2018 (3) TMI 1514 - AT - Income Tax

Addition on account of low gross profit rate - Held that - The accounts of the Assessee cannot be rejected merely based on the perception of the AO that the Assessee has declared low profit margin for certain projects when Books of Accounts have not been rejected. - Decided in favour of assessee. Disallowance of expenses on samples - expenditure incurred towards distribution of free samples to doctors/medical practitioners - Held that - Hon ble Delhi Tribunal in the case of Eli Lilly & Co. (India) Ltd. vs. ACIT 2015 (12) TMI 1172 - ITAT DELHI has examined the provisions of Medical Council of India and after analyzing the same Hon ble Tribunal has held that there is a clear distinction between the free samples, gifts, travel facilities, hospitality and cash or monetary grants. The disallowance made by the authorities below should be deleted. Allowability of expenses on business promotion expenses - Held that - We delete the addition of ₹ 18,45,317/- whereas we sustain the disallowance of ₹ 1,27,924/- which the assessee has debited under the head marketing and business promotion expenses but which in fact are installments for repayment of loan. In view of the above, ground No. 8 is partly allowed. Disallowance of advertisement expenses - Held that - From the ledger account of such expenses, it is apparent that all the payments have been made through cheques and not even a single payment has been made in cash. Therefore, the findings of the Assessing Officer that the expenses were not genuine, are not correct and in view of the above, we allow ground taken by the assessee. Addition u/s 68 - Held that - Such payments received from sister concern which have been credited in the assessee s account and similarly debited in the books of account of the sister concern, cannot be said to be ingenuine and unexplained credits. Therefore, the addition u/s 68 is not at all justified

Issues Involved:
1. Estimation of gross profit without rejecting books of account.
2. Disallowance of expenses incurred for sample medicines.
3. Disallowance of marketing and business promotion expenses.
4. Disallowance of advertisement expenses.
5. Addition under section 68 of the Income Tax Act, 1961.

Detailed Analysis:

1. Estimation of Gross Profit Without Rejecting Books of Account:
The assessee challenged the estimation of gross profit by the Assessing Officer (AO) without rejecting the books of account. The AO added to the gross profit based on discrepancies in the Balance Sheet and lower gross profit compared to previous years. The Tribunal noted that the AO did not reject the books of account and relied on the judgment of the Hon'ble Madras High Court in the case of Principal Commissioner of Income Tax vs. Marg Limited, which held that the AO must reject the books of account before estimating profits. The Tribunal found that the AO's action was unjustified and deleted the addition of ?7,24,774/-.

2. Disallowance of Expenses Incurred for Sample Medicines:
The AO disallowed expenses of ?13,68,582/- incurred for distributing sample medicines, citing regulations by the Medical Council of India and CBDT Circular No. 5 of 2012. The Tribunal referred to the Hon'ble Delhi Tribunal in the case of Eli Lilly & Co. (India) Ltd. vs. ACIT, which distinguished between gifts and samples, stating that samples are not prohibited by the Medical Council of India regulations. The Tribunal deleted the disallowance, noting that the expenses were a regular business practice.

3. Disallowance of Marketing and Business Promotion Expenses:
The AO disallowed marketing and business promotion expenses of ?19,73,241/-, which was more than the actual expenses claimed by the assessee. The Tribunal found that the assessee had consistently incurred such expenses in previous years, and the ratio of expenses to turnover was lower than the average of the last three years. The Tribunal deleted the disallowance of ?18,45,317/- but sustained the disallowance of ?1,27,924/- related to loan repayment.

4. Disallowance of Advertisement Expenses:
The AO disallowed advertisement expenses of ?94,464/-, claiming the assessee failed to provide evidence of organizing camps for doctors. The Tribunal found that all payments were made through cheques, and the AO's findings were incorrect. The Tribunal allowed the claim, considering the expenses a regular business practice.

5. Addition Under Section 68 of the Income Tax Act, 1961:
The AO added ?7,80,000/- under section 68, questioning the genuineness of transactions with the assessee's sister concern. The Tribunal noted that the sister concern was a regular taxpayer, and the transactions were reflected in its books. The Tribunal found the addition unjustified and deleted it.

Conclusion:
The Tribunal partly allowed the appeal, deleting the additions related to the estimation of gross profit, sample medicine expenses, marketing and business promotion expenses (except ?1,27,924/-), advertisement expenses, and the addition under section 68. The judgment emphasized the necessity of rejecting books of account before estimating profits and recognized the regular business practices of the assessee.

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