissioner of Income-tax, Range - 1 - TMI Issues Involved:1. Disallowance of Legal and Professional Expenses.2. Addition of Product Registration Expenses and Trademark/Patent Registration Fees.3. Disallowance of weighted deduction for Scientific Research under Section 35(2AB).4. Disallowance under Section 14A.5. Restriction of deduction under Section 80IC and 80IB.6. Upward adjustment on international transactions under Transfer Pricing provisions.7. Adjustments while computing book profits under Section 115JB.8. Allowance of deduction under Section 80G.9. Benefit of carry forward of MAT credit under Section 115JAA.10. Initiation of penalty proceedings under Section 271(1)(c).11. Enhancement of interest chargeable under Section 234B.Issue-wise Detailed Analysis:1. Disallowance of Legal and Professional Expenses:The assessee claimed Rs. 24,00,000/- as revenue expenditure under Legal and Professional Expenses for a project that was later abandoned. The AO disallowed it, treating it as capital expenditure. The Tribunal concluded that since the expenses were for the expansion of the existing business, they should be treated as revenue expenditure. Thus, this ground was allowed in favor of the assessee.2. Addition of Product Registration Expenses and Trademark/Patent Registration Fees:The AO treated Product Registration Expenses and Trademark/Patent Registration Fees as capital in nature, eligible only for depreciation under Section 32. The Tribunal, however, held that these expenses were incurred for the smooth running of the existing business and did not create any new asset. Therefore, these were allowable as revenue expenditure. Consequently, these grounds were allowed.3. Disallowance of weighted deduction for Scientific Research under Section 35(2AB):The AO disallowed the weighted deduction for expenses on clinical trials conducted outside the approved facility. The Tribunal held that clinical trials are an integral part of scientific research and should be considered as in-house research. Therefore, the assessee was entitled to the deduction under Section 35(2AB). This ground was allowed.4. Disallowance under Section 14A:The AO disallowed Rs. 118,84,177/- under Section 14A for expenses related to exempt income. The Tribunal noted that the AO did not establish a direct nexus between the borrowed funds and the investments. Following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd., the matter was remanded back to the AO for fresh determination. This ground was allowed for statistical purposes.5. Restriction of deduction under Section 80IC and 80IB:The AO restricted the deduction under Section 80IC for the Baddi Unit to Rs. 45.92 crores and under Section 80IB for the Goa Unit to Rs. 17,80,758/-. The AO argued that only the manufacturing profit should be considered for deduction. The Tribunal disagreed, stating that the entire profit from the eligible business, including marketing and brand value, should be considered. These grounds were allowed.6. Upward adjustment on international transactions under Transfer Pricing provisions:The AO made an upward adjustment of Rs. 23,81,922/- for service charges paid to Zydus Healthcare (USA) LLC. The DRP allowed a mark-up of 2% instead of NIL. The Tribunal directed the AO to verify the computation in light of the second proviso to Section 92C(2) and grant relief if applicable. This ground was allowed for statistical purposes.7. Adjustments while computing book profits under Section 115JB:The AO added 'provision for doubtful debts' and expenses disallowed under Section 14A to the book profits. The Tribunal upheld the addition of the provision for doubtful debts following the Delhi High Court's decision in Indo Rama Synthetics. However, it allowed the exclusion of Section 14A disallowance from book profits, following the decision in Goetze Ltd. This ground was partly allowed.8. Allowance of deduction under Section 80G:The assessee claimed that the deduction under Section 80G should be Rs. 27,57,600/- instead of Rs. 5,50,000/-. The Tribunal noted that this ground was consequential and not contested, hence dismissed.9. Benefit of carry forward of MAT credit under Section 115JAA:The assessee claimed carry forward of MAT credit of Rs. 1,65,98,236/- relating to A.Y. 2000-01. The Tribunal remanded the matter back to the AO to decide in light of the decision in ITO v. Data Software Research Company (International) Pvt. Ltd. This ground was allowed for statistical purposes.10. Initiation of penalty proceedings under Section 271(1)(c):The Tribunal noted that this ground was pre-mature and hence dismissed.11. Enhancement of interest chargeable under Section 234B:This ground was noted as consequential and hence dismissed.Conclusion:The Tribunal allowed several grounds in favor of the assessee, particularly concerning the disallowance of expenses and deductions under Sections 80IC, 80IB, and 35(2AB). It remanded certain issues back to the AO for fresh consideration and dismissed a few grounds as either pre-mature or consequential. Overall, the judgment provided significant relief to the assessee on multiple counts.