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2018 (7) TMI 1883 - AT - Income TaxTDS u/s 271(1)(c) - wrong claim of deduction u/s 80IB which had resulted in under assessment of its income - wrong claim of computer software expenses which though was in the nature of capital expenditure, but was claimed as a revenue expenditure by the assessee - wrong claim of expenditure on account of gift articles which were incurred for non-business purposes - reduction of penalty imposed pursuant to an application filed by the assessee u/s 154 - Held that - We find from a perusal of the order of the CIT(A) that the entitlement of the assessee for claim of deduction under Sec. 80IB in respect of the aforesaid other incomes had always been the subject matter of debate between the assessee and the department since A.Y. 1995-96 onwards, and the same had always been decided in favour of the assessee. The revenue had accepted the said order of the Tribunal and had not carried the same in further appeal before the High Court. We are of the considered view that in the backdrop of the aforesaid factual position and the fact that the assessee had furnished complete details as regards its claim of deduction under Sec. 80IB(4) of the Act, thus merely for the reason that the said claim of deduction did not find favour with the A.O would not justify imposition of penalty under Sec. 271(1)(c) in the hands of the assessee. re-characterization of the computer software expenditure as a capital expenditure by the A.O, as against the claim of the same as a revenue expenditure by the assessee, though would justify the disallowance of the said expenditure, but keeping in view the fact that the assessee had made a complete disclosure of the details of the said expenditure and claim of the same as a revenue expenditure in its return of income, thus no penalty under Sec. 271(1)(c) could have been imposed in the hands of the assessee. We are persuaded to subscribe to the view of the CIT(A) that no penalty was called for in the hands of the assessee in respect of the adhoc 15% disallowance of the gift articles expenses as was finally sustained by the CIT(A). Though an unproved claim of expenditure would justify an addition/disallowance, however nothing short of a disproved claim would justify imposition of penalty under Sec 271(1)(c). We find that our view that no penalty under Sec. 271(1)(c) on either of the aforesaid counts could have validly been imposed in the hands of the assessee - decided in favour of assessee Disallowance of Sales Promotion Expenses in order u/s 154 - Held that - A.O had merely rectified a clerical mistake in quantification of the sales promotion expenses and had not taken any new decision on merits in respect of the disallowance of the sales promotion expenses. We thus, find ourselves to be in agreement with the view taken by the CIT(A) that it was not permissible for the assessee to assail the merits of the disallowance of the sales promotion expenses in his appeal filed against the order passed by the A.O under Sec. 154 of the Act. Though the assessee in its appeal against the order passed by the A.O under Sec. 154 would be well within its right to challenge any infirmity emerging from the rectification carried out by the A.O, but it was not permissible on its part to traverse beyond the subject matter of the appeal and challenge the merits of the disallowance of the sales promotion expenses, as the latter could have only been assailed by way of an appeal against the order of assessment passed by the A.O under Sec. 143(3) of the Act. A.O had passed the order under Sec. 154 without affording a reasonable opportunity of being heard to the assessee, set aside the matter to the file of the A.O, who shall after verifying the veracity of the aforesaid claim of the Ld. A.R that the order of rectification was passed by the A.O without affording a reasonable opportunity of being heard to the assessee, and finding the same in order, shall pass a fresh order under Sec. 154 after affording a reasonable opportunity of being heard to the assessee Disallowance of sales promotion expense - expenditure incurred for distribution of costly articles (exceeding ₹ 750/- each article) as freebies to doctors and professionals - allowable business expenses - violation of CBDT circular no. 5/2012 dated 01.08.2012 and against regulations issued by Medical Counsel of India - Held that - despite an absence of enlargement of the scope of the regulations issued by the MCI under the Medical Council Act, 1956, therein bringing within the sweep of its code of conduct the pharmaceutical companies and allied health sector industry, the CBDT had however in all its wisdom provided that in case a pharmaceutical or allied health sector industry incurs any expenditure in providing any gift, travel facility, cash, monetary grant or similar freebies to medical practitioners and their professional associations in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the same shall be disallowed in the hands of such pharmaceutical or allied health sector industry. We are unable to persuade ourselves to subscribe to the burden imposed by the CBDT vide its aforesaid Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied healthcare sector industries, which as observed by us hereinabove, despite there being an absence of any enabling provisions under the Income Tax law or the Indian Medical Council Regulations, therein contemplating an authority to regulate the conduct of the pharmaceutical and allied health sector industries, had clearly impinged on the conduct of business by the latter. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the assessee company which is engaged in the business of manufacturing and sale of pharmaceuticals and allied products, had in the garb of sales promotion expenses incurred expenditure in respect of articles distributed to the stockists, distributors, dealers, customers and doctors, for a purpose which is either an offence or prohibited by law, are thus of the considered view that such expenditure incurred by the assessee would not be hit by the Explanation to Sec. 37(1) of the Act. We thus, conclude that the assessee was duly entitled for claim of sales promotion expenses incurred on the distribution of articles to the stockists, distributors, dealers, customers and doctors. Thus, the order of the CIT(A) sustaining the disallowance of the sales promotion expenses is set aside. - Decided in favour of assessee.
Issues Involved:
1. Validity of the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961. 2. Disallowance of sales promotion expenses under Section 37(1) of the Income Tax Act, 1961. 3. Applicability of CBDT Circular No. 5/2012 and MCI Regulations to pharmaceutical companies. Issue-wise Detailed Analysis: 1. Validity of the Penalty Imposed under Section 271(1)(c) of the Income Tax Act, 1961 The revenue appealed against the CIT(A)’s order which set aside the penalty imposed by the A.O under Section 271(1)(c) for A.Y. 2005-06. The A.O had imposed a penalty on the grounds of: - Wrong claim of deduction under Section 80IB. - Wrong claim of computer software expenses as revenue expenditure. - Wrong claim of expenditure on gift articles for non-business purposes. The CIT(A) deleted the penalty, stating there was no concealment of income or furnishing of inaccurate particulars of income by the assessee. The CIT(A) observed that the assessee had disclosed all relevant facts and details at every stage of the proceedings and that the claims were subject to genuine debate and had previously been decided in favor of the assessee by the Tribunal. The Tribunal upheld the CIT(A)’s decision, noting that mere disallowance of claims does not justify the imposition of penalty under Section 271(1)(c). 2. Disallowance of Sales Promotion Expenses under Section 37(1) of the Income Tax Act, 1961 For A.Y. 2009-10, the A.O had disallowed 10% of the sales promotion expenses, which was later corrected to ?99,91,996 under Section 154. The CIT(A) upheld the rectification but noted that the merits of the disallowance could not be contested in an appeal against a rectification order. The Tribunal agreed with the CIT(A) but remanded the matter back to the A.O to verify if the rectification was done without giving the assessee a reasonable opportunity of being heard. For A.Y. 2011-12 and 2012-13, the A.O disallowed the entire sales promotion expenses based on the MCI regulations and CBDT Circular No. 5/2012, which prohibits giving "freebies" to doctors. The CIT(A) partly allowed the expenses, disallowing only those exceeding ?750 per article. The Tribunal, after detailed deliberation, held that the MCI regulations apply only to medical practitioners and not to pharmaceutical companies. It concluded that the CBDT Circular No. 5/2012, which extended the MCI regulations to pharmaceutical companies, could not be applied retrospectively and was beyond the CBDT's jurisdiction. Consequently, the Tribunal allowed the entire sales promotion expenses for both years. 3. Applicability of CBDT Circular No. 5/2012 and MCI Regulations to Pharmaceutical Companies The Tribunal examined whether the MCI regulations and the CBDT Circular No. 5/2012 applied to pharmaceutical companies. It found that: - The MCI regulations govern the conduct of medical practitioners and do not apply to pharmaceutical companies. - The CBDT Circular No. 5/2012, which extended the MCI regulations to pharmaceutical companies, was issued without any enabling provision under the Income Tax Act or the Indian Medical Council Regulations. - The Tribunal held that the CBDT could not impose new burdens or liabilities on pharmaceutical companies retrospectively. The Tribunal concluded that the sales promotion expenses incurred by the assessee were legitimate business expenditures and not prohibited by law, thus allowing the deductions claimed by the assessee for both A.Y. 2011-12 and 2012-13. Summary of Judgments: - The appeal by the revenue for A.Y. 2005-06 was dismissed, upholding the deletion of the penalty under Section 271(1)(c). - The appeal by the assessee for A.Y. 2009-10 was allowed for statistical purposes, remanding the matter back to the A.O. - The cross appeals for A.Y. 2011-12 and 2012-13 were decided in favor of the assessee, allowing the entire sales promotion expenses and dismissing the revenue's appeals.
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