If no interest was charged from debtors, whether Interest paid o creditors could be disallowed?

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If no interest was charged from debtors, whether Interest paid o creditors could be disallowed?

IT: Where assessee-company, trading in medicines manufactured by a supplier, was paying huge interest on outstanding credit balance to supplier for delay in discharge of its outstanding liability, merely because no interest was being charged by assessee from its debtors, same could not be justifiable reason for resorting to disallowance of interest payment under section 40A(2)(a)

IT: Where assessee gave discounts to customers/ultimate consumers who purchased medicines sold by assessee through its C & F agents, since discounts given to customers/ultimate consumers had direct bearing on potential turnover of company, such expense would fall within expression ‘wholly and exclusively’ for purpose of business referred to in section 37(1)

IT: Where donation was made by assessee company from its bank account and receipt of donation was also in name of assessee, deduction under section 80G was to be allowed

IT: Where interest free funds available with assessee by way of capital and reserves were far more than investment made in shares yielding exempt divided income, a presumption would naturally arise in favour of assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to borrowed funds

IT: Disallowance of expenditure in terms of section 14A read with rule 8D cannot exceed exempt income itself

IT: Provision for wealth-tax could not be included for purposes of computation of book profit under section 115JA

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[2019] 105 taxmann.com 209 (Ahmedabad – Trib.)

IN THE ITAT AHMEDABAD BENCH ‘D’

Aditya Medisales Ltd.

v.

Deputy Commissioner of Income-tax, Circle- 1 (1), Baroda*

PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER
AND MAHAVIR PRASAD, JUDICIAL MEMBER

IT APPEAL NOS. 3049 (AHD.) OF 2014, 2511 TO 2513, 2548 TO 2550 AND 3415 AND 3354 (AHD.) OF 2015
[ASSESSMENT YEARS 2008-09 TO 2011-12]

MARCH  29, 2019

  1. Section 40A(2) of the Income-tax Act, 1961 – Business disallowance – Excessive or unreasonable payment (Interest) – Assessment year 2009-10 – Assessee was engaged in business of trading of medicines manufactured by SPIL – It paid interest to supplier SPIL on its outstanding credit for delay in discharge of outstanding liability – Assessing Officer noticed that assessee had not charged any interest from its debtors for sales carried out by it – He held that payment of interest on outstanding credit to SPIL was nothing but an arrangement with SPIL who also were alleged to be controllers of assessee-company – He, accordingly, disallowed aforesaid interest paid by assessee to SPIL by invoking provisions of section 40A(2A) – Whether merely because assessee paid huge interest on outstanding credit balance to SPIL while no interest was being charged by assessee from its debtors, same could not be justifiable reason for resorting to disallowance of interest – Held, yes [Para 10.6] [In favour of assessee]
  2. Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of (Discount) – Assessment year 2009-10 – Assessee was engaged in business of trading of medicines manufactured by one SPIL – Assessee had appointed various C & F agents who further supplied medicines – Assessee gave discount on sale of medicines to retailers/pharmacists, doctors, medicine stockiest and other customers – Assessing Officer observed that assessee had not given discount to its C & F agents who were directly purchasing medicines from assessee and discount was actually given to ultimate purchaser who purchased medicines from C & F agent and, therefore, expenses incurred towards discount payment by assessee had no nexus with sales made by it to C & F agents – He, accordingly, held that such indirect discounts to customers of C & F agents were not allowable expenditure – Whether discounts given to customers/ultimate consumer had direct bearing on potential turnover of company; therefore, such discount expenses would fall within expression ‘wholly and exclusively’ for purpose of business referred to in section 37(1) and was to be allowed – Held, yes [Para 11.10] [In favour of assessee]

III. Section 80G of the Income-tax Act, 1961 – Deductions – Donation to certain funds, charitable institutions, etc. (Illustrations) – Assessment year 2009-10 – Assessee-company paid Rs. 11 lakhs as donation to Vision foundation of India and claimed deduction under section 80G – Assessing Officer disallowed same – Commissioner (Appeals) found that it was undisputed fact that donation was made by assessee-company from its bank account and receipt of donation was also in name of assessee-company – Whether Commissioner (Appeals) was justified in allowing deduction under section 80G to assessee – Held, yes [Para 12.2] [In favour of assessee]

  1. Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-Tax Rules, 1962 – Expenditure incurred in relation to exempt income not includible in total income (Interest) – Assessment year 2010-11 – Whether where investment in shares giving rise to exempt dividend income was far lower than corresponding interest free funds available with assessee by way of capital and reserves, a presumption would naturally arise in favour of assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to borrowed funds – Held, yes – Whether disallowance under section 14A read with rule 8D was to be computed having regard to investments which had actually yielded exempt income instead of gross investments – Held, yes [Paras 18.3 and 18.4] [Partly in favour of assessee/Matter remanded]
  2. Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-Tax Rules, 1962 – Expenditure incurred in relation to exempt income not includible in total income (Scope of provision) – Assessment year 2008-09 – Whether disallowance of expenditure in terms of section 14A read with rule 8D cannot exceed exempt income itself – Held, yes [Para 3.2] [In favour of assessee]
  3. Section 115JA of the Income-tax Act, 1961 – Minimum alternate tax – Deemed income (Provision for Wealth tax) – Assessment year 2008-09 – Whether provision for Wealth-tax could not be included for purpose of computation of book profit under-section 115JA – Held, yes [Para 7.1] [In favour of assessee]

FACTS-I

The assessee was engaged in the business of trading of the medicines manufactured by SPIL. The assessee had paid/credited interest to the account of SPIL on its outstanding credit for delay in discharge of outstanding liability. The assessee, on the other hand, had not charged any interest from its debtors for sales carried out by it nor did SPIL paid any interest to its creditor for outstanding liabilities. The Assessing Officer held that payment of interest on outstanding credit to SPIL was nothing but an arrangement with SPIL who were also alleged to be controllers of the assessee-company. The Assessing officer accordingly disallowed the aforesaid interest paid by the assessee to SPIL being the difference between interest earned by the assessee-company from various resources and paid to SPIL.
On appeal, the Commissioner (Appeals) reversed the action of the Assessing Officer and found merit in the plea of the assessee that the interest expenses were incurred for business purposes. He accordingly deleted the addition towards disallowance of interest.
On appeal:

HELD

The issue is no longer res integraand adjudicated in favour of the assessee in its own case in DCITv. Aditya Medisale Ltd.assessment years 2005-06 and 2006-07 in [IT Appeal No. 1665 & 1666(Ahd.) of 2009, dated 22 -3-2013]. [Para 10.6]
In parity with the decision of the co-ordinate Bench, one is in agreement with the plea of the assessee that merely because the assessee-company, trading in medicines manufactured by a supplier, is paying huge interest on outstanding credit balance to SPIL while no interest is being charged by the assessee from its debtors cannot be the justifiable reason for resorting to the disallowance of interest. As pointed out on behalf of the assessee, the Gujarat High Court has also approved the order of the Tribunal concerning assessment years 1997-98 in CITv. Aditya Medisales Ltd. [Tax Appeal No. 559 of 2009, dated 4-5-2010] towards deletion of disallowance made on account of excess interest payment under section 40A(2)(a). Thus, the issue stands concluded in favour of the assessee by the jurisdictional High Court. The issue having been already examined in the earlier years, there is no any reason to look afresh. [Para 10.6.1]

FACTS-II

The assessee was engaged in business of distribution of pharmaceuticals products manufactured by SPIL through C & F agents, for distribution of products. During year, the assessee made sales of Rs. 1630.85 crores. On the said sales, the assessee claimed to have given discounts to various persons aggregating to Rs. 7.35 crores.
The Assessing Officer observed that the assessee had not given discount to its C & F agents who were directly purchasing medicines from the assessee-company. The discount was given to the ultimate purchaser from C & F agent. It was thus observed that the ultimate purchasers viz., dealers, doctors, other customers and medicine stockiest etc. were not purchasing medicines from the assessee company per se but from C & F agents . He observed that in business practices, the discount was given by the seller to its purchaser, whereas, in the instant case, the discount was given by the assessee to various parties who had no direct transaction with the company. It was also alleged that the payment was in the nature of illicit gratitude to doctors for promotion of SPIL Group product. It was held that such discount expenses incurred was not a business expense wholly and exclusively attributable to the assessee company. Consequently, the expenses towards discount to the tune of Rs. 7.34 crores was disallowed.
On appeal, the Commissioner (Appeals) held that the claim of the assessee towards discount expenses to customers of the C & F agents were in order except payments to doctors. He, accordingly, reversed the action of the Assessing Officer and directed him to allow the discount expenses incurred. He, thus, allowed the payment on account of discount made to the stockiest, distributor, dealers and retailers. But, however, disallowance of discount payment made to doctors amounting to Rs. 8.96 lakhs was retained holding the same to be in the nature of illicit gratitude to the doctors for promotion of SPIL Group products.
On revenue’s appeal:

HELD-II

The maintainability of discount on sales is in question. It is the case of the revenue that the assessee is supplying medicines to its C & F agents for its ultimate sale in the market for consumption. The discounts were given by the assessee-company to the distributors, retailers, dealers, doctors associated to C & F agent and who were not directly dealing with assessee and therefore expenses incurred towards discount payment by the assessee has no nexus with the sales made by it to the C & F agents. The Assessing Officer accordingly is of the view that such indirect discounts to the customers of its agents are not allowable expenditure. [Para 11.9]

There is no any iota of merit in such plea. The discounts given to the customers/ultimate consumer has direct bearing on the potential turnover of the company. It is well settled that the test of the commercial expediency cannot be reduced to the shape of a ritualistic formula nor can it be put in a water tight compartment. It is trite that the revenue authorities have to place themselves in the position of a business and find out whether expenses incurred can be said to have been laid out for the purposes of businessman. The commercial expediency and prudence are inseparable. If the expenditure is incurred to facilitate carrying on of business of the assessee and is supported by the commercial expediency, it does not matter that the payment is in voluntarily or not necessary or that it also ensures to the benefit of a third party. If the object is business promotion, the expenditure can be said to be wholly and exclusively for the purposes of the assessee’s business. The assessee in the instant case demonstrated on facts that payment of such discounts are integrally connected to the sales/turnover achieved or has potential to achieve. The discount expenses have thus been incurred with the object of furthering the trade or business interest of the assessee. Therefore, such expenses falls within the expression ‘wholly and exclusively’ referred to in section 37. Therefore, there is no hesitation to concur with the conclusion drawn by the Commissioner (Appeals) for allowability of discounts given to stockiests/distributors etc. However, the reasoning of the Commissioner (Appeals) for discarding the claim of discount expenditure paid to the doctors, could not be understood. When the test of commercial expediency is applied in its natural perspective, there is no reason to exclude doctors purchasing medicines from C & F agents for the purpose of eligibility of discount payments. Thus, the action of the Commissioner (Appeals) to this extent is set aside and the Assessing Officer is directed to allow the trade discount paid to all parties including doctors as ordinary business expenditure. [Para 11.10]

FACTS-III

 

The assessee-company had paid Rs. 11 lakhs to Vision foundation of India and claimed deduction under section 80G for such donation.
The Assessing Officer observed that the cheque was paid on behalf of one DS and only at instruction from him and also thanks were conveyed by the recipient to DS for his kind gesture. It was further noticed that the receipt and tax exemption certificate were sent to DS and not to the assessee. Thus the Assessing Officer held that the donation actually related to DS and, therefore, the assessee company was not eligible for deduction under section 80G.
On appeal, the Commissioner (Appeals) reversed the aforesaid action of the Assessing Officer on account of undisputed fact that donation was made by the assessee- company from its bank account and the receipt of donation was also in the name of the assessee-company.

On revenue’s appeal:

HELD-III

In the given facts, one completely endorsed the view taken by the Commissioner (Appeals) in this regard. The payment made on instruction of DS receipt of thanks by DS and recepit sent to DS are wholly irrelevant considerations as rightly observed by the Commissioner (Appeals). It is the assessee-company which is entitled to deduction under section 80G for which conditions laid down therein are not shown to be not fufilled. [Para 12.2]

FACTS-IV

The assessee had suo motudisallowed expenses to the extent of Rs. 50,000 as attributable to earning of exempt dividend income from investment made.
The Assessing Officer however re-computed the disallowance under section 14A in terms of statutory formula prescribed under rule 8D. He accordingly computed disallowance of Rs. 50,000 as offered by the assessee as ‘direct expenditure’ under rule 8D(2)(i). Similarly, proportionate interest expenditure of Rs.. 3.65 lakhs was disallowed under rule 8D(2)(ii) and Rs. 5.96 lakhs was disallowed towards administrative and general expenses under rule 8D(2)(iii).
On appeal, the Commissioner (Appeals) had deleted the disallowance of proportionate interest expenditure of Rs. 3.65 lakhs computed under rule 8D(2)(ii) but, however, disallowance of Rs. 50,000 under rule 8D(2)(i) and Rs. 6.46 lakhs under rule 8D(2)(iii) were retained.
In instant appeal, the revenue had challenged the action of the Commissioner (Appeals) for deleting of disallowance of interest under rule 8D(2)(ii) whereas the assessee had also challenged the retention of disallowance under rule 8D(i) and 8D(2)(iii).

HELD-IV

On appraisal of the documentary evidences and on perusal of the order of the Commissioner (Appeals), it is found that the Commissioner (Appeals) had rightly approached the issue and deleted the proportionate disallowance of interest expenditure under rule 8D(2)(ii) on the ground that investment in shares giving rise to exempt income is far lower than the corresponding interest free funds available with the assessee by way of capital reserves. Therefore, a presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds. Therefore, no infirmity is seen in the order of the Commissioner (Appeals). [Para 18.3]
Turning to the cross grievance of the assessee disallowance sustained under section 14A, it is observed that the assessee suo motu has disallowed Rs. 50,000 for earning of exempt income which is rightly reckoned to be direct expenditure under rule 8D(2)(i) in the absence of any supporting material to the contrary. The revenue authorities, have also rightly invoked formula under rule 8D(2)(iii) for disallowance of management and general expenses deemed to be attributable to tax free income. However, the disallowance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments. The issue is, therefore, remitted back to the file of the Assessing Officer for re-computation of disallowance under rule 8D(2)(iii). [Para 18.4]

CASE REVIEW

CIT v. Aditya Medisales Ltd. [Tax Appeal No. 559 of 2009, dated 4-5-2010] (para 10.6); Asstt. CIT v. Vireet Investments Ltd. [2017] 82 taxmann.com 415/165 ITD 27 (Delhi-Trib) (SB) (para 18.4); ASB International (P.) Ltd. v. Dy. CIT [2012] 26 taxmann.com 87/54 SOT 140 (URO) (Mum) (para 7.1) and CITv. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322/251 ITR 15 (Bom.)(para 7.1) followed.

CASES REFERRED TO

CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116/223 Taxman 130/[2015] 372 ITR 97 (Guj.) (para 3.2), DCIT v. TGB Banquets Hotels Ltd. in [Tax Appeal No. 470 of 2012, dated 21-06-2016 ] (para 3.2), Joint Investments (P.) Ltd.v. CIT [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694 (Delhi) (para 3.2), CIT v. Vision Finstock Ltd. [Tax Appeal No. 486 of 2017, dated 31-07-2017] (para 3..2), Asstt. CIT v. Vireet Investments Ltd. [2017] 82 taxmann.com 415/165 ITD 27 (Delhi-Trib) (SB)(para 4.1), Integrated Coal Mining Ltd. v. Dy. CIT [2016] 67 taxmann.com 260 (Kol-Trib) (para 5.2), CIT v. Gujarat State Road Transport Corpn. [2014] 41 taxmann.com 100/223 Taxman 398/366 ITR 170 (Guj) (para 6..1), ASB International (P.) Ltd. v. Dy. CIT [2012] 26 taxmann.com 87/54 SOT 140 (URO) (Mum) (para 7..1), CIT v. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322/251 ITR 15 (Bom.)(para 7.1), DCIT v. Aditya Medilsale Ltd.[IT Appeal Nos. 1665 & 1666(Ahd.) of 2009, dated 22-3-2013] (para 10.4), CIT v. Aditya Medisales Ltd. [Tax Appeal No. 559 of 2009 dated 4-05-2010] (para 10.6.1), Pr.CIT v. Sintex Industries Ltd. [2017] 82 taxmann.com 171 (Guj.) (para 32) and CIT v. HDFC Bank Ltd. [2014] 349 taxmann.com 335/226 Taxman 132 (Mag.)/366 ITR 505 (Bom.) (para 32).

S.N. Soparkar , A.R. and Anshu Prakash CIT DR for the Appellant. Vinod Tiwari, Sr. DR for the Respondent.

ORDER

Pradip Kumar Kedia, Accountant Member. – The captioned appeals at the instance of assessee & Revenue arise from the respective orders of the Commissioner of Income Tax (Appeals)-I, Baroda (‘CIT(A)’) against respective assessment orders for different assessment years as tabulated below:

ITA Nos. Name of assessee AY CIT(A)’s order dated AO’s order dated AO’s order under Section
3049/Ahd/14 Aditya Medisales Limited 2008-09 01.09.2014 30.04.2010 143(3) of the Income Tax Act, 1961
2511 & 2548/Ahd/15 -Do- 2009-10 11.06.2015 30.12.2011 -Do-
3415 & 3354/Ahd/15 -Do- 2009-10 30.09.2015 22.01.2015 143(3) r.w.s. 263 r.w.s. 153(3) of the Act
2512 & 2549/Ahd/15 -Do- 2010-11 12.06.2015 26.02.2013 143(3) of the Act
2513 & 2550/Ahd/15 -Do- 2011-12 -Do- 31.12.2013 -Do-
  1. At the time of hearing, it was informed by both the sides that cross appeals of the Revenue and the assessee captioned above involve common and repetitive issues in various assessment years. Accordingly, all the matters were heard together for consolidated disposal of appeals listed above.
  2. We shall now take up each appeal for adjudication as under;

3.1 Ground No.1 concerns disallowance of Rs.5,85,148/- under s.14A of the Act r.w. Rule 8D of the Income Tax Rules.

3.1.1 The learned AR for the assessee submitted at the outset that the exempt income stand at Rs.4000/- only and therefore, the disallowance under s.14A of the Act cannot exceed the aforesaid amount.

3.2 We find merit in the plea of the assessee in view of the decision of the Hon’ble Gujarat High court in the case of CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116/223 Taxman 130/[2015] 372 ITR 97; DCIT v. TGB Banquets Hotels Ltd. in [Tax Appeal No. 470 of 2012, dated 21-06-2016] and Joint Investments (P.) Ltd. v. CIT [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694 (Delhi). We also note that Hon’ble Gujarat High Court in the case of CIT v. Vision Finstock Ltd. [Tax Appeal No. 486 of 2017, dated 31-07-2017] has expressed the similar view and held that disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. As pointed out on behalf of the assessee, SLP(Civil) [Diary No. 13152/2018] filed by the Revenue against the judgment of the Hon’ble Gujarat High Court in Vision Finstock Ltd. (supra) has been dismissed on merits by the Hon’ble Supreme Court vide order dated 07.05.2018. Therefore, the issue is no longer res integra. The AO is accordingly directed to restrict the disallowance under s.14A of the Act to the extent of exempt income.

3.3 In the result, Ground no.1 of the assessee’s appeal is allowed in part.

  1. Ground No.2 concerns addition in the book profit computed for the purposes of Section 115JB of the Act on account of disallowance under s.14A of the Act.

4.1 In view of the long line of judicial precedents including the decision of Special bench in Asstt. CIT v. Vireet Investments Ltd. [2017] 82 taxmann.com 415/165 ITD 27 (Delhi-Trib) (SB), we find merit in the plea of the assessee. The AO is accordingly directed to delete adjustments made to the book profit on this score.

4.2 In the result, Ground No.2 is allowed.

  1. Ground No.3 concerns disallowance of provision for leave encashment of Rs.1,20,778/- and provision for gratuity of Rs.49,138/- under s.43B of the Act.

5.1 It was contended on behalf of the assessee that the said liabilities are not in the nature of statutory liabilities and are thus not covered by the spirit of provision of Section 43B of the Act.

5.2 We find that identical issue came up for consideration by the co-ordinate bench of Tribunal in Integrated Coal Mining Ltd. v. Dy. CIT [2016] 67 taxmann.com 260 (Kol-Trib) wherein the issue was set aside to the file of the AO to pass appropriate order based on the outcome of the main appeal on merits by the Supreme Court in Exide Industries Ltd. In parity, the grievance of the assessee as per Ground no.3 is set aside to the file of the AO.

5.3 In the result, Ground No.3 is allowed for statistical purposes.

  1. Ground No.4 concerns disallowance on account of delayed payments of employees’ contribution towards provident fund of Rs.54,775/-.

6.1 The aforesaid issue has been decided against the assessee by the Hon’ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100/223 Taxman 398/366 ITR 170 (Guj). Therefore, the grievance of the assessee is answered in negative and against the assessee.

6.2 In the result, Ground No.4 is accordingly dismissed.

  1. Ground No.5 concerns adjustment to the book profit computed under s.115JB of the Act towards provision of wealth tax of Rs.34,940/-.

7.1 The assessee seeks to claim that wealth tax is not a tax defined under Explanation 2 to Clause (a) of Explanation 1 to Section 115JA of the Act. In parity with the decision of the co-ordinate bench in ASB International (P.) Ltd. v. Dy. CIT [2012] 26 taxmann.com 87/54 SOT 140 (URO) (Mum) and CIT v. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322/251 ITR 15 (Bom.), the AO is directed to exclude the provision for wealth tax for the purposes of computation of book profit.

7.2 In the result, Ground No.5 is accordingly allowed.

  1. In the result, appeal of the assessee in ITA No.3049/Ahd/2014 is partly allowed.

ITA No. 2548/Ahd/2015 (Revenue’s appeal) – AY 2009-10

  1. The grounds of appeal raised by the Revenue read as under:
“1. On the facts and circumstances of the case the Ld.CIT(A) erred in allowing the interest of Rs.261962722/- by treating it as business expenditure, ignoring the fact on record that the transaction between Aditya Medisales Ltd. & M/s. Sun Pharmaceutical Industries Ltd. is not a transaction between 2 unrelated parties as the controlling person in both the company is same i.e. Mr. Dilip Shanghvi as per the Audit report u/s.44AB in form 3CD for A.Y. 2009-10 submitted by the assessee.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the Discount claim of Rs.73480655/- by ignoring the fact on record that the assessee has not given discount to its C&F agents who are directly purchasing medicines from the assessee company, but the assessee has made payment to other parties, which cannot be allowed as business expenditure and also failed to analyze the payments and its admissibility under the Income tax Act,1961.
3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in allowing the disallowance of donation of Rs.1100000/- by ignoring tax exemption certificate issued by trust and the remarks of the trust where donation is made that the donation was made on behalf of Shri Dilip Sanghvi, who is the Managing Director of M/s. Sun Pharma Industries Ltd, therefore this payment can not be considered as expenditure related to Aditya Medisales Ltd.”
  1. As per Ground No.1 of the Revenue’s appeal, the AO has agitated the action of the AO in allowing interest of Rs.26,19,62,722/- by treating it as business expenditure and reversing the position taken by the AO.

10.1 As observed by the AO, the assessee is primarily engaged in the business of trading of the medicines manufactured by Sun Pharma Industries Ltd. (Sun Pharma). The AO noticed that the assessee has paid/credited interest to the account of supplier Sun Pharma on its outstanding credit for delay in discharge of outstanding liability. The assessee, on the other hand, has not charged any interest from its debtors for sales carried out nor does Sun Pharma pays any interest to its creditor for outstanding liabilities. The AO accordingly held that payment of interest on outstanding credit to Sun Pharma is nothing but an arrangement with Sun Pharma who also are alleged to be controllers of the assessee company. The AO accordingly disallowed the aforesaid interest of Rs.26.59 Crores being the difference between interest earned by the assessee company from various resources and paid to Sun Pharma.

10.2 In the first appeal against the aforesaid addition, the CIT(A) reversed the action of the AO and found merit in the plea of the assessee that the interest expenses were incurred for business purposes. The CIT(A) accordingly deleted the addition towards disallowance of interest. The relevant operative para of the order of the CIT(A) is reproduced hereunder:

“4.14 With regard to the issue regarding disallowance of interest of Rs.26,19,62,722/-, the AO in the assessment order has mentioned that interest Income earned by the appellant was routed back to Sun Pharma for claiming deduction u/s 80IC. The same stand has been taken by the AO in his remand report also. In this regard, the AR of the appellant as per his submission dated 18/01/2013 has stated that the SPIL did not have any income during the year under consideration which was entitled to deduction u/s 80IC. In other words, no deduction of any income in the case of SPIL was claimed u/s 80IC. Thus, as per the AR the very basis and foundation of the AO in making the disallowance was erroneous and flimsy. I agree with this submission of AR of the appellant. It is further submitted by the AR that in fact the SPI has two new industrial undertaking which are eligible for deduction u/s 80IC of which one industrial undertaking was entitled to deduction @ 25% only for the year under consideration. As per the AR the appellant company has paid the same rate of interest to both SPIL and SPI and entire interest income earned by SPIL was taxable in its hand and part of the interest income earned by SPI was taxable in its hand. The fact is that an amount of interest of Rs. 17,75,28,370/- was paid by the appellant to SPIL and interest of Rs. 48,17,09,245/- was paid by the appellant to SPI. The AO in the assessment order has mentioned that though the appellant had paid interest of Rs. 66,19,55,722/-, but it had also earned interest income of Rs. 39,99,93,000/- and in view of this only the difference between the interest paid and interest earned has been treated by the AO as non-business expenses and which has been disallowed by him. As per the AO this difference of interest of Rs. 26,19,62,722/- (i.e. interest paid of Rs, 66,19,55,722/- interest earned of Rs. 39,99,93,000/- was non-business expenditure and the same was routed back to Sun Pharma for claiming deduction u/s 80IC. Thus, as per the AO payment of this amount of interest of Rs. 26,19,62,722/- was nothing but an arrangement to somehow claim deduction u/s 80IC on income earned by the appellant company by the controllers of the appellant company who were none other than the Directors of M/s Sun Pharma. But this interest of Rs. 26,19,62,722/- includes interest of Rs. 17,75,28,370/- which was paid by the appellant to SPIL and in the case of SPIL there was no any claim of deduction u/s 80IC of the Act. In other words, this entire amount of Rs. 17,75,28,370/- was taxable in the hands of SPIL Thus, the finding of the AO that this entire amount of interest of Rs. 26,19,62,722/- was routed back to Sun Pharma for claiming deduction u/s 80IC is not correct. The appellant had paid interest of Rs. 8,44,34,352/- to SPI and even if it is considered that the remaining amount of this interest of Rs. 8,44,34,352/-or any part of this interest amount as received by the SPI was claimed as deduction u/s 80IC, then also this interest expenditure cannot be disallowed in the hands of the appellant merely by holding that this payment of interest by the appellant to SPI was nothing but an arrangement to somehow claim deduction u/s 80IC. if someone goes by this logic of the AO, then no any payment would be made by a person to another person in whose case deduction under chapter VIA of the Income Tax Act is claimed as such payment would be considered to be an arrangement for getting deduction. As discussed in earlier paragraphs of this appeal order that the case of the appellant is not covered by the provisions of section 40A(2) of the Act and therefore it can be said that payment of interest is made by the appellant to non related parties. In my humble opinion, even If the case of the appellant is covered by the provisions of section 40A(2) and the appellant company and SPIL and SPI are related party, then also this entire payment of interest expenditure cannot be disallowed. This is in view of the fact that when there are two related parties in terms of provisions of section 40A(2)(b), then in such case reasonableness of payments made by one party to another party is required to be seen and this is not that entire payment is required to be disallowed. In the case of the appellant, the payments of interest have been made to SPIL and SPI @ 9% only which in my opinion is very reasonable looking to the rate of interest in the market. Thus, even if the case of the appellant is covered u/s 40A(2)(b), then also the reasonableness of interest payments as made to SPIL and SPI is required to be seen and entire payment of interest cannot be disallowed.. The AO has raised the objection that the appellant company did not charge any interest from its debtors and Sun Pharma also did not pay any interest to its creditors. But this allegation of the AO is not found to be tenable. To carry out the business is the domain of the businessman and the AO cannot step into the shoes of the businessman and dictate the business terms. I agree with the submission of the AR of the appellant that the AO cannot question the commercial judgment or business prudence of the appellant and disallow the interest paid on the ground that the other party has benefitted from it without first establishing how such interest payment was not in accordance with the binding contractual agreed to by the appellant company. It can also not be said that as and when an expenditure is incurred an assessee should earn income/profit as it does not require the presence of a receipt on the credit side to justify the deduction of an expense.

4.15 Considering all the facts and circumstances of case of the appellant as discussed in detail in preceding paragraphs of this appeal order it is held that the AO is not correct in making disallowance of interest expenditure of Rs. 26,19,62,722/- by treating the same as non business expenditure and on the ground that the same has been routed back to Sun Pharma for claiming deduction u/s 80IC and therefore such disallowance of interest expenditure of Rs. 26,19,62,722/- is hereby deleted. Thus the ground of appeal no. 2 of the appellant is allowed.”

10.3 Aggrieved by the relief granted by the CIT(A), the Revenue is in appeal before the Tribunal.

10.4 In the Revenue’s appeal, the learned AR for the assessee pointed out that identical issue came up before the Tribunal in its own case in DCIT v. Aditya Medilsale Ltd. [IT Appeal Nos. 1665 & 1666(Ahd.) of 2009, dated 22-3-2013] , wherein aforesaid addition stood deleted. This apart, the learned AR for the assessee adverted to the detailed written submission made before the CIT(A), remand report and reply thereto as reproduced by the CIT(A) in its order and submitted that there is no relationship between the assessee and Sun Pharma and the transactions are not covered by the provision of Section 40A(2) of the Act.

10.5 The learned DR, on the other hand, submitted that while the issue is apparently decided in favour of the assessee by the Tribunal in preceding assessment years, one cannot lose sight of the fact that both the concerns are related as revealed from the facts which came to light in survey proceedings under s.133A of the Act.

10.6 We have carefully considered the rival submissions. We find that the issue is no longer res integraand adjudicated in favour of the assessee in its own case in Aditya Medisale Ltd. (supra). The relevant operative para of the order is reproduced hereunder for ready reference:

“4. Now before us an order of the ITAT “D” Bench Ahmedabad in assessee’s own case bearing ITA No.3974/Ahd/2007 pertaining to AY 2004-05 titled as “The Dy.CIT vs. Aditya Medisales Ltd.” dated 4th February, 2011 has been cited, wherein the issue of interest disallowance u/s.36(1)(iii) has been decided in favour of assessee by following few orders of the Tribunal also decided in assessee’s own case in its favour in the past. In the past ITAT “D” Bench has taken a view for AYs 1999-2000, 2000-01, 2001-02, 2002-03 & 2003-04 in ITA Nos.3272/Ahd/2002, 1623/Ahd/2003, 1353 & 2180/Ahd/2005 and ITA No.08/Ahd/2007 respectively vide order dated 30/09/2010 in assessee’s favour again by following the order of the Tribunal pronounced in assessee’s own case for AY 1998-99 in ITA No.1233/Ahd/2002, wherein it was held that the assessee had its own substantial interest-free funds out of which advances have been made. An another noting has been made that the Revenue had not made out a case that interest bearing borrowed funds have been diverted to the group concerns by charging lower rate of interest. For the years under consideration, in the absence of any contrary material placed on record from the side of the Revenue, we are left with no option but to follow the past precedent as held in assessee’s favour vide series of orders cited supra. Therefore, the result is that the ground as raised by the Revenue stood covered in assessee’s favour, hence dismissed.

  1. Ground No.2 for AYs 2005-06 & 2006-07 is again identically worded; reproduced below:-
  2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of differential amount of interest of Rs.4,79,22,795/- (for A.Y. 2006-07 of Rs.65,10,131/-) on overdue bills of M/s.Sun Pharmaceuticals Industries Ltd. (SPIL), an associate concern, paid @ 15% when the assessee had charged interest on its advances @ 9.5% to 9% and had paid interest to the banks @ 13% only (for A.Y.2006-07 9% and had paid interest to the banks @ 11% only), which clearly reflected collusive nature of payment of excessive amount in the face of M/s.SPIL being entitled to deduction of 100% profits u/s.80IB, thus resulting in overall avoidance of tax by an arrangement between the assessee and its associate concern.

5.1. Even in respect of this issue, the objection of the AO was that excessive interest was paid to Sun Pharmaceutical Industries Ltd. (SPIL) @ 15% on overdue bills. According to AO, the assessee was not giving consistent treatment in respect of charging of interest and payment of interest for loans taken and advances given. The first appellate authority had followed his predecessors decision for AY 2004-05 and allowed the issue in assessee’s favour.

  1. As noted hereinabove while deciding the appeal of the assessee for AY 2004-05 (ITA No.3974/Ahd/2007-supra) vide an order dated 04/02/2011, it was noted that the issue has already been decided in favour of assessee by ITAT “D” Bench Ahmedabad in a consolidated order relevant for A.Y. 1999-2000 to 2003-04 bearing ITA Nos. ITA Nos.3272/Ahd/2002, 1623/Ahd/2003, 1353 & 2180/Ahd/2005 and ITA No.08/Ahd/2007-supra order dated 30/09/2010. In the said order of the Tribunal, ITAT “D” Bench followed an earlier order; pronounced in assessee’s own case for A.Y. 1997-98 in ITA No.492/Ahd/2001 dated 28/03/2008, wherein it was held that onus for application of the provisions of section 40A(2)(a) is on the Revenue and that there was no basis for holding that an excessive rate of interest was paid. It is also worth to mention that there was an order of the Hon’ble Gujarat High Court in assessee’s case (CITv. Aditya Medisales Ltd.– Tax Appeal No.559 of 2009 dated 4.5.2010), wherein it was opined that the CIT(A) as well as Tribunal have upon appreciation of the evidence found that the Revenue has not been able to make out any case for applying the provisions of section 40A(2)(a) and that interest earned on unsecured borrowings is always higher than the rate of interest paid to the bank account from where loan raised; hence accepted that interest paid to Sun Pharmaceuticals @ 24% p.a.. to be reasonable. We therefore hold that since the Tribunal/High Court is taking a consistent view in favour of the assessee in the past, therefore respectfully following these decisions for the year under consideration, we hereby hold that the Revenue has no force in the grounds raised for both the years, hence dismiss the same.”

10.6.1 In parity with the decision of the co-ordinate bench, we are in agreement with the plea of the assessee that merely because the assessee company is paying huge interest on outstanding credit balance to Sun Pharma while no interest is being charged by the assessee from its debtors cannot be the justifiable reason for resorting to the disallowance of interest. As pointed out on behalf of the assessee, we also note that the Hon’ble Gujarat High court has also approved the order of the ITAT concerning AYs 1997-98 in CIT v. Aditya Medisales Ltd. [Tax Appeal No. 559 of 2009 judgment dated 04-05-2010] towards deletion of disallowance made on account of excess interest payment under s.40A(2)(a) of the Act. Thus, the issue stands concluded in favour of the assessee by the jurisdictional High Court. The issue having been already examined in the earlier years, we do not see any reason to look afresh. Therefore, we decline to interfere with the order of the CIT(A) in this regard. Consequently, Ground No.1 of the Revenue’s appeal is dismissed.

  1. Ground No.2 of the Revenue’s appeal seeks to assail the action of the CIT(A) in allowing discount expenses of Rs.7,34,80,655/- paid to various customers of its C&F agents by the assessee.

11.1 Briefly stated, the assessee carries on business of distributor of pharmaceuticals products and accordingly deals with C&F agents, dealers, retailers, doctors etc. for distribution of products. During year under consideration, the assessee made sales of Rs.1630.85 Crores. On the said sales, the assessee claims to have given discounts to various persons aggregating to Rs.7.35Crores. The AO observed that the assessee has not given discount to its C&F agents who are directly purchasing medicines from the assessee company. The discount has been given to the ultimate purchaser from C&F agent. It was thus observed that the ultimate purchasers viz. dealers, doctors, other customers & medicine stockiest etc. are not purchasing medicines from the assessee company per se but from C&F agents. The AO accordingly observed that in business practices, the discount is given by the seller to its purchaser, whereas, in the instant case, the discount has been given by the assessee to various parties who have no direct transaction with the company. It was also alleged that the payment is in the nature of illicit gratitude to doctors for promotion of Sun Pharma Group product. It was held that such discount expenses incurred is not a business expense wholly and exclusively attributable to the assessee company. Consequently, the expenses towards discount to the tune of Rs.7,34,80,655/- was disallowed.

11.2 Aggrieved, the assessee preferred appeal before the CIT(A).

11.3 The CIT(A) re-visited the facts and circumstances of the case and found the claim of the assessee towards discount expenses to customers of the C&F agents to be in order except payments to doctors. The CIT(A) accordingly reversed the action of the AO and directed him to allow the discount expenses incurred. The relevant operative para of the order of the CIT(A) in this regard is reproduced hereunder:

“5.4 The reasons as mentioned by the AO in the assessment order for making disallowance of discount claim of Rs, 7,34,80,655/- and his remand report as well as submission dated 18/01/2013 and also rebuttal/reply dated 19/02/2015 of the AR of the appellant have been considered. The appellant has claimed discount of Rs. 7,34,80,655/-, It was noticed by the AO that the appellant had made payment mostly towards Doctors through DDs and the same was claimed as discount. The AO was of the view that these Doctors were not purchasing the medicines from appellant company and therefore discount given to them was not allowable. The AO in the assessment order has mentioned that these payments to Doctors was in the nature of elicit gratitude for promotion of some Pharma Group products. Thus, the AO held that this was not a business expense wholly and exclusively for the business of the appellant company and accordingly he added this amount of Rs. 7,34,80,655/- to the total income of the appellant. On the other hand, the AR of the appellant vide his submission dated 18/01/2013 has stated that the appellant is carrying on the business of distributor of SPIL and accordingly it deals with C & F agents, dealers, retailers, Doctors etc, for distribution of the product. As per the AR the appellant during the year under consideration made sales of Rs, 1630.85 crores and on the said sales it gave various discounts to various persons aggregating to Rs. 7.35 crores. The AR has further mentioned in his submission dated 18/01/2013 that total discounts allowed to the Doctors aggregate to only Rs. 9 lacs out of total amount of discount of Rs. 7.35 crores. Thus, as per the AR accordingly discount allowed to the Doctors constitutes only 1% of the total discount as allowed. With respect to the discount allowed to the Doctors of Rs. 8,96,508/- it is submitted by the AR that the same was allowed in the normal course of business.. It is pleaded by the AR that despite the fact that only Rs. 9 lacs was paid to the Doctors as discount, the AO has disallowed the whole sum of Rs. 7..35 crores. As mentioned in earlier paragraph of this appeal order that the submission dated 18/01/2013 of the AR of the appellant was forwarded to the AO for his remand report. The AO in his remand report dated 01/05/2014 as sent to this office has almost reiterated the same facts which have been mentioned by the AO in the assessment order for making disallowance of claim of Rs. 7,34,80,655/-. The AO in remand report has merely mentioned that the appellant is not paying discount to its purchaser i.e. C & F agent. It is mentioned by the AO in the remand report that while finalizing assessment it was found after verification that the appellant had made payment mostly towards Doctors through DDs and the same has been claimed as discount, As per the AO the Doctors are not purchasing medicines from the assessee company and therefore expenses are not incurred wholly and exclusively for business. However, the AO in his remand report has not controverted the submission of AR of the appellant that the payments on account of discount made to the Doctors were only Rs. 9 lacs. The AO in his remand report has also not controverted the submission of the AR that the remaining amounts of Rs. 7.26 crore (i.e. Rs. 7.35 crores -Rs, 9 lacs) are paid to the Dealers, Stockists, Distributors and Retailers etc. who are.”

11.4 The CIT(A), for the reasoning noted above, thus allowed the payment on account of discount made to the stockiest, distributor, dealers and retailers. But, however, disallowance of discount payment made to Doctors amounting to Rs.8,96,508/- was retained holding the same to be in the nature of illicit gratitude to the Doctors for promotion of Sun Pharma Group products.

11.5 Aggrieved by the action of the CIT(A) in granting part relief, both Revenue as well as assessee preferred appeal before the Tribunal.

11.6 The Revenue in the present appeal has challenged the discount allowed in respect of payments to stockiest/distributors/dealers/ retailers etc. whereas the assessee in its cross appeal in ITA No. 2511/Ahd/2015 has challenged the disallowance of discount of Rs.8,96,508/- retained by the CIT(A) towards payment to Doctors.

11.7 When the matter was called for hearing, the learned AR for the assessee referred to the party-wise details of various small amounts spread all over India aggregate to Rs.7.34Crores and also referred to its submission made before the CIT(A) in this regard. It was contended that the assessee has standard and structured system of allowing discounts. The assessee has appointed various C&F agents who supplies the medicines to stockiests/distributors who, in turn, supply to the retailers/pharmacists. The eligibility of discount is calculated on the basis of quantity lifted by these parties. It was pointed out that such discounts/incentive scheme floated by the assessee are universal and without any discrimination and applicable to all retailors/pharmacists/doctors who have purchased medicines from its designated C&F agents. The learned AR submitted that the payment of discount is duly evidenced by necessary documentation in this regard. In these circumstances, the discount given to the customers of its C&F agents based on quantity lifted is integrally connected to the business activity of the assessee and therefore an allowable business expenditure. The learned AR thereafter referred to the order of the AO for subsequent assessment year concerning AY 2010-11 and submitted that in the next assessment year, the AO himself has admitted the claim of discount made to stockiests/customers etc. aggregating to Rs.10.90 Crores and only the discount of Rs.15.44 Lakhs given to Doctors were rejected. It was thus contended that the order of the CIT(A) is in parity with the action of the AO himself in the subsequent year and therefore cannot be assailed by the Revenue by any means. As regard discount offered to the doctors amounting to Rs.8.956Lakhs, the learned AR pointed out that the supply of medicines have been made to the Doctors also by the C&F agents by way of sale and not on any promotional offer and therefore, no distinction can be drawn for discount bestowed to Doctors qua other stockiests/distributors/dealers etc. The learned AR thus submitted that the appeal of the Revenue thus deserves to be rejected whereas the appeal of the assessee requires to be allowed on this score.

11.8 The learned DR, on the other hand, relied upon the order of the AO.

11.9 We have carefully considered the rival submissions on the issue. The maintainability of discount on sales is in question. It is the case of the Revenue that the assessee is supplying medicines to its C&F agents for its ultimate sale in the market for consumption. The discounts were given by the assessee company to the distributors, retailers, dealers, Doctors associated to C&F agent and who were not directly dealing with assessee and therefore expenses incurred towards discount payment by the assessee has no nexus with the sales made by it to the C&F agents.. The AO accordingly is of the view that such indirect discounts to the customers of its agents are not allowable expenditure.

11.10 We do not see any iota of merit in such plea. The discounts given to the customers/ultimate consumer has direct bearing on the potential turnover of the company. It is well settled that the test of the commercial expediency cannot be reduced to the shape of a ritualistic formula nor can it be put in a water tight compartment. It is trite that the Revenue authorities have to place themselves in the position of a business and find out whether expenses incurred can be said to have been laid out for the purposes of businessman. The commercial expediency and prudence are inseparable. If the expenditure is incurred to facilitate carrying on of business of the assessee and is supported by the commercial expediency, it does not matter that the payment is in voluntarily or not necessary or that it also enures to the benefit of a third party. If the object is business promotion, the expenditure can be said to be wholly and exclusively for the purposes of the assessee’s business. The assessee in the instant case demonstrated on facts that payment of such discounts are integrally connected to the sales/turn over achieved or has potential to achieve. The discount expenses have thus been incurred with the object of furthering the trade or business interest of the assessee. Therefore, such expense falls within the expression ‘wholly and exclusively’ referred to in Section 37 of the Act. Therefore, we have no hesitation to concur with the conclusion drawn by the CIT(A) for allowability of discounts given to stockiests/distributors etc. However, we are unable to understand the reasoning of the CIT(A) for discarding the claim of discount expenditure paid to the Doctors. When the test of commercial expediency applied in its natural perspective, there is no reason to exclude Doctors purchasing medicines from C&F agents for the purpose of eligibility of discount payments. We thus set aside the action of the CIT(A) to this extent and direct the AO to allow the trade discount paid to all parties including Doctors as ordinary business expenditure. Thus, Ground No.2 of the Revenue’s appeal is dismissed. As a corollary, Ground No.1 of the assessee’s appeal in ITA No. 2511/Ahd/2015 stands allowed.

  1. Ground No.3 of the Revenue’s appeal seeks to assail the action of the CIT(A) in allowing donation of Rs.11 lakhs.

12.1 The AO in the course of assessment observed that assessee company has paid Rs.11 lakhs to Vision Foundation of India and claimed deduction under s. 80G of the Act for such donation. It was however observed by the AO that the cheque was paid on behalf of Shri Dilip Sanghvi and only at instruction from him and also thanks were conveyed by the recipient to Shri Dilip Sanghvi for his kind gesture. It was further noticed that the receipt and tax exemption certificate were sent to Shri Dilip Sanghvi and not to the assessee. It was thus held by the AO that the donation actually relates to Shri Dilip Sanghvi and therefore, the assessee company is not eligible for deduction under s.80G of the Act.

12.2 The first appellate authority, however, reversed the aforesaid action of the AO on account of undisputed fact that donation has been made by the assessee company from its bank account and the receipt of donation is also in the name of the assessee company. In the given facts, we completely endorsed the view taken by the CIT(A) in this regard. The payment made on instruction of Shri Dilip Sanghvi, receipt of thanks by Shri Dilip Sanghvi and receipt sent to Shri Dilip Sanghvi are wholly irrelevant considerations as rightly observed by the CIT(A). It is the assessee company which is entitled to deduction under s.80G of the Act for which conditions laid down therein are not shown to be not fulfilled. Therefore, we decline to interfere of the order of the CIT(A)..

12.3 In the result, Ground No.3 of the Revenue’s appeal is dismissed.

  1. In the result, appeal of Revenue in ITA No. 2548/Ahd/2015 is dismissed.

ITA No. 2511/Ahd/2015 (Assessee’s appeal) – AY 2009-10

  1. The solitary ground concerns disallowance of discount of Rs.8,96,508/- paid by the assessee to the Doctors purchasing medicines from C&F agents authorized by the assessee. For the detailed reasons discussed in para no. 11.9 (supra), we do not see any warrant to reject the claim of the assessee towards discount expenses paid to the Doctors who are no different from other buyers; such as, retailers, distributors, stockiests etc. The AO is accordingly directed to delete the disallowance of the aforesaid amount.
  2. In the result, appeal of the assessee in ITA No.2511/Ahd/2015 is allowed.

ITA No. 2549/Ahd/2015 (Revenue’s appeal) – AY 2010-11

  1. Ground No.1 of Revenue’s appeal concerns disallowance of interest amounting to Rs.8,62,78,759/- which was reversed by the CIT(A) holding the same as expenditure incurred for the purpose of business.

16.1 In the instant assessment year, the assessee has declared interest income of Rs.6,43,12,159/- whereas interest were also shown to have been paid to Sun Pharma Group amounting to Rs.15,05,90,918/-. The AO disallowed excess interest amount of Rs.8,62,78,759/- on the similar ground with that of AY 2009-10 (supra). It was alleged by AO that the assessee has not charged interest on its outstanding with other parties whereas it has paid interest on outstanding payable to Sun Pharma which is alleged to be the connected concerned to the assessee in terms of 40A(2)(a) of the Act. Identical issue has been dealt with in AY 2009-10 in para no. 10.1(supra) which, in turn, refers to the earlier assessment years dealing with identical issue. Thus, in parity with the view taken in several assessment years in assessee’s own case, we do not see any merit in the grievance of the Revenue on this score. We thus decline to interfere with the order of the CIT(A) in this regard.

16.2 In the result, Ground No.1 of Revenue’s appeal is dismissed.

17.. Ground no.2 concerns disallowance of discount of Rs.15,44,119/- paid to Doctors. As noted earlier concerning AY 2009-10, the AO in the impugned AY 2010-11 has restricted the disallowance of discount paid to the Doctors only whereas discount paid to stockiests, distributors and other customers of C&F agents have been accepted. The CIT(A) in AY 2009-10 had also rejected the similar claim of discount inter alia paid to Doctors. The CIT(A) in AY 2010-11 has simply followed its finding in AY 2009-10 but however deleted the disallowance on payments to doctor which is glaringly inconsistent with findings in AY 2009-10. Having followed the findings in AY 2009-10, the CIT(A) ought to have confirmed the action of the AO. Therefore, while the Revenue is in appeal against the deletion inadvertently made by the CIT(A), the assessee has also challenged the action of the CIT(A) as a measure of abundant caution in ITA No.2512/Ahd/2015. Having noted the aforesaid position, we do not find any merit in the disallowance made by the AO towards discount paid to the Doctors as discussed in relation to AY 2009-10 (supra). We thus agree with the conclusion drawn by the CIT(A) despite wrong reasoning. The Ground no.2 of Revenue’s appeal is thus dismissed.

  1. As per Ground No.3, the Revenue seeks to challenge the reversal of disallowance of Rs.9,62,383/- made under s.14A of the Act.. As pointed out on behalf of the assessee, the assessee has suo motto disallowed expenses to the extent of Rs.50,000/- as attributable to earning of exempt dividend income from investment made. The AO however re-computed the disallowance under s.14A of the Act in terms of statutory formula prescribed under Rule 8D of the Income Tax Rules. The AO accordingly computed disallowance of Rs.50,000/- as offered by the assessee as ‘direct expenditure’ under Rule 8D(2)(i) of the IT Rules. Similarly, proportionate interest expenditure of Rs.3,65,850/- was disallowed under Rule 8D(2)(ii) and Rs.5,96,533/- was disallowed towards administrative and general expenses under Rule 8D(2)(iii) of the Rules.

18.1 In the first appeal, the CIT(A) has deleted the disallowance of proportionate interest expenditure of Rs.3,65,850/- computed under Rule8D(2)(ii) but however disallowance of Rs.50,000/- under Rule 8D(2)(i) and Rs.6,46,533/- under Rule 8D(2)(iii) of the Rules were retained.

18.2 The Revenue has challenged the action of the CIT(A) for deleting of disallowance of interest under Rule 8D(2)(ii) whereas the assessee has also challenged the retention of disallowance under Rule 8D(i) & 8D(2)(iii) of the Rules.

18.3 On appraisal of the documentary evidences and on perusal of the order of the CIT(A), we find that the CIT(A) has rightly approached the issue and deleted the proportionate disallowance of interest expenditure under Rule 8D(2)(ii) on the ground that investment in shares giving rise to exempt income is far lower than the corresponding interest free funds available with the assessee by way of capital and reserves. Therefore, a presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds. Therefore, we do not see any infirmity in the order of the CIT(A).

18.4 Turning to the cross grievance of the assessee disallowance sustained under s.14A of the Act, we observe that the assessee suo motu has disallowed Rs.50,000/- for earning of exempt income which is rightly reckoned to be direct expenditure under Rule 8D(2)(i) of the Rules in the absence of any supporting material to the contrary. The Revenue authorities, in our view, have also rightly invoked formula under Rule 8D(2)(iii) for disallowance of management and general expenses deemed to be attributable to tax free income. However, the disallowance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments in consonance with the decision of the Special Bench in Vireet Investments (supra) as placed on behalf of the assessee. The issue is therefore remitted back to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) of the Rules. In terms of the averments made above, the Ground No.3 of the Revenue’s appeal is dismissed whereas cross ground no.2 of the assessee’s appeal on this score is allowed in part.

  1. In the result, appeal of the Revenue in ITA No. 2549/Ahd/2015 is dismissed.

ITA No. 2512/Ahd/2015 (Assessee’s appeal) – AY 2010-11

  1. Ground No.1 of the assessee’s appeal towards disallowance of discount of Rs.15,44,119/- is stated to be out of caution on account of error committed by the CIT(A) as discussed in para 17 (supra). However, as concluded in Revenue’s appeal for the AY 2010-11, the aforesaid discounts paid to Doctors is eligible for deduction as business expenditure without any demur. The conclusion of CIT(A) thus cannot be faulted. In terms of observation noted above, the Ground no.1 of the assessee’s appeal on relief already granted by CIT(A) is dismissed as infructuous.
  2. Ground no.2 of the assessee’s appeal relates to disallowance of expenditure under s.14A of the Act. The issue has already been deliberated in length in Revenue’s appeal. Therefore, in terms of observations noted in para no. 18 (supra), the issue is restored for re-computation under Rule 8D(2)(iii) to the AO with reference to investments actually yielding tax free income. Accordingly, Ground No.2 is allowed in part.
  3. In the result, appeal of the assessee in ITA No.2512/Ahd/2015 is partly allowed.

ITA No. 2550/Ahd/2015 (Revenue’s appeal) – AY 2011-12

  1. Ground No. 1 of the Revenue’s appeal concerns disallowance of interest expenditure of Rs.5,58,66,396/- paid to Sun Pharma. In consonance with our observations in AYs. 2009-10 & 2010-11 on the issue, we do not see any merit in the grievance of the Revenue on this core. Ground No.1 of the Revenue’s appeal is dismissed.
  2. Ground No.2 of the Revenue’s appeal concerns discount of Rs.17,24,524/- paid to Doctors for purchase of medicines from C&F agents of the assessee. The issue has already been deliberated in AYs. 2009-10 & 2010-11(supra). Our observations in AYs.2009-10 & 2010-11 shall apply mutatis mutandis to AY 2011-12 as well in the absence of any challenge in facts. Ground No.2 of the Revenue’s appeal is accordingly dismissed.
  3. Ground No.3 concerns disallowance of Rs.87,02,334/- under s.14A of the Act. The disallowance of Rs.81,55,801/- towards proportionate interest expenditure under Rule 8D(2)(ii) has rightly been reversed by the CIT(A) in view of the sufficient interest free funds available with the assessee. As regards disallowance of Rs.5,96,533/- under Rule 8D(2)(iii), our observations in ITA No.2549/Ahd/2015 (para no. 18) shall apply mutatis mutandis. The issue is accordingly restored to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) qua the investments which have actually yielded tax free income.
  4. Ground No. 3 of the Revenue’s appeal is thus dismissed whereas Ground No.2 of the assessee’s appeal (to follow) is allowed in part for the aforesaid reasons.
  5. In the result, appeal of the Revenue in ITA No. 2550/Ahd/2015 is dismissed.

ITA No. 2513/Ahd/2015 (Assessee’s appeal) – AY 2011-12

  1. Ground No.1 concerns disallowance of Rs.17,24,542/- on account of discount given to Doctors who have purchased medicines from C&F agents of the assessee. In sync with the observations in the earlier years as discussed above, the grievance of the assessee is merited. Ground No..1 of the assessee’s appeal is accordingly allowed.
  2. Ground No.2 of the assessee’s appeal is allowed in part in terms of directions noted in the corresponding Revenue’s appeal.
  3. Ground No.3 concerns suo motto disallowance of Rs.50,000/-. We decline to interfere with the action of the AO in view of the discussion in AY 2010-11 (supra). Ground No.3 of the assessee’s appeal is dismissed.
  4. In the result, appeal of the assessee in ITA No..2513/Ahd/2015 is allowed in part.

ITA No. 3415/Ahd/2015 (Assessee’s appeal) – AY 2009-10

& ITA No. 3354/Ahd/2015 (Revenue’s appeal) – AY 2009-10

  1. Both the appeals give rise to common issue of disallowance under s.14A of the Act in pursuance of assessment order passed under s.143(3) r.w.s. 263 of the Act. With the assistance of the learned AR for the assessee, we note that the AO made disallowance towards proportionate interest expenditure under Rule 8D(2)(ii) and towards administrative and general expenses under Rule 8D(2)(iii). The assessee has shown suo motto disallowance of Rs.50,000/-. In view of sufficient own funds available (Rs.30.35 Crores) in excess of corresponding investment (Rs.12.54 Crores) giving rise to exempt income, there is no warrant to make disallowance under Rule 8D(2)(ii) in view of the decision in Pr.CITv. Sintex Industries Ltd. [2017] 82 taxmann.com 171 (Guj.); and CIT v. HDFC Bank Ltd. [2014] 49 taxmann.com 335/226 Taxman 132 (Mag.)/366 ITR 505 (Bom.). Identical view has been expressed in other years of the assessee’s appeals discussed above. Accordingly, the AO is directed to delete the disallowance made under s.8D(2)(ii) of the IT Rules.
  2. As regards disallowance under Rule 8D(2)(iii),

 

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