2005 (5) TMI 548 - AT - Income Tax

Business expenditure, Deductions - Profit and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

Summary

Issues Involved:
1. Addition of Rs. 9,53,019 on account of free samples of toothpaste and medicines shortage/wastage.
2. Addition of Staff Welfare expenses of Rs. 6,250.
3. Addition of Rs. 10,000 being professional fees for valuing the fixed assets.
4. Motor car expenses.
5. Denial of deduction under section 80-IA on Rs. 6,04,962 presumed to be income from other sources.

Detailed Analysis:

1. Addition on account of free samples of toothpaste and medicines shortage/wastage:
The Assessing Officer (AO) added Rs. 9,53,019 due to the lack of detailed evidence regarding the distribution of free samples. The CIT(A) confirmed the AO's view but allowed 2% of total sales as sample distribution expenses, giving relief of Rs. 3,55,622. The assessee argued that the distribution of free samples is a normal business necessity and that the accounts are audited without adverse comments. The Tribunal found the distribution of free samples to be a normal business necessity and noted that the CIT(A) should verify the actual distribution from Medical Representatives' (MRs) reports. The issue was set aside for fresh adjudication by the CIT(A).

2. Addition of Staff Welfare expenses of Rs. 6,250:
The CIT(A) confirmed the addition due to the lack of supporting bills or details. The Tribunal upheld this decision as no additional evidence was provided by the assessee. This ground was rejected.

3. Addition of Rs. 10,000 being professional fees for valuing the fixed assets:
The AO disallowed Rs. 10,000, treating it as capital expenditure. The CIT(A) confirmed this, finding no basis for the assessee's apportionment of the expenditure. The Tribunal agreed with the CIT(A), as no evidence was provided to substantiate the apportionment. This ground was also rejected.

4. Motor car expenses:
The CIT(A) restricted the addition to 30% of total expenses, considering personal use of the car. The Tribunal found this restriction reasonable in the absence of evidence that the car was used exclusively for business purposes. This ground was rejected.

5. Denial of deduction under section 80-IA on Rs. 6,04,962 presumed to be income from other sources:
The AO denied the deduction under section 80-IA, considering the receipts as income from other sources. The CIT(A) confirmed this, noting that the receipts were from job work for a sister concern. The Tribunal, however, found that the profits derived from job charges for manufacturing goods of others are entitled to deduction under section 80-IA. It directed the AO to calculate the eligible deduction, reversing the CIT(A)'s order on this point.

Conclusion:
The Tribunal allowed the first ground for statistical purposes, rejected the second, third, and fourth grounds, and reversed the CIT(A)'s order on the fifth ground, directing the AO to calculate the eligible deduction under section 80-IA.