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2023 (1) TMI 358 - AT - Income TaxDisallowance of sales promotion expenses being payments made to Doctors u/s. 37(1) - freebies given to medical practitioners by Pharma companies - AO has disallowed sale promotion expenses in the nature of freebies distributed to Doctors and other medical professionals on the ground that said expenditure is not deductable u/s. 37(1) - HELD THAT - Since acceptance of freebies by medical practitioners was punishable as per circular issued by Medical Counsel of India under MCI Regulations, 2002, gifting of such freebies by assessee Pharma Companies to medical practitioners would also be prohibited by law and thus, expenditure incurred for such freebies would not be allowed as deduction in terms of section 37(1) of the Act. Therefore, respectfully following the decision of Apex Laboratories Pvt Ltd 2022 (2) TMI 1114 - SUPREME COURT we are inclined to uphold the finding of the ld. CIT(A) and reject the ground taken by the assessee. Disallowance of deduction claimed u/s. 35(1) (2) - R D expenditure - AO has disallowed R D expenditure incurred on the ground that the R D facility was approved only from the period 26.12.2014 to 31.03.2015 which is not covered in the impugned assessment year - HELD THAT - We find that the R D facility of the assessee has been approved by the Competent Authority in terms of relevant provisions for the period 26.12.2014 to 31.03.2015, which is beyond the period of impugned assessment year. Therefore, we are of the considered view that the assessee is not entitled for claiming deduction towards R D expenditure u/s. 35(2) 35(1) for the impugned assessment year. We further noted that, before the AO the assessee has admitted mistake and accepted disallowance of expenses. There is no merit in the argument of the assessee that deduction claimed u/s. 35(2) (1) of the Act is in accordance with law and thus, we reject argument of the assessee and sustain the additions made by the AO towards disallowance of deduction claimed u/s. 35(1) (2)towards R D expenditure. Additional depreciation on new assets capitalized during the year u/s. 32(1)(iia) - Number of days asset put to use - AO has disallowed additional depreciation on the ground that the additional depreciation u/s. 32(1)(iia) is available only for the year of purchase of new assets, but not for subsequent financial years - argument of the assessee that since the new assets purchased was put to use for less than 180 days, it has claimed 50% of additional depreciation for assessment year 2013-14 and remaining 50% has been claimed for the impugned assessment year - HELD THAT - We find no merit in reasons given by the AO for simple reason that as per law, the assessee is entitled for additional depreciation of 20% of new assets put to use, if certain conditions are satisfied. In this case, the AO accepted the fact that the assessee has satisfied conditions prescribed for additional depreciation. However, not allowed remaining 50% depreciation claimed on new asset in the subsequent financial year. In our considered view, the assessee is entitled for 20% additional depreciation on new assets and if assessee claims 50% of additional depreciation in one financial year owing to the purchase and use of said asset for less than 180 days as per law, then remaining 50% of additional depreciation should be given in the next financial year. Therefore, we are of the considered view that the AO is erred in disallowing additional depreciation on assets and thus, we direct the AO to delete additions made towards disallowance of additional depreciation. Re-computation of book profit u/s. 115JB - assessee has debited provision for leave encashment and provision for gratuity but not added back said provisions while computing book profit - AO re-computed book profit by making additions towards provision for leave encashment and provision for gratuity on the ground that provisions made for meeting liabilities other than ascertained liabilities need to be added back to book profit in terms of explanation (1)(c) to section 115JB - HELD THAT - In this case, provisions for leave encashment and provision for gratuity is an ascertained liability which is created on the basis of actuarial valuation for service rendered by the employees. Therefore, said liability cannot be considered as unascertained liability and thus, same need not be added back to the book profit computed u/s. 115JB of the Act. The AO without appreciating fact simply recomputed book profit by making additions towards provision for leave encashment and provision for gratuity. Hence, we direct the AO to re-compute the book profit u/s. 115JB of the Act by excluding provision for leave encashment and provision for gratuity. Appeal filed by the assessee is partly allowed.
Issues:
1. Sales Promotion Expenses disallowance 2. Research and Development (R&D) expenditure disallowance 3. Additional depreciation on new assets disallowance 4. Re-computation of book profit under Section 115JB Sales Promotion Expenses Disallowance: The assessee appealed against the addition of Rs.21,08,795 as Sales Promotion expenses incurred on doctors, contending that the expenses were for advertising products, not inducing doctors. The Tribunal upheld the disallowance, citing the Supreme Court's ruling that gifting freebies to medical practitioners is prohibited by law. Consequently, the deduction under Section 37(1) was not allowed. Research and Development (R&D) Expenditure Disallowance: The AO disallowed R&D expenditure of Rs. 75,69,617 as the facility approval was for a period beyond the assessment year. The assessee accepted the disallowance. The Tribunal noted that the R&D facility approval was not for the relevant year, and the assessee admitted the mistake, leading to the rejection of the claim under Section 35(1) & (2) of the Act. Additional Depreciation on New Assets Disallowance: The AO disallowed Rs. 3,82,489 claimed as additional depreciation on new assets, arguing it was only available in the year of purchase. The Tribunal referred to a precedent where it was held that if 50% of additional depreciation was claimed in one year, the remaining 50% should be allowed in the subsequent year. As the conditions for additional depreciation were met, the disallowance was overturned. Re-computation of Book Profit under Section 115JB: The AO re-computed book profit by adding provisions for leave encashment and gratuity. The Tribunal held that these provisions were ascertained liabilities and not required to be added back to book profit under Section 115JB. The AO was directed to re-compute the book profit excluding these provisions. The Tribunal admitted the appeal after condoning the delay in filing. The assessee's contentions on various grounds were analyzed, leading to partial allowance of the appeal. The judgment provided detailed reasoning for each issue, citing relevant legal provisions and precedents to support the decisions.
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