2019 (6) TMI 661 - AT - Income Tax

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

The Deputy Commissioner of Income Tax, Corporate Circle – 2 (2), Chennai Versus M/s. Heal Kraft India Pvt. Ltd. And (Vice-Versa) And M/s. Heal Kraft India Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Corporate Circle – 2 (2), Chennai

The tribunal allowed the assessee's appeal, dismissed the cross-objection of the assessee, and partly allowed the revenue's appeal. The order was ... Disallowance of Sales Promotion, Advertisement and Publicity Expenses - allowable business expenses u/s 37 - the said expenditure is hit by the CBDT Circular No.5 / 2012 - HELD THAT:- The expenditure incurred by the assessee towards sales promotion, advertisement and publicity expenses were incurred in line with the business of the assessee and that the revenue had not doubted the genuineness of the incurring of such expenditure.It is well settled that the revenue cannot step into the shoes of the assessee to decide whether the expenditure is required to be incurred by the assessee or not where the genuineness of the same is not questioned. AO has to see whether the particular expenditure incurred is not personal in nature , is not capital in nature and incurred wholly and exclusively for the purpose of business of the assessee. When assessee is able to provide the business nexus of incurrence of certain expenditure with supporting documents, it cannot be simply denied / rejected by the revenue merely on the ground of propriety, which action would lead to, travelling beyond the brief and stepping into the shoes of the assessee by the revenue. We therefore hold that the expenditure incurred by the assessee towards sales promotion, advertisement and publicity is an allowable expenditure. The assessee had only distributed the DVD players, silver coins, calenders and diaries to Tablets India Ltd which was marketing the products of the assessee. There was absolutely no distribution of gifts made by assessee to any medical practitioners and hence the applicability of CBDT Circular No. 5/2012 itself deserves to be rejected. Circular issued by the CBDT cannot enlarge the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. - Decided in favour of assessee. Claim of deduction u/s 80IC - whether disallowance of aforesaid expenditure would correspondingly go to increase the claim of deduction u/s 80IC ? - HELD THAT:- The issue of whether deduction u/s.80IC of the Act should be computed on the profits as increased by the disallowance u/s.37(1) of the Act is covered in favour of the assessee by the decisions in CIT V.Gem Plus Jewellery India Ltd [2010 (6) TMI 65 - BOMBAY HIGH COURT] and DCIT V. Vertex Infosoft Solution (P) Ltd [2014 (11) TMI 975 - ITAT CHANDIGARH] The issue now stands settled by the CBDT Circular No.37 / 2016 dated 02.11.2016 where the Board had clarified that the deduction under Chapter VI-A will be on such profits including disallowance under sections 32, 40(a)(ia), 40A(3), 43B etc of the Act which will include disallowance made u/s.37(1) as well. The computation of income made by the ld AO, that the ld AO had disallowed the entire Sales promotion, advertisement and publicity expenses u/s 37(1) of the Act separately. Further he had again reduced the claim of deduction u/s 80IC of the Act by the very same amount of sales promotion, advertisement and publicity. This would effectively result in double disallowance made by the ld AO which we direct the AO to rectify. Disallowance u/s 14A under normal provisions of the Act - disallowance should be restricted to the exempt income - HELD THAT:- Without going into the veracity of workings of disallowance made under Rule 8D(2) of the Rules made by the AO and without going into the basis of suo moto disallowance made by the assessee in the return of income, we direct the ld AO to restrict the disallowance made u/s 14A to the extent of exempt income i.e ₹ 12,73,586/- under normal provisions of the Act by accepting the additional ground raised by the assessee. Disallowance u/s 14A in computation of book profits u/s 115JB - HELD THAT:- The issue now stands settled in the case of ACIT V. Vireet Investment Pvt Ltd [2017 (6) TMI 1124 - ITAT DELHI] as held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imported into in clause (f) of Explanation to Section 115JB(2) - disallowance of actual expenditure incurred for earning exempt income is required to be made under clause (f) of section 115JB(2) - the assessee itself had disallowed a sum of ₹ 9,89,496/- u/s 14A in the return of income on some actual basis. In order to settle the disputes to rest, we direct the AO to consider this sum of ₹ 9,89,496/- for disallowance under clause (f) of Explanation to Section 115JB(2) of the Act as direct expenditure incurred for earning exempt income. 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.