Andhra HC (Pre-Telangana)
Commissioner Of Income Tax vs J & J Dechane Laboratories (P) Ltd. on 27 March, 1995
Equivalent citations: (1997)140CTR(AP)577
JUDGMENT
G. BIKSHAPATHY, J. :
The following questions have been referred to this Court by the Tribunal, Bench-B, Hyderabad, under s. 256(1) of the IT Act, 1961, for opinion :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that in respect of payments to the managing director of the assessee-company, though an employee, s. 40A(5) could not be applied but only s. 40(c) could be applied ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in excluding the expenditure on free samples supplied to the doctors in working out the disallowance under s. 37(3A) of the IT Act, 1961 ?"
Question No. 1 :
2. The assessee is a private limited company. The assessment years in respect of the issue under reference are 1978-79, 1979-80 and 1980-81. The reference case arises out of ITA Nos. 1563, 1575 and 1564/(Hyd) of 1982 on the file of the Tribunal. For the asst. yr. 1978-79, the managing director received salary of Rs. 48,400 besides getting perquisites amounting to Rs. 21,898. The ITO held that the assessee is entitled to only 20 per cent. of the salary towards perquisites by applying the provisions of s. 40A(5) and thus deleted a sum of Rs. 12,215 from the perquisites of the managing director. Similarly, in respect of the asst. yrs. 1979-80 and 1980-81, the managing director of the firm was paid remuneration, bonus and perquisites. The ITO while dealing with the matter under s. 40A(5) of the Act held that the computation has to be made in accordance with s. 40(c) of the Act.
On appeal by the assessee before the CIT(A), the CIT accepted the contention of the company and directed the ITO to modify the assessment by applying the provisions of s. 40(c), instead of s. 40A(5) by following the decision in Geoffrey Manners & Co. Ltd. vs. ITO (1983) 3 SOT 40, wherein it was held that in such circumstances, the assessment has to be made under s. 40(c). Accordingly, the first question is covered by the aforesaid decision. As such we are in agreement with the view taken by the Tribunal, which is in conformity with the decision rendered in the case of Geoffrey Manners & Co. Ltd. (supra). The question, therefore, is answered in the affirmative, that is, in favour of the assessee and against the Revenue.
Question No. 2 :
3. For the year 1979-80, the assessee distributed samples produced by it worth Rs. 1,59,996 among various doctors with a view to afford facilities of testing the genuineness of the drugs. The ITO held that the value of the samples are to be treated as part of advertisement expenditure incurred by the assessee under s. 37(3A) of the Act, as the samples are treated as advertisement media for pushing up the sales. Similarly, for the asst. yr. 1980-81, free samples of medicines manufactured by the assessee-company worth of Rs. 1,68,822 were distributed among the doctors. The ITO applied the same principle and refused to grant disallowance. Aggrieved by the order of the ITO for the asst. yrs. 1979-80 and 1980-81, the assessee-company preferred an appeal before the CIT(A). The learned CIT held that the samples given to the doctors by the assessee from out of its manufactured medicines should not be considered as falling under the term advertisement. Therefore, he directed the ITO to exclude the value of the samples for the asst. yrs. 1979-80 and 1980-81 in working out disallowance under s. 37(3A) of the Act. The Department filed second appeal before the Tribunal. The Tribunal after considering the respective contentions held that the view taken by the appellate authority was quite reasonable in view of the fact that the samples of medicine distributed for the purpose of testing the efficacy of the drugs and hence the direction of the appellate authority for exclusion of the sums in making disallowance under s. 37(3A) of the Act was found to be in order.
As against the said order of the Tribunal, the Revenue sought reference of question of law, which was accepted by the Tribunal and thus the questions referred to above have been referred to this Court for opinion.
In this issue, the question relating to the exclusion of expenditure on free samples supplied to the doctors while working out the disallowance under s. 37(3A) of the Act is considered.
4. Mr. S. R. Ashok, learned standing counsel for the Revenue, contends that the lower authorities did not consider the matter in the proper perspective. Samples are distributed to the doctors for the main purpose of sales promotion and, therefore, the value of the samples should be treated as expenditure on advertisement under s. 37(3A) of the Act. He relied on the decision of the Karnataka High Court in Smith Kline & French (India) Ltd. vs. CIT (1992) 193 ITR 582 (Kar) wherein a similar case arose in respect of samples manufactured by a pharmaceutical company. In the said case, the assessee-company claimed the expenditure on distribution of physicians samples as expenditure under s. 37 of the IT Act, 1961. While the Revenue treated this expenditure as an expenditure incurred towards advertisement, publicity or sales promotion and, consequently, the restrictive clause of s. 37(3A) was applied resulting in the disallowance of part of the expenditure, the High Court held that before the drug gets circulated, its reputation will have to be confirmed by the medical practitioners and that is why free samples are supplied to them. If the object of supplying free samples is only to find out the reaction of the medical practitioners about the efficacy or curative value of the drug, the supply of free samples would have been confined to the initial stages of production of the new drug. The assessee had not contended that the free samples were distributed only when a drug was introduced for the first time. Moreover, in its original return, the assessee had shown these sums under the head "advertisement". Therefore, on the facts and in the circumstances of that case, the Court held that the expenditure incurred on physicians samples amounts to an expenditure on advertisement, publicity or sales promotion falling within the restrictive provisions of s. 37(3A).
5. A somewhat similar issue came up for consideration before this Court (one of us Syed Shah Mohammed Quadri J., is a party) in R.C. No. 48 of 1985 [since reported in CIT vs. Ampro Food Products (1995) 215 ITR 904 (AP) ]. In the said case the issue was "Whether the expenditure incurred by the assessee towards the free distribution of notebooks and placing gift coupons in the assessees products is not covered by s. 37(3A) of the Act". This Court by its orders, dt. 21st February, 1995, after referring to the Karnataka High Court decision in Smith Kline & French (India) Ltd. vs. CIT (supra) and also the judgment of the Calcutta High Court in CIT vs. Bata India Ltd. (1993) 201 ITR 884 (Cal) held as follows :
"From the above discussion what follows is that expenditure of the nature which is essential to the running of the business a bare minimum to carry on the trade would not fall within the meaning of the three expressions, i.e., advertisement, publicity and sales promotion. The other expenditure, incurred under any of the three heads, would be within the mischief of the provisions of sub-s. (3A) of s. 37 of the Act and, therefore, will have to be scaled down."
6. In the instant case, the assessee claimed expenditure on distribution of physicians samples under s. 37 general head. In view of the principles settled by this Court in the aforesaid decision, if the expenditure falls within the bare minimum it will not be caught by sub-s. (3A) of s. 37, but if it is of the nature which is not essential to the carrying on the business, it will be within the net of sub-s. (3A). Physicians samples are necessary to ascertain the efficacy of the medicine and to introduce it in the market for circulation and it is only by this method the purpose is achieved. In such cases giving physicians samples for a reasonable period is essential to the business of manufacture and sales of the medicine. But if a particular medicine has been introduced into the market and its uses are established, giving of free samples could only be as a measure of sales promotion and advertisement and would thus be hit by sub-s. (3A). As in this case there is a finding of the CIT(A) and confirmed by the Tribunal that the expenditure was incurred to test the efficacy of the drug, the expenditure would be within the ambit of bare minimum to carry on the business. For these reasons, it has to be held that the expenditure on physicians samples distributed to doctors is outside the scope of sub-s. (3A) of s. 37 of the Act. Therefore, the appellate authority, as well as the Tribunal are right in directing the exclusion of the expenditure on free samples supplied to the doctors in working out disallowance under s. 37(3A) of the Act.
Accordingly, the reference is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
7. The reference is answered accordingly. No costs.