TMI Blog2010 (10) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 35(2AB) or under section 37(1) in the first year itself? - Held that:- As that ultimately products developed by incurring R&D expenditures were registered in the name of assessee, which is related to assessee’s business and accordingly in fact used by assessee for its business purposes - Once it is found that the expenditures are allowable same are allowable under respective provisions as in the case under consideration under section 35(2AB) or under section 37(1) as the case may be, in accordance with law - The AO shall provide reasonable opportunity of hearing to the assessee Addition u/s 41(1) - Held that:- The issue is covered in favour of the assessee by the order in the case Dsa Engineers (Bombay) VS ITO [2009 (3) TMI 646 - ITAT MUMBAI] where in it was held that if the assessee has not written off the liabilities reflected in sundry creditors account it was not open to the AO to make addition invoking section 41(1) of the Act without proving that there was cessation of liabilities. As find that in this case AO invoked section 41(1) merely on the ground that the liabilities were three years old thus the order of the AO is not sustainable. In favour of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not applicable. However, the disallowance is warranted under section 14A of the Act. The A.O. must adopt a reasonable basis or method consistent with the facts and circumstances of the case. In the case under consideration is related to the assessment year 200203. In the assessment year 200405 the A.O. himself admitted 10% reasonable disallowance under section 14A of the Act. The CIT (A) in the year under consideration has also accepted 10% disallowance of the expenditure u/s.14A of the Act as reasonable. We, therefore, do not find any reason against the findings of the CIT (A). The order of the CIT (A) on this issue is confirmed. Thus, ground No. 2 of the assessee s appeal and ground No.2 of the revenue s appeal both are dismissed. 3.1 Since facts are identical therefore it is covered by the order of ITAT in assessee s own case, we follow the same. The AO is directed accordingly. 4. Ground No. 5 is in respect of allowing relief of Rs. 10,33,544/out of the total disallowance of Rs. 10,74,906/, made out of expenses claimed under the head repairs and maintenance without appreciating the fact that the various items of expenditure listed in the assessment order are clearly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical knowhow, the assessee is entitled to depreciation under section 32 of the Act. We decline to interfere. The AO followed the detailed discussion made in the assessment year 200102. The CIT (A) also allowed the assessee s claim following the order of the CIT (A) for the assessment year 2001-02. Since facts are identical we respectfully follow the order of the ITAT and in the light of that the order of the CIT(A) is confirmed. 6. Since facts are identical in this year, therefore, it is covered by the order of ITAT in assessee s own case, we accordingly following the order cited supra confirm the order of the Ld. CIT(A) on this issue. 7. Ground No. 7 is in respect of deleting the disallowance of Rs. 1,98,177/u/s.43B on account of delayed payment of PF and ESIC by placing reliance on the first appellate order in the assessee s own case for AY 200304 and 200405 without appreciating the fact that there is no specific provision under the IT Act to allow benefit in respect of payments made within the grace period allowed under the relevant Act. 7.1 The learned representatives of the parties submitted that similar issue has been decided by the Tribunal in AY 2002-03 vide gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsection (1) of sec.35 relates to deduction of any expenditure of capital nature on ad hoc research related to he business carried on by the assessee, and such deduction as may be admissible under the provisions of sub-sec.(2). Sub-sec (2AB) of sec.35 provides that where a company engaged in the business of pharmaceuticals etc. incurs and expenditure on scientific research [not being expenditure in the nature of cost of any land or building] on in house research and development facility as approved by the prescribed authority, then deduction of a sum equal to 1 1/2time of the expenditure so incurred shall be allowed. Thus, it can be seen that the exception to the claim of deduction of the expenditure incurred on cost of any land or building is provided for only under sub sec.[2AB] of sec.35 and not under clause (iv) of sub-sec.(1) of sec.35 of the Act. The assessee s claim is undisputedly u/s.35(1)(iv) of the Act and as rightly held by the ld.CIT(A) 100% of the capital expenditure on scientific research relating to the business carried on by the assessee is admissible as provided under sub-sec.(2) thereof. In view of the same, we do not see any reason to interfere with the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company is engaged in the business of manufacturing and marketing pharmaceutical products and related research and development activities. The assessee has attached notes to the computation of income filed with the return of income. In note 6, the assessee has stated that it has incurred Research Development expenses towards development of new products on behalf of Glenmark Pharmaceuticals Inc., USA . the assessee stated that these expenses are not charged to the Profit and Loss account for the year and also no deduction u/s. 35(2AB) is claimed on the same. However, it is clarified that it reserves the right to claim the said deduction at the time of assessment. Subsequently, vide letter dated 26.11.2007, the assessee filed a claim for said expenses. The assessee also made a detailed submission, vide letter dated 2.1.2008, along with supporting documents to claim these expenses as R. D. expenses. In the said submission, the assessee stated that it was under the agreement with its subsidiary viz. Glenmark Pharmaceuticals Inc., UWSA (GPIUS) to develop certain products on its behalf for a consideration depending on certain milestones. In turn. GPI-US was under an agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Return of income for A.Y. 2007-08, the assessee has given effect to the aforesaid termination agreement and treated subsequent payments and waiver of amount receivable as cost of acquiring know how related to the products which were developed on behalf of GPIUS. The assessee has also claimed depreciation on the said know-how @25% in the Return of income for A.Y.200708. 15. The assessee submitted at the time of assessment before the AO that it has decided to continue development of the aforementioned products on its own account even before formal termination of the agreement. The assessee further submitted that it has refunded the advance payment received from GPI-US, giving effect to termination of the development agreement with GPI-US. Further, the assessee stated that since the said R D expenses were incurred by the assessee on its own risks and account, the said activity of development of these products is to be considered as business expenditure of the assessee and to be allowed u/s.35(2AB) of the I.T. Act, as the same were incurred in connection with research and development of a pharmaceutical product at an approval R D facility. The assessee submitted that they woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts which were developed on behalf of GPIUS. The payments that had been made and the balance amount which was waived, were treated as costs of acquisition of know how and depreciation was claimed on the same. Since these expenses were incurred on behalf of GPI-US during the relevant previous year, the subsequent termination, whereby the assessee acquired all the rights, claim, title, property and interest in the said products, can be treated as acquisition of know how in that year and only depreciation can be allowed on the same. The said expense can never be treated as R D expenses incurred by the assessee on its own account, and that too, in the year under consideration. 18. The AO also examined section 35(2AB) of the Act and observed that the section provides for weighted deduction of 150% in respect of R D expenses incurred by an assessee for the purpose of its business in an approved R D facility. The AO found that the assessee on behalf of a third party and not for the purpose of its own business has incurred these expenses. The assessee decided to incur these expenses on its own account and risk only in the subsequent year i. e financial year 2005-06 relevant to A.Y. 2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. Thus, it is clear that the appellant was not very much sure about allowability of its claim u/s 35(2AB) hence it has not made any such claim in the return of income. 5.12 The Assessing Officer has pointed out that the appellant has not incurred any R D expenses as per provisions of section 35(2AB) for its business during the year and entire R D expenditure was incurred on behalf of third party i.e. GPIUS. Since the expenditure was not incurred for its business by the appellant therefore, the appellant was not entitled to claim deduction u/s 35(2AB) of the Income Tax Act. As far as accounting of the R D expenses are concerned the appellant has not claimed these R D expenses as its business expenses in the P L A/c but reduced the same from the advance received from GPIUS and balance has been shown as receivable from the said party. Therefore, the appellant cannot claim deduction u/s 35(2AB) in respect of expenditure incurred on behalf of third party during the year under appeal. The dispute between the appellant and the GPIUS and KV has been started in FY 2005-06 i.e. in April, 2005 which is relevant to the assessment year 2006-07 and the appellant has decided to carry out this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses are allowable u/s 37(1) of the Act. He placed his reliance on the following decisions: ITA No. 4427/Mum/06 order dated 30.10.2009 Enem Nostrum Remedies (P) Ltd V ACIT 119 TTJ 427 (Mum). 22. It is also the submission of the learned AR that though initially the expenditure was incurred on behalf of the third party, but ultimately the agreement was cancelled and the assessee became owner of those products developed by R D expenses. The learned AR submitted that working capital of Rs. 17.26 crore received as advance, was refunded by the asessee to the party. The learned AR submitted that working capital was given to the assessee under clause 3.2 of the agreement. As per the agreement, the assessee was required to use that amount as working capital. As per agreed terms between the Parties, the full consideration was to be paid only on successful completion of the project by the assessee. Since, the project agreement was cancelled, therefore, the assessee did not raise the bills. The learned AR referring to various pages of the agreement submitted that work was not carried out strictly in accordance with that agreement .Expenses were incurred by the assessee as the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Rs. 17.76 crore, the learned Departmental Representative submitted that refund was made to the unilateral agency, who is not outsider but a sister concern of the assessee. The learned Departmental Representative submitted that they can decide any thing, which suits to them. The learned further submitted with reference to the learned AR s contention, that there was two types of expenses, one is incurred on approved scheme u/s 35(2AB) and another is incurred on non approved scheme u/s 35(2AB). The learned Departmental Representative submitted that such bifurcation was neither file before the AO nor before the CIT (A). The learned Departmental Representative submitted that expenditure related to subsidiary company which is not allowable to Assessee Company. The learned Departmental Representative in support of his contention relied upon the decision reported in CIBA INDIA P. LTD v ITO 318 ITR 71 (Mum.)(AT). 25. We have heard the rival submissions of the parties, record perused and gone through all the decision cited at Bar. The issue to be examined in this ground of appeal is whether under the facts and circumstances where initially the assessee started to incur R D expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction u/s 35(2AB) in respect of the aforesaid expenditures incurred at the approved R D at Mahape and Sinnar and deduction u/s 80IB in respect of aforesaid expenditure incurred at Goa Plant. The Company reserves the right to claim said deduction at the time of assessment. 28. During assessment proceedings for the year under consideration for AY 200506, before AO the assessee furnished details of R D expenditures vide letters dated 27/11/2007 and 2/01/2008. Ultimately the agreement under which the assessee incurred expenditures was terminated vide termination and settlement agreement dated 1.1.2007 w.e.f 1.7.2006 as disputes occurred in March 2005 between GPI USA and KV. According to the clause D of the said agreement the assessee allowed to alter its commercial strategy and the assessee company decided to undertake product development on its account and in its own name. That ultimately products developed by incurring R D expenditures were registered in the name of assessee, which is related to assessee s business and accordingly in fact used by assessee for its business purposes. There is no dispute regarding these facts. 29. Now we would like to discuss some the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rual of income /expenditure must be there and profit must be real profit. According to the Oxford English Dictionary, the meaning of the word accrue is to fall as a natural growth or increment; to come as an accession or advantage. The word arise is defined as to spring up, to come into existence . The words accrue and arise do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word receive and indicate a right to receive. Thus, it is manifest that if an assessee acquires a right to receive the income, the income can be said to accrue to him though it may be received later on. Unless and until there is created in favour of an assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. A mere claim to income without an enforceable right thereto cannot be regarded as accrued income for the purpose of the Incometax Act. Similar interpretation is applicable for accrual of expenditures. In the case under consideration there is no dispute that the expenditures have been accrued as there were enforceable rights created in between the parties work done for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. had replaced the eight locomotives lent by the assessee-company to it by new ones. The entire nature of the transaction was changed between the parties. There was a resolution of the assesseecompany in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materialise and the entry was reversed in the next year. Both the Tribunal as well as the High Court have held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax. 10. In support of this finding, the assessee has drawn our attention to a decision of this Court in Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 746 (SC) where the Court, inter alia, examined the cash system and the mercantile system of accounting in the context of hypothetical income. The computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction has been changed the same is required to be considered in the year of effect itself to determine the real income under the Income Tax Act. We find that in the case under consideration there is change in nature of the transaction by subsequent event, after the end of financial year. The expenditures which were to be reimbursed, was not backed by any legal or contractual right as contract has been cancelled. The assessee took the expenditures its own a/c. Facts of the case under consideration are similar to the facts of the case decided by the Apex Court in the case of Bokaro Steels Ltd. (supra) wherein accounting entries were reversed in the subsequent year. In the case of, Godhra Electricity Company Limited. Vs. Commissioner of Income Tax. 225 ITR 746 (SC) up to the assessment year 1963-64, the assessee-company was assessed on the basis of the accounts maintained according to the mercantile system. For the subsequent assessment years, i.e., from 1964-65 to71-72 the assessee-company deducted disputed amount from the total earnings in respect of sale of electrical energy on the ground that the said amount was not actually recovered by it from the consumers since the consumers h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, where an aggregate balance of Rs. 11,72,887 is outstanding for a period of more than three years. The assessee has also submitted that it was still very much liable to make payments to these creditors as the corresponding liability has not been waived off nor has such liability ceased to exist. On considering the submissions of the assessee, the Assessing Officer was of the view that there is no movement in these creditors account in the books of the assessee leaves little scope for accepting the assessee s stand that it is till liable for making the payments under reference. As regards the assessee s contention that some of the creditors have been subsequently been paid off, no evidence in this respect were furnished, despite specific opportunity allowed to the assessee during the course of assessment proceedings. Further, no prudent businessman would keep the recovery pending for 3 years unless the same is not recoverable. Under the law also a debt becomes barred by limitation in 3 years. Since these liabilities are outstanding for a period exceeding 3 years, the same have become barred by limitation. It is also evident that the same have not been demanded even after a lapse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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