Law: Income Tax Act, 1961

Section: 40

(a) Income-tax---Business expenditure---Disallowance---Company---Salary and perquisites paid to Managing Director---Section 40(c) was applicable---Indian Income Tax, 1961, Ss. 40(c) & 40-A(5). (b) Income-tax-- ----Business expenditure---Disallowance---Advertisement, publicity and-sales promotion--- Expenditure on free distribution of drugs ---Finding that distribution had been made to test efficacy of drug---Expenditure was not on advertisement, publicity or sales promotion and could not be disallowed­ Indian Income Tax Act, 1961, S. 37(3-A). . In respect of payments by a company to its Managing Director section 40(c) of the Income Tax Act, 1961, is applicable and not section 40-A(5) of the Act. The assessee claimed deduction of expenditure on distribution of free samples to Doctors. The Income-tax Officer disallowed it. However, the Commissioner of Income-tax (Appeals) and the Tribunal allowed it. On a reference: Held, that as there was a finding by the Commissioner of income tax (Appeals) which was 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. The expenditure on physician's samples distributed to Doctors was outside the scope of section 37(3-A) of the Act. The Tribunal was right in directing the exclusion of the expenditure on free samples supplied to the doctors in working out the disallowance under section 37(3-A) of the Act. CIT v. Ampro Food Products (1995) 215 ITR 904 (AP.); CIT v. Bata India Ltd. (1993) 201 ITR 884 (Cal.); Geoffrey Manners & Co. Ltd. v. ITO (1983) 3 SOT 40 and Smith Kline and French (India) Ltd. v. CIT (1992) 193 ITR 582 (Kar.) ref. JUDGMENT G. BIKSHAPATHY, J.---The following questions have been referred to this court by the Income Tax Appellate Tribunal, Bench-B, Hyderabad, under section 256(1) of the Income Tax Act, 1961, for opinion: "(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that in respect of payments to the managing director of the assessee-­company, though an employee, section 40-A(5) could not be applied…

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