IPCA Laboratories Ltd Vs DCIT (ITAT Mumbai)
Retracted Statements Require Corroborative Evidence for Over-Invoicing Additions; Capital Excise Duty Subsidies Excluded From Section 115JB Book Profits; Foreign Exchange Translation Reserve Not Added to MAT Book Profits; ESOP Perquisite Tax and Patent Expenditure Disallowances Deleted in Unabated Assessments: ITAT Mumbai
Summary: The Income Tax Appellate Tribunal (ITAT), Mumbai “H” Bench, in IPCA Laboratories Ltd Vs DCIT, adjudicated cross-appeals filed by the assessee and the Revenue for Assessment Years 2009-10, 2010-11, 2011-12, 2012-13 and 2014-15 arising from assessment orders passed following a search conducted under Section 132 of the Income-tax Act, 1961, on 23 December 2014. The consolidated order dated 8 April 2024 dealt with twelve disputed issues, including additions under Section 153A, alleged over-invoicing and bogus purchases, professional fees, sales promotion expenditure, deductions under Sections 35(2AB) and 80-IC, employee stock option expenses, and computation of book profits under Section 115JB. The Tribunal distinguished between completed assessments for AYs 2009-10 and 2010-11, which had not abated on the date of search, and the abated assessments for the remaining years.
On the scope of reassessment under Section 153A, the Tribunal relied upon the Supreme Court’s decision in PCIT Vs Abhisar Buildwell (P.) Ltd. and the Delhi High Court’s decision in CIT Vs Kabul Chawla. It held that completed or unabated assessments could not be disturbed in the absence of incriminating material discovered during the search. Accordingly, additions relating to transfer pricing adjustments, deduction under Section 80-IC on scrap sales, additional depreciation and ESOP expenditure, which had already been considered in the original assessments, could not be repeated in proceedings under Section 153A for AYs 2009-10 and 2010-11. Applying the same principle, the Tribunal directed deletion of the disallowance of Rs. 5,97,86,283 relating to losses incurred by the assessee’s Special Economic Zone unit while computing book profit under Section 115JB for AY 2009-10. It also rejected the Revenue’s challenges concerning patent-related expenditure of Rs. 8,08,000 under Section 35(2AB) and tax of Rs. 1,60,34,723 paid on employee ESOP perquisites in AY 2010-11. However, the assessee’s fresh claim concerning SEZ losses for AY 2010-11 was not entertained in the unabated assessment.
Regarding alleged over-invoicing of raw material purchases, the Assessing Officer had relied upon statements recorded during the search, including those of the assessee company’s Managing Director and employees, to allege that inflated purchase invoices were used to generate cash. The dispute involved purchases of pharmaceutical raw materials such as Meta-Chloro Aniline, Paracetamol and Erythromycin Estolate. The assessee disputed the allegations, pointed to subsequent retractions of the statements and contended that the transactions described by the employees principally concerned another group concern and a supplier from whom the assessee itself had not purchased goods. The Tribunal examined the evidentiary value of statements recorded under Section 132(4), the retraction affidavits, the Assessing Officer’s independent enquiries and the comparative purchase-price analysis. It emphasised that an admission is relevant evidence but is not necessarily conclusive, and that the factual basis of a retracted statement and the available corroborative material must be examined before sustaining an addition.
The consolidated appeals also involved disallowances relating to allegedly bogus purchases, professional fees and substantial sales promotion expenditure across different assessment years. The sales promotion additions alone ranged from Rs. 12.74 crore for AY 2009-10 to Rs. 24.62 crore for AY 2014-15. These disputes required consideration of the nature of the expenditure, the material gathered during the search, the explanations furnished by the assessee and the findings recorded by the Commissioner of Income Tax (Appeals). Separate grounds concerned ESOP expenses and the eligibility of income derived from scrap sales for deduction under Section 80-IC. The Tribunal considered these matters issue-wise across the relevant assessment years rather than treating all additions as governed by a single factual or legal conclusion.
Another significant dispute concerned the treatment of excise duty subsidies received under industrial incentive schemes and their exclusion from taxable income and book profit under Section 115JB. The assessee claimed that the subsidies were capital receipts intended to encourage industrial investment and therefore should not be subjected to tax merely because they had been credited in the accounts. Referring to judicial precedents, including Ankit Metal and Power Ltd. and Sicpa India (P.) Ltd., the Tribunal upheld the exclusion of the relevant capital subsidies from the computation of book profit. It also rejected the Revenue’s objection to the admission of the assessee’s additional claim through a revised computation rather than a revised return, recognising the appellate authority’s power to entertain such claims. Consequently, the Revenue’s grounds challenging the relief granted in respect of the excise subsidies were dismissed.
For AY 2014-15, the Tribunal additionally considered the assessee’s claim for exclusion of Rs. 8,59,80,061 representing a foreign exchange fluctuation translation reserve from book profit under Section 115JB. The amount arose from the restatement of foreign currency loans advanced to a subsidiary and had been credited directly to the balance-sheet reserve in accordance with the accounting treatment described in the order, without being routed through the profit and loss account. The Tribunal observed that the adjustments permitted while computing book profit were governed by the specific provisions of Section 115JB and that no corresponding adjustment was prescribed for the amount in question. It also noted the consistent treatment adopted in earlier assessment years and allowed the assessee’s additional ground. Ultimately, the ITAT partly allowed both the assessee’s and the Revenue’s appeals for all five assessment years, granting issue-specific relief while sustaining or rejecting other grounds in accordance with its findings.
The Tribunal further upheld relief against disallowance of Rs. 8,08,000 of patent-related expenditure claimed under Section 35(2AB) for AY 2009-10 and the addition of Rs. 1,60,34,723 of tax paid on employee ESOP perquisites to book profit for AY 2010-11. These findings rested on the absence of incriminating material in completed assessment years rather than a fresh determination of every underlying deduction on its merits.
Cases Discussed
1. PCIT Vs Abhisar Buildwell (P.) Ltd. (2023) 149 taxmann.com 399 (SC): The Supreme Court held that completed or unabated assessments under Section 153A cannot be disturbed without incriminating material found during a search. Applied to delete repeated additions for AYs 2009-10 and 2010-11.
2. CIT Vs Kabul Chawla (2016) 380 ITR 573 (Delhi HC): Relied upon for the restriction on additions in completed search assessments where no incriminating material is discovered.
3. Umesh D. Shinde Vs DCIT (ITAT Pune), ITA Nos. 1363 to 1367/Pun/2014, dated 16 March 2018: Applied to reject a fresh deduction claim made in an unabated assessment under Section 153A.
4. CIT Vs Continental Warehousing Corporation (Nhava Sheva) Ltd. / All Cargo Global Logistics Ltd. (2015) 374 ITR 645 (Bombay HC): Discussed regarding the restricted scope of completed assessments following a search.
5. Gajendra D. Pawar Vs DCIT (ITAT Pune), ITA Nos. 1009 to 1012/Pun/2015, dated 31 October 2017: Discussed regarding fresh claims for deductions in unabated assessments.
6. Rashtriya Chemicals & Fertilizers Ltd Vs CIT (2018) 91 taxmann.com 104: Considered in relation to the treatment of tax paid on ESOP perquisites while computing book profit under Section 115JB.
7. Pullangode Rubber Produce Co. Ltd. Vs State of Kerala (1973) 91 ITR 18 (SC): Discussed for the principle that an admission is important evidence but is not conclusive and may be shown to be incorrect.
8. CIT Vs Bholanath Poly Fab (P.) Ltd. (2013) 355 ITR 290 (Gujarat HC): Discussed in relation to additions arising from purchases allegedly made through non-genuine suppliers.
9. PCIT Vs Mohommad Haji Adam & Co. (2019) 103 taxmann.com 459 (Bombay HC): Relied upon for restricting additions on disputed purchases to the profit element where corresponding sales are accepted.
10. PCIT Vs Paramshakti Distributors Pvt. Ltd. (Bombay HC), ITA No. 413 of 2017: Discussed for taxation of the profit element embedded in purchases covered by alleged bogus bills rather than disallowance of the entire purchase expenditure.
11. PCIT Vs Pinaki D Panani (Bombay HC), ITA No. 1543 of 2017: Discussed regarding estimation of profit instead of complete disallowance where consumption of materials and completion of work are not disputed.
12. PCIT Vs Jakharia Fabric (P.) Ltd. (2020) 118 taxmann.com 406 (Bombay HC): Discussed in connection with alleged accommodation bills, supporting evidence and estimation of additions for disputed purchases.
13. CIT Vs Nikunj Eximp Enterprises (P.) Ltd. (2013) 35 taxmann.com 384 (Bombay HC): Considered regarding documentary evidence supporting purchases and the treatment of information obtained from investigating authorities.
14. PCIT Vs Vaman International (P.) Ltd. (Bombay HC), ITA No. 1940 of 2017, dated 29 January 2020: Discussed concerning the evidentiary basis for treating purchases as non-genuine.
15. Andaman Timber Industries Vs Commissioner of Central Excise (SC): Discussed in relation to cross-examination and reliance on statements of third parties.
16. CIT Vs Odeon Builders Pvt. Ltd. (2019) 418 ITR 315 (SC): Considered regarding additions founded on third-party information without adequate supporting evidence.
17. Apex Laboratories Pvt. Ltd. Vs DCIT (2022) 442 ITR 1 (SC): Discussed regarding the disallowance of expenditure incurred by pharmaceutical companies on prohibited freebies provided to medical practitioners under Section 37(1).
18. Himalaya Drug Company Vs CIT (ITAT Bangalore), 124 taxmann.com: Discussed in connection with pharmaceutical sales promotion expenditure and the regulatory framework governing medical practitioners.
19. Biocon Ltd. Vs DCIT (ITAT Special Bench): Discussed regarding the deductibility and treatment of employee stock option expenditure.
20. Goetze (India) Ltd. Vs CIT (2006) 284 ITR 323 (SC): Discussed concerning claims not made through a revised income-tax return and the distinction between the Assessing Officer’s powers and appellate jurisdiction.
21. CIT Vs Pruthvi Brokers & Shareholders (P.) Ltd. (2012) 349 ITR 336 (Bombay HC): Relied upon for the power of appellate authorities to entertain claims not originally made in the return.
22. CIT Vs Shree Balaji Alloys Ltd. (2017) 80 taxmann.com 239 (SC): Considered regarding the capital nature of subsidies granted under industrial incentive schemes.
23. CIT Vs Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392 (SC): Discussed for the purpose test in determining whether an industrial subsidy constitutes a capital or revenue receipt.
24. Sahney Steel & Press Works Ltd. Vs CIT (1997) 228 ITR 253 (SC): Discussed regarding the distinction between capital and revenue subsidies.
25. CIT Vs Chaphalkar Brothers (2018) 400 ITR 279 (SC): Discussed concerning the character of government incentives and the purpose for which subsidies are granted.
26. PCIT Vs Welspun Steel Ltd. (2019) 264 Taxman 252 (Bombay HC): Discussed in connection with the treatment of industrial subsidies as capital receipts.
27. Sicpa India (P.) Ltd. Vs DCIT (2017) 80 taxmann.com 87 (ITAT Kolkata): Relied upon regarding exclusion of capital subsidies received through excise duty incentives while computing book profit under Section 115JB.
28. Apollo Tyres Ltd. Vs CIT (2002) 255 ITR 273 (SC): Discussed regarding the statutory framework for computation of book profits under Section 115JB.
29. Dy. CIT Vs Binani Industries Ltd. (2016) 178 TTJ 658 (ITAT Kolkata): Discussed concerning the treatment of capital receipts in the computation of book profits.
30. Indo Rama Synthetics (I) Ltd. Vs CIT (2011) 330 ITR 336 (SC): Discussed regarding computation of book profit and permissible statutory adjustments.
31. Rain Commodities Ltd. Vs Dy. CIT (2010) 40 SOT 265 (ITAT Hyderabad Special Bench): Discussed in the context of capital receipts and book profit computation.
32. Radhasoami Satsang Vs CIT (1992) 193 ITR 321 (SC): Discussed for consistency in tax treatment where relevant facts and circumstances remain unchanged across assessment years.
