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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).

"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.