The Commissioner Of Income Tax -V vs Panacea Biotech Ltd.
2009 Latest Caselaw 2838 Del

*              IN THE HIGH COURT OF DELHI AT NEW DELHI

+                   ITA No. 422/2007

                                                                 July 27, 2009

THE COMMISSIONER OF INCOME TAX -V                 ...Appellant
             Through: Ms. Rashmi Chopra, Advocate

               VERSUS

PANACEA BIOTECH LTD.                                             ....Respondent
                 Through:               Mr. C.S. Aggarwal, Sr. Advocate with
                                        Mr. Prakash Kumar, Mr. Sunil Kapoor,
                                        Advocates
CORAM:
HON'BLE MR. JUSTICE A. K. SIKRI
HON'BLE MR. JUSTICE VALMIKI J.MEHTA

     1. Whether the Reporters of local papers may be allowed to see
        the judgment?

     2. To be referred to the Reporter or not?

     3. Whether the judgment should be reported in the Digest?

    %

VALMIKI J. MEHTA, J. (ORAL)

1. Three issues have been raised by the Revenue in this appeal under

Section 260(A) of the Income Tax Act, 1961. The first issue is that the ITAT

has erred in allowing depreciation on the flat purchased by the assessee at

Mumbai. The second issue raised by the Revenue is that the ITAT has erred in

allowing expenditure made by the assessee for the purchase of two machines in

the relevant year. The third issue canvassed is that ITAT has erred in allowing

ITA 422/2007 Page 1 expenditure incurred by the assessee on its R&D office and the same ought not

to have been allowed.

2. Qua the first issue, the facts which have emerged from the record are that

the possession of the flat was obtained on 21.3.2000, the deed in respect of the

same was registered on 29.3.2000 (though the Sub-Registrar returned it to the

assessee on 7.4.2000), the charges to the society where the flat is situated were

paid on 29.3.2000, One consignment was sent to this office/flat through M/s.

Mayur Roadways, and the flat had been fitted with the requisite amenities for

using it as an office. Thus, the office was ready for use and functional and was

actually used for the purpose of business. User of the flat is, therefore, a finding

of fact by the two concurrent authorities below in which we need not interfere.

The counsel for the Revenue has urged that passive user does not entitle the

assessee to claim depreciation. In the facts of the case, there is an actual user

and not passive user. Besides, so far use as an office is concerned, user of the

same need not be full-fledged and nor is it so urged by the Revenue. Obviously,

the assessee must have purchased this flat within the relevant financial year to

take benefit of depreciation as tax planning. We do not see any illegality in the

action of the assessee in the facts and circumstances of the case. The counsel

for the Revenue has relied upon the judgment of the Bombay High Court in the

case of Dinesh Kumar Gulab Chand Aggarwal vs. Commissioner of Income

Tax, 267 ITR 768. However, since there are judgments of two Division

ITA 422/2007 Page 2 Benches of this Court in the case reported as CIT Vs. Refrigeration & Allied

Industries Ltd., 247 ITR 12 and Capital Bus Services vs. CIT, 123 ITR

404, we would be bound by the same. In the case of Refrigeration & Allied

Industries Ltd. it had been held by this Court that the expression "used for the

purpose of business" includes passive user of the assets in the business. It was

held that the asset cannot be said to be not used when the same is kept ready for

use. This Court, therefore, in the said case allowed depreciation allowance to

the assessee and said that there was no justification to disallow the claim of the

depreciation. In fact, the Division Bench of this Court had even much earlier in

Capital Bus Services Pvt. Ltd. held that the expression used for the purpose of

the business and depreciation would be allowed where the buses were kept

ready by the owner for its use. Merely because the buses did not ply cannot

mean that the depreciation was not allowable. We accordingly hold that the

contentions of the Revenue on this issue have no force.

3. So far as the contention with regard to the disallowing the claim on the

expenditure incurred on the purchase of two machineries is concerned, the

counsel for the Revenue has urged that though with respect to the first

machinery an advance payment was made within the Assessment year , with

respect to the second machinery no payment at all was made. It was, therefore,

urged that since expenditure was not incurred within the meaning of the

provision of Section 35(2) (i) (a), it was said that in the present assessment year

ITA 422/2007 Page 3 the benefit of the same cannot be claimed and it would be entitled only in the

next assessment year. Per contra the counsel for the assessee has urged that the

books of accounts were maintained on mercantile basis and, therefore, since the

invoices were raised within the relevant financial year and since a letter of

credit was already opened with respect to the second machinery, it cannot be

said that expenditure was not incurred. It was argued that a debt incurred is an

expenditure incurred within the meaning of the expression "expenditure is

incurred" occurring in Section 35(2)(i)(a). The counsel for the assessee drew

the attention of this Court to Section 43 Sub-Section 2 of the Act which defines

the expression "paid" to means actually paid or incurred according to the

method of accounting upon the basis of which profits or gains are computed. It

is not disputed by the Revenue that the books of accounts are maintained by the

assessee on mercantile basis. This is also the concurrent finding of the two

authorities below. In the mercantile method of accounting incurring of the

expenditure is not based on payment but on the liability to pay. Once the goods

have been purchased, the invoices raised and the purchase considerations are

accounted for in the books of the assessee, the expenditure can be said to have

been incurred as per the method of accounting followed by the assessee.

Counsel for the assessee has rightly relied upon the judgment reported as

Belapahar Refractories Ltd. vs. CIT, 2007 ITR 144 (Orissa) in which the

Division Bench of the Orrisa High Court has held that incurring of expenditure

for scientific research means "to become liable to" i.e. to incur a debt and at

ITA 422/2007 Page 4 such time the expenditure can be said to have been incurred. It was further held

that the expression "incurring" includes either an actual payment or that the

concerned person has become liable for payment but had not actually made

payment. We agree with this view since in the facts of this case the position

which has emerged from the record is that the assessee has maintained its books

on a mercantile basis.

4. The third contention pertains to wrongly allowing by the ITAT of

expenditure incurred by the assessee on its R & D office at Lalru of Rs.

1,15,25,117/-. The details of the expenditure incurred were mentioned by the

assessee as under:-

      "S.No.             Name                            Amount(Rs.)


         1.     Arti Developers & Engineers              38,25,444/-

         2.     Gem Construction                         25,30,759/-

         3.     S.S. Construction                        36,92,530/-

         4.     M.R.B. Construction                      14,73,384/-''

5. The assessee had stated before the ITAT that the doubts raised by the

Assessing Officer were general in nature and the facility consists of built up

area of more than 3 lakhs Sq. ft. with plant and machinery and that the assessee

has given sufficient details of expenditure incurred. In fact, this work was

surveyed as per the order of the Assessing Officer and the survey report did not

ITA 422/2007 Page 5 find any defects details in the claim of the assessee. The Assessing Officer did

not refer to this survey report in the assessment order and consequently a report

was called by the CIT(A) from the Assessing Officer as to why no mention was

made about the survey report in the assessment order. The explanation of the

Assessing Officer was that the survey report was received on fax on 31.3.2000

and since it was illegible the same was not referred to. This explanation of the

Assessing Officer is indifferent to say the least.

We find that incurring of expenditure by the asessee having been duly

explained to the authorities below and more so supported by a survey report

prepared at the instance of the Assessing Officer, no fault can be found with the

decision on this aspect by the authorities below.

6. In view of the above, no substantial question of law arises. Dismissed.

                                                                 A.K. SIKRI, J



                                                       VALMIKI J.MEHTA, J


July 27, 2009
dkg




ITA 422/2007                                                               Page 6