1991 (12) TMI 92 - AT - Income Tax

Tribunal Ruling: Disallowance of Expenses, Interest Upheld; Deductions Allowed

Chemosyn (P.) Ltd. Versus Second Income-Tax Officer

Chemosyn (P.) Ltd. Versus Second Income-Tax Officer - [1992] 42 ITD 1, [1991] 42 TTJ 403, [1992] 198 ITR (A. T.) 209 Issues Involved:1. Whether free samples distributed by a pharmaceutical company to doctors are considered as expenses on 'advertisement, publicity, and sales promotion' u/s 37(3A)/(3B) of the Income-tax Act, 1961.2. Whether the assessment order was barred by limitation.3. Inclusion of certain expenses for calculating disallowance u/s 37(3A).4. Disallowance of interest paid on amounts received from directors and shareholders u/s 40A(8).5. Non-admission of additional ground for relief u/s 80J.6. Deduction u/s 35 for capital expenditure on scientific research.7. Allowability of Pooja expenses.Summary:Issue 1: Free Samples as Advertisement ExpensesThe Tribunal examined whether free samples distributed to doctors by pharmaceutical companies qualify as 'advertisement, publicity, and sales promotion' expenses u/s 37(3A)/(3B). It was argued that the samples were for obtaining information on the efficacy of medicines and not for advertisement. However, the Tribunal found that the distribution of samples also served to promote sales and create goodwill with doctors, thus falling within the ambit of 'sales promotion'. The Tribunal concluded that half of the expenditure on samples should be disallowed under section 37(3A).Issue 2: Assessment Order LimitationThe assessee contended that the assessment order was barred by limitation as it was completed more than six months after the issue of the draft order. The Tribunal rejected this ground, stating that the assessment was completed within the permissible time frame, excluding the period of 180 days as provided under Explanation 1(iv) to section 153.Issue 3: Inclusion of Certain ExpensesThe Tribunal upheld the inclusion of expenses on advertisement in medical journals and gifts to medical practitioners for calculating disallowance u/s 37(3A). However, it allowed the expenditure on presentation articles and lunch & snacks for business guests, stating that these were normal business expenses and not extravagant or wasteful.Issue 4: Disallowance of Interest u/s 40A(8)The Tribunal upheld the disallowance of interest paid on amounts received from directors and shareholders u/s 40A(8), following the Special Bench decision in Kaloomal Shorimal Sachdev Rangwalla (P.) Ltd. v. First ITO.Issue 5: Relief u/s 80JThe Tribunal found that the CIT(Appeals) erred in not admitting the additional ground for relief u/s 80J. It noted that similar claims had been allowed in previous years and directed the CIT(Appeals) to dispose of the case on merits after affording adequate opportunity to the parties.Issue 6: Deduction u/s 35 for Scientific ResearchThe Tribunal upheld the CIT(Appeals)'s decision allowing deduction u/s 35 for capital expenditure on scientific research, noting that the building was used for scientific research and the provisions of section 35(1)(iv) were clear in allowing such deductions.Issue 7: Pooja ExpensesThe Tribunal upheld the CIT(Appeals)'s decision to allow a significant portion of Pooja expenses, stating that they were incurred for business purposes to dispel workers' irrational beliefs and ensure their attendance at work. Only a small portion was disallowed to cover unverifiable expenses.Conclusion:The assessee's appeal was partly allowed, and the department's appeal was dismissed.