Case Law Details
Brief of the Case
ITAT Mumbai held in the case Syncom Formulations (I) Ltd. vs. DCIT that receiving of gifts by doctors is prohibited by MCI guidelines but giving of the same by manufacturer is not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies. Further, the disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012. However, the Circular was not applicable because it was introduced w.e.f.01.08.2012 i.e. assessment year 2013-2014, whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012.
Facts of the Case
ITA No.6429/Mum/2013 (AY: 2010-2011)
The assessee is engaged in manufacturing of various pharmaceuticals products and having sales within and outside India. During the year under consideration, the assessee had debited an amount of Rs.4,32,11,406/- under the head sales promotion expenses. Accordingly the details were called for and noticed that an amount of Rs.22,45,000/- was relating to freebies given to medical practitioners. The AO disallowed this amount by invoking Explanation to Section 37(1) and CBDT Circular dated 1-8-2012.
ITA No.11/Mum/2014 (AY: 2010-2011)
The assessee issued 325,000 convertible warrants of Rs.46/- each convertible into equity shares of Rs.10 each at a premium of Rs.36 per share to promoter family. Assessee received 10% of warrant price on allotment, that is, Rs.4.60 per warrant aggregating to Rs.14,95,000/-. Balance amount was to be received within 18 months as per SEBI guidelines. However, due to fall in share price of company, warrant holders did not avail the option for conversion of the warrants into equity shares within the stipulated time as per SEBI (DIP) guidelines and as per the terms of the issue within a period of 18 months from the date of allotment resulting in violation of terms of the issue and accordingly the upfront amount of Rs.4.60 per warrant paid by the warrant holder was forfeited by the company. The forfeited amount was credited to capital reserve. But the AO added this amount as income of the assessee.
Held by CIT (A)
ITA No.6429/Mum/2013 (AY: 2010-2011)
The CIT (A) confirmed the disallowance.
ITA No.11/Mum/2014 (AY: 2010-2011)
CIT (A) deleted the addition. It was held that in the present case, it is a case of forfeiture of liability on account of warrants which were to be converted into equity shares. The case of the appellant is squarely covered by the decision of hon’ble Supreme Court in case of Travencore Rubber & Tea Company Ltd. CIT 243 ITR 158 where it is held that if the agreed sums of money under the arrangement had been received by assessee, they would have been credited in its account as capital receipt, that being so the forfeited amounts must also be treated as capital receipts.
Held by ITAT
ITA No.6429/Mum/2013 (AY: 2010-2011)
ITAT held that receiving of gifts by doctors was prohibited by MCI guidelines, giving of the same by manufacturer are not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies. We found that the disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012 onwards. However, the Circular was not applicable because it was introduced w.e.f.01.08.2012 i.e. assessment year 2013-2014, whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012. Accordingly, we do not find any merit in the disallowance so made by the AO in both the assessment years under consideration.
ITA No.11/Mum/2014 (AY: 2010-2011)
ITAT held that it is clear in this case that warrants were converted into shares, however, money contributions did not contribute these warrants into shares, therefore, their contributions were forfeited which was treated by assessee as capital receipts. The issue is squarely covered by the decision of Hon’ble Supreme Court in the case of Travencore Rubber & Tea Company Ltd. CIT 243 ITR 158.The case laws relied on by the AO are not applicable to the facts of the instant case, which has elaborately dealt by the CIT (A) in his order. Furthermore, tax effect in the appeal filed by the revenue, as per Circular No.21/2015, dated 10th December, 2015, is less than Rs.10.00 lacs, therefore, the appeal of the revenue is not maintainable. Accordingly, we do not find any reason to interfere in the order of CIT (A) for deleting the addition.
Accordingly appeals of the assessee allowed.
