ITAT directs AO to delete Rs. 22.50 cr income, allows Rs. 42,52,628 exp.

The ITAT directed the AO to delete the addition of Rs. 22.50 crores as business income and partly allowed the deduction of Rs. 42,52,628/- as business expenditure, granting relief of Rs. 25,20,991/-. The appeal was partly allowed in favor of the assessee.

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Issues Involved:
1. Addition of Rs. 22,50,00,000/- as business income under Section 28(i) of the Income Tax Act.
2. Disallowance of Rs. 42,52,628/- as business expenditure.

Issue-wise Detailed Analysis:

1. Addition of Rs. 22,50,00,000/- as Business Income under Section 28(i):

The assessee company, engaged in manufacturing drugs and pharmaceuticals, entered into a marketing agreement with Boehringer Ingelheim India Pvt. Ltd. (BIIPL) for the global exclusive distribution rights of its products. The company received a non-refundable amount of Rs. 22.50 crores from BIIPL. The AO treated this amount as business income under Section 28(i) of the Income Tax Act, 1961, arguing that the receipt was a business transaction and should be taxed as such. The AO issued a show-cause notice to the assessee, who responded by stating that the amount was received to compensate for future losses and should not be treated as income for the current assessment year. The AO rejected this explanation, considering it a colorable device to evade tax.

The CIT(A) upheld the AO's decision, stating that the amount received was for assigning distribution rights, which is a business activity, and thus taxable as business income. The CIT(A) noted that the agreement between the assessee and BIIPL did not link the amount to future losses or pricing of the product. Instead, it was a consideration for the distribution rights, making it taxable under Section 28(i).

Upon appeal to the ITAT, the assessee reiterated that the amount was an advance for future services and should not be treated as income for the current year. The ITAT considered the rival submissions and the material on record. It concluded that the business had not commenced commercial activities, and the receipt was an advance for future services. The ITAT relied on various judgments, including Siddheshwar Sahakari Sakhar Karkhana Ltd., where the Supreme Court held that certain receipts linked to trading activities but meant to be held as deposits are not taxable as income. The ITAT directed the AO to delete the addition of Rs. 22.50 crores, allowing the assessee's grounds on this issue.

2. Disallowance of Rs. 42,52,628/- as Business Expenditure:

The AO observed that the assessee had claimed an expenditure of Rs. 42,52,628/- in its Profit and Loss account, despite not having commenced business operations. The AO issued a show-cause notice, proposing to disallow this expenditure, as the project was still in the work-in-progress stage, and the expenditure should have been capitalized. The assessee responded, requesting the dropping of the proceedings.

The CIT(A) confirmed the AO's decision, stating that the assessee had not commenced commercial production, and the project was still under work-in-progress. The CIT(A) held that the expenses, though of revenue nature, should be capitalized until the actual commencement of business. The CIT(A) cited various judgments, including the Supreme Court's ruling in CWT Vs. Rama Raju Surgical Cotton Mills Ltd., which stated that a unit cannot be said to have been set up unless it is ready to discharge its functions.

Before the ITAT, the assessee argued that the expenditure was incurred for business purposes and should be allowed under Section 37 of the Income Tax Act. The ITAT considered the rival submissions and the material on record. It noted that there is a distinction between setting up and commencement of business, and expenses incurred during the interval between these stages are deductible under Section 37. The ITAT observed that certain expenses, such as staff salaries, welfare expenses, and administrative expenses, were revenue in nature and should be allowed. However, expenses related to factory maintenance, repairs, and R&D were capital in nature and should be capitalized. The ITAT partly allowed the assessee's ground, granting relief of Rs. 25,20,991/-.

Conclusion:

The ITAT directed the AO to delete the addition of Rs. 22.50 crores as business income and partly allowed the deduction of Rs. 42,52,628/- as business expenditure, granting relief of Rs. 25,20,991/-. The appeal was partly allowed in favor of the assessee.

Pronounced in the open court on 5th October, 2021.

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