ITAT Mumbai Partly Allows Revenue Appeals in Thyrocare Case; Section 14A Recomputed, Sales Incentive Issue Remanded

Key Facts and Tribunal Findings

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, partly allowed a batch of appeals filed by the Revenue against Thyrocare Technologies Ltd. across Assessment Years 2018–19, 2020–21, 2021–22, 2022–23, and 2023–24, directing recomputation of disallowance under Section 14A and remanding issues relating to sales incentive expenditure.

The primary dispute for Assessment Year 2020–21 related to disallowance under Section 14A read with Rule 8D. The Assessing Officer had enhanced the disallowance to ₹2.14 crore as against the assessee’s suo motu disallowance of ₹7.58 lakh. The CIT(A) deleted the addition. The Tribunal, however, held that for the purpose of computing disallowance under Rule 8D, only those investments which yielded exempt income during the year should be considered, following the Special Bench ruling in Vireet Investment Pvt. Ltd. Accordingly, the issue was restored to the Assessing Officer for recomputation on this limited principle.

On the issue of ESOP expenditure, the Tribunal upheld the CIT(A)’s deletion of disallowance of ₹2 crore, relying on the Karnataka High Court ruling in CIT v. Biocon Ltd., holding that ESOP discount constitutes allowable business expenditure under Section 37(1).

With respect to sales incentive expenditure, the Assessing Officer had disallowed 10% of ₹17.49 crore invoking Explanation 1 to Section 37(1), alleging that such payments were in the nature of prohibited benefits to medical practitioners. The CIT(A) deleted the disallowance. The Tribunal noted that the factual matrix regarding the nature of recipients—whether they were genuine service providers or medical practitioners—had not been adequately examined. In light of the Supreme Court’s ruling in Apex Laboratories Pvt. Ltd., the Tribunal remanded the issue to the Assessing Officer for fresh adjudication after detailed verification of each recipient and supporting agreements.

For Assessment Year 2018–19, similar directions were issued regarding Section 14A disallowance. For Assessment Years 2021–22, 2022–23, and 2023–24, the Tribunal restored the sales incentive issue to the Assessing Officer on identical lines.

Accordingly, the Revenue’s appeals were partly allowed for statistical purposes, with key issues remanded for fresh examination.