Medley Pharmaceuticals Ltd Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that deduction u/s 80IB of the Income Tax Act, in respect of increased business income due to addition on account of concealed production, is not allowable.
Facts- The assessee is a company engaged in the business of manufacturing and selling of pharmaceutical products. For A.Y. 2010-11, the assessee filed the return of income declaring a taxable income at Rs.81,83,793/- after claiming deduction u/s. 80G and 80IB amounting to Rs.30,20,66,215/-. For A.Y. 2011-12, the assessee offered taxable income of Rs.24,38,48,900/- after claiming deduction u/s. 80G and 80IB amounting to Rs.11,96,35,535/-.
The case was selected for scrutiny and the statutory notices were duly served on the assessee. AO concluded the assessment by making a disallowance of Rs.19,73,90,622/- for AY 2010-11 towards concealed sales arising out of concealed production. AO made a similar disallowance for A.Y. 2011-12 for an amount of Rs.17,30,96,446/-.
Aggrieved, the assessee filed appeal before the CIT(A), who confirmed the above addition made by the AO. The Ld.CIT(A) also did not accept the submissions of the assessee that the addition made should be allowed as deduction u/s. 80IB for the reason that Form 10CCB was not filed for the enhanced income and, therefore, the addition made cannot be allowed as deduction u/s. 80IB of the Act.
Conclusion- Respectfully following the said decision of the coordinate bench, we see no reason to interfere with the decision of the CIT(A) in rejecting the claim of the assessee that 80IB deduction be allowed in respect of increase in the business income due to addition on account of concealed production. This ground is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These two appeals are against the order of the Commissioner of Income-tax (Appeals)-17, Mumbai dated 31/12/2018 for the assessment years 2010-11 and 2011-12.
2. The issues contended are common in both the appeals and hence, they were heard together and are disposed off through this common order. The common grounds raised by the assessee in both the appeals are with regard to the following issues:-
(1) Alleged concealed sales arising out of alleged concealed production;
(2) Allowing 80IB exemption in respect of increased business income due to addition on account of alleged concealed production.
(3) Disallowance of sales promotion expenses; and
(4) Not allowing 80IB deduction in respect of disallowed sales promotion expenses.
2. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing and selling of pharmaceutical products. The assessee has manufacturing facilities at 5 locations in Jammu. For the assessment year 2010-11, the assessee filed the return of income declaring a taxable income at Rs.81,83,793/- after claiming deduction under sections 80G and 80IB amounting to Rs.30,20,66,215/-. For A.Y. 2011-12, the assessee offered taxable income of Rs.24,38,48,900/- after claiming deduction under sections 80G and 80IB amounting to Rs.11,96,35,535/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer concluded the assessment by making a disallowance of Rs.19,73,90,622/- for AY 2010-11 towards concealed sales arising out of concealed production. The Assessing Officer made a similar disallowance for A.Y. 2011-12 for an amount of Rs.17,30,96,446/-. Aggrieved, the assessee filed appeal before the CIT(A), who confirmed the above addition made by the Assessing Officer. The Ld.CIT(A) also did not accept the submissions of the assessee that the addition made should be allowed as deduction under section 80IB for the reason that Form 10CCB was not filed for the enhanced income and, therefore, the addition made cannot be allowed as deduction under section 80IB of the Act.
3. During the course of appellate proceedings, a functional note was submitted by JCIT of circle 10(2)(2) to bring to the attention of the Ld.CIT(A) that in assessee’s case for A.Y. 2012-13 while completing the assessment, the doctors’ freebies were disallowed based on the circular issued by the CBDT. The CIT(A) , therefore, called on the assessee to explain why similar payments made for the years under consideration cannot be disallowed under section 37(1). The assessee made a detailed submission before the Ld.CIT(A) and submitted that the assessee has incurred certain sales promotion expenses which include amount spent on doctors’gift, travelling expenses, etc. The assessee also submitted that the CBDT circular No.5 / 2022 which is issued in August, 2012, is not applicable in assessee’s case for the reasons that the impugned expenses were incurred earlier to the circular. The assessee also submitted a break up of promotion expenses wherein the assessee has segregated the amount between the expenses which are incurred as per the norms and others. The assessee further submitted that the expenses are incurred towards the normal business of the assessee. Every day there are new developements taking place around the world in the area of medicine and therapeutic, hence, in order to provide correct diagonosis and treatment of patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main objects of the conference and seminars is to update the doctors of the latest development which is beneficial in treating the patients as well as the pharmaceutical companies. The CIT(A) did not accept the submissions of the assessee. Accordingly, the CIT(A) disallowed a sum of Rs.7,00,00,520/- for A.Y. 2011-12 and a sum of Rs.6,09,51,421/- for A.Y. 201011. The CIT(A) also rejected the claim of the assessee that the enhanced disallowance made towards sales promotion expenses should be allowed as a deduction under section 80IB of the Act. Aggrieved, assessee is in appeal before the Tribunal.
4. Concealed Sales arising out of concealed production
4.1 During the course of assessment, the Assessing Officer called on the assessee to provide the products’ samples of type 10 major manufactured products of the assessee. The Assessing Officer, after perusing the details submitted, was of the view that the assessee has shown particular quantity of consumption of ingredients but that quantity of finished products reported was unreasonably lesser. The Assessing Officer was of the view that the excessive consumption of raw materials revealed that the assessee has not correctly reported the production of finished goods and accordingly concluded that the assessee had not reported the production to carry out sales outside its books. The Assessing Officer computed the excessive consumption as per below table and accordingly made addition towards suppressed sales:-
