2024 (4) TMI 405 - AT - Income Tax

Assessment u/s 153A - Additions made in original assessment u/s 143(3) of the Act again added back in the assessment completed u/s 153A/143(3) , Disallowance of loss incurred by SEZ added u/s 115JB, Disallowance of deduction claimed u/s 35(2AB) , Expenditure by way of tax paid on ESOP added u/s 115JB - HELD THAT - We find merit in the preliminary plea of the Ld. AR for the assessee that the impugned disallowance was not based on any incriminating material found in the course of search and therefore the AO was legally unjustified in making this addition in the unabated AY 2010-11. It is noted that, this addition was also made on re-appraisal of the claim made by the assessee in the return of income, which had not been disputed in the original assessment u/s 143(3) of the Act. This addition was not made with reference to any impounded material seized in search. Hence, in absence of any incriminating material to justify this addition, and following the decision of Abhisar Buildwell Pvt Ltd 2023 (4) TMI 1056 - SUPREME COURT we hold that the impugned disallowance was legally untenable in the unabated AY 2010-11. Disallowance of purchases in relation to over-invoicing of raw materials - addition made it was made on the basis of statements given by the three employees in the course of search u/s 132(4) of the Act, which is an important piece of evidence in itself and that their subsequent retraction, being an afterthought, was of no relevance - HELD THAT - We direct the AO to delete the addition made on account of over invoicing in purchases across all AYs. Hence, the grounds raised by the assessee are allowed and the grounds of Revenue are dismissed. Estimation of income - bogus purchases - whether the entire value of payments made to the suppliers was to be disallowed or only the profit element embedded therein was to be taxed in hands of the assessee? - HELD THAT - Only the profit element embedded in these purchases ought to be assessed to tax and that on the given facts, the disallowance of entire value of purchases was unwarranted. Coming to the issue of estimation of the profits, on the given facts and having regard to the gross profit already declared by the assessee, according to us, in the fitness of matters and fair play, profit rate of 8% would be fair reasonable. The AO is accordingly directed to restrict the addition on account of bogus purchases to 8% of the value of supplies across all AYs 2009-10, 2010-11, 2011-12 2012-13. With these directions, the grounds of the assessee are partly allowed Disallowance of professional fees - AO thus held that ACIAL had provided accommodation entries to the assessee as well, in the guise of professional fees - case of the Revenue is found to be hinge solely on the statement of one Mr. Shirish Shah who was purportedly found to have been involved in providing accommodation entries in the form of bogus long-term capital gains and share capital etc. - HELD THAT - As relying on Odeon Builders Pvt. ltd 2019 (8) TMI 1072 - SUPREME COURT addition/disallowance made solely on third party information without subjecting it to further scrutiny and denying the opportunity of cross examination of the third party renders the addition/disallowance bad in law. , thus the order of the Ld. CIT(A) deleting the disallowance of professional fees made by the AO, does not warrant any interference. These grounds of the Revenue are therefore dismissed. Disallowance of sales promotion expenses u/s 37(1) - sales promotion expenses which according to the AO fell within the ambit of freebies given to doctors, in violation of the guidelines issued by Medical Council of India in December 2009 and the CBDT Circular issued in August 2012 - HELD THAT - It is not disputed by the Revenue that the items of expenses incurred under these heads were of nominal value less than Rs. 1000/- on flowers, sweets, cup, aprons etc. The sales promotion articles which had their name logo were given to customers, retailers, stockiest and distributors as a part of their brand awareness strategy. Likewise, flowers and sweets of nominal value would also be given by field staff on special occasions to their customer / stockiest / distributors. Also, some of these items were used by field staff to be given to doctors in the course of their visits. As noted MCI Notification dated 01.02.2016 has excluded nominal gifts valuing Rs. 1000/- and less from the mischief of MCI Regulations, 2009. This was also clarified by a public notice issued by Government of India dated 16.03.2022. In light of the foregoing and following the decision of this Tribunal at Bangalore in the case of Himalaya Drug Company 2020 (12) TMI 1060 - ITAT BANGALORE the disallowance made by the AO out of these sub-heads of sales promotion expenses is held to be unsustainable and is thus directed to be deleted. Expenditure u/Sub-head Journals Periodicals , it is noted that these expenses were incurred for researching printing literature or purchasing journals regarding the products and its related uses/effects. As noted earlier, these expenses do not result in any benefit or gifts given to the doctors. We thus agree with the following findings of Ld. CIT(A) recorded in AY 2011-12 deleting the disallowance made by the AO on account of expenses incurred under this sub-head. Sub-head Taxi Hire Charges we note that these expenses were incurred by sales personnel of the assessee and not paid to any doctors or medical practitioners. Accordingly, the disallowance of taxi hire charges is held to be unwarranted in the facts of this case, and we direct to delete the same in all AYs. Sub-head Field Printing Expenses we note that these expenses related to printing of files, folders, pads and pens which were understandably to be used by the field staff and also the doctors who were attending camps. Going by the nature of these expenses, it cannot be termed as freebies given to doctors and hence we uphold the order of Ld. CIT(A) deleting the same. Sub-head Trade Relation Expenses Gifts for Sales Promotion , AO had disallowed these expenses under erroneous understanding that these were given to doctors. We accordingly uphold the order of Ld. CIT(A) deleting the same. Sub-head Air Ticket Expenses, according to us, the air ticket expenses paid for doctors directly fell under the mischief of MCI Regulations 2009 and was thus not allowable as deduction under Explanation (1) to Section 37(1) of the Act. We thus reverse the order of Ld. CIT(A) in this regard and uphold the action of AO disallowing the same in full. Enhancement of deduction u/s 80-IC of the Act to the extent of such disallowance of sales promotion expenses - A s brought to our notice that the AO had already, in principle, accepted the above plea of the assessee qua the amount disallowed in the assessment and accorded the benefit of the Circular No. 37/2016 dated 02.11.2016 - The AO is noted to have attributed the disallowance relatable to the eligible units and enhanced the eligible profits of the units available for deduction u/s 80-IC of the Act accordingly. In such a scenario therefore, this particular plea of the assessee is found to be acceptable. Hence, having regard to the disallowance quantified by us above, the AO is accordingly directed to appropriately attribute the disallowance of freebies to the eligible unit s u/s 80-IC of the Act and consequentially re-compute the enhanced eligible profits and allow the deduction u/s 80-IC of the Act. Needless to say, the AO shall allow an opportunity of hearing to the assessee to provide necessary computation, before undertaking this exercise. Disallowance of ESOP expenses - HELD THAT - Tribunal in their order 2022 (9) TMI 526 - ITAT MUMBAI dated 29.08.2022 is noted to have upheld the Ld. CIT(A) s order deleting the disallowance of ESOP expenses by following the decision of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE The Tribunal also took note of the fact that the Hon ble Karnataka High Court in their judgment reported 2020 (11) TMI 779 - KARNATAKA HIGH COURT has since affirmed the decision of the Special Bench. Thus, in light of aforesaid decisions, we have no hesitation in upholding the order of Ld. CIT(A) deleting this impugned addition. We thus dismiss these grounds of the Revenue. D isallowance of deduction u/s 80IC in relation to sale of scrap - HELD THAT - Heard both the parties. It is noted that the impugned issue stands squarely covered in favour of the assessee by the decision rendered by this Tribunal in their common order passed in assessee s own case for AYs 2008-09 2009-10, 2022 (9) TMI 526 - ITAT MUMBAI wherein as held Provision of Section 80IC of the Act allows deduction of profit and gains derived by undertaking from eligible business. It cannot said that sale of empty containers is altogether different business of the assessee. We further held that this issue is squarely covered in favour of the assessee by the decision of honourable Delhi High Court in case of CIT versus Sadhu forging Ltd 2011 (6) TMI 9 - DELHI HIGH COURT Exclusion of excise subsidy by way of capital receipt not liable to tax - CIT(A) s action of admitting and allowing the fresh claim raised by the assessee - seeking exclusion of capital subsidy from computation of income under normal provisions as well as book profit u/s 115JB of the Act, which was not made in the return of income - HELD THAT - From the facts as discussed in the foregoing, it can be safely inferred that the subsidy was granted to the assessee for setting up new unit in the State of Sikkim. The Hon'ble Supreme Court in the case of Chaphalkar Brothers 2017 (12) TMI 816 - SUPREME COURT has held that the subsidies granted under Government Industrial Scheme to accelerate industrial development and generate employment is capital in nature. Thus we see no reason to interfere with the Ld. CIT(A) s findings hold that the excise subsidy received by the assessee was in the nature of capital receipt not liable to tax, as the object of granting subsidy was to encourage setting up new industries for industrial growth of industrially non-developed area. Treatment of these subsidies while computing book profit u/s 115JB - As decided in Ankit Metal and Power Ltd 2019 (7) TMI 878 - CALCUTTA HIGH COURT subsidy received by the assessee in form of excise duty exemption for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not liable to tax under the provisions of section 115JB - Thus we uphold the order of Ld. CIT(A) excluding the subsidy received by the assessee for setting up new industry, by way of refund of excise duty from the computation of book profit u/s 115JB of the Act. Admission of fresh claim - Hon ble Bombay High Court in the decisions rendered in the cases of Pr. CIT v. JSW Steel Limited 2020 (2) TMI 307 - BOMBAY HIGH COURT and CIT v. B. G. Shirke Construction Technology (P.) Ltd 2017 (3) TMI 879 - BOMBAY HIGH COURT has held that, it is open for an assessee to lodge a new claim in a proceeding under section 153A which was not claimed in his regular return of income, provided the assessment stood abated as a consequence of the search. We do not find any merit in the legal plea raised by the Ld. CIT, DR contesting validity of admission of additional claim by the Ld. CIT(A). Overall thus, we see no reason to interfere with the order of Ld. CIT(A) on this issue and uphold his action of directing the AO to delete / reduce the excise duty subsidy both while computing income under normal provisions as well as book profit u/s 115JB of the Act. These grounds of the Revenue are therefore dismissed. MAT computation - Non-inclusion of foreign fluctuation translation reserve while computing book profit u/s 115JB - HELD THAT - As rightly pointed out by the Ld. AR, there is no specific adjustment prescribed in this regard in Explanation (1) to Section 115JB of the Act. We further observe that, similar gains were credited to foreign fluctuation translation reserve on restatement of foreign currency loans in earlier AYs 2012-13 2013-14 and the same was not added to computation of book profit u/s 115JB of the Act by the assessee. The earlier AYs 2012-13 2013-14 are noted to be abated assessments. We note that, in the income-tax assessments u/s 153A/143(3) for these AYs 2012-13 2013-14 was completed by the same AO. The AO is noted to have accepted the computation of book profit made by the assessee in AYs 2012-13 2013-14 and the gains directly credited to foreign fluctuation translation reserve were not added while assessing book profit u/s 115JB of the Act. Hence, when on same set of facts and circumstances, the Revenue, in the earlier AYs 2012-13 2013-14, did draw any adverse inference on this issue, then in absence of any change in position of law, we uphold the claim of the assessee, seeking reduction of foreign fluctuation translation reserve, inadvertently added while computing book profit u/s 115JB of the Act in the return of income. Useful reference in this regard may be made to the following observations made by the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT 1991 (11) TMI 2 - SUPREME COURT Decided in favour of assessee.

Summary

Issues Involved:
1. Additions made in original assessment u/s 143(3) again added by the AO in assessment u/s 153A/143(3).
2. Disallowance of loss incurred by SEZ while computing book profit u/s 115JB.
3. Disallowance of weighted deduction u/s 35(2AB).
4. Disallowance of tax paid on ESOP while computing book profit u/s 115JB.
5. Disallowance of purchases in relation to over-invoicing of raw materials.
6. Disallowance of bogus purchases.
7. Disallowance of professional fees paid.
8. Disallowance of sales promotion expenses.
9. Disallowance of ESOP expenses.
10. Denial of deduction u/s 80IC in relation to sale of scrap.
11. Exclusion of excise subsidy received under the Industrial Scheme by way of capital receipt.
12. Addition of foreign exchange fluctuation reserve to book profit u/s 115JB.

Summary:

Issue 1: Additions made in original assessment u/s 143(3) again added by the AO in assessment u/s 153A/143(3)
The Tribunal held that the additions in AYs 2009-10 and 2010-11 were unsustainable as these were unabated assessments and not based on any incriminating material seized during the search. The AO could disturb completed assessments only with reference to incriminating material unearthed during the search.

Issue 2: Disallowance of loss incurred by SEZ while computing book profit u/s 115JB
The Tribunal agreed with the assessee that the SEZ unit's loss incurred before the commencement of commercial production was not hit by Section 115JB(6) of the Act. The disallowance was deleted for AY 2009-10, and the additional ground for AY 2010-11 was dismissed.

Issue 3: Disallowance of weighted deduction u/s 35(2AB)
The Tribunal upheld the Ld. CIT(A)'s deletion of the disallowance for AY 2009-10, noting that it was not based on any incriminating material found during the search.

Issue 4: Disallowance of tax paid on ESOP while computing book profit u/s 115JB
The Tribunal held that the disallowance made by the AO was unsustainable in the unabated AY 2010-11 as it was not based on any incriminating material found during the search.

Issue 5: Disallowance of purchases in relation to over-invoicing of raw materials
The Tribunal found that the AO's addition based on statements of employees was flawed as the assessee did not make any purchases from M/s Reynolds Petro Chem Ltd. The addition was deleted across all AYs.

Issue 6: Disallowance of bogus purchases
The Tribunal upheld the principle that only the profit element embedded in the purchases should be taxed. The AO was directed to restrict the addition to 8% of the value of supplies across all AYs.

Issue 7: Disallowance of professional fees paid
The Tribunal upheld the Ld. CIT(A)'s deletion of the disallowance, noting that the professional fees paid to ACIAL were genuine and supported by relevant documents.

Issue 8: Disallowance of sales promotion expenses
The Tribunal held that the CBDT Circular No. 5/2012 read with MCI Regulations, 2009 did not apply to sales promotion expenses incurred before 14.12.2009. For expenses incurred thereafter, only specific expenses benefiting doctors were disallowed. The AO was directed to re-compute the disallowance accordingly.

Issue 9: Disallowance of ESOP expenses
The Tribunal upheld the Ld. CIT(A)'s deletion of the disallowance, following the decision in the assessee's own case and the Special Bench decision in Biocon Ltd. vs. DCIT.

Issue 10: Denial of deduction u/s 80IC in relation to sale of scrap
The Tribunal upheld the Ld. CIT(A)'s decision that profit from the sale of scrap was eligible for deduction u/s 80IC, following the decision in the assessee's own case.

Issue 11: Exclusion of excise subsidy received under the Industrial Scheme by way of capital receipt
The Tribunal upheld the Ld. CIT(A)'s decision that the excise subsidy was a capital receipt not liable to tax, following the decisions of the Hon'ble Supreme Court and various High Courts.

Issue 12: Addition of foreign exchange fluctuation reserve to book profit u/s 115JB
The Tribunal allowed the assessee's additional ground, directing the AO to exclude the foreign fluctuation translation reserve from the computation of book profit u/s 115JB, consistent with the treatment in earlier AYs.

Conclusion:
The appeals of both the assessee and the revenue for AYs 2009-10, 2010-11, 2011-12, 2012-13, and 2014-15 were partly allowed.