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2015 (12) TMI 1373 - ITAT MUMBAI

2015 (12) TMI 1373 - ITAT MUMBAI - TMI - Reallocation of expenses while granting Deduction u/s.80IB & 801C - Held that:- It cannot be said that the benefit of R & D activity at Goa- PTD unit has benefited all the manufacturing units of the assessee during the year. Even as discussed above, the assessee has not allocated expenditure of Banglore R&D unit on the ground that the assessee’s formulation units were not deriving benefit from the activity carried in Bangalore unit, hence applying the sam .....

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lations have not been examined by either of the lower authorities. Even by the above submissions made before us without any supporting evidence are not sufficient to decide the issue under consideration. The matter under the circumstances required to be examined afresh by the AO in the light of the observations made above and considering the evidences that may be submitted by the assessee to support its claim. Under the circumstances, we restore this issue to the file of the AO to examine the co .....

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owance offered by the assessee @ 2% of the dividend income - Held that:- different coordinate benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09. The Hon'ble Bombay High Court in the case of CIT vs. 'Godrej Agrovet Ltd.' (2014 (8) TMI 457 - BOMBAY HIGH COURT ) has upheld the order of the Tribunal directing the AO to restrict the disallowance to .....

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se has restricted the disallowance @5% of the dividend income against ₹ 1,19,012/- which appears to be quite reasonable. We therefore do not find any infirmity in the order of the Ld. CIT(A) in this respect.

Addition on account of adjustments under section 145A in relation to excise duty and sales tax on closing inventory of raw material, packing material and stores & spares - Held that:- The assessee was following Exclusive method in respect of raw material, packing material an .....

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mentioned by him. The matter in our view requires fresh verification and AO is required to give specific finding as to how adjustment prepared by auditors was not found acceptable. We, therefore, set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of our observations made above and after allowing opportunity of hearing to the assessee

Ad-hoc disallowance @ 5% of repairs expenses incurred at Mumbai - .....

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. The AO, despite the above fact, considering the overall facts of the case, has allowed the claim but has retained only 5% adhoc disallowance for want of supporting evidences, which action seems to be quite justified. We do not find any infirmity in the order of the AO in this respect.

Addition made by the AO on account of capital expenditure as against the assessee’s claim that the same was revenue expenditure - CIT(A) deleted the addition - Held that:- This issue has been discussed .....

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considering the submissions of the Ld. Representatives of the parties, we do not find any infirmity in the order of the Ld. CIT(A) in this respect. The appeal of the Revenue is therefore dismissed.

Repairs and maintenance expenses was incurred for the maintenance and preservation of the assets and no new capital has come into existence. He, relying upon various judicial decisions of the higher judicial authorities, has held that the nature of expenses is revenue in nature. - ITA No. .....

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08-09 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)]. First we take up assessee s appeal ITA No.4461/M/2011 for AY 2006-07. 2. The assessee in this appeal has taken 5 effective grounds of appeal which are discussed as under: Ground No.1 3. In the Ground 1, the assessee has challenged the reallocation of the following expenses while granting Deduction u/s.80IB & 801C of the Income Tax Act,1961: a) Allocating the entire research and development expenditure .....

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ing the ratio of sales of various units for the purpose of allocating the Revenue Expenditure on Scientific Research incurred at the R & D unit at Mumbai amongst the different units. On the facts and in circumstances of the case the Assessing Officer ought to have accepted the ratio of turnover of sales computed by the appellant. 4. The assessee company is in the business of manufacturing and trading of Formulations and Bulk Drugs. The company has six manufacturing units located at different .....

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nditure incurred on research and development at Goa and Jogeshwari. The Assessing Officer (hereinafter referred to as the AO) has discussed this issue in the assessment order as under: In the course of assessment proceedings, two queries were raised in respect of allocation of expenditure to the different Units:- (i) Why the scientific expenditure of Goa R & D Unit should be allocated to any other Unit; & (ii) Why expenditure relating to Bulk Drugs in respect of R & D Unit, Jogeshwar .....

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act that Goa has an independent R & D Centre set up in February 2005, where the focus is on developing generic formulations for developed markets in Brazil, USA and Europe Such research work is specific only to Goa & has no ramifications so far as the other Units are concerned. As such, R & D expenditure incurred at Goa R & D Unit needs to be claimed against the profits only of that Unit. Otherwise also, it is important to note, in this context, that the assessee itself has not a .....

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Representatives appearing on behalf of the assessee company have in general terms argued that the Department should not take a view of restricting the expenses of Goa R & D Unit to Goa itself. There is, however, no written communication registering any specific objection. While maintaining the stand that the R & D expenses incurred at Goa should be allocated to all the other Units in the ratio of Sales turnover as has been done for other indirect expenses, the assessee vide letter dated .....

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to Roha & Pithampur. In response to query as to why the said allocation has not been made to other Units, the Authorised Representative has replied vide letter dated 2212/2008, that this was done since Bulk Drugs are manufactured only at Roha & Pithampur. This is consistent with the assessee's earlier submission that Roha & Pithampur are engaged in the manufacture of Bulk Drugs whereas the other Units manufacture only Formulations. Against this backdrop, the question which now ar .....

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ing the course of discussion is that small amount of Formulation, in addition to Bulk Drug, is manufactured by Roha & Pithampur Units. This stand, however, is not acceptable in the absence of any documentary evidence furnished to this effect. Otherwise also, manufacture of miniscule quantity of Formulation by Roha & Pithampur Units cannot justify allocation of the aforesaid expenditure to these Units in the ratio of sales turnover. Accordingly, the contention made on behalf of the assess .....

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7/- to the total income declared by the assessee company. 6. In first appeal, the Ld. CIT(A) confirmed the above additions made by the AO. The assessee has thus come in appeal before us. 7. The Ld. AR of the assessee, before us, has reiterated the submissions as were made before the Ld. CIT(A) which for the sake of convenience are reproduced as under: A. Allocating the entire R & D expenditure eligible for deduction u/s 35(2AB) of ₹ 2,13,60,603/- at Goa PTD to Goa undertaking 1. The ap .....

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ng research in relation to formulation. The benefit of formulation research is available to all the units of the appellant. 3. Since, the expenditure incurred at Goa-PTD benefits all units; the appellant has allocated these expenditures in the turnover ratio of the respective units. 4. In the AY 2005-06 relevant to previous year 2004-05 when the Goa-PTD was set up, the appellant had allocated expenditure of Goa-PTD to all units on the ground that it is an independent R&D centre separate from .....

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n to the basis of allocation of expenses of Goa PTD, the AO ought not to have disturbed the position accepted in the immediately preceding assessment year after due scrutiny. In any event, the benefit of formulation research is available to all the units, the allocation made by the appellant to all the units is proper and justified and the same ought to be accepted. In view of the above stated facts & in law, Goa PTD being an independent research centre and not forming part of the Goa Undert .....

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and small amount of bulk drugs are used as captive consumption in the formulation units. 2. Manufacture in pharmaceutical industry normally comprise of bulk drug and formulations. Bulk drugs are the active pharmaceutical ingredients (APIs) with medicinal properties, which are used to manufacture formulations. 3. Since, bulk drug is being manufactured considering its ultimate use for manufacture of formulation and hence, research conducted for formulation a also benefits and serves the basis for .....

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pted after due scrutiny. 5. We may also mention that in the subsequent year (i.e. AY 2007-08) the appellant's contention that the expenditure incurred on formulation R&D at Mumbai should be allocated to all units including Roha & Pithampur in the turnover ratio of the respective units has been accepted in the assessment u/s 143(3) of the Act. As there is no change in facts in relation to basis of allocation of R & D expenditure at Mumbai, the AO ought not to have disturbed the po .....

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in CIT vs Velimalai Rubber Co. Ltd (181 ITR 299) When a question of law or fact is decided in assessee's own case for an earlier assessment year and the identical question comes up for consideration for a later year, the Tribunal will be justified in placing reliance on the earlier decision to base its conclusion. Kerala High Court in CIT vs Kaltetta Estates Ltd (221 ITR 635) The principles of res judicata do not apply, but the Tribunal would be justified in placing reliance on earlier deci .....

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be taken into account. In doing that, no violence would be done to the doctrine of res judicata, which is, no doubt, not applicable to the proceedings under the Act. The reason for its non- applicability is that each assessment is quite independent of and separate from the other. But when a point or matter has been considered and adjudicated upon in a year and the same point or matter with no change of facts and circumstances and also in law, arises for consideration in a subsequent year, follo .....

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the basis of ratio of turnover of sales computed by the appellant and capital & revenue expenses on Scientific Research pertaining to formuIations incurred at the R & D center at Mumbai ought to be allocated to Roha & Pithampur units." 8. The Ld. AR has therefore submitted that the above grounds of appeal may be allowed. On the other hand, the Ld. DR has relied upon the findings of the lower authorities. 9. We have considered the rival submissions and have also gone through the .....

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so far as the appreciation of facts of the case is concerned. The case laws relied upon by the assessee in this respect are thus not applicable. 10. Now coming to the facts of the case, The ld. AR in this respect has relied upon page 45 of the paper book which is a copy of letter dated 30th March 2010 addressed to the CIT(A), relevant part of which, for the sake of convenience, is reproduced as under: In our submission dated 15.02.2010 and 12.03.2010 we have submitted that the appellant is allo .....

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darone tablets) Ghaziabad unit for Brazil Market Anti-fungal agents (Terbinafme tablets) Ghaziabad unit for Brazil Market Anti Histaminic (Cetirizine tablets) Goa unit for USA market Cardiovascular Agents Goa unit Anti-allergic Agents Goa unit Lipid lowering Agents Product dropped Anti Hypertensive (not yet commercialized) To be manufactured at Ghaziabad unit Sedative and Hyponotic Agents (not yet commercialized) To be manufactured at Ghaziabad unit Alfuzosin BPH (not yet commercialized) To be m .....

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s are not manufacturing such products and therefore, the expenditure of Banglore Unit has not been allocated to existing Formulation Units. However, the Goa-PTD unit has been conducting research in relation to formulations. The benefit of formulation research was available to all the above mentioned units of the assessee as explained in the relevant part of the chart/letter dt .30.3.2010 (supra), as reproduced above. Hence, the corresponding expenditure of Goa- PTD unit had been distributed to a .....

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ziabad unit only. The items mentioned at 3, 4 & 5 have been manufactured at Goa unit. The item mentioned at Sl. No.6 has been dropped by the assessee. However, the manufacturing in relation to item No.7 to 10 has not commenced during the year as in the respective columns it has been written that item No.7 & 8 to be manufactured at Ghaziabad unit and item Nos.9 & 10 to be manufactured at Baddi unit. So far as the year under consideration is concerned, it can be seen that even as per t .....

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the assessee has not allocated expenditure of Banglore R&D unit on the ground that the assessee s formulation units were not deriving benefit from the activity carried in Bangalore unit, hence applying the same analogy, the issue in the light of observations made above is required to be relooked into by the AO. We further find that even the above explanation was not offered by the assessee before the AO. The explanation given vide letter dated 30.03.10 for the first time was offered to the .....

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the light of the observations made above and considering the evidences that may be submitted by the assessee to support its claim. Under the circumstances, we restore this issue to the file of the AO to examine the contentions raised by the assessee in this respect and to verify as to which manufacturing units of the assessee had got the benefit of R&D activity and to what extent from the Goa-PTD unit and thereafter to decide the issue a fresh and to accordingly allocate the expenditure of .....

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AR of the assessee in this respect has relied upon the decision of the Hon ble Bombay High Court in the case of CIT vs. Godrej Agrovet Ltd. (ITA No.934/2011) decided on 08.01.13. We may point out here, that the Revenue in its cross appeal has agitated the restriction of the disallowance @ 5% by the CIT(A) against the disallowance of ₹ 11,87,354/- made by the AO under rule 8D of the I.T. Rules. 13. We have considered the submissions of the Ld. representatives of both the parties and have al .....

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tion/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. Almost similar view has been expressed by Hon'ble Delhi High Court in the case of 'Maxopp Investment Ltd. & Others' vs. CIT (247 ITR 162). It may be further observed that it is not a case where no exempt income was received by the assessee despite making investments for earning exempt income. It is also not the case of the Revenue that the exempt income earned by the assessee .....

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restrict the disallowance to the extent of 2% of the total exempt income earned by the assessee. Under the circumstances, the proposition of law which emerges from the order of the Hon ble High Court in the case of Godrej Agrovet (supra) is that certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09 and not that in each every case, such percentage is to be restricted @2% only. The Ld. CIT(A), in the facts .....

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ound No.4, the assessee has mentioned that without prejudice to Ground 3 above, AO has erred in adding excise duty of ₹ 1,64,59,919/- included in the value of closing stock of finished goods to the total income u/s 145A of the Act. The aforesaid excise duty, having already been included by the assessee in the valuation of closing stock of finished goods, unpaid excise duty on finished goods as at 31st March 2006 having been paid on or before due date for filing of return of income and the .....

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for A.Y. 2007-08. The relevant part of the order dated 27.02.13 (supra) for the sake of completeness is reproduced as under: 4. Pertaining to similar type of facts, similar types of additions were made by the Assessing Officer in case of assessee itself in relation to the Assessment Year 2007- 08. The assessee disputed the same and ultimately the matter came up for hearing before the "F" Bench of the Tribunal. The Ld. Co-ordinate Bench of the Tribunal vide order dated 13.04.2012 dispos .....

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ds to the place of its location and condition as on the date of valuation. In this case the assessee was following Exclusive method in respect of raw material, packing material and spare parts and therefore adjustment on account of tax/duty is required to be made in respect of such items in the purchase/ sales, opening stock and closing stock. The auditors had computed the adjustment under section 145A at Nil as per clause 12(b) of the auditors report which has not been accepted by the AO withou .....

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in the light of our observations made above and after allowing opportunity of hearing to the assessee." 5. Since the matter in dispute before us is regarding similar facts which were in issue before the Ld. Co-ordinate Bench for the Assessment Year 2007-08 and we do not find any reason to deviate from the view taken by the Ld. "F" Bench vide order dated 13.04.2012, hence this appeal is hereby disposed and in terms of the above said order. Respectfully following the above order for .....

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directed to examine the contentions of the assessee in relation to ground No.4 also while adjudicating the issue of adjustments under section 145A of the Act. Ground Nos.3 & 4 of the appeal are disposed of accordingly. Ground No.5 15. Vide Ground No. 5, the assessee has agitated the ad-hoc disallowance @ 5% of repairs expenses incurred at Mumbai amounting to ₹ 4,16,126/-. The AO made the above stated adhoc disallowance on the ground that there was nothing to substantiate the expenditu .....

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he invoices in respect of all the locations except Mumbai were furnished before the AO. In respect of Mumbai, it was clarified that documentary evidence in respect of repairs at Mumbai was not available as the records were burnt in fire occurred at company's godown. The expenditure was incurred in the normal course of business. Similar expenses had been incurred in the past and had been allowed. The Ld. DR on the other hand has relied upon the decision of the lower authorities. 16. We have c .....

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ire. The AO thus could not verify the said claim of expenditure. The AO, despite the above fact, considering the overall facts of the case, has allowed the claim but has retained only 5% adhoc disallowance for want of supporting evidences, which action seems to be quite justified. We do not find any infirmity in the order of the AO in this respect. This ground is therefore dismissed. Now coming to the Revenue s appeal i.e. ITA No.4996 for A.Y. 2006-07. ITA No.4996/M/2011 for A.Y. 2006-07 17. The .....

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has agitated the action of the Ld. CIT(A) in deleting the addition of ₹ 25246442/- made by the AO on account of capital expenditure as against the assessee s claim that the same was revenue expenditure. This issue has been discussed by the Ld. CIT(A) in paras 7.4 to 7.7. The Ld. CIT(A), after thoroughly examining the nature of expenses and relying upon the various case laws, has observed that these expenses were allowable as revenue expenditure because no new asset was acquired by the ass .....

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