TMI Blog2018 (4) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... t be any cessation of liability on the part of the assessee. We find that the ld AO had only forced the assessee to cease the liability payable to CABL. Had the ld AO verified the records of CABL which is also assessed in his office / circle only, he could have understood the truth. Without doing the same, the action of the ld AO by making an addition u/s 41(1) of the Act is not warranted and accordingly deserves to be deleted. TDS u/s 194J - Disallowance made u/s 40(a)(ia) towards audit fees - non deduction of tds - Held that:- In the instant case, the assessee had made provision for audit fees to the account of the payee which fact has been mentioned by the ld CITA. Hence the provisions of section 194J of the Act are clearly attracted and non-deduction of tax at source would automatically invite disallowance u/s 40(a)(ia) of the Act. The statutory auditor is appointed in the annual general meeting of the company by the shareholders and would hold office till the conclusion of the next annual general meeting. Hence the name of the payee (i.e the auditor) is very well known to the assessee in order to make provision for audit fees by crediting to the said auditor’s account. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of convenience. ITA No. 2027/CHNY/2017 Asst Year 2005-06 Assessee Appeal 2. The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of ₹ 1,18,23,353/- towards sales promotion expenses 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 ₹ 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 corres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee cannot be accepted for the reasons that as per the letter issued by CABL on 31.1.2005, it is observed that CABL has rejected the payment of the above claim of the assessee for the following reasons:- a) The expenses for the cited amount was never mentioned in the Agreement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The ld CITA based on this circular concluded that the subject mentioned sales promotion expenses incurred by the assessee would be hit by prohibition imposed by Medical Council of India and hence the explanation to section 37(1) of the Act would come into play. The ld CITA held that the expenditure incurred by the assessee 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of branded products and, therefore, the assessee had not debited the related sales promotion expenses incurred by it during the Asst Year 2002-03 to its profit and loss account. We find that the fact of incurrence of these expenses for the purpose of business and its genuinity thereon were not disputed by the revenue. The assessee was trying 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 1.8.2012 issued by CBDT is to be quashed as it goes beyond the section itself. The Hon ble Court in its decision was not required to decide on the nature of expenditures which all are in violation of the regulations framed by the MCI. Infact, the Hon ble Court has held that The regulation of the medical council prohibiting medical practitioners from availing 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of justice, we hereby direct the learned Assessing Officer to delete the addition made on account of disallowance of ₹ 71,62,741/-. The aforesaid decision also supports the facts of the instant case. 2.5.2. In view of our aforesaid facts and findings and respectfully following the judicial precedents relied upon hereinabove, we allow the claim of write off of the assessee in the sum of ₹ 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 ₹ 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed by the very same AO, there cannot be any cessation of liability on the part of the assessee. We find that the ld AO had only forced the assessee to cease the liability payable to CABL. Had the ld AO verified the records of CABL which is also assessed in his office / circle only, he could have understood the truth. Without doing the same, the action of the ld AO by making an addition u/s 41(1) of the Act is not warranted 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 ₹ 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee is dismissed. ITA No. 2028/Mds/2017 Asst Year 2006-07 5. The assessee has challenged the validity of reopening of assessment made by the ld AO in this appeal apart from challenging the addition made thereon on merits. Before we go into the merits, we deem it fit to addresss this preliminary issue of validity of reopening the assessment. The assessee has raised the following ground in this regard:- 6. The Appellant 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 ₹ 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 ₹ 1,77,106/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y known upon actual realization of scrap sales since they don t have any pre-set market readily available for sale. It is also an admitted fact that the assessee was able to sell the scrap only after 3 years. According the assessee objected to the adoption of value of closing stock based on information which is actually available in Asst Years 2008-09 and 2009-10 and not relevant for Asst Year 2006-07 (i.e the year under appeal). The ld AO however, did not heed to these contentions of the assessee on merits and made an addition of ₹ 11,09,690/- in the re-assessment, which was also confirmed by the ld CITA. Aggrieved, the assessee is in appeal before us . 6.2. The ld AR argued that the dispute in this appeal is in respect of the 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uance of notice u/s 148 of the Act, is assessed to tax. As stated above, during the reassessment proceedings, the ld AO agreed with the contentions of the assessee that it had indeed done business activity and hence the business loss was allowed to be set off with other income. In this scenario, the ld AO would be precluded from making any other addition towards the new source of income as prima facie his reason to believe that income had originally escaped assessment had failed. We draw support from the following decisions of various High Courts in this regard :- a) Hon ble Bombay High Court in the case of CIT vs Jet Airways Ltd reported in 331 ITR 236 (Bom) . b) Hon ble Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT reported in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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