Motor cars expenses unrelated to research & development is not eligible for deduction u/s.35(2AB)

IN THE ITAT AHMEDABAD BENCH ‘A’

ACIT v.  Torrent Pharmaceuticals Ltd.

IT APPEAL NOS. 1869 & 1881 (AHD.) OF 2009

[ASSESSMENT YEAR 2005-06]

MAY 31, 2012

ORDER

Kul Bharat, Judicial Member 

These are cross-appeals – one filed by the Revenue and another filed by the assessee are directed against the common order of Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad dated 27-03-2009 for the assessment year 2005-06.

First we take up Revenue’s appeal in ITA No.1869/Ahd/2009.

2. The Revenue has raised following grounds of appeal:-

“1.  The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of garden expenses of Rs. 27,06,563/-.

 2.  The Ld. CIT(A) has erred in la and on facts in deleting the disallowance of Weighted expenditure on R & D expenses of Rs. 1,03,25,000/-“

3. The facts in brief are that assessee-company is engaged in the business of manufacturing of pharmaceutical items. The assessee-company has filed its return of income declaring total income of Rs. 12,79,35,253/-. Subsequently, the case was selected for scrutiny and the assessment proceedings was initiated by issuing notice u/s.143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). The assessment proceeding was completed on 28-12-2008. The Assessing Officer made following disallowances:-

Against these disallowances, assessee filed appeal before Ld. CIT(A). Ld. CIT(A) following the order of predecessor in A.Y 2004-05 directed the Assessing Officer to allow weighted deduction of recurring expenses related to building of Rs. 38.33 lakh, municipal tax of Rs. 9.21 lakh and salary to Dr. C. Dutt of Rs. 75.97 lakh. Hence, the disallowance of weighted deduction on motor car expenses interest etc. was confirmed. However, accepting alternative submission of the assessee allowed depreciation on motor car and interest expenses capitalized. However, the disallowance made u/s 14A of the Act was confirmed. Against the order of Ld. CIT(A) both Revenue and assessee has filed cross appeal before this Tribunal.

4. Ground No. 1 is against deletion of disallowance of garden expenses of Rs. 27,06,563/-. Ld. CIT-DR strongly supported the order passed by Assessing Officer and submitted that Ld. CIT(A) has wrongly deleted the disallowance made by Assessing Officer. On the contrary, Ld. Authorized Representative for the assessee pointed out that this issue is squarely covered in favour of assessee in ITA No. 4356/Ahd/2007 order dated 31-01-2011 by the co-ordinate Bench. Ld. AR submitted Hon’ble ITAT has followed the decision rendered in respect of A.Y. 2004-05.

5. We have heard the rival submissions, perused the material available on record and the judgment cited by the parties. There is no dispute that the facts in the present case are identical with the facts of the case pertaining to A.Y. 2004-05. We have perused the order of the Hon’ble co-ordinate Bench in assessee’s own case in ITA No.4356/Ahd/2007 (supra). The Hon’ble Tribunal following the decision of co-ordinate Bench in ITA No.1347/Ahd/2007 for A.Y. 2003-04 dismissed the ground of appeal raised by Revenue. In view of the fact that issue has already been decided by Hon’ble co-ordinate Bench in ITA No. 4356/Ahd/2007 for A.Y. 2004-05 and ITA No.1347/Ahd/2007 for A.Y. 2003-04 in assessee’s own case. Respectfully following the order of the co-ordinate bench, this ground of Revenue’s appeal is dismissed.

6. Another effective ground as raised by the Revenue is with regard to deleting the disallowance of weighted expenses on R & D of Rs. 1,03,25,000/-. Ld. CIT-DR submitted that order passed by Ld. CIT(A) is erroneous. On the contrary, Ld. Authorized Representative for the assessee submitted that weighted deduction on Rs. 33.33 expenses relating to repairing building expenses Rs. 9.01 lakh municipal tax paid by the assessee and Rs. 75.97 lakh, salary to Mr. C Dutta has been allowed in the earlier year. Ld. AR submitted that this issue is squarely covered in favour of assessee in ITA No. 3569/Ahd/2004 A.Y. 2001-02.

7. We have heard the rival submissions, perused the materials available on record and judgment cited by the parties. So far the disallowance with regard to R&D, building, municipal tax and salary to Dr. C. Dutt are concerned this issue has been decided by the Hon’ble co-ordinate bench in ITA No.3569/Ahd/2004 (supra) in favouor of assessee. In view of the matter, we do not find any infirmity into the order passed by Ld. CIT(A). Hence, this ground of Revenue’s appeal is dismissed.

8. In the result, Revenue’s appeal is dismissed.

Now we take up assessee’s appeal in ITA No1881/Ahd/2009.

9. The assessee has raised following grounds of appeal:-

“1.  On the facts and in the circumstances of the case, the CIT(A) erred in confirming the disallowance of Rs. 63,00,000 which was claimed by the assessee on revenue account.

 2.  On the facts and in the circumstances of the case, the CIT(A) erred in not upholding the assessee’s claim for deduction in a sum of Rs. 1,24,48,500 being 150% weighted deduction u/s. 35(2AB) in respect of capital expenditure on motor cars and interest totaling Rs. 82,99 lacs.

 3.  On the facts and in the circumstances of the case, the CIT(A) erred in upholding the disallowance of Rs. 3 lacs made by the Assessing Officer by purportedly invoking the provisions of section 14A.

 4.  On the facts and in the circumstances of the case, the CIT(A) erred in not upholding the assessee’s contention that it was not at all a fit case for levy of interest u/s. 234D and for withdrawal of interest u/s. 244A.”

10. First ground is with regard to confirming the disallowance of Rs. 63 lakh which was claimed by assessee on revenue account. The contention of assessee before Ld. CIT(A) was that the assessee-company had entered into an agreement with IBM. In pursuance of this agreement, IBM would undertake to study the existing business system and come with solutions as required by an Enterprise Resource Planning (ERP for short) provided by SAP. It would also train people so that data migration from legacy system to SAP would smooth and train people in the running of the ERP system. Total payments made to IBM amounting to Rs. 63 lakh. It was submitted before Ld. CIT(A) that ERP expenditures are essentially revenue in nature which are related to upgrading its present accounting software and entire exercise of going for ERP for smooth functioning of the organization. Ld. counsel for the assessee submitted that the submission of assessee was not considered in right perspective by Ld. CIT(A). He submitted that the expenditure as claimed by assessee are revenue in nature in view of various judicial pronouncements in this regard. Ld. AR submitted that this issue is decided in favour of assessee in assessee’s own case in ITA No.4343/Ahd/2007 order dated 31-01-2011. Ld. AR further submitted that in identical facts, the Hon’ble Bombay High Court has decided this issue in favour of assessee in IT Appeal No. 4176 of 2009 dated 04-07-2011 in the case of CIT v. Raychem RPG Ltd. On the contrary, Ld. CIT-DR supported the orders of authorities below.

11. We have heard the rival submissions, perused the materials available on record and the judgments cited by the rival parties. We find that Hon’ble co-ordinate bench has decided this issue in para-47 in assessee’s own case in ITA No.4343/Ahd/2007 (supra), which reproduced as under:-

“47. We find that the Revenue has relied on the decision of this Tribunal Delhi Bench in the case of Escorts Ltd. v. ACIT [2007] 104 ITD 427 (Del), wherein the expenditure on software is considered as capital in nature by holding that where the assessee acquires ERP business software with unlimited users of licence and expenditure incurred on acquisition of software by way of outright purchase is to be considered as capital in nature. But in the present case, the facts are entirely different and it is not the allegation of the Revenue from the Assessing Officer’s stage till now that the assessee has acquired this software for unlimited user of licence and this is outright purchase. The Revenue also relied on the decision of Hon’ble Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P) Ltd. [2003] 259 ITR 30 (Raj) but the facts in that case are also in regard to distinguishable as in that case the software was an outright purchase of computer programme which relates to technical “know-how”. We find that the Assessing Officer has not given any finding as to the fact that whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee right to use the software becomes relevant. Accordingly we are of the view that in case the software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter or say less than 2 years, it may be treated as revenue expenditure. Hence, we find that the CIT(A) has recorded a categorical finding that the software programme without which the computer cannot work and with the advancement of technology, the programme changes during short period and this change is requirement of the business of the assessee i.e. share broking. Accordingly, we delete the addition confirmed by CIT(A) and this issue of assessee’s appeal is allowed.”.

Further the Hon’ble Bombay High Court in case of Raychem RPG Ltd. (supra), has affirmed the view of ITAT Special Bench which has held that the expenditure incurred on ERP is of revenue in nature. Respectfully following the aforementioned decision, we allow this ground of assessee’s appeal.

12. Next ground of assessee’s appeal with regard to upholding the assessee’s claim for deduction in a sum of Rs. 1,24,48,500/- being 150% weighted deduction u/s. 35(2AB) of the Act in respect of capital expenditure on motor cars and interest totaling to Rs. 82.99 lakh.

13. Ld. Authorized Representative for the assessee submitted that Ld. CIT(A) erred in upholding the assessee’s claim for deduction u/s. 35(2AB) of the Act. It is submitted that the motor cars provided to employees in the cadre of AGM and once the salary to the employees as provided during the course of employment is also allowable. On the contrary, Ld. CIT-DR supported the orders passed by Ld. CIT(A) and vehemently argued that same is not allowable for weighted deduction.

14. We have heard the rival submissions, perused the materials available on record. We find that Ld. CIT(A) has returned the finding of fact in para-5.3 of his order, which is reproduced hereinbelow:-

“5.3 I have considered the facts of the case and the appellant’s submissions carefully. Similar issue arose in earlier years and following the finding of C.I.T.(Appeals) in A.Y. 2004-05, I direct the AO to allow weighted deduction on recurring expenses related to building of Rs. 38.33 lacs, municipal taxes of Rs. 9.21 lacs and salary to Dr. C. Dutt of Rs. 75.97 lac totaling to Rs. 123.51 lacs. However, weighted deduction is not allowed on motor car expenses of Rs. 44.54 lacs and interest expenditure of Rs. 38.45 lacs totaling to Rs. 82.99 lacs, as the said expenditure was not incurred for research purposes. The appellant has alternatively claimed in ground 4.1 that depreciation in respect of motor car and interest capitalised should be allowed. This claim is in order, hence I direct the AO to allow depreciation on Rs. 82.99 lakhs consisting of car and interest capitalized.”

14.1 In the light of these facts as has been noted by Ld. CIT(A) in the above para, we examine the applicability of various contentions raised by Ld. AR of the assessee. First contention of Ld. AR of the assessee is this that since the salary to employee is eligible for deduction u/s 35(2AB) of the Act, acquisition of motor car for those employees should also be considered as eligible for this benefit. We do not find any merit in this contention of Ld. AR of the assessee. Simply because of this reason that motor cars are purchased for providing to the employees of research & development wing of the assessee, it cannot be accepted that the expenditure is incurred on in-house scientific research & development. In our considered opinion, the primary condition to the satisfied by the assessee for being eligible for this weighted deduction is this that the expenditure was incurred on in-house research & development and then only, it can be accepted that, expenditure on motor car is also eligible for such deduction. We would like to observe that the perquisite value of the car being expenditure incurred by the assessee-company on running and maintenance of car etc can be equated with salary payment to the employees but not the cost of car provided to the employees for traveling. Expenditure on purpose of car cannot be accepted as expenditure whether capital or revenue incurred on in-house research & development. In our considered opinion, capital expenditure for equipments to be used for in-house research is eligible for this benefit but not the motor car because whether the employees came into car provided by the employer or by public transport or hired car has no bearing on in-house research & development.

14.2 Now, we examine the applicability of the judgment of Hon’ble Apex Court cited by the Ld. AR of the assessee reported in 209 CTR (Statute) 89 case, the issue involved was regarding deduction u/s 35 (1)(iv) of the Act. When we examine the provisions of Section 35(1)(iv) of the Act, we find that these are materially different from the provisions of u/s. 35(2AB) of the Act because in Section 35(1), there is no condition that the expenditure on scientific research has to be incurred on in-house research & development facilities and there, all expenditures incurred on scientific research related to the business is eligible for deduction u/s. 35(1) and in clause (iv) of Section 35(1) is covered the expenditure of capital nature on scientific research related to the business carried on by the assessee and hence, in this clause also, there is no condition that such cost has been incurred on in-house scientific research facilities as in Section 35(2AB) of the Act and because of this reason, this judgment is not applicable in the present case.

14.3 In view of above discussion, we find that the capital expenditure incurred by the assessee on purchase of motor cars cannot be considered as expenditure incurred by the assessee on in-house research & development and therefore, the same is not eligible for weighted deduction u/s. 35(2AB) of the Act. Similarly, capitalized interest on purchase of car is also not eligible for this benefit for same reasons because it is equal or similar to cost of car. Hence, this ground is rejected.

15. Next ground is against the disallowance made u/s 14A of the Act. Ld. Authorized Representative submitted that the disallowance made merely on the basis of estimation of administrative expenses earned to tax free income. Ld. AR relied upon the judgment of Hon’ble Kerala High Court in the matter of CIT v. Catholic Syrian Bank Ltd. [2012] 207 Taxman 2/[2011] 9 taxmann.com 148 (Mag.).

On the contrary, Ld. CIT-DR supported the orders of authorities below.

16. We have heard the rival submissions, perused the material available on record. We find that Ld. CIT(A) has given a categorical finding in para-6.3 of his order, same is reproduced hereinbelow:-

“6.3 I have considered the facts of the case and the submissions of the AR of the appellant. However, I am not in agreement with the contention of the appellant that earning of dividend income does not require any specific/special administrative efforts, as even where company presumes to have not invested in single penny of money in shares /scripts, company would have to pay salary to its employees. I find force in the observation of the AO that certain administrative efforts were necessarily required for earning the exempt income. Hence, I am of the opinion that the disallowance of Rs. 3 lakhs made by the Assessing Officer is quire justified and this ground is dismissed.”

We find that case law cited by Ld. AR in the matter of Catholic Syrian Bank Ltd. (supra), wherein the Hon’ble Kerala High Court has held that so far as disallowance of administrative expense is concerned, there is no precious formula or proportionate disallowance, no disallowance called for, for proportionate administrative cost, attributable to earning of tax free income until Rule 8D of the I.T. Rule, 1962 came into force. It is further held that the proportionate disallowance u/s. 14A should be limited to only interest liability and not overhead or administrative expenditure, which should be considered for disallowance under Rule 8D of the I.T. Rule, 1962 from 2007-08. Respectfully following the ratio in the case of Catholic Syrian Bank Ltd. (supra) we hereby delete the addition made on account of administrative expenses. This ground of assessee’s appeal is allowed.

17. In the result, assessee’s appeal is partly allowed.

18. In combined result, Revenue’s appeal in ITA No. 1869/Ahd/2009 is dismissed and that of assessee’s appeal in ITA No. 1881/Ahd/2009 is partly allowed.