The present appeal by the Revenue preferred under section 260A of the Income Tax Act, 1961, is directed against order dated 31.01.2011 passed by the Income Tax Appellate Tribunal, Ahmedabad, Bench `B’, Ahmedabad in ITA No. 4356 of 2007 relating to the Assessment year 2004- 2005. The said order of the Tribunal was a common order passed in four different cross-appeals. The aforesaid ITA No. 4356 of 2007 was by the Department. 1.1 The appellant has raised the following questions proposing them as substantial questions of law.
(A) “Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance u/s.35(2AB) of the act in respect of Municipal taxes, salary to Dr. D.C. Dutt and expenses related to building?”
(B) “Whether the Appellate Tribunal is right in law and on facts in directing to exclude the components of excise duty from the total turnover for the purpose of computation of deduction u/s.80HHC even after the insertion of section 145A of the act?”
(C) “Whether the Appellate Tribunal is right in law and on facts in directing to treat the interest income as income from business rather than income from other sources for Rs.23,63,668/-?”
(D) “Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of garden expenses amounting to Rs.14,04,356/-”
(E) Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of Rs.58,50,000/- made in respect of club expenses?”
2. We heard learned advocate Ms. Paurami Sheth for the appellant. She took us through the impugned order and other relevant material on record. We considered her submissions.
3. The relevant facts are that the respondent assessee is a public limited company engaged in the business of manufacturing and marketing of pharmaceutical products. For the Assessment year 2004-05, the return of income filed by it was processed and assessment order dated 19.12.2006 under sec. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as `the Act’ for sake of brevity). Total income was assessed. The assessing officer disallowed deductions under different heads. The assessee preferred appeal before the Commissioner of Income tax (Appeals), who by order dated 24.09.2007 and allowed the appeal in part. The Revenue thereafter went in appeal before the Tribunal which culminated into the impugned order.
4. Question No. (A) pertained to weighted deduction under section 35(2AB). Section 35(2AB) grants weighted deduction for any expenditure incurred for scientific research. The Assessing Officer’s view was overturned by the Income Tax Commissioner (Appeals) who observed that similar issue had arisen in earlier years. On that reasoning, weighted deduction for building expenses, municipal tax and salary to Dr. Dutt were allowed. In respect of certain other expenses like garden expenses, weighted deduction was not allowed, as it had no relation with research activity.
4.1 The Tribunal referred to its own decision in the assessee’s case for the Assessment Year 2001-02 in ITA No. 3569 of 2004 wherein for these expenses, which were incurred on scientific research and development in relation to drugs and pharmaceuticals, weighted deduction was held grantable. It was noted by the Tribunal that”
“Section 35(2AB) grants weighted deduction for any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research & development facility as approved by the prescribed authority. What is excluded is cost of land & building and not the recurring expenditure related to building that is repairs and renovation of buildings, therefore, assessee is entitled to weighted deduction for repairs of Rs.37.55 lacs related to buildings. Similarly, Municipal Tax paid of Rs.6.93 lacs is entirely related to Buildings wherein in-house research activity is carried on. It is only municipal tax of R & D Centre, Bhatt, hence like current repairs, it is eligible for weighted deduction u/s.35(2AB). So far as security expenses of Rs.11.01 lacs is concerned, it is submitted that in-house research activity requires proper tight security to avoid leakage through visitors, and only in-house staff will have access to the said Building and no others, and to preserve research which is completed but its clinical trial is pending. Considering all these factors, security expenses of Rs.11.01 lacs is eligible for weighted deduction u/s.35(2AB).”
Dr. Dutt was a person through whom all coordination of technical scientists and other technical persons was carried out, therefore, the salary to Dr. Dutt had direct relationship with research activity, hence, the said expenditure was eligible for deduction.
4.2 After detailed discussion on the issue, the Tribunal observed:
“We find that the issue in respect of deduction u/s.35(AB) `ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd’ of the Act on security expenses, municipal taxes, salary paid to Mr. Dutt, building expenses, professional fees and gardening expenses are covered by the decision of this Tribunal and the facts being identical, taking a consisting view, we allow the cross appeals of the assessee and that of Revenue's cross-appeals are dismissed.”
4.3 The Tribunal’s analysis and conclusion are proper and it admits no error.
5. As regards question No.(B), the assessee adopted total turnover by excluding the excise duty and sales tax, which was not approved by the assessing Officer, who was of the view that those components are integral part of the total turnover for the purpose of calculation of deduction under section 80HHC of the Act. His reasoning was that as per Explanation (ba) to section 80 HHC(i), total turnover is defined on the basis of exclusive method, and that as per the amended provision of section 145A of the Act, the valuation of sale of goods for the purpose of determining the income chargeable under the head `profit and gains of business’ shall be further adjusted to include the amount of any tax, duty paid.
5.1 The Income tax Commissioner (Appeals) relied on Mumbai High Court decision in Sudarshan Chemicals [245 ITR 769 (Bom.)] and held that excise duty is not part of total turnover for deduction under section 80HHC. As rightly held by the Tribunal endorsing to the Appellate commissioner’s view, that this issue is covered by the Supreme Court decision in CIT v. Lakshmi Machine Works [290 ITR 667]. As per the ratio in Laxmi Machine Works (supra) after introduction of section 145A, there is no change in the formula of section 80HHC(3) of the Act and the excise duty and Sales Tax Act has to be excluded from total turnoer.
5.2 It is held by the Apex Court in Laxmi Machines (supra) as under:
"In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the Assessing Officer [See : page No.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc., It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time."
5.3 Therefore, no question of law, much less there is any substantial question of law arises in this appeal.
6. On question © regarding treatment of interest income – whether to treat it as income from business or income from other sources, the Tribunal discussed principles to be applied in this regard in page 36 and 37 of its order. Thereafter it has required the Assessing Officer to examine the issue by going into factual details. The Tribunal’s conclusion is thus:
“In the present case before us it is not clear whether the interest income is business income or income from other sources. First, this should be find out and accordingly the issue should be decided. The facts are not clear from the orders of lower authorities, hence, this issue is set aside to the file of Assessing Officer for verification and allowed for statistical purposes.
6.1 Therefore, with regard to above issue, no question of law arises.
7. The Assessing Officer did not accept the case of assessee to allow the garden expenses as business expenses on the reasoning that in the proceeding year, such expenditure was not allowed. It was assessee’s say that these expenses were incurred to maintain good atmosphere within the factory premises and in order to control pollution and to ultimately improve working condition. The Appellate Commissioner allowed them as revenue expenditure.
7.1 Taking note of decision of Madhya Pradesh High Court in Steel Tubes Pvt. Ltd, the Tribunal upheld the decision of the Commissioner (Appeals) by observing:
“... the manufacturing process of the assessee being such that it involves use of hazardous chemicals which affect the health of the workers. Thus, it is the duty of the assessee to make good the loss caused to nature and to prevent the health of thee workers engaged in production. Therefore, the assessee maintained the garden for maintaining better environment in the factory and the expenditure incurred in the process was therefore, for the purposes of the business of the assessee and was rightly allowed by the Learned Commissioner of Income Tax(Appeals). ...
7.2 We see no error in the above conclusion.
8. The club expenses were disallowed by the Assessing Officer on the ground that such expenses being not beneficial to the business of the assessee, they were not liable to be allowed. The amount claimed as deduction in this regard included the corporate membership fees and one towards different specified employees. The Appellate Commissioner and the Tribunal held in favour of the assessee on this count. The reasoning by the Tribunal was thus:
“We are of the view that the expenditure was incurred with the intention to establish and maintain business contact which is in the long term ITA No.333 & 346/A/06 & 4343, 4356/A/07 A.Ys 02-03 & 04-05 Torent Pharmaceuticals P. Ltd. v ACIT/DCIT Cir-8 A'bd interest of the company's business. This expenditure was incurred in the interest of the assessee's business. It would provide employees and officers better contacts and association with the persons in good position and would result in publicity. We find from the order of CIT(A) that such expenditure was not incurred with an intention to benefit employees of the assessee but was for the promotion of business of the assessee. This view of CIT(A) was considered by the High Court and was approved. Further we are of the view that this issue is squarely covered by the decision of the Hon'ble jurisdiction High Court in the case of Gujarat State Export Corporation Ltd. v. CIT (1994) 209 ITR 649 (Guj), wherein it is held that by paying the entrance fee to the sports club, the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business. By common sense standards, it could be stated that it was for running the business or for bettering the conduct of its business. The amount paid as entrance fee was deductible Considering the above position, and in view of the facts of the assessee's case, we confirm the order of CIT(A) and this issue of Revenue's appeal is dismissed.”
8.1 It cannot be said that the above view is unreasonable without rationale. It cannot be gainsaid that club association helps in expanding business contacts, as observed by the Tribunal, which is also the view taken by this High Court in Gujarat State Export Corporation [2009 ITR 649 (Guj)], as also by the Bombay High Court in OTIS Elevator Co. [ITR 682 (bom).].
8.2 We are in agreement with reasoning supported by the Tribunal for upholding deletion of disallowance on this score.
9. In view of the foregoing reasons and discussion, none of the five questions proposed raise any substantial question of law requiring to be gone into by this Court in this Appeal.
10. Accordingly, the appeal is dismissed.
(V.M.SAHAI, J.) (N.V.ANJARIA, J.) sndevu