TaxTMI 
TaxTMI 
2024 (2) TMI 223
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....in law, the learned CIT(A) has erred in confirming the upward adjustment to the extent of Rs. 80,34,261/- made by AO/TPO in relation to advances given for registration of appellant's product in respective territories and related matter to Associated Enterprises (AEs) namely Accord Farmaceutical, Brazil, Accord Farma, SA, Accord Mexico, Accord Healthcare SAC, Peru and Accord Healthcare, USA. (b) That in the facts and circumstances of the case, the learned CIT(A) has failed to appreciate that all the aforesaid AEs were incorporated as marketing and distribution company for marketing and distribution of appellant's products in respective territories. (c) That in the facts and circumstances of case and in law, the learned CIT(A) has also failed to appreciate that as per local regulations prevalent in respective territories, every pharmaceutical product is required to be registered with local regulatory authorities before its sale in the territories. As the AEs of the appellant company are in start-up phase and also not engaged in independent business activities, the advances were given out of commercial expediency to ensure that the AEs can obtain necessary re....
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....not appreciating and understanding the FAR as well as business models of the appellant and partnership firm and the industry in which both operates and thereby further erred in observing that broadly the functions performed, the activities carried out, assets employed and risk deployed by the appellant company and firm in relation to manufacturing of various products are similar. (d) That on facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance to the extent of Rs. 12,12,20,245/- even after recording following observations: * In the assessment order of the partnership firm or of the appellant company, the sale proceeds of the firm have not been doubted by the AO, therefore, there is no case of inflated profit on account of inflation of sale proceeds. * The disallowance is based on the observation of the AO in respect of expenditures such as R & D expenditure, selling and distribution expenses, packing expenses and financial cost belonging to the appellant firm but debited as expenses in the P & L Account of appellant company which is not based on any specific details and evidences brought on record by ....
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....s As per Return As per Form 3CL Difference Allowed by CIT Weighted portion of Relief Not Allowed by CIT Weighted portion -disallowance R&D capital expenditure 192,71 192,52 0.19 0.19 0.09 R&O revenue expenditure 5409.10 370742 1101,3.8 1492,86 746.42 208.42 104.21 Total 5,601.81 3900.34 1701.47 746.43 208.61 104.305 4. Without prejudice to Ground No. 3 above, in the facts and circumstances of the case, the learned C1T(A) further erred in stating amount of disallowance towards weighted portion of disallowance under section 35(2AB) of the Act at Rs. 2,10,44,148 in para 6.15 of the order (page 124) without appreciating that out of total disallowance of Rs. 850.93 lacs (para 6.13, page 109), on considering relief of clinical trial expenses granted by him at para 6.13 of the order (pager 123), the disallowance towards weighted portion works out at Rs. 104.35 lacs. The above grounds are independent and without prejudice to each other. The Appellant prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the heari....
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....al overseas territories and thereby increasing sales, the aforesaid advances were of a commercial nature and for the benefit of the assessee. Further, the assessee was also of the view that such advances are in the nature of quasi capital i.e. these advances were to be converted into equity at the option of the assessee. Accordingly, no interest was chargeable by the assessee with respect to aforesaid advances given to it's subsidiaries. However, the Assessing Officer made an upward adjustment of Rs. 1,25,43,960/- and added the same to the total income of the assessee. 5. In appeal, before CIT(Appeals) the assessee took similar arguments which are primarily to the effect that the advances were given to the subsidiaries for getting requisite registrations in the respective territories and hence were of commercial nature, on which no interest was chargeable. Further, the assessee submitted that as a result of such advances and it's utilization thereof in getting registration in respective countries, there was substantial increase in sales of the assessee. Further, it was submitted that the aforesaid advances were given out of own interest free funds and therefore, no interest may ....
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....y. Since, in the case of these foreign AEs, these basic conditions have not been fulfilled, therefore, the upward adjustment in respect of interest on loans and advances granted to them is found correct and justified and hence, the same is confirmed. In this regard, the upward adjustment on account of interest on loans and advances to them made by the AO at Rs. 80,34,261/- is found correct and justified, accordingly, confirmed. The ground of appeal is partly allowed." 6. Both the assessee and the Department are in appeal before us against the aforesaid order passed by the Ld. CIT(A), partly allowing the appeal of the assessee. The primary arguments of the Ld. Counsel for the assessee are that aforesaid subsidiaries were incorporated as marketing and distribution companies for marketing and distribution of assessee's products in respective territories. The Ld. CIT(A) failed to appreciate that as per the local regulations prevalent in respective territories, every pharmaceutical product is required to be registered with local regulatory authorities before it's sale in the local territories. As the Associated Enterprises of the assessee were in start-up phase and also not ....
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..... vs. Additional Commissioner of Income Tax 115 taxmann.com 230 (Surat Tribunal) the ITAT, while analysing the concept of quasi capital, observed that in simple terms, the difference between a quasi capital and loan simplicitor is that in the case of quasi capital, the consideration for a sum of money is received in the option to convert the loan to equity, however, in the case of loan simplicitor , the consideration is received in terms of interest and return of principal amount after a pre-decided deferred period of time. 12. In the case of Perot Systems TSI (India) Ltd. vs. DCIT 37 SOT 358 (Delhi ITAT), the ITAT made some useful observations in this regard, which are quoted for reference purposes only:- "11. The first objection of the TPO is that no two persons in normal business situation would grant interest free loan to the other persons. This is a fairly settled position. The assessee's contention in this regard is that no one would have given the AEs loan at that point of time as they were in a start-up stage and that debt ratio was not comfortable. Now, even if one is to accept this argument, there is no case for not providing or charging any interest, if asses....
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....ation in this context. Thus, clearly the assessee contention seeks to add text to the clear legal position as embodied in statute. Such an interpolation is not permissible, that when an interest free loan is given to the AEs, income on account of interest cannot be attributed from the point of view of arm's length consideration. In this regard we also draw support from the Hon'ble Apex Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 wherein it was held that when the language of the Act is clear and unambiguous, there is no scope of interpolation." 13. The Ld. Counsel for the assessee has relied on various judicial precedents including the ITAT Ahmedabad in the case of Micro Inks Ltd. (Ahmedabad Tribunal) 36 taxmann.com 50 which are primary on the proposition that where advances were made, pending capital contribution, in foreign subsidiary, which played significant commercial role in assessee's business, comparable uncontrolled price for interest was NIL. However, this case is distinguishable on facts from the assessee's set of facts, for the reason that the Tribunal, in the case of Micro Inks, observed that unlike the case of Perot Systems TSI (India) Ltd....
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....se cases referred to the situations in which (a) advances were made as capital could not be subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. 15. In our considered view, in the light of the assessee's facts, the Ld. CIT(A) has erred in facts and in law in coming to the conclusion that the nature of advances given by the assessee to it's subsidiaries / Associated Enterprises as quasi capital in nature. The nature of advances, whether it is quasi capital in nature or not, has to be seen at the time of granting of advance / loan to the subsidiary. In the instant facts there was nothing to suggest that at a time of advancement of such loan to the Associated Enterprises the nature of such advances was quasi capital in nature and fact that in the subsequent year, such amounts have been converted into equity (at the option of the assessee) would not alter such advance as being in the nature of quasi capital. Commercial Expediency/ availability of interest free funds: 16. Wi....
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....as in the nature of "quasi equity" and thus, whether notional interest could be computed. While passing the decision, the ITAT made the following observations:- "15. On the issue whether the transaction in question viz., interest free loan by the Assessee to its sister concern can be subject matter of test of Arm's Length Price (ALP) u/s. 92 of the Act, we are of the view that the order of the revenue authorities have to be upheld. It was argued on behalf of the Assessee that under the normal provisions of the Act (Chapter IV), had the Assessee given interest free loan out of its interest free funds to a resident or to a non-resident who is not an associated enterprise, then the revenue could not have brought to tax notional interest income attributable to such interest free loan given by the Assessee. The position cannot be different when interest free funds are given to AE which is a non-resident. We are unable to agree with such argument. Chapter X of the Act dealing with Special Provisions relating to Avoidance of Tax was introduced w.e.f. AY 02-03 by the Finance Act, 2001. Prior to such introduction Sec.92 of the Act was the only section dealing with Transfer pric....
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....gth price redetermination in this context. The fact that the loan has the RBI's approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arms length or not. 19. As noted earlier, if the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect to almost all international transactions between Associated Enterprises, since mostly such transactions are based on the principles of commercial expediency. Further, transfer pricing provisions are special provisions have been introduced specifically to ensure that there is no tax base erosion at the India level and profits are not shifted outside of India by way of certain pre-arranged transactions between associated enterprises. Therefore, the arguments that the advances were given out of one interest-free funds or that the transactions between the associated enterprises were guided by commercial principles, in our....
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....company. The Assessing Officer observed that the partnership firm in which the assessee is a partner has two units, one at Dehradun and another at Sikkim, which were claiming deduction under Section 80IE(i) and 80IC(3)(ii) of the Act, and therefore, their income was exempt from tax. The Assessing Officer observed that the partnership firm had shown net profit @ 49.05% of the sales while the assessee company had shown net profit of 11.04%. Thus, by claiming expenses of the partnership firm, the assessee company had reduced it's net profit and consequently taxes have been reduced. The Assessing Officer observed that the assessee company is engaged in the business of manufacturing and trading of pharmaceuticals products and almost entire production of the firm was sold to the assessee company only. The Assessing Officer observed that the partnership firm had supplied fully packaged products to the assessee company, but the partnership firm was not incurring any expenses on packaging. The partnership firm was simply manufacturing the pharmaceuticals products without incurring Research & Development, without incurring packaging cost and without incurring financial cost etc. Further, the....
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....e partnership firm have earned a higher profit rate as compared to the assessee company, cannot itself be a ground for coming to the conclusion that expenses of the partnership firm have been diverted in the hands of the assessee company, without any concrete basis and only on the basis of conjecture and surmises. 27. In response, the Ld. D.R. submitted that even though the partnership firm and the assessee company are in the same line of business, the partnership firm earned four times more profit percentage as compared to the assessee company. Further, the Ld. D.R. submitted that in the instant facts the packaging expenses in the partnership firm have been incurred and debited to the Profit & Loss account of the assessee company. 28. We have heard the rival contentions and perused the material on record. 29. We observe that in A.Y. 2009-10 in ITA No. 2377 to 2379/Ahd/2018 vide order dated 30.07.2021 ITAT Ahmedabad has discussed this issue in assessee's own case for A.Y. 2009-10. It would be pertinent to produce the relevant extract of ruling for ready reference:- "2. Briefly stated facts of the case are that the assessee, a partnership firm is eligible for deduc....
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....he issue raised by the assessee in the CO. 10. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, there is no effect on the tax liability on the assessee on account of the reduction made in the deduction claimed under section 80 IC of the Act. In other words, whatever amount of deduction is reduced by allocating the expenses which is resulting the deduction in the amount of profit that will get adjusted in the deduction available to the assessee under section 80 IC of the Act. Thus the entire exercise carried out by the Revenue is tax neutral. Accordingly, we hold that the appeals filed by the Revenue are not maintainable." 30. Further, we also observe that in the instant case, there is no concrete materials / evidence to come to the conclusion that there has been diversion of profits from the partnership firm to the assessee company. Admittedly, the Department has not challenged the sale price at which products have been sold by the partnership firm to the assessee company. Further, the Ld. CIT(A) has also made a specific observation that the products of the assessee company involved substantial innovation....
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....ollowing observations:- "6.13 Having considered the facts and the decision of CIT(A0 for the A.Y. 2007-08 & 2008-09, the clinical trials have been held to be an allowable expenditure u/s. 35(2AB) of the Act and subsequently, the Hon'ble ITAT has also approved the findings of the CIT(A) referred above. Respectfully following the decision of CIT(A) and Hon'ble ITAT, the expenditure towards clinical trial at Rs. 1492.86 lacs is held to be allowable expenditure for weighted deductions in view of the provisons of section 35(2AB) of the Act." 34. The Department is in appeal before us against the aforesaid relief granted by the Ld. CIT(A) with respect to claim of deduction under Section 35(2AB) of the Act on clinical trials. 35. We observe that this issue is directly covered in favour of the assessee in assessee's own case for A.Ys. 2002-03 to 2004-05 and 2008- 09. It would be useful to reproduce the relevant extracts of the judgment for ready reference:- "10. We have heard both the Revenue and assessee. We come to Revenue's grievance first. It is an admitted fact that assessee has incurred the amount in question on specified purposes only. We find that the hon'....
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....hat for the purpose of the said clause in relation to drug and pharmaceuticals, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an explanation." 37. Accordingly, in view of the above discussion, the observations made by ITAT in assessee's own case for preceding assessment years and the observations made by the Jurisdictional High Court in the case of Cadila Healthcare Ltd. (supra), we are of the considered view that Ld. CIT(A) has not erred in facts and in law in making any disallowance with respect to the aforesaid issue. 38. In the result, Ground No. 3 of the Department's appeal is dismissed. Ground Numbe....
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....ity in the order of Ld. CIT(A) so as to call for any interference. 42. In the result, Ground No. 3 of the assessee's appeal for A.Y. 2009- 10 is partly allowed. Ground No. 4 of the Department's appeal (deletion of expenses of Rs. 39.62 crores incurred by the assessee to earning exempt income under Section 10 (2A) on behalf of Intas Pharma, partnership firm to the book profit under Section 115JB of the Act: 43. Since we have, while dealing with Ground No. 2 of the assessee's as well as the Department's appeal, deleted the addition in the hands of the assessee company on this account, Ground No. 4 of the Department's appeal is dismissed. Ground No. 4 of the assessee's appeal (Disallowance towards weighted deduction under Section 35(2AB) of the Act amounting to Rs. 2,10,44,148) 44. Before us, the Counsel for the assessee submitted that Ld. CIT(A) vide order dated 30.06.2017 has already afforded relief to the assessee on this issue and accordingly, the assessee shall not be pressing for this ground of appeal. 45. In the result, Ground No. 4 of the assessee's appeal is dismissed as not pressed. Assessment Year 2010-11 46. The assessee has raised the following gro....
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.... (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 2,03,71,479/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk ignoring the fact that during the year under consideration rupee appreciated against the US dollar. 2. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming upward adjustment to the extent of Rs. 2,27,520/- towards guarantee fees/commission. (b) That in the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate that corporate guarantee does not fall in the ambit of international transaction as it has no bearing on profit, loss or assets of the appellant company and also it does not involve any cost for appellant company. 3. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming disallowance to the extent of Rs. 19,42,13,611/- by rejecting books of ....
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....bited as expenses in the P & L Account of appellant company which is not based on any specific details and evidences brought on record by AO. • The AO has only guess worked the reasons of low NP rate of the appellant company vis-a-vis high NP rate of firm and supported the same with the theory of reducing the tax liability in the hands of appellant company. • It is apparent that the firm has debited the various expenditures as noted above which were pertaining to it in its P&L Account and hence, the AOs observation that it has incurred only manufacturing cost expenses is factually incorrect. • As per the Income Tax provisions, the appellant company is different from the firm and their taxability are separately decided as per their business activities. Merely the appellant company has purchased majority of the products of the appellant firm does not mean that each and every deficiencies found in the case of the firm would call for the adverse inference in the case of the appellant company. (e) That in the facts and circumstances of the case and in law, the learned CIT(A) has further erred in confirming disallowance of Rs. 19,42,13,611/....
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....erred in law and on facts in deleting the addition of expense of Rs 74,98,32.361/- incurred by the assessee to earn exempt income u/s 10(2A) on behalf of Intas Pharma (IP) to the the Book Profits u/s 115JB of the Act 6. The Ld.CIT(A) has erred in law and on facts in allowing the expense of Rs 13,20,119/-incurred by the assessee towards issue of debentures as revenue expense instead of the treating the expense as capital expense 7. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 8. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 9. The appellant craves leave to amend or alter any ground or add a new which may be necessary." We observe that Ground Nos. 1, 3, 4 and 5 of the Department's appeal are similar to Assessment Year 2009-10 and our observations would apply for Assessment Year 2010-11 as well We further observe that Ground Nos. 1, 3 and 4 of the assessee's appeals are similar to Assessment Year 2009-10 and our observations would apply for Assessment Year 2010-11 as w....
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.... called for as prayed by the Department. Accordingly, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 52. In the result, Ground No. 2 of the Department's appeal and Ground No. 2 of the Assessee's appeal are dismissed. Ground No. 6 of the Department's appeal (Expenses of Rs. 13,20,119/- towards issue of debentures) 53. The brief issue for consideration before us is whether Ld. CIT(A) erred in disallowing expenses of Rs. 13,20,119/- towards issue of debenture as revenue expenses instead of treating the expenses as capital expenditure. 54. The brief facts of the case are that the Assessing Officer made disallowance of debenture issue expenses for the reason that these expenses were incurred before the issue of debentures which are in the nature of legal expenses and services charges and hence cannot be incurred in normal course of business. These expenses were held to be capital expenses as the non-convertible debentures were issued to provide enduring benefits to the business of the assessee company. In appeal, Ld. CIT(A) allowed the appeal of the assessee with the following observations:- "8.4. Having considered the facts and ....
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....of the debenture issue, a different view cannot be taken. o Commissioner of Income-tax V. ITC Hotels Ltd. [2010] 190 Taxman 430 (Karnataka) The honourable high court came to the conclusion that even if the debenture were to be converted into share at a later date, the expenditure incurred on such convertible debenture has to be. treated as a revenue expenditure. The ground of appeal is allowed." 55. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A) on this issue. 56. On going through the facts of the case and the judicial precedents on the subject, we observe that we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. The Ld. CIT(A) has given a specific finding that the funds received on issue of debentures were used by the assessee company in the course of business, these funds have not been deployed in any new projects and that the debentures are purely in the nature of loans which have been raised to fulfill the working capital requirements of the company and accordingly, the aforesaid expenses are allowable under Section 37(1) of the Act. 57. In the result, Ground No. 6 of the ....
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.... are claiming deduction of such expenses in India and it has been allowed by the Revenue Authorities. (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 1,48,92,713/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk ignoring the fact that during the year under consideration rupee appreciated against the US dollar. 2. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming upward adjustment to the extent of Rs. 28,050/- towards guarantee fees/commission. (b) That in the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate that corporate guarantee does not fall in the ambit of international transaction as it has no bearing on profit, loss or assets of the appellant company and also it does not involve any cost for appellant company. 3. (a) In the facts and circumstances of the case and in law, the lea....
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.... selling and distribution expenses, packing expenses and financial cost belonging to the appellant firm but debited as expenses in the P & L Account of appellant company which is not based on any specific details and evidences brought on record by AO. • The AO has only guess worked the reasons of low NP rate of the appellant company vis-a-vis high NP rate of firm and supported the same with the theory of reducing the tax liability in the hands of appellant company. • It is apparent that the firm has debited the various expenditures as noted above which were pertaining to it in its P&L Account and hence, the AOs observation that it has incurred only manufacturing cost expenses is factually incorrect. • As per the Income Tax provisions, the appellant company is different from the firm and their taxability are separately decided as per their business activities. Merely the appellant company has purchased majority of the products of the appellant firm does not mean that each and every deficiencies found in the case of the firm would call for the adverse inference in the case of the appellant company. (e) That in the facts and circumstance....
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....yer where proceedings or other particulars before them indicate that some refund or relief is due to him". 6. In the facts and circumstances of the case and in law, the learned CIT(A) erred in not admitting the additional ground raised by the appellant company relating to disallowance under section 40(a)((ia) of the Act towards commission paid outside India to non-resident agents operating outside India. The above grounds are independent and without prejudice to each other. The Appellant prays for leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal." 59. The Department has raised the following grounds of appeal:- "1. The Ld.CIT(A) has erred in law in deleting the upward adjustment of Rs 21563844/-made in respect of interest on loans and advances to Accord Newzeland, Accord UK and Accord Canada in whose case loans and advances have been converted int equity and advances were of nature of business advances. 2. The Ld.CIT(A) has erred in law and on facts in deleting the upward adjustment of Rs 42076/- made on account of charging of benchmark guarantee fees for the counter guarant....
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....sue has already been dismissed in Department's appeal for A.Y. 2010-11 in ITA No. 1645/Ahd/2017. Accordingly, this ground is dismissed as per directions given in Ground No. 2 of the Department's appeal for A.Y. 2010-11. Ground No. 3 (Restricting disallowance of expense incurred by assessee on behalf of its subsidiary firm "Intas Pharmaceuticals") 62. We observe that this issue has already been dismissed in Department's appeal for A.Y. 2009-10 in ITA No. 1644/Ahd/2017. Accordingly, this ground is dismissed as per directions given in Ground No. 2 of the Department's appeal for A.Y. 2009-10. Ground No. 4 (Disallowance under Section 35(2AB) on the basis of expense claim made by assessee in P&L Account) 63. We observe that this issue has already been dismissed in Department's appeal for A.Y. 2009-10 in ITA No. 1644/Ahd/2017. Accordingly, this ground is dismissed as per directions given in Ground No. 3 of the Department's appeal for A.Y. 2009-10. Ground No. 5 (Ld. CIT(A) erred in deleting disallowance under Section 14A amounting to Rs. 5,53,94,595/-) 64. The brief facts in relation to this ground of appeal are that the Assessing Officer worked out a disallowance under S....
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....oup companies which are in line of the business of the appellant company. This fact is more evident from the amalgamation of these companies having undertaken on 01/04/2012. Therefore, the purpose was not to earn any dividend income on investment in share of these companies, but for the strategic purposes. Since the appellant did not derive any dividend income from these companies, therefore, in absence of any exempt income, no disallowance in this regard is warranted as has been held by the Hon'ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd., Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsom Textile Ltd. and many more other decision / judgments discussed below. .... 9.15 In view of the aforesaid discussion, the disallowance made by the AO invoking the provisions of section 14A of the Act is not correct and justified on the investment made in the shares on which no dividend income has been derived by the appellant. Hence, same is deleted except to the following discussion. .... 9.17 Further, it has been noticed that the appellant had the capital employed in the partnership firm namely; Intas Pharmaceuticals in whic....
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....zed share capital and also issued the bonus shares during the year under consideration. It was submitted by the assessee from the audited books of accounts that the authorized share capital as on 31.03.2011 was at Rs. 12500 lakhs as against the authorized share capital of Rs. 6000 lakhs on 31.03.2010. Thus there was increase in the authorised share capital to the tune of Rs. 6500 lakhs in the year under consideration. Consequently, there was increase in the issued capital also because of the issuance of bonus shares of Rs. 5173.84 lakhs. Therefore, the issued capital increased from Rs. 5173.83 lakhs as on 31.03.2010 to Rs. 10347.67 lakhs as on 31.03.2011. This increase in share capital was on account of capitalisation of the general reserve for issuance of the fully paid bonus shares. The appellant claimed that these expenditures were directly linked to the increase in authorised capital for issue of bonus shares. The assessee company did not receive any enduring benefit by issue of bonus shares. No fresh capital was increased nor there was any inflow of new money in form of share capital in to the company. Thus, all the expenses incurred are allowable u/s. 37 of the Act. In suppor....
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....d reliance in the case of CIT vs. General Insurance Corporation 286 ITR 232 (SC), wherein it was held that expenditure incurred in connection with issues of bonus shares is revenue expenditure. Further, the Counsel for the assessee placed reliance in the case of CIT vs. Tata Chemicals Ltd. 75 taxmann.com 228 (Bombay), which has again held that expenses incurred for issue of bonus shares are to be allowed as revenue expenditure. 74. We have heard the rival contentions and perused the material on record. In our considered view, after going through the facts of the instant case, Ld. CIT(A) has duly considered and distinguished the facts of the instant case from the case of Brooke Bond India Ltd. (supra) and has taken a view that this is not a case of increase in share capital simplicitor and hence the facts and issues for consideration in the instant case are different from the facts before the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra). Accordingly, in light of the facts of the case, the observations made by Ld. CIT(A) we find no infirmity in the order Ld. CIT(A) so as to call for any interference. 75. In the result, Ground No. 6 of the Department's app....
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.... allegation of the AO remained unproved. 12.6. Considering the facts and submissions, the disallowance made by the AO towards the interest, treating the same as capital expenditure u/s. 36(l)(iii) is not correct, and therefore, the same is deleted. Reliance is placed on the following decisions / judgments:- (i) CIT Vs. Torrent Leasing & Finance Pvt. Ltd. in Tax Appeal No. 620 to 625 of 2006 dated 17/12/2014, whereby the Hon'ble Gujarat High Court has held that when the interest free funds were available with the appellant then disallowance of interest u/s. 36(1) (iii) of the Act was unwarranted. (ii) CIT Vs. Raghuveer Synthetics Ltd. [(2013) 354 ITR 222]. The Hon'ble Gujarat High Court has held as under:- "As can be noted from the order of the Tribunal, the Assessing Officer disallowed the interest solely on the ground that the assessee had given interest-free loans to the associate concerns, viz., R. R. Family Trust and Sagar Textile Mills and this disallowance, in appeal the Commissioner of Income-tax (Appeals) deleted by holding that the amount advanced to both R. R. Family Trust and Sagar Textiles Mils were not given during the year u....
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.... by way of any material, we hold that the issue is appropriately concluded in favour of the assessee and against the Revenue." (iii) CIT - I Vs. Amod Stamping Pvt. Ltd. [2014 (45 Taxman. Com 427] has also endorsed the similar views. "3.2 Similar observations are made by the learned ITAT with respect to the assessment years 2005-06 and 2006-07. In the case of Reliance Utilities & Power Ltd. (supra), the Bombay High Court has held that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments and therefore, interest was deductible. Similar view has been taken by the Division Bench of this Court in the case of CIT v. Gujarat State Fertilizers & Chemicals Ltd. [2013] 358 ITR 323/36 taxmann.com 230/217 Taxman 229 (Guj.). Applying the ratio/law laid down by the Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) as well as Division Bench of this Court in the case of Gujarat State Fertilizers & Chemicals Ltd. (supra) to the facts of t....
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....riety of reasons why an assessee doesn't charge or take interest from loanee parties; while at the same time, it pay interest on borrowings which are for business purposes. For the simple reason that the assessee has failed to charge interest on its receivables and dues there should not be proportionate disallowance in respect of interest paid by the assessee on its borrowings which are for the purpose of business. In the absence of any finding or evidence that borrowing was not for business, the disallowance of proportionate interest by the Assessing Officer cannot be upheld. Thus where the assessee borrowed money for the purpose of the business and the interest paid thereon was disallowed proportionately by the Assessing Officer on the ground that the assessee did not charge interest on amounts receivable by it from its subsidiary company and others but the assessing officer had not shown any nexus or close relation between the loans obtained and the loans advanced free of interest, it was held that the disallowance was not justified" ix) Gujarat Narmada Valley Fertilizers Co. Ltd. Vs. DCIT ITAT, Ahmedabad - A Bench [73 TTJ 787] "Business expenditur....
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.... found uncalled for and hence the same is deleted. The ground of appeal is allowed." 78. The Department is in appeal before us the aforesaid order passed by CIT(A) deleting the additions on this issue. On going through the facts of the instant case and the observations made by CIT(A) in the appellate order, we are of the considered view that the issue is directly covered in favour of the assessee by the decision of CIT vs. Raghuvir Synthetics Ltd. 354 ITR 222 (Guj.), wherein the Courts have held that where huge funds were available without any interest liability with assessee and there was no evidence to hold that borrowed money was utilized for purpose of advance to sister concerns, no disallowance of interest was warranted. We observe that Ld. CIT(A) has, after a detailed discussion on the facts of the case and judicial precedents as the subject decided this issue in favour of the assessee. Accordingly, we find no infirmity in the order of Ld. CIT(A), so as to call for any interference. 79. In the result, Ground No. 7 of the Department's appeal is dismissed. Ground No. 8 (Disallowance under Section 40A(2)(b) of Rs. 1,79,46,654/-) 80. The brief facts in relati....
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....d payment towards services mainly for the reason that the appellant has not provided any comparative instances to show that no excessive payments have been made by the appellant. The appellant has provided the basic details available with it and submitted that each of the R & D clinical expenses paid for the clinical trials are not comparable with any other clinical trials. All these information are secret information based on specific formulations and the same cannot be similarly made for appellant and for outside parties. Therefore, no comparative instances are available on this account. Moreover, the AO has adopted the excessive payment on lumpsum basis @ 2.5% of the payments to them without any base. Even the AO has not given any basis showing that some excessive payments have been made by the appellant to the related parties. The onus wasupon the AO to prove the details and evidences that some excessive payments have been made and in the instant case, the appellant has tailed to provide such details. In this regard, reference is made to the judgments / decision of Hon'ble Courts briefly discussed as under:- (i) CIT Vs. Aditya Medisales Ltd. (Tax Appeal No. 559 of ....
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.... section 40A(2)(b) of the Act were also paid interest at the rate of 18%. There are other factors also justifying higher rate of interest paid to the creditors as compared to the rate of interest paid to the bank, such as no need of offering security or pledging the movable or immovable asset, the period for which the loan was required and the purpose of the loan, etc. There is no material brought on record on behalf of the Revenue to suggest that the assessee has paid a lower rate of interest to outside parties as compared to the depositors covered u/s 40A(2)(b) of the Act. In these facts of the case, we hold that the addition / disallowance made u/s 40A (2)(b) on account of excessive interest is not justified and is deleted accordingly and the ground of appeal No.1 is allowed." 5.1 In view of the above discussions, keeping consistency with the decision taken in similar facts and circumstances by our Co-ordinate Bench, we hereby allow the appeal of the assessee in IT(SS)A No.50/Ahd/2010 for AY 2001-02. 5.2 Since, the facts and issue involved in case of the assessee for AY 2002-03 and 2003-04 are similar to that of AY 2001-02 and both the sides requested the Bench....
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....honable jurisdictional high court in (2014) 50 taxman.com 52 Gujarat CIT Vs. Sarjan Realities Ltd. holds that solely because an assessee had paid an interest to different parties would not itself be a ground to come to conclusion that payment of interest to related companies at rate other than that paid to other parties was excessive and unreasonable resulting in section 40A(2)(b) addition in question. We reiterate that neither of the lower authority gives an independent finding of such an excessive component over and above the prevailing market interest rate." * Hon'ble ITAT Ahmedabad "C" Bench in the case of M/s Saffron Enterprise Vs. DCIT ITA No. 1100/AHD/2008, where in it is held that, " it is not in dispute that generally in the market rate of interest in respect of unsecured loan is a bit higher than the rate of interest prevalent in respect of secured loan. Thus, as rate of interest in respect of secured loan from the bank in the case of the assessee was 16.5%, rate of interest in respect of unsecured loan @ 18% cannot be held as excessive or unreasonably higher than the market rate. Further, simply because the assessee could make a better bargain with ....
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....ts in relation to this ground of appeal are that during the course of assessment proceedings the assessee filed a letter dated 17.11.2014 before the Assessing Officer and claimed deduction @ 100% under Section 35(1)(i) in respect of Capital Work-In-Progress being intangible in nature at Rs. 1286.52 lakhs. In the said letter, the assessee also mentioned before the Assessing Officer that these expenditures were intangible CWIP and not incurred in-house and therefore, not eligible under Section 35(2AB) of the Act. However, the Assessing Officer did not give deduction of claim made by the assessee under Section 35(1)(i) of the Act of Rs. 12,86,51,799/- and further there was no discussion in the assessment order for rejection of claim made by the assessee on this issue during the course of assessment proceedings. In appeal, Ld. CIT(A) dismissed the appeal of the assessee with the following observations:- "However, the appellant has not providing any explanation / details for eligibility of such claim not made in the return of income, but claimed through the letter in the assessment proceedings. Further, the appellant has claimed the deduction u/s. 35(12)(i) of the Act in the le....
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....dismissed this additional ground raised by the assessee on this issue with the following observations:- "I have carefully considered the facts of the case, assessment order and submission of the appellant. The appellant has raised this ground before this office first in the appellate proceedings, as the same was not raised in the original appeal filed in Form No. 35. Even no details and evidences in support of the claim of expenditures having been submitted in the assessment proceedings before the AO. Thus, the entire material was not on record while taking the additional ground by the appellant. The appellant has not substantiated the good and sufficient reasons for admitting this additional ground submitted in the appellate proceedings, therefore, the same is not admitted in view of the following judgments:- - Appellant to satisfied about existence of good reasons for omission of such ground in original appeal memo - failure of assessee to give any reason, the additional ground could not be entertained - Held in the case of Batliboy& Co. Ltd. Vs. DCIT [ITAT, MUM] 67 ITD 397, S. Kumar's Tyre Manufacturing Co. Ltd. Vs. DCIT [ITAT, Indore] 61 ITD 326. ....