Case Law Details
ACIT Vs LA Renon Healthcare Pvt Ltd (ITAT Ahmedabad)
ITAT Ahmedabad held that the AO must record a proper satisfaction regarding the incorrectness of the assessee’s claim before invoking Rule 8D u/s. 14A. Thus, in absence of such satisfaction, disallowance u/s. 14A of the Income Tax Act unsustainable.
Facts-
The case of the assessee was selected for scrutiny under CASS. AO observed that the company has claimed professional fees to the doctors amounting to Rs.5,43,98,834/-. AO also observed that the assessee-company has earned a dividend of Rs.1,64,89,016/- and also claimed interest expense of Rs.1,45,82,263/-.
AO, concluded that the assessee has not given any proof or specific explanation other than general explanation and failed to submit day to day fund flow statement and added total Rs.51,15,778/- invoking provisions of section 14A read with Rule 8D of IT Rules on account of interest of Rs.36,30,382/- and Rs. 14,85,395/- on account of administrative expenses. AO also disallowed Rs.8,27,091/- on account of delay of 2 days in payment of Employee contribution of P.F.
CIT(A) partly allowed the appeal of the assessee. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
AO has not doubted the genuineness of these payments. He stated that no documentary evidence has been submitted by the assessee in support of its claim that the doctors have worked in the capacity as consultants, researchers or advisors. Whereas we noted that the assessee has already provided all the details like logbook along with agreements with different doctors, summary sheets of professional fees paid, copies of scientific broachers, training manuals and research papers. The Ld.CIT(A) has also noted that the facts are identical and followed the decision of tribunal while deleting the disallowance.
Held that the AO must record a proper satisfaction regarding the incorrectness of the assessee’s claim before invoking Rule 8D. In the absence of such satisfaction, the additional disallowance was deleted, and the suo-moto disallowance offered by the assessee was accepted. Considering the facts that the assessee was having sufficient funds in hand on the date of investment, as it is evident from the bank statement where proceeds of issuance of share capital were deposited and investments in mutual funds was made, we are in agreement with the decision of the Ld.CIT(A)’s decision to delete the disallowance of Rs.36,30,382/- u/s 14A on account of interest expenses.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed by the Revenue against the order dated 14/11/2019 passed by the Learned Commissioner of Income Tax (Appeals)-2, Ahmedabad (hereinafter referred to as “the Ld.CIT(A)”), arising out of the assessment order dated 23/12/2018 passed by the Assessing Officer (AO) u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relevant to the Assessment Year (AY) 2016-17. The Assessee has filed the Cross Objection to this appeal. Therefore, both were heard together and are being disposed of by this common order for the sake of convenience.
Facts of the case:
2. The assessee-company filed its original return of income declaring total income of Rs.47,17,20,900/-. The assessee invalidated previous return and filed its return of income on 07-11-2017. The case was selected for scrutiny under CASS and the assessee were sent notices under sections 143(2) and 142(1) of the Act. In response to which, the assessee filed its reply and the AO observed that the company has claimed professional fees to the doctors amounting to Rs.5,43,98,834/-.
2.1. The AO sent show-cause notice to the assessee as to why these fees paid to doctors should not be disallowed. The assessee submitted its reply and submitted the details that this amount is bifurcated into two parts Rs.2,07,28,000/- towards payment to scientific consultants and Rs.3,36,70,833/- was towards payment to consultants, advisors and professional service providers. The assessee contented that the expenditure was incurred wholly and exclusively for the purpose of business. The assessee-company also stated that such expenditure is essential for a pharmaceutical company having scientific and research-based orientation.
2.2. The assessee also placed reliance on some decisions of Tribunal and contented that the reference to Circular No. 5 of 2012 issued by CBDT and guidelines issued by MCI are not having any application to its case as the regulations made by MCI are required to be observed by medical practitioners and they are not applicable to pharmaceutical companies as they have separate code of conduct for such companies. The assessee-company requested that the payment was made out of business expediency and hence should not be disallowed. However, the AO relying on the Circular of CBDT and guidelines of MCI disallowed Rs.2,07,28,000/- u/s. 37(1) of the Act.
2.3. The AO also observed that the assessee-company has earned a dividend of Rs.1,64,89,016/- and also claimed interest expense of Rs.1,45,82,263/-. Therefore, AO in a notice u/s. 142(1) of the Act requested to show cause as to why provisions of section 14A r.w.r. 8D of the I.T. Rules, 1962 should not be invoked. In reply the assessee explained that it had, during the year under consideration, has acquired long term non-current investments of Rs.5,77,44,695/- and current investments in Debt mutual funds of Rs.53,64,13,406/- The assessee further stated that both current and non-current investments were made out of its own funds and in the year under consideration the company had received Rs. 68 crore as share capital including securities premium which was used for making investments. The assessee also contended that they have not made investments out of borrowed funds. The assessee further contented that the investments are routed through a separate investment account with HDFC Bank, and no direct or indirect cost was incurred for acquisition of such investments. The assessee also explained that in the recent era it does not require any specific administrative efforts for earning dividend income and the assessee had availed services of IIFL which did not charge any fee to assessee. However, the AO, concluded that the assessee has not given any proof or specific explanation other than general explanation and failed to submit day to day fund flow statement and added total Rs.51,15,778/- invoking provisions of section 14A read with Rule 8D of IT Rules on account of interest of Rs.36,30,382/- and Rs. 14,85,395/- on account of administrative expenses.
2.4. The AO also disallowed Rs.8,27,091/- on account of delay of 2 days in payment of Employee contribution of P.F. (Due date was 15-08-2015 and payment was made on 17-08-2015).
3. The assessee preferred an appeal before the Ld.CIT(A) against the order of AO passed u/s.143(3) of the Act. The Ld.CIT(A) partly allowed the appeal of the assessee. While doing so, the Ld.CIT(A) deleted the disallowance of Rs.207,28,000/- relying on the order of ITAT in assessee’s own case for the A.Y. 2011-12 to A.Y. 2014-15. The Ld.CIT(A) restricted disallowance u/s.14A read with Rule 8D to Rs. 14,85,395/- on account of administrative expenses. The Ld.CIT(A) deleted the disallowance of Rs.8,27,091/- u/s.36(1) of the Act relating to delayed payment of employees’ contribution to PF, ESIC, etc. While doing so, the Ld.CIT(A) concluded that the payment was made before due date of 20-08-2015 including grace days allowed.
4. Aggrieved by the order of the Ld.CIT(A), now the Revenue is in appeal before us with following grounds:
“1. Whether the CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000 made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act without properly appreciating the facts of the case and material brought on record.
1.1. The CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000/- made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act although the payments were in fact in the nature of gratuitous payments.
1.2. The CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000/- made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act in spite of the fact that as per the agreements with the doctors, doctors were imparting knowledge of assessee’s products to general public and also helping in marketing of assessee’s products, even though the doctors are prohibited from performing such activities by the MCI Guidelines issued by Indian Medical Council (Professional conduct, etiquettes and ethics) Regulation 2002.
1.3. The CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000/- made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act even though the assessee has not provided the documentary evidence of service provided by the doctors and the basis of calculation of fees paid to each of the doctors.
1.4. The CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000/- made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act even though admittedly, the medical practitioners and the paramedical staff for whose services the doctors were paid professional fees were not the employees of the assessee company.
1.5. The CIT(A) has erred in law and on the fact in deleting the additions of Rs.2,07,28,000/- made on account of disallowance of professional fees paid to the doctors u/s. 37(1) of the Act even though admittedly no clinical trials were conducted by the doctors on patients.
2. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs.36,30,382/- made as per Rule 8D(i) of I.T. Rules.
2.1. The Id CIT(A) failed to appreciate that the assessee company failed to prove that the exempt income had been earned solely by deploying interest free funds.
3. The appellant craves to leave and amend or alter any ground or add a new ground which may be necessary.
4. It is, therefore, prayed that the order of the la CIT(A) may be cancelled and that of Assessing Officer may restored to the above fact.”
5. The assesses has filed a Cross Objection against the appeal of Revenue with following grounds:
“1. In law and in facts and circumstances of the Respondent’s case, the impugned order u/s 143(3) of the Income tax Act,1961; is bad in law and needs to be quashed.
2. In law and in the facts and circumstances of the Respondent’s case, the Id. CIT(A) has erred in upholding the disallowance of administrative expenditure of Rs.14,85,395/- of section 14 A of the Act when no such addition is called for.
3. The Respondent’s craves to add to, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
On the Ground No. 1 of the Revenue
6. This ground is relating to disallowance of Rs.2,07,28,000/- u/s. 37(1) of the Act on account of the payment of professional fees paid to doctors. The Ld. Departmental Representative (DR) stated that the AO has dealt with this issue in detail in his assessment order and, hence, placed reliance on order of the AO.
7. The Ld. Authorised Representative (Ld.AR) of the assessee, stated that this issue is covered by the decision of Co-ordinate Bench in assessee’s own case for the A.Y. 2011-12 to A.Y. 2014-15 in ITA Nos. 2380/Ahd/2015, 3327/Ahd/2016, 1811/Ahd/2017 and 1812/Ahd/2017. The Ld.AR also submitted the details covering nature of assignment and number of hours used of concerned doctor. These details were already submitted to AO.
8. We have considered the decision of Co-ordinate Bench in assessee’s own case for earlier assessment years. The Tribunal has noted –
– That, the assessee established the genuineness of the transactions and that the expenses were incurred for business purposes.
– That, the Documentary evidence, such as agreements and confirmations from doctors, supported the claims.
– That, the professional fees were aligned with business exigencies and aimed at promoting the company’s pharmaceutical products.
– That, the MCI guidelines (para 6.8(g)) permit doctors to work with pharmaceutical companies in an advisory capacity.
– That, the CBDT Circular No. 5/2012 applies to gifts and hospitality, not to professional fees for services rendered.
– That, the Tribunal concluded that the professional fees paid by the assessee did not violate the MCI guidelines or the CBDT Circular.
8.1. The Judicial Precedents considered by the tribunal supported the principle that genuine business expenses paid through proper channels should be allowed and also highlighted that expenses paid through banking channels with TDS deducted are not bogus. These decisions reinforced that sufficient evidence of services rendered justifies business expenditure and affirmed that genuine business expenses are allowable if supported by agreements and proper documentation.
8.2. In the present case, the AO has not doubted the genuineness of these payments. He stated that no documentary evidence has been submitted by the assessee in support of its claim that the doctors have worked in the capacity as consultants, researchers or advisors. Whereas we noted that the assessee has already provided all the details like logbook along with agreements with different doctors, summary sheets of professional fees paid, copies of scientific broachers, training manuals and research papers. The Ld.CIT(A) has also noted that the facts are identical and followed the decision of tribunal while deleting the disallowance. We do not find any infirmity in the order of the Ld.CIT(A), so as to interfere with his decision. Therefore, this ground of Revenue is dismissed.
On the Ground No.2 of Revenue and on the Grounds of Assessee’s Cross Objection
9. These grounds deal with disallowance u/s. 14A read with rule 8D of the I.T. Rules, 1962. The Revenue in appeal against the deletion of addition made u/s 14A of Rs.36,30,382/- on account of interest expenditure and the assessee has filed cross objection against the confirmation of disallowance of Rs.14,85,395/- on account of administrative expenses.
10. The Ld.DR while relying on the order of AO stated that the assessee-company has not provided any fund flow statement evidencing that the assessee has used its own funds. On the other hand, the Ld.AR contended that the AO acted with predetermined thought of disallowance u/s.14A as he issued show cause notice in notice u/s.142(1) of the Act itself. The Ld.AR further contended that the assessee had informed that the investments were made out of own funds received from issuance of share capital at premium. The Ld.AR also stated that the assessee had submitted the copy of bank statement where proceeds of issuance of share were received and investment in mutual fund was made by way of Annexure 4A. The Ld.AR further submitted that the assessee has not earned any Long Term Capital Gain (LTCG) on these mutual funds which is claimed as exempt. During the course of appellate proceedings, the assessee submitted the statements of fund houses, transaction reports and capital gain statements in support of its contention that no long-term capital gain was made from such investments which was exempt. The Ld.AR submitted copy of computation of income before us, to support its claim. As argued by the AR, the AO has not recorded his dissatisfaction before invoking Rule 8D to calculate the disallowance.
11. Relating to confirming disallowing an amount of Rs.14,85,395/-, the Ld.AR argued that the Ld.CIT(A) has not dealt with the issue in detail and simply concluded that the assessee’s contention is devoid of merit.
11. The Ld.AR placed reliance on the decision of Mumbai Bench of Tribunal in case of DCIT 3(2)(2), Mumbai Vs Pidilite Industries Ltd. [2019] 107 taxmann.com 91 and decision of Co-ordinate Bench in case of Lok Prakashan Ltd. (in ITA No. 131/Ahd/2018). The Ld.AR also placed reliance on the decision of Chandigarh Bench of Tribunal in case of Ludhiana Stock Exchange (in ITA No.15/Chd/2017).
12. We have heard the rival contentions and noted that the Revenue argued that the assessee-company did not provide any fund flow statement evidencing the use of own funds. We also noted that the AO had a predetermined thought of disallowance u/s.14A, as evident from the show-cause notice and the Ld.AR also submitted bank statements and other documents proving that the investments were made from own funds and no exempt income was earned, which were already submitted to lower authorities. We also take into consideration decision of Pidilite Industries Ltd. (supra), where it was held that the AO must record a proper satisfaction regarding the incorrectness of the assessee’s claim before invoking Rule 8D. In the absence of such satisfaction, the additional disallowance was deleted, and the suo-moto disallowance offered by the assessee was accepted. In other two decisions also, the Tribunal emphasized the necessity for the AO to record specific dissatisfaction with the assessee’s computation before invoking Rule 8D under Section 14A. The lack of such satisfaction invalidates any additional disallowance made by the AO. This principle is critical in ensuring fairness and adherence to the statutory requirements under Section 14A r.w. Rule 8D.
12.1. Considering the facts that the assessee was having sufficient funds in hand on the date of investment, as it is evident from the bank statement where proceeds of issuance of share capital were deposited and investments in mutual funds was made, we are in agreement with the decision of the Ld.CIT(A)’s decision to delete the disallowance of Rs.36,30,382/- u/s 14A on account of interest expenses. This ground number 2 of the Revenue’s appeal is dismissed.
13. So far as assessee’s ground relating to cross objection i.e. the Ld.CIT(A)’s decision to confirm addition of Rs.14,85,395/- u/s.14A on account of administrative expenses is concerned, we have considered the contention of the Ld.AR that they have not incurred any administrative expenses to earn such income. We also note that the AO has not recorded his dissatisfaction about assessee’s claim that they have not incurred any administrative expenses, especially when all the investments are routed through one single bank account through one broker. Therefore, AO’s adoption of Rule 8D proves mechanical. Most of the judicial precedents, including those relied on by the assessee, underscore the importance of procedural fairness and due diligence by AO and also held that the AO has to objectively examine assessee’s claim. We also note that the Ld.CIT(A) also has not recorded his reason while confirming the addition on account of administrative expenses.
13.1. Considering the facts and judicial precedents, we are of the opinion that the Ld.CIT(A) and the AO both have failed in recording dissatisfaction before applying third component of rule 8D relating to administrative expenses. Therefore, the assessee’s second ground of Cross objection is allowed.
14. The assessee’s other grounds raised in cross objection especially relating to allowability of education cess u/s. 37(1) of the Act is not arising out of the order of the Ld.CIT(A) hence not taken up for adjudication. The Ld.AR also has not argued before us during the hearing before us.
15. In the combined result, the appeal of the Revenue is dismissed, whereas the Cross Objection filed by the Assessee is allowed in part.
Order pronounced in the Open Court on 6 August, 2024 at Ahmedabad.
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