2017 (9) TMI 566 - AT - Income Tax

Rectification of order u/ s 254 - Allowability of expenditure as business expenditure u/s 37 - Sales Promotion and advertisement expenses- Order beyond scope of section 254 - Held That - Since merely because the assessee is in the business of Pharmaceuticals and various payments are to be made to the Doctors is not sufficient to treat such expenditure as business expenditure. Therefore the issue was restored to the file of the assessee for verifying the claim whether this expenditure was for the purpose of business of the assessee. - Miscellaneous Application of the Assessee is dismissed.

Issues Involved:
1. Rectification of Tribunal's order.
2. Allowability of expenditure related to sales and promotion.
3. Prohibition of expenditure under Indian Medical Council Act, 1956 and CBDT Circular No. 5/2012.
4. Requirement of demonstrating business purpose for the expenditure.

Detailed Analysis:

1. Rectification of Tribunal's Order:
The assessee filed a Miscellaneous Application seeking rectification of the Tribunal’s order dated 27.12.2016. The counsel for the assessee argued that there was a mistake apparent from the record which needed rectification. However, the Departmental Representative opposed this, stating that the application was beyond the scope of section 254 of the Act, as there was no apparent mistake on the record. The Tribunal concluded that the assessee was attempting to review the Tribunal’s view under the guise of rectification, which is not permissible under section 254.

2. Allowability of Expenditure Related to Sales and Promotion:
The Tribunal had previously decided on the allowability of expenditure related to sales and promotion claimed by the assessee. According to section 37(1), any expenditure not being capital or personal expenses, laid out wholly and exclusively for business purposes, is allowable. However, the Tribunal found that the assessee failed to demonstrate that the expenditures incurred were related to the business. The expenses were primarily reimbursements to doctors, which did not show a direct benefit or relation to the business. Thus, the Tribunal upheld the disallowance made by the AO, who had determined that the expenditures were not incurred wholly and exclusively for business purposes.

3. Prohibition of Expenditure under Indian Medical Council Act, 1956 and CBDT Circular No. 5/2012:
The AO disallowed the expenditure based on the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002, and CBDT Circular No. 5/2012, which prohibits such expenditures. The Tribunal noted that the lower authorities did not dispute the business purpose of the expenditure but disallowed it on the grounds of prohibition by law. The Tribunal observed that the assessee did not provide sufficient material to demonstrate that the expenditures were for business purposes and not prohibited by law.

4. Requirement of Demonstrating Business Purpose for the Expenditure:
The Tribunal emphasized that the assessee must demonstrate a clear nexus between the expenditure and its business purpose. The AO had listed various expenditures, such as sponsorships, reimbursements, and conference fees for doctors, but the assessee failed to show how these expenditures benefited the business. The Tribunal restored the matter to the AO to verify whether the expenditures were for business purposes, highlighting that merely being in the pharmaceutical business and making payments to doctors is insufficient to qualify the expenditures as business expenses.

Conclusion:
The Tribunal dismissed the Miscellaneous Application, concluding that the assessee was seeking a review of the order, which is beyond the scope of section 254. The Tribunal reiterated the necessity for the assessee to demonstrate that the expenditures were incurred wholly and exclusively for business purposes and were not prohibited by law. The matter was restored to the AO for fresh consideration to verify the business purpose of the expenditures.

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