Income-tax---

----Business expenditure ---Assessee-Company deriving income from manufacture of tea---Tea samples and complimentary tea distributed to shareholders, directors and friends at annual general meeting of company-- Question of sale proceeds or profits element did not arise for bringing them to tax---Distribution made in interests of commercial expediency and for purposes of business---Addition made by ITO of value of tea distributed not justified.

The assessee, which derived income from manufacture and sale of tea, distributed tea samples to the shareholders who were present at the annual general meeting with a view to popularise the product and also distributed some additional quantity of tea as complimentary tea to the directors and friends to show the quality of tea manufactured by the assessee-company. The assessee claimed that the distribution was made for the purposes of business and hence the expenditure thereon was an allowable deduction. The Income tax Officer rejected the claim of the assessee for the reason that the expenditure was not for purposes of the business and added the value of the quantity of tea distributed as the income of the assessee. The Commissioner (Appeals) confirmed the addition made by the Income-tax Officer. The Tribunal found that the distribution was made to popularise the tea manufactured by the assessee-company which created more goodwill among the shareholders and the distribution was made for commercial expediency and hence directed the Income-tax Officer to delete the addition made by him to the income of the assessee. On a reference:

Held, that no sale was involved in the distribution of tea made by the assessee to the shareholders, directors and friends at the annual general meeting of the assessee-company as the distribution was made without charging any price. Where no sale was involved the question of there being any sale proceeds or any profit element in such purported sale did not and could not arise for bringing the same into the net of taxation. Even assuming that such distribution was made and was claimed as business expenditure, such expenditure was an allowable deduction. The Tribunal was justified in deleting the addition made by the Income-tax Officer.

Addl. CIT v. Bangalore Turf Club Ltd. (1980) 126 ITR 430 (Kar.) fol.

CIT v. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC) ref.

Sunil Mitra with Sunil Mukherjee for the Commissioner. N.K. Poddar with S.N. Dey and D. Mitra for the Assessee.

JUDGMENT

AJIT K. SENGUPTA, J.---This reference under section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1977-78. The assessee derives income from manufacture and sale of tea. The assessee claimed that it 'distributed tea samples to its shareholders, directors and friends. The Income tax Officer did not consider this expenditure for the purpose of business. He valued the quantity of tea according to the market rate and, accordingly, added it as the income of the assessee.

The assessee, in appeal, contended that the distribution of tea samples was done for the purpose of the business. This argument of the assessee was not accepted and, accordingly, the Commissioner of Income-tax (Appeals) confirmed the addition.

Counsel for the assessee urged that the assessee was manufacturing tea. Tea was distributed to the shareholders who were present at the annual general meeting. An additional quantity was given as complimentary to directors and friends. The distribution of the samples and complimentary tea was made in the interest of the business. The distribution was made to popularise the tea manufactured by the company and it was done for commercial expediency and, therefore, the expenditure was allowable.

The departmental representative, on the other hand, very strongly supported the order of the Commissioner of Income-tax (Appeals) and urged that the assessee could not prove that the distribution was made in the business interest of the company. The burden was upon the assessee. The burden had not been discharged and, therefore, the addition might be confirmed.

The matter was concluded by the Tribunal as hereunder:

"The Income-tax Officer added the value of 2,650 Kgs. of tea which were distributed to the shareholders, directors and their friends. Some of the quantity was distributed to the shareholders who were present at the annual general meeting of the company. The assesses is not a manufacturer. The shareholders were present at the annual general meeting to transact the business and to consider the business prospects of the company. The tea was distributed by way of samples to the share-holders with a view to popularise the product and to show the working of the company under the director, Similarly, the complimentary tea was distributed to friends to show the quality of the tea manufactured by the company. If the distribution is considered from the view-point of a businessman, it is evident that the distribution was made only to popularise the tea manufactured by the company and it further created goodwill among the shareholders assembled in the annual general meeting to consider the annual accounts of the company. The distribution was made for commercial expediency and, therefore, the addition was not called for at all. Accordingly, the addition is deleted. The Income-tax Officer is directed to modify the assessment of the assessee and its partners."

On these facts, the following question of law has been referred to this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the value of stock-in-trade distributed free of cost among the shareholders, directors and their friends attending the annual general meeting as business expenditure of the company and allowing the same?"

In our view, the question which has been raised is misconceived. The assessee in this case did not ask for deduction of any expenditure. What the assessee wanted to say is that the assessee had distributed at the annual general meeting the samples and complimentary tea to the directors and shareholders who were present at the annual general meeting. No sale is involved in such distribution inasmuch as such distribution was made at the annual general meeting to the shareholders and directors. The Income-tax Officer added the value of the tea so distributed as the income of the assessee. In our view, when no sale at all is invovled, the question of there being any sale proceeds or any profit element in such purported sale does not and cannot arise at all. There can be no notional sale. The Supreme Court, in CIT v. 01Calcutta Discount Co. Ltd. (1973) 91 ITR 8, has laid down that where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. The same principle will apply to the facts of this case as the distribution of tea was made to the shareholders and directors without charging any price and, accordingly, the assessee did not realise any price at all in the distribution so made. The question, therefore, of bringing into the net of taxation the notional receipts, if any, cannot arise. Even assuming that such distribution was made and was claimed as business expenditure, such expenditure must be held to be business expenditure as has been laid down in the case of Additional CIT v. Bangalore Turf Club Ltd. (1980) 126 ITR 430 (Kar.). In that case, certain refreshments were supplied to the members at the general meeting. There the Court held that the expenses were incurred as of necessity and constituted part of the expenses incurred for the holding of the business meetings. Such an expenditure, though incurred for the purpose of serving food, refreshments, drinks including liquor at the business meetings of the members of the managing committee or of ordinary members, would be in the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment, and allowed the same as business expenditure as it was for the purpose of business.

In that view of the mater, we answer the question in this reference by saying that the mount in question could not be added as income of the assessee. In other words, the Tribunal was justified in upholding the deletion of the addition made.

There will be no order as to costs.

M.B.A./1639/TQuestion answered.