2016 (2) TMI 263 - AT - Income Tax

Disallowance of sales promotion expenses - AO disallowed by invoking Explanation to Section 37(1) and CBDT Circular dated 1-8-2012 - Held that - As receiving of gifts by doctors was prohibited by MCI guidelines giving of the same by manufacturer is not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses. As regards sponsoring doctors for conferences and extending hospitality pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies. We found that the disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012 onwards. However the Circular was not applicable because it was introduced w.e.f.01.08.2012. i.e. assessment year 2013-2014 whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012. Accordingly we do not find any merit in the disallowance - Decided in favour of assessee Addition on account of forfeiture of warrant application money - Held that - As found that warrants were converted into shares however money contributions did not contribute these warrants into shares therefore their contributions were forfeited which was treated by assessee as capital receipts. The issue is squarely covered by the decision of Travencore Rubber 10.00 lacs therefore the appeal of the revenue is not maintainable.- Decided in favour of assessee Disallowance u/s.14A r.w.rule 8D - Held that - No merit for the disallowance so made u/s.14A when there is no exempt income during the year under consideration.- Decided in favour of assessee

Summary

Issues:
1. Disallowance of sales promotion expenses.
2. Addition made on account of forfeiture of warrant application money.
3. Disallowance under section 14A r.w.rule 8D.

Issue 1: Disallowance of sales promotion expenses

In the case, the Assessee and Revenue filed cross-appeals against the CIT(A)'s order for the assessment years 2010-2011 & 2011-2012 regarding the disallowance of sales promotion expenses. The AO disallowed an amount related to freebies given to medical practitioners under the head "sales promotion expenses." The CIT(A) confirmed the disallowance. However, the ITAT found that giving small gifts bearing the company logo to doctors was considered advertising expenses and not prohibited under any law. The disallowance made by the AO based on a CBDT Circular dated 01.08.2012 was deemed inapplicable as it was introduced for a later assessment year. Therefore, the ITAT concluded that there was no merit in the disallowance made by the AO for both assessment years.

Issue 2: Addition made on account of forfeiture of warrant application money

The Revenue appealed against the deletion of the addition made on account of the forfeiture of warrant application money. The Assessee had issued convertible warrants to a promoter family, and due to a fall in share price, warrant holders did not convert the warrants into equity shares within the stipulated time, resulting in forfeiture of the upfront amount paid. The CIT(A) deleted the addition, considering it as a capital receipt and relying on relevant legal precedents. The ITAT upheld the CIT(A)'s decision, stating that the issue was covered by the decision of the Supreme Court in a similar case. The ITAT also noted that the tax effect in the Revenue's appeal was less than the threshold, making the appeal not maintainable.

Issue 3: Disallowance under section 14A r.w.rule 8D

In the appeal for the assessment year 2011-2012, the Assessee raised a ground regarding the disallowance under section 14A r.w.rule 8D. The ITAT found that during the relevant year, the Assessee did not earn any income from dividends. Citing decisions from various High Courts, including the Delhi High Court, the ITAT concluded that disallowance under section 14A was not justified when there was no exempt income during the year. Consequently, the appeals of the Assessee for the assessment years 2010-2011 & 2011-2012 were allowed, while the appeal of the Revenue was dismissed.

In summary, the ITAT ruled in favor of the Assessee on all three issues, overturning the disallowances and additions made by the AO. The judgments were based on legal interpretations, precedents, and the specific circumstances of each issue, ensuring a fair and thorough analysis of the tax matters involved.