Ranbaxy Laboratories Ltd. v. Additional Commissioner of Income-tax

ORDER

1. These are cross-appeals. They are directed against two separate orders of CIT(A), dated 23-3-2004 and 11-6-2004 for assessment years 2002-03 and 2003-04 respectively. Grounds of appeals read as under :

Grounds of appeal in ITA No. 1855/Delhi/2004 :

"(1) That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in rejecting the claim for deduction under section 35D in respect of fee paid amounting to Rs. 24,30,000 to the RoC, Punjab and Haryana.

(2) That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in not allowing the deduction of Rs. 30,89,839 during the year, being the deferred employees compensation on account of company's Employees Stock Option Scheme (ESOP) and by directing the Assessing Officer to allow the same only in the year in which the shares are allotted to employees upon exercise of the option."

Grounds of appeal in ITA No. 2613/Delhi/2004 :

"On the facts and in the circumstances of the case, the learned CIT(A) has erred in :

(1) Deleting the addition of Rs. 33,00,782 in respect of lease rental on lease transaction with Rajasthan State Electricity Board.
(2) Deleting the disallowance of Rs. 4,94,69,267 made by the Assessing Officer under section 43B( b) on account of provision for pension.
(3) Directing the Assessing Officer to include duty drawback of Rs. 16,915 in the profit for working out deduction under section 80-IB.
(4) Directing to verify the details of shares allotted during the year under ESOP scheme and allow deduction accordingly with reference to deduction of Rs. 30,89,839 on account of deferred employee compensation.
(5, 6 and 7) directing to exclude excise duty of Rs. 7,65,47,346, taxes recovered of Rs. 2,84,19.115, .discount on sale of Rs. 2,21,09,218, commission on sale of Rs. 22,02,51,315 and miscellaneous income of Rs. 1,56,89,670 from the total turnover while working out deduction under section 80HHC.
(8) deleting the addition of Rs. 20 lacs on account of contribution to Ranbaxy Health Care Society (RCHS) holding the same as revenue expenditure.
(9) Directing to allow deduction under section 35(2AB) @ 150 per cent on the foreign exchange loss and the cost of computers, motorcars and other assets provided in accordance with the companies employment policy to the R&D employees.
(10) Directing that while computing book profit under section 115JB, the book profit should be reduced by the amount of profit eligible for deduction under section 80HHC and 80HHC should be computed by excluding the miscellaneous income, excise duty and other taxes etc. from the total turnover."

Grounds of appeal in ITA No. 3387/Delhi/2004 :

"1. That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in rejecting the claim for deduction under section 35D in respect of fee paid amounting to Rs. 4,86,000 to the RoC, Punjab and Haryana.

2. That on law, facts and in the circumstances of the case, the learned CIT(A) has erred in not allowing the deduction of Rs. 2,40,86,424 during the year, being the deferred employees compensation on account of company's Employees Stock Option Scheme (ESOP) and by directing the Assessing Officer to allow the same only in the year in which the shares are allotted to employees upon exercise of the option."

Grounds of appeal in ITA No. 3871/Delhi/2004 :

"On the facts and in the circumstances of the case, the learned CIT(A) has erred in :

(1) Deleting the disallowance of Rs. 7,46,89,985 made by the Assessing Officer under section 43B( b) on account of provision for pension.
(2) Directing the Assessing Officer to include duty drawback of Rs. 26,233 in the profit for working out deduction under section 80-IB.
(3) Directing to verify the details of shares allotted during the year under ESOP scheme and allow deduction accordingly with reference to deduction of Rs. 2,40,86,424 on account of deferred employee compensation.
(4, 5 and 6) directing to exclude excise duty of Rs. 1,54,92,794 taxes recovered of Rs. 28,77,366, commission on sale of Rs. 16,18,87,769 and miscellaneous income of Rs. 1,73,23,171 from the total turnover while working out deduction under section 80HHC.
(7) deleting the addition of Rs. 33,75,000 on account of contribution to Ranbaxy Health Care Society (RCHS) holding the same as revenue expenditure.
(8) Directing to allow deduction under section 35(2AB) @ 150 per cent on the foreign exchange loss and the cost of computers, motorcars and other assets provided in accordance with the companies employment policy to the R&D employees.
(9) Directing that while computing book profit under section 115JB, the book profit should be reduced by the amount of profit eligible for deduction under section 80IIHC and 80HHC should be computed by excluding the miscellaneous income, excise duty and other taxes etc. from the total turnover.
(10) Directing to allow deduction of Rs. 2,59,76,070 on account of demand raised by National Pharmaceutical Pricing Authority (NPPA)."

2. These appeals were argued on the basis of charts submitted by learned Authorised Representative with respect to all the appeals. Many of the issues are common and covered by the earlier orders of the Tribunal. In this manner this appeal was heard and appeals are decided as under.

TTA No. 1855/Delhi/2004:

3. Ground No. 1 : There is no discussion regarding this ground in the assessment order. Learned CIT(A) has discussed this issue in para 11 of the impugned order. The claim of assessee is regarding fee paid to RoC of Rs. 24,30,000 for increasing the authorized share capital under section 35D of the Income-tax Act, 1961 (Act). It was submitted by the assessee before CIT(A) that in the return of income vide note No. 8 forming integral part of the returned income deduction under section 35D was claimed. Reference was made to the decision of Hon'ble Rajasthan High Court in the case of Commissioner Of Income-Tax v. Multi Metals Ltd. [1991] 188 ITR 151 (Raj.) wherein it has been held that the fee paid to RoC for raising authorized capital of the company is covered by sub-section (2)(c)( iv) of 35D of the Act. However, learned CIT(A) has declined to accept the claim of the assessee as according to him such claim of the assessee could not be accepted in view of the decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 (SC) . It is against these findings of CIT(A) the assessee has filed such ground.

4. The submissions made before CIT(A) were reiterated by learned Authorised Representative. However, he admitted that the increase in capital is not on account of any expansion.

5. Learned Departmental Representative relied on the order of CIT(A).

6. We have carefully gone through the provisions of section 35D. sub-section (2) describes certain type of expenditures to be eligible for amortization under section 35D(1). Under sub-clause (iv) of clause (c) to sub-section (2) the expenditure in connection with issue for public subscription of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus are mentioned. But under sub-section (1) of 35D such expenditure should be incurred either before the commencement of business of such Indian company or if these expenses are incurred after the commencement of business then it should be in connection with the extension of industrial undertaking of the company or in connection with setting up of a new industrial unit of that company. Admittedly, in the present case the assessee company did not incur these expenditures in respect of either extension of its industrial undertaking or for setting up of a new industrial unit. Therefore, the claim of the assessee does not fall within the ambit of section 35D. Thus, learned CIT(A) was right in holding that assessee is not eligible for amortization of such preliminary expenses under the provision of section 35D. This ground of the assessee is dismissed.

Ground No. 2

7. Ground No. 2 in appeal by the assessee and ground No. 4 in appeal by the Revenue are against disallowance of deduction on account of shares of the company granted under Employees Stock Option Scheme (ESOP). During the year the assessee granted stock option of 3,32,250 shares to its employees. The shares were to be issued at Rs. 595 per share as against face value of Rs. 10 per share. The relevant market price on the date of grant was Rs. 738.95 per share. The assessee treated the difference between Rs. 738.95 and Rs. 595 as employees compensation in the books of accounts and charged the same to the P&L a/c. The charge to P&L a/c was deferred over the vesting period which is 5 years. Thus pro rata amount of such amount was charged as deferred employees compensation, and claimed as expenses.

Before the Assessing Officer it was contended that the shares are issued under ESOP scheme in accordance with SEBI guidelines. As per guidelines issued by SEBI the amount of option premium has to be treated as employees compensation in the books and to be charged to P&L a/c over the vesting period. The assessee submitted ESOP scheme. It was contended that any amenity, benefit or perquisite allowed to an employee is taxable as perquisite under section 17(2) in the hands of the employee. Therefore, the cost of such benefit is allowable as business expenditure to the employer. The value of any benefit under ESOP scheme was taxable as perquisite under section 17(2)(iiia) for assessment year 2000-01 but after amendment with effect from assessment year 2000-01, such benefit is not taxable in the hands of employee. The option discount given to employee is a constructive payment as and when the employee will apply for allotment and delivery of shares by making payment of offer price. Therefore, the grant of shares during the year is a benefit provided to the employee and hence allowable deduction in the hands of the company. Reliance was placed on the decisions of Hon'ble Supreme Court in the cases of Metal Box Company Of India Ltd. v. Workmen [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. Commissioner Of Income Tax, Karnataka. [2000] 245 ITR 428 (SC) . The Assessing Officer held that the claim is made only on the basis of SEBI guidelines but the deduction is not permissible under the IT Act unless a liability has either been paid or arisen during the year. Therefore, the claim is not allowable as such. The learned CIT(A) held that the liability will be a certain liability only when the employees exercise their option by making payment of the offer price and get their share. He accordingly directed the Assessing Officer to allow deduction in the year in which the option is exercised and allow deduction accordingly. The assessee as well as Revenue, both are in further appeal before us.

7.1 The learned counsel for the assessee submitted that both the Assessing Officer and the CIT(A) failed to appreciate the true nature of the option discount arising on grant of options under the ESOP scheme amortized and claimed as expenditure by the appellant, which is explained hereunder :

—ESOP is an employee compensation scheme Intended to inculcate a sense of belongingness and instill a feeling of ownership in the employees, to create partnership with the employees for a transition form being mere 'employees' to 'stake holders';

—ESOPs are issued in terms of ESOP scheme framed as per the SEBI guidelines;

—Once grants are issued by the assessee to its employees under the ESOP, insofar as the assessee is concerned the liability crystallizes inasmuch as the option to exercise such grant is with the employees on which the assessee has no control.

—Since such liability towards employee compensation can be estimated with reasonable certainty, following the mercantile system of accounting as regularly followed by the assessee, a liability towards the said compensation has definitely arisen during the year and is allowable deduction as has been similarly held in the following cases :

(i) Calcutta Company Ltd. v. Commissioner Of Income Tax, West Bengal [1959] 37 ITR 1 (SC);
(ii) Metal Box Co. of India Ltd.'s case ( supra); and
(iii) Bharat Earth Movers's case ( supra)

—The CIT(A) appears to have been influenced by the fact that the employee may not at a subsequent date, exercise the option and hence came to the conclusion that liability would crystallize as and when options are exercised by the employees at a future date. The CIT(A), however, failed to appreciate that the crystallization of liability has to be seen from the point of view of the company. The fact that at a subsequent date the employees may not exercise their option would only have the effect of remission/cessation of the liability at a future date. The CIT(A), therefore, erred in holding that the liability would crystallize as and when options are exercised by the employees.

—It may be appreciated that similar situation arises in provision for leave encashment, which was held to be allowable as revenue deduction in the case of Bharat Earth Movers (supra).

—The aforesaid principle of crystallization of liability has also been recognized in the SEBI guidelines, which are mandatory on the appellant, requiring option discount to be recognized and amortized as employee compensation in the financial statements on the date of grant of options;

—The exercise of options by the employees at a future date neither has the effect of the liability on account of 'option discount' being converted into a contingent liability nor requires deferment of amortization of option discount since as stated above insofar as the assessee is concerned the liability crystallized on the date of grant itself. Thus, following mercantile system of accounting, such liability has to be allowed as deduction as 'employee compensation' expense.

It was further contended that identical issue has been decided by Tribunal Chennai in the case of S.S.I. Ltd. v. Dy. CIT [2004] 85 TTJ (Chennai) 1049 wherein the claim of the assessee has been upheld.

7.2 The learned Departmental Representative on the other hand, submitted that the assessee has not incurred any expenditure in this regard nor any liability to pay any expenditure has been incurred. The assessee merely granted stock option. The grant price was Rs. 595 per share as against prevailing market rate Rs. 738.95 per share. Merely by granting stock option the assessee does not incur any expenditure. The difference between market price of share and the grant price will result into receipt of lesser amount towards share premium but the assessee does not incur any expenditure in this regard. The loss is a notional loss to the extent of receipt of lesser amount towards share premium. The share premium received by the assessee is not its income and hence if the assessee receives lesser amount by way of such share premium, the assessee does not incur any expenditure so as to claim the same as allowable. SEBI guidelines are relevant for the purpose of accounting or presentation of financial statement in respect of listed company but are not conclusive to determine the allowability of expenses. The expenses are allowable only as per the provision of Income-tax Act and the SEBI guidelines do not determine the allowability or otherwise of the sums. Even this benefit accruing to the employees are not considered as their income. Hence in view of the fact that merely stock options were granted and the loss if any, is towards lesser realization of share premium, the assessee has not incurred any expenditure and hence no part thereof is allowable.

7.3 We have considered relevant facts, arguments advanced and the case laws cited. The undisputed fact remains that the assessee granted stock option to its employees for 3,32,250 shares on 3rd Dec, 2001 at Rs. 595 per share. The prevailing market price on that date was Rs. 738.95 per share. As per ESOP scheme of the company, shares at 20 per cent per annum of the total option granted to the vest on the expiry of one year from the date of grant of option. In other words, after completion of one year from the date of grant of option, an employee would be entitled to exercise the option for allotment of shares at 20 per cent per annum by making an application in writing and tendering the offer price in cash. However, during the year the assessee has merely granted option but the same were not exercised by making payment thereof.

7.4 The assessee was to issue shares of face value of Rs. 10 by receiving a sum of Rs. 595 per share from its employees. Thus the assessee was entitled to receive Rs. 585 towards premium on issue of shares. The market price at Rs. 738.95 per share would have resulted in realization of higher share premium. The assessee has not accounted for the difference between Rs. 738.95 and Rs. 10 as its income during the year. Thus there is no loss of income held to be taxable. What is loss to the assessee is by way. of short receipt of share premium account and not by way of any expenditure or incurring any liability for such expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure rather it results into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of SEBI requires the assessee to account for short receipt of share premium as employees compensation expense, for claiming such expense as allowable, the assessee has to qualify that expenses are incurred and the same are wholly and exclusively for the purpose of business. Here we find that by issuing shares at lesser than market price, the assessee cannot be said to have incurred any expenditure rather it amounts to short receipt of share premium. The receipt of share premium is not taxable and hence any short receipt of such premium will only be a notional loss and not actual loss for which no liability is incurred. SEBI guidelines are relevant for the purpose of accounting but are not conclusive for the purpose of allowing the same as expenditure. In a case where the assessee contracts for sale of goods say at Rs. 100 per piece as against market price of Rs. 150 per piece, whether, the loss of Rs. 50 can be said to be allowable where the assessee accounts for only Rs. 100 as sales not at Rs. 150. In such a situation, the loss will be only a notional loss or the loss of possible benefit but not the loss or liability incurred so as to be held as allowable under the scheme of Income-tax Act. Similarly in the present case what is loss to the assessee is short receipt of share premium and not incurring any liability or loss in the course of carrying on the business. Therefore, such notional losses are not allowable under the Act. The assessee is not to defray or pay any liability under the claim. Therefore, such notional loss cannot be held to be allowable under the scheme of the Act.

7.5 The claim of assessee is made under section 37 of the Act. What is allowable under section 37 is any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Thus, the prerequisite is that the assessee should have incurred an expenditure. The word "expenditure" is not defined under the Act. Hon'ble Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 held that expenditure is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke at another's expense. But the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning which is relevant. 'Expenditure' is thus, what is 'paid out or away' and is something which has gone irretrievably.

7.6 Once again Hon'ble Supreme Court in the case of CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC) held that in its normal meaning, the expression 'expenditure' denotes 'spending' or 'paying out or away', i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not 'expenditure'; it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims, one by the assessee against a stranger and the other by the stranger against the assessee and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed 'expenditure' within the meaning of section 37(1). However, a mere forbearance to realize a claim is not 'expenditure'.

7.7 Hon'ble Delhi High Court in the case of B.K. Khanna & Co. (P.) Ltd. v. CIT [2001] 247 ITR 705 held that 'spending' in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. The word expenditure means what is paid out or away and is something which is gone irretrievably.

7.8 From the aforecited decisions it can be said that for claiming any sum under section 37 of the Act there should be an expenditure incurred by the assessee. However, a benefit or income foregone cannot be considered as an expenditure. The issue as in present appeal arose before the House of Lords in the case of Lowry (Inspector of Taxes) v. Consolidated African Selection Trust Ltd. [1940] 8 ITR 88 (Supp) . In the said case the company issued to its employees shares at par, when their market value was at a premium. It was claimed that the same to further the interest of the company's trade and to secure a benefit to the company. The sum representing the difference in price was that for a sum expended for the purpose of their trade and was consequently deductible before arriving at the amount of company's profit. The House of Lords disallowed the deduction on two main grounds : (i) the amount of premium 'foregone' by the company was not a disbursement or expense; and (ii) the issue of shares by a limited company is not a trading transaction at all. Viscount Maugham said, The issue of shares by a company, whether at par or over does not affect the profits or gains of the company for the purposes of income-tax'. The first ground of the decision, viz., that profit 'foregone' is not expenditure, proceeds on the view that the decision in Usher's Wiltshire Brewery Ltd. v. Bruce 6 Tax Cas. 399 which was a special case, cannot be regarded as laying down any broad rule of general application. The second ground of the decision, viz., that the issue of shares by a company is not a trading transaction at all, distinguishes this case from Usher (supra ) where the acquisition and letting of licensed premises was in the ordinary course of trade.

7.9 Applying the aforesaid decisions of Hon'ble Supreme Court as also the House of Lords in the case of Consolidated African Selection Trust Ltd. (supra), since the assessee had not incurred any expenditure but has merely received lesser amount of share premium, the same does not amount to expenditure within the meaning of section 37 of the Act. Therefore, the claim of assessee is not allowable.

7.10 The claim of the assessee is based on the entry made in the books of account which in term is made on the recommendation of the SEBI. It is by now settled law that entry or absence thereof in books of account is not conclusive either for treating the amount as income or allowability or otherwise of the expenditure. Thus, only on the basis of entry in the books of account the claim of expenditure is not allowable. The entry is made on the basis of recommendation of SEBI which is said to be mandatory for a listed company. The same may be relevant for the purpose of accounting but for allowability of expenditure under Income-tax Act the direction of SEBI do not determine the allowability of expenditure. For the purpose of allowability of expenditure under Income-tax Act the same has to be in consonance with the scheme of the Act. Somewhat similar issue arose before the Special Bench of the Tribunal in the case of New India Industries Ltd. v. Asstt. CIT [2007] 18 SOT 51 (Delhi)(SB) . In the said case claim of assessee was regarding provision for non-performing assets in view of the direction given by RBI in terms of section 45JA of RBI Act. The claim was made for bad debt under section 36(1)(vii) of the Act while computing income. The Special Bench negating the contention held that provision made in accordance with direction of RBI may be relevant for an NBFC governed by RBI but is not conclusive for allowability of claim under section 36(1)(vii) of the Act. So long as the claim is not meeting the requirement of section 36(1)(vii) of the Income-tax Act the claim is not allowable merely on the basis of direction of RBI. This view has been further fortified by the decision of Hon'ble Madras High Court in the case of TVS Finance & Services Ltd. v. Jt. CIT [2009] 23 DTR (Mad) 33. In similar way in the instant case the entry made in books of accounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under section 37 of the Income-tax Act. Unless the provision of section 37 is complied with, the deduction is not permissible.

7.11 The decisions relied upon by the learned counsel for the assessee are distinguishable on facts. In the case of Calcutta Co. Ltd. (supra), the Hon'ble Supreme Court was considering the allowability of estimated accrued liability to be discharged at a future date. In the said case the assessee undertook to carry out development within six months from the date of deeds of sale which was unconditional but the assessee bound itself absolutely to carry out the same. That undertaking imparted a liability on the appellant which accrued on the date of deeds of sale though to be discharged at a future date. In such circumstances, the Hon'ble Supreme Court held that amount to be expended could be debited in accounts maintained in mercantile system of accounting before it was actually disbursed. Since the liability accrued and was estimated with reasonable certainty, discharging the same at future date is allowable.

7.12 In the case of Metal Box Co. of India Ltd. (supra) the company was considering the liability incurred towards payment of gratuity for purpose of computing profit under Payment of Bonus Act. Though such gratuity liabilities were payable at a future date but since the liabilities were pertaining to the year and to be discharged at a future date, were held to be reducing the profit for purpose of computing surplus under the Payment of Bonus Act.

7.13 In the case of Bharat Earth Movers (supra), the Hon'ble Supreme Court applying the decision in the case of Calcutta Co. Ltd. (supra) and Metal Box Co. of India Ltd. (supra) held that amount set apart to meet liability on account of leave encashment of employees is not a contingent liability but an accrued liability though such liability is to be discharged at a future date.

7.14 However, in all the three above referred Supreme Court cases, it can be noticed that the assessee was required to discharge some sort of liability at a future date. In the present case the assessee is not to discharge any liability by making any sort of payment. The assessee merely granted stock option, though at a concessional rate but thereafter was not to discharge any liability in this regard. The loss if any, is notional and not actual liability incurred. Thus the cases of Hon'ble Supreme Court are distinguishable on facts.

7.15 Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. v. CIT [2000] 242 ITR 659 , was considering the claim of assessee towards expenditure on technical know-how. In the said case the assessee was a joint venture between an American company and an Indian company. The authorized capital of the assessee company was Rs. 100 lacs. Each of the promoters agreed to subscribe Rs. 4,70,000 out of which each would have to pay initially a sum of Rs. 2,80,000 towards its contribution. The share of American promoter was contributed by way of technical know-how valued at a sum of Rs. 2,35,000 and in lieu of which the assessee allotted equity shares. The same was considered as capital expenditure. The Hon'ble Supreme Court held :

"That what in effect was done by the appellant in allotting equity shares of Rs. 2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in the circumstances of the case, could not be termed as expenditure, much less revenue expenditure." [Emphasis, supplied]

Similar view was held by the Hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Reinz Talbros Pvt. Ltd. [2001] 252 ITR 637 (Delhi) wherein the Hon'ble Delhi High Court speaking through Hon'ble Shri Arijit Pasayat, Hon'ble Chief Justice (as His Lordship then was), held :

"A similar question came up before the apex Court in Eimco K.C.P. Ltd. v. CIT [2000] 242 ITR 659 (SC) . It was held that where a foreign company gives a technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under section 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character."

7.16 The decision of Tribunal, Chennai in the case of S.S.I. Ltd. (supra) relied upon by the learned counsel for the assessee is also distinguishable on facts. In the said case the assessee claimed similar expenditure which was allowed by the Assessing Officer. The learned CIT in his revision jurisdiction under section 263 held such expenditure as notional and contingent in nature. The Tribunal held that in view of SEBI guidelines which the assessee was required to follow, such expenditure are in the nature of ascertained liability and not contingent liability upon happening of certain events. Hence, it was held that the order was not erroneous so as to be validly revised under section 263 of the Act. However, the Tribunal in the said case has not answered the issue whether the loss is notional in nature or not. The Tribunal has also not considered the decision of Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. (supra) and that of Delhi High Court in the case of Reinz Talbros (P.) Ltd. (supra) which is a jurisdictional High Court for us. For all the reasons stated above we, therefore, hold that the expenses as claimed by the assessee are not allowable as such.

ITA No. 2613/Delhi/2004

8. Ground No. 1 - During the financial year relevant to asst. yr. 1996-97 erstwhile Cross Lands Research Laboratories Ltd. (CRL) which has merged into the assessee company had leased plant and machinery amounting to Rs. 5.5 crores to Rajasthan State Electricity Board, Jaipur (RSEB) on which lease rent of Rs. 33,44,000 is received during the year under consideration. The aforesaid transaction of lease was held to be a finance transaction by the Assessing Officer in assessment year 1996-97. Therefore, the depreciation claimed by CRL was disallowed and the interest income from the total lease rental was brought to tax. Following that practice the assessee offered interest portion out of lease rental of Rs. 33,44,000 and the rest of the amount i.e., an amount of Rs. 33,00,782 was not considered for income-tax. Thus, the lease rent excluding interest of Rs. 43,218 was added to the income of the assessee on protective basis as the similar stand was taken by Revenue in earlier years. The treatment of the lease transaction as finance transaction was upheld by the Tribunal in the case of CRL in assessment year 1996-97 in ITA No. 1730/Mum./2000. Learned CIT(A) has deleted that protective addition against which the Department is aggrieved hence in appeal.

9. At the outset it was pointed out by learned Authorised Representative that this issue is covered in favour of assessee by the order of the Tribunal for assessment year 1997-98 in ITA No. 4251/Delhi/2001 which is dated 31-3-2008 [reported as Commissioner Of Income-Tax v. Ranbaxy Laboratories Ltd. [2008] 10 DTR (Del)(Trib) 46Ed.] (sic) and a copy of which is placed at pp. 221 to 266. The relevant discussion is in paras 13 to 13.5. It was further pointed out that for assessment year 1999-2000 the said order of the Tribunal was followed subsequently in ITA No. 1513/Delhi/2004 and copy of such order is placed at pp. 267 to 285 and this issue is discussed therein in paras 20 to 21. Thus, it was pleaded by learned Authorised Representative that this issue is covered in favour of assessee by the aforementioned decisions of Tribunal in assessee's own case and, therefore, the learned CIT(A) has rightly decided this issue.

10. On the other hand, learned Departmental Representative relied on the order of Assessing Officer.

11. We have carefully considered the rival submissions in the light of material placed before us. The facts and circumstances of the case as it found for assessment year 1997-98 and present year are similar except difference in figure. For the sake of clarity relevant portion of the order of Tribunal vide which this issue was first decided i.e., for assessment year 1997-98 vide aforementioned order dated 31-3-2008 is reproduced hereunder :

"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 towards principal from RSEB.'

13.1 During the financial year relevant to assessment year 1996-97 the erstwhile M/s. Crosslands Research Laboratories Ltd. (since merged into assessee) leased plant and machinery amounting to Rs. 15.5 crores to Rajasthan State Electricity Board, Jaipur (RSEB) on which lease rent of Rs. 80,25,600 was received during the relevant previous year. The Assessing Officer held the transaction to be of financing nature and therefore disallowed the depreciation claimed by the assessee on the leased out assets and interest income from the total lease rental received by the assessee was brought to tax.

13.2 In the original return for the relevant previous year Rs. 80,25,600 was offered for tax by the assessee company but during the course of assessment proceedings the assessee requested the Assessing Officer to include only interest portion amounting to Rs. 18,30,038 out of the total lease rental of Rs. 80,25,600 to be charged to tax and to exclude balance amount of Rs. 61,95,562 from the total assessable income. The Assessing Officer although accepted the contention of the assessee in principle, but did not exclude the principal portion of the lease rent from the income chargeable to tax on protective basis. He did so by observing that the assessee's appeal for assessment year 1996-97 was pending.

13.3 In appeal, it was pointed out before the learned CIT(A) that the CIT(A), Mumbai, has already dismissed the appeal of CRL and the entire tax due on account of disallowance of depreciation has been deposited with the Department. It was thus submitted that the Assessing Officer was not justified in including the recovery of amount towards principal in the taxable income. Accepting this contention of the assessee, the learned CIT(A) deleted the addition of Rs. 61,95,562 made on protective basis by the Assessing Officer. The findings of the learned CIT(A) are as under :

'I have considered the issue. Since the appellant has already accepted the decision of the CIT(A) in the case of CRL, the amount received towards principal amounting to Rs. 61,95,562 cannot be taxed. The interest income on the transaction has already been subjected to tax. Accordingly, the addition of Rs. 61,95,562 is deleted.'

13.4 The learned CIT(A) has made reference to the decision of the Tribunal in the case of M/s Crosslands Research Labs. Ltd. for assessment year 1995-96 dated 9-1-2006 rendered in ITA No. 1479/Mum./1999, a copy of which is available at pp. 44 to 48 of the paper book.

13.5 After going through the entire material on record, we are of the opinion, that the Assessing Officer was not justified in making addition on protective basis as has been done by him. On the other hand, 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."

12. In this view of the situation, respectfully following the aforementioned order, we decline to interfere in the order of CIT(A) on this ground and this ground of Revenue is dismissed.

Ground No. 2 :

13. A new pension scheme was introduced by the assessee with effect from 1-11-1997. According to the said scheme pension was payable to managerial employees who were to retire/resign after completing 10/20 years of service respectively so as to bring the total pension payable to 2.25 per cent of basic salary for every complete year of service. The assessee estimated liability towards that pension fund for the year under consideration at Rs. 4,94,69,267 which was claimed as deductible expenses. The Assessing Officer though accepted that the above liability was computed on actuarial basis but held that absence of contribution of pension amount to any pension trust, the expenditure was not allowable deduction in the light of provisions of section. 43B(b) of the Act and thus, disallowance was made. The CIT(A) has allowed the deduction. Hence, Revenue is in appeal.

14. At the outset it was pleaded by learned Authorised Representative that this issue is covered in favour of assessee by the aforementioned decision of Tribunal in the case of assessee for assessment year 1999-2000 copy of which is placed at pp. 267 to 285 of the paper book in ITA No. 2612/Delhi/2004, dated 31-12-2008. The Tribunal has discussed this issue in paras 25 to 27.

15. On the other hand, learned Departmental Representative relied on the order of Assessing Officer.

16. We have carefully considered the rival submissions. This issue is found to be covered by the aforementioned decision of Tribunal in assessee's own case for assessment year 1999-2000. For the sake of clarity the relevant portion from the said order is reproduced below :

"The next dispute in the Revenue's appeal for assessment year 1999-2000 relates to disallowance of Rs, 1,99,73,822 made by the Assessing Officer by applying the provisions of section 43B(b) on account of provision for pension.

We have heard both the sides and gone through the records. Earlier the assessee was having a superannuation scheme with the LIC wherein the contributions were made at certain percentage of salaries of the employees. The pension payable under the said superannuation scheme was found to be too low and the assessee found it difficult to attract and retain management of employees. A new pension scheme was introduced with effect from 1-11-1997. This pension was applicable to all management employees and was non-funded. In other words, no separate fund was created and the pension was payable to the employees upon their resignation/retirement or to the family members in the event of death of the employee. The assessee got the fresh actuarial valuation. The incremental difference was debited to the P&L a/c. The CIT(A) allowed the provision and held that there can be no question of disallowance under section 43B of the Act.

We have gone through the impugned order and in the light of the fact that there was no contribution of any pension to any fund and the assessee has only provided on the basis of the actuarial valuation, the additional liability. The question of disallowance of same under s. 43B is clearly mispelt. We, therefore, agree with the reasoning given by the CIT(A) and decline to interfere."

17. In this view of the situation, respectfully following the aforementioned order of the Tribunal, we decline to interfere in the findings of learned CIT(A) on this issue and this ground of Revenue is dismissed.

Ground No. 3

18. While computing eligible profit for the purpose of deduction under s. 80-IB in respect of eligible units, the Assessing Officer reduced a sum of Rs. 16,915 received by the assessee as duty drawback. The said adjustment has been deleted by CIT(A). It is the case of assessee that such order of CIT(A) is in accordance with the decision of Hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Eltek Sgs P. Ltd. [2008] 300 ITR 6 (Delhi) and also by the aforementioned decision of Tribunal dated 31-12-2008 for assessment year 1999-2000 and also by the decision of Hon'ble Delhi High Court in assessee's own case for assessment years 1996-97 and 1997-98. Copy of Hon'ble High Court order is placed at pp. 286 and 287 of the paper book which is dated 11-12-2008 in IT Appeal No. 682 of 2007, wherein their Lordships have decided the issue in favour of assessee following their decision in the case of CIT v. Dharam Pal Prem Chand Ltd. in IT Appeal No. 1441 of 2006 decided on 27-11-2008 [reported at (2009) 221 CTR (Del) 133 : [2008] 16 DTR (Del) 130 Ed.].

19. However, learned Departmental Representative relied on the order of Assessing Officer.

20. After hearing both the parties and considering that this issue is covered in favour of assessee by the aforementioned decision of Hon'ble High Court in the case of Eltek SGS (P) Ltd. (supra) and also in assessee's own case by the Tribunal and Hon'ble High Court. Therefore, we decline to interfere in this ground and this ground of the Revenue is dismissed.

Ground No. 4

21. Ground No. 4 - In view of our discussion in this regard in appeal of the assessee, we uphold the disallowance.

Ground Nos. 5, 6 and 7

22. These grounds are in respect of exclusion of certain amounts from total turnover for the purpose of computation of deduction under section 80HHC.

23. So far as it relates to a sum of Rs. 7,65,47,346 which represents excise duty, it was pointed out that this issue is covered in favour of assessee by the decision of Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Coimbatore v. Lakshmi Machine Works [2007] 290 ITR 667 . Therefore, in that respect we find no infirmity in the order of CIT(A) when he has directed the Assessing Officer to exclude above amount of excise duty from total turnover for the purpose of computing deduction under section 80HHC.

24. So far as it relates to other components i.e., taxes recovered, discount on sale, commission on sale and miscellaneous income it was pointed out that this issue is covered in favour of assessee by the aforementioned order of the Tribunal in assessee's own case dated 31-12-2008, copy of which is placed at pp. 267 to 285 of the paper book and reference was made to paras 22 to 24.

25. On the other hand, learned Departmental Representative relied on the order of Assessing Officer.

26. After hearing both the parties we found that this issue is covered in favour of assessee by the aforementioned decision of Tribunal dated 31-12-2008 the relevant portion is reproduced below :

"The next dispute in the Revenue's appeal for assessment year 1999-2000 relates to the direction of the CIT(A) to exclude excise duty, tax recovery, discount on sales and commission on sale and sale of scrap from being a part of total turnover while working out deduction under section 80HHC of the Act. The learned counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Coimbatore v. Lakshmi Machine Works [2007] 210 CTR (SC) 1 : [2007] 290 ITR 667 (SC) and also Commissioner Of Income Tax v. Catapharma (India) (P) Ltd. [2007] 211 CTR (SC) 83 : [2007] 292 ITR 641 (SC) . Further reliance was also placed on the decision of the Tribunal in assessee's own case for assessment year 1996-97.

The learned Departmental Representative was also heard in the matter and we have gone through the records. In our view the numerator and the denominator or a formula must be alike. When the above receipts are not included in the denominator, the same can be included in the numerator. In the light of the decisions of the Hon'ble Supreme Court, cited above, which are on these lines, the order of the CIT(A) is upheld."

27. In view of above position respectfully following the aforementioned order of the Tribunal in assessee's own case, we decline to interfere and these grounds of Revenue are dismissed.

Ground No. 8:

28. During the year under consideration, the assessee contributed a sum of Rs. 20 lacs to Ranbaxy Community Health Care Society, on which deduction @ 50 per cent of contribution was claimed under section 80G of the Act. However, in note No. 4, 100 per cent deduction was claimed as revenue expenditure as according to assessee this deduction was allowable either under section 35 or under section 37(1) of the Act. Learned CIT(A) has allowed such claim of the assessee. The Revenue is aggrieved hence in appeal.

29. Learned Departmental Representative relied on the order of Assessing Officer.

30. On the other hand, it was pointed out by learned Authorised Representative that this issue is covered in favour of assessee by the aforementioned decision of Tribunal dated 31-3-2008 in respect of assessment year 1997-98 and this issue of Tribunal is discussed in paras 6 to 6.16.

31. We have carefully considered the rival submissions in the light of material placed before us. The contribution of Rs. 50 lacs was made by the assessee to Ranbaxy Community Health Care Society in assessment year 1997-98 and the said issue was considered by the Tribunal in paras 6 to 6.16. After discussing the issue in detail, it was held that such contribution was an expenditure incurred by the assessee to bring goodwill to the assessee or for the purpose of promoting its business and is an allowable expenditure. The conclusion of Tribunal is in paras 6.9 to 6.16 and the same is reproduced below for the sake of convenience :

"6.9 On going through the preamble of RSF, available at pp. 71 to 77 of the paper book, it is noticed that the foundation was incorporated in 1985 by Ranbaxy Laboratories Ltd. with the implicit mission of giving impetus to research activity and help in reviving India's great scientific tradition. The foundation instituted Ranbaxy Research Awards to recognize original outstanding contributions in the field of medical and pharmaceutical sciences. Later, Ranbaxy Research Foundation was reconstituted as a separate society and registered under the Societies Act in May, 1994. The list of governing council of Ranbaxy Science Foundation contains various names. The name of Dr. Parvinder Singh, chairman and managing director, Ranbaxy Laboratories Ltd., New Delhi figures on top in the list of members. The memorandum of association of Ranbaxy Community Healthcare Society, available at pp. 86 to 93 of the paper book, lays down the objects of the society. The main objects are to provide primary comprehensive health care and to initiate and provide necessary assistance to any programme for rural development. One of the objects of the society is to establish community based scientific research for control of various endemic diseases. The another object is to organize, convene, conduct, hold and participate in conferences, seminars, workshops and exhibitions, etc. On going through the material placed in the paper book and on examining various activities carried out by the society and the foundation, it is found that these activities are closely linked with the business activities of the assessee company. It appears that the assessee-company is the main source behind these two institutions, which have been created for promotion of its own business and for the larger objective to promote research work and for updating the knowledge in the field of medical science. The assessee-company, therefore, is directly concerned with the activities of these two organizations, although the organizations have a separate entity of their own. It is true that these organizations have been exempted under section 11 or under section 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 eminent journals by the society and the foundation go directly to benefit the research activity of the assessee company, in updating its know-how, etc.
(6) The assessee being engaged in the business of pharmaceutical products, contributions are made for promoting the business interest of the assessee.
(7) The activities of the society and the foundation are carried out under the banner of the assessee society i.e., 'Ranbaxy', which results in earning of goodwill to the assessee-company.
(8) The expenditure is also incurred as part of larger social as well as business responsibility of the assessee company, which is engaged in manufacture of drugs and in sale thereof.

6.10 The issue regarding contribution to various foundations and societies has been considered by various Courts in relation to allowability of deduction of expenditure. In the case of Shri Vijayalakshmi Rice Mill Contractors Co. v. Commissioner Of Income-Tax. [1997] 137 CTR (SC) 267 : [1997] 223 ITR 101 (SC) , the assessee claimed deduction of the amount paid by it to Andhra Pradesh Welfare Fund as a business expenditure under section 37(1) of the Income-tax Act. The case of the assessee was that it was carrying on business of exporting rice from the State of Andhra Pradesh and for this purpose, a permit was granted by the Collector who gave permits only if payment was made to a welfare fund. The ITO disallowed the deduction by holding that the payment was neither mandatory nor statutory, but was only discretionary. The CIT(A) also disallowed the claim of the assessee. The Special Bench of the Tribunal came to the conclusion that though there was no compulsion on the assessee to make contribution but still the contribution was made in pursuance of a scheme which was evolved by the Rice Millers' Association in consultation with the District Collector and therefore the deduction was allowable under section 37(1) of the Act. The Tribunal also held that such contribution could not be held to be opposed to public policy. The Department filed reference application under section 256. The Hon'ble High Court answered the questions referred in favour of the assessee. The Hon'ble High Court, however, disallowed deduction by coming to the conclusion that the payment of this amount was opposed to public policy. The Hon'ble Supreme Court, after making reference to various decisions, allowed the claim of the assessee by observing as under :

'From the aforesaid discussion 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 section 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 section 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. v. CIT [1987] 61 CTR (Kar) 265 : [1987] 166 ITR 836 (Kar) , the assessee started school for education of children of its employees for attracting technocrat and men of managerial skill to its industry. Donations made by it to the school were claimed as business expenditure under section 37(1). The Tribunal disallowed the deduction on the ground that the expenditure was not incurred wholly and exclusively for the purpose of the business of the assessee. The Hon'ble High Court did not approve the approach of the Tribunal and allowed the claim of the assessee by observing as under :

'Held, (i) that the words 'for the purpose of the business' used in section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency might require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as a deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is an expenditure allowable as deduction under the Act

(ii)That the word 'expenditure' primarily denoted the idea of spending or paying out or away. It was something which was gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future.

(iii)That the reasons given by the Tribunal for rejecting the claim of the assessee were not sound. Moreover, since the Tribunal had not recorded a finding as to whether the donation made by the assessee to the trust could be considered as 'expenditure', the matter had to be remanded to the Tribunal for decision afresh in the light of the observations contained in the judgment.'

6.12 In the case of Mahindra & Mahindra Ltd. v. CIT [2003] 182 CTR (Bom.) 34 : [2003] 261 ITR 501 (Bom.) , the Hon'ble Bombay High Court allowed deduction of expenditure incurred by the assessee in making initial contribution to the approved superannuation fund to an educational society, which was running a school for children of employees, as business expenditure under section 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 Ltd. (supra) was further followed by the Hon'ble Bombay High Court in the case of CIT v. Mahindra & Mahindra Ltd. [2006] 200 CTR (Bom.) 28 : [2006] 284 ITR 679 (Bom.) .

6.14 In the case of CIT v. Chemicals & Plastics India Ltd. [2007] 292 ITR 115 (Mad.) , 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 Assessing Officer 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 or otherwise, it was deductible.

6.15 The issue was also considered by Bombay Bench of the Tribunal in the case of Hindustan Petroleum Corporation Ltd. v. Dy. CIT [2005] 92 TTJ (Mumbai) 168 : [2005] 96 ITD 186 (Mumbai) . In that case the assessee company incurred certain expenditure towards implementation of 20 point programme. This expenditure was incurred to improve the conditions of SC/ST in pursuance of national policies and to help acceleration of all-round development of villages by providing assistance to educated unemployed to earn a living. The Assessing Officer held that since the item of expenditure was an item of donation, it could not be allowed. The CIT(A) upheld the order of the Assessing Officer by holding that the expenditure incurred did not have any direct connection with the business of the assessee because the beneficiaries of the expenditure were not employees of the assessee nor the assessee had any statutory obligation to incur such obligation. On second appeal, by making reference to various authorities including the decision of Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT (supra), the Tribunal upheld the claim of the assessee. We consider it proper to reproduce the relevant findings of the Tribunal which are as under :

'It had been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987] 61 CTR (Kar.) 265 : [1987] 166 1TR 836 (Kar.) : [1987] 30 Taxman 467 (Kar.) , that while the basic requirements for invoking sections 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the CIT(A), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court had observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material 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 section 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 all-around 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 the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.' (para 9)

Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. Therefore, the authorities below indeed erred in law in declining deduction of the expenditure incurred on 20-point programme which was, beyond dispute or controversy, at the instance of the Government and was to discharge the assessee's obligations towards society as a responsible corporate citizen. (para 10)

6.16 In view of the above authorities, it is clear that even if there is no statutory obligation on the part of the assessee to incur the expenditure, but the expenditure has been incurred to bring goodwill to the assessee or is for the purpose of promoting its business then such expenditure is to be allowed as business expenditure. In view of the above, we uphold the claim of the assessee and allow ground No. 5."

32. In this view of the situation, as the abovementioned order of the Tribunal is regarding contribution to the same institution, respectfully following the above order we find no infirmity in the order of CIT(A) vide which it has been held that assessee is entitled to claim the said contribution as an expenditure. We decline to interfere and this ground of revenue is dismissed.

Ground No. 9:

33. The assessee carries on in—house R&D activities related to its business at the facilities approved by the Department of Science and Industrial Research under section 35(2AB) of the Act. Capital expenditure on assets provided to the employees working at such approved R&D facilities aggregating to Rs. 1,32,64,258 were considered for 100 per cent deduction under section 35(2) (ia). In note No. 10 filed along with return weighted deduction @ 150 per cent was claimed thereby additional 50 per cent was claimed which was disallowed by the Assessing Officer and allowed by CIT(A). Department is aggrieved, hence in appeal.

34. Learned Departmental Representative relied on the order of Assessing Officer.

35. On the other hand, it was submitted by learned Authorised Representative that this issue is covered in favour of assessee by the aforementioned decision of Tribunal dated 31-12-2008 for assessment year 1999-2000, the copy of which is placed at pp. 267 to 285 of the paper book and this issue is discussed in paras 9 and 12. Thus, it was pleaded that order of CIT(A) should be upheld.

36. We have carefully considered the rival submissions. We found that this issue is covered by aforementioned decision of Tribunal for assessment year 1999-2000 in assessee's own case. The relevant portion of order is reproduced below :

"The next dispute in assessee's appeal for assessment year 1999-2000 relates to the claim of weighted deduction under section 35(2AB) on the capital expenditure incurred by the assessee in respect of in-house R&D Center which is duly approved by the Government of India.

The assessee is a pharmaceutical company and regularly carries on in-house research and development activity relating to its business at the facilities approved by the Department of Science and Industrial Research, Government of India, under section 35(2AB) of the Act. In the computation of the total income, the assessee claimed the entire expenditure, both of revenue and capital, as a deduction under the aforesaid section. The Department accepted and allowed it as business expenditure. The assessee has relied on the following authorities in support of its claim for weighted deduction in respect of these expenses :

(1) CIT v. Smith Kline & French (India) Ltd. [1994] 77 Taxman 153 (Kar.);
(2) Vijay Seeds Co. (P.) Ltd. v. Asstt. CIT [2002] 74 TTJ (Pune) 120 : [2001] 79 ITD 233 (Pune);
(3) Claris Lifesciences Ltd. v. Asstt. CIT [2007] 111 TTJ (Ahd.) 902 : [2008] 112 ITD 307 (Ahd.);
(4) SmithKline Beecham Consumer Healthcare Ltd. v. IAC (ITA No. 1089/Chd./1987; assessment year 1983-84).

The learned Departmental Representative, on the other hand, vehemently supported the impugned order.

We have gone through the records. The expenditure has been incurred by the assessee on vehicles, computers and other assets, provided to its employees working at the approved research facilities and directly engaged in the research and development activities. The Assessing Officer, it may be pointed out, did not accept the claim of the assessee in respect of weighted deduction, without any discussion in his order. There is no dispute that the expenditure in question was incurred by the assessee in respect of R&D facilities which have been duly approved by the prescribed authority under section 35(2AB). Therefore, the assessee is clearly entitled for weighted deduction. It was also reported to us at the time of hearing that the CIT(A) directed weighted deduction under section 35(2AB) while dealing with the claim of the assessee for assessment year 2001-02 in respect of similar expenses. There is no reason to deny the same in the year in question. Accordingly, we direct the Assessing Officer to allow the weighted deduction in respect of these expenses under section 35(2AB) of the Act."

Ground No. 10 :

37. So far as it relates to ground No. 10 of the revenue, it is the contention of learned Authorised Representative that in this ground revenue has merely challenged that the directions of learned CIT(A) to recompute deduction allowable under section 80HHC of the Act in view of relief allowed in earlier grounds and thus, it was pointed out that this ground of appeal is merely consequential to the decision in other grounds.

38. We find that the amount of deduction allowable under section 80HHC disallowed was an issue in computation of income under the regular provision of the Act. The learned CIT(A) has considered the effect of various adjustments made by the Assessing Officer in computing deduction under section 80HHC of the Act. Therefore, even for the purpose of computing book profit deduction allowable under section 80HHC to be reduced from book profit was also required to be reworked. Hence the direction of the learned CIT(A) does not call for any interference.

38.1 In the result, the appeal for the assessee for assessment year 2002-03 is dismissed and that of the Revenue is partly allowed.

ITA No. 3387/Del/2004 :

39. Ground No. 1 : It is similar to ground No. 1 of assessee's appeal in ITA No. 1855/Del/2004. The said ground of assessee has been dismissed. Accordingly this ground being similar to that ground, for the reasons mentioned there, this ground is also dismissed.

Ground No. 2 :

40. This ground relates to disallowance of ESOP expenses. The facts are identical as discussed in cross-appeals by the assessee and by the revenue for the assessment year 2002-03. In view of our discussion above, while disposing of the cross-appeals for assessment year 2002-03, we uphold the disallowance.

ITA No. 3871/Del/2004 :

41. Ground No. 1 : It is similar to ground No. 2 in ITA No. 2613/Del/2004 which is decided in favour of assessee and against the revenue. For the same reasons, for the present year this ground is decided in favour of assessee and this ground of revenue is dismissed.

Ground No. 2 :

42. This ground is similar to ground No. 3 in ITA No. 2613/Delhi/2004 and the said ground of revenue was dismissed. For the same reasons, this ground of revenue is dismissed.

Ground No. 3 :

43. This ground is similar to the ground of appeal by revenue in its appeal for assessment year 2002-03. For the detailed reasons stated therein, we uphold the disallowance, as made by the Assessing Officer.

Ground Nos. 4, 5 and 6 :

44. These grounds are similar to ground Nos. 5, 6 and 7 in ITA No. 2613/Delhi/2004 which have been decided above and these grounds are decided in favour of assessee. For the same reasons, these grounds of the revenue are dismissed.

Ground No. 7:

45. This ground is similar to ground No. 8 in ITA No. 2613/Delhi/2004. For the same reasons, this ground of the revenue is dismissed.

Ground No. 8:

46. This ground is similar to ground No. 9 in ITA No. 2613/Delhi/2004 For the reasons, recorded therein, this ground of revenue is dismissed.

Ground No. 9:

47. This ground is similar to ground No. 10 in ITA No. 2613/Delhi/2004. In view of our finding in appeal of revenue for assessment year 2002-03, we do not wish to interfere in the direction of the learned CIT(A).

Ground No. 10:

48. A show-cause notice was issued to the assessee by the National Pharmaceutical Pricing Authority (NPPA), dated 29-4-2002 to show cause that why overcharged price in respect of drug known as Pantojosign Injection amounting to Rs. 2,59,76,070 from November, 1999 onwards should not be recovered as per para 13 of DPCO, 1996. Copy of show-cause notice is placed at p. 215 of the paper book. The assessee submitted reply to that show-cause notice vide letter dated 3-6-2002 denying its liability for payment of such amount, copy of which is placed at pp. 216 to 218 of the paper book. However, vide letter dated 13-2-2003, demand against assessee was raised for a sum of Rs. 2,59,76,070 which was payable along with interest @ 15 per cent under section 7A Essential Commodities Act, 1955 latest by 28-2-2003. The assessee filed a writ petition to Hon'ble High Court and vide order dated 28-2-2003, the assessee was required to deposit a sum of Rs. 1 crore within a week from the date of the order and balance demand was stayed, copy of said order is placed at pp. 220 to 221 of the paper book. Accordingly, a payment of Rs. 1 crore was made vide City Bank cheque, a copy of which is placed at p. 222 of the paper book. The assessee claimed the said amount of Rs. 2,59,76,070 on account of demand raised by NPPA. The claim of assessee has been disallowed by the Assessing Officer as per para 5.8. The Assessing Officer observed that the said claim of the assessee could not be allowed for the reason that assessee company has not accepted the said demand as a liability as appeal has been filed before Hon'ble Delhi High Court. Thus, according to Assessing Officer assessee could not establish that the expenditure was incurred during the previous year relevant to assessment year 2003-04 and hence disallowance was made. It is the case of assessee that liability of Rs. 2,59,76,070 was crystallized and quantified during the relevant year and thus, it is allowable as a deduction under section 37 read with sections 28 and 29 of the Act. Reliance was placed by the assessee on the decision of Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. case (supra); Calcutta Co. Ltd. case (supra) and Bharat Earth Movers case (supra). Learned CIT(A) has discussed this issue in para 10. The submissions made before Assessing Officer were reiterated before CIT(A). Learned CIT(A) has observed that on issue of demand notice under provision of para 13 of DPCO, a liability had accrued and crystallized on the assessee company. Learned CIT(A) referred to the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 in which it was held that deduction would be allowable in the year of creation of demand and the fact that the assessee has taken proceedings before the higher authorities for getting the demand reduced or wiped out did not affect the assessee's right to claim the deduction during the year. He observed that the said decision was consistently followed by various Courts including Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Orissa v. Kalinga Tubes Ltd. [1996] 218 ITR 164 (SC) . In this manner, learned CIT(A) has allowed the deduction. The revenue is aggrieved, hence in appeal.

49. Learned Departmental Representative relied on the order of Assessing Officer.

50. On the other hand, after pointing out the factual aspect as well as documents relating to the issue which have been mentioned in the above part of this order, it was submitted by learned Authorised Representative that the decision of CIT(A) is in accordance with law. He referred to the following decisions to contend that the statutory liability arises/crystallized immediately on receipt of demand notice and the mere fact that the appeal was filed against the demand notice does not effect the accrual of such liability :

- CIT v. Bharat Carbon & Ribbon Mfg. Co. (P.) Ltd. [1999] 239 ITR 505 (SC) ;

- Kalinga Tubes Ltd. case (supra);

- Kedarnath Jute Mfg. Co. Ltd.'s case (supra);

- Commissioner Of Income-Tax v. Jamnadass Ram Krishan [2001] 250 ITR 155 (Delhi) ;

- Commissioner Of Income-Tax v. Ganga Glass Works (P.) Ltd. [2005] 276 ITR 394 (All.) ;

- Commissioner Of Income-Tax v. Appollo Textiles Agency [2005] 142 Taxman 396 (All.) .

51. We have carefully considered the rival submissions in the light of material placed before us. It is not disputed that demand was raised against the assessee by NPPA. The said demand was also enforced but assessee approached Hon'ble High Court and part payment was also made during the year to fulfill the directions of Hon'ble High Court. Thus, the demand had not only arisen during the year but it was a quantified and crystallized demand enforceable in law. Thus, it was a statutory liability which was to be paid by the assessee within the stipulated time saved if otherwise directed by higher Court. Disputing the payment of liability by way of an appeal does not make disentitle the assessee to claim that demand as an expenditure as what is sought by the assessee who is disputing the liability is a relief from higher Court. Suppose if higher Court gives some relief to the assessee and deduction is already granted to the assessee in a particular year, section 41(1) is there to take care of the relief got by the assessee by way of an appellate order. Thus, there is no loss to the revenue when deduction with respect to statutory liability which has arisen and crystallized during the year is allowed.

52. In view of above discussion, we find no infirmity in the order of CIT(A) vide which he has held that such liability being arisen and crystallized during the year should have been allowed to the assessee. The case law relied upon by learned CIT(A) and by learned Authorised Representative duly support such claim.

53. In view of our discussion, this ground of revenue is dismissed.

54. In the result, the appeal of the assessee for assessment year 2002-03 is dismissed and other appeals are partly allowed.