1. This Special Bench of the Tribunal has been constituted to decide the following question : " Whether the expenses in the nature of free samples distributed by a pharmaceutical company to the members of the medical profession are to be regarded as expenses on 'advertisement, publicity and sales promotion ' within the meaning of Section 37(3A)/(3B) of the Income-tax Act, 1961?" 2. It is the principal question in the appeal of the appellant-assessee and those of the interveners.
3. Briefly stated, the business of the assessee is to manufacture and sell medicines. In the course of that business, they distribute samples of their products free of charge to doctors through their representatives who record in certain forms information regarding their use by the doctor and his experience in that regard.
4. The Income-tax Officer made a partial disallowance of the expenditure under Section 37(3A) and 3(B) in respect of these samples claimed by the assessee. The Commissioner of Income-tax (Appeals) has confirmed that disallowance. Hence, the appeal by the assessee.
5. On behalf of the assessee, it was submitted that the free samples are given to doctors not for the purpose of advertisement, publicity or sales promotion, but, in order to obtain information from the doctors regarding the efficacy of the medicines and to ascertain whether any changes were necessary in those medicines to make them more effective or suitable for the patients. It was stated that this information was necessary even in the case of medicines which were already in the market for a long time. Shri Y. P. Trivedi, learned counsel, pointed out that the medicines had to be tried out in the larger laboratory of the society. He submitted that the samples were given free to the doctors in order that they may try them out in the treatment of their patients and inform the representatives about the results and their experience. On behalf of M/s. John Wyeth & Brother Ltd., learned counsel, Shri Dastur, submitted that the medicines may have different effects on different human beings and it was the human factor which made constant testing of the medicines necessary. This, according to him, was an ongoing process. He pointed out, as an example, from a copy of one form filled up by a medical representative containing suggestions regarding flavour of a certain medicine samples of which were given to a doctor by the assessee. He submitted that this gave the company information for improving its products. He also pointed out from a copy of the letter dated July 6, 1974, from the J.J. Group of Hospitals, Bombay, which showed that the assessee, M/s. John Wyeth & Brother Ltd., had supplied certain injections free of charge as samples to obtain the clinical response and cost benefit. He submitted that the reasons for giving samples were that the doctors wished to certify the usefulness and the therapeutic effect in their own practice through clinical evaluation and, therefore, requested for samples of the product --(Ref: assessee's note on sampling). Learned counsel submitted that the samples were given to doctors to gather information which otherwise could not be obtained. Shri Pooran, learned counsel for M/s.
Roche Products Ltd., submitted that although this activity did not involve any fundamental research, it did mean research regarding the suitability to the patients, conditions for prescribing, etc., and was necessary for the proper development in the use of the medicine.
Counsel further submitted that the difference in environment also made a difference in the efficacy of the medicine. He also submitted that the information obtained from the doctors was used by the manufacturers and cited an incident of a medicine called "Enterovioform" which was withdrawn by the manufacturer, CIBA, when it was found that it had an adverse effect on the eyes. He submitted that no medicine could be regarded as perfect and it had to be evaluated by gathering information regarding its use by the doctors. He also said that the medical representatives inform the doctors regarding the proper use of the medicines in question and also submitted that the doctors were not influenced by the samples being given free of charge. The learned advocate appearing on behalf of M/s. Baver (I) Ltd. submitted that pesticides were distributed to farmers who ascertain their effect on farming and rubber chemicals were given to industrial laboratory for testing purposes in the same manner as medicines produced were given to doctors as free samples. He submitted that the basic object of distributing samples was to test the efficacy of the products and so, that could not be classified as an item of advertisement, publicity or sales promotion.
6. The second submission on behalf of the assessee was that that what was intended-to be disallowed under Section 37(3A) and (3B) was the extravagant and socially wasteful expenditure as shown by the Finance Minister's Budget Speech and the Memorandum explaining the provisions of the Bill respectively as follows (see [1978] 111 ITR (St.) 89, 164) : " Extravagant and socially wasteful expenditure is often incurred on advertisement, publicity and sales promotion. In order to put a curb on such expenditure at the cost of the Exchequer, I propose to provide for the disallowance of a part of such expenditure in the computation of taxable profits." " In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, it is proposed to make a provision for the disallowance of a part of such expenditure in the computation of taxable profits." 7. Counsel submitted that, considering the turnover, the expenditure was very small and by no means extravagant or wasteful. It was also submitted that the decision of the Karnataka High Court in the case of Smith Kline and French (India) Ltd. v. CIT [1992] 193 ITR 582, although against the assessee, had not considered this argument based on the object of the legislation as contained in the Budget Speech and the Memorandum to the Bill as quoted above. Regarding this decision, Shri Dastur submitted that, in that case, this kind of expenditure was claimed separately while, in the present case, the Income-tax Officer had derived the expenditure from the total expenditure on proportionate basis of the manufacture of the medicines. This point has a connection with the argument of Shri Dastur that there was no separate cost of the samples which we shall consider later. He also submitted that the said decision of the Karnataka High Court could not be regarded as binding on the basis of the Bombay High Court decision in the case of CIT v.Smt. Godavaridevi Saraf [1978] 113 ITR 589, because the Bombay High Court was dealing with the application of law which the Madras High Court had declared ultra vires which was beyond the powers of the Tribunal and that is why the Bombay High Court had said that the Tribunal was bound to respect the decision of the Madras High Court.
Shri Dastur also submitted that if the assessee had agreed to pay a doctor, say Rs. 1,000 per drug prescribed, that would be the cost of the sale and would be allowed and if that was so, why should this expenditure be disallowed? A similar argument was advanced by Shri Trivedi that if, in a seminar, a particular medicine manufactured by the assessee was discussed and if the assessee had paid the bill for hosting the seminar, that expenditure would be allowed and if that was so, why should this expenditure be not allowed Counsel had submitted that here, since we are concerned with scheduled or ethical medicines for which advertisement was prohibited by law, expenditure incurred here could not be regarded as being for that purpose and so could not be disallowed. A simple example was given by Shri T. Pooran, counsel for Roche Products Ltd. He stated that if a customer in a sweetmeat shop tasted a piece of a sweet for sale, the cost thereof would be allowed and so this expenditure should also be allowed. Shri Trivedi pointed out that the decision of the Karnataka High Court was not regarding the ethical drugs (as in the cases before us) which could be obtained only on doctor's prescription. Counsel then relied upon the Tribunal's order,. Ahmedabad Bench 'C, in the case of Miles India Ltd. [1985] 20 Taxman 102 where, according to them, the Tribunal had allowed a similar claim. According to counsel, this expenditure could not come within the scope of the expression " sales promotion". It was argued by Shri Trivedi that every activity ultimately was for sales promotion, even manufacturing of the product. According to counsel, that expression was to be understood in the context of the other words, i.e., advertisement and publicity. In that connection, they cited the decision of the Tribunal, Calcutta Bench 'B', in the case of Statesman Ltd. v. IAC [1990] 33 ITD 202 and also another decision in the same Report in the case of Hindustan Times Ltd. v. ITO [1990] 33 ITD 427 (Delhi), where the Tribunal had allowed the deduction of commission paid to sales agents and advertisement agents. Counsel also referred to similar decisions in ITO v. Meera and Co. [1986] 15 ITD 227 (Chd), Mopeds India Ltd. v. IAC [1984] 7 ITD 324 (Hyd), which were relied upon in the above decision. In this connection, counsel relied upon the Board's Circular No. 240, dated May 17, 1978 (see [1979] 117 ITR (St) 17), which was also relied upon in the case of Miles India Ltd. [1985] 20 Taxman 102 (Ahd). Shri Trivedi pointed out that the decision of the Tribunal in the case of Tyagi Anand and Co. (P) Ltd. v. ITO [1987] 21 ITD 1 (Delhi), where the distribution of free cinema tickets to journalists and to policemen was not regarded as entertainment expenditure. Shri Dastur also submitted that this provision was for disallowance of expenditure and, therefore, had to be construed strictly. He relied upon the decision of the Supreme Court in the case of R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570, where it has been stated that " It is true that equitable considerations are irrelevant in interpreting tax laws. But those laws, like all other laws, have to be interpreted reasonably and in consonance with justice " (at page 575). He submitted that only direct expenditure under this head could be disallowed and since, in this case, the public was not approached directly, disallowance could not be made. He asked that if the expenditure incurred on a loudspeaker announcing this product would be allowed, why should this expenditure be disallowed He submitted that Sub-sections (3A) and (3B) have to be read together, relying upon Maxwell on the Interpretation of Statutes (12th Edn., pages 59 & 60), where it has been stated that : " the meaning of a Section may be controlled by other individual Sections in the same Act. So too, the apparently general language of a schedule may be restricted by the more specific provision of one of the Sections of the statute." 8. Shri Dastur pointed out that, under Sub-section (3B), disallowance could not be made in the case of expenditure for the maintenance of any office for the purpose of advertisement, publicity or sales promotion and asked how could the expenditure on those very items, i.e., advertisement, publicity and sales promotion, be disallowed He submitted that it would be unreasonable to say that the salary of a person who actually drew the advertisement was to be allowed, but the salary of a person who manufactured the product which was advertised was to be disallowed. He submitted that there was no separate cost for the samples and that the cost of producing samples was part of the cost of production. Since this was not separately identifiable, it could not be disallowed as was done by the Income-tax Officer. He then asked the question : when could the expenditure be said to have been incurred, i.e., when the samples were distributed or when the medicine was manufactured He submitted that, since the point of time of incurring of the expenditure was not identifiable, the year of its disallowance was not identifiable and, consequently, it could not be disallowed. He relied upon the decision of the Supreme Court in the case of Indian Molasses Co. (P) Ltd. v. CIT [1959] 37 ITR 66. He drew the analogy of Section 43B under which collection of sales tax was not allowed as a deduction unless it was paid during the same accounting year in which it was collected. He also submitted that if the samples had not been distributed, they would have been part of the closing stock and by distributing the same, there was a reduction in the closing stock which was not an expenditure incurred and so, there was no question of disallowance.
9. Learned standing counsel, on behalf of the Revenue, first of all submitted that it could not be said that there was no expenditure because there was no cash payment. According to him, expenditure could be in kind also. Regarding reference to the Budget Speech and the Memorandum to the Finance Bill, relied on by the Tribunal in the case of Miles India Ltd. [1985] 20 Taxman 102 (Ahd), he submitted that there was nothing in the said Sub-sections (3A) and (3B) regarding extravagance of the expenditure and that that consideration could not be brought in for applying those provisions which were quite clear. He submitted that the above decision of the Karnataka High Court ([1992] 193 ITR 582) was on all fours with the present case and applying the decision of the Bombay High Court in the case of Smt. Godavaridevi Saraf [1978] 113 ITR 589, it was binding on the Tribunal. Regarding the argument that the samples were distributed in order to get information from doctors regarding the efficacy of the medicines, he submitted that the medical representatives who gave the samples approached the doctors " both as salesmen as well as for getting information ". According to him, it could not be contended that there was no advertisement or sales promotion here just because the public was not approached directly. He submitted that the nature of the product sought to be sold was such that it could be done only through doctors and so, it was as much sales promotion as in the case of any other product. He also relied on the decision of the Bombay Bench 'C in the case of Geoffrey Manners and Co.
Ltd. v. I AC, dated January 28, 1985, where the arguments of counsel on behalf of the assessee have been considered.
10. In rejoinder, Shri Trivedi referred to the following paragraph from the decision of the Karnataka High Court in Smith Kline and French (I) Ltd. [1992] 193 ITR 582, 585 : " 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 during the initial stages of production of a new drug.
However, that is not the case of the assessee here. The assessee nowhere contends that free samples were given to the medical practitioners only at the time when a drug is introduced, for the first time." 11. He submitted that this decision does not take into account the fact that, even in the case of old medicines, it was necessary to ascertain their efficacy by eliciting information in that regard. He submitted that it was a mistake to think that testing was necessary only in the case of new medicines. In reply to standing counsel's argument that there was no testing involved here because that could be done only in a proper laboratory, he said that although testing done here was not of that standard, it certainly resulted in obtaining information which was necessary for ascertaining the suitability of the product and improving it. He also said that the Tribunal decision in the case of Geoffrey Manners and Co. Ltd. did not have an answer to Shri Dastur's argument that the reduction in stock was not an expenditure. Shri Dastur, in rejoinder, stated that the decision in the case of Geoffrey Manners and Co. Ltd. was regarding Section 80G and the cases relied on therein were overruled by the decision of the Supreme Court in H. H. Shri Rama Verma v. CIT [1991] 187 ITR 308. He also said that the standing counsel had wrongly stated that nothing has happened after information was obtained from the doctors. In one case, as he pointed out, the flavour of the medicine was changed and in another case, i.e., CIBA, the medicine was withdrawn from the market. He submitted that, in any case, the expenditure was incurred for gathering information.
12. We shall now deal with the above arguments. The material parts of Sub-sections (3A) and (3B) are reproduced below : " (3A) Notwithstanding anything contained in Sub-section (1) but without prejudice to the provisions of Sub-section (2B) or Sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely :-- (i) where such aggregate expenditure does not exceed 1/4 per cent, of the turnover or, as the case may be, gross receipts of the business or profession (ii) where such aggregate expenditure exceeds 1/4 per cent. but does not exceed 1/2 per cent, of the turnover or, as the case may be, gross receipts of the business or profession (iii) where such aggregate expenditure exceeds 1/2 per cent, of the turnover or, as the case may be, gross receipts of the business or profession Explanation. -- (a) meaning of 'adjusted expenditure' and (b) meanings of 'turnover' and 'gross receipts'.
(3B) Nothing contained in Sub-section (3A) shall apply in relation to any expenditure incurred by an assessee on -- . . .
(iv) the maintenance of any office for the purpose of advertisement, publicity or sales promotion ; (v) the payment of salary (as defined in Clause (1) of Section 17) to any employee engaged in advertisement, publicity or sales promotion ; " 13. It has been said that the medical representatives, while distributing the samples, do so only in order to gather information from the doctors regarding the efficacy of the assessee's products and for carrying out improvements, if any, as are necessary and that, therefore, this activity does not amount to advertisement, publicity or sales promotion. It has also been said that this kind of research is necessary even in the case of medicines which have already been in the market for a long time and that their suitability has to be ascertained because of variability of the human factor and the effect of the environment also.
14. A perusal of the forms, copies of which have been supplied by Shri Dastur, shows various kinds of information and nothings for which columns and spaces have been provided. There are columns which are supposed to indicate the month-wise frequency of use of the company's products by the doctor such as occasional prescriber, buyer of Wyeth, products, buyer of competitive products, selected for Wyeth products or consistent prescriber (presumably of that company's products). There is a column which indicates the average monthly RX support which means value of the medicines prescribed for a month. There is also a column ,for month-wise value of the orders booked. There is a space for the kind of practice of the doctor, i.e., whether general practitioner (or a specialist) and his attitude during the visits. There is also a space with the heading " clues " where the effect of various products of the company and the doctor's experience with his patients in that regard are recorded. There is a space called " strategy for the next call " wherein it is recorded what the medical representative should do at the time of next call. Considering all these details which are to be obtained from the doctors, in our view, the aim of the assessee is two fold. In the forms, space is provided for gathering the aforesaid information regarding the efficacy of the medicines and the scope for improvement, if any, as is seen from the space with the heading " clues" and partly in the space with the heading " strategy for next call". On this basis, it can be said that one of the aims of the assessee is to obtain the aforesaid information regarding the acceptability 'or otherwise of the medicines and to ascertain the necessity for improvements, if any. On the other hand, columns regarding value of average monthly support, orders booked and the remarks in the space for " clues " and " strategy for next call " indicate that the aim is also to canvass more orders or to persuade the doctor to prescribe the assessee's products. Thus, for example, in the space for "clues" regarding the product " Wysolone ", there is a remark that the medicine was not available freely and the space for strategy for next call states " to convince on availability ". Regarding, the product " Mucaine", there is a remark stating "want to know the difference ". Opposite to that, in the space for " strategy for next call ", there is a statement " to convince on superiority ". Regarding that medicine, there is a remark " want to try in peptic ulcer". In the " clues" column and opposite to that in the strategy for next call, is written : given -- samples for friends. In the space regarding the details of the doctor visited,-there is a remark " good supporter of Wyeth". These are examples and indications to show that the assessees are also interested in promoting the sales of their products in this way. It is true that the human factor has to be taken into account regarding the general acceptability of the medicines and it may be desirable also to ascertain the acceptance of the medicines and the scope for improvement of the medicines which are already in the market.
That, however, does not mean that a generalisation regarding the treatment of various ailments cannot be done. Just as there is the individual human factor, there is also a common human factor. If that was not so, the general applicability of medicines regarding various diseases would never be possible. Therefore, to say that this exercise is carried out by the assessee only in order to carry out some kind of research is over-stretching the argument. All sciences are dependent upon generalisation and medical science is no exception.
15. It is to be noted that the information is obtained from the doctors on giving free samples. If the idea was only to gather information, medical representatives would visit various doctors only to find out whether that doctor is using or prescribing the assessee's products and if so with what results. When the assessees give those samples, certain amount of good relationship is created with the doctor who may then be inclined to buy or prescribe those medicines, other things being equal and in preference to other similar products. Enquiring about doctor's opinion about the medicines, his experience in its use and suggestions, if any, for its improvement also creates a good relationship with the doctor and so, this is a sophisticated way of canvassing for the sale of the assessee's products. It was said that, without giving samples to doctors, it is not possible to sell the medicines, We are unable to accept this contention. Medical representatives can speak about the efficacy, dosage, etc., of the medicines to the doctors and give them the relevant literature.
16. Moreover, changes made in the medicines are not substantial or frequent. A case where a medicine was withdrawn from the market has been pointed out to us and we appreciate that it is only an instance but it has not been shown that there are many changes or that they are substantial. Therefore, it cannot happen that assessees who are doing business would spend large sums of money only for the sake of obtaining this kind of information for improving their products. The sums may not be large compared to the turnover, but by themselves they are large. To queries from the Bench, it was clarified that the medicines were fully tested in laboratories before being put into the market and the doctors were given the samples only thereafter. Therefore, the normal inference would be that the samples are distributed also for promoting sales.
Shri Dastur had argued that, without giving these free samples, the assessees could not obtain relevant information. We may say that this is not entirely correct. It may be possible to obtain information regarding the efficacy of medicines even without giving the samples by finding out which doctors use particular medicines and asking them about their efficacy. It may be true that the work is made easier by giving samples free of charge, but it would not be correct to say that, without giving free samples information cannot be obtained. Moreover, we have taken the view that free samples are distributed also for canvassing and not only for canvassing.
17. Regarding the argument based on the Budget Speech and the Memorandum to the Bill that disallowance can be made only if the expenditure is extravagant, we may first of all notice that the Sections do not use this expression and there is no condition therein that the disallowance can be made only if the expenditure is extravagant. The normal Rule of interpretation is that, where the text is clear, the text is conclusive and, in our view, the text in this case is clear. It has to be noticed that the disallowance made is not total. It is only partial and in proportion to the expenditure beyond a certain limit. Therefore, it must be said that what is extravagant and what is not, has been duly taken care of in making the law. It is not open to us now to read an additional condition in these Sections that the expenditure should be extravagant for the purpose of disallowance.
The Supreme Court in K. P. Varghese v. JTO [1981] 131 ITR 597 said that (headnote) : "... speech made by the mover of the Bill explaining the reason for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted." 18. Thus, all that it says is that the material may be referred to, not that it should be imported into the statute. In taking this view, we are not ignoring the intention of the Legislature as shown in the Budget Speech and in the Memorandum, but we are taking it into account as above.
19. Regarding Shri Dastur's argument that when expenditure on maintenance of an office for advertisement publicity and sales promotion was not to be disallowed, this expenditure also could not be disallowed, the answer is not far to seek. Since the disallowance is not complete, but only partial, the assessee would be maintaining an office and paying the employees for this purpose and that has to be allowed.
20. In this connection, we may also consider the decision of the Ahmedabad Bench of the Tribunal in the case of Miles India Ltd. [1985] 20 Taxman 102 on which the assessee's counsel has relied. In that case, the Tribunal held that the disallowance under Section 37(3A) could not be made in respect of the expenditure incurred by the assessee on the free distribution of samples, testing strips and kits to doctors. The Tribunal has relied upon the Budget Speech and the Explanatory Memorandum and held that the expenditure was not extravagant or wasteful, because the free samples were distributed in order to help persons suffering from diabetes. It has relied upon the Board's Circular No. 240, dated May 17, 1978 (see [1979] 117 ITR (St.) 24) as follows : " As the terms ' publicity' and ' sales promotion' have a wide amplitude, expenditure incurred by taxpayers on fashion shows ; beauty contests ; Consumer contests ; consumer gift offers ; and free samples or gifts will fall within the ambit of new Sub-section (3A) of Section 37 of the Income-tax Act." 21. The Tribunal has quoted only up to the words fl beauty contest " and not taken into account the mention of " free samples or gifts " in this circular. The Tribunal, in the case of Statesman Ltd. [1990] 33 ITD 202 (Cal), while relying on the same circular, only mentions the words in the circular up to the words " gifts " but omits the words " free samples " which occurred before the word " gifts " in the circular. Secondly, in paragraphs 2 and 3 of the order of the Tribunal in Miles India Ltd. [1985] 20 Taxman 102 (Ahd), the Tribunal has recorded the assessee's statement that " the main purpose was to popularise the products". (emphasis * supplied). In spite of this, the Tribunal has accepted the argument of the assessee that the samples were distributed free to help persons suffering from diabetes. It is also clear that these samples were not distributed free at a time when there was absolutely no other means available for the detection of diabetes. It was, therefore, distributed in order to introduce it in the market through doctors so that it may be accepted in preference to other means available for the detection of diabetes. Further, both the Budget Speech as well as the Memorandum speak of extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion. This means that the law-makers have not sought to disallow the expenditure itself on these items, but only sought to curb the extravagant and socially wasteful element therein. This, as we have stated above, has been duly provided for by fixing a certain proportion to the expenditure. Moreover, the words" extravagant and wasteful" have a connection only with the extent or degree of anything and not with the kind of a particular thing or item (in this case expenditure).
Therefore, even if the Tribunal took into account only the words such as " fashion shows " and " beauty contest", it was not proper to exclude free samples on the reasoning that only items like fashion shows and beauty contests involve extravagant and wasteful expenditure.
As stated above, the words " extravagant or wasteful" have a connection only with the extent or degree of anything and, therefore, even in the case of beauty contests or fashion shows, if the expenditure does not exceed the limit of allowability specified in the Section, it would not be extravagant or wasteful. Finally, the Board has no power of interpretation of a statute. That power is a judicial power. Therefore, for the purpose of interpretation, the Board's above circular cannot be relied upon. However, as stated above, the circular does mention free samples. Even on the basis of this circular, Sub-sections (3A) and (3B) would be applicable to the present case. For the above reasons, we are unable to agree with the decision of the Tribunal in the case of Miles India Ltd. [1985] 20 Taxman 102 (Ahd).
22. The decision of the Tribunal in the case of Tyagi Anand and Co. (P) Ltd. [1987] 21 ITD 1 (Delhi) on which Shri Trivedi had relied is not applicable here. That was a case where the Tribunal had held that the-expenditure on distribution of free cinema tickets to policemen and journalists was not expenditure on entertainment, because the Tribunal had come to the conclusion that the purpose of the expenditure was to obtain an independent objective opinion from the journalists and also the help of the police in maintaining law and order in the cinema halls. Thus, the purpose was other than the purpose for which the cinema was shown to the public. There is no similarity between the two cases merely because in these cases, samples are distributed free and in that case the tickets were distributed free of charge. In that case, the expenditure was not disallowed, because the purpose was other than the one for which disallowance could be made whereas, in these cases, part of the purpose is for something for which disallowance can be made.
23. That brings us to the two decisions relied upon on behalf of the assessees, i.e., the case of Statesman [1990] 33 ITD 202 (Cal) and the Hindustan Times Ltd. [1990] 33 ITD 427 (Delhi). Both are cases of payment of commission to newspaper agents and advertisement agents. The Tribunal has held in both the cases that this expenditure was not covered by Sub-sections (3A) and (3B) of Section 37 and no part of the expenditure can be disallowed on that count. Learned counsel for the assessee had argued that the words " sales promotion" have to be construed in the context of the earlier words" advertisement" and " publicity " and, therefore, they would take their colour from those words. In the case of advertisements and publicity, the consumer is directly approached and the expenditure is incurred in making that direct approach while, in the case of payment of commission, there is no such direct connection. That is why this payment of commission would not come within the scope of Sub-section (3A). In the present case, the connection with the ultimate consumer of the product is not indirect as in the case of commission. It can be said to be indirect only on a superficial view. We have to remember that the products in these cases are ethical medicines, i.e., they can be obtained only on the doctor's prescription. Therefore, the nature of the product itself is such that it can be sold to the public only by persuading the doctor to recommend the medicine to the public which is the ultimate consumer. Therefore, canvassing before the doctor amounts to canvassing before the consumer.
In the case of newspapers, it is not necessary that the agents should recommend the newspaper to the public while, in the case of ethical medicines, it is necessary that the doctor should recommend them to the consumer. We are fortified in this view by the decision of the Karnataka High Court in the case of Smith Kline and French (India) Ltd. [1992] 193 ITR 582, where it has been observed that (at page 585) : " The nature of the advertisement or publicity depends upon the nature and quality of the article in question. An inducement to the public to buy a particular commodity maybe formulated in a mode most suitable to the article in question.
The members of the public would not buy a drug just because it is advertised repeatedly or publicised through posters or announced on the T.V., etc. The members of the public should have confidence about the curative value of the drug and such confidence could be created mainly by the medical practitioners prescribing the said drug or when the medical practitioners give the same to the patients towards treatment. The media through which the drug could get publicised and earn goodwill will be the media of prescription by the medical practitioner. Further, the real persons who could create a market for a particular drug are the medical practitioners themselves having regard to the nature of the drug, when compared to other industrial products. A drug is not an ordinary article of consumption. It is consumed only to get rid of some ailment. Before the drug gets circulated, its reputation will have to be confirmed to the medical practitioners and that is why the free samples are supplied to them." .
24. The above decision of the Karnataka High Court has come after the above two decisions of the Tribunal and could not be considered therein. It is unnecessary to consider the other decisions which have been cited on behalf of the assessee, because we have considered the above later decisions where those decisions have been considered.
25. Regarding the arguments of Shri Trivedi based on the analogy of expenditure for holding of a seminar on the use of a particular medicine ; of Shri Dastur based on the analogy of payment of commission to a doctor for recommending a medicine and that of Shri Pooran of a customer in a sweetmeat shop tasting a sample of the sweet, we may only observe that, in so far as there is a direct connection between the expenditure on canvassing and the customer, it would come within the scope of Section 37(3A). Since, as we have stated above, in the cases before us, the expenditure is not indirect, we hold that it could come within the scope of Sub-section (3A). Shri Trivedi had pointed out the decision of the Amritsar Bench of the Tribunal in the case of Shri Ashok Kwnar v. IAC 18 TLR 137, where it has been held that giving of free samples to educational institutions could not be said to be to promote sales and that, therefore, the cost thereof could not be considered to be sales promotion expenses so as to be included within the scope of Section 37(3A). The full text of the decision has not been made available to us. Only a small extract of eight lines has been given. The reasoning of the Tribunal is not very clear. It is not clear as to what kind of educational institutions were involved in that case.
Further, it may be possible for the person running the educational institutions to recommend these medicines to others depending upon the benefit by the use of those samples. Shri Trivedi had also pointed out that the advertisement of certain medicines was prohibited under the Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954, suggesting that, therefore, what was done was not sales promotion. We find that, under Section 6 of that Act, advertisement suggesting that a particular drug would cure diseases or prevent any of the diseases in the Schedule to the Act is prohibited. The Schedule mentions those diseases which are generally incurable. Here, we are not concerned only with those kinds of medicines. Further, even if advertisement regarding those medicines may not be permitted, advertisements or sales promotion may be made regarding those kinds of medicines. The fact that it is prohibited does not mean that, if it is done, it is not advertisement or sales promotion. Whether an act amounts to publicity, advertisement or sales promotion is to be decided on the relevant facts. Just because an act is prohibited by law, that does not mean that if it is done, it is not done at all. Theft is punishable under the law, but that does not mean if a pocket is picked that is not theft.
26. We shall now deal with some of the other arguments of Shri Dastur.
He had submitted that the samples were not produced separately and so their cost could not be separated or identified separately and so, there was no question of disallowing the cost of these samples. He raised the question about the point of time at which the expenditure on the a samples could be said to have been incurred. Manufacture of the samples could be in one year and their distribution in another year and so, it was not possible to say when the expenditure was incurred. We may, at the outset, say that a sample is not something in the abstract.
It is always a sample of something and, in these cases, that something happens to be the medicine. Medicines are manufactured and a part thereof is separated out to be distributed as samples to doctors free of charge. Thus all the stock of medicine is not sample, but all the sample is medicine. Nobody says that samples are produced separately.
They are part of the general production of the medicine. They represent the medicine. If they are different in quality or efficacy from the medicine itself, they would not be samples of that medicine. Therefore, the cost of samples is the cost of the medicine which is treated as samples. Hence, their cost can be identified. Regarding the question as to when the expenditure would be said to have been incurred,, we have to observe that these are cases of disallowance of a claim of the expenditure. That disallowance has to be made when the expenditure is claimed. It is not for an assessee who claims an expenditure for a particular year to ask the question as to when that expenditure was incurred. It is on the basis that the expenditure was incurred in a particular year that the claim itself has been made. Since, as stated above, the expenditure is equal to the cost of the medicines which are given as samples, there is no difficulty in working out the extent of disallowance to be made. However, the Tribunal decision in the case of Geoffrey Manners and Co. Ltd. cannot be applied, since it must be considered to have been overruled by the Supreme Court decision in the case of H. H. Sri Rama Verma v. CIT [1991] 187 ITR 308.
27. Regarding Shri Dastur's argument that the distribution of samples would be a reduction in the stock which is not an expenditure, he had relied upon the Tribunal decision (Bombay Bench B), dated November 3, 1983, in Parle Beverages (P) Ltd. v. CIT. In that case, the assessee, a manufacturer of soft drinks, gave them free to visitors to the factory.
On that account, the stock in the hands of the assessee was reduced.
The Income-tax Officer regarded the value of that reduction as entertainment expenditure and made a partial disallowance. The Commissioner of Income-tax (Appeals) cancelled that disallowance. The Tribunal held that the expenditure which could be disallowed under Section 37(4) is an expenditure in the nature of entertainment. It observed : " Here, the assessee has not incurred any expenditure. No cash has gone out of their till. What has happened is that their stock-in-trade has been reduced. This would be a loss under Section 28. It cannot be considered as expenditure. The provisions of Section 37(2B) either before or after the amendment would not be applicable." 28. We are unable to accept this view. This is not merely a case of reduction of stock or of loss. The soft drinks or samples (here) are voluntarily given away free. Therefore, there is expenditure. The medicines are used as another commodity, i.e., samples. It so happens that the samples were a part of the medicine which was manufactured, but the moment a part thereof is separated as samples, it must be said that it was the samples which were manufactured. For the purpose of business, the samples constitute another commodity not for sale but for promoting the sale of the medicines. The expenditure for the manufacture of that other commodity (samples) is like any other expenditure. Learned counsel had relied upon the' Supreme Court decision in Indian Molasses Co. (Pvt) Ltd. v. CIT [1959] 37 ITR 66, but that decision lays down only that expenditure is something which is gone irretrievably. On that point, there is no controversy here.
Moreover, the assessee is claiming a deduction of the expenditure and it cannot be that it is expenditure for the purpose of deduction and not expenditure for disallowance of a part thereof. Shri Dastur had also relied upon the analogy of Section 43B. In our view, there is no similarity with the situation dealt with in Section 43B. Here, there is no doubt about the period in which the expenditure has been incurred.
29. Learned standing counsel had relied upon the decision of the Bombay High Court in the case of Godavaridevi Saraf [1978] 113 ITR 589, in order to argue that the aforesaid Karnataka High Court decision was binding on the Tribunal. If that view is to be taken, then the entire expenditure would come within the scope of Section 37(3A). As stated above, Shri Dastur has submitted that that decision does not require the Tribunal to follow the decisions of other High Courts. That was a case where the Bombay High Court had held that the Tribunal was bound to respect a decision of the Madras High Court that a certain Section of the Income-tax Act was violative of the Constitution of India. The Tribunal had no powers to consider the constitutional validity of any part of the Income-tax Act and, therefore, it had to recognise as a fact that a particular part of the Act had been declared invalid. The High Court has observed (at page 592): "Actually, the question of authoritative or persuasive decision does not arise in the present case because a Tribunal constituted under the Act has no jurisdiction to go into the question of constitutionality of the provisions of that statute." " What the Tribunal really did was that in view of the law pronounced by the Madras High Court it proceeded on the footing that Section 140A(3) was non-existent and so the order of penalty passed thereunder cannot be sustained." 30. Therefore, this was not a case of following a decision of another High Court as a precedent, but merely recognising as a fact that the particular provisions of the Income-tax Act had been declared violative of the Constitution and was non-existent in law. Therefore, the decision in the case of Godavaridevi Saraf [1978] 113 ITR 589 (Bom) does not lay down that a High Court's decision is binding on a Tribunal Bench outside the territorial jurisdiction of that High Court.
31. We have expressed the view that the distribution of samples is both for obtaining information as well as for promoting the sales. That is a realistic, reasonable and balanced view in the facts of this case.
Moreover, the Karnataka High Court has not considered the argument that supply of free samples is necessary even in the case of medicines which are in the market for some time. It would be fair and just, therefore, to hold that half of the expenditure on the samples as worked out by the Income-tax Officer would be covered by the said Sub-section (3A).
This ground is partly allowed.
32. We shall now deal with the other grounds in the assessee's appeal.
The first ground is : " The, learned CIT(A) erred in not holding that the assessment order under Section 143(3) read with Section 144B was bad in law and barred by limitation as it was completed by more than 6 months after the issue of the draft order on 28-2-1983." 33. A time limit of 6 months, i.e., 180 days, is provided under Explanation 1(iv) to Section 153 which is as follows : " In computing the period of limitation for the purposes of this Section --...
-(iv) the period (not exceeding one hundred and eighty days) commencing from the date on which the Assessing Officer forwards the draft order under Sub-section (1) of Section 144B to the assessee and ending with the date on which the Assessing Officer receives the directions from the Deputy Commissioner under Sub-section (4) of that Section . . .
34. Thus, it is for the purpose of exclusion of the time taken that the period of 180 days is provided. The draft order was served on the assessee on March 3, 1983, and directions under Section 144B(4) were received on September 5, 1983. The final order was passed by the Income-tax Officer pursuant to the directions on September 20, 1983.
The assessment was to be completed within two years from March 31, 1981, excluding the above period of 180 days. If that is done, it is in time. Accordingly, this ground is rejected.
" 2. The learned Commissioner of Income-tax (Appeals) erred in upholding the inclusion of the following expenses for the purpose of calculating the disallowance under Section 37(3A) of the Income-tax Act, 1961.
3. Without prejudice to ground No. 2 above and in the alternative, the learned Commissioner of Income-tax (Appeals) erred in not accepting your appellant's plea that gifts to medical practitioners of Rs. 3,591 are a part of normal business expenses and should be allowed as such.
4. The learned Commissioner of Income-tax (Appeals) erred in upholding the following disallowance : (a) Presentation articles on the occasion of Diwali total amount Rs. 36,801 to the extent these have been given to customers.
36. Ground No. 2(b) has been dealt with above. We do not find any merit in the claim regarding the advertisement in medical journals. Even according to the assessee, it is advertisement and also meant to furnish information about medicines. Although it may give the required information such as dosage, it is regarding the assessee's product intended to enable the doctors to prescribe them. Therefore, it is advertisement. Moreover, no evidence has been produced to show that the circulation of the journals in question was small. The Commissioner of Income-tax (Appeals) order on this point is upheld.37. Regarding the claim, for Rs. 3,591, the assessee's claim is that the expenditure was necessary to keep good relations with doctors and stockists and not on advertisements. In the case of First ITO v. French Dyes and Chemicals (I) (P) Ltd. [1984] 10 ITD 240 (Bom) (SB), it was held that it would be far-fetched to say that distribution of some articles would give a potential customer an indication of the excellence of the assessee's product so as to induce him to buy them.
Therefore, this expenditure cannot be said to be on advertisement and, accordingly, it is allowed. Similar is the position regarding the expenditure of Rs. 36,801 in ground 4(a). The Income-tax Officer has disallowed it under Section 37(2A) and the Commissioner of Income-tax (Appeals) held that it would fall under Rule 6B of the Income-tax Rules. This amount is also allowable for the above reasons. Regarding the expenditure of Rs. 10,494, the assessee's plea was that it was incurred as a matter of business hospitality and, therefore, not entertainment. In view of the amendment to Section 37(2A) by way of Explanation 2 with retrospective effect from April 1, 1976, expenditure on hospitality of every kind by the assessee to any person would be on entertainment. The disallowance is, accordingly, confirmed.
" The learned Commissioner of Income-tax (Appeals) erred in not accepting your appellant's plea that interest of Rs. 35,145 paid on amounts received from directors and shareholders is not disallowable under Section 40A(8) of the Income-tax Act, 1961." 39. For the reasons stated in the Special Bench decision in the case of Kaloomal Shorimal Sachdev Rangwalla (P) Ltd. v. ITO (First) [1985] 14 ITD 248 (Bom), we uphold the disallowance made and reject this ground.
40. The next ground in the assessee's appeal is with regard to the non-admission of the additional ground for relief under Section 80J of the Act. The assessee had set up a new unit for manufacture of a certain product in 1978 and it had commenced production in that year.
It did not claim benefit under Section 80J because the new unit had to be closed with effect from December 25, 1980, due to labour unrest and it had to declare its Bombay unit which is located in the registered/administration office of the assessee as closed with effect from May 7, 1981, due to labour unrest and the workers resorted to violence and took charge of the Bombay premises with effect from May 4,1981, and since then the whole premises remained inaccessible for 2 1/4 years up to August, 1983. The principal officer and the chief accountant of the assessee had resigned after rendering 30 continuous years of service in July, 1981. A similar claim of the assessee in the assessment years 1981-82, 1982-83 and 1983-84 was allowed, incorporating this fact that this unit of the assessee was set up in 1978 and that the assessment year 1981-82 was the third year. The assessee claimed this relief for the first time before the Commissioner of Income-tax (Appeals) who declined to entertain the ground as he was not satisfied with the reasons for the delay in making the ground before him. We find that the assessee had raised two additional grounds before the Commissioner of Income-tax (Appeals) -- one regarding this claim of Section 80J relief and the other with regard to certain liabilities which had accrued during the year under consideration and disallowed in the assessment year 1981-82. The Commissioner of Income-tax (Appeals) entertained the second ground considering the reasons for the delay in raising the same as satisfactory, but declined to entertain the first one. We do not find any difference in the facts and circumstances of the two claims raised by the assessee before the Commissioner of Income-tax (Appeals). It is not the case of the Revenue that the facts are not on record, or that the assessee's claim requires any investigation. In fact, a similar claim has been allowed for the assessment years 1981-82, 1982-83 and 1983-84 by the Income-tax Officer himself. Even otherwise, the powers of the Commissioner of Income-tax (Appeals) are, coterminous and co-extensive with those of the Income-tax Officer, the entire assessment is open before the Commissioner of Income-tax (Appeals) and, in the light of the latest Supreme Court decision in the case of Jute Corporation of India Ltd. v.CIT [1991] 187 ITR 688, we are of the opinion that the Commissioner of Income-tax (Appeals) was not justified in declining to entertain the ground. He should have entertained the ground and decided the matter on merits. We, therefore, set aside the order of the Commissioner of Income-tax (Appeals) on this point and remit the matter back to his file for disposal of the case on merits, of course, after affording adequate opportunity of being heard to the parties. This ground is disposed of accordingly.
41. In the Revenue's appeal, the first ground is that the learned Commissioner of Income-tax (Appeals) erred in holding that the assessee was entitled to deduction under Section 35 in respect of the expenditure of .Rs. 6,26,590. The assessee had incurred capital expenditure on construction of buildings. As recorded in the order of the Commissioner of Income-tax (Appeals) which fact has not been disputed by the Revenue before us, there is no dispute that the building was utilised for the purpose of scientific research. The dispute, according to the Income-tax Officer, however, is that it was a building under construction and was, therefore, capital work-in-progress. It was not to, and could not, be used for the purposes of research during the previous year. A similar matter came up before the Commissioner of Income-tax (Appeals) in the immediately preceding year, wherein the assessee's claim was upheld. Following the said order, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee in this year as well. The said order of the Commissioner of Income-tax (Appeals) was upheld by the Tribunal in I.T.A. No. 3944/ Bom/84, wherein by order dated January 28, 1988, and the Tribunal sustained the allowance of the claim of the assessee by the Commissioner of Income-tax (Appeals). Facts and circumstances being similar, we uphold the order of the Commissioner of Income-tax (Appeals) on this point in the year under consideration as well. We may state that the provisions of Section 35(1)(iv) of the Act are clear to this effect directing deduction in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee. The requirement is the incurring of the expenditure of a capital nature on scientific research and it would not be necessary that the capital asset must be used in the year of expenditure itself. This ground is, accordingly, rejected.
42. The second ground is that the Commissioner of Income-tax (Appeals) erred in holding that, out of pooja expenses of Rs. 33,809, a sum of Rs. 30,409 is allowable. The above expenditure was regarding pooja performed by the assessee because of certain irrational belief of the workers. A part of the expenditure was for providing food to the workers. It was disallowed by the Income-tax Officer under Section 37(2A) holding it to be entertainment expenditure, but this disallowance was restricted by the Commissioner of Income-tax (Appeals) to Rs. 3,400 taking into consideration some element of entertainment and the fact that the extent of expenditure was unverifiable. We see no reason to interfere with this order of the Commissioner-of Income-tax (Appeals). The expenditure was for the business of the assessee because, without dispelling the fear, the workers would not have come to work. Moreover, the expenditure was on employees and the retrospective amendment to Section 37(2A) does not apply to such an expenditure. In any case, the Commissioner of Income-tax (Appeals) has sustained the disallowance suitably, i.e., up to Rs. 3,400 to cover the unverifiable nature of the expenditure. This ground is, therefore, rejected.
43. In the result, the assessee's appeal is allowed partly and the Department's appeal is dismissed.