2022 (10) TMI 478 - AT - Income Tax

Revision u/s 263 - Allowable revenue expenditure u/s 37(1) - expenditure incurred on distribution of gifts / freebies to doctors and Medical Practitioners in the form of televisions, laptops, electronic goods, mobiles, sponsorship of tours and conferences and distribution of other similar items which have been charged as expenditure in the Profit and Loss Account under the head Business Promotion Expenditure - it is the opinion of PCIT that such expenditure was not allowable in terms of Explanation to section 37(1) of the Act being expenditure for a purpose which was an offence or was prohibited under the law - HELD THAT - We have no hesitation in holding that the nature of the expenses under the head Business Promotion in all the years under consideration have thoroughly been examined/verified by the Assessing Officer, who framed the search assessments simultaneously and, as such, we are of the considered view that the concerned AO had duly applied his mind on this issue and the records of the various assessment proceedings, both in the original and in search assessment, bear testimony to the fact that, no Freebies/Gifts have been given to the Medical Practitioners/Doctors and that such gifts were only given to the Stockists/Distributors of the company as is evident from the various promotional schemes launched by the assessee company in different years. It would be relevant here to refer to the judgment of CIT vs. Sunbeam Auto 2009 (9) TMI 633 - DELHI HIGH COURT wherein has held that the distinction between the lack of enquiry and inadequate enquiry has to be considered and it has been held that if there was an enquiry, howsoever inadequate that would not give occasion to the Commissioner, who passed an order u/s 263 of the Act, just because he has a different opinion in the matter and under such circumstances, it was held that the assessment cannot be held to be as erroneous and prejudicial to the interest of the revenue. Once there is an application of mind and enquiry has been made by the AO, then in such circumstances, the assessment cannot be branded as erroneous and prejudicial to the interest of revenue and we have no hesitation in setting-aside the orders as passed by the Ld. PCIT u/s 263 of the Act on the issue of Freebies/Gifts to the Medical Practitioners/Doctors in all the 11 years under consideration. In assessment year 2017-18, besides the issue of business promotion expenses, there is another issue of non-reference to the Transfer Pricing Officer (TPO) in respect of Specified Domestic Transactions and the Ld. AR has been fair enough to concede that the AO was mandatorily required to refer the same to the TPO and, therefore, we hold that the Ld. PCIT was justified in setting aside the assessment on the issue of non-reference to the TPO in Assessment Year 2017-18.

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Allowability of business promotion expenses under Section 37(1).
3. Examination and verification of business promotion expenses by the Assessing Officer (AO).
4. Application of Medical Council of India Regulations and CBDT Circular.
5. Incriminating material and its relevance in assessments under Section 153A.
6. Non-reference to Transfer Pricing Officer (TPO) for specified domestic transactions.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The primary contention was whether the Principal Commissioner of Income Tax (PCIT) had correctly assumed jurisdiction under Section 263 to revise the assessment orders. The assessee argued that the PCIT erred in assuming jurisdiction as the AO had already examined the business promotion expenses in detail during the original and search assessments. The Tribunal found that detailed inquiries were made by the AO regarding the nature of business promotion expenses, and thus, the PCIT's assumption of jurisdiction was not justified.

2. Allowability of Business Promotion Expenses under Section 37(1):
The main issue was whether the expenditure on gifts/freebies to doctors and medical practitioners was allowable under Section 37(1). The PCIT held that such expenses were not allowable as they were prohibited under the Medical Council of India Regulations and the CBDT Circular. However, the assessee contended that the expenses were incurred for stockists and distributors, not for doctors or medical practitioners. The Tribunal agreed with the assessee, noting that the expenses were for business promotion and not for prohibited purposes under Section 37(1).

3. Examination and Verification of Business Promotion Expenses by the AO:
The assessee provided extensive evidence showing that the AO had examined the nature of business promotion expenses during the original and search assessments. The Tribunal reviewed the order sheet entries, replies, and other documents submitted during the assessments, concluding that the AO had indeed conducted detailed inquiries. Therefore, the Tribunal found that the AO had applied his mind to the issue, and the assessments were neither erroneous nor prejudicial to the interest of the Revenue.

4. Application of Medical Council of India Regulations and CBDT Circular:
The PCIT relied on the Medical Council of India Regulations and the CBDT Circular to disallow the expenses. However, the Tribunal noted that these regulations and the circular applied to gifts/freebies given to medical practitioners. Since the assessee's expenses were directed towards stockists and distributors, the Tribunal held that the regulations and circular were not applicable in this case.

5. Incriminating Material and Its Relevance in Assessments under Section 153A:
The Tribunal addressed the issue of whether additions could be made in search assessments under Section 153A without incriminating material. The Tribunal referred to various judicial precedents, concluding that additions in search assessments should be based on incriminating material found during the search. Since no incriminating material was found regarding the business promotion expenses, the Tribunal held that the PCIT's action under Section 263 was not justified.

6. Non-reference to Transfer Pricing Officer (TPO) for Specified Domestic Transactions:
For the assessment year 2017-18, the PCIT raised an additional issue regarding the non-reference to the TPO for specified domestic transactions. The assessee conceded that the reference to the TPO was mandatory. The Tribunal agreed with the PCIT on this issue and upheld the setting aside of the assessment for making the reference to the TPO.

Conclusion:
The Tribunal concluded that the PCIT was not justified in setting aside the assessments on the issue of business promotion expenses for all the years under consideration. The assessments were found to be neither erroneous nor prejudicial to the interest of the Revenue. However, the Tribunal upheld the PCIT's action for the assessment year 2017-18 regarding the non-reference to the TPO. Consequently, the appeals were partly allowed.

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