2010 (5) TMI 702 - AT - Income Tax

Employees contribution to provident fund - allowable as deduction - HELD THAT - the issue is covered in favour of the assessee by the decision of the hon ble apex court in the case of CIT v. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT according to which contribution to employees State insurance is allowable as deduction if the same is paid before the due date of filing the return. The hon ble Delhi High Court in the case of CIT v. AIMIL Ltd. 2009 (12) TMI 38 - DELHI HIGH COURT following the aforesaid issue the hon ble apex court has held that the employees contribution to provident fund would be allowed if the same is paid before the due date of filing return. Respectfully following the precedent we set aside the order of the authorities below and decide the issue in favour of the assessee.

Issues Involved:
1. Deletion of addition under section 43B(b) of the Income-tax Act, 1961.
2. Deletion of disallowance of contributions to Ranbaxy Community Health Care Society and Ranbaxy Science Foundation.
3. Deletion of disallowance under section 37 for demand raised by National Pharmaceuticals Pricing Authority (NPPA) on cefazoline-based formulations.
4. Deletion of disallowance under section 37 for demand raised by NPPA on cloxacillin-based formulations.
5. Deletion of disallowance of weighted deduction under section 35(2AB) for scientific research and development expenditure.
6. Deduction on account of liability for "deferred employees compensation" in respect of employees' stock option plan (ESOP).
7. Deduction for employees' compensation expenses under ESOP.
8. Deduction of contribution to employees' State insurance (ESI).

Detailed Analysis:

1. Deletion of Addition under Section 43B(b):
The Tribunal upheld the deletion of the addition made under section 43B(b) amounting to Rs. 21,31,56,460 for the provision for pension based on actuarial valuation. The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 1999-2000, where it was held that since there was no contribution to any pension fund and the liability was only actuarial, section 43B was not applicable.

2. Deletion of Disallowance of Contributions:
The Tribunal upheld the deletion of disallowance of Rs. 40,00,000 and Rs. 14,00,000 made to Ranbaxy Community Health Care Society and Ranbaxy Science Foundation, respectively. It cited its earlier decision where it allowed such expenditures as business expenditures promoting goodwill or business purposes, even in the absence of statutory obligations.

3. Deletion of Disallowance under Section 37 for NPPA Demand on Cefazoline-based Formulations:
The Tribunal upheld the deletion of disallowance of Rs. 4,54,86,909 for the NPPA demand on cefazoline-based formulations. It referred to its previous decision, stating that the demand was a quantified and crystallized statutory liability enforceable in law, thus allowable as an expenditure.

4. Deletion of Disallowance under Section 37 for NPPA Demand on Cloxacillin-based Formulations:
Similarly, the Tribunal upheld the deletion of disallowance of Rs. 4,65,08,333 for the NPPA demand on cloxacillin-based formulations, following the same rationale as for cefazoline-based formulations.

5. Deletion of Disallowance of Weighted Deduction under Section 35(2AB):
The Tribunal upheld the deletion of disallowance of weighted deduction amounting to Rs. 2,68,75,526 under section 35(2AB) for scientific research and development expenditure. It referenced its prior decision where such expenditures were incurred in approved research facilities, making the assessee eligible for weighted deduction.

6. Deduction on Account of Liability for Deferred Employees Compensation (ESOP):
The Tribunal ruled against the assessee on this issue, stating that the expenses claimed for ESOP were not allowable. It reasoned that granting stock options at a price below market value results in a notional loss of share premium, not an actual business expenditure or liability.

7. Deduction for Employees' Compensation Expenses under ESOP:
The Tribunal dismissed the assessee's cross-objection on this issue, maintaining that the notional loss due to ESOP does not qualify as an allowable expenditure under the Income-tax Act.

8. Deduction of Contribution to Employees' State Insurance (ESI):
The Tribunal allowed the deduction of Rs. 60,691 for contributions to ESI, following the apex court's decision in CIT v. Alom Extrusions Ltd. and the Delhi High Court's ruling in CIT v. AIMIL Ltd., which held that such contributions are allowable if paid before the due date of filing the return.

Conclusion:
The appeal filed by the Revenue and the cross-objection filed by the assessee were both partly allowed. The Tribunal's decisions were largely based on precedents from earlier rulings in the assessee's own cases and relevant judgments from higher courts. The order was pronounced in the open court on May 21, 2010.

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