Asst. Commissioner of Income tax Cir. 2 (1), Panaji V. M/s. Geno Pharmaceuticals Ltd., Goa

ITA 12/PAN/2014

• Counselvise Citation: 1224114 RSA 2014
• Duration Of Justice: 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 15-04-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 13-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SONAL L SONKAVDE LD
• Assessee Lawyers: PRADEEP KULKARNI
• Keywords: Gift; Business income; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 12/PNJ/2014 (ASSESSMENT YEAR - 20 10 - 11 ) THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 2(1), PANAJI, GOA. (APPELLANT) VS. M/S. GENO PHARMACEUTICALS LTD TIVIM INDL ESTATE, KARASWADA, MAPUSA - GOA. PAN:AAACG5887G (RESPONDENT) APPELLANT BY : SMT. SONAL L. SONKAVDE, LD. DR. RESPONDENT BY : SHRI PRADEEP KULKARNI , CA. DATE OF HEARING : 15 /04/2014 DATE OF PRONOUNCEMENT : 30 /05 /2014 O R D E R PER: D.T. GARASIA THIS APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINST THE ORDER OF CIT(A) - PANAJI, DATED 25.10.2013 FOR THE ASSESSMENT YEAR 2010 - 11. 2. THE FOLLOWING GROUNDS ARE RAISED IN THIS APPEAL AS UNDER: - 1. THE LD. CIT(A) IGNORED THE MEDICAL COUNCIL OF INDIAS IMPOSITION OF BAN ON MEDICAL PRACTITIONERS IN ACCEPTING THE GIFTS, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHARMACEUTICAL COMPANIES W.E.F. 10.12.2009 AND CBDTS CIRCULAR NO.5/2012 DATED 01.08.2012 WHICH IS APPLICABLE TO A.Y.2010 - 11 IN ALLOWING THE RELIEF TO THE ASSESSEE. 2. THE CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT OF CLOSING STOCK DUE TO DISCREPANCY ON ACCOUNT OF STOCK STATEMENT GIVEN TO THE BANK AND SHOWN IN THE P&L ACCOUNT BY IGNORING THE KARNATAKA HIGH COURT DECISION IN THE CASE OF RECON MACHINE TOOLS (P) LTD., VS. CIT(KAR) 286 ITR 637. 2 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. 3. THE FIRST GROUND OF APPE AL RELATES TO DISALLOWANCE OF SALES PROMOTION EXPENSES AMOUNTING TO RS.87 ,62,377/ - . 3.1. DURING THE YEAR U NDER CONSIDERATION , THE ASSESSEE HAS INCURRED THE EXPENDITURE OF RS. 87,62,377/ - FOR THE PERIOD 10.12.2009 TO 31.03.2010. THE ABOVE SALES PROMOTION EXPENSES PAID TO THE DOCTORS INCLUDE TRAVELLING AND CONVEYANCE, SELLING AND DISTRIBUTION EXPENSES, CONFERENCE EXPENSES INCURRED ON THE DOCTORS FOR PROMOTING THE SALES. THE ASSES SING OFFICER RELIED UPON THE CBDT CIRCULAR AND AS PER THE CBDT CIRCULAR THE MEDICAL COUNCIL OF INDIA IN EXERCISE OF ITS STATUTORY POWERS AMENDED THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 IMPOSING A PROHIBITIO N O N MEDICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATIONS FROM TAKING ANY GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHARMACEUTICAL AND ALLIED HEALTH SE CTOR I NDUSTRIES. S ECTION 37(1) OF INCOME TAX ACT PROVIDES THAT IF ANY REVENUE EXPENDITURE HAS BEEN INCURRED WHICH IS NOT AN OFFENCE OR PROHIBITED BY LAW, IT CANNOT BE DISALLOWED. THE ASSESSEE WAS GIVEN SHOW CAUSE NOTICE AND AFTER CONSIDERING THE REPLY , THE AO DISALLOWED THE AMOUNT OF RS. 87,62,377/ - . 3.2 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS ALLOWED THE CLAIM BY OBSERVING AS UNDER: FACTS DURING THE INSTANT YEAR IS IDENTICAL TO 2007 - 08 AND 2008 - 09, WHEREIN HONBLE ITAT HAS CONFIRMED THE ORDER OF THE CIT(A) RESTRICTING THE DISALLOWANCE TO 5% OF THE TOTAL SALES PROMOTI ON EXPENSES. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE SALES PROMOTION EXPENSES WERE VERIFIED AND THE SAME WERE DISCUSSED WITH THE ARS OF THE APPELLANT COMPANY. DURING VERIFICATI ON OF SALES PROMOTION EXPENSES SHRI PRADEEP KULKARNI, FCA, AR AND SHRI. R.S. KHOLKAR, COMPANY SECRETARY OF THE APPELLANT COMPANY, ON THE BASIS OF THE FACTS, REQUESTED THAT DISALLOWANCE BE ENHANCED TO 10% OF TOTAL SALES PROMOTION EXPENSES IN PLACE OF 5% ; WHICH WAS FOUND TO BE ACCEPTABLE. THE TOTAL SALES PROMOTION EXPENSES CLAI MED ARE RS.1,93,37,578/ - . THEREFORE, THE DISALLOWANCE OFFERED @ 10% WORKS OUT TO RS.19,33,758/ - . THE A.O. IS DIRECTED TO RESTRICT THE DISALLOWANCE AT RS.19,33,758/ - AND BALANCE ADDITION IS DELETED. THIS GROUND OF APPEAL OF THE APPELLANT IS PARTLY ALLOWED. 3 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. 3.3 . WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ISSUE ON HAND IS WHETHER THE ASSESSEE HAS INCURRED THE EXPENSES ON SALES PROMOTION . T HE ASSESSEE HAS INCURRED THE EXPENSES W HICH WAS PAID TO THE DOCTORS INCLUDING TRAVELLING AND CONVEYANCE, SELLING AND DISTRIBUTION EXPENSES, CONFERENCE EXPENSES INCURRED ON THE DOCTORS FOR PROMOTING THE SALES. THE ASSESSING OFFICER WAS OF THE VIEW THAT SUCH TYPE OF EXPENDITURE IS AGAINST THE E THICS OF DOCTORS. THE INDIAN MEDICAL COUNCIL REGULATION ACT 2002 PROHIBITS DOCTORS TO ACCEPT ANY GIFT FOR ANY KIND OF SERVICES FOR PH ARMACEUTICAL COMPANY, THEREFORE, THIS EXPENDITURE MAY NOT BE ALLOWED. W E ALSO FIND THAT WHEN ANY NEW PRODUCT HAS BEEN LAUNCHED BY THE ASSESSEE, THE ASSESSEE HAS TO PUBLISH THE MATE RIAL AND THEY HAVE TO MAKE THE DOCTORS AWARE ABOUT THE MEDICINE MANUFACTURED BY THE ASSESSEE. WE ALSO FIND TH AT WHEN ANY PRODUCT IS LAUNCHED, THERE IS A LOT OF CONFERENCE HAS TO BE ARRANGED AND FOR ARRANGING THE CONFERENCE THE INDUSTRY HAS TO INCUR THE EXPENSES FOR TRAVELLING OF EXPENSES AND OTHER EXPENSES . T HEREFORE, WE ARE OF THE VIEW THAT SUCH EXPENDITURE IS ADMISSIBLE UNDER THE INCOME TAX ACT . THE SIMILAR ISSUE HAS COME U P IN ASSESSEES OWN CASE IN ITA NO S. 167 & 168 /PNJ/2011, WHEREIN THE TRIBUN AL HAS HELD AS UNDER: 21. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME AT THE TIME OF HEARING THE LD. AR DID NOT PRESS GROUND TAKEN IN HIS APPEALS AND THEREFORE THE SAME STAND DISMISSED AS NOT PRESSED. COMING TO THE GROUND TAKEN BY THE REVENUE, WE HAVE GONE THROUGH THE BREAKUP OF THE SALES PROMOTION EXPENSES. FROM THE BREAKUP IT IS APPARENT THAT THE EXPENSES HAVE BEEN INC URRED FOR THE PROMOTION OF THE PRODUCT OF THE ASSESSEE. NONE OF THE EXPENDITURE INCURRED, IN OUR OPINION, IS HIT BY EXPLANATION TO SECTION 37, THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS AND ARE NOT THE CAPITAL EXPENDITURE OR THE PERS ONAL EXPENSES. THE NATURE OF THE BUSINESS IN OUR OPINION DEMANDS THAT THE ASSESSEE MUST HAVE INCURRED SUCH EXPENDITURE OTHERWISE THE ASSESSEE WOULD NOT BE ABLE TO DISPOSE OFF HIS PRODUCT; MEDICINE MANUFACTURE BY THE ASSESSEE IS A CONSUMER ORIENTED INDUSTRY HAVING VAST BASE OF THE CONSUMER. IT HAD A LOT OF COMPETITION IN THE MARKET WITHOUT PUBLISHING MATERIAL AND MAKING THE DOCTORS AWARE OF ABOUT THE MEDICINE MANUFACTURED BY THE ASSESSEE, THE ASSESSEE WILL NOT BE ABLE TO SELL THE PRODUCTS. IT IS NOT A CASE W HERE TH E AO HAVE DISPUTED THE GENUINETY OF THE EXPENDITURE. UNDER THESE FACTS WE AGREE WITH THE ORDER OF THE CIT (A) ON THIS ISSUE. WE ACCORDINGLY CONFIRM THE ORDER OF THE CIT (A) BY DISMISSING THE GROUND TAKEN BY THE REVENU E AS WELL BY THE ASSESSEE IN THE BOTH THE ASSESSMENT YEARS IN THIS ISSUE. 4 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. WE HAVE GONE THROUGH THE CIRCULAR NO. 5/2012, MINISTRY OF FINANCE DEPARTMENT OF REVENUE, GOVT. OF INDIA WHEREIN THE CBDT HAS CLARIFIED THE ADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO THE MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTION INDUSTRIES. BY THAT CIRCULAR THE MEDICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATES ARE BEING PROHIBITED FROM TAKING ANY GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHAR MACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES. MOREOVER, ANY FACILITIES GIVEN TO MEDICAL PROFESSION OR MEDICAL PRACTITIONER ARE NOT ALLOWED, THEREFORE, THIS CIRCULAR IS APPLICABLE TO THAT RELEVANT FACTS BUT IN THE INSTANT CASE EACH CASE HAS TO BE VERIFIED IN RESPECT OF EXPENDITURE, WHICH COMPANY HAS DEBITED AS SALES PROMOTION EXPENSES WHICH ARE PAID TO DOCTORS DIRECTLY OR INDIRE CTLY. THE ASSESSING OFFICER HIMSELF HAS STATED THAT ABOVE SALES PROMOTION EXPEN SES PAID TO DOCTORS INCLUDING TRAVELLING AND CONVEYANCE, SELLING AND DISTRIBUTION EXPENSES, CONFERENCE EXPENSES INCURRED ON THE DOCTORS FOR PROMOTING THE SALES. THE ASSESSING OFFICER HAS NOT POINTED OUT ANY EXPENSES WHICH IS DIRECTLY INCURRED WHICH PROHIBITED BY LAW AND THE AO HAS NOT BROUGHT OUT ANY EVIDENCE THAT ASSESSEE HAS INCURRED THIS EXPENDITURE WHICH IS PROHIBITED BY CBDTS CIRCULAR NO. 5/2012. WE FIND THAT THE CIT(A) HAS DISALLOWED THE SALES PROMOTION EXPENSES @ 10% OF THE TOTAL EXPENDITURE. WE FIND THAT THE ASSESSING OFFICER DID NOT POINT OU T WHICH EXPENDITURE IS PROHIBITED BY LAW, THEREFORE, IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007 - 08 AND IN 2008 - 09 THE TRIBUNAL HAS DISMISSED THE APPEAL OF THE REVENUE AND CIT(A) HAS FOLLOWED THE DECISION OF THE TRIBUNAL, THEREFORE, OUR INTERFERENCE IS NOT REQUIRED. IN T HE RESULT, APPEAL ON TH IS GROUND IS DISMISSED . 4 . THE SECOND GROUND OF APPEAL RELATES TO DELETION ON ACCOUNT OF DIFFERENCE IN THE CLOSING STOCK AS PER S TOCK STATEMENT GIVEN TO THE BANK AND STOCK AS APPEARING IN THE BALANCE SHEET AMO UNTING TO RS . 16,98,000/ - . 5 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. 4.1. DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE ASSESSEE WAS REQUESTED TO FURNISH THE STOCK STATEMENT GIVEN TO THE BANK AND RECONCILIATION OF STOCK AS PER THE BALANCE SHEET AND STOCK AS PER THE STOCK STATEMENT GIVEN TO THE BANK. THE ASSESSEE FURNISHED THE S TOCK STATEMENT GIVEN TO THE BANK. THERE IS A DIFFERENCE OF RS.16,98,000/ - (STOCK AS PER BANK STATEMENT 1401.03 LAKHS - STOCK AS PER THE BALANCE SHEET 1384.45) ON THIS ISSUE. THE A.R. OF THE ASSESSEE EXPLAINED THAT THE STOCK STATEMENT AS ON 31.03.2010 IS GIVEN TO THE BANK ON 15.04.2010. IT IS PROVISIONAL AND THE DIFFERENCE IS MAINLY ON ACCOUNT OF GIVING EFFECT TO THE EXPIRY OF FINISHED GOODS AT THE TIME OF ACCOUNTS FINALIZATION. THE EXPLANATION OF THE AUTHORIZED REPRESENTATIVE IS CONSIDERED AND NOT ACCEPTED DUE TO ABSENCE OF ANY SATISFACTORY EVIDENCE TO VERIFY THE CLAIM OF THE ASSESSEE. ACCORDINGLY, THE AMOUNT OF RS.16,98,000/ - IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 4.2 . THE MATTER CARRIED TO CIT (A) AND CIT(A) HAS DELETED THIS ADDITION BY OBSERVING AS U NDER: 8.3. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LEARNED COUNSEL OF THE APPELLANT STATED THAT THE DIFFERENCE AROSE AS THE STATEMENTS SUBMITTED TO BANK ON 15/04/2010 WERE ONLY PROVISIONAL AND ESTIMATES. IT IS ONLY AT THE TIME OF AUDIT THAT THE F IGURES ARE FINALISED AND PROVISION IS MADE FOR OBSOLETE STOCK/WRITE - OFF/VALUATION ETC. DUE TO WHICH THERE IS BOUND TO BE SOME DIFFERENCES. THE APPELLANT ALSO SUBMITTED A RECONCILIATION STATEMENT OF CLOSING STOCK AS SUBMITTED TO BANK AND AS PER THEIR BOOKS. APART FROM THE ABOVE, THEY PLACED RELIANCE ON THE DECISION IN THE CASE OF CIT V/S RIDDHI STEEL AND TUBES PVT. LTD. 8.4. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSION OF THE APPELLANT. THE ASSESSEE SHOWED A STOCK OF RS.8,75.59 LAKHS AT THE YEAR END TO THE BANK, WHEREAS SUBSEQUENT TO TAX AUDIT, THE ASSESSEE DISC LOSED CLOSING STOCK VALUED AT 858.48 LAKHS, DIFFERENCE BEING 17.11 LAKHS, WHICH WORKS TO BE LESS THAN 2% ABERRATION. I HAVE ALSO GONE THROUGH THE RECONCILIATION STATEMENT SUBMITTED BY THE APPELLANT. THE MAJOR DIFFERENCE IS BECAUSE OF THE EXPIRED MEDICINE, WHICH WAS DECLARED TO THE BANK, BUT AT THE TIME OF FINALIZATION OF ACCOUNTS, THE SAME WAS WRITTEN OFF. THIS ITEM ALONE IS RESPO NSIBLE FOR A DIFFERENCE OF RS.5 1.54 LAKHS. THERE ARE OTHE R MINOR RECONCILIATIONS AS WELL. ON GOING THROUGH THE RECONCILIATION STATEMENT. I AM OF THE VIEW THAT THERE WAS NO CONSCIOUS EFFORT ON PART OF THE APPELLANT TO GIVE AN INFLATED STOCK STATEMENT TO BANK OR REDUCED VALUE OF CLOSING STOCK IN THE BALANCE - SHEET. THIS DIFFERENCE HAS OCCURRED AS A NATURAL PROCESS BECAUSE OF THE TIME - GAP BETWEEN THE DATE OF FURNISHING OF STOCK - STATEMENT TO THE BANK AND FINALIZATION OF ACCOUNT. IN THE CASE OF RIDDHI STEELS AND TUBES PVT. LTD., THE 6 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. HON. GUJ ARAT HIGH COURT (2013 (10) TMI 291) DECI DED THE ISSUE IN FAVOUR OF THE ASSESSEE SAYING THAT INFLATED VALUE OF STOCK WORKED ON ESTIMATE BASIS AND GIVEN TO BANK FOR AVAILING LOAN FACILITY ALONE CANNOT BE REASON FOR MAKING ADDITION BY THE A.O. IT IS WORTHWHILE TO MENTION HERE THAT IN THE CASE OF RIDDHI STEEL, THE DIFFERENCE BETWEEN THE VALUE OF STOCK SHOWN TO THE BANK AND THE VALUE OF STOCK REFLECTED IN BALANCE - SHEET WAS SUBSTANTIAL I.E. RS.4,16,80,220 (RS.11,03,22,151/ - ( - ) RS.6,86,41,931/ - ) WHEREAS THE DIFFERENCE IN THE INSTANT CASE IS NEGLIGIBLE. IN VIEW OF THE ABOVE FACTS, I AM OF THE OPINION THAT THE A.O. WAS NOT JUSTIFIED IN MAKING AN ADDITION OF RS. 16,98,000/ - ON ACCOUNT OF DIFFERENCE IN VALUE OF STOCK SHOWN TO THE BANK AND AS DECLARED IN THE AUDITED BALANCE - SHEET, AND THEREFO RE ADDITION AMOUNTING TO RS. 16,98,000/ - IS HEREBY DELETED. THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED ACCORDINGLY. 4. 3 . WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS A ND CIRCUMSTANCES OF THE CASE, W E FIND THAT ASSESSEE SHOWED STOCK OF RS.8,75.59 LAKHS AT THE YEAR END TO THE BANK, WHEREAS SUBSEQUENT TO TAX AUDIT, THE ASSESSEE DISCLOSED CLOSING STOCK VALUED AT 858.48 LAKHS DIFFERENCE BEING 17.11 LAKHS. WE FIND THAT THE ASSESSEE HAS SUBMITTED THE STOCK VALUE AT THE END OF THE MONTH END WITH THE BANK BEFORE 15 TH OF THE NEXT MONTH. ACCORDINGLY, ASSESSEE HAS FILED THE STOCK STATEMENT GIVING VALUE AS AT 31 - 03 - 2010 WHICH WAS WORKED OUT ON THE BASIS OF COST SHEET AS AT 31 ST DECEMBER, 2009. HOWEVER , WHILE FINA LISING THE ACCOUNTS AS PER THE COSTS SHEETS AS AT 31 ST DECEMBER, 2010 AND THE VALUED THE STOCKS WHICH IS SLIGHTLY HIGHER THAN THE EARLIER VALUE INFORMED TO THE BANK. WHILE FINALISING THE ACCOUNTS FOR 2009 - 10, THE ASSESSEE HAS WRITE OFF STOCKS OF PLAYMAX VALUING RS. 51.54 LAKHS SINCE THE SAME HAS EXPIRED BUT W AS SHOWN IN THE STOCK STATEMENT SUBMITTED TO THE BANK ON 15.04.2010. THE STOCK VALUE ON 31 ST MARCH, 2010 WAS FURTHER REDUCED AT THE TIME OF FINALISATION OF ACCOUNTS TO THE EXTENT OF RS. 1.71 LACKS FOR THE STOCK OF EXPIRED GOODS. THE CIT(A) HAS VERIFIED AND HE WAS OF THE VIEW THAT THE STOCK STATEMENTS GIVEN TO BANK ON 15.04.2010 WA S ONLY PROVISIONAL AND ESTIMATE D BASIS, THEREFORE, HE HAS DELETED THIS ADDITION AND OUR INTERFERENCE IS NOT REQUIRED. 7 . ITA NO. 12/PNJ/2014(A.Y.2010 - 11 ) ACIT VS. M/S. GENO PHARMACEUTICAL LTD. 5 . IN THE RESULT, THE APPEAL FILED BY THE DEPARTMENT IS DI SMISSED . ORDER PRONOUNCED IN THE OP EN COURT ON 30 .5 .2014. SD/ - SD/ - ( P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : PANAJI / GOA DATED : 30 .5 .2014 P.S. - *PK* COPY TO : ( 1 ) APPELLANT ( 2 ) RESPONDENT ( 3 ) CIT CONCERNED ( 4 ) CIT(A) CONCERNED ( 5 ) D.R ( 6 ) GUARD FILE TRUE COPY, BY ORDER