Piramal Healthcare Limited(Successor ... vs Assessee

BEFORE S/SHRI N. K. BILLAIYA, (AM) AND AMIT SHUKLA, (JM) सव ी एन. के. बलै या, लेखा सद य, एवं अ मत शु ला, या यक सद यके सम

आयकर अपील सं./I.T.A. No.3213/Mum/2009 ( नधा!रण वष! / Assessment Year 2005-06)

Asstt. Commissioner of Income बनाम/ Boots Piramal Health Care Ltd Tax, (now known as M/s Nicholas Vs. Cir. 6(1), Piramal Consumer Products Room No.506, 5th floor, Pvt.Ltd) Penisula Corporate Park, Aayakar Bhavan, Nicholas Piramal Tower, M K Marg, Mumbai-400020 Ganpatrao Kadam Marg, Lower Parel, Mumbai-400013 (अपीलाथ% /Appellant) .. (&'यथ% / Respondent)

आयकर अपील सं./I.T.A. No.2714/Mum/2009 ( नधा!रण वष! / Assessment Year 2005-06)

Piramal Health Care Ltd बनाम/ The Addl. Commissioner of (successor in the business of Income Tax, Cir. 6(1), Vs. Boots Piramal Healthcare Mumbai.

Pvt.Ltd), Nicholas Piramal Tower, Ganpatrao Kadam Marg, Lower Parel, Mumbai-400013 (अपीलाथ% /Appellant) .. (&'यथ% / Respondent)

आयकर अपील सं./I.T.A. No.4129/Mum/2008 ( नधा!रण वष! / Assessment Year 2004-05)

Boots Piramal Health Care Ltd बनाम/ Income Tax Officer 6(1)(2), (Now merged with Piramal Mumbai-400020 Vs. Healthcare Ltd., Nicholas Piramal Tower, Ganpatrao Kadam Marg, Lower Parel, Mumbai-400013 (अपीलाथ% /Appellant) .. (&'यथ% / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AAACB5803B

अपीलाथ% ओर से / Revenue by Shri Sachhidanand Dubey

&'यथ% क+ ओर से/ Assessee by Shri Jahangir D Mistry 2 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

सन ु वाई क+ तार,ख / Date of Hearing : 3.2.2015 घोषणा क+ तार,ख /Date of Pronouncement : 18.2.2015

आदे श / O R D E R

PER N. K. BILLAIYA (AM)

These are the cross-appeals by the Revenue and the assessee

against the very same order of the ld.CIT(A)-VI, Mumbai dated

27.2.2009 pertaining to the assessment year 2005-06. The Appeal

No.4129/Mum/2008 is the appeal filed by the assessee against the

order of ld. CIT(A)-V, Mumbai dated 17.1.2008. All these three

appeals were heard together and are being disposed of by this

common order, for the sake of convenience.

I.T. A. No.2714/Mum/2009 (By assessee)

2. The assessee has raised three substantive grounds of appeal

which relate to the disallowance of expenditure for purchase of

license for windows of Rs.30,000/. During the course of assessment

proceedings, the AO noted that the assessee has claimed repairs

and maintenance. It was also found that the assessee itself has

disallowed a sum of Rs.201,800/- treating as capital expenditure and

claimed depreciation on it. It was explained that these expenditures

were not incurred for the purchase of any kind capital assets and

since not asset of enduring benefit has been acquired, these

expenditures cannot be capitalized as capital assets. The explanation

of the assessee was not accepted by the assessing officer who 3 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

treated a sum of Rs.4,48,144/- as capital expenditure and allowed

depreciation as per the provisions of law.

3. The assessee carried the matter before the ld CIT(A) and

explained that the expenditures were incurred on networking which

are revenue in nature. It was further pointed out that the assessee

has deducted tax at source on some of the payments which itself

shows that the expenditure are revenue in nature. The ld.CIT(A) was

convinced by the submissions made by the assessee. However,

while deleting the addition made by the AO, the ld.CIT(A) confirmed

the addition of Rs.30,000/- being the license purchased for window.

Aggrieved by this the assessee is before us.

4. We have carefully perused the orders of authorities below. We

find that the expenditure are incurred for the purchase of application

software and therefore are revenue in nature. Windows being

application software cannot be treated as capital assets and therefore

any license fee paid for the purchase of windows has to be allowed

as revenue expenditure as the soft ware has to be updated every

year. We accordingly set aside the findings of the ld.CIT(A) and direct

the AO to delete the addition. Ground No.1 is allowed.

5. Ground No.2 of the appeal is against the disallowance of

Rs.2,66,59,853/- on the alleged ground that such expenditure

pertains to prior period expenses. While scrutinizing the return of 4 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

income, the AO noticed that the assessee has debited a sum of

Rs.2,66,59,853/- to its profit and loss account. The assessee was

asked to justify its claim. The assessee filed a detailed reply

explaining that due to financial irregularities committed by the

erstwhile Chief Finance Officer and an employee from the account

department some fraud/ irregularities were perpetrated which has

resulted into fraud. The company has found and detected the

financial irregularities during the financial year 2004-05 relevant to

the assessment year under consideration and therefore the amount

of Rs.2,66,59,853/- has been claimed as revenue expenditure/loss.

The AO considered and examined the submissions made by the

assessee. The AO observed that the assessee has also made a

claim of Rs.1,23,20,570/- in the immediately preceding year i.e

assessment year 2004-05 which has been debited once again

claimed during the year under consideration i.e. assessment year

2005-06. The AO was of the opinion that the assessee is just taking a

chance and claiming deduction though he is also aware that it cannot

be allowed treating the entire expenditure as prior period expenses.

The AO disallowed the same. Aggrieved, the assessee carried the

matter before the ld.CIT(A) and reiterated what has been stated

before the AO. After considering the facts and the submissions, the

ld. CIT(A) observed that the assessee could not accurately identify

the individual party-wise balances and accordingly the amount were 5 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

reflected on aggregate debits in financial statement. The ld. CIT(A)

further observed that such expenditure pertains to prior period

expenditure and cannot be allowed as deduction in this year as the

books of account of the assessee are audited and there is no mention

in the audit report that there is any discrepancy in the accounting of

expenditure. The ld.CIT(A) finally concluded by holding that prior

period expenditure cannot be allowed in this year. The ld. CIT(A) was

convinced that the AO was justified in disallowing the expenditure on

the ground that the assessee has not claimed the expenditure in the

original return nor in the revised return. Aggrieved by this the

assessee is before us.

6. Before us, the ld.counsel reiterated what has been stated

before the lower authorities. The ld. counsel brought to our notice the

noting appended to the financial statement and pointed out that in the

financial statement itself the assessee has explained how the

financial irregularities have perpetrated by the Chief Finance Officer

and an employee. The said note is exhibited at pages 34 and 35 of

the paper book. The ld. Counsel further brought to our notice Exs.178

to 190 and explained that the detailed expenditure of each

transaction was explained to the AO during the course of assessment

proceedings itself. The ld. counsel further stated that every item of

expenditure has been explained. Without verifying the details filed by

the assessee, the AO has treated the entire claim as prior period 6 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

expenditure without realizing that financial irregularities were detected

during the year under consideration and therefore there is no

question of treating the amount as prior period expenditure.

7. Per contra, the ld. DR stated that the onus was upon the

assessee to establish that the expenditure was genuine. The

assessee has not brought any evidence on record to substantiate its

claim and therefore, there is no error in the findings of the revenue

authorities.

8. We have considered the rival contentions and carefully perused

the orders of authorities below. We have also considered the relevant

documents referred to and brought to our notice. It is undisputed fact

that certain accounting and financial irregularities have been

perpetrated by the Chief Finance Officer. It would be pertinent to

first understand the nature of financial fraud which primarily

comprises :

(i) Advancing monies to various parties by way of inter

corporate deposits and discounting of bills of exchange without

adequate authorizations and credit evaluation of the borrowers;

(ii) Wrong credits to the parties against short term loans

taken from other bodies corporate and consequently non-

recording of the loans taken and 7 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

(iii) Payments made to acquire personal assets, or withdrawals

of a personal nature debited to wrong account etc;

9. On notice of these financial irregularities, the assessee has

accounted for interest on loans taken of Rs.3,33,42,922/- during the

financial year under consideration. This interests includes interest of

Rs.2,66,59,853/- which has been treated as prior period expenditure.

As a matter of fact, this amount of Rs.2,66,59,853/- which relates to

the financial transaction have been debited during the year under

consideration has to be allowed during the year when it is discovered.

This is in line with the Board circular No.35D(XLVII-

20)(F.No.10/48/65-IT(A-I) dated 24.11.1965. The Hon'ble Supreme

Court in the case of Associated Banking Corporation Of India Limited.

vs CIT reported in 56 ITR 1(SC) has held that "the loss by

embezzlement must be deemed to have occurred when the assessee

came to know about the embezzlement and realized that the amount

embezzled could not be recovered" . In another decision, the Hon'ble

Supreme Court in the case of Badridas Daga V/s CIT reported in 34

ITR 10) (SC) has held that "the losses which have been suffered by

the assessee as a result of misappropriation by an employee have

(1) which was incidental to the carrying on the business and should

therefore be deducted in computing the profit of the business."

8 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

10. It would not be out of place to mention here that a FIR has also

been lodged against the Chief Finance Officer which was brought to

the notice of the AO which clearly shows that the defalcation has

taken place.

11. Considering all these facts in totality in the light of judicial

decisions mentioned hereinabove. In our considered opinion, since

fraud and financial irregularities were detected during the year under

consideration. The claim of such financial irregularities has to be

allowed during the year under consideration itself. We find that the

complete details of transactions were submitted by the assessee

before the AO. The AO did not care to verify the same. The

assessment order pertains to assessment year 2005-06 and we are

entering in the assessment year 2015-16. Ten years have since

been lapsed, it would be gross injustice to the assessee, if we restore

this issue to the file of AO for verification of the details. Considering

the details and judicial decisions, we set aside the findings of the ld.

CIT(A) and direct the AO to delete the addition of Rs.

Rs.2,66,59,853/-. Ground No.2 is allowed.

12. Ground No.3 relates to disallowance of Rs.1,43,000/- on

account of foreign exchange fluctuation treated it as capital loss.

13. The AO found that the assessee has debited Rs.1,43,000/- as

loss on foreign exchange variation. . Necessary details were filed by 9 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

the assessee before the AO, but the AO was of the firm belief that

this is a contingent liability as the actual liability arises only at the time

of actual payment of its liability. The AO accordingly disallowed

Rs.1,43,000/-. The assessee carried the matter before the ld CIT(A)

but without any success. While disallowing this ground of the

assessee, the ld. CIT(A) observed that the assessee has obtained a

loan on capital account. Hence, the variation, on account of foreign

exchange fluctuation would be capital loss and not revenue loss.

14. Before us, the ld. counsel stated that the ld. CIT(A) has not

appreciated the facts in the right perspective. It is the say of the

ld.counsel that foreign exchange fluctuation was not on account of

loan taken by the assessee but it was on account of revenue

expenditure and therefore, the ratio laid down by the Hon'ble

Supreme Court in the case of Sutlej Cotton Mills Ltd V/s CIT

reported in 116 ITR 1)(SC) squarely apply to this issue.

15. The ld. DR relied upon the findings of revenue authorities.

16. Annexure 16 at page 200 of the paper book has carefully been

perused by us which is a details of claim of foreign exchange

fluctuation loss. A perusal of the same shows that the fluctuation are

on account of revenue expenditure. There are also gain which have

been noted while claiming loss of Rs.1,43,000/-. We find force in the

contention of the ld.counsel. The ratio laid down by the Hon'ble 10 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

Supreme Court in the case of Sutlej Cotton Mills Ltd(supra)

squarely apply on the facts of the present case, wherein the Hon'ble

Supreme Court has held that "Where profit or loss arises to an

assessee on account of appreciation or depreciation in value of

foreign currency held by him, on conversion into another currency,

such profit or loss would ordinarily be trading profit or loss if foreign

currency is held by assessee on revenue account or as a trading

asset or as part of circulating capital embarked in business. But, if on

the other hand, the foreign currency is held as a capital asset or as

fixed capital, such profit or loss would be of capital nature."

6.5 Considering the facts of the case in the light of ratio laid down

by the Hon'ble Supreme Court, we set aside the finding of the ld.

CIT(A) and direct the AO to delete the addition of Rs.1,43,000/-

Ground No.3 of the appeal is allowed.

17. In the result, the appeal filed by the assessee is allowed.

I.T.A. No.3213/Mum/2009 (By Revenue)

The Revenue has take four substantive grounds in this appeal.

18. Ground No.1 relates to deletion of Rs.4,88,86,386/- added back

by the AO under section 40(a)(ia) of the Act.

19. During the course of assessment proceedings, the assessee

was asked to reconcile the expenses debited in the profit and loss

account with TDS done on it. The assessee filed reconciled 11 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

statement. The AO noticed that the TDS has not been made for

certain expenditures totaling to Rs.4,88,86,386/-.The AO proceeded

by disallowing the same u/s 40(a)(ia) of the Act.

20. Before the ld.CIT(A), the assessee once again filed a detailed

chart showing the reasons why the TDS was not made. The ld.CIT(A)

after carefully perusing the chart found that most of the expenses

were reimbursement and in some of the cases the assessee has

obtained no deduction certificate from the respective AO and

wherever the TDS was applicable, the assessee has deducted the

same. The ld.CIT(A) also verified the challans. Having been

convinced the ld.CIT(A) deleted the addition.

21. Before us, the ld. DR supported the findings of the AO. The ld.

counsel of the assessee reiterated the same submissions what has

been submitted before the First Appellate Authority. The ld.counsel

also brought to our notice the detailed chart which was filed before

the lower authorities. The same is exhibited at pages 61 to 64 of the

paper book.

22. We have carefully considered the orders of the authorities

below and the relevant documentary evidence brought on record

before us. In our considered opinion, the ld.CIT(A) has very rightly

appreciated the documentary evidence and the details submitted by

the assessee. We have also considered the documentary evidence 12 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

and after perusing the details as submitted by the parties concerned,

we do not find any reason to interfere with the findings of the ld.

CIT(A). Ground No.1 is therefore dismissed.

23. Ground No.2 relates to deletion of Rs.4,18,144/- added by the

AO as capital expenditure. The ld. CIT(A) has considered this issue

at para 3 of his order, wherein he has given categorical findings that

the assessee has incurred expenditure on repair and maintenance

and no new assets has been brought in to existence. As no

distinguishing facts have been brought on record by the ld.DR, we do

not find it necessary to interfere with the order of ld.CIT(A). Ground

No.2, is therefore, dismissed.

24. Ground No.3 relates to deletion of addition of Rs.1,19,42,804/-

added back by the AO on account of advertisement expenditure. The

AO noticed that an amount of Rs.1,19,42,804/- has been allocated to

the account of M/s Nicholas Piramal India Ltd (NPIL) on account of

advertisement expenses for Saridon BME. It was explained by the

assessee that TDS is done on these expenses by NPIL and therefore

the assessee has not done TDS on these credits to NPIL. The AO

was not convinced with this reply of the assessee and disallowed the

entire sum of Rs.1,19,42,804/-.

25. Before the ld. CIT(A), the assessee explained that NPIL

incurred advertisement expenditure and the assessee reimbursed 13 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

the same and hence NPIL has to deduct tax at source and if the

assessee is required to make TDS it would amount to double

taxations since, expenditure is subject to TDS by NPIL. After

considering the entries of the statement, the ld.CIT(A) found that the

assessee has simply made reimbursement and therefore not required

to make further TDS. The ld.CIT(A) deleted the entire addition.

26. Before us, the ld. DR supported the assessment order, the ld.

counsel of the assessee reiterated the same facts what has been

stated before the lower authorities. It is an undisputed fact that the

advertisement expenses have been incurred by the NPIL. It is also

an undisputed fact that the assessee has simply credited it to the

account of NPIL as reimbursement of the expenditure. It is further

found that NPIL has made TDS on the advertisement expenses. All

that being the facts of the matter, we do not find any reason to

interfere with the finding of the ld CIT(A). The ground No.3 is

accordingly dismissed.

27. Ground No.4 relates to deletion of Rs.21,84,331/- added by the

AO being an amount of expenditures paid to various vendors without

TDS. While scrutinizing the return, the AO noticed that the assessee

has debited to the profit and loss account an amount of

Rs.21,84,331/- on account of misappropriation of assets. The

assessee was asked to explain the same. It was explained by the

assessee that Account Executive of the company did fraudulent 14 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

transactions by issuing cheques in the name of M/s Anmol Manas

Agency and accounted the cheques in the vendor accounts. It was

pointed out by the assessee that FIR has already been lodged. The

AO considered these submissions made by the assessee. The AO

was of the opinion that the payment has been made to the vendor for

expenditure without deducting tax at source. The AO further observed

that the assessee has not furnished any progress or outcome of the

FIR filed and the details of action taken by the Police against the said

employee of the assessee. The AO disallowed the entire amount of

Rs.21,84,331/-.

28. Before the ld. CIT(A), the assessee once again explained the

nature of transaction and the misappropriation done by the employee

of the assessee. After considering the facts and the submissions, the

ld. CIT(A) was of the firm belief that loss is required to be allowed in

the year in which it was detected. The ld. CIT(A) deleted the entire

addition of Rs.21,84,331/-. The ld. CIT(A) drew support from the

decision of eh Hon'ble Supreme Court in the case of Associated

Banking Corporation Of India Limited (supra) and Badridas Daga

(supra).Aggrieved by the decision of the ld. CIT(A), the Revenue is

before us.

29. The ld. DR supported the order of AO. The ld.counsel for the

assessee reiterated the same facts what has been submitted before

the lower authorities.

15 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

30. We have perused the orders of authorities below. An identical

issue on embezzlement and misappropriation of funds have been

decided by us in assessee's appeal in ITA No.2714/Mum/2009 qua

ground No.2 of that appeal, wherein we have followed the ratio laid

down by the Hon'ble Supreme Court, which has been followed by the

ld. CIT(A) while deleting the present addition. We, therefore, do not

find any reason to interfere with the findings of ld. CIT(A). Ground

No.4 is dismissed.

31. The appeal filed by the revenue is, therefore, dismissed.

I .T.A. No.4129/Mum/2008 (By Assessee)

32. Since we have deleted the entire addition made in assessment

year 2005-06 amounting to Rs. 2,66,59,853/-, the issue raised by the

assessee in this appeal become otiose. Accordingly, the appeal filed

by the assessee dismissed as infructuous.

33. In the result, the appeal bearing ITA No.2714/Mum/2009 filed

by the assessee is allowed, appeal bearing ITA No.3213/Mum/2009

filed by the Revenue is dismissed and the appeal by the assessee

bearing ITA No.4129/Mum/2008 is dismissed.

The above order was pronounced in the open court on 18th Feb, 2015. घोषणा खल ु े यायालय म/ 0दनांकः18th Feb, 2015 को क+ गई ।

sd sd

(अ मत शु ला / AMIT SHUKLA) (एन. के. बलै या, लेखा सद य/ N. K. BILLAIYA)

या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मुंबई Mumbai:18th Feb,2015.

16 3 2 1 3 , 2 7 1 4 / M/ 2 0 0 9 a n d 4 1 2 9 / Mu m / 2 0 0 8

व. न.स./ SRL , Sr. PS

आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :

1. अपीलाथ% / The Appellant

2. &'यथ% / The Respondent.

3. आयकर आय ु त(अपील) / The CIT(A)- concerned

4. आयकर आय ु त / CIT concerned

5. :वभागीय & त न<ध, आयकर अपील,य अ<धकरण, मंब ु ई/ DR, ITAT, Mumbai concerned

6. गाड! फाईल / Guard file.

आदे शानुसार/ BY ORDER,

true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील,य अ<धकरण, मुंबई /ITAT, Mumbai