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TMI Blog2018 (4) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... ses in the facts and circumstances of the case. 2.1. The brief facts of this issue is that the assessee company is a manufacturer of pharmaceutical goods. It incurred a sum of Rs. 1,18,23,353/- as Sales Promotion expenses in respect of its products. The assessee entered into a Joint Venture Agreement dated 27.3.2002 with another company by name Citadel Aurobindo Biotech Limited (CABL in short) as a result of which it had sold its brands to the said company. It was agreed between the assessee and CABL, that they would reimburse the assessee certain sales promotion expenses incurred in respect of its branded products and therefore, the assessee had not debited the related sales promotion expenses to the profit and loss account in the year of its incurrence. The fact that these expenses were genuinely incurred and that it was recoverable from CABL was not in dispute at all. The asseseee was having various correspondences with CABL for over three years. Ultimately, CABL refused to reimburse the said sum of Rs. 1,18,23,353/- during the Asst Year 2005-06. In other words, the refusal was made by CABL in Asst Year 2005-06 and accordingly the assessee decided to write off the said claim in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purchase a Brands and taken over of Current Assets, dated 27.03.2002. b) The argument that Compliments of Gift articles constitute a part of the Current Assets taken over cannot be applied to your claim for the simple reason that there was no proper accounting available for the same and all have been reported to have been distributed well before the formation of the JV Company. c) Also, we feel that since promotion of products constitute a daily routine there is nothing extra-ordinary in giving compliments/gifts to doctors. As far as we can foresee, this is akin to paying the salary to your staff. d) More importantly, the talk of forming a JV was initiated only sometime in November- December, 2001 and when the items were ordered there was no linking that a JV company was in the anvil. e) Your claim looks like an additional levy on us for the purchase of your brands and we are unable to appreciate the points referred to in your letter dated 03.02.2003. f) Books like Ha Ha Therapy' though authored by a renowned doctor is more a book on 'humour during medicine practice' rather that giving any insight into technicalities. However, since, you had your own strategies w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in Asst Year 2002-03 would be in the nature of freebies, gifts etc given to doctors which is prohibited as per statute ( i.e MCI regulations). Accordingly, he held that the disallowance had been rightly made by the ld AO. 2.4. Aggrieved, the assessee is in appeal before us on the following grounds :- 2. The Commissioner of Income Tax (Appeals) erred in treating a disputed claim written-off by the Appellant amounting to Rs. 1,18,23,353/- on the ground that: a) the expenditure not incurred wholly and exclusively for the purpose of the business; and b) the expenditure is even otherwise disallowable in terms of the CBDT Circular 5/2012 in F. No. 225/142/2012-ITAT.II dated 1st August, 2012. 3. The Commissioner of Income Tax (Appeals) erred in disregarding to the basic fact that the appellant had made a legitimate claim in pursuance of an Agreement with an company (Citadel Aurobindo Biotech Limited) to which it had sold its brands and that both the amount incurred and the claim made were never in dispute. 4. The Commissioner of Income Tax (Appeals) erred in not taking into consideration that the amount written off is a disputed claim between two parties and the decision to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to resolve the dispute with regard to absorption of these expenditure in the books of CABL and various correspondences in this regard were entered into over a period of three years which are part of the records. We find that CABL however refused to pay the amount claimed by the assessee and the decision with regard to non-payment was communicated to the assessee only during the Asst Year 2005-06 and hence the assessee had no other option but to write off the same as irrecoverable loss in its books of accounts and claim deduction for the same. Even though the ld AO accepted the facts relating to the claim made by the assessee and that it was genuine business expenditure, he disallowed merely on the ground that the same were incurred in the earlier previous year relating to Asst Year 2002-03 and cannot be allowed in Asst Year 2005-06. In other words, the disallowance was made by the ld AO by treating the said expenditure as prior period expenses. But we find that the necessity to absorb the said expenditure in Asst Year 2005-06 (i.e the year under appeal) got crystallized only pursuant to the letter rejecting the claim dated 31.1.2005 by CABL, which falls in Asst Year 2005-06. As lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling of freebies is a very salutary regulation which is in the interest of patients and the public. This court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, section 37(1) comes into play. The Petitioner's contention that the circular goes beyond the section is not acceptable. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file an appeal but the circular which is totally in line with section 37(1) cannot be said to be illegal. If the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the AO that the expense is not in violation of the Medical Council Regulations." In the instant case, it is not the case of the ld AO that the expenditures incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the sum of Rs. 1,18,23,353/- as deduction in Asst Year 2005-06. Accordingly, the Grounds 2 to 7 raised by the assessee for Asst Year 2005-06 are allowed. 3. The next issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the addition made u/s 41(1) of the Act in the sum of Rs. 39,90,797/- in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the assessee showed amounts payable to M/s Citadel Aurobindo Biotech Ltd (CABL in short) in its balance sheet as on 31.3.2005. The ld AO observed that CABL is a group concern of the assessee. The ld AO observed that since CABL had ceased its business operations, he came to a conclusion that the assessee would not pay the dues to CABL and accordingly invoked the provisions of section 41(1) of the Act by stating that the said liability ceased to exist. The assessee pleaded that CABL is also assessed by the very same assessing officer assessing the assessee herein. The assessee pleaded that CABL had reflected the very same balance as has been reflected by the assessee and there is no dispute regarding the same. The assessee stated the amount of Rs. 39,90,797/- is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rranted and accordingly deserves to be deleted. Accordingly, the Ground No. 8 raised by the assessee is allowed. 4. The last issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance made u/s 40(a)(ia) of the Act towards audit fees in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the assessee made provision for audit fees of Rs. 2,52,909/- and claimed the same as deduction. But this expenditure was not subjected to deduction of tax at source. Accordingly, the ld AO sought to disallow the same u/s 40(a)(ia) of the Act for violation of provisions of section 194J of the Act. The assessee replied that the audit fees, though expenses, of the year of account, the amount is payable only after the signing of the report by the auditor, and therefore, till it is signed, it will not be known as to whom the amount has to be paid. It was submitted that the provisions of section 194J of the Act would not apply to audit fees, as the question of payment to the auditor would arise only after the signing of the accounts which takes place after the year end. The ld AO however proceeded to disallow the same u/s 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant submits that the reopening of the assessment made by the Assessing Officer is not correct for there was no fresh material available with the Assessing Officer to reopen the assessment - for the reopening has been made based on the documents filed with the return of income. 6. The brief facts of this issue is that the assessee company filed its return of income for the Asst Year 2006-07 electronically on 16.8.2007 admitting loss of Rs. 73,832/-. No assessment was framed on the said return u/s 143(3) of the Act. This assessment was later sought to be reopened by issuance of notice u/s 148 of the Act on 24.2.2011 on the following reasons :- During the year, the assessee has offered Long Term Capital Gains of Rs. 1,77,106/- . The same is set off against business losses of Rs. 2,50,938/-. The assessee company had shut down its business and the return of income electronically filed exhibits lack of business activity and hence, the expenditure akin to business cannot be allowed and the entire capital gains of Rs. 1,77,106/- needs to be taxed. The reassessment was framed u/s 143(3) r.w.s. 147 of the Act on 15.12.2011 by making an addition of Rs. 11,09,690/- to the closing stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following:- (i) reopening of assessment u/s 147 of the Act ; (ii) bringing to tax a new source of income without even discussing in his order the issue for which the assessment has been reopened and (iii) valuing closing stock (classified as scrap) based on scrap sales made in Asst Years 2008-09 and 2009-10. The ld AR further argued that there was no fresh material for reopening and the ld AO had initiated proceedings u/s 147 of the Act merely on change of opinion on matters already considered which is not valid in law as held by the Hon'ble Supreme Court in the case of Kelvinator of India Ltd reported in 320 ITR 561 (SC). He pleaded that no disallowance / addition was made in the reassessment in respect of reasons recorded (i.e disallowance of business loss) by the ld AO. Hence he argued that the entire re assessment deserves to be quashed. In response to this, the ld DR vehemently relied on the orders of the lower authorities. 6.3. We have heard the rival submissions. At the outset, we find that the reopening was made for the Asst Year 2006-07 for disallowance of business loss of Rs. 2,50,938/- as in the opinion of the ld AO, the assessee did not carry on any business activity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 336 ITR 136 (Del) . c) Hon'ble Calcutta High Court in the case of CIT VS Infinity Infotech Parks Ltd in ITAT No. 60 of 2014 G.A.No. 1736 of 2014 dated 10.9.2014. d) Hon'ble Jurisdictional High Court in the case of Martech Peripherals P Ltd vs DCIT and Another reported in (2017) 394 ITR 733 (Mad) dated 4.4.2017 6.4. Even on merits, from the facts narrated and explanations given hereinabove, we find that the ld AO is not justified in valuing the closing stock of packing materials representing scrap based on the scrap sales made in subsequent years ignoring the principles of valuation of stock as enumerated in AS 2 issued by ICAI which is also mandated to be followed u/s 145A of the Act. Hence no addition towards valuation of closing stock could be validly made in the reassessment even on merits in the instant case. 6.5. In view of our aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we hold that the re-assessment proceedings framed for the Asst Year 2006-07 deserves to be quashed. Accordingly, the grounds raised by the assessee for the Asst Year 2006-07 are allowed. 7. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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