2012 (9) TMI 757 - AT - Income Tax

Dis-allowance of expenditure on adhoc basis on ground of it being excessive - Pharmaceutical Sales Representative (PSR) expenses and PSR salary - assessee company engaged in the business of trading of pharmaceutical products - Held that - It is observed that AO though doubted higher percentages of expenditure claimed by the assessee; however, no enquiry or investigation has been made to find out the genuineness of the claim of the assessee. Nature of business is such expenditure on marketing of pharmaceutical products is bound to happen, which is not disputed by Department. Without giving a finding that the claim of the assessee is bogus, the same cannot be disallowed merely on the ground that the claim of the assessee is excessive. In the facts and circumstances of the case when the actual expenditure incurred by the assessee has not been doubted and the payment has been made to the various Medical Representatives, who are not related parties of the assessee, than no adhoc disallowance is called for on account of excess PSR expenses and PSR salary. Dis-allowance deleted Decided in favor of assessee

Summary

Issues:
- Disallowance of PSR salary and expenses based on adhoc basis
- Genuineness of expenditure claimed by the assessee
- Assessment of expenses in the pharmaceutical products trading business

Analysis:
1. The judgment involves cross-appeals against two separate orders of the Commissioner of Income Tax(Appeals) for the assessment years 2003-04 and 2005-06. The main issue revolves around the adhoc disallowance of Pharmaceutical Sales Representative (PSR) salary and expenses.

2. The assessee, engaged in trading pharmaceutical products, declared a higher gross profit in the relevant year. The Assessing Officer questioned the genuineness of the claimed PSR expenses and salary, considering the percentage of expenses in comparison to total sales. The Assessing Officer disallowed a significant portion of the expenses, leading to the appeal.

3. The assessee argued that the expenses on Medical Representatives are essential for the business and should not be subject to adhoc disallowance. The Commissioner of Income Tax(Appeals) partially allowed the claim but restricted it to 28% of sales instead of the 32.4% claimed by the assessee.

4. The Tribunal noted that no investigation was conducted by the Assessing Officer to verify the genuineness of the expenses. It was recognized that marketing pharmaceutical products involves substantial expenses, and the necessity of such expenses was not disputed. The Tribunal emphasized that without proving the claim as bogus, disallowing it solely based on being excessive is unjustified.

5. The Tribunal highlighted that the payments to Medical Representatives were not disputed, and the expenses were part of the regular business operations. Therefore, an adhoc disallowance was deemed unwarranted. The Tribunal accepted the assessee's explanation regarding the nature of expenses in the pharmaceutical marketing business.

6. Ultimately, the Tribunal allowed the appeals of the assessee and dismissed the revenue's appeals. The disallowance sustained by the Commissioner of Income Tax(Appeals) was deleted, affirming the legitimacy of the claimed expenses in the trading of pharmaceutical products business for both assessment years.

This detailed analysis outlines the key legal points and arguments presented in the judgment regarding the disallowance of PSR salary and expenses, the genuineness of the claimed expenditure, and the assessment of expenses in the pharmaceutical trading business.