2020 (7) TMI 568 - AT - Income Tax

Reopening of assessment u/s 147 - Validity of reason to believe - HELD THAT - The mandate of law, even where a concluded assessment is sought to be reopened by the A.O within a period of 4 years from the end of the relevant assessment year, it is must that the A.O has fresh material or information with him, that had led to the formation of belief on his part that the income of the assessee chargeable to tax has escaped assessment. Our aforesaid view is fortified by the judgments in the case of NYK Lime (India) Ltd. 2012 (2) TMI 283 - BOMBAY HIGH COURT and Purity Tech Textile Pvt. Ltd. Vs. ACIT Anr. 2010 (2) TMI 26 - BOMBAY HIGH COURT . As the reopening in the case before us had been resorted to by the A.O on the basis of a change of opinion as regards the allowability of deduction of the sales promotion expenses, on the same set of facts and material as were there before his predecessor who had framed the regular assessment vide his order passed under Sec. 143(3), dated 27.03.2015, the same in light of the aforesaid settled position of law cannot be sustained, and on the said count itself is liable to be vacated. We thus not being able to persuade ourselves to subscribe to the view taken by the CIT(A) as regards the validity of the jurisdiction assumed by the A.O u/s 147 of the Act, set aside his order. Allowable expenses u/s 37 - HELD THAT - Expenditure incurred by the assessee towards sales promotion expenses viz. (i) conference expenses for doctors, travelling expenses for doctors, other expenses related to doctors and expenses incurred on product reminders given to doctors would not be hit by the Explanation to Sec. 37 of the Act. Accordingly, on the basis of our aforesaid observations, we are of the considered view, that the A.O even otherwise on merits was not justified in disallowing the sale promotion expenses by bringing the same within the realm of the Explanation to Sec. 37(1) of the A ct. Gr ound of appeal No. 2 is allowed. Suppressed production - wastage exceeding the DPCO norms - computation of wastage - HELD THAT - Wastage up to the limits prescribed by the DPCO norms was to be accepted, we concur with him. At the same time, we are unable to persuade ourselves to subscribe to his view that the excess wastage of raw material would ipso facto lead to an inference of suppressed/unaccounted production carried out by the assessee. In our considered view, the aforesaid observation of the CIT(A) de hors any material evidencing the factum of suppressed/unaccounted production carried out by the assessee, cannot be accepted. Unexplained wastage of raw material, in our understanding can only lead to a consequential addition/disallowance of the cost of such raw material as had been debited by the assessee in its books of accounts for the year under consideration. Accordingly, we modify the order of the CIT(A) and therein direct the A.O to restrict the disallowance in respect of the excess raw material wastage in terms of our aforesaid observations. Ground is partly allowed. Deduction u/s 80IB - HELD THAT - Claim of the assessee that pursuant to the enhancement made by the A.O, its entitlement for deduction u/s 80IB would also be modified, we are unable to find favour with the same, and concur with the view taken by the CIT(A) who has rightly rejected the same.

Summary

Issues Involved:
1. Validity of reopening assessment under Section 147.
2. Disallowance of sales promotion expenses.
3. Alleged concealed sales arising out of alleged concealed production.
4. Allowing Section 80IB exemption on increased business income due to additions.

Detailed Analysis:

1. Validity of Reopening Assessment under Section 147:
The assessee challenged the reopening of the assessment on the grounds that it was based on a "change of opinion" and lacked "new tangible material". The original assessment had already deliberated on the sales promotion expenses, and the reasons for reopening were based on the same set of facts without any new information. The Tribunal concluded that the reopening was not justified as it was merely a substitution of the successor AO's view for that of his predecessor, which is not permissible under the law. The Tribunal referenced the Supreme Court's decision in CIT Vs. Kelvinator of India, emphasizing that reassessment must be based on new tangible material, not a mere change of opinion.

2. Disallowance of Sales Promotion Expenses:
The assessee argued that the disallowance of ?6,25,53,800/- for sales promotion expenses, including conference expenses, traveling expenses, and product reminders given to doctors, was incorrect. The Tribunal observed that the Medical Council of India (MCI) regulations are applicable to medical practitioners and not to pharmaceutical companies. The CBDT Circular No. 5/2012, dated 01.08.2012, was held to be prospective and not applicable to the assessment year 2012-13. The Tribunal concluded that the expenses were not prohibited by law and thus allowable under Section 37(1) of the Act.

3. Alleged Concealed Sales Arising out of Alleged Concealed Production:
The AO had added ?14,56,98,623/- to the assessee's income, alleging underreported production based on excessive raw material consumption. The CIT(A) found that the AO's basis for computation was scientifically unsustainable and accepted wastage within DPCO norms. However, wastage exceeding the DPCO norms was held to be unexplained, leading to suppressed production. The Tribunal modified this view, stating that unexplained wastage should lead to disallowance of the cost of such raw material, not an inference of suppressed production. The Tribunal directed the AO to restrict the disallowance to the cost of excess raw material wastage.

4. Allowing Section 80IB Exemption on Increased Business Income Due to Additions:
The assessee claimed that the increased business income due to additions should be eligible for Section 80IB exemption. The CIT(A) rejected this claim, stating that the deduction under Section 80IB requires verification and authentication by an auditor in Form 10CCB, which was not satisfied for the addition made towards suppressed production. The Tribunal concurred with the CIT(A) and dismissed this ground of appeal.

Conclusion:
- The reassessment proceedings were quashed for want of jurisdiction as they were based on a mere change of opinion.
- The disallowance of ?6,25,53,800/- for sales promotion expenses was deleted as the expenses were not prohibited by law.
- The addition for alleged concealed sales was partly allowed, with the disallowance restricted to the cost of excess raw material wastage.
- The claim for Section 80IB exemption on increased business income due to additions was dismissed.