TaxTMI 
TaxTMI 
2024 (4) TMI 405
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....ved are common, all the appeals for all the assessment years were heard together. Both the parties also argued them together raising similar arguments on these issues. Accordingly, for the sake of convenience and brevity, we dispose all the appeals by this consolidated order. 2. Before we advert to the grounds taken in the cross appeals, it would first be relevant to cull out the basic facts of the case and effect of law in brief in respect of certain AYs. Search u/s 132 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was conducted against the IPCA Laboratories Ltd. & Others Group, on 23-12-2014 thereby triggering Section 153A of the Act. Prior to the date of search, the income-tax assessment under section (hereinafter referred to as "u/s.") 143(3) of the Act (scrutiny assessment) for AYs 2009-10 and 2010-11 stood completed on 09.05.2013 & 29.05.2014. Accordingly, the income-tax assessments for Assessment Years [AYs] 2009-10 & 2010-11 were not pending before Assessing Officer (AO) on the date of search, therefore, those years assessments didn't abate consequent to the search on 23-12-2014. As far as assessments for AYs 2011-12, 2012-13 & 2014-15 are concerned,....
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....common issues across all AYs before us together. 4. Issue 1: Additions made in original assessment u/s 143(3) of the Act again added back in the assessment completed u/s 153A/143(3) of the Act Ground Nos. 13-15 of the assessee's appeal and Ground No. 12 of the Revenue's appeal for AY 2009-10 Ground Nos. 11-13 of the assessee's appeal and Ground No. 12 of the Revenue's appeal for AY 2010-11 4.1 These grounds relate to the several additions which were made by the AO while completing the original assessment u/s 143(3) of the Act for AYs 2009-10 & 2010-11, which were again considered and added back by the AO while framing the income tax assessments u/s 153A/143(3) of the Act. The additions in question are noted to comprise of viz., a) transfer pricing adjustments towards goods sold to AEs and interest recoverable from AEs made by the TPO u/s 92CA(3) of the Act, which was added by the AO in the original assessments for AYs 2009-10 and 2010-11; b) disallowance of deduction claimed u/s 80-IC of the Act to the extent of income derived from the sale of scrap added in original assessments u/s 143(3) for AYs 2009-10 & 2010-11; c) disallowance....
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....O cannot assess or reassess, by taking into consideration the other material, in respect of completed/unabated assessment. Hence, in case of unabated assessments, the AO can re-assess the income only to the extent and with reference to any incriminating material which the Revenue has unearthed in the course of search qua the assess qua the AY. 4.5 From the facts before us, it is noted that the AO's predecessor had already made additions on the four (4) issues mentioned above in the original assessment u/s 143(3) for AYs 2009-10 & 2010-11, which was completed much prior to the date of search. Hence, these assessments were unabated and the fate of the addition/s made in the original assessments, constituted separate & independent proceedings, which as rightly pointed by the Ld. AR was being separately pursued both by the assessee and the Revenue as well. We thus note that the fate of the addition/s made therein had no relation with the income-tax assessments completed u/s 153A/143(3) of the Act pursuant to the search. As noted above, since AYs 2009-10 & 2010-11 were unabated assessments, the AO could disturb these completed assessments only qua the issues in relation to which incr....
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....ance is permissible even in absence of incriminating material in an unabated assessment, then he has prayed for admission of the Additional Ground No. 1 raised in AY 2010-11. In this additional ground, the assessee has claimed deduction for the amount of loss incurred by the same SEZ Unit, prior to commencement of commercial production, while computing the book profit u/s 115JB of the Act for AY 2010-11. 5.3 On merits of the claim, the Ld. AR submitted that the provisions of Section 115JB (6) of the Act invoked by the AO had no application to the loss incurred by SEZ Unit prior to commencement of business activity/commercial production. He submitted that, the SEZ Unit at Pritampur, Madhya Pradesh had commenced commercial production only from 29.11.2011 i.e. AY 2012-13 and onwards and thus any expenses/losses incurred by the said SEZ unit prior to commencement of business was not amenable to Section 10AA of the Act and hence the provisions of Section 115JB(6) had no application. For this, the Ld AR first invited our attention to the language used in clause (6) to Section 115JB of the Act. It is noted that clause (6) of Section 115JB provided that; the provisions of this section s....
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....s found with respect to the loss on account of trial expenses incurred at the SEZ Unit at Pritampur, Madhya Pradesh. As noted by us above, following the decision of the Hon'ble Supreme Court in the case of Abhisar Buildwell Pvt Ltd (supra), in case of unabated assessments, the AO can re-assess the income only to the extent and with reference to any incriminating material which the Revenue has unearthed in the course of search qua the assess qua the AY. On the given facts before us, we find that the AO has made disallowance to the computation of book profit on the basis of his interpretation of the provisions of Section 115JB (6) of the Act, without any reference to any seized material impounded in the course of search. Following the decision of Hon'ble Supreme Court (supra), we are in agreement with the Ld. AR that the impugned disallowance could not have been made in the unabated AY 2009-10, in absence of there being any incriminating material found in the course of search relating to this impugned issue. Accordingly, this legal plea of the assessee stands allowed and hence the disallowance of Rs. 5,97,86,283/- made by the AO on account of loss incurred by the SEZ Unit while compu....
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.... order dated 31.10.2017. The first issue which was decided by the Tribunal was in respect of claim of expenditure and in some cases on account of depreciation made for the first time in the returns of income filed under section 153A of the Act. The Tribunal vide para 11 held as under:- "11. We have heard the rival contentions and perused the record. The first issue which arises in the present appeal is in respect of claim of expenditure on account of interest and in some cases on account of depreciation. Admittedly, the said expenditure was not claimed by the assessee in the return of income filed prior to search at the premises of assessee. However, consequent to search proceedings carried on the premises of assessee, notice under section 153A of the Act was served upon the assessee. In response thereto, in the return of income filed by the assessee, fresh claim of interest expenditure and depreciation on certain assets was made. The said claim was not allowed by the authorities below. The assessments for assessment years 2005-06 to 2008-09 i.e. appeals listed before us have not abated. In such cases, where the assessment has not abated, then the Hon'ble Bombay High C....
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....n of income, which had been accepted in the original assessment u/s 143(3) of the Act. In our opinion, in absence of any incriminating material to justify the impugned addition, and following the decision of Hon'ble Supreme Court in the case of Pr.CIT vs Abhisar Buildwell Pvt Ltd (supra), it is held that the impugned disallowance could not have been legally made in the unabated AY 2009-10. We thus uphold the order of Ld. CIT(A) by allowing this legal issue and dismiss this ground of the Revenue. 7. Issue 4: Expenditure by way of tax paid on ESOP added u/s 115JB of the Act Ground No. 7 of the Revenue's appeal for AY 2010-11 7.1 This ground raised by the Revenue relates to the Ld. CIT(A)'s action of deleting the addition made on account of tax of Rs. 1,60,34,723/- paid on the non-monetary perquisite granted to employee/s by way of ESOPs while computing book profit u/s 115JB of the Act. The AO is noted to have held that this tax paid for and on behalf of the employees, although a non-monetary perquisite, was in the nature of 'income-tax' and hence added the same under Explanation (1) to Section 115JB of the Act. On appeal, the Ld. CIT(A) is noted to have deleted the disallowa....
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....atement u/s 132(4) of the Act that, this amount was generated from over-invoicing of raw material purchases in the IPCA Laboratories Ltd, which was received back by him in cash. Basis this statement, the Investigating authorities are noted to have examined three (3) employees viz., Mr. Manoj K. Jain, Mr. Manoj S Jayawant and Mr. Peter Fernandez, each of whom is noted to have stated that over-invoicing purchases are booked through M/s Reynolds Petro Chem Ltd. The relevant excerpts of their statements as noted by us are as follows :- Relevant part of statement of Mr. Manoj Kumar Jain:- "Q. 9 Are you aware of any bogus purchases booked or bogus commission payments made by M/s IPCA Laboratories Ltd. Ans: Sir, I am not aware of any bogus commission made by M/s IPCA Laboratories ltd. but there is bogus purchase booked from M/s Reynolds Petro Chem Ltd. Q. 11 Please furnish the details of the transactions made with M/s Reynolds Petro Chem Ltd, along with the modes operandi followed. Ans: Sir, in case of purchase of product MAPA (Methyl Amino Propyl Amine) which is made in M/s Makers Laboratories Ltd., the adjustments are made. M/s Makers Laborat....
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....Peter Fernandes:- "Q. 9 Are you aware of any bogus purchases booked or bogus commission payments made by M/s IPCA Laboratories Ltd. Ans: Sir, purchases are booked from M/s Reynolds Petro Chem Ltd. The purchases are not bogus but over invoicing are done. Q.12 Please give details of all products which are purchased at a rate higher than market rate for the purpose of taking cash out of the system. Ans. Sir, following are the products purchased at a higher rate: Name of the Products Market Rate Inflated Rate Difference per Kg taken out in cash Paracetomol 235/- 245/- 10/- Erythromycin Estolate 2500/- 2700/- 200/- The market price keeps on fluctuating with time. However, the difference per Kg. taken out in cash remains same." 8.2 The Ld. AR particularly pointed out to us that, each of these three (3) employees in their statements had only admitted that the over invoicing of raw materials was done through one vendor, M/s Reynolds Petro Chem Ltd who would provide inflated bills. In fact, Mr. Manoj K. Jain & Mr. Manoj S Jayawant in their answers to Q No. 11 & Q No. 12 respectively, are noted to have specif....
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....cing was routed back in guise of 'commission'. 8.4 Referring to the search findings, the AO is noted to have made independent enquiries u/s 133(6) of the Act from five (5) suppliers viz., M/s Sarna Chemicals Pvt Ltd, M/s Anuh Pharma Ltd, M/s Mehta API Pvt Ltd, M/s Calyx Chemicals & Pharmaceuticals Ltd and M/s Farmson Pharmaceuticals Pvt Ltd. According to AO, these vendors were over-invoicing the assessee. To this, the Ld. AR has rightly pointed before us out that M/s Reynolds Petro Chem Ltd does not feature therein and it is not in dispute that the assessee company i.e. M/s IPCA Laboratories Ltd had not made any purchases from M/s Reynolds Petro Chem Ltd in any of the AYs. It is further noted that, in the enquiries made u/s 133(6), the AO had called for the comparative details of sales made by these five (5) vendors to the assessee company and their other customers. Based on the data obtained from these vendors, the AO is noted to have undertaken a benchmarking analysis and compared the prices at which the aforementioned vendors had made sales to the assessee and to others and also the internal rates at which the assessee made purchases of same products from other parties, apart....
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....s in the course of search u/s 132(4) of the Act, which is an important piece of evidence in itself and that their subsequent retraction, being an afterthought, was of no relevance. In order to adjudicate this contention, it is first relevant to examine the extant provisions of Section 132(4) of the Act, which reads as follows: "(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act. Explanation.-For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act." 8.....
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....the facts admitted originally is correct and thus retraction can be discarded. 8.8 In view of the above position of law, we now proceed to examine the facts on the present case. It is noted that the impugned addition on account of over-invoicing emanated from the statement of Mr. Prashant Godha. He is noted to have admitted in his statement that the cash found in his possession was generated out of over-invoicing and that these proceeds belonged to the assessee-company. Based on his statement, the Investigating Authorities are noted to have enquired into the source/party from whom such over-invoicing was done. As noted from the statements of the three (3) employees extracted above, the Investigating Authorities had questioned them as to whether they were aware of any bogus purchases booked by the assessee company. To this, each of the employee is noted to have made the same averment that purchases were booked from M/s Reynolds Petro Chem Ltd but these purchases were not bogus and that only over invoicing was done. The Investigating Authorities are noted to have followed up this answer with another question to explain the details of transactions made with M/s Reynolds Petro Chem ....
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.... Godha had backed his retraction affidavit by offering the cash found in his possession to tax as his own unaccounted income and the Revenue is also noted to have accepted the said offer and assessed it to tax in his hands. The contemporaneous facts showed that assessee-company had not made any purchases from M/s Reynolds Petro Chem Ltd, which was found to be engaged in giving inflated invoices. Moreover, the Revenue had already made additions on account of over-invoicing in hands of M/s Maker Laboratories Ltd in relation to the purchases from M/s Reynolds Petro Chem Ltd. Also, the cash found from the possession of Shri Prashant Godha had been ultimately assessed as his own undisclosed income. Considering the entire gamut of facts therefore, the original testimony of Shri Prashant Godha is found to be based on wrong assumption of facts, which makes it unsafe to rely on it and as discussed, the assessee has rebutted the same with evidence. Hence, we hold in aforesaid factual matrix, the AO erred to draw adverse inference in the hands of the assessee solely based on an incorrect admission made by the Director on wrong assumption of fact/mistake of fact. 8.9 As already noted above,....
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.... varied across vendors and hence an apple-to-apple comparison was not possible until functional adjustments were made. The Ld. AR also showed us that there were quantitative differences as well. He explained that it is well-known that bulk purchases carry discounted value in comparison to small/retail purchases. The Ld. AR also brought to our notice certain quality differences as well, which according to him, would have a bearing on the price. For instance, he took us through the different grades of paracetamol used in Indian market, European market and other countries. He accordingly explained that the rates of paracetamol varied across different grades. Having regard to the foregoing, we overall find merit in the assessee's plea that the benchmarking exercise conducted by the lower authorities suffered from several infirmities and was therefore unreliable. 8.11 The Ld. AR also pointed out that this benchmarking exercise undertaken by the lower authorities had no legal backing. He submitted that Chapter X of the Act contained provisions giving authority to the officers for undertaking the transfer pricing exercise in relation to international or specified domestic transactions ....
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....owed and the grounds of Revenue are dismissed. 9. Issue 6: Disallowance of bogus purchases Ground Nos. 8-10 of the assessee's appeal and the Ground No. 5-6 of the Revenue's appeal for AY 2009-10 Ground Nos. 8-10 of the assessee's appeal and the Ground No. 5-6 of the Revenue's appeal for AY 2010-11 Ground Nos. 8-10 of the assessee's appeal and the Ground No. 5-6 of the Revenue's appeal for AY 2011-12 Ground Nos. 8-10 of the assessee's appeal and the Ground No. 8-9 of the Revenue's appeal for AY 2012-13 9.1 These grounds are in relation to the disallowance of purchases made from seven (7) parties viz., M/s Arihant Enterprises, M/s Rushabh Sales Corporation, M/s Regal Sales Corporation, M/s Seva Enterprises, M/s Shree Ganesh Enterprises, M/s Mehul Traders and M/s Krish Enterprises. Briefly stated, the facts as noted are that, during the course of a survey action at one of the premises of the assessee, statement of one employee Mr. Bhupendra Joshi was recorded. In his statement, he is noted to have stated that, the purchases made from M/s Arihant Enterprises, M/s Rushabh Sales Corporation and M/s Regal Sales Corporation were not verifiable and thus he offered to disal....
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....ose dealers who had collected VAT from the customers but did not deposit it with the State Government. According to Ld. AR therefore, this default by the supplier would not ipso facto mean that the purchases made by the assessee was not genuine. The Ld. AR accordingly submitted that the premise on which the AO suspected the purchases to be bogus was fundamentally flawed. The Ld. AR thus urged that these purchases ought to be held as genuine and thus the entire addition be deleted. Alternatively, the Ld. AR submitted that the profit element of 12.5% taxed by the Ld. CIT(A) was excessive. He showed us that, the assessee had already disclosed gross profit of 38% and thus according to him, further addition of 12.5% was unwarranted. 9.3 Per contra, the Ld. CIT, DR vehemently supported the order of the AO. He submitted that the retraction affidavit furnished by Mr. Bhupendra Joshi was an after-thought and therefore ought to be discarded. He further claimed that the assessee had failed to prove the genuineness of the purchases in the course of assessment, hence the AO had rightly disallowed the same. According to him, the Ld. CIT(A) had erred in restricting the disallowance to the exte....
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....his regard, we may gainfully refer to the decision of the Hon'ble Gujarat High Court in the case of CIT Vs Bholanath Polyfab (P.) Ltd. (355 ITR 290) wherein similar issue was involved. In that case also, it is noted that this Tribunal was of the opinion that the purchases might have been made from bogus parties but the purchases themselves were not bogus. Considering such a situation, this Tribunal was of the opinion that not the entire amount of purchases but the profit margin embedded in such amount would be subjected to tax. On appeal by the Revenue, the Hon'ble High Court is noted to have upheld this finding of the Tribunal. 9.6 We further note that there are a series of judgments of the Hon'ble jurisdictional Bombay High Court wherein it has been held that, only the profit element embedded in the purchases made from bogus parties has to be brought to tax and that the entire value of purchases cannot be disallowed. In the case of PCIT vs Mohommad Haji Adam & Co (103 taxmann.com 459), the Hon'ble jurisdictional High Court has held as under:- "8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging....
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....ional High Court in the case of PCIT vs. Pinaki D Panani (ITA No. 1543 of 2017) has held as under :- "Even if the purchases made by the assesse are to be treated as bogus, it does not mean that entire amount can be disallowed. As the AO did not dispute the consumption of the raw materials and completion of work, only a percentage of net profit on total turnover can be estimated." 9.9 The Hon'ble Bombay High Court in the case of PCIT vs. Jakharia Fabric (P.) Ltd. [2020] (118 taxmann.com 406) also held as under: "11. In the assessment proceedings Assessing Officer had relied upon information obtained from the Investigation Wing of the Department at Mumbai which in turn had obtained the information from the Sales Tax Department, Government of Maharashtra. The information was to the effect that the eight parties from whom the purchases were allegedly made were alleged hawala dealers who had issued bogus bills totalling Rs. 1,14,92,970.00. 12. In the appellate proceedings before the first appellate authority, it was held as under :- "2.15 The facts in the present case shows that the appellant was not in a position to prove the existence of the supp....
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....cumstances of the case, CIT(A) took the view that taking of 17.5% as the profit would meet the ends of justice. Accordingly, Assessing Officer was directed to estimate profit of 17.5% on the total alleged bogus purchases and thereafter, to delete the balance amount of addition. 14. In further appeal Tribunal referred to the above finding of the CIT(A), whereafter it was held as under:- "6. Thus, from the aforesaid analysis, conclusions and findings recorded by the Ld. CIT(A), it is evident that total purchases were wrongly disallowed by the Assessing Officer. The Ld.CIT (A) took a reasonable view whereby the disallowance was sustained to the extent of estimated inflation in the amount of purchases made by the assessee. The disallowance sustained by the Ld. CIT(A) @ 17.5% of the purchases have been accepted by the assessee with a view to bury the litigation. Nothing has been brought before us by the Ld. DR to contradict the findings recorded by the Ld.CIT(A). The assessee's counsel has also placed reliance upon the judgment of Hon'ble Bombay High Court in the case of Nikunj Eximp Enterprises Pvt. Ltd. (supra) wherein similar issue has been decided on identi....
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....genuineness of the purchases, it was incumbent upon the Assessing Officer to have caused further enquiries in the matter to ascertain genuineness or otherwise of the transaction and to have given an opportunity to the assessee to examine/cross-examine those two parties vis-a-vis the statements made by them before the Sales Tax Department. Without causing such further enquiries in respect of the purchases, it was not open to the Assessing Officer to make the addition under section 69C of the Act. 18. We are in agreement with the view expressed by the Tribunal. In fact, Tribunal has only affirmed the finding of the first appellate authority. Thus, there is concurrent finding of fact by the two lower appellate authorities. 19. This Court in the case of Commissioner of Income-tax -1, Mumbai v. Nikunj Eximp Enterprises(P.) Ltd. 372 ITR 619; wherein an identical fact situation arose did not interfere with the order passed by the Tribunal and held that no substantial question of law arose from such order. It was held that merely because the suppliers had not appeared before the Assessing Officer, no conclusion could be arrived at that the purchases were not made by the a....
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....ovided the details of services rendered by ACIAL, invoices raised by them, service tax charged, TDS deducted etc. The AO however observed that this company ACIAL was being operated by Shri Shirish Shah who was found to be providing accommodation entries like LTCG, share capital etc., which was revealed in the course of a search action conducted upon Mr. Shah. The AO thus held that ACIAL had provided accommodation entries to the assessee as well, in the guise of professional fees. The AO accordingly disallowed the professional fees paid by the assessee to ACIAL. Being aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the same. Aggrieved by this Ld. CIT(A)'s action, the Revenue is now in appeal before us. 10.3 We have heard both the parties and perused the material placed before us. It is noted that, the assessee had availed annual support services for maintenance of their computer systems and internal servers from ACIAL which was essential to their business. The Ld. CIT(A) at Para 11.3.2 of the order for AY 2009-10 is observed to have taken note of the annual maintenance services rendered by ACIAL, which are as follows :- "9.3.2. The facts of ....
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....paid the professional fees inclusive of service tax after deducting tax at source through banking channel. These facts are not in dispute before us. We therefore note that the assessee has provided all relevant contemporaneous evidences, which it was required to maintain in the ordinary course of business, to substantiate the genuineness of the transactions. 10.5 The case of the Revenue is found to be hinge solely on the statement of one Mr. Shirish Shah who was purportedly found to have been involved in providing accommodation entries in the form of bogus long-term capital gains and share capital etc. According to the Revenue, ACIAL was being managed and controlled by Shri Shah and thus in light of his statement given in the course of his search, the professional fees paid to ACIAL was treated to be in nature of accommodation entry. The Ld. AR has shown us that, the copy of the statement of Mr. Shirish Shah was never provided to the assessee nor was any opportunity to cross-examine him afforded to the assessee. It also not the case that the Revenue was able to show that Mr. Shirish Shah in his statement had implicated the assessee of any wrong-doing or admitted to providing acc....
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....rs Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs. 19,39,60,866/-, is directed to be deleted." 4. The ITAT by its judgment dated 16th May, 2014 relied on the self-same reasoning and dismissed the appeal of the revenue. Likewise, the High Court by the impugned judgment dated 5th July, 2017, affirmed the judgments of the CIT and ITAT as concurrent factual findings, which have not been shown to be perverse and, therefore, dismissed the appeal stating that no substantial question of law arises from the impugned order of the ITAT." 10.7 In view of the facts as discussed above and following the ratio laid down in the decisions cited (supra), the order of the Ld. CIT(A) deleting the disallowance of professional fees made by the AO, does not warrant any interference. These grounds of the Revenue are therefore dismissed. 11. Issue 8: Disallowance of sales promotion expenses Ground Nos. 1 to 4 of the assessee's appeal and the Ground Nos. 1-3 of the Revenue's appeal for AY 2009-10 Ground Nos. 1 to 4 of the assessee's appeal and the Ground Nos. 1-3 of the Revenue's appeal for AY 2010-11 Ground Nos. 1 to 4 ....
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....in Rs. ) 2013-14 2012-13 2011-12 2010-11 Total 1)547014 Patient Education / Detection Camp 91918890 23210338 15485059 11417698 142031985 2)547019 HTC expenses 5437948 5437948 3)547050 Other Sales promotion expenses 303491 7434329 4458844 9527184 21723848 4)548262 Sales promotion expenses 10222498 11760119 16155111 13913895 21723848 5)548283 Journal & periodicals 3185471 16160223 24083160 9805864 43447696 6)548284 Taxi Hire charges 12346237 11016369 4899879 11541126 86895392 7)548285 Field Printing expenses 47067729 41214476 22982639 8)547017 Sponsorship expenses 19407 141271 237285 21964439 22362402 9)547025 CRM-1 Expenses 2078002 2078002 10)547026 CRM-II Expenses 483201 483201 11)547027 CRM-III Expenses 254396 254396 12)547055 Trade Relation expenses 9579992 9579992 13)5457056 Gifts for sales pro....
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.... expenses are in contrarian to the guidelines issued by MCI vide notification No. MCI-211(1)/2009 (Ethics)/ 55667 dt. 10/12/2009 and CBDT Circular No. 05/2012 issued in August 2012. Shri Shravan Beli has admitted that these expenses of Rs. 63.66 Crores are not allowable expenses as per the provisions of 1.T.Act. 1961. Ans. Sir, I confirm that I have gone through the statement of Mr. Shravan Beli recorde U/s 131 on 25.12.2014. I do agree with him and state that expenses of Rs. 63.66 crores are not allowable expenses and M/s IPCA will disallow the same and pay the applicable taxes." 11.3 In the post search enquiries, the assessee is however noted to have furnished explanation for selective impounded material relating to sales promotion expenses which has been extracted by way of a Table in Para 7.3 of the assessment order for AY 2009-10. The assessee is noted to have provided the complete details and supporting's in relation to the impounded materials and showed that these were incurred in the course and for the purposes of business. These selective impounded materials were not found to contain any details of freebies paid to doctors. 11.4 Thereafter, the case of the a....
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....manner, which is noted to be independent and different from the amounts admitted to be disallowable by Mr. Beli. Nature of Expenses Quantum Disallowed - Expenses on Patient Detection / Education Camp 100% - Camp Expenses 10% Sponsorship Expenses 100% Participation in Symposium Separate Quantification by AO Doctor Meeting/ Medical Awareness Separate Quantification by AO Corporate / Brand-recall Promotion Expenses 10% HTC Expenses 100% CRM Expenses 100% Sales Promotion & Other Sales Promotion Expenses 100% Journals & Periodicals 100% Taxi Hire Charges 100% Field Printing Expenses 100% Trade Relation Expenses & Gifts for sales promotion 100% Air Ticket Expenses 100% 11.6 Being aggrieved by the above action of the AO, the assessee had preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) is also noted to have undertaken factual exercise into the nature and details of the above sales promotion expenses and re-quantified the expenses which were incurred for the benefit of the doctors across all AYs 2009-10, 2010-11, 2011-12, 2012-13 & 2014-15 and accordingly partially deleted the addition mad....
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....e expenses incurred towards sales promotions expenses to show us that none of these expenses were incurred for the benefit of the doctors. According to him therefore, even on facts the sales promotion expenses did not fall within the mischief of MCI Regulations, 2009 read with CBDT Circular (supra) and thus he prayed that the entire addition be deleted in full. The Ld. AR has also furnished a written note in support of the same. 11.9 In the rejoinder, the Ld. CIT, DR in his written submissions has submitted that, in the course of search, the statement of Mr. Beli and Mr. Godha were recorded which constituted incriminating material to justify the disallowances made in the unabated AYs 2009-10 & 2010-11. According to him, the AO had analyzed the details of expenses found on the server and unearthed that certain expenses which were in nature of 'freebies' had been guised as 'sales promotion expenses', and this, in his view was incriminating in nature. The Ld. CIT, DR has also filed written submissions obtained from the AO. 11.10 We have heard both the parties and perused the material as well as the written submissions placed before us. Before adverting to the facts of the case, ....
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....ular dated Circular No.5/2012 (F.No.225/142/2012-ITA.II), dated 01.08.2012 and the regulations of 2002. 20 In this context it becomes necessary to briefly refer to the regulations of 2002 as also the CBDT circular dated 1 August 2012. 21 The Medical Council of India in exercise of powers conferred under the MCI Act 1956 framed the regulations called the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. These regulations pertain to the professional conduct, etiquette and ethics for medical practitioners. 22 Chapter 6 of the regulations in particular deals with certain acts which would be construed as unethical like advertising his professional skill or practice soliciting patients directly or indirectly etc. .... 23 However, vide notifcation dated 10 December 2009 the aforementioned regulations were amended to include Clause 6.8. This was incorporated for the reason that the existing regulations prescribed conditions and regulations for medical practitioners only and did not cover their relationship with the pharmaceutical and allied health industry. The regulation prescribed as under : .... ....
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.... "the CBDT Circular being clarifcatory in nature and was in effect from the date of implementation of Regulation 6.8 of 2002 Regulations, i.e. from 14 December 2009." 29 In our opinion, since the CBDT Circular No.5/12 as also Regulation 6.8 of 2002, were not applicable to the case of the Petitioner for the relevant assessment year 2008-09, there would be no tangible material or basis for the assessing officer to have 'reason to believe' that income for the said assessment year 2008-09 had escaped assessment." 11.12 Having regard to the above position of law, we thus hold that the CBDT Circular No. 5/2012 read with MCI Regulations, 2009 did not apply to the sales promotion expenses incurred by the assessee in FY 2008-09 relevant to AY 2009-10. It is accordingly held that the sales promotion expenses disallowed by the AO in this AY 2009-10 by invoking Explanation (1) to Section 37(1) of the Act was unjustified. Thus, the entire disallowance is held to be unsustainable and is directed to be deleted. 11.13 Now coming to AY 2010-11, as noted above, the CBDT Circular No. 5/2012 read with MCI Regulations, 2009 is effective only from 14.12.2009. Accordingly, any sales promot....
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....ll under the mischief of MCI regulations 2009. 11.17 The Ld. AR has also rightly pointed out that, being a pharmaceutical company, the assessee cannot advertise its products. However, the assessee is entitled to create awareness of its products by participating in exhibitions and organizing conferences and therefore the expenditure incurred for organizing the same would not fall within the ambit of CBDT Circular No.5/2012 read with MCI Regulations 2009. Likewise, any journals or periodicals printed and shared with customers, distributors or medical practitioners to make them aware about the research behind manufacture of any new medication or its uses or effects in any particular disease also cannot be termed as 'gifts' given to doctors. However, the expenses, if any, incurred on travel and hotel accommodation of the doctors to attend these exhibitions or conferences would however be hit by the rigors of MCI Regulations, 2009. 11.18 In light of the above understanding of the position of law and MCI Regulations, 2009, we now proceed to examine the head-wise nature of sales promotion expenses claimed by the assessee and ascertain as to the quantum of expenses, if any, which qua....
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....f these expenses and recorded a finding of fact that the expenses on Patient Detection were incurred for the benefit of patients and not the doctors and thus deleted the same. Likewise, camp expenses were examined by the Ld. CIT(A) and was noted to have been paid to various camps and included expenses incurred for travelling & refreshments of field staff or patients and thus was not related to doctors. 11.19.3 Before us, the Ld. DR was unable to point out any specific defect in the above submissions of the Ld. AR as well as the findings of Ld. CIT(A). We thus do not see any reason to interfere with the Ld. CIT(A)'s action of deleting the disallowance made by the AO out of Expenses on Patient Detection / Education Camp & Camp expenses. 11.20 We now come to Sponsorship Expenses. The AO is noted to have held that these expenses were for the benefit of doctors and thus disallowed the same in full. It is observed that, there were no specific reasons assigned by the AO for arriving at such conclusion. On appeal, the Ld. CIT(A) is noted to have examined the details of these expenses and he found that these payments were made to trade associations for sponsoring their events as a mea....
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....siums / Exhibitions: The AO had noted that the expenses under this head majorly comprised of payments to organizers for hiring & erection of stalls at their symposiums, registration charges, hotel expenses & travelling expenses and disallowed the entire amount as 'freebies' to doctors. The Ld. CIT(A) however noted that these expenses were paid to institutions and not doctors and thus deleted the same. Having heard the rival submissions and upon examining the facts placed before us, it is noted that the payments made by the assessee can be categorized into three categories viz., (a) payments made to institutions/trade bodies for registration, hiring of stall, designing and erecting their stalls, (b) hotel expenses and (c) travelling expenses. According to us, there is no such bar under the MCI regulations preventing the assessee from registering themselves at different symposiums, hiring & erecting stalls etc. The Ld. AR showed us that these expenses were paid to institutions / trade bodies. We agree with the Ld. CIT(A) that these expenses did not result in any benefit to the medical practitioners and thus could not be disallowed u/s 37 of the Act. With regard to hotel & travelling ....
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....anizing such events for their brand awareness and dissemination of information and research, cannot be said to constitute 'freebies' to medical practitioners and thus is held allowable u/s 37(1) of the Act. As far as hotel & travelling expenses are concerned, we find that these expenses comprised of refreshments provided to doctors who were the delegates at the conferences and reimbursement of their travelling expenses. As noted earlier, these expenses indeed benefitted the doctors and would tantamount to availing hospitality from a pharmaceutical company. According to us therefore, only the hotel & travelling expenses fell within the ambit of MCI regulations and directed to be disallowed and added back u/s 37(1) of the Act. 11.23 We now take up the Brand Recall Purchases, HTC Expenses, CRM Expenses and Sales Promotion & Other Sales Promotion Expenses together. Briefly stated, the AO noted that the brand re-call purchases included procurement of customized items such as clock, cup, cookware etc. The assessee had explained that these sales promotion articles which had their name & logo were given to customers, retailers, stockiest and distributors as a part of their advertisement....
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....is thus directed to be deleted. 11.24 With regard to sub-head 'Journals & Periodicals', it is noted that these expenses were incurred for researching & printing literature or purchasing journals regarding the products and its related uses/effects. As noted earlier, these expenses do not result in any benefit or gifts given to the doctors. We thus agree with the following findings of Ld. CIT(A) recorded in AY 2011-12 deleting the disallowance made by the AO on account of expenses incurred under this sub-head. "6.4.3 Further, with respect to expenses incurred under the head 'Journal and periodicals', I find that the same are not related to doctors and used for the branding of the products of the assessee. The said journals and periodicals contains the description and articles on the products of the assessee which are circulated by the assessee in order to advertise its brands. The main purpose behind these expenses is for providing knowledge and update about its products. Thus, the doctors have not get any benefit from such expenses paid to third party. Therefore, 100% disallowance of Rs. 98,05,864/- made by the AO is deleted." 11.25 Now we examine the sub-head....
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....' given to doctors and hence we uphold the order of Ld. CIT(A) deleting the same. 11.27 The next sub-head for our consideration is 'Trade Relation Expenses & Gifts for Sales Promotion'. Briefly noted, these expenses are noted to cover the cost of articles / gifts purchased by field staff to be distributed to wholesalers / stockiest / business partners etc. The assessee is noted to have placed sample supporting's at Page Nos. 270 to 279 of Paper Book No. 3. It is observed that, the AO had disallowed these expenses under erroneous understanding that these were given to doctors. On appeal, the Ld. CIT(A) in AY 2014-15 is noted to have deleted the addition by observing as under :- "Further, with respect to the expenditure incurred under the head Trade relation expense and gifts for sales promotion expenses, the same has majorly incurred on the distributors and stockists for the domestic marketing. Therefore, it is not incurred in relation to the doctors. Therefore, 100% of the disallowance of Rs. 95,79,992/- in relation to Trade Relation expenses and Rs. 5,66,672/- in relation to Gift for sales promotion expenses by the AO is deleted." 11.27.1 The Ld. CIT, DR appearing f....
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.... gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A. 2. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits.... 3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissibl....
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....h Court in their judgment reported in 121 taxmann.com 351 has since affirmed the decision of the Special Bench. Thus, in light of aforesaid decisions, we have no hesitation in upholding the order of Ld. CIT(A) deleting this impugned addition. We thus dismiss these grounds of the Revenue. 13. Issue 10: Disallowance of deduction u/s 80IC in relation to sale of scrap Ground No. 11 of the Assessee's appeal for AY 2011-12 Ground No. 11 of the Assessee's appeal for AY 2012-13 Ground No. 8 of the Assessee's appeal for AY 2014-15 13.1 These grounds of the Revenue are against the Ld. CIT(A)'s action of reversing the AO's action of not considering the profit derived from sale of scrap as eligible profit of industrial undertaking u/s 80IC of the Act. Briefly noted, the AO following the identical line of reasoning set out by his predecessors held that the sale of scrap does not constitute turnover and is not derived from the eligible undertaking. The AO accordingly held the profit from sale of scrap to be ineligible for deduction u/s 80-IC of the Act. Likewise, on appeal, the Ld. CIT(A) is noted to have deleted this disallowance by following the order passed by this Tribunal in ....
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.... facts placed before us, it is noted that, the assessee was in receipt of excise subsidy from the Central Government to the tune of Rs. 69,49,430/- and Rs. 11,58,23,153/- in AYs 2012-13 & 2014-15 respectively in respect of their new unit set-up in the State of Sikkim. The Ld. AR pointed out that the assessee had set-up a new manufacturing unit in the State of Assam. The ld. AR invited our attention to the Eligibility Certificate confirming that the unit set-up by the assessee is eligible for exemption from excise duty in terms of the said Notification as a new unit with effect from 01.07.2011 i.e. the date of commencement of commercial production. It is noted that the said exemption was given to the new units for development of Industries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification dated 01.04.2007 is reproduced below: - "Incentives will be available to all industrial units, new as well as existing units on their substantial expansion, located anywhere in the North Eastern Region. Consequently, the distinction made between 'thrust' and 'non-thrust' industries made in NEIP, 1997 will be discontinued from 01.04.2....
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....e Ld. CIT(A). 14.4 We have considered the rival submissions of both the parties. From the facts as discussed in the foregoing, it can be safely inferred that the subsidy was granted to the assessee for setting up new unit in the State of Sikkim. The Hon'ble Supreme Court in the case of Chaphalkar Brothers (400 ITR 279) has held that the subsidies granted under Government Industrial Scheme to accelerate industrial development and generate employment is capital in nature. The relevant extracts of the judgment are as follows: "21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the "purpose test". It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial. 22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been star....
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....bjects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19-4-2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed. 25. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference." (Emphasis Supplied) 14.5 The above decision of the Hon'ble Supreme Court has been followed by the jurisdictional Hon'ble Bombay High Court in the case of Pr. CIT Vs Welspun Steel Ltd (264 Taxman 252). In the decided case also, the Hon'ble Court hel....
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....only after setting up of a new industry which was in the nature of assistance given for the purpose of carrying on business. ...... 8. In the present appeal also, as noted, the subsidy was granted under schemes framed by the State and the Central Government, to be given to the assesses who set up new industry in Kutch District. The scheme was envisaged to encourage investment which would in turn, provide fresh employment opportunity in the district which had suffered due to devastating earthquake. The computation of subsidy may be on the basis of sales tax or excise duty. Nevertheless, the purpose test would ensure that, the subsidy was capital in nature." 14.6 Following the ratio laid down in the judgements (supra), we see no reason to interfere with the Ld. CIT(A)'s findings hold that the excise subsidy received by the assessee was in the nature of capital receipt not liable to tax, as the object of granting subsidy was to encourage setting up new industries for industrial growth of industrially non-developed area. 14.7 We now come to the issue relating to treatment of these subsidies while computing book profit u/s 115JB. It is noted that, in the context ....
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...., 1961." 14.8 We also rely on the decision of the coordinate bench of this Tribunal in the case of Sicpa India (P.) Ltd. Vs DCIT (80 taxmann.com 87) involving identical facts and circumstances as found in the present case before us. In the decided case, it has been held that the subsidy received by the assessee in form of excise duty exemption for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not liable to tax under the provisions of section 115JB of the Act. The relevant findings of this Tribunal are as follows: "21. The main issue that arises for consideration on the basis of the grievance projected by the Revenue in the aforesaid ground No. 2 is as to whether the excise duty refund which were held by the CIT(A) to be capital receipts not chargeable to tax can still be considered as part of the book profits u/s. 115JB of the Act, even though these sums have been credited in the profit and loss account and treated as income and even though the exclusion of these sums for the purpose of computing book profit u/s. 115JB has not been specifically provided under explanation below sec. 115JB (2) of the Act. In rejecti....
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.... is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to sec. 115JB(2) of the Act. 23. We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon'ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision the Hon'ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid decision of the Hon'ble High Court rendered on identical facts as that of the Assessee's case, there can be no doubt that subsidies in question does not have any character of income. 24. When a receipt is not in the character of income, can it form part of the book profits for the purpose of sec. 115JB of the Act, is the question that arises for consideration. The ITAT Kolkata Bench in the case of Dy. CIT v. Binani Industries Ltd. [2016] 178 TTJ 658 : had to deal with a case where the question was as to whether receipts on account of forf....
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....n the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H. Sugar Factory Ltd. (supra), where receipts on account of carbon credits which were capital receipts not chargeable to tax and hence not in the nature of income were held not included in the book profits. The Bench also referred to the decision of the Mumbai Bench of the ITAT in the case of Shivalik Venture (P.) Ltd. (supra) which was a case where the question was whether profits arising on transfer of a capital asset by a company to its wholly owned subsidiary company which is not treated as income" u/s 2(24) of the Act and since it does not form part of the total income u/s. 10 of the Act and therefore does not enter into computa....
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....cussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s. 115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue. 14.9 For the reasons set out above and respectfully following the decisions (supra), we uphold the order of Ld. CIT(A) excluding the subsidy received by the assessee for setting up new industry, by way of refund of excise duty from the computation of book profit u/s 115JB of the Act. 14.10 As far as the ld. CIT, DR's contention regarding admission of fresh claim is concerned, we note that the assessee had raised the claim in the abated AYs 2012-13 & 2014-15. It is noted that the Hon'ble Bombay High Court in the decisions rendered in the cases of Pr. CIT v. JSW Steel Limited (270 Taxman 201) and CIT v. B. G. Shirke Construction Technology (P.) Ltd.(395 ITR 371) has held that, it is open for an assessee to lodge a new claim in a proceeding under section 153A which was not claimed in his regular return of income, provided the assessment stood abated as a consequence of the search. Also, the Hon'ble Bombay High Court in the case of CIT Vs Pruthvi Brokers & Shareholde....
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....ia) Ltd. (supra). 29. This case does not help the revenue/appellant. In this case Supreme Court has made it clear that its decision was restricted to the power of the Assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under section 254 of the Income-tax Act, 1961. The Hon'ble Supreme Court in the said decision held as follows: "..........In the circumstances of the case, we dismiss the Civil Appeal. However, we make it clear that the issue in this case is limited to the power of the Assessing Authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961." 29.1 This judgment was followed by our Court in the case of Britannia Industries Ltd. (supra) holding that Tribunal has the power to entertain the claim of deduction not claimed before the Assessing Officer by filing revised return. Respectfully following the aforesaid decision as well as the view already taken by us in this case that the aforesaid subsidies are capital receipt and not an 'income' and not liable to Tax Tribunal in ....
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....in AY 2014-15 while computing book profit u/s 115JB of the Act for the relevant year, even though the same was not credited in P&L A/c. The assessee had accordingly raised fresh claim in this regard before the AO along with exclusion of excise subsidy (as discussed at Para 14 above), and filed a revised computation of income in the course of assessment. The AO is noted to have rejected both these claims since it was not made in the return of income. On appeal, the Ld. CIT(A) is noted to have held in principle that, additional claims not raised in return of income but made in the course of assessment is admissible and accordingly admitted the revised computation of income. The Ld. CIT(A) however is noted to have only adjudicated and allowed the claim relating to exclusion of excise subsidy on merits but no specific finding is noted to have been rendered on this particular claim. The Ld. AR further brought to our notice that, the AO while giving effect to the appellate order u/s 250/143(3) of the Act had accepted the revised computation of income in its entirety. The AO had accordingly reduced the gain credited to foreign fluctuation translation reserve along with the excise duty sub....