Tribunal Decision: Assessee's Appeal Allowed, Cross-objection Dismissed, Revenue's Appeal Partly Allowed.

The tribunal allowed the assessee's appeal, dismissed the cross-objection of the assessee, and partly allowed the revenue's appeal. The order was pronounced on 7th June 2019 at Chennai.

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Issues Involved:
1. Disallowance of Sales Promotion, Advertisement, and Publicity Expenses.
2. Corresponding increase in the claim of deduction under Section 80IC.
3. Disallowance under Section 14A of the Income Tax Act.
4. Computation of book profits under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Promotion, Advertisement, and Publicity Expenses:
The primary issue was whether the Commissioner of Income Tax (Appeals) [CITA] was justified in upholding the disallowance of Rs. 43,62,479 towards sales promotion, advertisement, and publicity expenses under Section 37 of the Income Tax Act. The Assessing Officer (AO) disallowed these expenses, arguing they were not incidental to the manufacturing activity and violated the Medical Council's code of ethics, relying on CBDT Circular No. 5/2012.

The tribunal found that the assessee, a pharmaceutical manufacturer, shared these expenses with Tablets (India) Ltd based on a commercial agreement. The tribunal emphasized that the revenue cannot question the business decisions of the assessee if the expenses are genuine and for business purposes. The CBDT Circular No. 5/2012 was deemed inapplicable for AY 2012-13 as it was effective from 01.08.2012. Moreover, the tribunal observed that the expenses were not distributed to medical practitioners but to Tablets (India) Ltd, thus not violating the circular. The tribunal concluded that the expenses were allowable under Section 37.

2. Corresponding Increase in the Claim of Deduction under Section 80IC:
The tribunal addressed whether the disallowance of the aforementioned expenses should increase the claim of deduction under Section 80IC. It admitted the legal claim that disallowed expenses should enhance the gross profit eligible for deduction under Section 80IC, supported by the decisions in CIT v. Gem Plus Jewellery India Ltd and CBDT Circular No. 37/2016. The tribunal directed the AO to rectify the double disallowance made by reducing the claim of deduction under Section 80IC by the same amount of disallowed expenses.

3. Disallowance under Section 14A:
The tribunal examined whether the CITA was justified in restricting the disallowance under Section 14A to Rs. 9,89,496 under normal provisions. The AO had disallowed Rs. 16,09,980 by applying Rule 8D(2), but the tribunal directed the AO to restrict the disallowance to the exempt income of Rs. 12,73,586, following the Supreme Court's decision in Maxopp Investments.

4. Computation of Book Profits under Section 115JB:
Regarding the disallowance under Section 14A vis-à-vis the computation of book profits under Section 115JB, the tribunal referred to the Special Bench decision in ACIT v. Vireet Investment Pvt Ltd, which held that Rule 8D(2) cannot be imported into clause (f) of Explanation to Section 115JB(2). The tribunal directed the AO to consider Rs. 9,89,496 as the actual expenditure incurred for earning exempt income under clause (f) of Section 115JB(2).

Conclusion:
The tribunal allowed the assessee's appeal, dismissed the cross-objection of the assessee, and partly allowed the revenue's appeal. The order was pronounced on 7th June 2019 at Chennai.

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