Income Tax Appellate Tribunal - Mumbai
Aristo Pharmaceuticals P.Ltd, Mumbai vs Pr Cit 2, Mumbai on 7 December, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI SANDEEP GOSAIN, JM
ITA Nos. 2982/Mum/2017 & 554/Mum/2018
(Assessment Years: 2012-13 & 2013-14)
M/s. Aristo Pharmaceuticals Pvt. Ltd. Principal CIT-2,
rd
Mercantile Chambers, 3 Floor, 3rd Floor, Aaykar Bhavan,
Vs.
12, J. N. Heredia Marg, Ballard Estate, Mumbai-400 020
Mumbai - 400 001
PAN/GIR No. AAACA 4495 N
(Appellant) : (Respondent)
Appellant by : Shri Ajay Kumar Rastogi &
Ms. Smriti Singh
Respondent by : Shri R. P. Meena
Date of Hearing : 12.09.2018
Date of Pronouncement : 07.12.2018
ORDER
Per Bench:
These are appeals by the assessee against the respective orders of the learned Commissioner of Income Tax, Mumbai ('ld.CIT for short) passed u/s. 263 of the Income Tax Act, 1961.
2. Since the issues are common and connected and the appeals were heard together these are being disposed of by this common order for the sake of convenience.
3. For the assessment year 2012-13, the ld. CIT noted that the case record was called for examination. On examination, it was observed that the case was selected for scrutiny under the CASS to examine the large deduction claimed under Chapter VI-A etc. The Assessing Officer (A.O. for short) has disallowed sales promotion expenses of Rs.11,37,45,179/-. The ld. CIT observed that A.O. has not applied his mind and has allowed the claim of expenses viz. Medical Conference Expenses amounting to Rs.31.18 2 ITA Nos. 2982/M/17&554/M/18 crores, which were prohibited by Medical Council of India (MCI) vide notification dated 10th December, 2009. That these Medical Conference Expenses paid to the doctors clearly fall within the classification of medical freebies and are not allowable in view of Explanation 1 to Section 37 of the I.T. Act. That the A.O., therefore, has wrongly allowed Medical Conference Expenses claimed by the assessee company.
4. The ld. CIT further observed that it is settled proposition in law that failure of the Assessing Officer to carry out relevant and meaningful enquiries as warranted by the facts and circumstances of the case renders the assessment order erroneous and prejudicial to the interest of revenue. That by allowing prohibited 'Medical Conference Expenses', A.O. has passed an erroneous order which is prejudicial to the Revenue. That the case of the assessee is also covered by deeming provision of Explanation 2(a) and (b) of section 263(1) of the Act. Accordingly, a show-cause notice dated 06.03.2017 was issued u/s.263 of the Act to the assessee to grant the opportunity of being heard while proposing to revise the assessment order dated 06.01.2015 suitably for the aforesaid reasons.
5. Thereafter, he noted the assessee's response as under:
(i) that the AO had called for and examined the 'Medical Conference Expenses' not only this year but in earlier years.
(ii) that the MCI is not a regulatory authority of the assessee. Its jurisdiction is limited to medical professionals and has no jurisdiction over the assessee and the assessee is not bound by the regulations whatsoever passed by the MCI.
(iii) that the Notification dated 10.12,2009 has the approval of the Central Government and there is no evidence that the said Notification received assent of the President of India.
(iv) that the said Medical Conference Expenses are incurred 'wholly & exclusively' for the purposes of business and are allowable u/s.37 of the Act.
(v) that the said expenses are not categorised as an 'offence' or which are 'prohibited by law' to fall under the Explanation to section 37 of the Act.3 ITA Nos. 2982/M/17&554/M/18
(vi) that the said expenses of Rs.31.18 crores includes expenditure under the Head Medical Conference Expenses of Rs, 19,26,49,60s/- and the remaining expenses are on account of field staff conference expenses."
6. The ld. CIT was not convinced. He gave some observation on the scope section 263 of the Act. Thereafter he held as under:
6. When the facts of this case and the submissions made are tested against the proposition of law as discussed above, it is apparent that the assessment made by the A.O. in allowing the medical conference expenses that are proscribed by the Medical Council's Notification dated December 10, 2009 is erroneous and prejudicial to the interest of revenue. The arguments made by the assessee company that the Assessing Officer has applied his mind and that the Medical Council of India is not the regulatory authority are not acceptable. It is evident from the above legal discussion, the Supreme Court has field the order to be erroneous not only if it contains error of reasoning or of law or of facts but also if it is a stereotype order. Therefore, even after examining the details filed if the Assessing Officer commits an error of law or of facts, the same falls within the purview of revision u/s.263 of the Act. It is without dispute that AO erred in allowing 'medical freebies' given to doctors by the assessee. There is also no dispute that MCI is a regulatory authority for regulating these medical freebies to the doctors. The Notification by MCI was passed with the approval of the Central Government. The question whether the said Notification has the approval of the President of India or not is inconsequential. It is true that the MCI regulates the professional conduct ethics and etiquette of the medical professionals and not the assessee. However, when the medical professionals are barred from receiving medical freebies, it is incumbent upon the assessee not to indulge in such prohibited expenses. Even if the assessee chose to ignore the MCI guidelines to boost his business, the same cannot be allowed as a business expenditure u/s.37 of the Act, more so when the Explanation to the said section clearly disallows such expenses. Moreover, MCI has barred these expenses so that the medical professionals are not swayed by the freebies of the pharmaceutical companies while treating patients. It has an ethical connotation. As per the assessee's own submission, these expenses are in the nature of (i) Registration fees for the doctors attending conferences (ii) Travelling expenses Air/Train etc, for attending conferences (iii) Stay charges for attending conferences (iv) Food, snacks, tea, coffee expenses during conferences (v) Expenses incurred in holding medical camp for detection and awareness of diseases and (vi) Gift articles. These expenses clearly fall under the MCI regulation dated 10.12.2009 which prohibits acceptance of gift, travel facility, hospitality, cash or monetary grants by a medical practitioner. As regards the quantum of expenses i.e. whether it is Rs.31.18 crores or it is Rs.19.26 crores as claimed by the assessee, the AO, shall examine the facts and decide the same as per law.4 ITA Nos. 2982/M/17&554/M/18
7. In view of the above facts and circumstances and after considering the submissions made by the assessee company, I am convinced that A.O. has committed the errors described above which are also prejudicial to the interest of revenue. Considering the same, in exercise of powers conferred u/s. 263 of the I. T. Act, I, therefore, set aside the orders made u/s. 143(3) of the I.T.Act for A.Y. 3012-13 on the issues discussed above. The A.O. is directed to reframe the assessment afresh after giving due opportunity to assessee. The A.O is further directed to consider the CBDT's tax the same as per CBDT's Circular No. 5/2012, while reframing the assessment, Needless to add that the Assessing Officer shall examine all the evidences and accord sufficient opportunity to the assessee.
7. For A.Y. 2013-14, the ld. CIT noted that following notice was issued to the assessee :
"The assessee has debited in the profit and loss account an amount of Rs. 23,18,11,343/ being expenses on 'Medical Conference' which are in the nature prohibited by 'The Medical Council of India (MCI)' vide notification dated 10.12.2009 amending the "Indian Medical Council (Professional conduct, Etiquette and Ethics), Regulations 2002", and are therefore not allowable expenses. It is observed that the aforesaid expenses have not been disallowed by the Assessing Officer in the assessment order dt. 10.3.2016. Failure by the Assessing officer to disallow the expenses of Rs. 23,18,11,343/- has rendered the assessment order dt 10.3(2016 erroneous in so far it is prejudicial to the interest of the revenue."
8. Thereafter the ld. CIT noted the response of the assessee as under:
i. The notification issued by Indian Medical Council in exercise of its executive power is in the nature of instruction / notification and is not new. The MCI notification has no statutory force. Even if there is violation of the notification issued by Medical Council, the violation cannot be termed as 'offence' or 'prohibited by law'.
ii. The assessee has furnished the details of expenditure incurred on medical conference expenses, produced the bills/invoices in support of the expenses claimed and the AO after verification has accepted the same. iii. Such expenses have also been examined in the earlier years and have been allowed all through including the year under consideration. iv. The expenditure incurred is in the nature of sales promotion and is, thus, allowable u/s 37 of the IT. Act and has accordingly been allowed from year to year.
9. He further noted the following case laws referred by the assessee:
1. Commissioner of Income-tax v. Green World Corporation, 314 ITR oaae 81 (SC) 5 ITA Nos. 2982/M/17&554/M/18
2. 2009(4) PLJR Page 417 (Pat) - Commissioner of Income-tax Vs. Mukul Kumar
3. 203 ITR 108 fBoml - Commissioner of Income-tax vs. Gabriel India Limited
4. 270 ITR 157 (MP)
5. 276 ITR 13 (MP):
6. (2015) 372 ITR 310f AIM CIT V. Krishna Caobox (PI Ltd
7. (2014) 367 ITR 377 (RAJ.) CIT V. Deepak Real Estate Developers (I) P. Ltd.
8. (2012) 341 ITR 537 (Delhi) CIT V. Vikash polymers
10. Considering the above, the ld. CIT observed as under:
The assessee has contended that the notification issued by the MCI is in exercise of its executive powers and is not 'law'. In this regard, it is noticed that as per Article 13(3)(a) of the Constitution of India, law includes any Ordinance, order, bye law, rule, regulation, notification, custom or usages having in the territory of India the force of law. Further, as is evident from the notification itself that the notification has been issued by the Medical council of India in exercise of power conferred by Section 33 of Indian Medical Council Act, 1956 with previous sanction of the Central Government. Therefore, the notification certainly qualifies as 'law'. Explanation i to Section 37, declares that any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Since, the expenditure claimed by the assessee were prohibited by law, the same was liable to disallowance under the Explanation 1 to Section 37 of the Income-tax Act, 1961. Further, by providing freebees to doctors the assessee has aided and abetted the acts which were prohibited by law (MCI regulation) and therefore, the expenses can certainly be treated as expenses prohibited by law. ii. The assessee has contended that the assessee has furnished the details of expenditure and the assessing Officer has accepted the same. However, neither the copy of ledger accounts nor any other details of expenses were found on records. The order sheet entry also does not show any production or examination of such expenses. In its reply, the assessee has not mentioned any specific reference to filing of details of such expenses and examination by the Assessing Officer. The Assessing Officer has erred in allowing the expenses as the expenses being prohibited by law, were deemed to have not been incurred for the purposes of business of the assessee in view of the express provisions of explanation 1 to section 37 of the Act. Even if the expenses were genuine, still these were liable to disallowance in view cf the provisions of Explanation 1 to section 37 of the Act. The Assessing Officer has not considered this aspect of law also. iii. The assessee has contended that such expenses were allowed in earlier years. In this regard, it is observed that each assessment year is separate and the allowance of expenditure is dependent on the facts of the case and applicable law.6 ITA Nos. 2982/M/17&554/M/18
The CBDT vide its Circular No. 5/2012 dated 01.08.2012 clarified that the claim of any expense incurred in providing freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income-tax Act being an expense prohibited by law. The aforesaid circular being issued by the CBDT, in exercise of powers conferred on it under the provisions of the Income-tax Act, was binding on the Assessing Officer. Therefore, the allowance of such expenditure which is prohibited under the aforesaid notification of Medical council of India was not in accordance with law. Moreover, it is observed from records that in subsequent assessment year i.e. AY 2014-15, such expenditure has been disallowed by the Assessing Officer.
iv. The contention of the assessee is that the expenditure incurred is in the nature of sales promotion and is, thus, allowable u/s. 37 of the I.T. Act. However, it is observed from records that the assessee has separately claimed "Product Advertisement Expenses' which were found by the Assessing Officer to be in the nature of expenses on Sales Promotion Articles and was disallowed in the assessment order. As already/discussed in preceding paras, the expenses were liable to disallowance being hit by the provisions of Explanation 1 to section 37 of the Act.
11. Thereafter, the ld. CIT distinguished the case laws relied upon by the assessee. Thereafter ld. CIT made the following observation in his concluding remarks:
6.8 The assessee has also referred to the decision of the Mumbai Bench of ITAT in the case of DCIT 8(2), Mumbai Vs PHL Pharma (ITA No. 4605/Mum/2014) wherein the expenses on medical conference have been held to be allowable. In this regard, it is observed that the appeal against the said decision is pending before the Hon'ble Bombay High Court in ITXL No. 1933/2017.
Further, in the said decision, reference to the decision of Hon'ble Punjab & Haryana High Court in the case of Confederation of Indian Pharmaceutical Industry (SS) v. CBDT, in CWP No. 10793 of 2012-J., decision date 26.12.2012 has been made wherein the validity of the CBDT circular No. 05/2012 has been upheld. The Court further held that the expenditure can be allowed only when the assessee satisfies that the expenditure is not in violation of the regulation of Indian Medical Council. Therefore, the legal position as on date is that the expenses are allowable only when it is not in violation of the regulation of the Medical Council of India. It is observed from records that in the instant case, the Assessing Officer did not examine the expenses claimed under the head 'Conference Expenses' from this angle. Even the ledger copy of 'Conference Expenses' was not found on records. However, from the assessment records for AY 2014-15 it is observed that the expenses were in the nature of travelling expenses, registration expenses, accommodation charges, food charges and gift items such as I-pads, Tread mill, furniture, computer, generator, chargers etc., for doctors attending conferences. These expenses were disallowed being freebees to doctors for AY 7 ITA Nos. 2982/M/17&554/M/18 2014-15. However, for AY 2013-14, neither the assessee produced ledger copy nor details like bills/vouchers etc were produced by the assessee (as claimed) nor the Assessing Officer called it or examined. Certainly, there was failure on the part of the Assessing Officer as details were neither called nor verified/examined before allowing such expenses.
7. As per clause (a) to Explanation to Section 263 (amended by Finance Act, 2015 with effect from 01.06.2015), an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, the order is passed without making enquiries or verification which should have been made. In the instant case, as mentioned in the preceding paragraph, it is found that the A.O passed the assessment order without making inquiries and verification which were required in facts and circumstances of the case. This non-verification which was required in the facts and circumstances of the case and allowance of the aforesaid amount of Rs. 23,18,11,3437- and consequent loss of revenue has rendered the assessment order erroneous in so far it is prejudicial to the interest of revenue.
8. In this regard, the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC) may be referred to wherein the Hon'ble Court held "...The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer." It was further held by the Apex Court that the assessment orders was erroneous if the assessing officer passed the assessment order without applying his mind to the case in all perspective. In view of the aforesaid judgment of the Apex Court, if assessment has been made without application of mind in all perspective and there is consequential loss of revenue the order becomes erroneous in so far it is prejudicial to the interest of revenue. In the instant case the A.O failed to apply his mind on all perspective and there was consequential loss of revenue. Therefore, the assessment order was erroneous in so far it is prejudicial to the interest of revenue.
9. In the instant case, as is evident from the preceding paragraphs, the Assessing Officer allowed the expenses of Rs. 23,18,11,343/- debited on account of'Medical Conference' without proper inquiries and verification and in violation of law. The assessment order dated 10.03.2016 is, therefore, found erroneous on this issue in so far it is prejudicially to the interest of revenue. The assessment order dt 10.03.2016 is, therefore, set aside being erroneous and prejudicial to the interest of the revenue on the aforesaid issue. The Assessing Officer is directed to allow the expenses claimed on account of 'Medical Conference' only after proper inquiries and verification. Further, the expenditure can be allowed only when it is found that the expenditure is not in violation of the regulation of Indian Medical Council. Necessary opportunity of hearing will be provided to the assessee before 8 ITA Nos. 2982/M/17&554/M/18 passing the fresh assessment order. The Assessing Officer may take into consideration the subsequent binding judicial decisions on the aforesaid issue which may become available at the time of passing of the fresh assessment order. The Assessing Officer may take into consideration the subsequent binding judicial decisions on the aforesaid issue which may become available at the time of passing of the fresh assessment order.
12. Against the above order, the assessee is in appeal before us.
13. We have heard the counsel and perused the records. The learned counsel of the assessee submitted that the A.O. in these cases has examined the issues and has duly applied his mind. He submitted that as a result of this application of mind, the A.O. has disallowed the sales promotion articles, which were found to be covered under freebies to doctors, prohibited under MCI guidelines and CBDT Circular. He submitted that the expenditure on medical conferences has been examined and found to be for the business of the assessee and the assessing officer has rightly allowed the same. In this regard, the ld. Counsel of the assessee placed reliance upon following case laws:
1. M/s. Aristo Pharmaceuticals Pvt. Ltd. (in ITA No. 6680/M/012 & others vide order dated 26.07.2018);
2. M/s. Solvacy Pharma India Ltd. now merged with Abbott India Ltd. (in ITA No. 3585/Mum/2016 vide order dated 11.01.2018);
3. D. D. Pharmaceutical (P.) Ltd. vs. Asst. CIT (in ITA No.772/JP/2014 vide order dated 12.12.2017);
4. Asst. CIT vs. M/s. Geno Pharmaceuticals Ltd. (in ITA No. 12/PNJ/2014 vide order dated 30.05.2014);
5. Ensure Pharmaceuticals Ltd. vs. DCIT (in ITA No.1532/Pun/2015 vide order dated 29.01.2018)
14. Per Contra, the ld. Departmental Representative (ld. DR for short) relied upon the order's of the ld. CIT. He further relied upon the following case laws:
1. Bisakha Sales (P.) Ltd. vs. CIt [2014] 52 taxmann.com 205 (Kol - Trib);
2. CIT vs. Abad Constructions (P.) Ltd. [2014] 44 taxmann.com 319 (Kerala)
15. Upon careful consideration, we note that the CBDT circular, the medical counsel of India guideline which dealt with disallowance of freebies to doctors have been duly considered by the A.O. The A.O. has elaborately dealt with these items and has rejected 9 ITA Nos. 2982/M/17&554/M/18 the assessee's contention to the contrary. Thereafter, the A.O. has made the disallowance of the sales promotion expenses. The case of the ld. CIT is that the A.O. has not examined the details of medical conference expense. He has rejected the contention that this aspect has been examined by holding that the concerned ledger account is not in assessment records. Thereafter, the ld. CIT has dwelt upon the MCA guideline and the CBDT circular. The assessee has duly submitted the decision of ITAT, Mumbai in the case of DCIT vs. PHL Pharma Pvt. Ltd. (in ITA No. 4605/Mum/2014 vide order dated 12.01.2017), wherein similar expenditure on medical conference has been allowed. The ld. CIT has totally ignored this by mentioning that the department has filed the appeal against this decision in Hon'ble Bombay High Court.
16. Upon careful consideration, we note that the ld. CIT observed that the A.O. has not applied his mind is totally not sustainable. The A.O. has duly applied his mind in the course of assessment. He has shown his adherence to the MCA guideline and the CBDT Circular in this regard. In the assessment order, he has disallowed the sales promotion expenses of Rs.11,37,45,179/- in A.Y. 2012-13 and Rs.15,68,10,431/- in A.Y. 2013-14 being in the nature of freebees to doctors. Hence, the ld. CIT's observation that the A.O. has not followed these MCA Guideline and CBDT Circular is totally misplaced. As regards the examination of conference expense is concerned, the ld. CIT has held that the same were not examined by the A.O. by holding that the concerned ledger accounts were not available in assessment record. This, in our considered opinion, is not at all sustainable in view. There is no rule that the A.O. is supposed to obtain and keep in the assessment records, the copy of all the ledger account which he has examined. Furthermore, the ld. CIT is fully aware of the case law cited by the assessee before him 10 ITA Nos. 2982/M/17&554/M/18 wherein similar expenses were allowed by the ITAT. He has not followed the same holding that it has been appealed against in High Court. Just because the ITAT order has been appealed before High Court, it will not cease to have binding effect on the ld. CIT. It will always be considered to be a permissible view. Hence, if the A.O. adopts a legally permissible view the same cannot be the subject to revision u/s. 263 of the Act.
17. Furthermore while concluding, the ld. CIT has observed that the A.O. shall take into account the binding judicial precedence which may become available on the subject. In this connection, we note that in assessee's own case the ITAT in ITA Nos. 5479 & 5747/Mum/2015 and others for A.Y. 2012 - 13 and others vide order dated 26.07.2018 has allowed the assessee's appeals and dismissed the Revenues appeals. The issue involved was the allowability of similar expenses. In this view of the matter, we find that admittedly the decision of tribunal is binding upon the A.O. Hence the order u/s. 263 of the Act by the ld. CIT will be of no consequence. Further, we note that the A.O. has already made the necessary enquiries in this regard. Here it is a case that the A.O. has made some enquiry and the ld. CIT is not satisfied and he wants another enquiry to be done. This direction u/s. 263 is not sustainable legally. This proposition draws support from the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Gabriel India Ltd. 203 ITR 108 (Bom-HC).
18. As regards the case law relied by the ld. Departmental Representative (ld. DR) in the case of Bisakha Sales (P.) Ltd. (supra) is concerned, we find that the same was rendered in connection with bogus capital share accepted as genuine without enquiry. Hence, the same is not at all applicable here. Similarly the decision of Abad 11 ITA Nos. 2982/M/17&554/M/18 Constructions (P.) Ltd. (supra) also not applicable in the light of Hon'ble jurisdictional High Court decision in the case of Gabriel India Ltd.(supra).
19. In this view of the matter, we are of the considered opinion that firstly the A.O. has made the examination and in his opinion these expenditures were allowable. Hence, he has not made any disallowance. This is a legally permissible view. In any case, as held by the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) and CIT vs. Max India Ltd. (2007) 295 ITR 282 (SC) if there are two views possible and the A.O. has adopted one view, with which the ld. CIT is not in agreement, the order cannot be said to be liable to be visited with the revisionary order by the ld. CIT. Accordingly, the order under 263 passed by the ld. CIT is hereby quashed. Accordingly, we decide the issue in favour of the assessee.
20. In the result, the appeals filed by the assessee are allowed.
Order pronounced in the open court on 07.12.2018
Sd/- Sd/-
(Sandeep Gosain) (Shamim Yahya)
Judicial Member Accountant Member
Mumbai; Dated : 07.12.2018
Roshani, Sr. PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT - concerned
5. DR, ITAT, Mumbai
6. Guard File
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai