TaxTMI 
TaxTMI 
2021 (10) TMI 907
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....imid Labs Limited and its group concern on 09-11-2016 by the DDIT(lnv.), Unit-1(2), Hyderabad. In connection with search & seizure operation in Vivirnid labs, a survey operation u/s.133A of the Income Tax Act, 1961 were conducted on 09-11-2016 in the case of assessee. Accordingly, this case had been selected for compulsory scrutiny. The assessee company had filed its return of income u/s.139(1) of the Income Tax Act on 28-10-2017 declaring total income of Rs. 2,02,870/- admitted income under 115JB at Rs. 2,78,636/-. Accordingly, notices u/s.143(2) and 142(1) were issued by the Assessing Officer. 3.1 After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s.143(3) of the Income Tax Act, 1961, making the following additions j disallowances: 1. Business income u/s.28(i) of the IT Act - Rs. 22,50,00,000/- 2. of capital expenditure - Rs. 42,52,628/- 4. When the assessee preferred an appeal before the CIT(A), the CIT(A) confirmed the order of AO. 5. Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT. 6. As regards the issue of addition of Rs. 22,50,00,000/- towards bus....
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....oehringerlngel Heim India Pvt. Ltd. which is placed on record , 6.4 After considering the contentions of the assessee and considering the agreement submitted by the assessee, the AO observed that the same was not acceptable. In this connection, he referred to the Article - 4 - 'Consideration Prices' of the said agreement, which states as under: "4.1. For the agreement of global exclusive distribution rights to DISTRIBUTOR and/or a D1STRlBUTOR affiliate to any and all products which MANUFACTURER produces/will produce and holds/will hold a Marketing Authorization, DISTRIBUTOR shall pay to manufacturer Rs. 22,50,00,000/-." 6.5. Further the assessee had replied that the assessee is foregoing its rights in respect of trademark, fixing of price of the product, and to have incurred expenditure towards package, export transport and other related expenditure. Further it was stated that this corresponds to period of 15 years and further renewal period of 5 years, in this process, the assessee will incur huge losses for a long period. To compensate these losses, it has received an amount of Rs. 22.50 Cr. from the 'distributor'. 6.6 Rejecting the above contention of t....
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....e appellant. 8. After considering the submissions of the assessee, the CIT(A) observed that the AO had considered the facts on the record and gave an opportunity to the assessee to explain the same by way of show cause notice which was in turn replied by the assessee and these facts were considered by the AO on merits. Therefore, it is not correct to state that the AO has not appreciated the facts of the case and has not considered the submissions made by the assessee. He, therefore, upheld the addition made by the AO by observing as under: "5.3.12 To sum up, the appellant received Rs. 22.50 crores for assigning the territory distribution rights exclusively to M/s. BllPl for an initial period of 15 years extendable by another 5 years. The consideration is non-refundable. This was received as the appellant has exercised its business right of appointing distributor in the territories across the globe and appointed Mis. BllPl who in turn has paid the consideration for purchasing the distributor rights. This amount received is not linked to the pricing of the product or to compensate future losses. There are separate clauses in the agreement as to how the cost of the produc....
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....res to market and sell all of the Animal Health Products which it manufactures or that it will manufacture in future in the territory and seeking to align with a global distribution partner, it has entered marketing agreement on 01-04-2016 with M/s. BOEHRINGER Ingelheim India Pvt. t.td., Mumbai which was effected w.e.f. 01-04-2016. According to the agreement, the above distributed company M/s. Boehringerlngelheim India Pvt. ltd.., has paid Rs. 22,50,00,000/- to the appellant for the assignment of Global Exclusive Distribution Rights to it and/ or it affiliated to any and all products which the appellant produces/ will produce and holds/will hold a Marketing Authorization for a period of 15 years from 01-04-2016. The above amount of Rs. 22,50,00,000/- was paid to the appellant as non refundable for fulfilling the conditions as laid down in the said agreement by the appellant. 9.1 He submitted that for fulfilling the clauses in the agreement as well as also the other clauses in the said agreement, of the distributor viz., M/s BOEHRINGER ingelheim India Pvt. ltd, Mumbai, the Manufacturing company, viz., the appellant has to lose substantial amounts for 15 Years from the date of agr....
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.... take a divergent view was that the contract with M/s. Boehringerlngelheim India Pvt Ltd. did not specify the accounting treatment. According to the AR, the AO completely erred in this regard because the accounting treatment and the Income Tax liability of a person depends on the nature of his business and objects. Further, no part of the advance can accrue in the present assessment year as the assessee is yet to render the services in this behalf. The amount is received with a view to incur expenditure in future. Since, the amount is in respect of a future liability in the form of incurring costs for rendering the said services, the amount could not partake of character of income until it was earned and could be said to be earned only when the assessee would render the said services in future, He pointed out that this fact that the assessee is under an obligation to render services in the future has not been disputed by the AO considering the fact that the amount of advance is received towards future services for which costs are to be incurred in future and the same is non-refundable, no addition need to made during this year. Moreover, the receipt in advance amount do not come wi....
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....o income- tax under the head" Profits and gains of business or profession",- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;" 11.1 As per the above section, it is clear that the assessee has not undertaken any business activity and he has received only advance for setting off of losses for future years, which commence w.e.f. 01/04/2016, but, no commercial activity has been started, which is clear from the audited financial statements. Therefore, the agreement in this regard for treating it as a revenue income cannot arise. On perusal of the agreement, which is placed at page nos. 23 to 56 of the paper book, the agreement will be in force when the commercial activity will start. Accordingly, we observe that the advance received of Rs. 22.50 crores is not a revenue in nature for the year under consideration. The relevant part of the agreement in this regard is as under: "Article 4 - Consideration/Prices: 4.1 For the assignment of global exclusive distribution rights to Distributor and/or a distributor affiliate to any and all products which manufacturer produces/will produce and ho....
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....he mere fact whether the realization was in the course of trading operations. The moment it is found that certain amounts were deducted by the assessee out of the price payable to its members who supplied the raw material, the conclusion does not necessarily follow that all such realizations get impressed with the character of revenue receipts, giving rise to taxable income in the hands of the assessee. It is not any and every receipt linked to the trading activity that acquires the quality of revenue receipt. The Tribunal or the Court should go further and delve into the true nature, character and purpose of the realizations. If the amounts are meant to be held as deposits liable to be returned to the depositor at a specified point of time or on the happening of specified contingencies which are by no means uncertain or are otherwise treated as members' money-the depository having no unfettered dominion over the said funds, then, it is difficult to characterize them as the income of the assessee. [Para 21] On an analysis of the relevant bye-laws regarding sugarcane price and non-refundable deposits, the following salient features were discernible: 1. The pric....
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....ty/heritability; (c) refundability; and (d) payment of interest on the deposit. The first three features were no doubt dependent upon occurrence of certain contingencies or hedged in by certain limitations. But the deposited amount was not denuded of its character of 'deposit' for that reason alone. [Para 27] The conversion of deposits into shares was as good as refund. Such conversion into additional shares was, however, postponed till the repayment of loans towards capital expenditure and the repayment of Government share capital. In other words, till such time, the member/depositor had no immediate right to demand the payment. Nevertheless, the obligation to repay stood annexed to the deposited amount at the time it was received by the assessee subject of course to the occurrence of the contingency specified in the bye-laws itself It could not be said, as had been said by the High Court, that "under the bye-laws, no event or contingency had been contemplated" under which the members could demand the repayment of the deposit. Nor could it be said that even after the happening of the event specified in the bye-laws, the right to demand repayment becomes illusory i....
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.... ripened itself into a complete obligation on the occurring of specified events stipulated in the bye-laws. Such an obligation may be contingent in nature ~l initially but the right to enforce the obligation inheres in the depositor from the beginning. The existence of other features such as transferability of the deposit to another member and the provision for refund of the deposited amount to the member in case of cessation of membership or to his legal heirs in case of death. were important indicators against the treatment of the deposited amount as the money belonging to the Society. The payment of interest from year to year at a specified rate was another important factor that supported the conclusion of the disputed sum being a deposit. Such payment of interest was only consistent with the fact that the deposited amount still belonged to the member. The fact that the deposited amounts were credited to individual accounts of the members was a corroborative circumstance to indicate that deposits belonged to the members. [Para 33] Further, the manner of user of the deposit was limited by the bye-laws. Which provided that the amount of deposits shall be utilized jar the ....
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.... transaction of loan. They were clearly liable to be excluded from taxable income. [Para 40] The contended by the revenue that the members had no option but to agree for deduction on pre-obtained terms and there could not be in law a contract creating deposit could not be accepted. A person by becoming the member of a Co-operative Society volunteers to abide by the bye-laws of the Society, the real object of which is to provide for internal management of the Society including rendering assistance to the members. There is an authority for the proposition that the bye-laws of the Co-operative Society constitute a contract between the society represented by its managing body and its constituents. That apart, the mere fact that the contract has to be entered into in conformity with and subject to restrictions imposed by law does not per se impinge on the consensual element in the contract. [Para 41] CONCLUSION For the aforesaid reasons it was concluded that the non-refundable and refundable deposits could not be treated as the income of the assessee-society. Therefore, appeals filed by the assessees were allowed. [Para 41J OTHER FUNDS As reg....
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....e of collections made towards the Cane Development Fund. The amounts realized on that account undoubtedly reached the assessee as its income and was utilized by the assessee for the benefit of itself and its members. The supervisory role of the Directorate of Sugar to ensure that the amount was properly utilized to promote the objectives with which the Fund was formed, did not make a material difference to the quality and character of the receipt. Thus, the deductions made out of cane price towards the Cane Development Fund should be treated as income of the assessee. [Para 48J CONCLUSION Therefore, the appeal of the Commissioner of Income-tax partly in respect of the amounts collected by the respondent-societies towards the Cane Development Fund and was allowed, the amount collected towards the Cane Development Fund would be treated as the income of the assessees and any claim for deduction would be entertained and decided by the Tribunal. [Para 49J In the ultimate analysis, the assessee's appeals were allowed and the Commissioner's appeals were partly allowed to the extent indicated above." 11.4 Considering the totality of the facts and circu....
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....t of salaries which was incurred for the purpose of business and therefore is an allowable expenditure. 14. After considering the submissions of the assessee, the CIT(A) confirmed the addition by observing as under: 6.3.2 I have considered the submissions of the appellant as well as the facts mentioned in the assessment order. There is no dispute that the appellant has not commenced commercial production and the project is still in work-in-progress stage. There is no depreciation claimed by the appellant as the fixed assets are not put to use or ready to be put to use. There is no business income on account of sale of products offered in the P&L A/c. except interest from bank. These facts dearly show that the appellant has not set up his business yet and is still in pre-commencement period. Therefore, the expenses though of revenue nature are to be capitalized to the capital work-in-progress Ale. till the time period of actual commencement of business. The Proviso to Section 3 of the I.T. Act refers to the date of setting up of business and the previous year would commence only thereafter. The assessee has not produced any evidence to prove that it has actually set up i....
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....ition made by the revenue authorities is correct and the same may be confirmed. 17. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The ld. CIT(A) has alleged that the assessee has not set-up its business and still is in pre-commencement period, therefore, the expenditure should be capitalized. We observe that there may be time gap between the setting up of business and commencement of business, as the setting up of business involves many activities, viz., registration of the organization, obtaining license, selection/ purchase of land, installation of plant and machinery, construction activities, R&D activities, market research activities and employee recruitments, compliance with the govt. departments, etc. During this period, the company has to incur some expenditure which may be either in capital in nature or may be in revenue in nature. The revenue expenditure is allowed u/s 37 in the previous year in which it has been incurred. The Section 3 of the Income Tax Act, which defines "previous year", in the context of first year of business operation, states that the same previous year shall s....
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....ivities including the first activity is also deductible in computing the profits and gains of the assessee for the relevant year when the activity is undertaken." 17.2 In Sarabhai Management Corporation Ltd. v. CIT, [1976] 102 ITR 25, the Gujarat High Court took the same view and held that the business commences with the first activity for acquiring by purchase or otherwise, immovable property. There may be an interval between the setting up of the business and the commencement of the business. All expenses incurred during that interval are also permissible for deduction. 17.3 The Delhi High Court, in case of Carrefour WC & C India Private Ltd. v. Deputy Commissioner Of Income Tax (September 2014) made the following observations on setting up:- "The present assessee i.e. Carrefour was engaged and incorporated for carrying on trading activities in different commodities. The word 'trade' even though not defined in the Act is used to denote operations of a commercial character by which a trader provides to customer for reward, some kind of goods or services. In other words, when the trader start providing such goods and services, the business is said to have com....