M/S Yeturu Bio Tech Ltd.,, Hyderabad vs Assessee

ITA Nos.660-664 661 662 and 665 of 2014 Y.Ramachandra Reddy & Others Hyd

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad 'B' Bench, Hyderabad

Before Shri P.M. Jagtap, Accountant Member and Smt.Asha Vijayaraghavan, Judicial Member

ITA No.660/Hyd/2014 (Assessment year: 2008-09) Shri Yeturu Ramachandra Vs. Dy. Commissioner of Reddy Income Tax Circle 3(3) Hyderabad Hyderabad PAN: AAEPY 9574 F (Appellant) (Respondent) ITA No.664/Hyd/2014 (A.Y. 2008-09) Dy. Commissioner of Income Vs. Shri Yeturu Ramachandra Tax Circle 3(3) Reddy Hyderabad Hyderabad PAN: AAEPY 9574 F (Appellant) (Respondent) ITA No.661/Hyd/2014 (A.Y 2009-10) Shri Yeturu Sirish Reddy Vs. Dy. Commissioner of Hyderabad Income Tax Circle 3(3) PAN: AAEPY 8629 Q Hyderabad (Appellant) (Respondent) ITA No.662/Hyd/2014 (A.Y 2009-10) M/s. Yeturu Biotech Ltd Vs. Dy. Commissioner of Hyderabad Income Tax Circle 3(3) PAN: AAACY 0850 F Hyderabad (Appellant) (Respondent) ITA No.665/Hyd/2014 (A.Y 2009-10) Dy. Commissioner of Income Vs. M/s. Yeturu Biotech Ltd Tax Circle 3(3) Hyderabad Hyderabad PAN: AAACY 0850 F (Appellant) (Respondent)

Assessee by: Shri A.V.Raghuram, Advocate Department by: Shri Rajat Mitra, (DR)

Date of Hearing: 07/01/2015 Date of Pronouncement: 28/01/2015

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ORDER

Per Bench:

These are the cross appeals by the assessee and the Revenue against the orders of the CIT (A) IV Hyderabad dated 13th January, 2011, 25th November, 2011 and 27th January, 2012 relating to A.Ys 2008-09 and 2009-10.

ITA No.660/Hyd/2014 - A.Y 2008-09 2. The facts relating to this appeal are that the assessee Shri Yeturu Ramachandra Reddy, is the Managing Director of M/s. Yeturu Constructions Ltd, engaged in the business of civil construction. He filed his return of income admitting a total income of Rs.38,98,290/- and agricultural income of Rs.17,93,430/-. AO disallowed loss from business of Rs.9,09,957/- and brought a sum of Rs.3,51,443/- credited to the assessee's P&L a/c to tax. AO also assessed the agricultural income of Rs.17,93,430/- as income from other sources, thus the total income was assessed at Rs.69,53,120/-. Aggrieved the assessee preferred appeal before the ld CIT (A). Assessee claimed to have carried on agricultural operations on 33 acres at Survey Nos. 6 & 11 of Kothwalguda Village of Shamshabad Mandal under Ranga Reddy District for cultivation of Aloe leaf. The leaves were sold to Yeturu Biotech Ltd in which the assessee was a Director. The assessee claimed that he had realized a sum of Rs.15,62,030/- from the sale of Alovera and incurred an expenditure of Rs.4,09,504/- resulting in surplus of Rs.11,52,526/- claimed to be exempt as agricultural income. As far as the consideration from the sale of Alovera leaves amounting to Rs.15,62,030/- is concerned, the CIT (A) accepted

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that the consideration has been received through verifiable sources and accepted the same. However, at Para 7.8 to 7.10, the CIT (A) held as follows:

"7.8 The appellant has claimed to have derived an income of Rs.17,93,430 from the gross agricultural receipts of Rs.19,72,586/-. Apart from the appellant, YBL has made purchases from three other members of the appellants family, namely Y. Ramachandra Reddy, Y. Hema Reddy and K. Sandhya Reddy. The details of agricultural income of these four persons for A.Y 2009- 10 is as follows:

Name (S/Sri) Receipts Expenses Income Y.Sirish Reddy 32,74,656 7,13,000 25,61,656 (78%) K.Sandhya Reddy 6,75,310 5,23,123 1,52,187(23%) Y.Ramachandra Reddy 15,62,030 4,09,504 11,52,526(74%) Y.Hema Reddy 26,88,481 3,78,081 23,10,400(86%)

7.9 As can be seen above, the agricultural income of the four persons, all members of the same family, all engaged in cultivation of an identical crop in the same area, varies from 74% of the gross receipts in case of Y. Ramachandra Reddy to 23% in the case of K. Sandhya Reddy. The appellant has declared even higher agricultural income during the current year at 91% of the gross receipts. The AR has been unable to explain why there is such wide difference in the income as a percentage of the agricultural receipts and why the net income declared by K. Sandhya Reddy should not be taken to be the correct state of affairs. 7.10 The AO is therefore, directed to estimate the income at 25% (comparable to the income disclosed by K. Sandhya Reddy) of the sale proceeds of Rs.19,72,586/- at Rs.4,93,147 and to assessee the balance sum of Rs.13,00,283 as income from other sources".

3. Aggrieved by the above order, the assessee is in appeal before us. The ld Counsel for the assessee Shri

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A.V.Raghuram pointed out that the CIT (A) has compared the agricultural income declared by Smt. K. Sandhya Reddy incorrectly in as much as the appeal of Smt. K. Sandhya Reddy was not pending before the CIT (A) and also it was never put before the assessee to give his comments while debiting the agricultural income taking as comparable Sandhya Reddy's return of income. The ld AR gave a note wherein he brought to our notice some of the reasons for less percentage of agricultural income in the case of Smt. Sandhya Reddy:

(a) The nature of land is different from others. The land is located on a hill lock and there are rocks and boulders.

(b) The lands of Sandhya Reddy are located far away on account of which the costs incurred for supervision and labour are on high

(c) Others have started the agricultural activity in 2004.

The lands are located at one place and other had the advantage of common supervision on account of which expenditure is low.

(d) Sandhya Reddy has not cultivated full extent of land in the A.Y 2009-10 as it was not conducive

(e) Sandhya Reddy had stopped cultivating land post 2011 as it was not conducive.

3.1 It is obvious that the comparable facts have not been taken into consideration by the CIT (A) or the AO. In these circumstances, we deem it fit to send back the issue to the file of the AO, who shall examine the agricultural income realized by

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the family members and also carry out the exercise of determining agricultural income of the assessee. The assessee may be given reasonable opportunity to establish his case that agricultural income declared by Smt. K. Sandhya Reddy is not comparable to that of the assessee. Thereafter the AO shall decide the issue in accordance with law.

4. With respect to addition of income relating to building owners association, amounting to Rs.3,51,443/-, the family members of Yeturu Ramachandra Reddy are owners of a five storied building known as "Yeturu Towers". The P&L a/c of the assessee showed two items i.e. interest income (Rs.1,38,042) and other income (Rs.3,51,443) whereas the appellant admitted only the sum of Rs.1,38,042 in his return. The assessee submitted that the other income of Rs.3,51,443 related to the owner's association of Yeturu Towers and therefore, did not form part of his income. The AO held that the assessee had failed to explain why the amount had been included in his P&L a/c if that was so and brought it to tax.

4.1 In the course of the appellate proceedings, the AR submitted that there were several items of expenditure debited to the P&L a/c which had similarly not been claimed by the assessee and submitted a breakup of items pertaining to the owners association.

4.2 The ld CIT (A) perused the details submitted by the AR and observed that merely because the assessee may not have

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claimed several amounts debited to the P&L a/c, it does not follow that the income credited to the appellant's P&L a/c should not be brought to tax. The CIT (A) held that the AR has not brought any evidence to show that this sum pertained to the Owners Association as claimed. Thus, the addition made by the AO was upheld.

4.3 Aggrieved, the assessee is in appeal before us on this issue and the ld Counsel Shri A.V. Raghuram pointed out page No.22 of the paper book, wherein certain incomes as well as expenses were not claimed as it belonged to the building. It was submitted that the maintenance charges were received by Shri Ramachandra Reddy from the other 3 members of his family. The ld Counsel pointed out to page No.14 of the paper book where the assessee in his reply to the Dy. Commissioner by letter dated 16.12.2010. Para No.2 of the letter is reproduced below:

"2. The AO enquired as to why interest income of Rs.1,38,042/- being interest income and Rs.3,51,443/- being other income reflected in the consolidated P&L a/c is not admitted in the computation. In this regard I submit that Rs.1,38,042 is admitted under other sources as income. Whereas the income of Rs.3,51,443 shown in consolidated P&L a/c does not relate to me. It relate to the owners association of Yeturu Towers. This income represents maintenance charges collected from the tenants from which expenditure is incurred. The AO could see the administrative expenses in Schedule C wherein except Rs.76,652/- and Rs.9,13,170/- all other items of expenses relate to the maintenance expenses. Neither the expenses are considered for computation nor the receipt is considered since it does not belong to me though shown in the P&L a/c".

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4.4 After a careful consideration of the issue, we are of the opinion that the sum of Rs.3,51,443/- relates to the Owners Association of "Yeturu Towers" and therefore, does not form part of income of Shri Rama Chandra Reddy. Hence, this appeal of the assessee is allowed on this issue.

4.5 In the result assessee's appeal in ITA No.660/Hyd/2014 is partly allowed.

ITA No.664/Hyd/2009 - A.Y 2008-09 - Revenue's Appeal 5. With respect to the Departmental appeal, the Revenue has raised the following grounds in ITA No.664/Hyd/2009:

(1) The ld CIT (A) erred in law and on facts of the case (2) The Hon'ble CIT (A) ought to have appreciated the fact that the assessee has not been doing any business for the past few years but claiming administrative expenditure.

(3) The Hon'ble CIT (A) ought to have appreciated the fact that the assessee had advanced huge loans to different parties without showing the receipt of interest and is a clear evidence that the assessee is enjoying the funds from this proprietary concern in the disguise of business loss.

6. The main issue in the above grounds relates to disallowance of business loss of Rs.9,09,957/- on the ground that the assessee was not carrying on any business. The assessee submitted before the AO that he was a civil contractor having several pending cases of claims receivables, that he had to incur expenses for recovery of the dues from these projects

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and that since these were part of his business activities, the expenses were allowable whether or not there were any receipts during the year.

6.1 The AO did not accept this plea and held that since there were no business activities during the year, the expenses were not allowable.

6.2 During the course of the assessment proceedings the AR reiterated the submissions made before the AO.

6.3 The ld CIT (A) held that mere fact that there is no civil construction work carried on by the assessee or that there are no revenues during the year cannot be a reason for the view that there was no business activity carried on. As explained by the AR, the assessee had to incur legal and other expenses for recovery of business dues which is a necessary part of any business activity. Hence, the CIT (A) allowed the expenditure of Rs.9,09,057.

7. Aggrieved, the Revenue is in appeal before us. We have heard both the parties. In the assessment order at Para 3 the AO has mentioned as follows:

"3. As seen from the P&L a/c of the assessee's business concern, it is observed that the assessee has not done any contract work during the year under consideration. However, he has claimed loss of Rs.9,09,657. An amount of Rs.15,09,657 has been debited to P&L a/c including an amount of Rs.6,00,000 towards income tax. After adding the

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Income tax, the loss has been arrived at Rs.9,09,657/- , expenses to the tune of Rs.15,09,657 (as per books). The expenditure includes depreciation, financial charges and administrative expenses. The assessee has been asked to state as to why the expenditure should not be disallowed as there was no business during the year".

7.1 Vide his reply dated 10.11.2010 the assessee has submitted as under:

"The AO also directed me to explain as to why the professional charges and legal expenses, salaries, administrative expenses etc., should be allowed when there is no income/revenue receipt. In this regard it is to submit that the assessee is a civil contractor having several cases of claims receivable. Cases are pending. The cases of Singur Project suit filed in 2002, award cheque received in the year 2006-07. Therefore, in the same manner, I have to spend professional and legal expenses every year, until all such cases are decided. I have to keep alive the business activity whether I do business or not. Therefore, these expenses towards professional and legal charges are allowable. Further , when the amounts are realized, it is assessable as business income and there is no provision to allow these expenses when you assess the income when it is received. A detailed statement of court cases/arbitration cases is herewith enclosed".

7.2 The AO has given a finding that the assessee has not carried out any business activity during the year under consideration and the assessee did not offer any income from arbitration award during the year under consideration and hence he disallowed the total expenditure debited to P&L a/c and added back to the income returned.

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7.3 We are of the opinion that while expenditure can be allowed only for business which is carried on during the year, it cannot be disallowed merely because there is no production during the year, but business itself has not been closed as held in CIT vs. Udaipur Mineral Development Syndicate Pvt. Ltd (269 ITR 263 (Raj.). Litigation cost to defend one's right has been held to be admissible as business expenditure. It has been discussed in landmark cases as follows:

"Merely because there are certain allegations and the State Govt. has constituted an enquiry into such allegations, the expenditure incurred by the company in engaging an advocate to assist the Commission appointed for this purpose for ascertaining the facts cannot be disallowed. Such expenditure is necessary for protecting or safeguarding the image of the company, which has necessarily to be preserved for the purpose of its business. It was so decided after review of many precedents on deductible expenditure in Gujarat Agro Oil Enterprises Ltd v. CIT (2002) (256 ITR 230 (Guj.) following the decision in CIT v. H. Hirjee (1953) (23 ITR 427 (SC). Incidentally, in Hirjee's case decided by a Bench of three Judges, the Supreme Court also held that such expenditure would be allowable in view of its impact on the profits of the assessee and that the deductibility of the expenditure does not depend upon final outcome of the proceedings, which may take some years before such proceedings are brought to finality".

7.4 Hence professional charges and legal charges are to be considered allowable. Therefore, we remit the issue to the file of the AO to go through the expenditure claimed by the assessee in the P&L account and determine the allowability of the same in light of the above mentioned decisions.

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7.5 In Ground No.3, the Department has merely stated that the CIT (A) ought to have appreciated the fact that the assessee had advanced huge loans to different parties without showing the receipt of interest and is a clear evidence that the assessee is enjoying the funds from this proprietory concern in the disguise of business loss. We find that neither the AO nor the CIT (A) has discussed the above issue and hence we dismiss this ground raised by the Revenue as not arising from the order of the AO.

ITA No.661/Hyd/2014 - A.Y 2009-10 Shri Yeturu Sirish Reddy

8. The facts in this case are identical to that in ITA No.660/Hyd/2014 in the case of Sri Yeturu Ramachandra Reddy. We have decided the same and concluded at Para 3.1 of this order. Hence the same conclusion is to be followed in the present appeal also.

ITA No.662/Hyd/2014 & ITA No.665/Hyd/2014: A.Y 2009- 10 9. These are the cross appeals filed by M/s Yeturu Biotech Ltd and the Revenue. The only ground in the assessee's appeal is with respect to disallowance of deduction u/s 35D of preliminary expenses of Rs.14,16,916/-. The assessee had debited the following expenses as preoperative expense and claimed the sum of Rs.15,86,349 as deduction u/s 35D:

a) ROC Registration charges Rs. 11,794 b) Raw materials - R&D purpose Rs.26,15,129 c) Lab expenses - R&D purpose Rs.19,27,522 d) Professional charges-R&D Purpose Rs.6,70,305 e) Salaries and wages Rs.4,15,154 f) Market survey expenses Rs.3,23,329

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ITA Nos.660-664 661 662 and 665 of 2014 Y.Ramachandra Reddy & Others Hyd

g) Transport charges Rs.1,57,639

h) Rent & rates and taxes Rs.8,38,194

i) Other expenses Rs.9,72,679 TOTAL Rs.79,31,745

9.1 The AO allowed deduction on ROC Registration charges of Rs.11,794 and market survey expenses of Rs.1,57,639 and disallowed Rs.14,16,916. During the course of appellate proceedings, the AR has submitted that it was operating an R&D wing and had claimed only 5% of such expenditure.

9.2 The CIT (A) considered the facts on record and the submissions of the AR. The CIT (A) observed that the AO has held the market survey expenses as eligible u/s 35D. However, the AO has erroneously adopted the expenses incurred on market survey as Rs.1,57,639/- as against the correct figure of Rs.3,23,329/-. The CIT (A) therefore, directed the AO to allow a sum of Rs.67,025 u/s 35D (1/5th of Rs.3,35,123). However, with regard to the other expenses the CIT (A) held that section 35D is not applicable to R&D expenses as admittedly incurred by the assessee. The disallowance of the balance sum of Rs.15,19,324 was therefore, upheld by the CIT (A) and the ground was partly allowed.

10. We have gone through the order of the CIT (A) and we are of the opinion that the CIT (A) has rightly held that the market survey expenses are to be allowed at 1/5th of Rs.3,35,123/-being Rs.67,025/- while other expenses are not

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applicable to R&D expenses and eligible for deduction u/s 35D. We find no infirmity in the order of the CIT (A) and therefore, we confirm the same.

11. In the result assessee's appeal in ITA No.662/Hyd/23014 is dismissed.

12. With respect to the Departmental appeal in ITA No.665/Hyd/2014, the grounds raised by the Revenue are as follows:

"1. Ld CIT (A) erred in law and on facts of the case.

2. The Hon'ble CIT (A) ought to have appreciated the fact that the purchases of Aloevera leaves made by the assessee are from related parties i.e. the Directors and their relatives only.

3. The Hon'ble CIT (A) ought to have appreciated the fact that the burden of proof with respect to the transactions of the assessee entered into with the related parties vests with the assessee.

4. The Hon'ble CIT (A) ought to have appreciated that the real intention of the assessee behind the purchase transactions is to inflate the purchases and to transfer the profits to its Directors which will be an exempted income in their hands as it being agricultural income.

13. The only issue is with respect to the disallowance on purchase cost out of total cost of Rs.80,48,717. The facts relates to the disallowance of Rs.29,30,763. The assessee had made purchases of its main raw material, aloevera leaves from related parties for a sum of Rs.80,48,717. AO held that the assessee had

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not furnished any details or proof to establish that the transaction was at fair market value and therefore, restricted the purchase cost to the extent of loss, disallowing a sum of Rs.29,30,763.

13.1 In the course of the appellate proceedings, the AR submitted that the AO had not brought on record any comparable case to show that the purchases were made at an unreasonable value, that aloevera leaves were not generally available for sale in the market and only the juice was sold and that it had entered into an agreement with the suppliers for continuous supply and that the disallowance was not called for.

13.2 The ld CIT (A) agreed with the AR that the AO was obliged to bring on record information or evidence to establish that the purchase of aloevera leaves from related parties was at an unreasonable rate and was above the market price. In the absence of any such information or evidence, the CIT (A) directed that the disallowance is to be deleted.

14. Aggrieved, the Department is in appeal before us. As rightly held by the CIT (A) onus is on the Department to establish that the purchase of aloevera leaves by Yeturu Biotech Ltd from related parties was at unreasonable rate which was much more than the market price. But this has not been satisfactorily discharged by the Department by adducing any evidence or material supporting the statement that the rates are

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unreasonable. Hence we confirm the order of the CIT (A) and dismiss the Revenue's appeal on this issue.

15. In the result, ITA No.665/Hyd/2014 filed by the Revenue is dismissed.

16. To sum up, appeals in ITA No.660 and 661 are partly allowed, ITA No.664 is partly allowed for statistical purposes while appeals in ITA Nos. 662 and 665 are dismissed.

Order pronounced in the Open Court on 28th January, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member Hyderabad, dated 28th January, 2015.

Vnodan/sps Copy to:

1. Shri K.V.Santikumar & A.V. Raghuram, Advocates, 610 6th Floor, Babukhan Estate, Basheerbagh, Hyderabad 01

2. The Dy. Commissioner of Income Tax Circle 3(3) Hyderabad

3. The CIT(A) - IV Hyderabad

4. The CIT Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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