2023 (11) TMI 580 - AT - Income Tax

Deduction u/s 80IC for Unit-III - premises owned by sister concern, the assessee had carried out the manufacturing activity - HELD THT - We find that the assessee had furnished the rent agreement entered into between the assessee and the sister concern. Further from the P L Account of the assessee of the eligible Unit-III, we find that the assessee had debited rent expenses - This entire rent expenditure has been allowed as deduction by the Ld. AO. Admittedly, this rent includes the rent paid in the factory premises to sister concern. Proof of acquisition of plant and machinery for the new Unit No. III. - The assessee company has provided the bills/vouchers for the same vide submission dated 08/01/2016 which had been duly verified by the Ld. AO. This fact clearly goes to prove that the entire bills and vouchers for acquisition of new plant and machinery were indeed filed by the assessee before the Ld. AO in the re-assessment proceedings for AY 2011-12 and the said fact was also submitted before the Ld. CIT(A) during the impugned appellate proceedings. Furnishing of evidence of the approval obtained from the competent authority such as Department of Industries, Govt. of Himachal Pradesh for setting up of the Unit. - A license in the prescribed form to manufacture that pharmaceutical drugs was granted to the assessee on 29/03/2010 by State Drugs Controlling-Cum- Licensing Authority of Himachal Pradesh at Baddi and the said license validity period was from 29/03/2010 to 28/03/2015. Further, the assessee has also obtained Pollution Control Licence by making an application on 27/03/2010 and obtained No Objection Certificate (NOC) from Himachal Pradesh State Pollution Control Board on 07/04/2010. Apart from this, the assessee had also incurred electricity expenses for Unit-III. Apart from other expenses, this electricity expenses was also allowed as deduction by the Ld. AO. Hence, 3rd objection raised by the lower authorities also has no legs to stand. The assessee would be duly eligible for deduction u/s 80-IC of the Act in respect of Unit-III at Baddi. Sales promotion expenses of gift items, air tickets, foreign trips and hotel expenses spent on the Medical Practitioners - lower authorities had held that the same would be falling under the ambit of Explanation to section 37 of the Act as incurrence of the said expenditure were in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 - HELD THAT - This issue on merits is no longer res-integra in view of the decision of the Hon ble Supreme Court in the case of Apex Laboratories Pvt. Ltd. 2022 (2) TMI 1114 - SUPREME COURT wherein it was held that since acceptance of freebies by Medical Practitioners was prohibited as per Circular issued by the Medical Council of India under Medical Council of India (MCI) Regulations, 2002, gifting of such freebies by assessee pharmaceutical company to medical practitioners would also be prohibited by law and thus expenditure incurred in distribution of such freebies would not be allowed as deduction in terms of Explanation to section 37(1) of the Act. It is not in dispute that the unit is eligible for deduction u/s 80-IC of the Act and that the said sales promotion expenditure has been incurred by the assessee only in the eligible unit. In view of the CBDT Circular No.37/2016 dated 02/11/2016, pursuant to this disallowance, the deduction u/s 80IC of the Act would automatically get enhanced and thereby making the entire issue revenue neutral. This is because the disallowance of the aforesaid expenditure would only go to increase the business profit of the assessee from the eligible unit. When the said profits are eligible for deduction u/s 80IC of the Act, in view of the aforesaid circular, the same would be eligible for enhanced deduction u/s 80-IC of the Act for the assessee. Accordingly, Ground No.1(i) and (ii) are allowed. Disallowance towards the purchase of capital assets and granted deduction in respect of salary expenses paid to IT Staff - AR before us argued that this expenditure also was incurred in the eligible unit of the assessee and hence, the same would be consequentially eligible for enhanced deduction u/s 80-IC in view of the CBDT Circular No.37/2016 dated 02/11/2016 - HELD THAT - It is not in dispute that the manufacturing unit of the assessee is eligible for deduction u/s 80-IC of the Act. However, there seems to be some confusion as to whether the aforesaid expenditure towards the purchase of capital assets were incurred in such manufacturing division or not. - Matter restored back to AO - The ld. AO is directed to give a clear finding in this regard as to whether it pertains to eligible unit or not and decide the issue.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80-IC for Unit-III.
2. Disallowance of sales promotion expenses.
3. Treatment of payments towards purchase of computers as capital expenditure.

Summary:

Issue 1: Disallowance of Deduction under Section 80-IC for Unit-III

The tribunal examined whether the Ld. CIT(A) was justified in confirming the disallowance of Rs. 3,29,40,574/- claimed under Section 80-IC of the Income Tax Act for Unit-III. The tribunal found that the assessee had provided sufficient evidence, including a rent agreement, confirmation from Himachal Pradesh State Industrial Development Corporation, and acquisition of plant and machinery, to support its claim. It was also noted that the Department of Industries, Govt. of Himachal Pradesh, had approved the setup of Unit-III, and the necessary licenses and NOCs were obtained. Therefore, the tribunal concluded that the assessee is eligible for the deduction under Section 80-IC for Unit-III and allowed the grounds raised by the assessee.

Issue 2: Disallowance of Sales Promotion Expenses

The tribunal addressed whether the Ld. CIT(A) was justified in partly upholding the disallowance of Rs. 72,36,394/- on account of sales promotion expenses. The expenses were deemed ineligible for deduction under Section 37(1) of the Act as they were in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. However, since the unit is eligible for deduction under Section 80-IC, the disallowance would increase the business profit, making the issue revenue neutral. Consequently, the tribunal allowed the grounds raised by the assessee.

Issue 3: Treatment of Payments Towards Purchase of Computers as Capital Expenditure

The tribunal considered whether the payments amounting to Rs. 15,93,934/- made to Dotcom Creation and Redbrook Intertrade should be treated as capital expenditure. The Ld. CIT(A) had confirmed the disallowance, treating the payments as capital assets. The tribunal noted that the expenditure was incurred in the eligible unit of the assessee and directed the Ld. AO to verify if the expenditure pertains to the unit eligible for deduction under Section 80-IC. If so, the disallowance would increase the business profit of the eligible unit, making it eligible for enhanced deduction under Section 80-IC. The tribunal restored the issue to the file of the Ld. AO for verification and allowed the ground for statistical purposes.

Conclusion:

The appeal of the assessee was allowed for statistical purposes, with directions to the Ld. AO to verify specific details regarding the eligibility of the expenditures for deduction under Section 80-IC.