1991 (4) TMI 45 - HC - Income Tax

Court rules tea samples distribution as business expense, not entertainment. Distribution not taxable income.

The High Court held that the distribution of tea samples by the assessee to its shareholders, directors, and friends for commercial expediency and ... Distribution of stock-in-trade as samples - notional sale / notional receipts - business expenditure - expenses incurred for holding business meetings - popularising product and creation of goodwillDistribution of stock-in-trade as samples - notional sale / notional receipts - business expenditure - expenses incurred for holding business meetings - Tribunal was justified in treating the value of stock-in-trade distributed free among shareholders, directors and their friends attending the annual general meeting as business expenditure and allowing deletion of the addition. - HELD THAT: - The assessee distributed tea samples and complimentary tea at the annual general meeting to shareholders, directors and friends without any sale or realisation of price. Where no sale or price is fetched, there can be no notional sale proceeds or profit element to be brought to tax. The principle in CIT v. Calcutta Discount Co. Ltd. that market price cannot be substituted for the real price in a bona fide transaction applies: here no price was realised, so notional receipts cannot be taxed. Further, even if the distribution were characterised as expenditure claimed for business purposes, such outlay is allowable where it is incurred as necessary for holding business meetings and for commercial expediency-paralleling the reasoning in Addl CIT v. Bangalore Turf Club Ltd. that refreshments supplied at business meetings constitute administrative or business expenditure and are not disallowable as entertainment. Applying these principles, the Tribunal correctly deleted the addition and treated the distribution as business-related expenditure.Addition could not be treated as income and the Tribunal was justified in deleting the addition; the distributions are not taxable as notional sales and, if regarded as expenditure, are allowable as business expenses.Final Conclusion: Reference answered in favour of the assessee: the value of the tea distributed free at the annual general meeting could not be added as income and the Tribunal correctly upheld deletion of the addition. Issues involved: The judgment involves the assessment of whether the distribution of tea samples by the assessee to its shareholders, directors, and friends should be considered as a business expenditure for the purpose of income tax assessment for the year 1977-78.Assessment of Tea Distribution as Business Expenditure: The assessee, engaged in the manufacture and sale of tea, distributed tea samples to its shareholders, directors, and friends. The Income-tax Officer added the value of the distributed tea as income of the assessee, not considering it as a business expenditure. The Commissioner of Income-tax (Appeals) upheld this addition, rejecting the assessee's argument that the distribution was for the business's interest.Arguments Presented: The assessee contended that the distribution of tea samples was done to popularize the tea manufactured by the company for commercial expediency, making it an allowable business expenditure. The departmental representative argued that the assessee failed to prove the distribution was made in the business interest of the company, shifting the burden of proof onto the assessee.Tribunal's Decision: The Tribunal concluded that the distribution of tea samples was aimed at popularizing the company's product and creating goodwill among shareholders, thus being done for commercial expediency. Consequently, the addition of the value of the distributed tea was deleted, directing the Income-tax Officer to modify the assessment of the assessee and its partners.Legal Interpretation: The High Court clarified that since no sale was involved in the distribution of tea samples to shareholders and directors at the annual general meeting, the question of profit element or notional sale did not arise. Referring to legal precedents, the Court emphasized that such distribution, even if claimed as business expenditure, should be considered as necessary business expenditure, similar to expenses incurred for business meetings, and not as entertainment expenses.Court's Decision: The Court held that the distribution of tea samples without any sale involved could not be added as income of the assessee, affirming the Tribunal's decision to delete the addition made. The Court answered the raised question by stating that the amount in question was not taxable income of the assessee. No costs were awarded in the matter.Separate Judgment: Judge Shyamal Kumar Sen agreed with the decision presented in the judgment.