2023 (5) TMI 1054 - AT - Income Tax

Tribunal modifies AO's conclusions on concealed sales, raw material wastage, and 80IB deduction

Medley Pharmaceuticals Ltd Versus DCIT, C-44, Mumbai

The Tribunal allowed the appeals of the assessee for Assessment Years 2010-11 and 2011-12. The Assessing Officer's conclusions regarding alleged concealed ... Deduction u/s 80IB - Concealed Sales arising out of concealed production - difference is arising due to various factors such as wastage of raw material, overages vitamins, enzymes etc., additional material input for potencies and moisture consumption, salt form and wastage during production - AO was of the view that the excessive consumption of raw materials revealed that the assessee has not correctly reported the production of finished goods and accordingly concluded that the assessee had not reported the production to carry out sales outside its books - HELD THAT:- We notice that for the years under consideration the basis on which the disallowance is made by the Assessing Officer and the decision of the CIT(A) modifying the addition is similar to A.Y. 2012-13 [2020 (7) TMI 568 - ITAT MUMBAI] and, therefore, respectfully following the above decision of the co-ordinate bench, we modify the order of the CIT(A) wherein the A.O is directed to restrict the disallowance in respect of the excess raw material wastage in terms of the aforesaid observations of the Hon’ble Tribunal. Allowing 80IB Deduction in respect of increased income due to addition on account of alleged concealed production - CIT(A) did not allow this claim of the assessee for the reason that the additional income is not supported by the amount mentioned in Form 10CCB basis which the deduction u/s.80IB is allowed - HELD THAT:- Respectfully following the said decision of the co-ordinate bench, we see no reason to interfere with the decision of the CIT(A) in rejecting the claim of the assessee that 80IB deduction be allowed in respect of increase in the business income due to addition on account of concealed production. This ground is dismissed. Sales promotion expenses - For the year under consideration there is no critical evaluation of the expenses and post the Hon’ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. In the present case, the A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. The A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice, in view of the latest judgment of the Hon’ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, necessarily, the matter needs fresh verification by the A.O, especially in the light of the recent judgment in the case of M/s.Apex Laboratories Pvt. Ltd. [2022 (2) TMI 1114 - SUPREME COURT] - The issues for both AYs is remitted back to the AO with a direction to examine the details of expenses submitted from MCI guidelines perspective in the light of the decision of the Apex Court after giving an opportunity of being heard to the assessee. Allowing of deduction u/s 80IB in respect of the sale promotion expenses disallowed - HELD THAT:- In view of the CBDT circular No.37/2016 dated 2nd November 2016, we direct the AO to consider enhanced profits due to the disallowance if any of sales promotion while computing the revised deduction u/s.80IB for AY 2010-11 and 2011-12. Needless to say that the assessee be given a reasonable opportunity of being heard. Issues Involved:1. Alleged concealed sales arising out of alleged concealed production.2. Allowing 80IB exemption in respect of increased business income due to addition on account of alleged concealed production.3. Disallowance of sales promotion expenses.4. Not allowing 80IB deduction in respect of disallowed sales promotion expenses.Summary:1. Alleged Concealed Sales Arising Out of Alleged Concealed Production:The Assessing Officer (AO) concluded that the assessee had not correctly reported the production of finished goods, leading to concealed sales. The AO computed the excessive consumption of raw materials and made additions towards suppressed sales. The CIT(A) upheld the AO's decision but directed the AO to verify the selling price on net realizable value. The Tribunal, following the decision of the co-ordinate bench for AY 2012-13, modified the CIT(A)'s order, directing the AO to restrict the disallowance regarding excess raw material wastage.2. Allowing 80IB Deduction in Respect of Increased Income Due to Addition on Account of Alleged Concealed Production:The CIT(A) did not allow the 80IB deduction claim for the additional income, stating that it was not supported by Form 10CCB. The Tribunal, following the co-ordinate bench's decision for AY 2012-13, upheld the CIT(A)'s decision, rejecting the assessee's claim for the 80IB deduction on the increased business income due to alleged concealed production.3. Disallowance of Sales Promotion Expenses:The CIT(A) disallowed a portion of the sales promotion expenses, citing that they were hit by Explanation to section 37(1) of the Act. The Tribunal noted that the AO had not critically examined the nature of the expenses and remitted the issue back to the AO for fresh verification in light of the recent Supreme Court judgment in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT. The AO was directed to examine the details of expenses from the MCI guidelines perspective and the decision of the Apex Court.4. Not Allowing 80IB Deduction in Respect of Disallowed Sales Promotion Expenses:The Tribunal directed the AO to consider enhanced profits due to any disallowance of sales promotion expenses while computing the revised deduction under section 80IB for AY 2010-11 and 2011-12, in line with CBDT circular No.37/2016.Conclusion:The appeals of the assessee for AY 2010-11 and 2011-12 were allowed, with specific directions for fresh verification and computation by the AO.