With reference to the information provided in the Annexure, advise Hiral Mehta on how she should guide Jay Pradhan in relation to the following…

Answers to Descriptive Questions 1.7 (i) Computation of deduction available under section 35 for A.Y. 2025-26 Particulars ₹ Section % of deduction Amount of deduction (₹) Payment for scientific research to notified approved institutes/ company - Indian Institute of Science, Bangalore 5 crores 35 (1) (ii) 100.00% 5 crores - IIT Delhi 4 crores 35 (2AA) 100.00% 4 crores - Healthy India Limited 2 crores 35(1) (iia) 100.00% 2 crores Expenditure incurred on in-house research and development facility - Revenue Expenditure 8 crores 35 (2AB) 100.00% 8 crores - Capital Expenditure (excluding the cost of land) 15 crores 35 (2AB) 100.00% 15 crores Total deduction available under section 35 34 crores (ii) GJPL utilizes the services of many agents abroad, who arrange to sell the company's products from India in select markets like Mexico, Brazil and Argentina. For such services it had paid commission of 25crores during F.Y. 2023-24 and claimed this as a business expense. Since it had not deducted TDS on such payments, the Assessing Officer is of the opinion that the commission of 25crores paid during F.Y. 2023-24 should not be allowed as a business expenditure. GJPL has also not made any application u/s 195(2) for making deduction of tax at source at Nil rate. To assess this validity of this stance, reference can be made to the Delhi High Court case law CIT vs Maruti Suzuki India Limited (2018) 407 ITR 165 (Del). In the said case, it was held that the non-resident agent who operated outside India did not have any income arising in India. Accordingly, the commission earned by a non-resident agent who was in the business of selling Indian goods abroad, did not accrue or arise in India, and hence, no tax was deductible on such commission payment to a non-resident agent. Since the assessee has made payment to a non-resident agent and such income is not chargeable to tax in India, section 40(a)(i) could not be invoked to disallow deduction of such payment for non-deduction of tax at source while computing business income of the assessee. On similar grounds, it can be concluded that the Assessing Officer is not justified in invoking section 40(a)(i) to disallow deduction of 25crores paid as commission to non-resident agents selling products in various markets outside India on behalf of GJPL. Therefore, Hiral should advise that the ground for this disallowance is not justified. (iii) During F.Y. 2023-24, GJPL had provided freebies to medical practitioners practicing within India. This was amounted to 5 crores. On assessment the income tax officer has disallowed this expenditure as a business expense. To assess the validity of this stance, reference can be made to the Supreme Court case in Apex Laboratories Pvt. Ltd. Vs DCIT (2022) 442 ITR 1. In this case it was held that the incentives (or freebies) given by the pharmaceutical company, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. These sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative and have legally binding effects. The conceded participation of the assessee – pharmaceutical company i.e. the provider or donor, was plainly prohibited, as far as their receipt by medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts or freebies was no less a prohibition on the part of their giver or donor i.e. the pharmaceutical company. Explanation 3 inserted in section 37(1) is in consonance with the above Supreme Court judgment. Thus, pharmaceutical companies' gifting of freebies to doctors is clearly "prohibited by law" and not allowed to be claimed as a deduction under section 37(1). Doing so would undermine public policy. From this it can be concluded the position of the income tax officer is correct. The expenditure of 5crores incurred on freebies to doctors can be considered as expenses prohibited by the law and not allowed as a deductible expenditure on the hands of the GJPL under section 37(1) of the Income Tax Act. Therefore, Hiral should advise that the ground for this disallowance is justified.