TaxTMI 
TaxTMI 
2010 (10) TMI 813
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere has to be a one-to-one nexus between the borrowed funds and investments yielding exempt income. 3. ignoring the decision of the jurisdiction ITAT in the case of ACIT, Range 10(1), Mumbai versus Citicorp finance (India) Ltd in order IT%A No. 5832/Mum/2003 dated 21.11.2006, wherein it was held that the term 'expenditure' occurring in section 14A would taken in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial 4..ignoring the provisions of Rule 8D which even has retrospective application as held by the ITAT Mumbai Spl. Bench in the case of M/s. Daga Capital Management Pvt. Ltd." 3. Grounds numbers 1 to 4 related issue under section 14A of the Act. The assessee has also raised ground vide ground number 3 in appeal filed by the assessee. The issue is similar to A.Y.2002.2003 appeal filed by the assessee vide ITA NO. 1110/M/07 and the relevant finding reads as under: "7. We have heard the learned representatives of the parties and records perused. In the light of the latest judgment of the Hon'ble High Court in the case of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies Ltd. without appreciating the fact that such royalty payment is not a depreciable asset and that similar relief allowed in the earlier years has not been accepted by the department. 5.1 The learned representatives of the parties submitted that similar issue arose in A.Y. 200203 by ground no. 3 of grounds of appeal filed by the revenue. We find that similar issue has been decided by ITAT in assessee's appeal for the A.Y. 200203 vide order dated 30.09.2010. The relevant findings are reproduced as under: "39. The learned representative for the assessee submitted that the issue is covered by the order of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No. 6477/M/04 9th and others order dated July, 2008. The relevant facts and findings of the ITAT are as under: "16. The next dispute in the Revenue's appeal relates to allowing of depreciation of Rs. 69,97,585/in respect of royalty payments. We have heard the learned counsel for the assessee and gone through the discussions in para 13.6 to 13.10 and agree with the view of the learned CIT(A) that the examination of the agreement as a whole shows that in substance, the royalty inpayment has been made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... same. The AO is directed accordingly. 9. Ground No. 8 is pertaining to directing the A.O. to allow deduction of Rs. 2,49,25,217/u/s.35(1)(iv) being expenditure incurred on construction of building by placing reliance on the first appellate order in the assessee's own case for A.Ys.2003-04 and 2004-05 without appreciating the fact that subsection (2AB) of section 35 clearly lays down that an assessee dealing in pharmaceuticals is not eligible for any deduction of account of expenditure incurred in the nature of cost of any land of building and that similar relief allowed in the earlier years has not been accepted by the department. 9.1 The learned representatives of the parties submitted that similar issue arose in AY 2002-03 by ground No. 3 of grounds of appeal filed by the revenue. We find that the issue is covered by the order of the ITAT for AY 2003-2004 by ground No. 3 of appeal filed by the revenue. The relevant findings are reproduced as under: "75. The learned AR submitted that this issue is covered by the order of the ITAT in Assessment Years 19992000 and 200102 in assessee's own case in ITA No. 4781 and 4782/M/2007 order dated 7.09.2009. The finding of the ITAT i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....56/u/s. 14A of the Income-tax Act. He ought to have restricted the disallowance upto Rs. 3,44,356/attributable to the exempt income relating to the investment of Rs. 149,07,176/ The Hon'ble CIT(A) has erred in facts and in law in confirming the disallowance claim of repairs and maintenance expenses of Rs. 41,362/out of Rs. 10,74,906/by treating the same as capital in nature. The Hon'ble CIT(A) has erred in facts and I law in confirming the disallowance of Research and development expenses of Rs. 20,49,85,240/incurred by the assessee during the year under consideration. The learned AO has further erred in law and in facts in not allowing weighed deduction @ 150@ on such Research and Development expenses of Rs. 20,49,85,240/u/s35(2AB) of the Act. The Hon'ble CIT(A) has erred in facts and in law in confirming the addition of Rs. 11,72,887/u/s.41(1) of the Act on account of creditors outstanding for more than 3 years. 12. The learned counsel for the assessee submitted that ground Nos. 1 and 2 are general in nature and require no finding. 12.1 Ground No. 3 is decided above along with ground numbers 1 to 4 of revenues appeal in para 3 of this order. 12.2 Ground No. 4 di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of these products on its own account with the consent of GIP-US and KV till the dispute between GPI-US and KV was resolved. Further the assessee claimed weighted deduction in respect of the R& D expenses incurred on the aforesaid products in the Return of income for Assessment years 2006-07 stating that the same were incurred on its own account. 14. Thereafter, during the financial year 2006-07, relevant to A.Y.200708 a settlement was arrived at between the parties i.e. GIP-US and KV who decided to terminate the Product Development Agreement (PDA) without any recourse to the parties concerned. In turn, GIP-US decided to terminate its arrangement with the assessee. As a result, a termination agreement was entered into between the assessee and GPI-US. The parties arrived at an arrangement, as per which the assessee would continue to develop the products on its own account and GPI-US would act as distributor for the said products in the US market. The assessee further stated that in order to give effect the termination agreement, the assessee returned back the advance amount of Rs. 17,51,99,518/received from GPIUS and decided not to recover the balance receivable of Rs. 2,97,8....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s shown as receivable. The expenditure of Rs. 20,49,85,240/was incurred by the assessee in the previous year relevant to A.Y. 2005-06 and the assessee had received Rs. 17,51,99,518/as advance payment. Thus, it is very clear that in the relevant previous year, the said expenses were incurred by the assessee on behalf of a third party, i.e. GPI-US and, therefore, it cannot be considered as the business expenses of the assessee for the relevant year. All events relating to the dispute between the parties and subsequent termination of the agreement are subsequent events, which cannot be considered for deciding allowability of an expense in an earlier year. In the financial year 2005-06, relevant to A.Y. 2006-07, both the parties had asked the assessee to discontinue development of these products on their behalf and the assessee decided to continue such development activities on its own account and risk. Thus, the expenses incurred in a subsequent year on assessee's on account and risk can be allowed in that year but the same does not give any right to the assessee to claim these expenses in the year under consideration when the agreement with GPI-US was very much in force and when the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 139(1) of the Income Tax Act. The appellant has also not filed any revised return as per provisions of section 139(5) of the income tax act within one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier. The appellant has made its claim before the Assessing Officer during the assessment proceeding vide letter dated 27.11.2007 when the time allowed u/s 139(5) has also been expired. The Assessing Officer cannot entertain any claim of deduction of the appellant if the same has not been made in the return filed u/s 139(1) or in a revised return filed u/s 139(5). The reliance has been placed on the decision of Hon'ble Supreme Court in the case of Goetz (India) Ltd. Vs. Commissioner of Income Tax, 284 ITR 323 in which the Court have held that deduction claimed after return of income filed no power to the assessing authority to entertain claim made otherwise than by way of revised return. 5.11 The appellant has stated that it is appended note No. 6 along with computation of income in which it is stated that it reserve its right to claim the deduction under section 35(2AB) during the assessment proceeding. There is no a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned AR while arguing the matter in respect of R&D expenditure incurred on approved item u/s 35(2AB), submitted that the assessee engaged in the business of biotechnology. The nature of expenditure incurred is eligible for deduction u/s 35(2AB) of the Act. The expenditure was incurred on approved schemes. The learned AR further submitted that the grievance of the revenue is that the assessee did not incur the expenditure for own business purposes. He submitted that there is no such condition u/s 35(2AB) like condition in section 35(1)(I) of the Act. The learned AR while referring Rule 5(xi) which are guidelines for approval of 'in house R&D centers' and certificate of expenditure u/s 35(2AB) of the Act, submitted that incase of sponsored research programme, the expenditure will be reduced to that extent. The relevant clause is reproduced below: "Grants/Gifts, donations, presents and payments obtained by the company for sponsored research in the approved in house R&D centres shall be shown as credit to the R&D Accounts for the purpose of section 35(2AB) of IT Act, 1961, and the R&D expenditure claimed for deduction under the subsection shall be reduced to that extent." 21. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llows the mercantile system, therefore, royalty amount was taxable but the said order has been reversed by the Hon'ble Bombay High Court in FGP LTD v/s CIT 326 ITR 444 (Bom ) on the ground of real income concept. The learned AR submitted that these are expenses allowable in view of the judgment of the Apex Court in the case of Bokaro Steels, 236 ITR 315. The learned AR further submitted that CIT(A) objected to assessee's claim on the ground that the same was not claimed by filing revised return, following the decision of the Hon'ble Supreme Court in Goetz (India) Ltd. Vs. Commissioner of Income Tax, 284 ITR 323. The learned AR submitted that the assessee's claim is allowable in accordance with following decisions wherein the Goetz India (supra) has been considered: JCIT Vs. Hero Honda Finlease Ltd., 115 TTJ 752 (Del) [TM] Chicago Pneumatic India Ltd. Vs. DCIT, 15 SOT 252 (Mum) Emerson Network power India P. Ltd. V. ACIT, 122 TTJ 67 (Mum.) CIT Vs. Mahavir Spg. Mills Ltd., 303 ITR 353 (P&H), and CIT Vs. Jai Parabolic Springs Ltd., 306 ITR 42 (Del.) 23. The learned AR finally submitted that even if two views are possible for allowing claim u/s 35(2AB), the view in fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ought to have admitted the same in the interest of justice as an appellate authority and Ld. CIT(A) has authority to admit such claim which is in accordance with Goetz (India) Ltd.(supra). Moreover, the Tribunal can also admit any new ground or claim for the first time if it is legal issue and no further probe of facts is required. Admittedly, all material facts are on records. Hence, following the principles laid down in the case of Thermal Power Co. Ltd. 229 ITR 363 (S.C), we admit the assessee's claim in the interest of justice 27. Now we come to the main issue. To examine this issue we would like to refer some important facts of the issue. During the year under consideration the assessee incurred R&D expenses for third party under an agreement dated 1.4.2004. But subsequently disputes arose. The assessee while filing return of income reserves its right by way of a note 6 appended along with computation of total income to claim deduction under section 35(2AB). The said note reads as under: "During the year the company has incurred Rs. 2049.85 lacs (Rs. 1460.76 lacs at R & D Mahape Rs. 42.31 lacs at R&D Sinnar and Rs. 546.76 Lacs at Goa Plant) towards the Product Developmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 41. Under section 43B certain deductions are to be made only on actual payment. Section 43 provides definition of certain terms relevant to income from profits and gain of business or profession. Moreover, sections 42, 43A, 43C and 43D are special provisions for computation/deductions in certain cases. 30. Section 145 of the Act provides that income chargeable under the head "profits and of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The profits of a business must be real profits and have to be ascertained on ordinary principles of trading and commercial accounting. It is a fundamental principle of income tax accounting where the assessee prepares his accounts under the mercantile system, his business profits for income tax purposes would have to be computed in accordance with those principles. There is no definable relation between the assessable income and profits of a business concern in a commercial sense. Computation of income for the purpose of assessment of income tax is based on various provisions of the Act and several fictional deductions and allowances. There are di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndustrial Measurement Corporation Ltd. Vs. CIT, 225 ITR 802 (SC) wherein it has been held that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written off in his books of over period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of years. In fact, allowing the revenue expenditure in one year might give a very distorted picture of a particular year. According to the revenue, these expenditure incurred in AY 2005-06 & 2006-07 are allowable only in AY 2007-08 is contrary to the above law laid down by the Apex Court. 31. The important thing to see is how to give effect of subsequent events to determine accrual of expenditure and real profit/income for the purpose of Income Tax Act. For this purpose we would to refer the facts and finding of the Apex Court cited by the learned AR, in the case of CIT V Bokaro Steel Ltd 236 ITR 315 (SC) (Page NO 323 and 324), reads as under: "9. In the assessment year 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arges. The Court held that no real income had accrued to assessee-company and hence the entries in respect of enhanced charges did not reflect the real income of the assessee and could not be brought to tax by the ITO. 11. In the present case also the entry which was initially made as interest was reversed the next year because in fact the nature of the transaction was changed and the assessee did not receive any real income. The High Court has, therefore, rightly held this entry as not reflecting the real income of the assessee and hence not exigible to income-tax." 32. The Supreme Court in the case of Godhra Electricity Company Limited. v. Commissioner of Income-tax. 225 ITR 746 (SC), held as under: Page No 755 "The High Court has held that the assessee-company was following the mercantile system of accounting and that even under this system in order to visit the assessee-company with the obligation to pay tax the profit must become actually due no matter when it is received and that income cannot be said to have accrued to an assessee-company if it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date". ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he expenditures are allowable same are allowable under respective provisions as in the case under consideration under section 35(2AB) or under section 37(1) as the case may be, in accordance with law. The learned DR submitted that the bifurcation of the expenditure for approved program and nonapproved programme were not before the AO and CIT (A) .This submission of the learned DR is not correct. The assessee has furnished the bifurcation of expenditures in the note attached to the return of income itself. The assessee also filed details before AO Vide letters dated 27.11.2007 and 2.1.2008. We do not find substance in this submission of learned DR. However, some difference in figures given in note and figures pointed out by the learned AR are noticed by us therefore we considered it fit to restore the issue to the file of the AO for a limited purpose for bifurcation of the expenditures to be allowed in respective provisions i.e under section 35(2AB) and section 37(1) as the case may be. The AO shall provide reasonable opportunity of hearing to the assessee. ... 35. Ground No. 6 is in respect of addition of Rs. 11,72,887/u/s.41(1). Briefly the facts relating to this ground are tha....