LINCOLN PHARMACEUTICALS LTD.,,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), AHMEDABAD

In the appeal filed by the assessee, grievance raised is as follows:

The assessee has also raised two additional grounds, and sought our leave to pursue the same. Having perused the petition seeking admission of additional grounds of appeal, and having heard the parties thereon, we are inclined to admit these grounds of appeals and deal with the same on the merits. One of these additional grounds of appeal, i.e. ground no. 2, is linked with the above ground of appeal, and must be taken up along with the same. This additional ground of appeal is as follows:

The relevant material facts are like this. The assessee before us is engaged in the business of manufacturing drugs and pharmaceuticals. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction under section 35(2AB) amounting to Rs 3,88,55,801 on research and development. As he probed the matter further, he discovered that out of total revenue expenditure of Rs 263.99 lakhs, DSIR (Department of Scientific and Industrial Research, Government of India) had certified eligibility of deduction for Rs 251.73 lakhs. The balance amount of Rs 12.26 lakhs was declined for certification by DSIR. Similarly, as regards capital expenditure of Rs 120.22 lakhs claimed for 200% deduction, DSIR certified eligibility of only Rs 117.20 lakhs and capital expenditure of Rs 4.34 lakhs for 100% deduction, DSIR did not certify eligibility of any amount at all. On the basis of this DSIR certifications, the amounts of Rs 12.26 lakhs, Rs 3.02 lakhs and Rs 4.34 lakhs were not allowed as deduction for research and development expenditure under section 35(2AB). A disallowance of Rs 19.62 lakhs was accordingly made by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

When this issue came up for hearing before us, without prejudice to learned counsel’s arguments on merits of original claim, it was submitted that the expenses being in bonafide furtherance of its legitimate business interests is not in doubt, and, therefore, the Assessing Officer should at best restrict the disallowance to capital expenditure but allow depreciation thereon nevertheless. It was also submitted that so far as revenue expenditure is concerned, the Assessing Officer should consider its deductibility under section 37(1). Learned Departmental Representative submitted that he has not objection to the claim of the assessee being re-examined in this light but prayed that the matter should be restored to the file of the Assessing Officer for fresh adjudication so that the matter may be properly examined. Learned counsel for the assessee does not oppose this submission. In the light of these discussions, and bearing in mind entirety of the case, we deem it fit and proper to remit the

The only other issue in this appeal, i.e. first additional ground of appeal by the assessee, is as follows:

In a connected grievance raised in the appeal filed by the Assessing Officer, which we must take up alongwith the above ground of appeal, grievance raised is as follows:

The relevant material facts are as follows. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has, as put by the Assessing Officer himself in the assessment order, “the assessee has shown Rs 84,58,904 as gift items to chemists, retailers and retailers”. As the Assessing Officer himself puts it, “the assessee was asked, vide order sheet entry dated 27.01.2016, to submit the names, addresses and details of the gift items to chemists, stockists and retailers as claimed by the assessee and the various schemes under which the same have been given and the description of gifts that have been given”. It was noted that some of these gifts were things like gold rings and gold chains and that “despite several opportunities, the assessee has not submitted complete names and addresses of various stockists, retailers and chemists to whom the gifts have been given during the year”. The Assessing Officer thus proceeded on the presumption that these gifts were actually given to the doctors and were inadmissible as deduction under section 37(1) being in violation of the Medical Council of India guidelines. The disallowance of Rs 84,58,904 was accordingly made. In appeal, learned CIT(A) noted that complete details of recipients were placed on record by the assessee, no were discrepancies found therein and the disallowance was made on the basis of a presumption rather than factual finding. On a rather contradictory note, however, he also observed that “for want of verification due to improper maintenance of accounts in supply of gift articles, it would be fair and reasonable to confirm the disallowance @ 12.5% of the purchase and the same is confirmed, which comes to Rs 10,57,363”. None of the parties is satisfied. While Assessing Officer is aggrieved of the disallowance being restricted to Rs 10,57,363, the assessee is aggrieved of the disallowance of Rs 10,57,363. Both the parties are in appeal before us.

Having heard the rival contentions and having perused the material on record, we are unable to find any justification, save and except for the suspicion that these gifts may have found their way to the doctors, for the impugned disallowance. The scheme under which the gifts were given were placed on record even before the Assessing Officer and no defects were pointed out therein. We have also noted that complete details of the recipients were on record before the CIT(A) and no perversity is even alleged in these factual findings of the CIT(A).

In the result, the appeal of the assessee is partly allowed, as above, and the appeal of the Assessing Officer is dismissed. Pronounced in the open court today on the 4th day of March, 2019