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2019 (1) TMI 1126 - AT - Income TaxApplication of Explanation 1 to Sec. 37(1) - allowability of sales promotion expenses - abnormal increase in expenditure - expenses were incurred on travel and hospitality of the Doctors and medical professionals - violation of MCI guidelines - Held that - We hold that it is trite law that CBDT Circular which creates a tax burden or tax liability on an assessee cannot be reckoned with retrospective effect. The CBDT Circular could be made applicable only from assessment year 2013-14 onwards. Reliance in this regard is made on the decision of Hon ble Supreme Court in the case of DCIT Vs. S.R.M.B Dairy Farming (2017 (11) TMI 1494 - SUPREME COURT). We also find that the lower authorities had not doubted the fact that the sales promotion expenditure were incurred wholly and exclusively for the purpose of business of the assessee. The only grievance of the Revenue seems to be that the said expenditure is hit by the provisions of Explanation 1 to 37(1) of the Act, which in our considered opinion, is not applicable in view of aforesaid discussions. In view of series of decisions relied upon hereinabove on the impugned issue, we hold that the sales promotion expenses incurred by the assessee in the total sum deserves to be allowed.
Issues Involved:
1. Applicability of Explanation 1 to Section 37(1) of the Income-tax Act, 1961. 2. Validity and applicability of the Medical Council of India (MCI) guidelines and CBDT Circular No. 05/2012. 3. Classification of sales promotion expenses incurred by the assessee. Detailed Analysis: 1. Applicability of Explanation 1 to Section 37(1) of the Income-tax Act, 1961: The core issue was whether the provisions of Explanation 1 to Section 37(1) of the Act could be applied to disallow the sales promotion expenses incurred by the assessee. The assessee, a private limited company engaged in marketing and trading of pharmaceutical products, had incurred travel and hospitality expenses for doctors to attend conferences. The Assessing Officer (AO) disallowed these expenses, citing them as violations of MCI guidelines and thus hit by Explanation 1 to Section 37(1), which disallows expenses incurred for any purpose that is an offence or prohibited by law. 2. Validity and Applicability of MCI Guidelines and CBDT Circular No. 05/2012: The AO relied on the MCI guidelines dated 10.12.2009 and CBDT Circular No. 05/2012 dated 01.08.2012 to disallow the expenses. The CIT(A) upheld the disallowance for the period after the MCI guidelines came into effect but allowed relief for expenses incurred before 10.12.2009. The Tribunal, however, noted that the MCI guidelines apply only to medical practitioners and not to pharmaceutical companies. The Tribunal referenced the Delhi High Court's decision in Max Hospital vs. MCI, which clarified that MCI regulations govern only the conduct of doctors and not the operations of pharmaceutical companies. Consequently, the Tribunal held that the MCI guidelines and the subsequent CBDT circular could not be applied to disallow the expenses of the assessee. 3. Classification of Sales Promotion Expenses: The Tribunal examined whether the sales promotion expenses were incurred wholly and exclusively for business purposes. The expenses included travel, hospitality, and gifts to doctors, which the Tribunal found to be common industry practices aimed at promoting products. The Tribunal referenced several cases, including Syncom Formulations and PHL Pharma Pvt Ltd, where similar expenses were allowed as business expenses. The Tribunal concluded that such expenditures were necessary for business promotion and were not prohibited by law, thus not falling under Explanation 1 to Section 37(1). Conclusion: The Tribunal allowed the appeal filed by the assessee, holding that the sales promotion expenses were legitimate business expenditures and not disallowable under Explanation 1 to Section 37(1). The Tribunal dismissed the appeal filed by the Revenue, reinforcing that the MCI guidelines and CBDT circular were not applicable to pharmaceutical companies for the assessment year in question. The Tribunal emphasized that the CBDT circular could not retrospectively create a tax burden or liability. The final judgment upheld the assessee's claim for the sales promotion expenses incurred during the relevant period.
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