Assessee wins Section 80IC deduction for Unit-III despite manufacturing at sister concern's premises with proper documentation

ITAT Delhi allowed assessee's appeal regarding deduction u/s 80IC for Unit-III, finding manufacturing activity was conducted at premises owned by sister concern with proper rent agreement and documentation. Court confirmed eligibility after verifying rent expenses, plant/machinery acquisition bills, and government approvals from Himachal Pradesh authorities. Regarding sales promotion expenses to medical practitioners, ITAT followed SC precedent in Apex Laboratories holding such expenses prohibited under MCI regulations but noted disallowance would be revenue neutral due to enhanced 80IC deduction per CBDT Circular 37/2016. Issue of capital asset purchases remanded to AO for determining whether expenditure pertained to eligible unit.

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Issues Involved:
1. Disallowance of deduction under Section 80-IC for Unit-III.
2. Disallowance of sales promotion expenses.
3. Treatment of payments towards purchase of computers as capital expenditure.

Summary:

Issue 1: Disallowance of Deduction under Section 80-IC for Unit-III

The tribunal examined whether the Ld. CIT(A) was justified in confirming the disallowance of Rs. 3,29,40,574/- claimed under Section 80-IC of the Income Tax Act for Unit-III. The tribunal found that the assessee had provided sufficient evidence, including a rent agreement, confirmation from Himachal Pradesh State Industrial Development Corporation, and acquisition of plant and machinery, to support its claim. It was also noted that the Department of Industries, Govt. of Himachal Pradesh, had approved the setup of Unit-III, and the necessary licenses and NOCs were obtained. Therefore, the tribunal concluded that the assessee is eligible for the deduction under Section 80-IC for Unit-III and allowed the grounds raised by the assessee.

Issue 2: Disallowance of Sales Promotion Expenses

The tribunal addressed whether the Ld. CIT(A) was justified in partly upholding the disallowance of Rs. 72,36,394/- on account of sales promotion expenses. The expenses were deemed ineligible for deduction under Section 37(1) of the Act as they were in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. However, since the unit is eligible for deduction under Section 80-IC, the disallowance would increase the business profit, making the issue revenue neutral. Consequently, the tribunal allowed the grounds raised by the assessee.

Issue 3: Treatment of Payments Towards Purchase of Computers as Capital Expenditure

The tribunal considered whether the payments amounting to Rs. 15,93,934/- made to Dotcom Creation and Redbrook Intertrade should be treated as capital expenditure. The Ld. CIT(A) had confirmed the disallowance, treating the payments as capital assets. The tribunal noted that the expenditure was incurred in the eligible unit of the assessee and directed the Ld. AO to verify if the expenditure pertains to the unit eligible for deduction under Section 80-IC. If so, the disallowance would increase the business profit of the eligible unit, making it eligible for enhanced deduction under Section 80-IC. The tribunal restored the issue to the file of the Ld. AO for verification and allowed the ground for statistical purposes.

Conclusion:

The appeal of the assessee was allowed for statistical purposes, with directions to the Ld. AO to verify specific details regarding the eligibility of the expenditures for deduction under Section 80-IC.

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