Vascular Concepts Limited Vs DCIT (ITAT Bangalore)
For these assessment years as well, the Revenue has not established that conditions stipulated u/s 36(2) of the I.T.Act was not fulfilled with respect to any of the debts which were written off by the assessee during the previous years. Under these circumstances, we are of the view that disallowance made by the Revenue authorities is incorrect as the assessee is only required to write off the bad debts and is not required to establish that it has become really bad. Accordingly, we direct the A.O. to allow the claim of bad debt raised by the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
The Hon’ble High Court of Karnataka vide judgment dated 22.04.2019 had set aside the order of the Tribunal dated 29.01.2018 and directed the Tribunal to consider the issue afresh in terms of the judgment in the case of CIT v. GMR Energy Limited (GMR Energy Limited case in ITA No.358 of 2018 judgment dated 08.01.2018).
2. The brief facts of the case are as follow:
The ITAT vide common order dated 29.01.2018 had disposed of the above appeals. The common order of the ITAT dated 29.01.2016 was concerning seven appeals relating to A.Y’s 2007-2008 to A.Y’s 2013-2014 in ITA Nos.1921/Bang/ 2016 to 1927/Bang/2016, respectively. The order of the ITAT dated 29.01.2018 was in two parts. The first part was concerning A.Ys 2007-2008 to A.Ys 2011-2012 and the second part was concerning A.Y’s 2012-2013 and 2013-2014. In all the appeals, the assessee had raised the grounds challenging the notice issued u/s 153A of the I.T.Act. Apart from challenging the notice, the assessee had raised grounds relating to merits on three issues, viz.,
(i) disallowance of business promotion expenses,
(ii) disallowance of discount given to the customers, and
(iii) disallowance of bad debts written off (this issue is not there for A.Y’s 2007-2008 to A.Y’s 2009-2010)
2.1 In the first part of the ITAT’s order concerning A.Y’s 2007-2008 to 2011-2012 in ITA No.1921/Bang/2016 to 1925/Bang/2016 (cases which we are concerned now), the Tribunal quashed the assessment orders by holding that the notice issued u/s 153A of the I.T.Act was not valid on the ground that no incriminating material was found for these years, whose assessment has already been concluded u/s 143(3) of the I.T.Act. While doing so, the Tribunal placed reliance on various judicial pronouncements as detailed in the order. Since the assessments for A.Y’s 2007-2008 to 2011-2012 were quashed, the issues on merits were not adjudicated (para 10 at page 14 of the Tribunal order).
2.2 As regards the second part, the ITAT’s order concerning A.Y’s 2012-2013 and 2013-2014, the Tribunal upheld the issue of notice u/s 153A of the I.T.Act and the assessment order passed. Then the Tribunal proceeded to adjudicate the issue on merits, including the above three issues viz., (i) disallowance of business promotion expenses, (ii) disallowance of discount given to customers, and (iii) disallowance of bad debts written off.
2.3 Aggrieved by the order of the ITAT dated 29.01.2018 concerning ITA Nos.1921/Bang/2016 to 1925/Bang/2016 pertaining to A.Y’s 2007-2008 to 2011-2012, the Revenue preferred appeals to the Hon’ble High Court u/s 260A of the I.T.Act. As regards the A.Y’s 2012-2013 and 2013-2014, the Revenue did not file appeals to the Hon’ble High Court. Therefore, the order of the ITAT dated 29.01.2018 concerning A.Y’s 2012-2013 and 2013-2014 (which is on merits) has attained finality.
2.4 The Hon’ble High Court vide judgment dated 22.04.2019, allowed the appeal of the Revenue. The Hon’ble High Court set aside the order of the Tribunal concerning A.Y’s 2007-2008 to 2011-2012 (ITA No.1921/Bang/ 2016 to 1925/Bang/2016) and directed the ITAT to consider the issues afresh in terms of High Court judgment in the case of M/s.GMR Energy Limited (judgment of GMR Limited dated 08.01.2019). In the case of M/s.GMR Energy Limited, the Hon’ble High Court upheld the proposition that the conditions precedent for application u/s 153A of the I.T.Act is that there should be a search u/s 132 of the I.T.Act and initiation of proceedings u/s 153A of the I.T.Act is not dependent on any undisclosed income being unearthed during the search.
3. Pursuant to the Hon’ble High Court judgment dated 22.04.2019, the above appeals were finally heard by the ITAT on 05.01.2021. The learned AR during the course of hearing submitted a note stating that he is instructed to submit that the assessee is only pressing grounds relating to the merits, viz., grounds No.12 to 15. The three issues on merits are as follows:-
(i) Disallowance of business promotion expenses (for A.Y’s 2007-2008 to 2011-2012)
(ii) Disallowance of discount to customers (for A.Y’s 2007-2008 to 2011-2012)
(iii) Disallowance of bad debts written off (concerning A.Y’s 2010-2011 and 2011-2012)
3.1 The learned AR submitted that the above three issues on merits were decided by the ITAT for assessment years 20122013 and 2013-2014. It was stated that the order of the ITAT for assessment years 2012-2013 and 2013-2014 has attained finality as no appeal was preferred by the Revenue before the Hon’ble High Court. It was submitted that the same decision / directions rendered for A.Y’s 2012-2013 and 2013-2014 may be taken in these assessment years as well.
We shall adjudicate each of the issues as under.
(i) Disallowance of business promotion expenses (for assessment years 2007-2008 to 2011-2012 – Ground No.12)
4. The Tribunal in its earlier order dated 29.01.2018 for assessment years 2012-2013 and 2013-2014 elaborately discussed the above issue in para 13 to 18. The Tribunal at para 17 and 18 held that the expenses incurred on doctors before 01.08.2012 is to be allowed as revenue expenditure. The relevant finding of the Tribunal reads as follow:-
‘13. Now coming to the merits, the ld. Counsel for the assessee has assailed the order of the CIT(Appeals) with regard to the additions made after making disallowances of business promotion expenses claimed u/s. 37 of the Act. In this regard, the facts in brief borne out from the record are that the assessee has debited a sum of Rs.7,68,77,000 as business promotion expenses for AY 2012-13 and Rs.8,25,00,000 in AY 2013-14, for which the assessee could not furnish the details of Doctorwise expenditure nor could it furnish the confirmation letter from the Doctor. Consequently, the AO has observed that the details of business promotion expenses incurred by the assessee on various Doctors is not available. The Notification issued by Medical Council of India (MCI) through which MCI has imposed prohibition on Medical Practitioners and Professional Association from taking any gift, travel facility, hospitality from pharmaceuticals or allied health sector industries was also examined by the AO. The AO further took a note of CBDT Circular No.5/12 dated 01.08.2012 wherein it was clarified that u/s. 37 of the Act such type of expenditure which are prohibited by law cannot be allowed. The AO accordingly held that since this expenditure was incurred on Doctors, it is not allowable as deduction under the provisions of section 37(1) of the Act. Accordingly, a show cause notice was issued to the assessee and since the assessee could not furnish the details of expenditure Doctorwise and their confirmation letters, the AO did not allow the claim of expenditure.
14. Aggrieved the assessee preferred an appeal before the CIT(Appeals) but did not find favour with him.
15. Now the assessee is before us with the submission that as per the reasons given by the AO, only Rs.1,39,80,582 out of Rs.8,25,00,000 can be disallowed under the expenses relating to Doctors and the balance disallowance must be deleted as it is unrelated to Doctors but incurred for the purpose of business. The ld. Counsel for the assessee further contended that the CBDT Circular mentioned hereinabove is prospective in nature effective from 01.08.2012, therefore the expenses incurred prior to that date amounting to Rs.72,24,991 does not come under the scope of the Circular, hence requires to be allowed. It was further contended that the balance amount was incurred after 01.08.2012 on those Doctors, who have attended the Conference & Seminar as faculty members and not as delegates. In support of this contention, he invited our attention to Notification of MCI, according to which medical practitioner shall not accept any travel facility inside or outside the country as delegate. In the case in hand, the Doctors have attended Seminars & Conference not as delegates, but as faculty members, therefore no disallowance can be made having invoked the Notification of MCI and Explanation to 37(1) of the Act. In support of his contentions, the ld. Counsel for the assessee has placed reliance upon the order of Tribunal in the case of DCIT v. PHL Pharma Pvt. Ltd., 146 DTR 0149, Simcon Formulation (India) Pvt. Ltd. v. DCIT of Mumbai Tribunal and Hon’ble Delhi High Court judgment in the case of Max Hospital v. MCI in W.P.C. No.1334/Del/2013 dated 10.01.2014.
16. The ld. DR, on the other hand, has placed reliance upon the order of the CIT(Appeals). Besides it was also contended by the ld. DR that no details are available on record as to whether the Doctors have attended the Conferences & Seminars as faculty members or as delegates. The onus is upon the assessee to establish these facts. In the absence of any evidence in this regard, the revenue has rightly disallowed the claim.
17. Having carefully examined the orders of authorities below in the light of rival submissions, we find that the AO has disallowed the business promotion expenses claimed by the assessee only on the ground that they were incurred on Doctors who attended Seminars & Conferences. The revenue has placed reliance upon the Notification issued by the MCI whereby the MCI in exercise of its statutory powers amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 on 10.12.2009 and imposed a prohibition on Medical Practitioners and Professional Associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceuticals or allied health sector industries. Thereafter, the CBDT has issued a Circular dated 01.08.2012 clarifying that section 37(1) of the I.T. Act provides for deduction of any revenue expenditure (other than those falling under sections 30 to 36) from the business income if such income is laid out/extended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Though Explanation 1 to section 37 was inserted by the Finance Act, 2014 w.e.f. 01.04.2015, but before that CBDT has also issued a clarification vide Circular dated 01.08.2012 not to allow such expenditure u/s. 37(1) of the Act which are prohibited by law, meaning thereby, before 01.08.2012 the expenditure incurred upon the Doctors to attend Seminars & Conferences may be the business expenditure of the assessee, but the same cannot be allowed after 01.08.2012 as it was prohibited by Notification issued by the MCI. Therefore, we find force in the contention of the assessee that expenditure incurred till 01.08.2012 should be allowed as an expenditure towards business inasmuch as the AO has simply disallowed the entire expenditure having invoked the Circular issued by the CBDT. This aspect was examined by the Tribunal in the case of DCIT v. PHL Pharma Pvt. Ltd. reported in146 DTR 0149 in which it was held that Explanation I below section 37(1) provides an embargo upon allowing expenditure incurred by the assessee for any purpose, which is an offence or which is prohibited by law. In that case the assessment year involved was AY 2010-11 and CBDT issued Circular in 2012 and the Tribunal held that since no evidence has been brought on record which prohibits pharmaceutical company to incur any development or sales promotion expenses, the Tribunal allowed the expenditure. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-
“5. We have considered the rival contentions made by ld. CIT DR as well as ld. Sr. Counsel, Mr J.D. Mistry, perused the relevant finding given in the impugned orders and material referred to before us. The entire controversy revolves around, whether the expenditures in question incurred by the assessee (a pharmaceutical company) is hit by Explanation 1 below section 37(1) in view of CBDT Circular dated 01.08.2012, interpreting the amendment dated 10.12.2009 brought in Indian Medical Council Regulation 2002 or not. The break-up of sales promotion expenses, which has been disallowed by the AO, are as under:
