TaxTMI 
TaxTMI 
2019 (11) TMI 327
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....AAB of the Act is valid as the initiation of penalty was under section 271(1)(c) of the Act by issuance of notice under section 274read with section 271(1)(c) of the Act dated 30.03.2015 (ii) the second issue is on merits is as regards to the levy of penalty under section 271AAB on the following items of disallowance: - Sr. No. Particulars Declared under section 132(4) Return filed under section 139(1) a. Expenses incurred on sales promotion 4,31,14,706 8,39,35,025 b. Expenses incurred on Education/ Training 40,40,000 40,40,000 c. Reduction in Depreciation 15,95,863 15,95,863 d. Reduction in claim for deduction under section 35(2AB) 4,67,96,325 4,67,96,325 e. Discrepancy in Physical Stock at R& D Centre 14,05,680 14,05,680 Total 9,69,52,574 13,77,72,893 3. Brief facts are that the assessee is engaged in the business of manufacturing, marketing and export of pharmaceutical products and is assessed to tax regularly. A search action u/s 132 of the Act was carried out on 17-10-2012 at the Offices, Factories, and R&D Centre of the assessee and at the residences of its directors and senior officials. The return of income of the asses....
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.... AO, thereafter, vide letter dated 14.09.2015 stated that in the notice issued under section 274 of the Act, there is a defect inasmuch as section 271(1)(c) has been mentioned inadvertently instead of section 271AAB of the Act. In view of the provisions of section 292B of the Act, the defect is being corrected and penalty initiated should be read as issued under section 271AAB of the Act. Finally, the AO vide order dated 30.09.2015 levied penalty @ 10% of the undisclosed income of Rs. 13,77,72,893/- (as per the assessment order) instead of Rs. 9,69,52,574/- (as disclosed in the statement under section 132(4) of the Act. The breakup of the amount of Rs. 13,77,72,893/- is as follows:- a. Inadmissible payments to doctors under the head Sales Promotion expenses : Rs. 8,39,35,025/- b. Personal expenses debited in the books: Rs. 40,40,000/- c. Excess Research & development expenses claimed u/s 35(2AB) Rs. 4,67,96,325/- d. Difference in physical R&D stock Rs. 14,05,680/- e. Bogus Purchases of capital goods resulting in excess claim of depreciation: Rs. 15,95,863/- The Penalty was levied by the AO and confirmed by the CIT(A). The CIT(A) has decided the issues as under: - "7.4.....
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....1,14,706/- and an additional amount of Rs. 408,20,319/-, relating to such expenses incurred after the date of search, was disallowed in the return filed u(s139(1) of the Act. In this regard. I find that the A 0 has levied the penalty @ 10% of the undisclosed income admitted in the course of search as per clause (a) of section 271AA9 of the Act Therefore, the AO should have restricted the levy of penalty with respect to the amount of undisclosed income of Rs. 43114706/-, on account of expenses admitted as undisclosed income in the statement given u1s132(4) of the Act, during the search. since the disallowances of Rs. 408.20,3191- has been made by the appellant in the return of income on its own. The A 0. is accordingly directed to recompute the quantum of penalty by restricting the undisclosed income on account of inadmissible payment to doctors, for levy of penalty uIs.271AAB to Rs. 431.14.706/- and allow appropriate relief to the appellant Ground No.4 and 5 are allowed and Ground No. 7 is partly allowed. 7.4.4 As regards expense on doctors, it has been held in the case of ACIT Vs. Liva Healthcare Ltd reported at (2016] 73 taxmann.com 171 (Mumbai - Trib) that the CBDT circular No....
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....nt as specified in the books of accounts of the assessee has been made. It is neither a case of not recording of expenditure nor a case of wrong recording of expenditure in the books of the assessee. The only question is whether, the expenditure on account of sales promotion can be allowed as a deduction or not. The assessee submits that the said amount cannot be said to be "undisclosed income" so as to come within the ambit of section 271AAB of the Act. The assessee has not claimed the expenses in the return of income on the ground that the said expenses may not come within the ambit of section 37 of the Act in view of Circular No. 5/2012 dated 01.08.2012 issued by the Central Board of Direct Taxes. The assessee submits that the claim and allowability of deduction under the Act would be examination and determination by the assessee at the time of filing of income. Therefore, the assessee argued that once expenditure has been incurred and recorded in the books of the assessee, the same cannot be said to be an 'undisclosed income' on the ground that it is an inadmissible expenditure under the Act. The assessee stated that 'undisclosed income' is defined in clause (c)....
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....me also does not come within the ambit 'undisclosed income' under the said section. The assessee argued that the assessee had not made any claim of such expenses under section 35(2AB) of the Act till the time of the search, as the claim of the same would be made while filing the return of income. The assessee stated that there is no dispute that expenditure has been incurred by the assessee. The only question is whether the same has been used for the purpose of research and development or not, which would be determined only after the audit and finalization of the books of account. Therefore, the assessee argued that for the detailed reasons given for the 'sales promotion expenses', the expenses on Research and development expenses cannot be said to come within the ambit of undisclosed income under section 271AAB of the Act. 12. The next item of 'Sales promotion expenses' of Rs. 4,08,20,319/- incurred after the date of search. It was contended that the AO erred in applying section 271AAB of the Act even to 'sales promotion expenses' of Rs. 4,08,20,319/- admittedly incurred subsequent to the date of the search. The assessee explained that the sales promotion ....
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....egulations, the question of any disallowance under the explanation to Section 37(1) of the Act does not arise as what can be disallowed is only those items of expenses which are prohibited by Law and not prohibited by any ethical guidelines or anything else. It is further explained that the entire Medical Council Regulations are applicable to the medical professionals and not to the pharma companies. On just a plain reading of the regulations it is clear that what it says is that the medical professionals will not accept any gift etc. from pharma companies but nowhere it says that the pharma companies will not give any gift etc. to medical professionals and accordingly the guidelines are only applicable to medical professionals and not to the pharma companies at all. 15. Accordingly, in view of the above legal position, we noted that the entire expenditure incurred by assessee on doctors are pure marketing business expense required and incurred wholly and exclusively for the purpose of the business of the company and is allowable as a business expense u/s 37(1) of the Act as it is not hit by the explanation thereof. However, at the time of search, it was pointed out by the search ....
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....of payment. There is no dispute regarding genuineness of incurring of such expenses and it is also not the case of revenue that the expenditure is not incurred. Further, the assessee has recorded this expenditure in the books of account maintained during normal course of business. In regard to disallowance of deduction under section 35(2AB) of Rs.4,67,96,325/- and R & D stock difference of Rs.14,05,680/-. It was contended that the expenses on Research and Development which is entitled for deduction under section 35(2AB) of the Act are as per the books of accounts and recorded in the books of accounts. Further, R&D stock difference was consumed in R&D but stock register maintained by technical persons was not updated as on the date of the search but during search it was pointed out by the search party that a part of the deduction so claimed may not be utilized be allowable in the assessment. Hence, it was thought that it was not appropriate to contest this claim of deduction and it was decided to withdraw the claim of deduction in the statement under section 132(4) of the Act. In regard to reversal of depreciation of Rs.15,95,863/-, the names of some of the suppliers appearing on th....