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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’ NEW DELHI
Before: SHRI SAKTIJIT DEY & DR. B.R.R. KUMAR
PER SAKTIJIT DEY, JM:
Captioned appeals and cross objection relate to the same assessee and arise out of separate orders of learned Commissioner of Income Tax (Appeals), New Delhi, pertaining to assessment years 2011-12, 2012-13 and 2013-14.
(Revenue’s Appeal for AY: 2011-12)
The grounds raised by the Revenue are as under:
On the facts and circumstances of the case, the Id. CIT(A) erred in deleting the disallowance made on account of Interest Expenses of Rs.1,90,46,178/- made by the Assessing Officer. The additional amount which NPPA directed the Assessee to pay was in the nature of penalty. The penal nature of the directive is evident from the fact that it was against the amount received over and above the permissible limit for this purpose.
2. On the facts and circumstances of the case, the Ld. CIT(A) in its decision relied on the judgment made by ITAT "J" Bench , Mumbai, ITA No. 145/Mum./ 2001, (A. Y - 1997-98) Addl. Comm. of Income Tax Special Range - 23, Mumbai (Appellant) v/s M/s Johnson & Johnson Ltd.
C.O. No. 45/Del/2021 & 5458/Del/2018 (Respondent). The judgment of ITAT Mumbai is not applicable in this case as the expenses in this case are not related to business expenses. 3. On the facts and circumstances of the case the order of Ld. CIT(A) is perverse. 4. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground) s) of appeal at any time before or during the hearing of this appeal."
Briefly the facts are, assessee, a resident company, is engaged in manufacturing and sale of pharmaceutical products. In the past years the assessee has over-charged price of certain drugs manufactured by it, in excess of the price fixed by National Pharmaceutical Pricing Authority (NPPA). Having found this fact, NPPA issued demand notices in September and October, 2008, for an aggregate amount of Rs.41.20 crores. Challenging the demand notices issued by NPPA, assessee filed a Writ Petition in the Hon’ble Allahabad High Court. However, Hon’ble Allahabad High Court disposed of the Writ Petition vide judgment dated 20.04.2010 directing the assessee to pay an amount of Rs.33.70 crores. Against the judgment of Hon’ble High Court, the assessee filed a Special Leave Petition (SLP) in the Hon’ble Supreme Court.
While admitting the SLP, as an interim measure, the Hon’ble Supreme Court directed the assessee to deposit Rs.16.50 crores with NPPA. Complying with the aforesaid direction, the assessee
C.O. No. 45/Del/2021 & 5458/Del/2018 deposited an amount of Rs.16.50 crores with NPPA. The demand created due to alleged over-pricing of drugs alongwith accrued interest thereon was treated by the assessee as liability in its books of account. In the return of income filed for the impugned assessment year, the assessee claimed the interest component on the outstanding liability as revenue expenditure. While completing the assessment under section 143(3) of the Act, the Assessing Officer accepted the aforesaid claim. Subsequently, in course of assessment proceedings for assessment year 2012-13, while verifying similar claim made by the assessee qua accrued interest on the outstanding liability of NPPA, the Assessing Officer held that such interest expenditure is not allowable as it is of contingent nature. Further, he held that since the amount was not actually paid during the year, it is not deductible under section 43B of the Act. Basis the decision of the Assessing Officer in assessment year 2012-13, Revenue Audit raised objection in assessment year 2011-12 and based on such objection, assessment proceeding for assessment year 2011-12 was reopened. As alleged by the Assessing Officer, since, the assessee failed to comply with the notices issued, he proceeded to complete the assessment under section 144 read with section 147 of the C.O. No. 45/Del/2021 & 5458/Del/2018 Act to the best of his judgment, by disallowing the interest expenditure. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals). Being convinced with the submission of the assessee, learned Commissioner (Appeals) allowed the claim by deleting the disallowance made by the Assessing Officer.
We have heard the learned Departmental Representative as well as learned counsel appearing for the assessee. As could be seen from the facts on record, due to overpricing of certain drugs/pharmaceutical products by the assessee, the NPPA had raised demand notice in the year 2008 for an amount of Rs.41.20 crores. While dismissing assessee’s Writ Petition challenging the aforesaid demand notice, the Hon’ble Allahabad High Court directed the assessee to pay an amount of Rs.33.70 crores.
Whereas, while admitting assessee’s SLP against the decision of Hon’ble High Court, the Hon’ble Supreme Court, as an interim measure, directed the assessee to deposit a sum or Rs.16.50 crores with NPPA. Complying with the aforesaid direction, the assessee has paid the amount of Rs.16.50 crores with NPPA.
Undoubtedly, assessee has treated the demand raised alongwith accrued interest thereon as a liability in its books of account. In C.O. No. 45/Del/2021 & 5458/Del/2018 the return of income filed, assessee has claimed deduction of the interest component.
The Assessing Officer has disallowed assessee’s claim citing three reasons. Firstly, it is a contingent liability; secondly, interest was not paid within the due date of filing of return under section 139(1) of the Act hence, not allowable under section 43B(d) of the Act and; thirdly, the interest charged being of penal character is not allowable under section 37(1) of the Act. As far as the first reasoning of the Assessing Officer is concerned, the liability incurred by the assessee on account of demand notices raised by the NPPA cannot be considered to be a contingent nature. As could be seen from the facts on record, with the issuance of demand notice, liability has already accrued to the assessee. The dispute, as it appears, is only with regard to the quantum of the liability. In fact, as per the interim direction of the Hon’ble Supreme Court, the assessee has deposited an amount of Rs.16.50 crores with NPPA. That being the factual position, it cannot be said that liability is contingent in nature. Insofar as the second reasoning of the Assessing Officer that the payment is hit by section 43B, we fully agree with learned Commissioner (Appeals) that none of the clauses of section 43B are applicable to C.O. No. 45/Del/2021 & 5458/Del/2018 the interest paid by the assessee. Further, as rightly observed by learned Commissioner (Appeals), the principal amount along with interest payable in assessment year 2010-11 was allowed by the Assessing Officer. That being the factual position, the interest paid on such principal amount cannot be disallowed. As regards the reasoning of the Assessing Officer that interest is of penal character, in our view, the amount demanded by NPPA cannot fall in the category of payment made for a purpose which is an offence or which is prohibited by law. Simple fact is, the assessee has overpriced certain drugs/pharmaceutical products, which the assessee is required to refund back to NPPA. Thus, there is no infraction of any law. Therefore, the payment will not be hit by section 37(1) of the Act. In any case of the matter, the issue in dispute is squarely covered by the decision of Coordinate Bench in case of Additional Commissioner of Income Tax Vs. M/s.
Johnson & Johnson Ltd. in (AY: 1997- 98) relied upon by learned Commissioner (Appeals). In view of the aforesaid, we do not find any merit in the grounds raised.
Accordingly, grounds are dismissed.
In the result, appeal is dismissed.
C.O. No. 45/Del/2021 & 5458/Del/2018 C.O. No. 45/Del/2021 (Assessment Year : 2011-12)
In view of our decision in (AY: 2011- 12) (supra), the cross objection of the assessee having become infructuous is dismissed. (Assessee’s appeal for AY: 2012-13)
In ground no. 1, the assessee has challenged disallowance of interest expenditure of Rs.1,73,54,255/-. This ground is identical to grounds raised in (AY: 2011-12) (supra) decided in the earlier part of this order. The decision taken therein will apply mutatis mutandis to this ground as well. In the aforesaid view of the order, we delete the disallowance made by the Assessing Officer. This ground is allowed.
In ground no. 2, the assessee has challenged disallowance of legal and professional expenses of Rs.1,54,83,83,508/-.
9.1 Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee has debited an amount of Rs.1,77,28,284/- to the profit and loss account towards legal and professional charges. After calling for necessary details and examining them, the Assessing Officer held that the C.O. No. 45/Del/2021 & 5458/Del/2018 assessee was unable to justify the reasonableness of the claim and failed to establish the business expediency. Accordingly, he disallowed part of the expenditure by quantifying to Rs.1,54,83,508/-. The disallowance so made by the Assessing Officer was also sustained by learned Commissioner (Appeals).
9.2 We have considered rival submissions and perused materials on record. While the Assessing Officer has disallowed the expenditure on the reasoning that the assessee failed to establish the reasonableness of the expenditure and business expediency, learned Commissioner (Appeals) sustained disallowance on an altogether different ground that the amount claimed as deduction remained payable at the end of the year. On a perusal of the Audited Financial Statement of assessee, particularly Note 2.7, it is observed, the other liability remaining payable is Rs.83,40,104/-, which includes legal and professional charges of Rs.28,61,792/-. Thus, the finding of learned Commissioner (Appeals) that the legal and professional charges claimed by the assessee remained payable at the end of the year appears to be on a factual misconception. Further, the materials on record reveal that not only the assessee has paid the legal and professional charges through cheque but has also deducted tax
C.O. No. 45/Del/2021 & 5458/Del/2018 on them. In view of the aforesaid, we delete the disallowance made by the Assessing Officer and sustained by learned Commissioner (Appeals). Thus, this ground is allowed.
In the result, appeal is allowed. Assessee’s appeal for AY : 2013-14
The only dispute in the present appeal is in relation to interest payable of Rs.1,73,54,255/- to NPPA. This issue is identical to the issue raised in (AY: 2011- 12) decided by us in the earlier part of this order. Following our decision therein, we allow assessee’s claim of deduction.
In the result, the appeal is allowed.
No.45/Del/2021 are dismissed. Whereas, ITA Nos. 4481/Del/2017 and 5458/Del/2018 are allowed. Order pronounced in the open court on 11th April, 2022