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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH & SHRI G. MANJUNATHA
PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income-tax (Appeals)-6, Chennai, dated 30.01.2018 and pertains to assessment year 2014-15.
The assessee has raised the following grounds of appeal: 1. The Commissioner of Income Tax (Appeals) 6 erred in confirming the addition of Rs.21,08,795/- being Sales
:-2-: ITA. No:1176 /Chny/2018 Promotion expenses incurred doctors, without appreciating the facts. 2. The Commissioner of Income Tax (Appeals) 6 failed to appreciate the fact, that the expenditure incurred for the purpose of advertising the products and not for inducing the doctor. 3. The Commissioner of Income Tax (Appeals) 6 filed to distinguish the judgment in the case of PHL Pharma (P) Ltd. ITA 4605/Mum./2014 and failed to relate this case to that of appellant. 4. The Commissioner of Income Tax (Appeals) 6 summarily accepted the order of assessing officer with detailing any reasons to justify the same. 5. The Commissioner of Income Tax (Appeals) 6 also erred in rejecting the claim of the appellant u/s 35(2) relating to Research and Development, without getting into details of the claim. 6. The Commissioner of Income Tax (Appeals) 6 was wrong to state that appellant had agreed to the addition and failed to note that the appellant furnished all the justification for the claim. 7. The Commissioner of Income Tax (Appeals) 6 failed to issue a speaking order and also skipped to go in to the details of claim. 8. The Commissioner of Income Tax (Appeals) 6 and the assessing officer did not appreciate the fact that the approval of the R&D is the criterions and shall relate to any particular year. 9. The appellant rely on the judgment Sandan Vikas (India) Ltd. ITA 348/2011 among other decisions to support the claim of the appellant. 10. The Commissioner of Income Tax (Appeals) 6 had erred in rejecting the claim of appellant for additional depreciation amounting to Rs.3,82,489/-. 11. The Commissioner of Income Tax (Appeals) 6 relied only on the order of assessing officer and failed to apply the judgment in the case of Century Enka, ITA 560/Kol./2010, wherein it was clearly ruled that the claim of balance 50% of additional depreciation cannot be denied invoking second proviso to Section 32(i)(ii) of the Act. 12. The Commissioner of Income Tax (Appeals) 6 was wrong to have accepted' the assessing officer's order adding back provision for Employees Gratuity and Leave Encashment to book profits under Section 115 JB.
:-3-: ITA. No:1176 /Chny/2018 13. The Commissioner of Income Tax (Appeals) 6 ought to have discussed the appellants submission in detail that it was only a provision and not a Reserve created. 14. The relied judgment in the case of NHPC Limited, ITA 2449/Del./2008 dealt with the similar matter in detail, which was not considered by the Assessing Officer, and failed to take the said judgment on record. 15. On the above grounds and on such other grounds that may be advanced at the time of appeal it is prayed that the additions made by assessing officer and confirmed by Commissioner of Income Tax (Appeals) 6, be deleted.”
At the outset, learned AR for the assessee submitted that the appeals filed by the assessee is time barred by 06 days for which necessary petition for condonation of delay along with affidavit explaining the reasons for the delay has been filed. The AR further submitted that the assessee could not file appeals within the time allowed under the Act, because the CIT(A) order dated 31.01.2018 received only on 27.02.2018 and their auditors M/s. P.B. Vijayaraghavan & Associates, CA, undertook to do the needful soon after the rush of work of filing returns of income by 27.03.2018 was over, and had filed the appeal on 06.04.2018 with a delay of 06 days. The delay in filing appeal is neither intentional nor willful but for the unavoidable reasons, therefore, delay may be condoned in the interest of advancement of substantial justice.
:-4-: ITA. No:1176 /Chny/2018 4. The learned DR, on the other hand, strongly opposing condonation of delay petition filed by the assessee submitted that the reasons given by the assessee do not come within the ambit of reasonable and bonafide reasons, which can be considered for condonation of delay and hence, appeal filed by the assessee may be dismissed as not maintainable.
Having heard both sides and considered the petition filed by the assessee for condonation of delay, we are of the considered view that reasons given by the assessee for not filing the appeal within the time allowed under the Act comes under reasonable cause as provided under the Act for condonation of delay and hence, delay in filing of appeal is condoned and appeal filed by the assessee is admitted for adjudication.
The brief facts of the case are that assessee company is engaged in the business of manufacturing of harmless medicines, filed its return of income for assessment year 2014-15 on 29.11.2014, declaring total income of Rs. 9,35,97,686/-. The assessment has been completed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) on 27.12.2016 and determined total income of Rs.
:-5-: ITA. No:1176 /Chny/2018 13,46,47,790/- by making various additions including additions towards sales promotion expenses u/s. 37(1) of the Act, towards freebies paid to Doctors amounting to Rs. 21,08,795/-, disallowance of deduction claimed u/s. 35(1) & (2) of the Act amounting to Rs. 75,69,617/-, disallowance of excess depreciation on addition to fixed assets amounting to Rs. 3,82,489/- and also the AO has recomputed book profit u/s. 115JB of the Act, by making additions towards provision for gratuity and leave encashment amounting to Rs. 2,32,57,147/-. The assessee carried the matter in appeal before the first appellant authority, but could not succeed. The Ld. CIT(A), for the reasons stated in their appellant order dated 27.12.2016 rejected ground taken by the assessee and sustained additions made by the AO towards various expenses and also upheld re-computation of book profit u/s. 115JB of the Act.
The first issue that came up for our consideration from ground no. 1 to 4 of assessee’s appeal is disallowance of sales promotion expenses being payments made to Doctors u/s. 37(1) of the Act. The AO has disallowed sale promotion expenses in the nature of freebies distributed to Doctors and
:-6-: ITA. No:1176 /Chny/2018 other medical professionals on the ground that said expenditure is not deductable u/s. 37(1) of the Act.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The issue of deductions towards sales promotion expenses in the nature of freebies given to medical practitioners by Pharma companies is deductable or not u/s. 37(1) has been examined by the Hon’ble Supreme Court in the case of Apex Laboratories Pvt Ltd vs DCIT (2002), 286 Taxmann 200 (SC), where it has been held that since acceptance of freebies by medical practitioners was punishable as per circular issued by Medical Counsel of India under MCI Regulations, 2002, gifting of such freebies by assessee Pharma Companies to medical practitioners would also be prohibited by law and thus, expenditure incurred for such freebies would not be allowed as deduction in terms of section 37(1) of the Act. Therefore, respectfully following the decision of Hon’ble Supreme Court in the case of Apex Laboratories Pvt Ltd vs DCIT, (supra) we are inclined to uphold the finding of the ld. CIT(A) and reject the ground taken by the assessee.
:-7-: ITA. No:1176 /Chny/2018 9. The next issue that came up for our consideration from ground no. 5 to 9 of assessee’s appeal is disallowance of deduction claimed u/s. 35(1) & (2) of the Act towards R&D expenditure amounting to Rs. 75,69,617/-. The AO has disallowed R&D expenditure incurred by the assessee u/s. 35(1) of the Act on the ground that the R&D facility was approved only from the period 26.12.2014 to 31.03.2015 which is not covered in the impugned assessment year. When this mistake was brought to notice of the Ld. Counsel for the assessee, the assessee has agreed for the disallowance and accordingly, claim of deduction u/s. 35(2) & 35(1) of the Act amounting to Rs. 75,69,617/- is disallowed.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The Ld. Counsel for the assessee referring to certain judicial precedence submitted that when facility has been approved by the Competent Authority for deduction u/s. 35(1) & (2) of the Act for subsequent period, then R&D expenditure incurred by the assessee for earlier period cannot be disallowed. We find that the R&D facility of the assessee has been approved by the Competent Authority in terms of
:-8-: ITA. No:1176 /Chny/2018 relevant provisions for the period 26.12.2014 to 31.03.2015, which is beyond the period of impugned assessment year. Therefore, we are of the considered view that the assessee is not entitled for claiming deduction towards R&D expenditure u/s. 35(2) & 35(1) of the Act for the impugned assessment year. We further noted that, before the AO the assessee has admitted mistake and accepted disallowance of expenses. Therefore, we are of the considered view that there is no merit in the argument of the assessee that deduction claimed u/s. 35(2) & (1) of the Act is in accordance with law and thus, we reject argument of the assessee and sustain the additions made by the AO towards disallowance of deduction claimed u/s. 35(1) & (2) of the Act towards R&D expenditure amounting to Rs.76,69,617/-.
The next issue that came up for our consideration from ground no. 10 & 11 of assessee appeal is additional depreciation on new assets capitalized during the year u/s. 32(1)(iia) of the Act. The AO has disallowed additional depreciation claimed on new assets purchased during the year amounting to Rs. 3,82,489/- on the ground that the additional depreciation u/s. 32(1)(iia) of the Act is available only for the
:-9-: ITA. No:1176 /Chny/2018 year of purchase of new assets, but not for subsequent financial years. It was an argument of the assessee that since the new assets purchased was put to use for less than 180 days, it has claimed 50% of additional depreciation for assessment year 2013-14 and remaining 50% has been claimed for the impugned assessment year.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The issue of additional depreciation u/s. 32(1)(iia) of the Act, when new assets has been purchased and put to use for less than 180 days, has been considered by the co-ordinate bench of ITAT, Kolkata in the case of Century Enka Limited vs DCIT, in ITA No. 568/Kol/2010, where it has been held that when the assessee has claimed 50% of additional depreciation on account of utilization of said assets in the business for less than 180 days, remaining 50% of additional depreciation should be allowed in the subsequent financial year. In this case, there is no dispute with regard to the fact that the assessee has purchased and put to use new assets, which is eligible for additional depreciation. In fact, the AO has accepted fact that the assessee is entitled for additional
:-10-: ITA. No:1176 /Chny/2018 depreciation, however disallowed 50% of additional depreciation only on the ground that the assessee has claimed additional depreciation on assets purchased and put to use in the immediate preceding financial year. We find no merit in reasons given by the AO for simple reason that as per law, the assessee is entitled for additional depreciation of 20% of new assets put to use, if certain conditions are satisfied. In this case, the AO accepted the fact that the assessee has satisfied conditions prescribed for additional depreciation. However, not allowed remaining 50% depreciation claimed on new asset in the subsequent financial year. In our considered view, the assessee is entitled for 20% additional depreciation on new assets and if assessee claims 50% of additional depreciation in one financial year owing to the purchase and use of said asset for less than 180 days as per law, then remaining 50% of additional depreciation should be given in the next financial year. Therefore, we are of the considered view that the AO is erred in disallowing additional depreciation on assets and thus, we direct the AO to delete additions made towards disallowance of additional depreciation.
:-11-: ITA. No:1176 /Chny/2018 13. The next issue that came up for our consideration from ground no. 12 to 14 of assessee’s appeal is re-computation of book profit u/s. 115JB of the Act. The assessee has debited provision for leave encashment and provision for gratuity amounting to Rs. 2,32,57,147/-, but not added back said provisions while computing book profit u/s. 115JB of the Act. The AO re-computed book profit by making additions towards provision for leave encashment and provision for gratuity on the ground that provisions made for meeting liabilities other than ascertained liabilities need to be added back to book profit in terms of explanation (1)(c) to section 115JB of the Act.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The AO has disallowed provision for leave encashment and provision for gratuity while computing book profit in terms of explanation (1)(c) to section 115JB of the Act. We find that as per clause (c) of explanation (1) of section 115JB, only amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities are added back to the book profit computed u/s. 115JB of the Act. In this case, provisions
:-12-: ITA. No:1176 /Chny/2018 for leave encashment and provision for gratuity is an ascertained liability which is created on the basis of actuarial valuation for service rendered by the employees. Therefore, said liability cannot be considered as unascertained liability and thus, same need not be added back to the book profit computed u/s. 115JB of the Act. The AO without appreciating fact simply recomputed book profit by making additions towards provision for leave encashment and provision for gratuity. Hence, we direct the AO to re-compute the book profit u/s. 115JB of the Act by excluding provision for leave encashment and provision for gratuity.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the court on 18th November, 2022 at Chennai. Sd/- Sd/- (जी. मंजुनाथ) (महावीर �सह ) (G. MANJUNATHA) (MAHAVIR SINGH) उपा�य� /Vice President लेखासद�य/Accountant Member चे�ई/Chennai, �दनांक/Dated, the 18th November, 2022 JPV आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF