Leviability of Penalty under section 271(1)(c) against Wrong claim of deduction

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Leviability of Penalty under section 271(1)(c) against Wrong claim of deduction

Leviability of Penalty under section 271(1)(c) against Wrong claim of deduction

Merely disallowance of any claim which is legally not allowable, no penalty under section 271(1)(c) can be levied when there was no concealment of any material facts or furnishing of inaccurate particulars of income.

Assessee in its return of income claimed deduction under section 80-IB(4) to the extent of 30% of profits of new industrial undertaking located at Daman. Certain miscellaneous incomes were excluded by AO framing assessment and computer software expenditure was disallowed as being capital expenditure claimed by assessee as revenue expenditure. Further, AO also disallowed 25% lump sum disallowance of expenses incurred on gift articles. AO also improved penalty under section 271(1)(c) on basis of quantum disallowance. CIT(A) deleted penalty levied by AO. Held: Though an unproved claim of expenditure would justify an addition/disallowance, however, nothing short of a disproved claim would justify imposition of penalty under section 271(1)(c). No penalty under section 271(1)(c) on either of the aforesaid counts could have validly been imposed in the hands of assessee. Merely because of disallowance of any claim which is legally not allowable, no penalty can be levied when there was no concealment of any material facts or furnishing of inaccurate particulars of income. Thus, there was no infirmity in order of CIT(A) deleting penalty and the same was therefore, to be upheld.

Decision: In assessee’s favour.

Relied: CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 1058 (SC)</i>.

Referred: CIT v. Zoom Communication (P) Ltd. (2010) 327 ITR 510 (Del), CIT & Anr. v. M/s. SSA”s Emerald Meadows (SLP(C)/2016 (CC Nos. 11485/2016), dt. 5-8-2016) andSansui Steel (P) Ltd. v. ITO-7(2)(2), Mumbai (ITA Nos. 1403/Mum/2015, dt. 30-11-2017).

IN THE ITAT, MUMBAI “A” BENCH

G.S. PANNU, A.M. & RAVISH SOOD, J.M.

Aristo Pharmaceuticals (P) Ltd. v. Asst. CIT

ITA No 6680/Mum/2012

ITA Nos 5553 & 6129/Mum/2014

ITA Nos 5479, 5167 & 5747/Mum/2015

A.Ys. 2005-06, 2009-10, 2011-12 & 2012-13

26 July, 2018

Appellant by: Ajay Kumar Rastogi, Authorised Representative

Respondent by: R.P. Meena & Rajesh Kumar Yadav, Departmental Representatives

ORDER

Ravish Sood, J.M.

The present appeals filed by the assessee and the revenue are directed against the respective orders passed by the Commissioner (Appeals)-4, Mumbai for assessment year 2005-06, assessment year 2009-10, assessment year 2011-12 and assessment year 2012-13, which in itself arises from the order passed by the assessing officer under section 271(1)(c) of the Income Tax Act, 1961 (for short Act”), dated 21-3-2011 for assessment year 2005-06; order passed by the assessing officer under section 154 of the Act, dated 24-8-2012 for assessment year 2009-10; order passed by the assessing officer under section 143(3) of the Act, dated 28-3-2013 for assessment year 2011-12; and order passed by the assessing officer under section 143(3) of the Act, dated 6-1-2015 for assessment year 2012-13. As certain common issues are involved in the aforementioned appeals, thus the same are being taken up and disposed off by way of a composite order. We shall first take up the appeal filed by the revenue against the order passed by the Commissioner (Appeals), setting aside the penalty imposed by the assessing officer under section 271(1)(c) in the case of the assessee for assessment year 2005-06. The revenue assailing the order of the Commissioner (Appeals) has raised before us the following grounds of appeal :–

“On the facts and in the circumstances of the case and in Law, the learned Commissioner (Appeals) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below :–

1. The order of the Commissioner (Appeals) is opposed to Law and facts of the case.

2. On the facts and in the circumstances of the case and in Law, the learned Commissioner (Appeals) erred in deleting the penalty levied under section 271(1)(c) without appreciating the fact that the assessee had concealed his income and had filed inaccurate particulars of his income as per the provisions of section 271(1)(c) read with Explanation 1 thereto of the Income Tax Act, 1961.

3. For these and other grounds that may be urged at the time of hearing, the decision of the Commissioner (Appeals) may be set aside and that of the assessing officer restored.”

2. Briefly stated, the assessee-company which is engaged in the business of manufacturing and sale of pharmaceuticals products had filed its return of income for assessment year 2005-06 on 31-10-2005, declaring income at Rs. 81,16,05,080. The case of the assessee was therafter taken up for scrutiny assessment under section 143(2) of the Act.

3. The issue involved in the present appeal lies in a narrow compass. The assessee in its return of income had claimed deduction under section 80IB of Rs. 16,18,40,947 on account of a new industrial undertaking located at Daman. The deduction claimed by the assessee was to the extent of 30% of the profits of the said unit. The assessing officer while framing the assessment, being of the considered view that the deduction under section 80IB was to be worked out on the basis of the profit and gains “derived from” an eligible industrial undertaking, thus declined to allow the said deduction in respect of certain other incomes aggregating to Rs. 5,87,993 viz. (i) interest on MSEB : Rs. 622; (ii) interest on security deposit for tender : Rs. 13,615; (iii) interest on electricity deposits : Rs. 828; (iv) insurance claim : 4,33,788; and (v) miscellaneous income : Rs. 1,39,140. The assessing officer further characterizing the expenditure of Rs. 3,58,454 incurred by the assessee on computer software as a capital expenditure, therein dislodged the claim of the same as a revenue expenditure by the assessee. Still further, the assessing officer carried a lump sum disallowance of 25% of the expenses on gift articles as claimed by the assessee and made a disallowance of Rs. 1,22,06,085 on the said count in the hands of the assessee. However, the disallowance in respect of expenses incurred by the assessee on gift articles was on appeal scaled down by the Commissioner (Appeals) to 15% of the aggregate of such expenses, as a result whereof the disallowance stood restricted to an amount of Rs. 73,23,651.

4. Subsequent to the receipt of the Commissioner (Appeals) order a “Show cause” Notice (for short “SCN”) under section 274 read with section 271(1)(c), dated 28-9-2010 was issued by the assessing officer The assessing officer not finding favour with the explanation of the assessee as regards the issues involved viz. (i) raising of a wrong claim of deduction under section 80IB which had resulted in under assessment of its income; (ii) wrong claim of computer software expenses which though was in the nature of capital expenditure, but was claimed as a revenue expenditure by the assessee; and (iii) wrong claim of expenditure on account of gift articles which were incurred for non-business purposes, thus imposed a penalty of Rs. 1,07,50,531 under section 271(1)(c) of the Act. However, pursuant to an application filed by the assessee under section 154 of the Act, the quantum of penalty imposed by the assessing officer was reduced to an amount of Rs. 30 lac, vide a rectification Order, dt. 6-1-2014passed by the assessing officer under section 154 of the Act.

5. Aggrieved, the assessee carried the rectified order of penalty, dated 6-1-2014 in appeal before the Commissioner (Appeals). The Commissioner (Appeals) after deliberating on the contentions advanced by the assessee in support of its claim that no penalty under section 271(1)(c) was liable to be imposed in respect of the additions/disallowances sustained in its hands viz. (i) disallowance of part of the claim of deduction under section 80IB; (ii) re­characterisation by the assessing officer of the computer software expenses as capital expenditure; and (iii) disallowance of 15% of gift article expenses, being persuaded to subscribe to the said claim of the assessee, deleted the penalty of Rs. 30 lac imposed by the assessing officer, observing as under :–

“3.3 I have considered the background of the case, finding of the assessing officer in penalty order as well as in rectification order and have also considered the rival submission of the appellant, carefully. I find that this is the case of simple disallowance of some part of deduction under section 80IB and disallowance of capital expenditure related to computer software and further disallowance of 15% of gift articles expense. Obviously, appellant has disclosed all the facts in return of income, profit & loss account in computation of income and has also given all the relevant details to the assessing officer at every stage of proceedings, hence, merely on the ground that some part of claim of deduction related to business of the appellant, but not derived from industrial undertaking, it cannot be presumed that there is a concealment of income or furnishing of inaccurate particulars of income. The dispute, if at all, between the appellant and the assessing officer in respect of allowance of deduction under section 80IB on other income viz. interest on MSEB amounting to Rs. 622, interest on security deposit for tender amounting to Rs. 13,615, interest on electricity deposit amounting to Rs. 828, insurance claim amounting to Rs. 4,33,788 and miscellaneous income amounting to Rs. 1,39,140 totalling to Rs. 5,87,993 as would be evident from order under section 154 dated 19-12-2013–copy enclosed. This issue has always been subject matter of debate between the appellant and the department since assessment year 1995-96 onwards and the issue has always been decided in favour of the appellant. The Tribunal vide Order, dt. 30-9-2005 for assessment year 1995-96 to 2001-02 has decided the issue in favour of the appellant and no appeal was preferred by the Revenue under section 260A. The Tribunal again vide its Order, dt. 30-5-2008 for assessment year 2002-03 to 2004-05 following its earlier order has decided the issue in favour of appellant. In the circumstances, the claim of the concealment and or furnishing of inaccurate particulars of income by the assessing officer while imposing penalty is wholly misconceived. I find force in the contention of the appellant because as mentioned earlier, there is no concealment or furnishing of inaccurate particulars of income, hence, no penalty can be levied. Appellant gets support from the above decision relied upon by learned Authorised Representative in the case of Benette Coleman and Co. Ltd. v. ACIT 24 ITR (ITAT Mumbai) 102, it is held that if any disallowance is made, no penalty can be levied. Hon|ble ITAT has held as under :–

“In the absence of a other contrary material or distinguishing feature brought on record by the revenue to show that the claim of deduction made by the assessee was not bona fide or was bogus, we respectfully following the ratio of the above decisions and the consistent view hold that there is no concealment on the part of the assessee which may call for levy of penalty under section 271(1)(c) of the Act and accordingly the penalty imposed by the Assessing officer and sustained by the learned Commissioner (Appeals) is deleted.”

Since it is a simple case of disallowance of some of the expenditures from total deduction claimed under section 80IB(4) and disallowance of computer software expenditure as capital expenditure and disallowance of 15% of Gift Articles expenses, it becomes very obvious that there is no furnishing of inaccurate particulars of income or concealment of income. The Hon|ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 1058 (SC), has held that merely because of disallowance of any claim which is legally not allowable, no penalty can be levied when there is no concealment of any material facts or furnishing of inaccurate particulars of income. The assessing officer is therefore directed to delete the penalty of Rs. 30 lakhs levied by him by rectifying the original penalty of Rs. 1.25 crores.”

6. The revenue being aggrieved with the order of the Commissioner (Appeals) has carried the matter in appeal before us. The Learned Departmental Representative (for short ” Departmental Representative “) at the very outset submitted that the assessee had furnished wrong particulars and therein inflated its claim of deduction under section 80IB, as well as had wrongly debited expenditure on gift articles which were incurred for non-business purposes and also raised a wrong claim in respect of computer software expenses which was in the nature of a capital expenditure, therefore, the assessing officer had rightly imposed penalty under section 271(1)(c) in the hands of the assessee. The learned Departmental Representative to support his aforesaid contention relied on the judgment of the Hon|ble High Court of Delhi in the case of CIT v. Zoom Communication (P) Ltd. (2010) 327 ITR 510 (Del). Per Contra, the learned Authorised Representative (for short ” Authorised Representative “) for the assessee objected to the validity of the jurisdiction assumed by the assessing officer for imposing penalty under section 271(1)(c) in the hands of the assessee. The learned Authorised Representative in support of his aforesaid contention took us through the “SCN” issued by the assessing officer under section 274 read with section 271(1)(c), dated 29-12-2007, 21-4-2008, 22-5-2008 and 28-9-2010. The learned Authorised Representative taking us through the aforesaid notices, submitted that a perusal of the “SCN” dt. 29-12-2007 revealed that the assessing officer had failed to strike off the irrelevant default. On the basis of his aforesaid submissions, it was the claim of the learned Authorised Representative that the assessee was never put to notice as regards the default for which penalty was sought to be imposed on it. The learned Authorised Representative taking support of the order passed by the Hon|ble Supreme Court while dismissing the SLP of the revenue in the case of CIT & Anr. v. M/s. SSA”s Emerald Meadows (SLP (C)/2016 (CC Nos. 11485/2016), dt. 5-8-2016), submitted that on the failure on the part of the assessing officer to strike off the irrelevant default in the “SCN”, no penalty under section 271(1)(c) could validly be imposed in the hands of the assessee. On merits, the learned Authorised Representative relied on the order passed by the Commissioner (Appeals). The learned Authorised Representative submitted that as the computation of deduction under section 80IB had remained a subject matter of debate since long, hence the Commissioner (Appeals) had rightly appreciated that no penalty under section 271(1)(c) could have validly been imposed on the said count. It was further averred by the learned Authorised Representative that mere characterization of the computer software expenses by the revenue as a capital expenditure, as against bona fide claim of the same as a revenue expenditure by the assessee, would not call for penalty under section 271(1)(c) in the hands of the assessee. The learned Authorised Representative further submitted that an ad hoc disallowance of 15% of the expenditure incurred by the assessee on gift articles would also not justify imposition of penalty under section 271(1)(c). The learned Departmental Representative rebutting the challenge thrown by the learned Authorised Representative to the validity of the assumption of jurisdiction by the assessing officer for imposing penalty under section 271(1)(c), submitted that as neither any cross-objection or a cross-appeal was filed by the assessee in context of its aforesaid claim, thus it was not permissible on its part to have challenged the validity of the assumption of jurisdiction by the assessing officer, without putting the revenue to notice as regards the same. Alternatively, the learned Departmental Representative submitted that the non-striking off the irrelevant default in the “SCN” would not have any bearing on the validity of the penalty imposed under section 271(1)(c) in the hands of the assessee, as long as the same is found to be in conformity with the basis on which such penalty proceedings were initiated by the assessing officer while framing the assessment. In support of his aforesaid contention the learned Departmental Representative relied on the order of the ITAT, Mumbai Bench “A”, Mumbai, in the case of Sansui Steel (P) Ltd. v. ITO-7(2)(2), Mumbai (ITA Nos. 1403/Mum/2015, dt. 30-11-2017).

7. We have heard the Authorised Representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the assessing officer had declined the claim of deduction of the assessee under section 80IB in respect of certain other incomes aggregating to Rs. 5,87,993 viz. (i) interest on MSEB : Rs. 622; (ii) interest on security deposit for tender : Rs. 13,615; (iii) interest on electricity deposits : Rs. 828; (iv) insurance claim : 4,33,788; and (v) miscellaneous income : Rs. 1,39,140. We find from a perusal of the order of the Commissioner (Appeals) that the entitlement of the assessee for claim of deduction under section 80IB in respect of the aforesaid other incomes had always been the subject matter of debate between the assessee and the department since assessment year 1995-96 onwards, and the same had always been decided in favour of the assessee. We find that the Tribunal, vide its Order, dt. 30-9-2005 for assessment years 1995-96 to 2001-02 had decided the said issue in the favour of the assessee. The revenue had accepted the said order of the Tribunal and had not carried the same in further appeal before the High Court. Still further, the Tribunal following its earlier order had again vide its Order, dt. 30-5-2008for assessment years 2002-03 to 2004-05 had decided the said issue in favour of the assessee. We are of the considered view that in the backdrop of the aforesaid factual position and the fact that the assessee had furnished complete details as regards its claim of deduction under section 80IB(4) of the Act, thus merely for the reason that the said claim of deduction did not find favour with the assessing officer would not justify imposition of penalty under section 271(1)(c) in the hands of the assessee. We are further of the considered view that the re-characterization of the computer software expenditure as a capital expenditure by the assessing officer, as against the claim of the same as a revenue expenditure by the assessee, though would justify the disallowance of the said expenditure, but keeping in view the fact that the assessee had made a complete disclosure of the details of the said expenditure and claim of the same as a revenue expenditure in its return of income, thus no penalty under section 271(1)(c) could have been imposed in the hands of the assessee. Still further, we are persuaded to subscribe to the view of the Commissioner (Appeals) that no penalty was called for in the hands of the assessee in respect of the ad hoc 15% disallowance of the gift articles expenses as was finally sustained by the Commissioner (Appeals). We are of the considered view that though an unproved claim of expenditure would justify an addition/disallowance, however nothing short of a disproved claim would justify imposition of penalty under section 271(1)(c) of the Act. We find that our view that no penalty under section 271(1)(c) on either of the aforesaid counts could have validly been imposed in the hands of the assessee is fortified by the judgment of the Hon|ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC). We thus, finding no infirmity in the order of the Commissioner (Appeals), uphold the deletion of the penalty of Rs. 30 lac imposed by the assessing officer under section 271(1)(c) as per his rectified penalty Order, dt. 6-1-2014.

8. The appeal filed by the revenue is dismissed.

ITA Nos. 6680/Mum/2012 assessment year 2009-10

9. We shall now take up the appeal of the assessee for assessment year 2009-10. The assessee assailing the order passed by the Commissioner (Appeals) has raised before us the following grounds of appeal :–

“1. For that the learned Commissioner (Appeals) has erred in upholding disallowance of Rs. 99,91,996 out of Sales Promotion Expenses in order under section 154 passed by the assessing officer.

2. For that the learned Commissioner (Appeals) has erred in confirming exercise of power under section 154 by the assessing officer even though there was no mistake apparent on record.

3. For that the learned Commissioner (Appeals) has erred in holding that the assessing officer has rectified the clerical error in calculation of disallowance @10% under the head “Sale Promotion Expense” in the order impugned.

4. For that the learned Commissioner (Appeals) has failed to appreciate that the assessing officer while passing order under section 143(3) dated 30-9-2011 has disallowed a sum of Rs. 10,00,000 on account of Sale Promotion Expense and thus there was no mistake apparent on record which has been rectified in the order impugned by enhancing the disallowance to Rs. 99,91,996.

5. For that the learned Commissioner (Appeals) has erred in con1rming disallowance of Rs. 99,91,996 in order under section 154 as against Rs. 10,00,000 disallowed originally.

6. For that the learned Commissioner (Appeals) has erred in holding that the grievance of disallowance of Rs. 99,91,996 does not arise from the order under section 154 and accordingly the disallowance was affirmed to the detriment of the appellant.

7. For that the learned Commissioner (Appeals) has erred in upholding levy of interest under section 234B amounting to Rs. 43,61,560 although the advance tax and TDS exceeded 90% of total tax payable and was accordingly not charged in order under section 143(3) dated 30-9-2011.

8. For that whole order is bad in fact and law of the case and is fit to be annulled/modified.

9. For that the other grounds, if any, shall be urged at the time of hearing of the appeal.”

10. Briefly stated, the assessing officer while framing the assessment under section 143(3), vide his Order, dt. 30-9-2011 had disallowed 10% of the sales promotion expenses and had inter alia made an addition of Rs. 10,00,000 in the hands of the assessee while assessing its income at Rs. 235,69,98,790. Observing, that there was a clerical error as regards the disallowance made by the assessing officer in respect of the sales promotion expenses, the assessee brought the same to the notice of the assessing officer, vide his Letter, dt. 11-10-2011. The assessing officer rectified the assessment order under section 154 of the Act and taking cognizance of the fact brought to his notice by the assessee, that the total sales promotion expenses were to the tune of Rs. 999.19 lac and not Rs. 99.91 lac as considered by him while framing the assessment, thus made a disallowance on account of sales promotion expenses at Rs. 99,91,996 (i.e. 10% of Rs. 999.19 lacs).

11. Aggrieved, the assessee assailed the order passed by the assessing officer under section 154 before the Commissioner (Appeals). The Commissioner (Appeals) after deliberating on the contentions advanced by the assessee before him, observed that the assessing officer while framing the assessment under section 143(3), vide his Order, dt. 30-9-2011 had wrongly taken the sales promotion expenses at Rs. 99.91 lac for calculating 10% of disallowance. It was observed by the Commissioner (Appeals) that it was only when the assessee brought it to the notice of the assessing officer that the correct amount of sales promotion expenses was Rs. 999.19 lac, that the assessing officer had rectified his order under section 154 and had modified the amount of disallowance of 10% of the sales promotion expenses to an amount of Rs. 99.91 lac (i.e. 10% of Rs. 999.19 lac). It was observed by the Commissioner (Appeals) that the assessee by not assailing the assessment order for the year under consideration viz. assessment year 2009-10, had thus accepted the disallowance of 10% of the sales promotion expenses made by the assessing officer In the backdrop of the aforesaid facts, it was observed by the Commissioner (Appeals) that as the assessing officer while passing the order under section 154 had not taken any fresh decision on merits in respect of the disallowance of the sales promotion expenses but had only rectified a clerical mistake that had crept in his order while computing the sales promotion expenses, thus the grievance of the assessee as regards the maintainability of such disallowance on merits did not arise from the order passed by the assessing officer under section 154 of the Act. On the basis of his aforesaid deliberations, the Commissioner (Appeals) concluded that though the grievance of the assessee as regards the disallowance of the sales promotion expenses on merits did arise from the order passed by the assessing officer under section 143(3), however as the assessee by not carrying the same in further appeal had allowed the same to attain finality, therefore, it was not permissible for him to now contest the merits of the said disallowance by way of an appeal against the order passed by the assessing officer under section 154 of the Act. The Commissioner (Appeals) on the basis of his aforesaid observations dismissed the appeal of the assessee.

12. The assessee being aggrieved with the order of the Commissioner (Appeals) has carried the matter in appeal before us. The learned Authorised Representative submitted that the assessing officer had in his order passed under section 154 enhanced the disallowance of the sales promotion expenses. The learned Authorised Representative in support of his contention took us through the observations of the assessing officer in context of the issue under consideration as recorded in the assessment order. It was submitted by the learned Authorised Representative that though it was brought to the notice of the assessing officer that the sales promotion expenses were wrongly taken by him at Rs. 99.91 lac as against the actual expenditure of Rs. 999.91 lac, however, the assessee had at no stage stated that the disallowance out of the sales promotion expenses were also to be enhanced from Rs. 10 lac (as disallowed in the assessment framed under section 143(3)) to an amount of Rs. 99,91,996 (i.e. 10% of total sales promotion expenses of Rs. 999.19 lac). It was further submitted by the learned Authorised Representative that the assessing officer while carrying out the rectification had though substantially enhanced the income of the assessee by raising the disallowance of the sales promotion expenses from an amount of Rs. 10 lac (as per order under section 143(3)) to an amount of Rs. 99,91,996, however no opportunity of being heard was afforded to the assessee before passing of the order under section 154 of the Act. The learned Authorised Representative in support of his claim that an addition/disallowance made under section 154 can be assailed independently without there being any appeal against the original assessment order, relied on the judgment of the Hon|ble Supreme Court in the case of S. Sankappa & Ors. v. ITO (1968) 68 ITR 760 (SC). The learned Authorised Representative in support of his contention that no disallowance out of sales promotion expenses was called for in the hands of the assessee, took us through the assessment orders passed by the assessing officer under section 143(3) in the case of the assessee for the assessment years 2007-08 and 2008-09 (Page 14-30 of the “APB”). The learned Authorised Representative drawing our attention to the aforesaid assessment orders submitted that no disallowance out of sales promotion expenses was carried out by the assessing officer while framing the assessment in either of the aforesaid years. Per contra, the learned Departmental Representative submitted that as the assessing officer had merely rectified a clerical mistake and that too at the behest of the assessee who had brought the same to the notice of the assessing officer, therefore, the Commissioner (Appeals) had rightly dismissed the appeal of the assessee. The learned Departmental Representative in support of his contention that the assessing officer was not in error in rectifying the mistake which was glaring, patent, apparent and obvious from record, relied on the judgment of the Hon|ble High Court of Delhi in the case of CIT v. Satish Kumar Agarwal (2011) 79 CCH 782 (Del).

13. We have heard the Authorised Representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have deliberated at length on the issue under consideration and find that the assessing officer had merely rectified a clerical mistake in quantification of the sales promotion expenses and had not taken any new decision on merits in respect of the disallowance of the sales promotion expenses. We thus, find ourselves to be in agreement with the view taken by the Commissioner (Appeals) that it was not permissible for the assessee to assail the merits of the disallowance of the sales promotion expenses in his appeal filed against the order passed by the assessing officer under section 154 of the Act. We are of the considered view that though the assessee in its appeal against the order passed by the assessing officer under section 154 would be well within its right to challenge any infirmity emerging from the rectification carried out by the assessing officer, but it was not permissible on its part to traverse beyond the subject matter of the appeal and challenge the merits of the disallowance of the sales promotion expenses, as the latter could have only been assailed by way of an appeal against the order of assessment passed by the assessing officer under section 143(3) of the Act. We may herein observe that the reliance placed by the learned Authorised Representative on the judgment of the Hon|ble Apex Court in the case of S. Sankappa & Ors. v. ITO (1968) 68 ITR 760 (SC), not being in context of the issue under consideration, thus would not assist the case of the assessee appellant. We find that in the case before the Hon|ble Apex Court a partnership firm was assessed as an unregistered firm. On appeal, the firm was held as a registered firm by the Appellate Assistant Commissioner (for short “AAC”). That pursuant to the order of the AAC the Income Tax Officer rectified the assessment of the firm under section 35(1) of the Income Tax Act, 1922. Thereafter, the Income Tax Officer proceeded with to rectify the individual assessments of the partners under section 155 of the Act, which however was objected to by them on the ground that in respect of the assessment year under consideration the provisions of the Income Tax Act, 1922 would be applicable. Subsequently, the rectification of the individual assessments of the partners sought to be done by the assessing officer under section 35(5) of the Income Tax Act, 1922 was objected to by the assessee on the ground that the proceedings for rectification under section 35(5) were not proceedings for assessment. We find that it was in the backdrop of the aforesaid controversy, that the Hon|ble Apex Court had held that the proceedings taken for rectification of assessment either under section 35(1) or under section 35(5) of the Income Tax act, 1922 were proceedings for assessment and thus the Income Tax Officer was well within his right to carry out rectification of the individual assessments of the partners under section 35(5) of the Act. We are unable to comprehend that as to how the aforesaid judgment of  the Hon|ble Apex Court would assist the assessee in dislodging the observations of the Commissioner (Appeals) that in an appeal against a rectification order passed by an assessing officer, the assessee could have only restricted himself to the modifications or rectifications carried out by the assessing officer and cannot traverse beyond that. We thus, finding no infirmity in the findings of the Commissioner (Appeals) that the grievance of the assessee as regards the merits of the disallowance of 10% of the sales promotion expenses does not arise from the order passed by the assessing officer under section 154, thus uphold the same. However, we find that the learned Authorised Representative had averred before us that the order under section 154 enhancing the assessed income of the assessee was passed by the assessing officer without affording an opportunity of being heard to the assessee. We are of the considered view that as per section 154(3) of the Act, where the rectification of a mistake has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, the same shall not be carried out unless the authority concerned has given a notice to the assessee of its intention of carrying out such rectification and has allowed a reasonable opportunity of being heard to him. We thus, in the backdrop of the aforesaid contention of the learned Authorised Representative that the assessing officer had passed the order under section 154 without affording a reasonable opportunity of being heard to the assessee, set aside the matter to the file of the assessing officer, who shall after verifying the veracity of the aforesaid claim of the learned Authorised Representative that the order of rectification was passed by the assessing officer without affording a reasonable opportunity of being heard to the assessee, and finding the same in order, shall pass a fresh order under section 154 after affording a reasonable opportunity of being heard to the assessee. The Grounds ofAppeal Nos. 1 to 6 are allowed for statistical purposes in terms of our aforesaid observations.

14. The learned Authorised Representative had during the course of hearing of the appeal submitted that the Ground of Appeal Nos. 7 is not being pressed. We thus, in terms of the aforesaid concession of the learned Authorised Representative dismiss the Ground of Appeal Nos. 7 as not pressed. The Grounds of Appeal Nos. 8 & 9 being general are dismissed as not pressed.

15. The appeal of the assessee is allowed for statistical purposes.

ITA Nos. 5553 & 6129/Mum/2014 assessment year 2011-12

16. We shall now take up the cross appeals filed by the assessee and the revenue for assessment year 2011-12. The assessee assailing the order passed by the Commissioner (Appeals) to the extent he had upheld the disallowance of sales promotion expenses of Rs. 66,49,685, has raised before us the following grounds of appeal

“1. For that the learned Commissioner (Appeals) has erred in sustaining disallowance of sales promotion expense amounting to Rs. 66,49,685.

2. For that the learned Commissioner (Appeals) has erred in holding that expenditure incurred for distribution of costly articles (exceeding Rs. 750 each article) are freebies to doctors and professionals.

3. For that the learned Commissioner (Appeals) has erred in holding that the such expenditures (exceeding Rs. 750 each articles) have been incurred in violation of CBDT Circular No. 5/2012, dt. 1-8-2012 and are against regulations issued by Medical Counsel of India.

4. For that the learned Commissioner (Appeals) had erred in holding that such expenditures are prohibited by law and thus hit by Explanation to section 37(1).

5. For that the sustenance of disallowance of Rs. 66,49,685 is wrong, illegal and unjustified on the facts and in the circumstances of the appellant|s case.

6. For that the whole order sustaining disallowance of Rs. 66,49,685 is bad in fact and law of the case and is fit to be modified.

7. For that the whole order is bad in fact and law of the case and is fit to be modified.

8. For that the other grounds, if any, shall be urged at the time of hearing of the appeal.”

The revenue on the other hand has assailed the order of the Commissioner (Appeals) on the ground that the latter had erred in deleting the disallowance of sales promotion expenses of Rs. 9,04,32,632 by restricting the same only in respect of the expenditure incurred by the assessee on sales promotion articles costing more than Rs. 750 per article, by raising before us the following grounds appeal :–

“On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below :–

1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the disallowance of sales promotion expenses of Rs. 9,04,32,632 without consideringCircular Nos. 5/2012 (F. No 225/142/2012-ITA.II) dt. 1-8-2012.

2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the disallowance of Rs. 9,04,32,632 without appreciating the fact that the expenditure was incurred for providing freebies to medical practitioners and their professional associates in violation of regulation issued by Medical Council of India.”

17. Briefly stated, the assessee-company which is engaged in the business of manufacturing and distribution of pharmaceuticals and allied pharma products had e-filed its return of income for assessment year 2011-12, disclosing total income of Rs. 337,76,68,812. The case of the assessee was thereafter taken up for scrutiny assessment under section 143(2) of the Act. On the basis of a solitary disallowance of Rs. 9,70,82,317 on account of sales promotion expenses the income of the assessee-company was assessed under section 143(3) read with section 154. The assessing officer while framing the assessment had disallowed the entire amount of sales promotion expenses of Rs. 9,70,82,317 for the reasons viz. (i) the Medical Council of India (MCI) had imposed prohibition on medical practitioners from accepting gifts, travel facilities, hospitalities, cash or monetary grants (known as “freebies”) from pharmaceutical and allied health care sector industry; and (ii) the CBDT Circular Nos. 5/2012 issued vide F.Nos. 225/142/2012-ITA.II, dt. 1-8-2012 had clarified that such “freebies” shall be inadmissible under section 37(1) of the Act being an expense prohibited by the law.

18. Aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) after deliberating on the contentions advanced by the assessee before him, observed viz. (a) undisputedly, the assessee had incurred sales promotion expenses of Rs. 9,70,82,317 and the genuineness of the same had not been disputed by the assessing officer; (b) all sales promotion articles were bearing the name and logo of the assessee-company; (c) in the earlier assessment years the assessing officer had consistently allowed such sales promotion expenditure in the hands of the assessee-company; (d) that for the first time in assessment year 2010-11 the assessing officer had disallowed part of such sales promotion expenditure, but on appeal the Commissioner (Appeals) had vacated the entire disallowance; (e) that a perusal of the last three years sales, sales promotion expenditure and percentage of such expenditure to sales revealed that assessee had incurred much less sales promotion expenditure during the year under consideration viz. assessment year 2011-12 as in comparison to the preceding years i.e., assessment years 2009-10 and 2010-11; and (f) even the sales promotion expenditure to sales ratio had declined to merely 0.91% in assessment year 2011-12 as in comparison to the earlier years i.e., assessment year 2010-11 (1.09%) and assessment year 2009-10 (1.29%). It was further observed by the Commissioner (Appeals) that in the trade line of the assessee, it was a normal business practice to distribute sales promotion articles to stockists, distributors, dealers, customers and doctors in order to promote volume of sales. The Commissioner (Appeals) taking support of certain judicial pronouncements observed that as incurring of said expenditure was neither in the nature of a capital expenditure nor personal expenditure, therefore, the same was held by the courts as an expenditure allowable under section 37(1) of the Act. On the basis of his aforesaid deliberations the Commissioner (Appeals) was of the view that distribution of sale promotion articles to stockists, distributors, dealers, customers clearly fell within the sweep of expenditure which was incurred by the assessee for its business interest. The Commissioner (Appeals) was further of the view that as the dealers selling the products of the assessee-company were certainly its lifeline, thus reasonable amounts spent on distribution of sales promotion articles backed with the intent to promote the goodwill and enhancing the business interest of the assessee could in no way be termed as an illegal expenditure. It was further observed by the Commissioner (Appeals) that the total sales promotion expenditure of Rs. 9,70,82,317 comprised of viz. (i) expenditure incurred on sales promotion articles costing more than Rs. 750 per article : Rs. 71,65,680 ; and (ii) expenditure incurred on sales promotion articles costing less than Rs. 750 per article : Rs. 8,99,16,637. In the backdrop of the aforesaid facts the Commissioner (Appeals) concluded that the expenditure incurred by the assessee on purchase of sales promotion articles costing upto Rs. 750 per article were to be considered to have been incurred wholly and exclusively by the assessee for its business purposes. In respect of the expenditure incurred by the assessee on sales promotion articles costing more than Rs. 750 per article, the Commissioner (Appeals) was of the view that the same were distributed predominantly to doctors and medical professionals in addition to stockists, chemists, distributors and customers. The Commissioner (Appeals) was further of the view that the sales promotion articles costing less than Rs. 750 per article were primarily distributed by the assessee to stockists, chemists, distributors and customers. It was further observed by the Commissioner (Appeals) that out of the sales promotion articles exceeding a cost of Rs. 750 per article, the same, inter alia, included an item namely glucometers purchased along with glucostrips by the assessee during the year for Rs. 5,15,995. The said glucometers alongwith the glucostrips were given by the assessee to its field staff, with a direction to hold diabetes detection camps in respective head quarters every month for promoting the anti-diabetic medicine sold by the assessee-company. It was further noticed by the Commissioner (Appeals) that BP instruments, clocks and watches, tracksuits etc. were given by the assessee to the doctors, while for some of the BP instruments were kept at the companies branches for using them in health camps. The Commissioner (Appeals) deliberating on the nature of the sales promotion articles, observed that the same comprised of tracksuits, watches/clocks, electrical kettles, stainless steel utensil sets etc. which were distributed by the assessee through its field staff to the stockists, distributors and doctors. However, the assessee despite specific directions by the Commissioner (Appeals) to place on record material evidences and documents in respect of sales promotion articles worth more than Rs. 750 per article, failed to furnish the same. In the backdrop of the aforesaid facts the Commissioner (Appeals) concluded that as the expenditure of Rs. 8,99,16,637 incurred by the assessee on sales promotion articles costing less than Rs. 750 per article could safely be related to the articles which were distributed by the assessee to its distributors, stockists, dealers and customers with the purpose of promoting its goodwill and enhancing the business interest, thus the same being an expenditure incurred by the assessee wholly and exclusively for the purpose of its business was allowable as an expenditure in its hands. On the basis of his aforesaid observations the Commissioner (Appeals) deleted the disallowance of the sales promotion expenses of Rs. 8,99,16,637. Still further, the Commissioner (Appeals) was of the view that the sales promotion articles comprising of costly articles worth more than Rs. 750 per article were primarily distributed by the assessee as “freebies” to the doctors and medical professionals. The Commissioner (Appeals) observed that out of the sales promotion articles of a cost of more than Rs. 750 per article aggregating to an amount of Rs. 71,65,680, an amount of Rs. 5,15,995 pertained to the purchase of glucometers along with glucostrips which were used by the field staff for holding diabetes detection camps. As regards the balance expenditure of Rs. 66,49,685 (Rs. 71,65,680 (-) Rs. 5,15,995) the Commissioner (Appeals) was of the view that the same being costly articles would have been distributed as “freebies” by the assessee to the doctors and medical professionals. The Commissioner (Appeals) observed that such distribution of “freebies” to the doctors and professionals by the assessee-company was in violation of the CBDT Circular Nos. 5/2012 issued vide F.Nos. 225/142/2012-ITA.II, dt. 1-8-2012 and also against the regulation issued by the Medical Council of India, which was a regulatory body constituted under the Medical Council Act, 1956. In the backdrop of his aforesaid observations the Commissioner (Appeals) concluded that as the aforesaid amount of Rs. 66,49,685 was incurred by the assessee for a purpose which was prohibited by the law, thus the same was not allowable as per the Explanation to section 37(1) of the Act. On the basis of his aforesaid deliberations the Commissioner (Appeals) upheld the disallowance of the sales promotion expenses to the extent of Rs. 66,49,685.

19. The assessee being aggrieved with the order of the Commissioner (Appeals) to the extent he had sustained the disallowance of sales promotion expenses of Rs. 66,49,685, has carried the matter in appeal before us. The revenue on the other hand has assailed before us the deletion of the disallowance of the sales promotion expenses of Rs. 9,04,32,632 by the Commissioner (Appeals). The learned Authorised Representative taking us through the observations of the lower authorities submitted that the Commissioner (Appeals) had disallowed the expenditure incurred by the assessee on sales promotion articles of a cost exceeding Rs. 750 per article, for the reason that the same having been distributed as “freebies” to doctors and medical professionals was in violation of the CBDT Circular Nos. 5/2012, dt. 1-8-2012 and also against the regulation issued by the MCI, a regulatory body constituted under the Medical Council Act, 1956. The learned Authorised Representative taking us through the observations of the Commissioner (Appeals) submitted that he had observed that the genuineness of the expenditure incurred by the assessee on sales promotion expenses of Rs. 9,70,82,317 was not disputed by the revenue. The learned Authorised Representative in support of his contention that the allowability of the sales promotion expenses incurred by the assessee by distribution of articles to the stockists, distributors, dealers, customers and doctors was not covered by the CBDT Circular Nos. 5/2012, dt. 1-8-2012 or by the MCI regulations, relied on the orders passed by the coordinate benches of the Tribunal viz. (i) Simcon Formulations (I) Ltd. v. DCIT-8(3), Mumbai (ITA Nos. 6429/Mum/2012, dt. 23-12-2015); and (ii) DCommissioner-8(2), Mumbai v. PHL Pharma (P) Ltd. (ITA Nos. 4605/Mum/2014, dt. 12-1-2017). The learned Authorised Representative taking support of the aforesaid judicial pronouncements submitted that even if the sales promotion articles distributed by the assessee were to be held as “freebies”, the same still would not be hit by the CBDT Circular Nos. 5/2012, dt. 1-8-2012, as the same was not available during the year under consideration, viz. assessment year 2011-12. It was averred by the learned Authorised Representative that the aforesaid CBDT Circular Nos. 5/2012, dt. 1-8-2012 would only be applicable prospectively. It was further submitted by the learned Authorised Representative that the MCI regulations though were binding on the doctors or the medical professionals registered with the Medical Council of India, however the same would not be applicable to the assessee which was a pharmaceutical company. The learned Authorised Representative in order to drive home his contention that even distribution of “freebies” by a pharmaceutical company being an expenditure incurred wholly and exclusively for the purpose of its business, thus could not be disallowed, relied on the orders of the coordinate benches of the Tribunal viz. (i) M/s. Solvay Pharma India Ltd. v. Pr.CIT, Mumbai (ITA Nos. 3585/Mum/2016, dt. 11-1-2018); and (ii) Emcure Pharmaceuticals Ltd., Pune v. DCIT, Central Circle-2(1), Pune (ITA Nos. 1532/Pun/2015, dt. 29-1-2018). Per contra, the learned Departmental Representative relied on the order passed by the assessing officer It was submitted by the learned Departmental Representative that as the expenditure incurred by the assessee on distribution of articles was clearly in violation of the CBDT Circular Nos. 5/2012, dt. 1-8-2012 as well as against the MCI guidelines, thus the same being in the nature of an expenditure for a purpose which was prohibited under law, had rightly been disallowed in totality by the assessing officer. It was further averred by the learned Departmental Representative that the Commissioner (Appeals) had without any basis adopted a cut off amount of Rs. 750 while partly sustaining the disallowance of the sales promotion expenses. The learned Departmental Representative rebutting the contention of the assessee that no such disallowance was made in the preceding years, submitted that as each and every year is an independent year, thus the same cannot form a basis for determining the allowability of the sales promotion expenses during the year under consideration. The learned Departmental Representative in order to buttress his contention that the sales promotion expenses incurred by the assessee were not allowable as an expenditure, relied on the judgment of the Hon|ble High Court of Punjab & Haryana in the case of CIT v. Kap Scan and Diagnostic Centre (P) Ltd. (2012) 344 ITR 476 (P&H). The learned Authorised Representative further in support of his contention that the aforesaid expenses incurred by the assessee by way of distribution of “freebies” were not allowable in the backdrop of the CBDT Circular Nos. 5/2012, dt. 1-8-2012 and the MCI guidelines, relied on certain judicial pronouncements viz. (i) DCommissioner, Circle-13(1), New Delhi v. Ochoa Laboratories Ltd., Noida (ITA Nos. 4114/Del/2009, dt. 25-8-2017); (ii) ACommissioner, Circle-6(3), Mumbai v. Liva Healthcare Ltd., Mumbai (ITA Nos. 904/Mum/2013, dt. 12-9-2016); and (iii) Confederation of Indian Pharmaceutical Industry (SSI) v. The Central Board of Direct Taxes (CWP Nos. 10793 of 2012, dt. 26-12-2012)(HP). The learned Departmental Representative in the backdrop of his aforesaid contentions submitted that as the Commissioner (Appeals) had without any basis restricted the disallowance of the sales promotion expenses only in respect of the articles of a cost of more than Rs. 750, thus his order may be set aside and that of the assessing officer be restored. The learned Authorised Representative in his rejoinder submitted that the judgment of the Hon|ble High Court of Himachal Pradesh in the case of Confederation of Indian Pharmaceutical Industry (SSI) v. The Central Board of Direct Taxes (CWP Nos. 10793 of 2012, dt. 26-12-2012)(HP) was considered by the ITAT, Mumbai Bench “C”, Mumbai in the case of DCommissioner-8(2), Mumbai v. PHL Pharma (P) Ltd. (2017) 49 CCH 124 (Mum). It was further submitted by the learned Authorised Representative that the Tribunal after considering the aforesaid judgment had observed that as held by the High Court, if the assessee was able to establish that the MCI regulation was not applicable to the assessee, then the same could not be blindly applied in its case. The learned Authorised Representative further referring to the reliance placed by the revenue on the judgment of the Hon|ble High Court of Punjab & Haryana in the case of CIT v. Kap Scan and Diagnostic Centre (P) Ltd. (2012) 344 ITR 476 (P&H), submitted that the said case was rendered in context of allowability of commission which was paid to the private doctors for referring the patients for diagnosis/scanning to the assessee-company which was running a scanning and a diagnostic centre. The learned Authorised Representative submitted that the said judgment was also considered by the Tribunal while passing the order in the case of M/s. PHL Pharma (P) Ltd. (supra). The learned Authorised Representative further averred that the order passed by the coordinate bench of the Tribunal in the case of ACIT, Circle-6(3), Mumbai v. Liva Healthcare Ltd., Mumbai (ITA Nos. 904/Mum/2013, dt. 12-9-2016) was also considered by the Tribunal while adjudicating the case of M/s. PHL Pharma (P) Ltd. (supra). It was submitted by the learned Authorised Representative that unlike the case of the present assessee, in the aforementioned case the expenses were incurred by the assessee for creating good relations with the doctors in lieu of expected favours from them for recommending to the patients the pharmaceuticals products dealt with by the company. As regards the reliance placed by the learned Departmental Representative on the order passed by the ITAT, Delhi in the case of M/s. Ochoa Laboratories Ltd.(supra), it was the contention of the learned Authorised Representative that as the same pertained to the allowability of conference expenses which were incurred by the assessee, thus the same being distinguishable on facts would not assist the case of the revenue.

20. We have heard the Authorised Representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the cross appeals filed by the assessee and the revenue has been sought for adjudicating the allowability of the sales promotion expenses incurred by the assessee on the distribution of articles to the stockists, distributors, dealers, customers and doctors, in the backdrop of the CBDT Circular Nos. 5/2012, dt. 1-8-2012 and the MCI regulations. We find that it is the case of the revenue that as per the CBDT Circular Nos. 5/2012, dt. 1-8-2012 any expense incurred by a pharmaceutical or allied health sector industry in providing any “freebies” to medical practitioners or their professional associations in violation of the regulation issued by Medical Council of India which is a regulatory body constituted under the Medical Council Act, 1956, would be liable to be disallowed in the hands of such pharmaceutical or allied health sector industry or any other assessee which had provided such “freebies” and claimed the same as a deductible expense against its income in the accounts.

21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of India, find that the same lays down the code of conduct in respect of the doctors and other medical professionals registered with it, and are not applicable to the pharmaceuticals or allied health sector industries. Rather, a perusal of the provisions of the Indian Medical Council Act, 1956, reveals that the scope and ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to the persons registered as medical practitioners with the State Medical Council and whose name are entered in the Indian Medical Register maintained under section 21 of the said Act. We are of the considered view that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/society and deals only with the conduct of individual registered medical practitioners. In the backdrop of the aforesaid facts, it emerges that the applicability of the MCI regulations would only cover individual medical practitioners and not the pharmaceutical companies or allied health sector industries. Interestingly, the scope of the applicability of the MCI regulations was looked into by the Hon|ble High Court of Delhi in the case of Max Hospital, Pitampura v. Medical Council of India (CWP Nos. 1334/2013, dt. 10-1-2014). In the aforementioned case the MCI had filed an “Affidavit” before the High Court, wherein it was deposed by the council that its jurisdiction is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and it has no jurisdiction to pass any order affecting the rights/interest of the petitioner hospital. We are of the considered view that on the basis of the aforesaid deposition of MCI that its jurisdiction stands restricted to the registered medical professionals, it can safely be concluded that the MCI regulations would in no way impinge on the functioning of the assessee-company which is engaged in the business of manufacturing and sale of pharmaceutical and allied products. We thus, in the backdrop of our aforesaid deliberations are of the considered view that the code of conduct enshrined in the MCI regulations are solely meant to be followed and adhered by medical practitioners/doctors, and such a regulation or code of conduct would not cover the pharmaceutical company or healthcare sector in any manner. We are further of the view that in the backdrop of our aforesaid observations, as the Medical Council of India does not have any jurisdiction under law to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our aforesaid observations, we are unable to comprehend that now when the MCI has no jurisdiction upon the pharmaceutical companies, then where could there be an occasion for concluding that the assessee-company had violated any regulation issued by MCI. We thus, in terms of our aforesaid observations are of the considered view that even if the assessee had incurred expenditure on distribution of “freebies” to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 (as amended on 10-12-2009), however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, the latter cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. In this regard we are reminded of the maxim “Expressio Unius Est Exclusio Alterius”, which provides that if a particular expression in the statute is expressly stated for a particular class of assessee, then by implication what has not been stated or expressed in the statute has to be excluded for other class of assesses. Thus, now when the MCI regulations are applicable to medical practitioners registered with the MCI, then the same cannot be made applicable to pharmaceutical companies or other allied healthcare companies.

22. We shall now advert to the CBDT Circular Nos. 5/2012, dt. 1-8-2012. We find that the aforesaid CBDT Circular reads as under :-

“Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry

Circular Nos. 5/2012 (F.Nos. 225/142/2012-ITA.II), dt. 1-8-2012

It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebess (freebies) to medical practitioner and their professional associations in violation of the regulations issued by Medical Council of India (the “Council”) which is a regulatory body constituted under the Medical Council Act, 1956

2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expenses, if the same has been incurred for a purpose which is either an offence or prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The assessing officers of such medical practitioner or professional associations should examine the same and take an appropriate action.

This may be brought to the notice of all the officers of the charge for necessary action.”

We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the “freebies” provided by the pharmaceutical companies or allied health sector industries to medical practitioners or their professional associations in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act, 1961, as the same would be an expense prohibited by the law. We are of the considered view that as observed by us hereinabove, the code of conduct enshrined in the notifications issued by MCI though is to be strictly followed and adhered by medical practitioners/doctors registered with the MCI, however the same cannot impinge on the conduct of the pharmaceutical companies or other healthcare sector in any manner. We find that nothing has brought on record which could persuade us to conclude that the regulations or notifications issued by MCI would as per the law also be binding on the pharmaceutical companies or other allied healthcare sector. Rather, the concession made by the MCI before the Hon|ble High Court of Delhi in the case of Max Hospital v. MCI (CWP Nos. 1334/2013, dt. 10-1-2014)fortifies our aforesaid view that MCI has no jurisdiction to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector. We further find that MCI had by adding Para 6.8.1 to its earlier notification issued as “Indian Medical Council Professional (Conduct, Etiquette and Ethics) Regulations, 2002” had even provided for action which shall be taken against medical practitioners in case they contravene the prohibitions placed on them. We find from a perusal of Para 6.8.1 that in case of receiving of any gift from any pharmaceutical or allied health care industry and their sales people or representatives, action stands restricted to the members who are registered with the MCI. In other words the censure/action as had been suggested on the violation of the code of conduct is only for the medical practitioners and not for the pharmaceutical companies or allied health sector industries. We are thus of the considered view that the regulations issued by MCI are qua the doctors/medical practitioners registered with MCI, and the same shall in no way impinge upon the conduct of the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of Explanation to section 37(1), then the same would debar the doctors or the registered medical practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure.

23. We find that the CBDT as per its Circular Nos. 5/2012, dt. 1-8-2012 had enlarged the scope and applicability of Indian Medical Council Regulation, 2002, by making the same applicable even to the pharmaceutical companies or allied healthcare sector industries. We are of the considered view that such an enlargement of the scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. We are of a strong conviction that the CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. Still further, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its power to create a new impairment adverse to an assessee or to a class of assessee without any sanction or authority of law. We are of the considered view that the circulars which are issued by the CBDT must confirm to the tax laws and though are meant for the purpose of giving administrative relief or for clarifying the provisions of law, but the same cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a regulation issued under a different act so as to impose any kind of hardship or liability on the assessee. We thus, are unable to persuade ourselves to subscribe to the rigors contemplated in the CBDT Circular Nos. 5/2012, dt. 1-8-2012, which we would not hesitate to observe, despite absence of anything provided by the MCI in its regulations issued under the Medical Council Act, 1956, contemplating that the regulation of code of conduct would also cover the pharmaceutical companies and healthcare sector, however provides that in case a pharmaceutical or allied health sector industry incurs any expenditure in providing any gift, travel facility, cash, monetary grant or similar freebies to medical practitioners or their professional associations in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the expenditure incurred on the same shall be disallowed in the hands of such pharmaceutical or allied health sector industry. We are of the considered view that the burden imposed by the CBDT vide its aforesaid Circular Nos. 5/2012, dt. 1-8-2012 on the pharmaceutical or allied health sector industries, despite absence of any enabling provision under the Income Tax law or under the Indian Medical Council Regulations, clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee-company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to section 37(1) of the Act.

24. Alternatively, we are of the considered view that it is a trite law that a CBDT Circular which creates a burden or liability or imposes a new kind of imparity, cannot be reckoned retrospectively. We are of the considered view that though a benevolent circular may apply retrospectively, but a circular imposing a burden has to be apply prospectively only. Our aforesaid view is fortified by the judgment of the Hon|ble Supreme Court in the case of Director of Income Tax v. S.R.M.B Dairy Farming (P) Ltd. (2018) 400 ITR 9 (SC). The Hon|ble Apex Court in its aforesaid judgment has held that beneficial circulars had to be applied retrospectively, while oppressive circulars had to be applied prospectively, observing as under :–

“25. It is in this context, the question arises, when the instruction expressly states that the benefit of the said policy is prospective, still can the courts place a construction on such instruction so as to make it retrospective. In this context, the Apex Court in the case of CCE v. Mysore Electricals Industries Ltd. (2006) 204 ELT 517 (SC) : (2007) 8 RC 1, dealing with the question how a beneficial circular is to be construed, has approached this question in the following manner. At paragraph 13 of the judgment, it is stated that the learned counsel further submitted that the circular being oppressive and against the respondent, has to apply only prospectively and cannot be applied retrospectively. In other words, a beneficial circular has to be applied prospectively. Thus, when the circular is against the assessee they have a right to claim the enforcement of the same prospectively. It is further submitted that for the period in question, trade notices had been issued classifying the circuit breakers under heading Nos. 85.35 or 85.36. When the approved classification was proposed to be revised to reclassify the single panel circuit breakers under heading Nos. 85.37 of the tariff, such re-classification can take effect only prospectively from the date of communication of the show-cause notice proposing reclassification.”

We find that the aforesaid CBDT Circular Nos. 5/2012, dt. 1-8-2012 had came up for consideration before a coordinate bench of the Tribunal in the case of DCIT v. PHL Pharma (P) Ltd. (2017) 49 CCH 124 (Mum),wherein the Tribunal after deliberating at length on two aspects viz. (i) validity of the circular in the backdrop of enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT, without any enabling provisions either under the Income Tax Law or under the Indian Medical Council Regulations; and (ii), the prospective applicability of the circular, had observed as under :–

“5. We have considered the rival contentions made by learned Commissioner Departmental Representative as well as learned 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 dt. 1-8-2012,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 assessing officer, are as under :–

Sr.No

Particulars of expenses

Amount (in Rs.)

1.

Customer Relationship Management expenses (CRM)

7,61,96,260

2.

Key Account Management expenses(KAM)

2,56,68,509

3.

Gift Articles

9,20,22,518

4.

Cost of samples

3,60,85,320

TOTAL

22,99,72,607

The nature of aforesaid expenses has already been explained above. Now whether the nature of such expenditure incurred by the assessee is to be disallowed in view of the CBDT Circular dt. 1-8-2012. For the sake of ready reference, the said CBDT Circular Nos. 5/2012 is reproduced hereunder :–

“INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL & ALLIED HEALTH SECTOR INDUSTRY

Circular Nos. 5/2012 (F. Nos. 225/142/2012-ITA.II), dt. 1-8-2012

It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the |Council|) which is a regulatory body constituted under the Medical Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended 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.

Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The assessing officers of such medical practitioner or professional associations should examine the same and take an appropriate action.

This may be brought to the notice of all the officers of the charge for necessary action.”

From the perusal of the aforesaid Board Circular, it can be seen that heavy reliance has been placed by the CBDT on the Circulars issued by the Medical Council of India, which is the regulatory body constituted under the “Medical Council Act, 1956”. One such regulation has been issued is “Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulations, 2002”. The said regulation deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clause 6.1 to 6.7 of the said regulation which shall be construed as unethical. Clause 6.8 has been added (by way of amendment dated 10-12-2009) in terms of notification published on 14-12-2009 in Gazette of India. The said clause reads as under :–

“6.8 Code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry.

6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below :–

(a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives.

(b) Travel facilities: A medical practitioner shall not accept a any travel facility inside the country or outside, including rail, air, ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc as a delegate.

(c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext.

(d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law/rules/guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed.

(e) Medical Research: A medical practitioner may carry out, participate in work, in research projects funded by pharmaceutical and allied healthcare industries. A medical practitioner is obliged to know that the fulfilment of the following items:-

(i) to (vii) will be an imperative for undertaking any research assignment/project funded by industry for being proper and ethical. Thus, in accepting such a position a medical practitioner shall:–

(i) Ensure that the particular research proposal(s) has the due permission from the competent concerned authorities.

(ii) Ensure that such a research project(s) has the clearance of national/state/institutional ethics committees/bodies.

(iii) Ensure that it fulfils all the legal requirements prescribed for medical research.

(iv) Ensure that the source and amount of funding is publicly disclosed at the beginning itself.

(v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research project(s).

(vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and a humane way.

(vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the society by inserting such a clause in the MoU or any other document/agreement for any such assignment.

(f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never be any compromise either with his/her own professional autonomy and/or with the autonomy and freedom of the medical institution.

(g) Affiliation : A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always :–

(i) Ensure that his professional integrity and freedom are maintained.

(ii) Ensure that patients” interests are not compromised in any way.

(iii) Ensure that such affiliations are within the law.

(iv) Ensure that such affiliations/employments are fully transparent and disclosed.

(h) Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and/or through appropriate scientific bodies or published in appropriate scientific journals in a proper way”.

6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before us the learned senior counsel, Shri Mistry brought to our notice the judgment of Hon|ble Delhi High Court in the case of Max Hospital v. MCI in WPC 1334/2013 judgment dt. 10-1-2014, wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. Relevant portion of the said judgment reads as under :–

“6. The Petitioner|s grievance is twofold. Firstly, that since the Medical Council of India (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) have been framed in exercise of the power conferred under section 20-A read with section 33 (m) of the Indian Medical Council Act, 1956, these regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and secondly, that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt. The case of the Petitioner is that the Petitioner hospital is governed by the Delhi Nursing Homes Registration Act, 1953. It is urged that in fact, an inspection was also carried out on 22-7-2011 by Dr. R.N. Dass, Medical Superintendent (Nursing Home) under the Directorate of Health Services, Govt. of NCT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27-10-2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated.

7. In the counter affidavit filed

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