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TMI Blog2008 (3) TMI 694X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has erred in upholding the addition of Rs. 1,06,146 made by the AO in respect of payment of interest under s. 201(1A) for delay in deposit of TDS while computing the book profit under s. 115JA of the IT Act, 1961." 3.1 The assessee company was carrying on the business of manufacturing and trading of pharmaceuticals/bulk drug. During the year under consideration, the assessee company showed total turnover at Rs. 1,114.56 crores. The AO after examining the various details of balance sheet and P&L a/c, filed along with the return, found that income computed under the provisions of s. 115JA of the IT Act, needed certain adjustments/disallowances. He, therefore, proceeded to consider the adjustments to book profits for the purpose of s. 115JA. 3.2 From the computation of income under provisions other than those under s. 115JA, the AO noticed that the assessee had disallowed interest of Rs. 1,06,146 paid under s. 201(1A) of the IT Act on account of delayed deduction/payment of tax at source, but this interest was not added to book profit for purposes of s. 115JA. After making reference to cl. (a) of Explanation to s. 115JA, he observed that it is inherent in this clause that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenging the findings of the learned CIT(A), the learned counsel for the assessee submitted that cl. (a) of Explanation to s. 115JA of the Act only provides for the addition of income-tax paid or payable or any provision thereof. According to the learned counsel appearing for the assessee, this clause does not provide for addition of interest paid under s. 201(1A) of the Act. The learned counsel further made reference to the definition of 'tax' given under s. 2(43) of the IT Act and submitted that as per this definition 'tax' means income-tax chargeable on income under the provisions of the Act. According to him, "TDS" is not income-tax but is tax deducted at source from the receipt of other person by the assessee and therefore does not fall in the meaning of the word 'tax' under s. 2(43). He further submitted that 'tax' does not include 'interest'. For supporting this preposition, he placed reliance on several authorities including the following : (i) Harshad Shantilal Mehta vs. Custodian & Ors. (1998) 231 ITR 871 (SC); (ii) Soma Sundarams (P) Ltd. vs. CIT (1979) 116 ITR 620 (Kar); (iii) CIT vs. Fertilisers & Chemicals Travancore Ltd. (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that the addition of interest on income-tax cannot be made. However, in the impugned order, the learned CIT(A) relied on the decision of Bharat Commerce & Industries Ltd. which was in the context of deduction as an expenditure for the purpose of earning any income or profit but not about the deemed income under s. 115JA, which provision has to be construed strictly. In that view of the matter, the learned CIT(A) is found to have committed an error. Having regard to the decision of Kerala High Court in Fertilizers & Chemicals Travancore Ltd. (supra), the action to increase the profit by the amount of interest paid to the IT Department while determining book profit cannot be upheld. Accordingly, ground of the assessee stands allowed. Since the charging of additional tax under s. 143(1)(a) would be consequential, this ground along with ground Nos. 1 and 2 stands allowed. 14. As regards charging of interest under s. 234B is concerned, various High Courts have held that the provisions of payment of advance tax are fully applicable to deemed income under s. 115JA of the Act. Accordingly, we do not find any merit in the ground raised by the assessee. The authorities on such issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the learned CIT(A) was not justified in upholding the addition of Rs. 1,06,146 made by the AO in respect of payment of interest under s. 201(1A) while computing book profit under s. 115JA of the IT Act. The issue is, therefore, decided in favour of the assessee. In the result, ground is allowed. 4. Ground Nos. A2 and B3 : These grounds relate to education (sic-deduction) under s. 80-IA. The assessee had claimed deduction in respect of Dewas and Ponta Sahib units as under : Dewas (Amount) Paonta Sahib (Amount) Duty drawback 6,39,214 57,759 Profit on sale of REP. Licenses 14,71,707 1,32,983 Total : 21,10,921 1,90,742 Deduction claimed @ 30 per cent Rs. 6,33,276 @ 100 per cent Rs. 1,90,742. 4.1 The AO did not allow deduction under s. 80-IA on the amount received as duty drawback and profit on sale of REP license under the normal provisions of the Act as well as under s. 115JA of the Act, while computing book profit on the ground that the same are not derived from industrial undertaking. 4.2 The learned CIT(A) allowed deduction under s. 80-IA of the Act on duty drawback but has not allowed the same on profits earned from sale of REP licenses. He d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal as contained in para 6 of the order are as under : "We have considered rival submissions. As rightly contended by learned Departmental Representative deduction under section to various business enumerated in sub-s. (3) to sub-s. (11). Since the assessee is claiming deduction under sub-s. (3) of s. 80-IA which provides that only the profits and gains derived from an industrial undertaking is eligible for deduction. In view of the decision of Hon'ble Supreme Court in the case of Sterling Foods (supra) and in the case of Ritesh Industries (supra), the amount received by way of duty drawback and profit on sale of REP licenses cannot be considered as 'profit derived from industrial undertaking'. Thus, this ground has to fail." 4.7 In the case of CIT vs. Ritesh Industries Ltd. (2004) 192 CTR (Del) 81: (2005) 274 ITR 324(Del), the Hon'ble Delhi High Court has categorically held that amount of duty drawback cannot be regarded as income derived from industrial undertaking. The observations of the Hon'ble Court are as under : "There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of actual expenses as claimed while computing the total income and not on ad hoc basis." 5.2 As the issue stands covered against the assessee, respectfully following the order of the Tribunal, referred to above, the ground is rejected. 6. Ground No. 5 : Ground No. 5, originally raised by the assessee, is as under : "That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in rejecting the claim of the appellant that contribution of Rs. 50 lacs each made to Ranbaxy Science Foundation and Ranbaxy Community Health Care Society is a business expenditure eligible for deduction under s. 37 of the Act." 6.1 Later on the Bench vide order dt. 15th Oct., 2007 allowed the aforesaid ground to be amended. The amended ground is as under : "That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in rejecting the claim of the appellant that contribution of Rs. 50 lacs each made to Ranbaxy Science Foundation and Rs. 95 lacs made to Ranbaxy Community Health Care Society is a business expenditure eligible for deduction under s. 37 of the Act." 6.2 On going through the order of the learned CIT(A) it is found that the assessee took gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the appellant is only indirect. As such, it is held that the said contributions do not constitute expenditure laid out wholly and exclusively for the purpose of business carried on by the appellant. Accordingly, this ground of appeal is rejected." 6.4 The learned counsel for the assessee pointed out that during the relevant previous year, the assessee had contributed a sum of Rs. 50 lacs to RSF and Rs. 95 lacs to RCHCS, on which deduction at 50 per cent of the contribution was claimed under s. 80G of the Act. Subsequently vide cl. (3b) of the Notes forming part of computation of income, the said contribution was claimed to be allowable as 100 per cent deduction as revenue expenditure under s. 35 of the Act on the ground that the same was in the nature of research and development. It was pointed out that the contributions were made in the course of business of the assessee and were incurred wholly and exclusively for the purpose of its business. It was further pointed out that the contribution resulted in advantage/ benefit in business carried on by the assessee which was a research based pharmaceutical company. Elaborating his argument the learned counsel submitted that thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Kirloskar Ltd. vs. CIT (1987) 61 CTR (Kar) 265 : (1987) 166 ITR 836 (Kar); (iii) CIT vs. Kamal & Co. (1993) 113 CTR (Raj) 353 : (1993) 203 ITR 1038 (Raj); (iv) CIT vs. Cheran Transport Corporation Ltd. (1996) 134 CTR (Mad) 466 : (1996) 219 ITR 203 (Mad); (v) CIT vs. Madras Refineries Ltd. (2004) 266 ITR 170 (Mad); (vi) Addl. CIT vs. Rajasthan Spinning & Weaving Mills Ltd. (2004) 186 CTR (Raj) 117 : (2005) 274 ITR 463 (Raj); (vii) CIT vs. Rajasthan Spg. & Wvg. Mills Ltd. (2005) 198 CTR (Raj) 96 : (2006) 281 ITR 408 (Raj); (viii) CIT vs. Mahindra & Mahindra Ltd. (2006) 200 CTR (Bom) 28 : (2006) 284 ITR 679 (Bom); (ix) IAC vs. Nuchem Plastics Ltd. (1989) 35 TTJ (Del) 559; (x) Addl. CIT vs. Delhi Cloth & General Mills Co. Ltd. (1983) 144 ITR 280 (Del); (xi) Hindustan Petroleum Corporation Ltd. vs. Dy. CIT (2005) 92 TTJ (Mumbai) 168: (2005) 96 ITD 186(Mumbai). 6.7 The learned counsel also pointed out that exemption under s. 11 was granted to the foundation's income. In addition to the above, the learned counsel also placed reliance on the ratio of decisions in the following cases : (i) CIT vs. Chemicals & Plastics India Ltd. (2007) 292 ITR 115 (Mad); (ii) Sri Venkata S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s true that these organizations have been exempted under s. 11 or under s. 80G but the fact remains that the assessee company is incurring heavy expenditure in maintaining these institutions for its own business purposes and is being directly benefited by their activities. The provisions made by the assessee company cannot be said merely for carrying out philanthropic objects, rather the contributions are directly aimed for promoting business of the assessee company and also for advertising its name because various conferences and workshops are conducted under the banner of the Ranbaxy Laboratories (P) Ltd. Thus, on examination of the nexus between the activities of the foundation and society and those of the assessee company, following facts emerge : (1) The assessee has the main hand in establishing and promoting the society and foundation. (2) It runs foundation and society by giving contributions. (3) It takes business benefit out of the activities of the society and the foundation. (4) The name of the assessee company is published and advertised through the conferences and workshops conducted by these organizations. (5) The lectures delivered and articles published in emi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under s. 37(1) of the Act when such payment had been made for the purpose of the assessee's business." 6.11 In the case of Mysore Kirloskar Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business expenditure under s. 37. It was held that the amount should be allowed as business expenditure because it was incurred predominantly for staff welfare. 6.13 The decision in the case of Mahindra & Mahindra (supra) was further followed by the Hon'ble Bombay High Court in the case of CIT vs. Mahindra & Mahindra Ltd. (supra). 6.14 In the case of CIT vs. Chemicals & Plastics India Ltd. (supra), the assessee claimed deduction in relation to contribution to the Madras Chamber of Commerce as business expenditure. The assessee was one of the members of the chamber. It was contended that the maintenance of the trade chamber was for the furtherance of the business interest of the constituents of the chamber, hence the payment had to be treated as a business expenditure. The AO rejected this claim but the Tribunal allowed the claim of the assessee. The Hon'ble High Court approved the view taken by the Tribunal by holding that since activities of the Chamber of Commerce were closely linked with the welfare of corporate entities who were its members and whose interests were taken care of by the Chamber of Commerce, irrespective of whether the expense incurred was compulsory o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in this context is whether the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under s. 37(1) cannot be declined (para 7). In the instant case, the expenditure on 20-point programme was incurred in view of specific directions of the Government of India. It could not but be the business interest of the assessee to abide by the directions of the Government of India which also owned the assessee. Further, the expenditure incurred for the implementation of 20-point programme was solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination and for contribution to allround development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be a concrete expression of care and concern for the society at large and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year also. It could not be pointed out as to what happened to the directions of the Tribunal and what is the final outcome. Since position could not be ascertained and further since neither the AO nor the learned CIT(A) have considered the relevant facts nor carried out further examination or inquiry we consider it proper to restore the matter back to the file of AO to decide the issue afresh after examining all relevant aspects and as per law, of course, after providing opportunity of being heard to the assessee. Consequently, order of the learned CIT(A) is set aside and the ground is allowed for statistical purposes. 8. Ground No. 7 : This ground is as under : "That on law, facts and in the circumstances of the case the learned CIT(A) has erred in upholding that sale of scrap amounting to Rs. 7.77 crores will form part of total turnover for computing deduction under s. 80HHC of the Act." 8.1 While computing deduction under s. 80HHC, the AO included Rs. 7.77 crores in the total turnover of the assessee holding that sale of scrap is includible in the total turnover. On appeal, the learned CIT(A) sustained the action of the AO by observing that sale of scrap is part a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances'. This amount was disallowed and added by the assessee in normal computation but the same was not added to the book profit for the purpose of s. 115JA. The AO was of the view that as per cl. (c) of Explanation to s. 115JA, the book profit is to be included by the amount set aside to provisions made for meeting liabilities other than ascertained liabilities. After making reference to the reply of the assessee, the AO held that in view of cl. (c) of Explanation to s. 115JA, provision for bad and doubtful debts shall be added to book profit for the purpose of s. 115JA. 10.2 In appeal, the assessee made following submissions before the learned CIT(A) : "(a) The appellant company's accounts were prepared in accordance with Parts II and III of Sch. VI to the Companies Act, 1956 and the prescribed Accounting Standards. (b) Doubtful debts provision was not made to meet any liability but the same was made towards reduction in the value of the assets i.e. debtors. (c) Diminution in non-depreciable assets takes place when their market value/ realizable value fall below the cost. Therefore, under Part III of Sch. VI the word provision has been defined as amount written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 TTJ (Del)(TM) 849: (2001) 76 ITD 69(Del)(TM) have held that while computing book profit under s. 115J, adjustment for provision of bad and doubtful debts is not permitted. (i) Therefore, the addition to the book profit on account of bad and doubtful provision may kindly be deleted." 10.3 The learned CIT(A) found force in the submission and allowed the claim by deleting the addition. His observations are as under : "I have carefully considered the issue. As per Sch. VI of the Companies Act a provision for doubtful or bad debts has to be deducted while preparing the accounts. Hence the provision made by the appellant was in accordance with the Companies Act. The said provision is also not hit by cl. (c) of Explanation to s. 115JA. This issue is squarely covered by the order of the Tribunal Delhi Bench 'C' in Steel Authority of India Ltd. vs. Dy. CIT (2001) 70 TTJ (Del)(TM) 849: (2001) 76 ITD 69(Del)(TM), in which it has been held that adjustment for provision of bad and doubtful debts under cl. (c) of Explanation to s. 115J in book profits prepared as per Parts II and III of Sch. VI of the Companies Act cannot be made. The learned Tribunal has further held that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "On the facts and in the circumstances of the case, the learned CIT(A) has erred : 2. In directing to include duty drawback of Rs. 57,759 in the income of Poata Sahib Unit and to allow deduction under s. 80-IA on the same. 3. In directing to include duty drawback of Rs. 6,96,973 in connection with profit on sale of REP license and to allow deduction under s. 80-IA on the same." 11.1 The issue stands covered by the order of the Tribunal for asst. yr. 1996-97 in the case of assessee itself. Therein the Tribunal has followed the ratio of decision of Delhi High Court in the case of CIT vs. Ritesh Industries Ltd. (supra) and has held that the amount received by way of duty drawback and REP licenses cannot be considered as profit derived from industrial undertaking. The Tribunal disallowed the claim by observing as under : "6. We have considered rival submissions. As rightly contended by learned Departmental Representative deduction under s. 80-IA applies to various business enumerated in sub-s. (3) to sub-s. (11). Since the assessee is claiming deduction under sub-s. (3) of s. 80-IA which provides that only the profits and gains derived from an industrial undertaking is eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G.F. (India) Ltd. (2006) 206 CTR (Del) 92: (2006) 285 ITR 142(Del). 12.4 We have carefully considered the relevant material on record and the rival submissions. The Hon'ble jurisdictional High Court of Delhi in the case of CIT vs. Bansal Credits Ltd. (supra) has, inter alia, held that assessees which were engaged in the business of leasing out commercial vehicles, were entitled to depreciation at the higher rate of 40 per cent as provided in Item III(2)(ii) of Part A of Appendix I to the IT Rules, 1962. The same view has been taken by the Hon'ble Delhi High Court in the case of M.G.F. (India) Ltd. (supra). Accordingly, we see no reason to interfere in the order of the learned CIT(A) and the same is upheld. Ground fails. 13. Ground No. 5 : This ground is as under : "On the facts and in the circumstances of the case, the learned CIT(A) has erred : in directing to exclude the amount of Rs. 61,95,562 from the income of the assessee on account of amount received toward principal from RSEB." 13.1 During the financial year relevant to asst. yr. 1996-97 the erstwhile Crosslands Research Laboratories Ltd. (since merged into assessee) leased plant and machinery amounting to Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, the approach of the learned CIT(A) is fully justified that only interest component of the lease rental can be brought to tax and not the portion of the principal amount. Accordingly, we uphold the order of the learned CIT(A) on the issue in question and reject ground No. 5 taken by the Revenue. 14. Ground No. 6 : This ground is as under : "On the facts and in the circumstances of the case, the learned CIT(A) has erred : in directing the AO to exclude miscellaneous receipts and sale of scrap and excise duty, sales-tax and other taxes collected on sales from the total turnover for the purpose of working out deduction under s. 80HHC." 14.1 The learned counsel for the assessee at the very outset contended that the issue in question is squarely covered in favour of the assessee by the earlier order of the Tribunal in assessee's own case for asst. yr. 1996-97 dt. 15th Feb., 2007, rendered in ITA No. 1802/Del/2005, a copy of which has been placed on record. The learned counsel further contended that there being no change in facts and circumstances, the very course should be taken for the assessment year in question also. 14.2 On the other hand, the learned Departmental Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing activity. The assessee is not accepted to sell even such scrap outside India where otherwise he is carrying on business as 100 per cent exporter. The Hon'ble Supreme Court observed in the case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167(SC) that the words 'sales', 'turnover', and 'gross receipts' are commercial terms and they have to be construed in a commercial sense and in accordance with general accepted accounting principles. As per the common parlance, meaning applied to the word 'turnover', it can include only such amounts as are received by the assessee in the course of its business. The deduction allowable is in the proportion of export turnover to total turnover. However, what cannot form part of export turnover, cannot be made part of total turnover. Thus, the scrap generated which is not meant for the purpose of export will neither form part of total export nor total turnover. In the present case, the business is that of manufacture and sale of utensils and not sale of scrap. The amount realized on sale of scrap is merely incidental to the manufacturing activity. Thus, such realization of scrap will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and directed the AO to include only (Rs.) 4,31,250 in the taxable income and to exclude Rs. 23,28,750. His observations are as under : "I have considered this issue. It is noted that the appellant has accepted the order of CIT(A) confirming the action of AO in taking the purchase price of barrels at Rs. 15,63,000 as against Rs. 1,00,03,200. Hence the claim of the appellant that the portion recorded towards principal should be excluded is justified. The proportionate lease rent on the basis of purchase price of Rs. 15,63,000 adopted by the Department comes to Rs. 4,31,250 as calculated by the appellant in the abovenoted submissions. Accordingly, the AO is directed to include Rs. 4,31,250 in the taxable income and exclude the balance amount of Rs. 23,28,750." 15.2 The learned counsel has also pointed out that the order of the learned CIT(A) was upheld by Tribunal in the case of Crosslands Research Lab Ltd. for asst. yr. 1995-96 rendered in ITA No. 1479/Del/ 1999. The learned counsel for the assessee has supported the order of the learned CIT(A) whereas the learned Departmental Representative has supported the order of AO. 15.3 On going through the order of the Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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