Income Tax Appellate Tribunal - Mumbai
Warren Laboratories (P.) Ltd. vs Dy. Cit on 19 May, 2005
Equivalent citations: [2005]3SOT638(MUM)
ORDER
D.C. Agrawal, A.M.
1. In this appeal, the assessee has raised following issues in the grounds of appeal :
(i) The confirmation of addition of Rs. 9,53,019 on account of free samples of toothpaste and medicines shortage/wastage.
(ii) Addition of Staff Welfare expenses of Rs. 6,250.
(iii) Addition of Rs. 10,000 being professional fees for valuing the fixed assets.
(iv) Motor car expenses.
(v) Not granting deduction under section 80-IA on Rs. 6,04,962 presuming it to be income from other sources.
2. Regarding first ground, the assessing officer found that the assessee had distributed free samples of toothpaste and medicines, but details of parties to whom such samples have been given have not been furnished. There is no reconciliation of details of free samples filed before the assessing officer and the details as given in the Tax Audit Report. There is also no evidence how these samples are utilised for the purposes of business. Further, the Marketing agent of the assessee-company is M/s. Warrant Pharmaceuticals Pvt. Ltd., a sister concern. Hence, it was not required for the assessee-company to distribute free samples. Further, according to assessing officer, the quantum of claim is very high. The assessing officer worked out an addition of Rs. 9,53,019. The CIT(A) confirmed the view of assessing officer, that there is no evidence of actual distribution of samples. But accepted that samples distribution is a part of medicine trade. He allowed expenditure on this account @ 2% of total sales. Thus he gave a relief of Rs. 3,55,622.
3. Before us the learned Authorised Representative argued that distribution of free samples is not unusual and abnormal. Disallowance of entire claim is illogical and unreasonable. It was the liability of the assessee-company and not of the Warrant Pharma, the distributing agent and sister concern of the assessee. Further, accounts of the company are audited. There is no adverse view by the auditors. The assessee-company is distributing free samples since 1929. No disallowance in the past or in subsequent years is done. Under law, the free samples have only to be distributed and cannot be sold. Further, its sales have been accepted by the Sales Tax department including goods returned. There are large number of Medical Representative (MR) who are distributed all over the country. Territories are divided among the MRs and samples are issued to them. The CIT(A) has restricted the allowance on this issue only to 2% without any basis.
4. On the other hand, learned departmental Representative supported the orders of the authorities below on this point.
5. We have considered the rival submission and perused the material on record. We are of the view that distribution of free samples is a normal business necessity, which fact has also been accepted by the CIT(A) in his order. Only question remains to be answered is whether the claim is reasonable or excessive. We also find that the distribution of free samples is done through Medical Representative who are spread all over the country and territory is divided among them to distribute free samples among doctors and also to chemists. The Medical Representatives send a periodical report about such distribution to the company. The learned A.R. of the assessee has also submitted a sample of such report. In this report, quantities of free samples distribution by MRs is also given. It seems that assessing officer and CIT(A) have ignored this aspect of verification as to whether samples were actually distributed or not. He has by a thumb rule allowed 2% of sale as sample distribution expenses. In fact, there is no basis for such an estimate or to restrict the claim only to2% of sales. We feel it necessary that CIT(A) should enquire and verify as to how much free samples are distributed as reflected from MRs report. Let the assessee-company compile the data as reflected from MRs report and submit before CIT(A) for verification. The claim as verifiable from MRs report should be allowed. If on verification figure of allowance comes to less than 2% of sales, then allowance may be kept at @ % of sales because, assessee need not be put to a situation worse than what it was after the order of CIT(A). The issue is therefore set aside into the file of the CIT(A) for fresh adjudication. This ground is allowed for statistical purposes.
6. Second issue is about staff welfare expenses of Rs. 6,250. The CIT(A) confirmed the addition on the ground that it is totally unsupported and no bill or details was furnished either before him or before the assessing officer. Even before us, no details of these expenses have furnished. Hence, we decline to interfere. This ground is therefore rejected.
7. The next ground is about payment of professional fee of Rs. 10,000 for valuing the fixed asset for taking loan. The assessee had in fact paid Rs. 30,000 to M/s. Dalal Consultant & Engg. The assessee bifurcated it partly into revenue and party capital, and two-third of expenditure was treated as capital. The assessing officer disallowed the rest one-third on the ground that the difference of treatment between the two parts was not substantiated. The CIT(A) also confirmed the addition, treating entire sum as capital expenditure, and finding that no explanation or the basis of apportionment was offered by the appellant. Before us, the learned AR tried to distinguish the apportionment on the ground that a part of expenditure belonged to sister concern, namely, M/s. Warren Pharma. But no evidence was furnished. We do not find any basis for apportionment. Since one part is treated as capital, other will also be capital unless proved otherwise. Hence, we decline to interfere in the order of the CIT(A). This ground is therefore also rejected.
8. Regarding fourth issue, about Motorcar expenses. We find that CIT(A) has confined the addition to 30% of total expenses. According to CIT(A), the personal use of car would involve expenses on maintenances. The personal use of the vehicle has not been denied. Before us learned counsel of the assessee submitted that there cannot be any personal use of the vehicle by the company. We are not convinced in absence of evidence as to the use of car wholly and exclusively for the purposes of business. The disallowance restricted to 30% of actual expenditure on petrol and maintenance is reasonable and, hence, it is confirmed. Accordingly, this ground is rejected.
9. The last ground of the assessee is about the claim under section 80-IA in respect of maintenance charges of Rs. 5,79,812, analysis charges of Rs. 21,700 and miscellaneous receipts of Rs. 3,450. The assessing officer held that these receipts are from other sources and did not comprise profits of the industrial unit. According to him, there was no nexus of these receipts with the industrial undertaking. He relied on the decision in the case of CIT v. Cement Distributors Ltd. (1994) 208 ITR 355 (Del), and in the case of Sterling Foods v. CIT (1984) 150 ITR 292 (Kar), and held that manufacturing charges are not derived from industrial undertaking and hence, are not entitled to deduction under section 80-IA. The CIT(A) also confirmed the addition basically on the ground that assessee has done job work for the sister concern. It received raw material, etc., from the sister concern and only obtained manufacturing charges for the job done. Since these receipts are not directly connected with the industrial undertaking of the assessee, he will not be entitled for claim under section 80-IA.
10. Before us, learned counsel for the assessee submitted that income from manufacturing charges has been assessed under the head Profit and gains from business and profession and not under the head Income from other sources. The assessee is carrying out manufacturing activity for others for which it is receiving job charges. According to learned counsel, the profits which are entitled for deduction under section 80-IA are the one which are derived from manufacturing of any article or thing from an industrial undertaking. The requirement of section 80-IA is that the profit and gains should be derived from any business of an industrial undertaking. It is not necessary the manufacturing activity should relate to own products and assessee will not be entitled for deduction if it carries out manufacturing activity in relation to goods of others. In other words, according to learned counsel, the assessee would be entitled to deduction under section 80-IA irrespective of the fact, whether it produces own goods or goods belonging to others, that is produces goods on job charges. For this he relied on the decision in CIT v. Kantilal Chhotalal (2000) 246 ITR 439 (Bom) and CIT v. K.K. Doshi & Co. (2000) 245 ITR 849 (Bom). According to learned counsel such deduction was not disallowed in earlier years and also in subsequent years. It was only this year the assessing officer has disallowed the claim.
11. On the other hand, learned departmental Representative was of the view that manufacturing charges received by the assessee from sister concern did not have direct nexus with the profit and gains derived from Industrial undertaking and hence the assessee will not be entitled for deduction under section 80-IA. The main activity of the assessee is to manufacture its own goods and when it works for others, then such income falls under the head "Income from other sources".
12. We have heard the rival submissions and considered the facts and materials on record. We are not convinced with the learned departmental Representative that for claiming deduction under section 80-IA, one should produce or manufacture own goods and if the assessee is producing or manufacturing goods belonging to others and receiving job charges for such manufacturing, he will not be entitled for deduction under section 80-IA. Section 80-IA states as under:
"80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.(I) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship (such business being hereinafter referred to as the eligible business), to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6).
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) *** *** ***
(ii) *** *** ***
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operate some or more cold storage plant or plants, in any part of India :
Provided that the condition in this clause shall, in relation to a small scale industrial undertaking, apply as if the words not being any article or thing specified in the list in the Eleventh Schedule had been omitted;"
13. From bare reading of these two, it is clear that
(i) profit and gains should be derived from any business of an industrial undertaking,
(ii) industrial undertaking manufactures or produces any article or thing....
14. Thus, it is clear that profit and gains should be from the business of the industrial undertaking and that industrial undertaking should manufacture or produce any article or thing. The direct nexus of profits and gains in section is with any business and not with manufacture or production of any article or thing. Clause (3) of sub-section (2) does not say that the assessee would be entitled for deduction under this section if he produces or manufactures article or things exclusively belonging to it. There is no such condition laid down in this clause that only that industrial undertaking which manufactures or produces its own article or thing would be entitled for deduction under section 80-IA. The words any business is associated with words derived from. The expression derived from has definite meaning and it should be confined to the word with which it is associated. Thus, if an industrial undertaking which produces or manufactures any article or things and carries out any business there from any deriving profit from such business then it is entitled for deduction. Both these conditions are satisfied in the present case. The assessee is manufacturing or producing article or thing and doing business by way of receiving job charges by manufacturing goods of others.
15. The words any business is of great significance. It allows benefit of deduction not only to the profits and gains derived from manufacturing activity but also in respect of income having close and direct nexus with the profits and gains. Wherever Legislature intended to give extended benefit, they have sometimes used the words attributable to and other occasions they have used words derived from any business. Both phrases practically have similar effect. The benefit is extended to those profits also which have direct nexus as, manufacturing activity. Thus, where goods belonging to others are manufactured by the assessee and derived profits by way of job charges, the assessee is entitled for deduction. In this context, the view of Cuttack Bench of ITAT in the case of Asstt. CIT v. Maxcare Laboratories (2005) 92 ITD 11 (Cut), are significant and this support our view. The head notes from the decision is reproduced below :
Maxcare Laboratories Ltd.s case (supra) "In section 80-I of the Income Tax Act, 1961, the statute has used the expression derived from with a view to give a restricted meaning to the income of the industrial undertaking. However, in section 80-IA, the expression used is profits and gains derived from any business of an industrial undertaking which shows that the intention of the Legislature while inserting the additional words in section 80-IA, i.e.,any business of was to give the benefit of deduction not only to the profits and gains derived from the industrial undertaking but also to give the benefit of deduction in respect of income having a close and direct nexus with the profits and gains of the industrial undertaking. Whenever the Legislature had intended to give the benefit of deductions to the wider extent of income and not only to income derived from the industrial undertaking, it has used expressions like profit attributed to. To give an extended benefit, the statute has used the words income derived from any business of an industrial undertaking. Thus, any income generated out of an act, which is required to be undertaken essentially for carrying on the business of industrial undertaking is to be considered for computing the deduction under section 80-IA.
The assessee had entered into an agreement with Dabur according to which Dabur was to get its products manufactured by the assessee under the technical know-how and in the trade name of Dabur. Dabur was to arrange the necessary business and bank guarantee for the assessee for the manufacture and sale of products on the terms and conditions as provided in the agreement. Under the terms and conditions of the agreement, the technology, material procurement, quality control including selection of machinery shall be as per the approval of Dabur. Dabur had organised term loans and working capital from bankers and its associate concerns and also extended corporate guarantee to the respective bankers for extending financial assistance to the assessee. On the other hand, the assessee was under business compulsion to place deposits with Dabur and its associate concerns. The assessee had paid interest on the loan and other credit facilities extended by the bank and associates of Dabur. As the assessee was under business compulsion to.bave security deposit with Dabur and its associates, it earned interest income on such deposits. The assessee claimed deduction under section 80-IA in respect of interest income earned by it for the assessment years 1995-96 to 1989-90. The assessing officer declined the assessees claim for deduction under section 80-IA in respect of interest income. The CIT(A) held that the interest expenditure incurred by the assessee was much more than the interest income earned by it from the very same source and therefore ultimately there was no interest earning and therefore deduction under section 80-IA could not be denied. On appeal :
Held, dismissing the appeal, that in all the years under consideration, the expenditure on interest was higher than the interest income, no interest income augmented the profit of the business of the industrial undertaking which needed to be reduced for computing the deduction in respect of the business of the industrial undertaking. Admittedly, the only source of income of the assessee was from the business of the industrial undertaking. The deposits given by the assessee out of business compulsion and the interest earned thereon even though not derived from industrial undertaking had a direct and proximate connection with the business of the industrial undertaking of the assessee. The assessee was therefore eligible for deduction under section 80-IA on the interest earning. Likewise, the income from sale of empty drums/containers, sale of useless materials was out of the business of industrial undertaking of the assessee. For determining the profits of business of the industrial undertakings the sale of empty drums/ containers, sale of useless materials could be taken into account."
16. Reliance placed by learned departmental Representative on the decision of Honble Bombay High Court in Kantilal Chhotalals case (supra) and CIT v. Pravin M. Mehta (2000) 246 ITR 445 (Bom), is misplaced because in those cases question involved was computation of deduction under section 80HHC and whether commission, charges can be included in business profit for the purpose of computation of special deduction under section 80HHC. The question that whether these charges are derived from a business of an industrial undertaking which manufacturing or producing article or thing was not involved. Similarly, learned counsel incorrectly placed reliance on the decision in Kantilal Chhotalals case (supra), which is also distinguishable on facts. The learned authorised representative of the assessee also relied on the decision in K.K. Doshi & Co.s case (supra). The question involved in K.K. Doshi & Co.s case (supra) was as to whether service charges collected by the assessee was related to the activity of manufacture and export for the purpose of deduction under section 80HHC. There was a finding of the fact that assessee-firm did not engage itself in the business activity of export and manufacture. The Service charges were found links with export activity of the assessee and on that basis eligible export profits were computed. Thus, the facts in this case are also different.
17. In view of the above, the assessee is entitled for deduction under section 80-IA on the job charges received by it by manufacturing goods of sister concern. Hence, the assessing officer is directed to calculate the eligible deduction under section 80-IA. The order of CIT(A) is reversed on this point.