TaxTMI 
TaxTMI 
2024 (6) TMI 1133
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....posed of through this common order. 2. The issues contended in the above appeals and the C.O are tabulated as under: Issues ITA No.77/M/21 ITA No. 1242/M/21 ITA No. 1241/M/21 CO No. 1/M/22 General C.O. No.1 Disallowance of depreciation on unverified purchases and other expenses Ground No.1 Disallowance of depreciation on goodwill on amalgamation Ground No.2 Transfer Pricing Adjustment on letter of comfort Ground No.3 Initiation of penalty proceedings u/s 271(1)(c) Ground No.4 Mark to market loss allowed as deduction under section 37(1) Ground No.1 C.O. No. 2 to 4 Disallowance of sales promotion expenses Ground No.2 Expenditure on Employee's stock option Ground No.3 C.O. No. 5 Weighted deduction u/s 35(2AB) Ground No. 4 & 5 Ground No.1 to 3 Pre-commencement expenses Ground No.6 C....
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....disallowance of ESOP expenses to allow additional deduction of Rs. 6,01,35,587. Further the AO also did not allow the deduction claimed through a letter during assessment proceedings towards additional depreciation on assets put to use for less than 180 days under section 32(1)(ii) of the Act and deduction towards leave encashment. The AO also made an addition under section 40(a)(v) of the Act towards non-monertary perquisites were made to the tune of Rs. 2,95,87,707 accordingly assessing the book profit at Rs. 17,31,91,70,282/- under section 115JB of the Act. 6. Aggrieved the assessee filed further appeal before the CIT(A) partly allowed the appeal by granting relief to the assessee in respect of the following: • Disallowance of Mark to market loss of Rs. 1,18,20,185 • Disallowance of sales promotion expenses amounting to Rs. 82,30,32,740 • Weighted Deduction under Section 35(2AB) of the Act on Clinical & Analytical Charges of Rs. 49,94,52,208; • Weighted deduction under Section 35(2AB) of the Ac other R&D expenditure of Rs. 8,17,46,000 (through rectification under section 154 of the Act) • Disallowance of ESOP ex....
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.... lower authority. 10. We have heard the parties and perused the material on record. In assessee's case depreciation on unverified purchases were disallowed for AY 2006-07 to AY 2012-13 and the Co-ordinate Bench has given relief to the assessee towards depreciation unverified purchases capitalized and the issue of depreciation on unverified purchases was remitted back to the AO for fresh examination. We notice, that the disallowance made by the AO towards unverified purchases and expenses is the consequential depreciation on the written down value of the assets. The relevant observations of the coordinate bench are extracted below - Unverified Expenditure "6.4 In our view, we may leave aside the issue as to whether the said retraction is valid or not, since the assessee is supporting its stand for not disallowing these expenses on merits. In our view, the stand of the assessee, in the facts and circumstances of the case, merits acceptance. First of all, there is no dispute that the amount of Rs.48,89,052/- is not in the nature of commission expenses, i.e., the assessee has admitted that it has booked bogus expenses by way of commission payments only. Secondl....
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....-revised its VAT returns after verification on 26th June, 2012, i.e., subsequent to the date of search. According to the assessee, the rerevised VAT returns has since been accepted by the VAT authorities. Accordingly, it was submitted that the surrender of income towards alleged bogus purchases was made on the basis of incomplete information and further on the reasons that the assessee was not able to prove the genuineness of purchases at that point of time. 7.4 With regard to the statement given by one of the vendors Shri Naresh Kantilal Shah, which was referred to by the AO, the assessee submitted that it has not made any purchases from the concerns belonging to the above said person during the year under consideration. On legal aspects, the assessee has contended that the addition could not be made merely on the basis of statement given on oath. 7.5 The ld D.R, on the contrary, supported the orders passed by tax authorities on this issue. 7.6 We notice that the assessing officer has entirely placed his reliance on the statement given by the employees and directors of the assessee u/s 132(4) of the Act. Besides the above, the AO has also placed reliance on the statement given by ....
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....t the AO to delete the disallowance of consequential depreciation on unverified expenses and the issue of consequential depreciation on unverified purchases is remitted back to the AO with similar directions. Needless to say that the assessee be given a reasonable opportunity of being heard. This ground of the assessee is partly allowed for statistical purposes. Disallowance of depreciation on goodwill on amalgamation - Ground No.2 11. There was an amalgamation approved by the Board of Directors and the Hon'ble Bombay High Court of the assessee-company and its wholly owned subsidiaries namely Lupin Pharmacare Ltd., Lupin Herbal Ltd. and Novodign Ltd. w.e.f. 01.04.2009. The amalgamation was accounted in the books of the assessee as per pooling of interest method prescribed by Accounting Standard-14. In terms of the scheme all Assets & Liabilities of the transferor company have been transferred to the assessee-company at their respective book value and all intercompany balances were canceled. Since the transferor companies were wholly owned subsidiaries of the assessee, the shares held by assessee in the transferor company were cancelled and no shares were issued to effect ....
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....ising on acquisition of unrelated concern? Let us take a hypothetical case. Let us assume that a company acquires an "unrelated concern" by way of amalgamation. Let us assume that the consideration paid was Rs.50 crores and the net asset value of assets of acquired was Rs. 40 crores. Since there is excess payment of Rs. 10 crowes, the said excess payment shall be treated as payment towards goodwill. Is this case, (a) there is cash payment by the company (b) it in a case of fresh acquisition and not acquisition in lieu of investments already made. (c) the excess payment was made voluntarily. (d) such excess payment was a conscious decision, i.e, the buyer should be visualizing some business advantage and hence it was paying higher consideration that the value of net assets. (e) The business advantage so visualized by the assessee is considered as an intangible asset eligible for depreciation. 7.8 In the instant case, the assessee has acquired its subsidiary companies by taking over their assets and liabilities in lieu of investments made by it. The above said short fall shall be termed as "goodwill" as per accounting princi....
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.... with similar directions. It is ordered accordingly. This ground is allowed for statistical purposes. TP Adjustment on letter of comfort (LOC) - Ground No.3 14. The assessee has issued a letter of comfort towards credit facilities sanctioned by ANZ Banking Group Ltd. to assessee's subsidiaries Multicare Pharmaceuticals Philippines Inc. The TPO treated the said transaction as international transaction and proceeded to bench mark the same. The TPO placed reliance on the decision of the Hon'ble Bombay High Court in the case of Everest Canto (58 taxmann.com 254 (Bom.)) and the decision of Co-ordinate Bench in the case of Glenmark Pharmaceuticals Ltd. (ITA No. 5031/Mum/2012 dated 13.11.2013) to make an adjustment of 1.5% towards Guarantee Commission. The relevant observations of the TPO are extracted below: "v) In view of the detailed discussion above, following the recent decision of Hon'ble Bombay High Court in the case of Everest Kanto, and Mumbai ITAT in Glenmark Pharmaceuticals Ltd. in ITA No.5031/Mumbai/2012 dated 13.11.2013 (A.Y. 2008- 09), a downward adjustment to the naked quotes of the rates of bank Guarantee has been done in this year, while benchma....
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....it is clear that the assessee is giving a comfort to the ANZ bank that the AE would be operated and maintained in such a way to be in a financial position to repay its obligations and not to take any action that would hinder the operations of the AE. The assessee also gives the commitment that assessee's stake in AE will not go below 51%. Therefore we see no merit in the contention that the assessed has to repay all outstanding to the bank if it reduces its capital below 51% in its AE. Our view is further strengthened by the relevant clauses in the letter of offer given by ANZ to the AE i.e.borrower as extracted by the CIT(A) in his order which is reproduced below - "I have gone through the above and TPO's order, It can be held that it would depend on the nature letter of comfort issued to a bank to give a finding that a particular transaction constitute a guarantee or not. Therefore to held letter of comfort as international transaction/ transaction providing guarantee, it has to be seen whether the letter of comfort cast any additional obligation on the assessee and whether there could be any financial liability on the assessee. In the present c....
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....n. Allowability of deduction under setion 10AA of 100% of profits derived from Export Oriented Unit before considering the additions/deletions 20. The assessee through additional ground is contending that the deduction under section 10AA of the Act with respect to Pithampur SEZ Unit should be allowed on the commercial profit and not on the profit after the deductions/additions. In support of the admission of this additional ground, the learned A.R. submitted that it involved only adjudication of legal issue and no fresh facts were required to be examined. The learned Departmental Representative opposed the admission of additional ground. Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised before us we are convinced that its adjudication does not require any fresh investigation of facts and involves only legal issue. Respectfully following the judgement of the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits. 21. The ld AR submitted that a similar issue was contended before the coordinate be....
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....ch has not been examined by the tax authorities, the ld D.R submitted that this claim of the assessee requires examination at the end of AO. We agree with the submission made by Ld D.R. Accordingly, we restore this issue to the file of AO for examining this claim of the assessee. 24. For the year under consideration also the assessee has not raised this issue before the lower authorities and therefore respectfully following the above decision of the Tribunal we remit the issue back to AO for examination with a direction to decide keeping in mind the decision of coordinate bench in the case of Reliance Industries Ltd (supra) and decide in accordance with law. This ground is allowed for statistical purposes. I.T.A. No. 1242/Mum/2021 - Revenue's appeal Allowability of mark to market (MTM) loss under section 37(1) - Ground No.1 25. For the year under consideration the assessee had provided for loss arising on the outstanding derivatives contracts in respect of foreign exchange receivables and derivatives contract which were valued at the year end. Accordingly, the assessee provided for MTM loss of Rs. 1,18,20,185/-. The AO disallowed the expenditure by placing reliance ....
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....on to ineffective portion of Option contract outstanding on 31.3.09 - 39,97,341 M to M Loss in relation to derivative asset w/off relating to Option Contract - 2,66,20,000/ 3,48,70,868 Less: Reversal of M to M Loss in relation to Ineffective portion of Option contract - 8,99,687 13.2 The Ld A.R submitted that an identical issue has been examined by the Tribunal in the assessee's own case in AY 2008-09 and it has been decided in favour of the assessee following the decision rendered by Hon'ble jurisdictional Bombay High Court in the case of CIT vs. M/s D Chetan & Co (ITA No.278 of 2014 dated 01-10-2016)( [2016] 75 taxmann.com 300 (Bombay)). We also notice that the decision rendered by the Tribunal in the assessee's own case has since been upheld by Hon'ble Bombay High Court, vide its order dated 2nd April, 2019 in ITA No. 1532 of 2017. In the case of M/s D Chetan & Co. (supra), the Hon'ble Bombay High Court held as under:- "5. Being aggrieved, the Revenue preferred an appeal to the Tribunal. The impugned order of the Tribunal upheld the finding of the CIT (Appeals) that the loss incurred by the Respondent Assessee was a r....
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....gular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. Vinodkumar Diamonds (P.) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar Diamonds (P.) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act. However, it appears that the decision of this court in CIT v. Badridas Gauridu (P.) Ltd. [2003] 26....
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....SOP expenses - Ground No.3 29. The assessee had claimed a deduction of Rs.34,65,39,003 as ESOP expenses in the revised return of income. The AO disallowed the same holding the said expenses to be notional. The CIT(A) allowed the deduction by placing reliance on the decision of the Special Bench in the case of Biocon Ltd (2104) (144 ITD 21)(Bang)(SB). 30. We heard the parties. We notice that the issue is covered by the decision of the coordinate bench in assessee's own case for AY 2009-10 and AY 2010-11. The relevant findings of the Tribunal for AY 2010-11 is extracted below - 12.1 We noticed that an identical claim made by the assessee was disallowed in A.Y. 2009-10 by the AO. This issue was examined in detail by the Tribunal in ITA No. 395/Mum/2021 read with order passed in M.A. No. 193/Mum/2023 arising out of ITA No. 395/Mum/2021 relating to A.Y. 2009- 10. The final decision rendered by the Tribunal is extracted below by culling out relevant observations from the main order and the order passed in the Miscellaneous Application filed by the assessee:- From Main Order:- "15.1 The Ld CIT(A) allowed the claim of the assessee following the decision rendered....
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....d 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999." Continued in MA order:- "15.4 We notice that the Special bench has recognised that the discount on ESOP arises on two occasions, viz., (a) First type of discount arises at the time of granting and/or vesting of ESOP options and it represents the difference between fair market value on the date of granting/vesting date and the price at which shares are offered to the employees. This discount is usually amortised over the vesting period. The employee need not exercise option at the time of vesting itself. (b) The second type of discount arises at the time of "actual exercise of option" by the employees and it represents the difference between the fair market value of the equity shares....
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....omputation of depreciation and development rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out "the actual cost" of the plant and machinery purchased by the company. This court held that "cost" is a word of wider connotation than "price". There was a difference between the price of a machinery and its cost. This court thereafter pointed out that the expression "actual cost" had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase..............The judgment in Challapalli's case [1975] 98 ITR 167 (SC), goes to show that the court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants." From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9. The trump card of the ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of SSI Limited (supra) w....
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....at the time of exercise of option, needs to be scrupulously followed 11.3. We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head `Profits and gains of business or profession'." We notice that the assessee has also paid "fringe benefit tax" on the second type of d....
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....rdinate Bench in assessee's own case for AY 2010-11 while considering a similar issue has held that - 11.3 We noticed that the AO had made identical disallowance in Asst. Year 2009-10. The Coordinate Bench has examined the same in the assessee's own case in A.Y. 2009- 10 and decided in favour of the assessee by following the decision rendered by Hon'ble Gujarat High Court in the case of Cadila Pharmaceuticals Ltd. (supra). The observations made by the coordinate bench in AY 2009-10 are extracted below:- "14.3. We heard the rival contentions and perused the record. In our view, following questions arises on this issue in respect of the claim u/s 35(2AB) of the Act made by the assessee:- (a) Whether expenditure incurred on clinical trials, bioequivalence studies outside the in-house facility is eligible for weighted deduction u/s 35(2AB) of the Act? (b) Whether the weighted deduction u/s 35(2AB) could be allowed during the year under consideration, even if the expenditure has not been certified by DSIR in Form no.3CL? (c) Whether expenditure incurred prior to the date of approval could be allowed as deduction? (d) Whether ....
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...., however, strongly relied on the certificate issued by the Prescribed Authority, which segregated the expenditure in two parts, that incurred in in-house facility and that incurred outside. 14. In our opinion, the Tribunal committed no error. Section 35(2AB) of the Act provides for deduction to a company engaged in business of biotechnology or the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. Such deduction at the relevant time was one-and-a-half times expenditure which has now been increased to twice the eligible expenditure. We may notice that explanation to section 35(2AB)(1) which was introduced by the Finance Act 2001 with effect from 1.4.2002 reads as under: "Explanation - For the purposes of this clause, "expenditure on scientific research" in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)." ....
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....rch. In the context, certain observations made by the Bench may be of some relevance. "25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee." 18. We are, therefore, of the opinion that the Tribunal comm....
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....n the decision of Concept Pharmaceuticals ltd (supra) the Coordinate bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explanation introduced with reference to 'Clinical Trials'. By very nature, the Clinical Trials cannot alone be done within research facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of 'in-house' research. This issue was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court has approved the same....." Accordingly, following the decision of Hon'ble Gujarat High Court, we hold that the amount spent by the assessee on clinical trials outside the approved in- house facility is eligible for weighted deduction u/s 35(2AB) of the Act. Since the facts are identical in this year also and since the decision rendered by Ld CIT(A) on this issue is in accordance with the decision rendered by the co- ordinate bench in AY 2009-10, we uphold his order passed on this issue. 34. The facts for the year....
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....9;s own case has considered a similar issue where it has been held that - 14.5 The next question is Whether the weighted deduction u/s 35(2AB) could be allowed during the year under consideration, even if the expenditure has not been certified by DSIR in Form no.3CL?. The ld D.R placed her reliance on the decision rendered by Hon'ble Karnataka High Court in the case of Tejas Network Ltd (2015)(60 taxmann.com 309)(Kar), wherein it was held that the AO cannot sit in judgment over the report submitted by prescribed authority. Accordingly, the Ld D.R submitted that the AO has to necessarily follow the report given by the prescribed authority. The Ld D.R submitted that, in the instant case, the DSIR (Prescribed authority) has not certified the expenses incurred outside the in-house facility and the AO could not sit in judgment over the said report. Accordingly, the Ld D.R submitted that the unapproved expenses cannot be allowed deduction u/s 35(2AB) of the Act. 14.6 The next question is whether expenditure incurred prior to the date of approval could be allowed as deduction? Both these questions are answered together. 14.7 The legal sanctity of Form no.3CL was....
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....uestion of allowing deduction u/s.35(2AB) of the Act was considered by the Hon'ble Delhi High Court in the case of CIT v. Sadan Vikas (India) Ltd. [2011] 335 ITR 117 (Del) where AO refused to accord the benefit of the weighted deduction to the assessee under s. 35(2AB) on the ground that recognition and approval was given by the DSIR in February/September, 2006, i.e., in the next assessment year and, therefore, the weighted deduction cannot be allowed. In this case, the CIT(A) confirmed the order of the AO. The Tribunal held that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the s. 35(2AB) of the Act and in coming to this conclusion, the Tribunal relied upon the judgment of Gujarat High Court in CIT v. Claris Lifesciences Ltd. 326 ITR 251 (Guj). In its decision the Hon'ble Gujarat High Court had held that the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulf....
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....lopment of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction." From the above discussion it is clear that prior to 1-7-2016 Form 3CL had no legal sanctity and it is only w.e.f 1-7-2016 with the amendment to Rule 6(7A)(b) of the Rules, that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. Further, the date of approval shall not be cut off date for allowing scientific research expenditure u/s 35(2AB) of the Act. 39. Considering that the facts for the year under consideration being similar, we respectfully follow the above decision and see no infirmity in the order of the CIT(A) allowing the weighted deduction towards the amount not approved by DSIR. Cross Objection No. 01/Mum/2022 - Assessee's 40. The cross objections raised by the assessee are tabulated in the earlier part of the order and from the perusal of the same, it is clear that....