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2015 (6) TMI 202 - ITAT DELHI

2015 (6) TMI 202 - ITAT DELHI - TMI - Treatment to repairs - revenue or capital expenditure - Held that:- There is nothing on the record, baring some general remarks, to demonstrate that any part of the repairs and maintenance expenses incurred by the assessee are capital expenditure in nature. Just because tiles, cement or iron is used in the civil work carried out by the assessee, in respect of those premises, such civil work need not necessarily result in capital expenditure. In a sophisticat .....

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lt in the very character of expenditure being rendered capital, we are of the considered view that impugned disallowances were wholly unwarranted and unsustainable in law - Decided in favour of assesse.

Disallowance of interest u/s 40A - CIT(A) deleted addition - Held that:- The unsecured borrowings by a commercial organisation like the assessee, on these facts, @ 16% interest seems to be reasonable. The benchmark @ 14% adopted by the ld. CIT(A), by taking fixed deposit interest rates .....

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ment to the specified persons, at the rate of 16%, should be allowed as deduction. Accordingly, inmpugned disallowances deserve to be deleted - Decided in favour of assesse.

Disallowance of the claim u/s 80IA/IB - CIT(A) deleted the disallowance with the direction to re-compute the deduction u/s 80IB by apportioning the expenditure on research and development by 1/3rd to each unit - Held that:- In granting the impugned relief, learned CIT(A) has merely followed his order, in assessee' .....

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ore us by the Assessing Officer. - Decided in favour of assesse.

Disallowance of packing expenses - CIT(A) deleted the addition - Held that:- We are not inclined to disturb well reasoned findings of the learned CIT(A) as he rightly observed, it is not always practicable to maintain item wise day to day consumption of packing material, and the Assessing Officer cannot disregard the books of account without rejecting the same. The observations of the Assessing Officer proceed on mere su .....

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and details of persons contacted during visit etc. On these facts, and satisfied by the evidences produced by the assessee about fact of expenditure and broad purpose of expenditure, learned CIT(A) has deleted the disallowance. In any case, the disallowance is purely on adhoc basis. We see no reasons to disturb the conclusion so arrived at by the ld. CIT(A), which are also in harmony with accepted past history of the case.- Decided in favour of assesse. - ITA No. 2182/Del/2011, ITA No. 2161/Del/ .....

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, by way of this consolidated order. 2. We will first take up the appeal filed by the assessee. 3. Ground no.1 is general in nature and does not call for any adjudication. 4. In ground no.2, the assessee has raised the following grievance:- "2. Because, the leaorned Commissioner of Income Tax (Appeals) erred in treating the repairs of ₹ 9,83,339/- incurred from time to time as capital expenditure merely on the basis of presumption and considering the registration of old building on 30 .....

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ting the facts of the case. Hence the order of CIT(A) be cancelled and the order of the AO be restored." 6. So far as this issue is concerned, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed a sum of ₹ 19,44,957/- on account of building repairs and maintenance during the year. Out of this amount, ₹ 9,42,376/- was spent on Unit III and ₹ 9,83,339/- was spent on C-98 premises. .....

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egulatory authorities and WHO GMP regulatory authorities require us to follow good manufacturing practices. This require us to keep our factory building in a up to date condition. As a result of this requirement, we have to carry out repairs and maintenance of the factory building. All the expenses incurred are only for the current repairs of the building and there is no creation of any new asset." 7. The Assessing Officer was of the view that this explanation is vague and very general. It .....

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e in the nature of capital expenditure only". Accordingly, so far as expenses incurred on C-98 premises were concerned, entire amount of ₹ 9,83,339/- was disallowed. As regards the existing premises, i.e. Unit III, the Assessing Officer disallowed 50% expenditure as capital expenditure and the balance amount was allowed as deduction. Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the ld. CIT(A). Learned CIT(A), while sustaining the disallowance .....

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e have gone into. Regarding C-98 i.e. extension of Unit III I find that new asset (C-98) has come into existence to the extent that a new area has been constructed. It is on the record that assessee took possession of premises C-98 in May, 02 for which requisite documents are examined. So, AO is justified in making the date of registration; as an indicator for treating C 98 as a new asset, and for the capitalization of expenses. It is also a fact that the company is required to maintain the stan .....

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ure is not only on account of existence of new asset but covers any expenditure which results into advantage of enduring nature and is not merely for the protection or maintenance of the existing asset. Of course, it is on record that this new purchases C-98 was acquired fresh, and naturally, all the expenses relating to items starting from plastering, to POP, to sanitation, and, more importantly, to scientific lay-out were necessary to start the operation of this new unit-III. By all standards .....

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mstances shall stand allowed as revenue expenditure. Because, in respect of old units, no new capital asset has come into existence. Rather, these are expenses necessary for smooth running and maintenance of old units. It is on record that such repairs and maintenance are necessitated by the standard laid down by Regulatory authority. Overall : Therefore, out of entire repair & maintenance expenses; the addition of ₹ 9,83,399/- stands sustained and balance is deleted. Depreciation on t .....

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assessee are capital expenditure in nature. Just because tiles, cement or iron is used in the civil work carried out by the assessee, in respect of those premises, such civil work need not necessarily result in capital expenditure. In a sophisticated technical and scientific work as vaccine development, it is only natural that highest precautions are taken to ensure that the manufacturing or other scientific process does not get vitiated by unwelcome elements. The exercise of such precautions n .....

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hen some one buys a new house, and cleans, paints or fumigates it before moving in, cleaning, painting or fumigation expenses do not become capital expenditure in nature. This is a simple example but even with respect to little more complex situations, the principle remains the same. In the situation before us, and particularly as there is nothing to show that expenditure incurred by the assessee resulted in a new asset, or such enduring advantage so as to result in the very character of expendi .....

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interest ₹ 5,77,283/- u/s 40A(2)(b) of the Act treating the same as excessive by 2% (Allowing 14% against payment of 16%) even after accepting genuinety of payment, deduction of tax, business need, past history of such payment & declaration of such interest by depositor etc." 13. In a connected grievance, which we will take up together, the Assessing Officer has raised following grievance: "3. That the Ld. CIT(A) has wrongly deleted the addition made by the AO on account of .....

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has shown net interest income of ₹ 81,77,424/- which consisted of interest receipt of ₹ 1,27,95,687/- and interest payment of ₹ 46,18,263/-. The Assessing Officer also noticed that the assessee has paid interest @ 16% to various relatives of directors, which, in the opinion of the Assessing Officer, was excessive and unreasonable. The Assessing Officer noted that while reserves and surpluses in the hands of the assessee amounted to ₹ 11.26 crores, which, according to the .....

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duced inasmuch as rate of 14%, as against 9.5% adopted by the Assessing Officer, was held to be reasonable. The amount paid in excess of 14% interest was disallowed. None of the parties is satisfied by the stand so taken by the learned CIT(A) and both the parties are in appeal before us. 15. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 16. We have noted that the payment of interest is not .....

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imself holds that the funds held as 'reserve and surplus' and 'unsecured loans' are to be presumed to have been invested in investments, and this findings or presumption remains undisturbed, the yardstick for what constitutes reasonable interest rate is the rate at which the assessee could have raised borrowings from similarly placed unrelated parties. In the details reproduced at page 24 of the assessment order, it is seen that interest received at item nos. 6, 8 and 9, interest .....

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nd Rama Vision Ltd., cannot be applied in a rigid way. There is no material whatsoever to suggest that a 2% higher interest than interest paid to such well reputed companies, and that too on fixed period deposits, will render the interest paid by the assessee to it's unsecured lenders as excessive and unreasonable having regard to fair market interest rate. In view of these discussions, as also bearing in mind entirety of the case, we hold that entire interest payment to the specified person .....

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exemption u/s 80IA/B of the Act ain the whole disregard of the fact that the issue has already been decided finally in favour of assessee by Hon'ble ITAT & Ld. CIT(A) in the earlier years which is against the judicial discipline." 19. In a connected ground raised by the A.O. vide ground no.4 of his appeal, the following grievance is raised:- "4 That the Ld. CIT(A) has wrongly deleted the disallowance of deduction u/s 80IB of ₹ 16,08,971/- with the direction to re-compute .....

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ot;20. We have heard the parties and perused the material available on record. The point of contention before the parties is the allocation of R & D expenses to the three units. From the ITAT order in appeal No. 5649/Del/2004, it is observed that the assessee company was originally denied the benefit of section 80IA in respect of Unit No. 2 during 1994-95 which was challenged before the CIT(A) and CIT(A) had given relief to the company. The revenue had not filed appeal against the CIT(A)' .....

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nd furnished details of vaccines manufactured during the year. It was further pointed out that the Assessing Officer himself agreed in the assessment order that the R&D expenses did not relate to any particular unit and that the benefit derived by one particular unit from the R&D expenditure cannot be ascertained. It was further pointed out that for the assessment year 1994-95, the CIT(A) has by order dated 1.5.1998 held that the expenditure on research and development cannot be apportio .....

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see has not received any intimation of an appeal filed by the department against the decision of the CIT(A) for the assessment year 1994-95 on this point. The Ld Sr. DR stated that he has no information of any appeal by the Department on this point for the assessment year 1994-95, but wanted to verify the position and requested that we may hold over the passing of the orders till the end of the month. Accordingly, we have waited till the 31.5.2007 but so far no information has come from the Depa .....

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the order of the Tribunal and keeping in view the principles of consistency in the judicial pronouncements, we are of the opinion that the CIT(A) while on the one hand had rightfully given the benefit of section 80IB of the Act but at the same time he has wrongly reduced the profits of Unit No. 3 by allocating 1/3rd of R&D expenses in respect of both years." 21. As far as the issue regarding allocation of R&D expenses is concerned, we find that this issue is covered, in favour of th .....

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not challenge findings of an appellate authority, against him, for one assessment year, it is not open to him to challenge the same findings in a subsequent assessment year. In any case, once a co-ordinate bench taken a particular view of the matter, it is amorally not open to us to take any other view of the matter. In view of these discussions, we uphold the grievance of the assessee and dismiss the grievance raised before us by the Assessing Officer. 22. Ground no.4 of the assessee is thus al .....

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of the fact that the assessee has failed to maintain separate details of these expenses in respect of 3rd Unit. Hence the order of CIT(A) be cancelled and the order of the AO be restored." 26. So far as this disallowance of ₹ 12,04,041/- is concerned, the relevant material facts are like this. The assessee is engaged in production of Pharmaceuticals and mainly manufactures animal and human vaccines. The animal vaccines are produced in Unit I & II, whereas human vaccines are produc .....

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of it's deduction under section 80IB". It was also noted that while ratio of packing material to sales, so far as Unit I & II are concerned, is only 6.08%, whereas this ratio stood at 15.44% in respect of Unit III. It was in this backdrop, and in the absence of day today stock records of consumption of material, the Assessing Officer disallowed 25% of packing expenses in respect of Unit III. Aggrieved, inter alia, by this disallowance of ₹ 12,04,041/-, assessee carried the ma .....

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is found by the AO after examination. It is also found that in the nature of business it may not be practicable to maintain item wise consumption of packing material, cost of which may also be very very petty in terms of consumption per item. Stock register of finished goods is also made a basis in the assessment order but, I observe that the same is not relevant for this matter because the same is stated to be produced in the replies produced before me. I also find it important that stock regis .....

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ade. In my considered view, assessee has fully proved the transaction of packing material of ₹ 12,04,041/-. Therefore, the addition of ₹ 12,04,041/- is deleted. (Relief of ₹ 12,04,041/-) 27. The Assessing Officer is aggrieved of the relief so given by the ld. CIT(A) and is in appeal before us. 28. Having heard the rival submissions and having perused the material on record, we are not inclined to disturb well reasoned findings of the learned CIT(A). As he rightly observed, it i .....

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is point also and decline to interfere in the matter. 29. Ground no.1 of the Assessing Officer is dismissed. 30. In ground no.2, the Assessing Officer has raised the following grievance:- "2. That the Ld. CIT(A) has wrongly deleted the addition made by the AO on account of sales expenses amounting to ₹ 10,43,373/- in spite of the fact that the assessee could not prove the payment of these expenses in respect of sales promotion. Hence the order of CIT(A) be cancelled and the order of t .....

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s were made to justify such expenditure without production of any evidence". However, when assessee carried this disallowance in appeal, learned CIT(A) deleted the disallowance by observing as follows :- "5.B. About the second disallowance out of sales expenses, it is examined that sufficient evidences are filed and time to time explanations are given on the queries raised. Examples of reimbursement of expenses incurred by employees are filed before AO as well as in appeal. Out of vouc .....

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obviously reimbursement of expenses cannot be a ground for the rejection especially when the same is properly supported. Past history also support the claim as expenses incurred are comparable and not disallowed in the earlier year. Having considered all the facts I am inclined to agree with the Ld. Counsel that without rejecting the accounts and without finding any expenses wrong or not related to business no lump sum disallowance could have made. In my view assessee has properly roved the expe .....

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