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Disallowance made u/s 14A has to be restricted to quantum of exempt income: ITAT

2019-TIOL-1350-ITAT-MAD

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘D’ CHENNAI

ITA No. 2793/Chny/2017 
Assessment Year: 2012-13

DEPUTY COMMISSIONER OF INCOME TAX
CORPORATE CIRCLE – 2(2), CHENNAI – 34

Vs

M/s HEAL KRAFT INDIA PVT LTD
NEW NO 22, (OLD NO 12/56), 1A, OWNERS COURT
MONTIETH LANE, EGMORE, CHENNAI – 600008
PAN NO: AAACH5487R

CO No. 14/Chny/2018
in ITA No. 2793/Chny/2018

M/s HEAL KRAFT INDIA PVT LTD
NEW NO 22, (OLD NO 12/56), 1A, OWNERS COURT
MONTIETH LANE, EGMORE, CHENNAI – 600008
PAN NO: AAACH5487R

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CORPORATE CIRCLE – 2(2), CHENNAI – 34

ITA No. 2755/Chny/2018
Assessment Year: 2012-13

M/s HEAL KRAFT INDIA PVT LTD
NEW NO 22, (OLD NO 12/56), 1A, OWNERS COURT
MONTIETH LANE, EGMORE, CHENNAI – 600008
PAN NO: AAACH5487R

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CORPORATE CIRCLE – 2(2), CHENNAI – 34

M Balaganesh, AM & Duvvuru Rl Reddy, JM

Date of Hearing: June 04, 2019
Date of Decision: June 07, 2019

Appellant Rep by: Shri R V Aroon Prasad, JCIT
Respondent Rep by: 
Shri T Banusekar, CA

Income Tax – Section 14A, 37 & 115JB

Keywords – Dividend – Exempt income

THE assessee company had filed its return for the relevant AY. During the course of the assessment proceedings, the AO observed that the assessee had earned exempt income in the form of dividend of Rs 12.73 lacs and had suo motu disallowed a sum of Rs 9.89 lacs in the return. The AO ignored the same and resorted to make disallowance by applying second and third limbs of Rule 8D(2) of Rs 16.09 lacs. On appeal, the CIT(A) confirmed the disallowance.

On appeal, the Tribunal held that,

Whether disallowance made u/s 14A has to be restricted to the quantum of exempt income – YES: ITAT

++ the assessee had earned exempt income in the form of dividend to the tune of Rs 12,73,586/- and had suo moto disallowed a sum of Rs 9,89,496/- in the return of income. The AO ignored the same and resorted to make disallowance by applying second and third limbs of Rule 8D(2) of the Income Tax Rules ( in short the ‘Rules’) to the tune of Rs 16,09,980/-. The assessee had raised an additional ground no. 14 pleading that the disallowance u/s 14A of the Act be restricted to the exempt income in order to put quietus to the entire dispute. This ratio has been already approved by the Supreme Court in the case of Maxopp Investments.Without going into the veracity of workings of disallowance made under Rule 8D(2) of the Rules made by the AO and without going into the basis of suo motu disallowance made by the assessee in the return of income, the AO is directed to restrict the disallowance made u/s 14A of the Act to the extent of exempt income i.e Rs 12,73,586/- under normal provisions of the Act by accepting the additional ground no. 14 raised by the assessee.

Revenue’s appeal partly allowed

(Editor’s Note – The other issues of deduction u/s 80IC and computation of book profit u/s 115JB have not been discussed in this headnote.)

ORDER

Per: M Balaganesh:

The appeal of the Revenue, the cross objection of the assessee and the cross appeal of the assessee are directed against the order of the Ld. Commissioner of Income Tax (Appeals)-6, Chennai vide proceedings in ITA Nos. 137/CIT(A)-6/2015-16 dated 14.09.2017 for the assessment year 2012-13 against the order of assessment passed by the ACIT(OSD), Corporate Circle-2, Chennai (herein after referred to as Ld. AO) u/s. 143(3) of the Income Tax Act,1961 (herein after referred to as the Act). As the issues involved in all these appeals, cross objection are common in nature, the same are taken up together and disposed off by this common order for the sake of convenience.

2. Let us take up the assessee appeal for Asst Year 2012-13 in ITA No. 2755/Chny/2017 first. The first issue involved in this appeal is as to whether the ld CITA was justified in upholding the disallowance of Sales Promotion, Advertisement and Publicity Expenses in the facts and circumstances of the case. The inter connected issue involved therein is as to whether the said disallowances would correspondingly increase the claim of deduction u/s 80IC of the Act in the facts and circumstances of the case.

2.1. The brief facts of the appeal are that the ld AO disallowed sales promotion expenses of Rs.27,05,841/- and advertisement and publicity expenses of Rs.16,56,638/- totaling to Rs.43,62,479 as expenditure not allowable u/s.37. The ld AO disallowed the expenditure for the reason that the said expenditures were incurred for marketing the products and that the same is not incidental to the manufacturing activity. In addition to that, the ld AO in respect of the sale promotion expenses had stated that the said expenditure incurred by the assessee is an offence as it has been incurred in violation of the code of ethics by the Medical Council. The ld AO placed reliance on the CBDT Circular No.5 / 2012 dated 01.08.2012 in making the disallowance. The said disallowance was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us.

2.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a manufacturer of pharmaceutical products. The various arguments of the ld AR could be summarized as under:-

a) The assessee, who is a manufacturer of pharmaceutical products had marketed its products through Tablets (India) Ltd. Based on an agreement with Tablets (India) Ltd, the assessee had accepted to share a part of the sales promotion, advertisement and publicity expenses. It is a commercial decision taken by the assessee and the same cannot be questioned by the revenue. The ld AR relied on the decisions of the Hon’ble Supreme Court in the case of S.A.Builders Ltd V. CIT reported in 288 ITR 1 (SC) = 2006-TIOL-179-SC-IT and in the case of Hero Cycles (P) Ltd V. CIT reported in 379 ITR 347 (SC) = 2015-TIOL-280-SC-IT and also the decision of Hon’ble Delhi High Court in the case of CIT V. Dalmia Cement (Bharat) Ltd reported in 254 ITR 377 (Del) = 2003-TIOL-556-HC-DEL-IT, wherein it was held that the assessee’s nexus between the expenditure and the purpose of the business had to be looked into from the point of view of businessman and not from the point of the revenue. The ld AO cannot step into the shoes of the assessee to decide whether the expenditure is required to be incurred by the assessee or not.

b) The ld AR stated that the CBDT Circular No.5 / 2012 which the ld AO relied on to hold the expenditure incurred by the assessee is an offence is dated 01.08.2012 and hence the same would not be applicable to the impugned assessment year i.e. AY 2012-13. In support of this proposition, he relied on the co-ordinate bench decision of Mumbai Tribunal in the case of Macleods Pharmaceuticals Ltd V. Additional CIT reported in 161 ITD 291 and Syncom Formulations (I) Ltd V. DCIT in ITA No.6429 /Mum/2012, wherein it has been held that the Circular was introduced w.e.f. 01.08.2012 and hence effective from assessment year 2013-14 onwards.

c) The ld AR also stated that the assessee company had not distributed the freebies namely DVD players and silver coins to any medical practitioner but only to Tablets (India) Ltd which is marketing the assessee’s products and hence the said expenditure would not be covered by Circular No.5 / 2012of the CBDT.

d) The ld AR by placing reliance on the co-ordinate bench decision of Mumbai Tribunal in the case of Solvay Pharma India Ltd V. PCIT reported in 169 ITD 13 = 2018-TIOL-195-ITAT-MUM, submitted that the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002 is applicable only to the medical practitioners and not to the Pharma companies and further that the CBDT cannot enlarge the scope and applicability of “Indian Medical Council Regulation 2002” by making it applicable to the pharmaceutical companies.

e) The ld AR in support of Additional Ground No.13 raised by the assessee claimed that the expenditure disallowed by the Assessing Officer goes to increase the gross profit of the assessee and that the same is eligible for deduction u/s.80IC. In support of this proposition, he placed reliance on the decision of Hon’ble Bombay High Court in CIT V. Gem Plus Jewellery India Ltd reported in 330 ITR 175 (Bom) = 2010-TIOL-456-HC-MUM-IT. He also placed placed reliance on the CBDT Circular No.37 / 2016 dated 02.11.2016 where it has been stated as follows:-

“3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”

2.3. Per Contra, the ld DR vehemently argued that the expenditure incurred by the assessee is in violation of the provisions of section 37(1) and that they are hit directly by the CBDT Circular No.5 of 2012 and accordingly the said expenditure is not eligible for deduction u/s 37(1) of the Act. He also argued that the CBDT Circular needs to be extended to Pharma companies also as it is the paying hands (i.e the persons distributing the various gifts etc) and the medical practitioners are the receiving hands ( i.e the persons receiving the various gifts etc). Hence there is no need to segregated between two parties and that the Circular should be read in totality.

2.4. We find that the expenditure incurred by the assessee towards sales promotion, advertisement and publicity expenses were incurred in line with the business of the assessee and that the revenue had not doubted the genuineness of the incurring of such expenditure. We find that the only grievance of the revenue is that the assessee need not have incurred that expenditure (i.e getting into the propriety of a transaction) and further the said expenditure is hit by the CBDT Circular No.5 / 2012. It is well settled that the revenue cannot step into the shoes of the assessee to decide whether the expenditure is required to be incurred by the assessee or not where the genuineness of the same is not questioned. The ld AO has to see whether the particular expenditure incurred is not personal in nature , is not capital in nature and incurred wholly and exclusively for the purpose of business of the assessee. When assessee is able to provide the business nexus of incurrence of certain expenditure with supporting documents, it cannot be simply denied / rejected by the revenue merely on the ground of propriety, which action would lead to, travelling beyond the brief and stepping into the shoes of the assessee by the revenue. The various apex court decisions relied upon by the ld AR supra clearly point out this ratio. We therefore hold that the expenditure incurred by the assessee towards sales promotion, advertisement and publicity is an allowable expenditure.

2.5. It is not in dispute that the assessee had only distributed the DVD players, silver coins, calenders and diaries to Tablets India Ltd which was marketing the products of the assessee. There was absolutely no distribution of gifts made by assessee to any medical practitioners and hence the applicability of CBDT Circular No. 5/2012 itself deserves to be rejected. Reliance in this regard had been rightly placed on the co-ordinate bench decision of Mumbai Tribunal in Solvay Pharma India Ltd V. PCIT 169 ITD 13 = 2018-TIOL-195-ITAT-MUM wherein it was held as follows:-

“23. Now coming to the Explanation to Section 37(1) invoked by the CIT, the Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of ‘Expressio Unius Est Exclusio Alterius’ is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section.

24. We observe that the CBDT Circular dated 1-8-2012 (supra) in its clarification has enlarged the scope and applicability of ‘Indian Medical Council Regulation 2002’ by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations. The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like ‘contemporaneaexpositio’ in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of ‘Indian Medical Council Regulation, 2002’ and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect…………………”

2.6. We hold that the Circular issued by the CBDT cannot enlarge the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee.

2.7. We further hold that Circular No.5 / 2012 is effective only from 01.08.2012 (i.e from Asst Year 2013-14 onwards) as held by the Mumbai Tribunal in Macleods Pharmaceuticals Ltd referred to supra. Hence the same would not be applicable to the impugned assessment year i.e AY 2012-13 and hence disallowance cannot be made based on the said Circular. We therefore, direct the ld AO to allow the claim of sales promotion, advertisement and publicity expenses u/s.37 of the Act.

2.8. Now let us come to the Additional Ground raised by the assessee on the aspect of whether the disallowance of aforesaid expenditure would correspondingly go to increase the claim of deduction u/s 80IC of the Act. We find that this is a legal claim made by the assessee which could be raised for the first time before this tribunal and accordingly deem it fit to admit the same and take up for adjudication. The issue of whether deduction u/s.80IC of the Act should be computed on the profits as increased by the disallowance u/s.37(1) of the Act is covered in favour of the assessee by the decisions in CIT V.Gem Plus Jewellery India Ltd 330 ITR 175 (Bom) = 2010-TIOL-456-HC-MUM-IT and DCIT V. Vertex Infosoft Solution (P) Ltd 37 ITR (Trib) 521. Further it would be pertinent to hold that the issue now stands settled by the CBDT Circular No.37 / 2016dated 02.11.2016 where the Board had clarified that the deduction under Chapter VI-A will be on such profits including disallowance under sections 32, 40(a)(ia), 40A(3), 43B etc of the Act which will include disallowance made u/s.37(1) as well.

2.9. We also find from the computation of income made by the ld AO, that the ld AO had disallowed the entire Sales promotion, advertisement and publicity expenses u/s 37(1) of the Act separately. Further he had again reduced the claim of deduction u/s 80IC of the Act by the very same amount of sales promotion, advertisement and publicity. This would effectively result in double disallowance made by the ld AO which we direct the ld AO to rectify.

2.10. The aforesaid findings on the issue of admissibility of sales promotion, advertisement and publicity would cover the assessee’s appeal in ITA No. 2755/Chny/2017 and also Grounds 3.1. and 3.2. of Revenue’s appeal in ITA No. 2793/Chny/2017. The same are disposed off accordingly.

3. Cross Objection of assessee in CO No.14/Chny/2018 was stated to be withdrawn by the ld AR in support of which an affidavit was filed before us. Respectfully taking the same on record, we dismiss the Cross Objections of the assessee as withdrawn.

4. The next ground in revenue’s appeal and the additional ground in assessee’s appeal to be decided is as to whether the ld CITA was justified in restricting the amount of disallowance u/s 14A of the Act in the sum of Rs 9,89,496/- under normal provisions of the Act in the facts and circumstances of the case. The inter connected issue involved thereon is determination of amount of disallowance u/s 14A of the Act vis a vis the computation of book profits u/s 115JB of the Act.

4.1. We have heard the rival submissions. We find that the assessee had earned exempt income in the form of dividend to the tune of Rs 12,73,586/- and had suo moto disallowed a sum of Rs 9,89,496/- in the return of income. The ld AO ignored the same and resorted to make disallowance by applying second and third limbs of Rule 8D(2) of the Income Tax Rules ( in short the ‘Rules’) to the tune of Rs 16,09,980/-. We find that the assessee had raised an additional ground no. 14 pleading that the disallowance u/s 14A of the Act be restricted to the exempt income in order to put quietus to the entire dispute. We find that this ratio has been already approved by the Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC) = 2018-TIOL-87-SC-IT. Without going into the veracity of workings of disallowance made under Rule 8D(2) of the Rules made by the ld AO and without going into the basis of suo moto disallowance made by the assessee in the return of income, we direct the ld AO to restrict the disallowance made u/s 14A of the Act to the extent of exempt income i.e Rs 12,73,586/- under normal provisions of the Act by accepting the additional ground no. 14 raised by the assessee.

4.2. As far as issue of disallowance u/s 14A of the Act vis a vis computation of book profits u/s 115JB of the Act, the issue now stands settled by the Special Bench decision of Delhi Tribunal in the case of ACIT V. Vireet Investment Pvt Ltd reported in 165 ITD 27 = 2017-TIOL-923-ITAT-DEL-SB wherein it was held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imported into in clause (f) of Explanation to Section 115JB(2) of the Act. It further held that the disallowance of actual expenditure incurred for earning exempt income is required to be made under clause (f) of section 115JB(2) of the Act. We find that the assessee itself had disallowed a sum of Rs 9,89,496/- u/s 14A of the Act in the return of income on some actual basis. In order to settle the disputes to rest, we direct the ld AO to consider this sum of Rs 9,89,496/- for disallowance under clause (f) of Explanation to Section 115JB(2) of the Act as direct expenditure incurred for earning exempt income.

4.3. The regular and additional grounds raised by the assessee and revenue are disposed off accordingly.

5. In the result, the appeal of the assessee is allowed; Cross objection of the assessee is dismissed and the appeal of the revenue is partly allowed.

(Order pronounced on the 7.06.2019)

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