2018 (4) TMI 925 - AT - Income Tax

Tribunal grants relief on sales expenses, quashes reassessment.

The Tribunal partially allowed the appeals for the assessment year 2005-06 and fully for the assessment year 2006-07. It provided relief to the assessee ... Disallowance towards sales promotion expenses - Held that:- In the instant case, it is not the case of the ld AO that the expenditures incurred in the form of giving diaries, medical planners, medical representative bags etc were in the nature of expenditure prohibited by MCI regulations. In any event, these expenditures were incurred much prior to the introduction of the CBDT Circular and MCI regulations itself. We have already held that the genuinity of the expenditure and business purposes thereon were not doubted by the revenue herein - We further hold that the applicability of the Circular 5/2012 could only be prospective in nature and cannot be made applicable for the Asst Year under dispute before us. We allow the claim of write off of the assessee in the sum of ₹ 1,18,23,353/- as deduction in Asst Year 2005-06 - Decided in favour of assessee Addition made u/s 41(1) - Held that:- When the entire balance outstanding in the sum of ₹ 39,90,797/- is reflected as receivable in the books of CABL, which is also assessed by the very same AO, there cannot be any cessation of liability on the part of the assessee. We find that the ld AO had only forced the assessee to cease the liability payable to CABL. Had the ld AO verified the records of CABL which is also assessed in his office / circle only, he could have understood the truth. Without doing the same, the action of the ld AO by making an addition u/s 41(1) of the Act is not warranted and accordingly deserves to be deleted. TDS u/s 194J - Disallowance made u/s 40(a)(ia) towards audit fees - non deduction of tds - Held that:- In the instant case, the assessee had made provision for audit fees to the account of the payee which fact has been mentioned by the ld CITA. Hence the provisions of section 194J of the Act are clearly attracted and non-deduction of tax at source would automatically invite disallowance u/s 40(a)(ia) of the Act. The statutory auditor is appointed in the annual general meeting of the company by the shareholders and would hold office till the conclusion of the next annual general meeting. Hence the name of the payee (i.e the auditor) is very well known to the assessee in order to make provision for audit fees by crediting to the said auditor’s account. Hence we are not inclined to accept the arguments of the ld AR that the audit report is signed after the end of the year. Accordingly, the Ground raised by the assessee is dismissed. Validity of reopening the assessment - valuing the closing stock of scrap - Held that:- In the instant case, the purported income ie valuing the closing stock of scrap which was discovered subsequently during the course of reassessment proceedings, can be brought to tax, only if the escaped income i.e business loss claimed by the assessee, which triggered, in the first instance, the issuance of notice u/s 148 of the Act, is assessed to tax. As stated above, during the reassessment proceedings, the ld AO agreed with the contentions of the assessee that it had indeed done business activity and hence the business loss was allowed to be set off with other income. In this scenario, the ld AO would be precluded from making any other addition towards the new source of income as prima facie his reason to believe that income had originally escaped assessment had failed. Even on merits, from the facts narrated and explanations given hereinabove, we find that the ld AO is not justified in valuing the closing stock of packing materials representing scrap based on the scrap sales made in subsequent years ignoring the principles of valuation of stock as enumerated in AS 2 issued by ICAI which is also mandated to be followed u/s 145A of the Act. Hence no addition towards valuation of closing stock could be validly made in the reassessment even on merits in the instant case. - Decided in favour of assessee. Issues Involved:1. Disallowance of sales promotion expenses.2. Addition under section 41(1) of the Income Tax Act.3. Disallowance under section 40(a)(ia) of the Income Tax Act towards audit fees.4. Validity of reopening of assessment.Issue-wise Detailed Analysis:1. Disallowance of Sales Promotion Expenses:The first issue is whether the CIT(A) was justified in upholding the disallowance of Rs. 1,18,23,353 towards sales promotion expenses. The assessee, a pharmaceutical manufacturer, incurred these expenses and expected reimbursement from its joint venture partner, CABL. However, CABL refused reimbursement in the assessment year 2005-06, leading the assessee to write off the amount and claim it as a deduction. The AO disallowed the claim, treating it as prior period expenses. The CIT(A) further disallowed the expenses based on a CBDT circular prohibiting freebies to medical practitioners. The Tribunal found that the expenses were genuine business expenditures and crystallized as a loss in the assessment year 2005-06. The Tribunal also held that the CBDT circular was not applicable retrospectively. Therefore, the Tribunal allowed the deduction of Rs. 1,18,23,353.2. Addition under Section 41(1) of the Income Tax Act:The second issue is whether the CIT(A) was justified in confirming the addition of Rs. 39,90,797 under section 41(1). The AO added this amount, assuming the liability to CABL ceased to exist as CABL had ceased operations. The assessee argued that CABL was still in existence and the liability was acknowledged in CABL's books. The Tribunal found that the AO did not verify CABL's records and wrongly assumed cessation of liability. Therefore, the Tribunal deleted the addition under section 41(1).3. Disallowance under Section 40(a)(ia) of the Income Tax Act towards Audit Fees:The third issue is whether the CIT(A) was justified in upholding the disallowance of audit fees of Rs. 2,52,909 under section 40(a)(ia) for non-deduction of tax at source. The assessee argued that the audit fees were payable only after the signing of the audit report, and the provisions of section 194J would not apply. The Tribunal held that tax is deductible at the time of credit or payment, whichever is earlier. Since the audit fees were credited to the payee's account, the provisions of section 194J were applicable, and non-deduction of tax warranted disallowance under section 40(a)(ia). Therefore, the Tribunal upheld the disallowance.4. Validity of Reopening of Assessment:The fourth issue is the validity of reopening the assessment for the assessment year 2006-07. The AO issued a notice under section 148, believing that business losses were incorrectly set off against capital gains. However, in the reassessment, the AO did not disallow the business loss but made an addition based on the valuation of closing stock of raw materials as scrap. The Tribunal noted that the AO can only assess a new source of income if the income that triggered the reassessment is assessed to tax. Since the AO accepted the business loss, the addition of the new source of income was invalid. The Tribunal also found that the valuation of closing stock based on subsequent scrap sales was incorrect. Therefore, the Tribunal quashed the reassessment proceedings and allowed the appeal for the assessment year 2006-07.Conclusion:The Tribunal allowed the appeals partly for the assessment year 2005-06 and fully for the assessment year 2006-07, providing relief to the assessee on the disallowance of sales promotion expenses and the addition under section 41(1), while upholding the disallowance under section 40(a)(ia). The reassessment for the assessment year 2006-07 was quashed.