2017 (9) TMI 317 - HC - Income Tax

Allowance of business expenditure u/s 37- honorarium paid to Dr.Saxena for consultancy services - travel, boarding and lodging expenses paid for Dr. Saxena to attend a Medical Advisory Board meeting for Asia pacific region held at Japan - Expenses incurred on sponsorship for organizing seminars and conferences - Held that - Mr. Syali is right in his contention that the ITAT placed an unfair burden on the Assessee to prove that the above expense was incurred bonafide for the business purposes of the Assessee. The Assessee had placed before the ITAT all the relevant details thereby discharging the initial onus. Thereafter, it was open to the Revenue to prove to the contrary. It was not going to be possible for the Assessee to show that Dr Saxena actually delivered any lectures, attended any meetings, provide training courses and seminars for Assessee etc. The ITAT appears not to have considered the legal position as explained in Commissioner of Income Tax v. United Hotels Limited (2008 (10) TMI 4 - HIGH COURT DELHI) and CIT v. Ashok J. Patel (2013 (12) TMI 1480 - GUJARAT HIGH COURT) as regards burden of discharging the initial onus. It is also not in dispute that the ITAT dealt only with one of the disallowances in the sum of ₹ 13,14,548 and not the other two disallowances in the sum of ₹ 19,06,000 and ₹ 8 lakhs. Since the ITAT has not dealt with these aspects, the Court is of the view that it is necessary to remand the matter back to the ITAT and considers all the three disallowances in the entire appeal alongwith the question whether the CBDT s Circular No. 05/2012 dated 1st August 2012 would apply to the AY in question of the Assessee on merits afresh.

Issues Involved:
1. Jurisdiction of the Dispute Resolution Panel (DRP) under Section 144C (8) of the Income Tax Act.
2. Applicability of CBDT Circular No. 05/2012 to AY 2011-12.
3. Classification of expenses as 'freebies' or 'gifts' under Explanation to Section 37 (1) of the Income Tax Act.
4. Onus of proof regarding the bona fide nature of business expenses.
5. Specific disallowances of expenses by the Assessing Officer (AO).

Detailed Analysis:

1. Jurisdiction of the Dispute Resolution Panel (DRP) under Section 144C (8) of the Income Tax Act:
The Assessee contended that the DRP did not have jurisdiction under Section 144C (8) of the Act to consider grounds not part of the draft assessment order. The DRP had suo motu picked up deductions related to 'advertisement and business promotion expenses' and 'travel expenses,' which were not originally part of the draft assessment order. This jurisdictional overreach was challenged by the Assessee.

2. Applicability of CBDT Circular No. 05/2012 to AY 2011-12:
The Assessee argued that the CBDT Circular No. 05/2012, which prohibits certain expenditures as per MCI Guidelines, was not applicable to the AY 2011-12. The ITAT failed to address this contention. The Court noted that this issue was crucial and required examination by the ITAT, as the Assessee contended that the Circular was prospective and did not apply to the AY in question.

3. Classification of expenses as 'freebies' or 'gifts' under Explanation to Section 37 (1) of the Income Tax Act:
The AO disallowed expenses totaling ?40,20,548, including ?13,14,548 for 'freebies' to medical consultants, ?19,06,000 for seminars and conventions, and ?8,00,000 for sponsorships. The ITAT upheld the disallowance of ?13,14,548, citing the CBDT Circular, but failed to address the other two disallowances. The Court noted that the ITAT did not consider the Assessee's argument that these expenses were genuine business expenditures and not 'freebies' or 'gifts.'

4. Onus of proof regarding the bona fide nature of business expenses:
The ITAT placed the burden on the Assessee to prove that the expenses were bona fide and for business purposes. The Assessee argued that it had provided all necessary details, and the onus should shift to the Revenue to disprove the Assessee's claims. The Court agreed with the Assessee, citing precedents that the initial burden lies with the Assessee, but once discharged, it shifts to the Revenue.

5. Specific disallowances of expenses by the Assessing Officer (AO):
The AO disallowed three specific expenditures:
- ?13,14,548 for 'freebies' to doctors.
- ?19,06,000 for conducting seminars and conventions.
- ?8,00,000 for sponsorships made after the event.

The ITAT only addressed the ?13,14,548 disallowance and failed to consider the other two amounts. The Court found this oversight significant and remanded the matter to the ITAT for reconsideration of all three disallowances.

Conclusion:
The High Court set aside the ITAT's order and remanded the matter for fresh consideration of all issues, including the applicability of CBDT Circular No. 05/2012 to AY 2011-12 and the genuineness of the disputed expenses. The ITAT is directed to re-evaluate the Assessee's appeal on merits, considering all contentions raised by both parties. The Assessee's appeal will be listed before the ITAT on 9th October 2017 for further proceedings in accordance with the High Court's judgment.

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