2023 (3) TMI 551 - AT - Income Tax

Disallowance of free samples - Allowable business expenditure - CIT(A) observed that due to failure on the part of the assessee in providing list of the name and address of the recipient of free samples/products before the Assessing Officer, he made disallowance for 50% of the total expenses - HELD THAT - As the contention of the assessee that this expenditure was for the purpose of its business, is not accepted as the distributing of free samples to healthcare personnel is prohibited. In view of provisions of reproduce above, we do not find any error in the order of the Ld. CIT(A) in upholding the disallowance made by the Assessing Officer following the ratio in the case of M/s Apex Laboratories Pvt. Ltd. 2022 (2) TMI 1114 - SUPREME COURT Disallowance of expenses on account of organizing conference and seminars for the doctors and healthcare professionals - HELD THAT - For disallowance of conference and seminars expenses, though the assessee has contested that same is a part of research and development activity which aids the assessee to gain knowledge, remain updated of development of related fields, and enables the assessee to innovate and improve products line, however, we find that the Hon ble Supreme Court in the case of Apex Laboratories 2022 (2) TMI 1114 - SUPREME COURT has also considered the expenses on conference as disallowable in the form of freebies given to the healthcare practitioner/medical practitioners. In the instant case, the assessee has not supplied any name and address of the healthcare personnel, to whom the conference or travel expenses have been reimbursed. The section 4 of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, strictly prohibit offer of inducement of any other kind for the purpose of promoting the use or sale of the infant milk substitutes or infant foods for taking part in promoting of the infant milk substitutes, feeding bottles and infant foods. Therefore, though the assessee is claiming that the expenses on conference and seminars were for his business, however, same falls under prohibited activity and therefore, expenses incurred thereon have been validly disallowed of the Assessing Officer and confirmed by the Ld. CIT(A) invoking Explanation to section 37(1) of the Act, following Hon ble Supreme Court in Apex Laboratories Ltd. (supra). As far as the grievance of the assessee regarding the comment the Ld. CIT(A) we are of the opinion that the said comments without providing opportunity of being heard are not justified. To levy penalty or filing prosecution for violation of provisions of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, is within the domain of the relevant authority under said Act, following due procedure of law and Ld CIT(A) was not required to express his conclusion in said matters, that too without providing any opportunity of being heard. However, we also note the recognized principle of Criminal Jurisprudence that anyone can set or put the criminal law into motion except where the statue enacting or creating offence indicate to the contrary. We accordingly restore this matter back to ld CIT (A) for considering evidence on record and after providing due opportunity of being heard, express his opinion, if so, required in the matter. Appeal of the assessee is allowed partly for statistical purpose.

Summary

Issues Involved:
1. Legality and jurisdiction of the Impugned Order by the Ld. CIT(A).
2. Disallowance of expenses on free samples.
3. Disallowance of expenses on conferences and seminars.
4. Comments made by the Ld. CIT(A) regarding violations of related laws without providing an opportunity to be heard.

Issue-wise
Detailed Analysis:

1. Legality and Jurisdiction of the Impugned Order by the Ld. CIT(A):
The assessee challenged the order dated 30.08.2022 by the Ld. CIT(A) on grounds of illegality, arbitrariness, and violation of principles of natural justice. The assessee argued that the Ld. CIT(A) exceeded its jurisdiction by making findings related to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (IMC Regulations) and the Infant Milk Substitutes, Feeding Bottles, and Infant Foods (Regulation of Production, Supply and Distribution) Act (IMS Act). The Ld. CIT(A) should have confined its inquiry to the provisions of the Income Tax Act (IT Act) and not ventured into other laws, as this was beyond its statutory authority.

2. Disallowance of Expenses on Free Samples:
The Ld. CIT(A) upheld the disallowance of expenses on free samples amounting to Rs.1,66,083/-. The disallowance was based on the assessee's failure to provide a list of names and addresses of the recipients of the free samples. The Ld. CIT(A) noted that without verifiable data, the authenticity of the claim remained dubious. Furthermore, Section 4 of the IMS Act prohibits the distribution of samples of infant milk substitutes, feeding bottles, and infant foods. The Ld. CIT(A) concluded that the expenditure was not for business purposes as it violated the IMS Act, thus justifying the disallowance.

3. Disallowance of Expenses on Conferences and Seminars:
The Ld. CIT(A) also upheld the disallowance of Rs.42,66,926/- incurred on organizing conferences and seminars for doctors and healthcare professionals. The assessee argued that these expenses were for business purposes, enabling healthcare professionals to gather technical knowledge. However, the Ld. CIT(A) found that these activities violated the IMS Act, which bans sponsorships and financial benefits to healthcare providers. The Ld. CIT(A) referred to the Supreme Court's decision in Apex Laboratories (P.) Ltd. and the Calcutta High Court's decision in Peerless Hospitex Hospital and Research Center Ltd., which held that such expenses are disallowable under Section 37(1) of the IT Act.

4. Comments Made by the Ld. CIT(A) Regarding Violations of Related Laws Without Providing an Opportunity to be Heard:
The Ld. CIT(A) made a conclusive finding that the assessee had violated all related laws pertaining to the sales and marketing of infant and child nutrition food, calling for penalty and/or prosecution. The assessee contended that these comments were beyond the jurisdiction of the Ld. CIT(A) and were made without providing an opportunity to be heard, thus violating the principles of natural justice. The Tribunal agreed with the assessee, stating that such comments should not have been made without following due procedure and providing an opportunity to be heard. The matter was restored back to the Ld. CIT(A) for reconsideration, allowing the assessee to present evidence and be heard.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, emphasizing that the Ld. CIT(A) should have confined its inquiry to the provisions of the IT Act and not ventured into other laws. The disallowances of expenses on free samples and conferences were upheld based on violations of the IMS Act and relevant judicial precedents. However, the comments regarding violations of related laws without providing an opportunity to be heard were deemed unjustified and were sent back for reconsideration.