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TMI Blog2019 (4) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of provision for leave encashment and provision for gratuity u/s 43B - HELD THAT:- We find that identical issue came up for consideration by the co ordinate bench of Tribunal in Integrated Coal Mining Ltd. vs. DCIT (2015 (12) TMI 1326 - ITAT KOLKATA) wherein the issue was set aside to the file of the AO to pass appropriate order based on the outcome of the main appeal on merits by the Supreme Court in Exide Industries Ltd.[2009 (5) TMI 894 - SUPREME COURT]. In parity, the grievance of the assessee as per Ground no.3 is set aside to the file of the AO. Payments of employees’ contribution towards provident fund - HELD THAT:- This issue has been decided against the assessee by the Hon’ble Gujarat High Court in the case of CIT vs. Gujarat State Road Transport Corporation [2014 (1) TMI 502 - GUJARAT HIGH COURT]. Therefore, the grievance of the assessee is answered in negative and against the assessee. Adjustment of provision of wealth tax for Book profit u/s 115JB - HELD THAT:- The assessee seeks to claim that wealth tax is not a tax defined under Explanation 2 to Clause (a) of Explanation 1 to Section 115JA of the Act. In parity with the decision of the co-ordinate bench in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o deduction under s.80G for which conditions laid down therein are not shown to be not fulfilled. Therefore, we decline to interfere of the order of the CIT(A). - Decided against revenue. Disallowance of discount paid to Doctors - HELD THAT:- No merit in the disallowance made by the AO towards discount paid to the Doctors as discussed in relation to AY 2009-10. We thus agree with the conclusion drawn by the CIT(A) despite wrong reasoning. The Ground no.2 of Revenue’s appeal is thus dismissed. Disallowance u/s 14A for interest - HELD THAT:- CIT(A) has rightly approached the issue and deleted the proportionate disallowance of interest expenditure under Rule 8D(2)(ii) on the ground that investment in shares giving rise to exempt income is far lower than the corresponding interest free funds available with the assessee by way of capital and reserves. Therefore, a presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds. Therefore, we do not see any infirmity in the order of the CIT(A). Suo motu disallowance for earning of exempt income - The Revenue authorities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We shall now take up each appeal for adjudication as under; ITA No. 3049/Ahd/2014 (Assessee's appeal) - AY 2008-09 3. Ground No.1 concerns disallowance of ₹ 5,85,148/- under s.14A of the Act r.w. Rule 8D of the Income Tax Rules. 3.1 The learned AR for the assessee submitted at the outset that the exempt income stand at ₹ 4000/- only and therefore, the disallowance under s.14A of the Act cannot exceed the aforesaid amount. 3.2 We find merit in the plea of the assessee in view of the decision of the Hon'ble Gujarat High court in the case of CIT vs. Corrtech Energy Pvt. Ltd. 372 ITR 97; DCIT vs. TGB Banquets Hotels Ltd. in Tax Appeal No. 470 of 2012 dated 21.06.2016 (Gujarat) and Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694 (Delhi). We also note that Hon'ble Gujarat High Court in the case of CIT vs. Vision Finstock Ltd. Tax Appeal No. 486 of 2017 judgment dated 31.07.2017 has expressed the similar view and held that disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. As pointed out on behalf of the assessee, SLP(Civil) [Diary No. 13152/2018] filed by the Revenue against the judgment of the Hon'ble Gujarat Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax defined under Explanation 2 to Clause (a) of Explanation 1 to Section 115JA of the Act. In parity with the decision of the co-ordinate bench in ASB International (P.) Ltd. 26 taxmann.com 87 (Mum) and CIT vs. Echjay Forgings (P.) Ltd. 251 ITR 15 (Bom.), the AO is directed to exclude the provision for wealth tax for the purposes of computation of book profit. 7.2 In the result, Ground No.5 is accordingly allowed. 8. In the result, appeal of the assessee in ITA No.3049/Ahd/2014 is partly allowed. ITA No. 2548/Ahd/2015 (Revenue's appeal) - AY 2009-10 9. The grounds of appeal raised by the Revenue read as under: "1. On the facts and circumstances of the case the Ld.CIT(A) erred in allowing the interest of ₹ 261962722/- by treating it as business expenditure, ignoring the fact on record that the transaction between Aditya Medisales Ltd. & M/s. Sun Pharmaceutical Industries Ltd. is not a transaction between 2 unrelated parties as the controlling person in both the company is same i.e. Mr. Dilip Shanghvi as per the Audit report u/s.44AB in form 3CD for A.Y. 2009-10 submitted by the assessee. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng disallowance of interest of ₹ 26,19,62,722/-, the AO in the assessment order has mentioned that interest Income earned by the appellant was routed back to Sun Pharma for claiming deduction u/s 80IC. The same stand has been taken by the AO in his remand report also. In this regard, the AR of the appellant as per his submission dated 18/01/2013 has stated that the SPIL did not have any income during the year under consideration which was entitled to deduction u/s 80IC. In other words, no deduction of any income in the case of SPIL was claimed u/s 80IC. Thus, as per the AR the very basis and foundation of the AO in making the disallowance was erroneous and flimsy. I agree with this submission of AR of the appellant. It is further submitted by the AR that in fact the SPI has two new industrial undertaking which are eligible for deduction u/s 80IC of which one industrial undertaking was entitled to deduction @ 25% only for the year under consideration. As per the AR the appellant company has paid the same rate of interest to both SPIL and SPI and entire interest income earned by SPIL was taxable in its hand and part of the interest income earned by SPI was taxable in its hand. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 40A(2) of the Act and therefore it can be said that payment of interest is made by the appellant to non related parties. In my humble opinion, even If the case of the appellant is covered by the provisions of section 40A(2) and the appellant company and SPIL and SPI are related party, then also this entire payment of interest expenditure cannot be disallowed. This is in view of the fact that when there are two related parties in terms of provisions of section 40A(2)(b), then in such case reasonableness of payments made by one party to another party is required to be seen and this is not that entire payment is required to be disallowed. In the case of the appellant, the payments of interest have been made to SPIL and SPI @ 9% only which in my opinion is very reasonable looking to the rate of interest in the market. Thus, even if the case of the appellant is covered u/s 40A(2)(b), then also the reasonableness of interest payments as made to SPIL and SPI is required to be seen and entire payment of interest cannot be disallowed.. The AO has raised the objection that the appellant company did not charge any interest from its debtors and Sun Pharma also did not pay any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3A of the Act. 10.6 We have carefully considered the rival submissions. We find that the issue is no longer res integra and adjudicated in favour of the assessee in its own case in AYs. 2005-06 & 2006-07 in ITA No.1665 & 1666/Ahd/2009 (supra). The relevant operative para of the order is reproduced hereunder for ready reference: "4. Now before us an order of the ITAT "D" Bench Ahmedabad in assessee's own case bearing ITA No.3974/Ahd/2007 pertaining to AY 2004-05 titled as "The Dy.CIT vs. Aditya Medisales Ltd." dated 4th February, 2011 has been cited, wherein the issue of interest disallowance u/s.36(1)(iii) has been decided in favour of assessee by following few orders of the Tribunal also decided in assessee's own case in its favour in the past. In the past ITAT "D" Bench has taken a view for AYs 1999-2000, 2000-01, 2001-02, 2002-03 & 2003-04 in ITA Nos.3272/Ahd/2002, 1623/Ahd/2003, 1353 & 2180/Ahd/2005 and ITA No.08/Ahd/2007 respectively vide order dated 30/09/2010 in assessee's favour again by following the order of the Tribunal pronounced in assessee's own case for AY 1998-99 in ITA No.1233/Ahd/2002, wherein it was held that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. In the said order of the Tribunal, ITAT "D" Bench followed an earlier order; pronounced in assessee's own case for A.Y. 1997-98 in ITA No.492/Ahd/2001 dated 28/03/2008, wherein it was held that onus for application of the provisions of section 40A(2)(a) is on the Revenue and that there was no basis for holding that an excessive rate of interest was paid. It is also worth to mention that there was an order of the Hon'ble Gujarat High Court in assessee's case (CIT vs. Aditya Medisales Ltd. - Tax Appeal No.559 of 2009 dated 4.5.2010), wherein it was opined that the CIT(A) as well as Tribunal have upon appreciation of the evidence found that the Revenue has not been able to make out any case for applying the provisions of section 40A(2)(a) and that interest earned on unsecured borrowings is always higher than the rate of interest paid to the bank account from where loan raised; hence accepted that interest paid to Sun Pharmaceuticals @ 24% p.a. to be reasonable. We therefore hold that since the Tribunal/High Court is taking a consistent view in favour of the assessee in the past, therefore respectfully following these decisions for the year under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction with the company. It was also alleged that the payment is in the nature of illicit gratitude to doctors for promotion of Sun Pharma Group product. It was held that such discount expenses incurred is not a business expense wholly and exclusively attributable to the assessee company. Consequently, the expenses towards discount to the tune of ₹ 7,34,80,655/- was disallowed. 11.2 Aggrieved, the assessee preferred appeal before the CIT(A). 11.3 The CIT(A) re-visited the facts and circumstances of the case and found the claim of the assessee towards discount expenses to customers of the C&F agents to be in order except payments to doctors. The CIT(A) accordingly reversed the action of the AO and directed him to allow the discount expenses incurred. The relevant operative para of the order of the CIT(A) in this regard is reproduced hereunder: "5.4 The reasons as mentioned by the AO in the assessment order for making disallowance of discount claim of Rs, 7,34,80,655/- and his remand report as well as submission dated 18/01/2013 and also rebuttal/reply dated 19/02/2015 of the AR of the appellant have been considered. The appellant has claimed discount of ₹ 7,34,80,655 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rification that the appellant had made payment mostly towards Doctors through DDs and the same has been claimed as discount, As per the AO the Doctors are not purchasing medicines from the assessee company and therefore expenses are not incurred wholly and exclusively for business. However, the AO in his remand report has not controverted the submission of AR of the appellant that the payments on account of discount made to the Doctors were only ₹ 9 lacs. The AO in his remand report has also not controverted the submission of the AR that the remaining amounts of ₹ 7.26 crore (i.e. ₹ 7.35 crores - Rs, 9 lacs) are paid to the Dealers, Stockists, Distributors and Retailers etc. who are 11.4 The CIT(A), for the reasoning noted above, thus allowed the payment on account of discount made to the stockiest, distributor, dealers and retailers. But, however, disallowance of discount payment made to Doctors amounting to ₹ 8,96,508/- was retained holding the same to be in the nature of illicit gratitude to the Doctors for promotion of Sun Pharma Group products. 11.5 Aggrieved by the action of the CIT(A) in granting part relief, both Revenue as well as assessee preferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts/distributors/dealers etc. The learned AR thus submitted that the appeal of the Revenue thus deserves to be rejected whereas the appeal of the assessee requires to be allowed on this score. 11.8 The learned DR, on the other hand, relied upon the order of the AO. 11.9 We have carefully considered the rival submissions on the issue. The maintainability of discount on sales is in question. It is the case of the Revenue that the assessee is supplying medicines to its C&F agents for its ultimate sale in the market for consumption. The discounts were given by the assessee company to the distributors, retailers, dealers, Doctors associated to C&F agent and who were not directly dealing with assessee and therefore expenses incurred towards discount payment by the assessee has no nexus with the sales made by it to the C&F agents. The AO accordingly is of the view that such indirect discounts to the customers of its agents are not allowable expenditure. 11.10 We do not see any iota of merit in such plea. The discounts given to the customers/ultimate consumer has direct bearing on the potential turnover of the company. It is well settled that the test of the commercial expediency canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t instruction from him and also thanks were conveyed by the recipient to Shri Dilip Sanghvi for his kind gesture. It was further noticed that the receipt and tax exemption certificate were sent to Shri Dilip Sanghvi and not to the assessee. It was thus held by the AO that the donation actually relates to Shri Dilip Sanghvi and therefore, the assessee company is not eligible for deduction under s.80G of the Act. 12.2 The first appellate authority, however, reversed the aforesaid action of the AO on account of undisputed fact that donation has been made by the assessee company from its bank account and the receipt of donation is also in the name of the assessee company. In the given facts, we completely endorsed the view taken by the CIT(A) in this regard. The payment made on instruction of Shir Dilip Sanghvi, receipt of thanks by Shri Dilip Sanghvi and receipt sent to Shri Dilip Sanghvi are wholly irrelevant considerations as rightly observed by the CIT(A). It is the assessee company which is entitled to deduction under s.80G of the Act for which conditions laid down therein are not shown to be not fulfilled. Therefore, we decline to interfere of the order of the CIT(A). 12.3 In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and other customers of C&F agents have been accepted. The CIT(A) in AY 2009-10 had also rejected the similar claim of discount inter alia paid to Doctors. The CIT(A) in AY 2010-11 has simply followed its finding in AY 2009-10 but however deleted the disallowance on payments to doctor which is glaringly inconsistent with findings in AY 2009-10. Having followed the findings in AY 2009-10, the CIT(A) ought to have confirmed the action of the AO. Therefore, while the Revenue is in appeal against the deletion inadvertently made by the CIT(A), the assessee has also challenged the action of the CIT(A) as a measure of abundant caution in ITA No.2512/Ahd/2015. Having noted the aforesaid position, we do not find any merit in the disallowance made by the AO towards discount paid to the Doctors as discussed in relation to AY 2009-10 (supra). We thus agree with the conclusion drawn by the CIT(A) despite wrong reasoning. The Ground no.2 of Revenue's appeal is thus dismissed. 18. As per Ground No.3, the Revenue seeks to challenge the reversal of disallowance of ₹ 9,62,383/- made under s.14A of the Act. As pointed out on behalf of the assessee, the assessee has suo motto disallowed expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments in consonance with the decision of the Special Bench in Vireet Investments (supra) as placed on behalf of the assessee. The issue is therefore remitted back to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) of the Rules. In terms of the averments made above, the Ground No.3 of the Revenue's appeal is dismissed whereas cross ground no.2 of the assessee's appeal on this score is allowed in part. 19. In the result, appeal of the Revenue in ITA No. 2549/Ahd/2015 is dismissed. ITA No. 2512/Ahd/2015 (Assessee's appeal) - AY 2010-11 20. Ground No.1 of the assessee's appeal towards disallowance of discount of ₹ 15,44,119/- is stated to be out of caution on account of error committed by the CIT(A) as discussed in para 17 (supra). However, as concluded in Revenue's appeal for the AY 2010-11, the aforesaid discounts paid to Doctors is eligible for deduction as business expenditure without any demur. The conclusion of CIT(A) thus cannot be faulted. In terms of observation noted above, the Ground no.1 of the assessee's appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of discount given to Doctors who have purchased medicines from C&F agents of the assessee. In sync with the observations in the earlier years as discussed above, the grievance of the assessee is merited. Ground No.1 of the assessee's appeal is accordingly allowed. 29. Ground No.2 of the assessee's appeal is allowed in part in terms of directions noted in the corresponding Revenue's appeal. 30. Ground No.3 concerns suo motto disallowance of ₹ 50,000/-. We decline to interfere with the action of the AO in view of the discussion in AY 2010-11 (supra). Ground No.3 of the assessee's appeal is dismissed. 31. In the result, appeal of the assessee in ITA No.2513/Ahd/2015 is allowed in part. ITA No. 3415/Ahd/2015 (Assessee's appeal) - AY 2009-10 & ITA No. 3354/Ahd/2015 (Revenue's appeal) - AY 2009-10 32. Both the appeals give rise to common issue of disallowance under s.14A of the Act in pursuance of assessment order passed under s.143(3) r.w.s. 263 of the Act. With the assistance of the learned AR for the assessee, we note that the AO made disallowance towards proportionate interest expenditure under Rule 8D(2)(ii) and towards administrative and general expenses under Rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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