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TMI Blog2021 (2) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, we direct the A.O. to delete the disallowance of business promotion expenses in A.Y. 2007-2008 to 2011- 2012. Hence ground is allowed. Disallowance of discount to customers - HELD THAT:- In light of the ITAT order dated 29.01.2018 for A.Y s 2012- 2013 and 2013-2014, [ 2018 (1) TMI 1623 - ITAT BANGALORE ] we restore the issue of discount given to customer, to A.O. for de novo consideration with following directions, namely - (a) Discounts given in the invoice itself should be allowed without making any further enquiry; and (b) Discounts given to hospitals may be allowed after making enquiry. Disallowance of bad debts u/s 36 - HELD THAT:- Revenue has not established that conditions stipulated u/s 36(2) of the I.T.Act was not fulfilled with respect to any of the debts which were written off by the assessee during the previous years. Under these circumstances, we are of the view that disallowance made by the Revenue authorities is incorrect as the assessee is only required to write off the bad debts and is not required to establish that it has become really bad. Accordingly, we direct the A.O. to allow the claim of bad debt raised by the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness promotion expenses, (ii) disallowance of discount given to customers, and (iii) disallowance of bad debts written off. 2.3 Aggrieved by the order of the ITAT dated 29.01.2018 concerning ITA Nos.1921/Bang/2016 to 1925/Bang/2016 pertaining to A.Y's 2007-2008 to 2011-2012, the Revenue preferred appeals to the Hon'ble High Court u/s 260A of the I.T.Act. As regards the A.Y's 2012-2013 and 2013-2014, the Revenue did not file appeals to the Hon'ble High Court. Therefore, the order of the ITAT dated 29.01.2018 concerning A.Y's 2012-2013 and 2013-2014 (which is on merits) has attained finality. 2.4 The Hon'ble High Court vide judgment dated 22.04.2019, allowed the appeal of the Revenue. The Hon'ble High Court set aside the order of the Tribunal concerning A.Y's 2007-2008 to 2011-2012 (ITA No.1921/Bang/ 2016 to 1925/Bang/2016) and directed the ITAT to consider the issues afresh in terms of High Court judgment in the case of M/s.GMR Energy Limited (judgment of GMR Limited dated 08.01.2019). In the case of M/s.GMR Energy Limited, the Hon'ble High Court upheld the proposition that the conditions precedent for application u/s 153A of the I.T.Act is that there should be a search u/s 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred by the assessee on various Doctors is not available. The Notification issued by Medical Council of India (MCI) through which MCI has imposed prohibition on Medical Practitioners and Professional Association from taking any gift, travel facility, hospitality from pharmaceuticals or allied health sector industries was also examined by the AO. The AO further took a note of CBDT Circular No.5/12 dated 01.08.2012 wherein it was clarified that u/s. 37 of the Act such type of expenditure which are prohibited by law cannot be allowed. The AO accordingly held that since this expenditure was incurred on Doctors, it is not allowable as deduction under the provisions of section 37(1) of the Act. Accordingly, a show cause notice was issued to the assessee and since the assessee could not furnish the details of expenditure Doctorwise and their confirmation letters, the AO did not allow the claim of expenditure. 14. Aggrieved the assessee preferred an appeal before the CIT(Appeals) but did not find favour with him. 15. Now the assessee is before us with the submission that as per the reasons given by the AO, only ₹ 1,39,80,582 out of ₹ 8,25,00,000 can be disallowed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctitioners and Professional Associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceuticals or allied health sector industries. Thereafter, the CBDT has issued a Circular dated 01.08.2012 clarifying that section 37(1) of the I.T. Act provides for deduction of any revenue expenditure (other than those falling under sections 30 to 36) from the business income if such income is laid out/extended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Though Explanation 1 to section 37 was inserted by the Finance Act, 2014 w.e.f. 01.04.2015, but before that CBDT has also issued a clarification vide Circular dated 01.08.2012 not to allow such expenditure u/s. 37(1) of the Act which are prohibited by law, meaning thereby, before 01.08.2012 the expenditure incurred upon the Doctors to attend Seminars & Conferences may be the business expenditure of the assessee, but the same cannot be allowed after 01.08.2012 as it was prohibited by Notification issued by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this subsection denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Travel facilities: A medical practitioner shall not accept any travel facility inside the country or outside, including rail, air, ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc as a delegate. c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law / rules / guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed. e) Medical Research: A medical practitioner may carry out, participate in work, in research projects funded by pharmaceutical and allied healthcare industries. A medical practitioner is obliged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasis added is ours] 6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before us the learned senior counsel, Shri Mistry brought to our notice the judgment of Hon'ble Delhi High Court in the case of Max Hospital vs. MCI in WPC 1334/2013 judgment dated 10.01.2014, wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained. " [Emphasis added is ours] From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section." 18. We therefore following the view taken in the aforesaid order of the Tribunal hold that expenditure incurred on Doctors before 01.08.2012 be allowed as revenue expenditure, but the nature of expenditure incurred thereafter on Doctors is required to be examined by the AO - whether it was incurred on Doctors to attend the seminars as delegates or faculty members. Hence, the order of the CIT(Appeals) is set aside in this regard and the matter is restored to the AO to adjudicate the issue afresh in the terms indicated above." 4.1 In the earlier proceedings before the ITAT, the AR had filed five paper books (in total 887 pages). It was submitted that the details of the year-wise break up of business promotion expenses are placed at page 409 of the paper book. The learned AR submitted that the Assessing Officer had disallowed the entire business promotion expenses. It was stated that in assessment year 2007-2008 out of the total business promotion expenses of ₹ 3,41,00,217 only ₹ 1,21,06,967 is incurred on Doctors' expenses, which only oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (i) MCI guidelines are not applicable to the assessee. Hence the Explanation 1 to Section 37(1) does not apply to the assessee. ii) The CBDT circular has prospective effect and does not apply at all to the years in appeal iii) In any case, the expenses incurred by the assessee on the doctors are not freebies and are not of the nature prohibited by the MCI guidelines and are allowable as deduction as they are not covered under Explanation 1 to Section 37(1). iv) Pursuant to the Tribunal's order, the A.O has passed OGE to the Tribunal order, accepting our contention and allowed the entire expenses as deduction for A.Y 2012-13 and 13-14. (The OGE are placed on record). v) The decision of the Hon'ble tribunal for A.Y 12- 13 and A.Y 13-14 are taken on the above set of facts and principles and are squarely applicable to the years in appeal (A.Y 2007-08 and 2011-12). Even the A.O and the CIT(A) have passed orders for these years relying on their orders for A.Y. 2013-14 and hence the decision of the Hon'ble tribunal for A.Y. 2013-14 is squarely applicable to A.Y. 2007-08 and 2011-12 4.3 The learned Departmental Representative, on the other hand, has filed two written s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.08.2012 be allowed as revenue expenditure. The CBDT Circular No.5/2012 dated 01.08.2012, clearly states that any expense incurred in violation of MCI Regulations dated 10.12.2009, is inadmissible u/s 37(1) of the I.T.Act w.e.f. 01.08.2012 (i.e. prospectively). Prior to 01.08.2012, the expenditure relating to doctors were to be allowed as deduction. When MCI has issued the regulation 6.8 from 10.12.2009, the same is binding only on its members, namely, doctors. The pharma companies are not bound by MCI regulations. The CBDT Circular No.5/2012 dated 01.08.2012, extended the applicability of MCI Regulation 6.8 to pharma companies and other health sectors companies. Therefore, expenditure incurred by pharma companies on doctors can only be disallowed, if at all from the date of issuance of Circular No.5/2012. In these cases, we are not concerned whether CBDT has power to issue Circular No.5/1012, which enlarged the scope of MCI Regulations to pharma companies without any enabling provision either under Income-tax or under MCI Regulations. As mentioned earlier, the limited question is only regarding applicability whether it applicable from 01.08.2012 or 14.12.2009. This issue has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liation statement of discount for each of the hospitals / parties which were given credit discounts along with the ledger extracts of all the parties were furnished to the A.O. - pages 459 to 714 of the paper book. (iv) For A.Y.2013-2014, the Hon'ble Tribunal in its order dated 29.01.2018 has given a direction that, (a) discounts given in the invoice itself should be allowed without making any further enquiry, and (b) discounts given to hospitals may be allowed after making enquiry. (v) Pursuant to the Tribunal's order, the A.O. has passed OGE to the Tribunal order, accepting our contention and allowed the discounts as deduction for A.Y. 2012-2013 and 2013-2014. The OGE are submitted. Prayer In the light of the above facts, it is our submission that the facts are similar for the years A.Y. 2007-2008 and 2011-2012 and the above decision / direction is applicable to these years also. 5.1 The DR in his written submission dated 30.12.2020 had agreed that the matter may be remanded back to the A.O. for examination in terms of the ITAT order dated 29.01.2018 for A.Y.'s 2012-2013 and 2013-2014. 5.2 We have heard rival submissions and perused the material on record. The ITAT in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale invoice and such discount was duly considered in VAT return. After filing the sales tax return, the assessee company has claimed further discount allowed by way of credit notes of ₹ 23,55,30,000/- in the audited financial statements. The above assumption of the AO is erroneous as the sales shown in the audited financial statement is gross sales less discount which is evident in the audited financial statement 2013-14 which is available at page 139-159 of the paperbook. He further invited our attention to page 151 of the compilation wherein gross sales revenue of ₹ 156,77,20,000/- is shown and discount shown is ₹ 23,55,13,000/- and the net sale revenue is ₹ 1,33,89,107/-. Breakup of which is available at page 159 of the compilation. The discount reconciliation summary available at page 713-714 in the paperbook was also furnished before the AO to establish the fact that discount of ₹ 23,55,30,000/- include the discount given in invoice of ₹ 1,16,91,000/- and the sales shown is a gross sales and not net of discount. It was further submitted that the AO was confused with regard to discount allowed in the sales invoice credit notes and sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment from hospital was received separately and also they give the receipt separately while stunt payment receipt is given by the company. For the second type of patients who are served cashless hospitals purchase the stunts from the assessee and make the payment by cheque. All these aspects were required to be examined by the lower authorities but they have disallowed the entire payment of discount having doubted the genuineness of payment without having examined the clarification furnished by the assessee. 25. We have also considered the Revenue's contention that sufficient opportunities were given to the assessee to explain the discrepancy in discounts and genuineness of substantial amount of discount given to the buyers. But we find that assessee has furnished the details of persons to whom the stunts were sold and the AO has collected the evidences only from few persons. The contention of the assessee that sometime discounts were given in the invoice itself were also not properly appreciated or examined by the AO. When certain hospitals have categorically stated that there are two types of patients and one type of patient cashless treatment is to be given by the hospital i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2013-2014 and shall take decision in accordance with law. 5.6 Therefore ground No.13 in these appeals are allowed for statistical purposes. Disallowance of bad debts written off (Ground No.15 for A.Y. 2010-2011 & Ground No.14 for A.Y. 2011-2012) 6. The learned AR has made the following submissions on the above issue:- (i) The details of each of the customers in whose case there were write off of bad debts were furnished to the A.O.- letter dated 26th November, 2014 - pages 764 to 768 of paper book. The details are placed as Annexure to the assessment order for A.Y. 2013-2014. (ii) The detailed reasons for each of the parties in whose case bad debts had been claimed were furnished - letter dated 26th November, 2014 - pages 766 to 768 of paper book. (iii) Reconciliation statement along with the ledger extract of each of the parties was furnished to the A.O. - pages 459 to 714 of the paper book. (iv) It is submitted the provisions of the Income Tax Act requires that, prior to the debt being written off as bad, it is essential that the same is accounted in the books first as income. Accordingly, the details of accounting of such sales income were furnished to the A.O. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g carefully examined the orders of authorities below in the light of rival submissions, we find force in the contentions of the assessee that after the amendment and as per the Circular No.12/2016 dated 30.05.2016 it is not necessary for the assessee to establish that debt has become irrecoverable. It is enough that bad debt is irrecoverable in the accounts of the assessee. This position has been clarified by the Apex Court through its judgment in the case of TRF Vs. CIT 323 ITR 0397. Thereafter the Board has also issued a Circular in the light of the judgment of the Apex Court and clarified the position that the claim of bad debt in the previous year shall be admissible under section 36(1)(vii) of the Act if it is written off as irrecoverable in the books of accounts of the assessee for that previous year if it fulfills the condition stipulated in section 36(2) of the Act. The Board has also advised the authorities concerned that no appeal may henceforth be filed on this ground and appeal already filed if any on this issue before various grounds in the Tribunal may be withdrawn as not pressed upon. The issue was also examined by jurisdictional High Court in the case of Amco Batter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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