1995 P T D 1128
[Karachi High Court]
Before Mamoon Kazi and Mrs. Majida Razvi, JJ
Messrs POIBANI DOLLS
Versus
COMMISSIONER OF INCOME TAX
Income Tax Reference No. 287 of 1988, decided on 01/12/1994.
Income-tax Act (XI of 1922)---
----S.10 (2)(xv)---Drugs (Licensing, Registration and Advertising) Rules, 1976, Rr.33 & 12---Admisibility of admitting expenses---Claim of assessee of sale promotion expenses in excess of five per cent of the turn over in violation of Rr.12 & 35 of the Drugs (Licensing, Registration and Advertising) Rules, 1976---Admissibility---Penalty; provided by Rr.33 & 12 of Drugs (Licensing, Registration and Advertising) Rules, 1976, having not been provided in Income-tax Law, could not be extended to the assessee's case---Expenses incurred by the assessee, on advertising sale promotion etc., therefore, were admissible expenses.
CIT v. Alpha Insurance Company PLD 1981 SC 293; 1981 PTD (Trib.) 71 and M/s. General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi 1986 PTD 52 ref.
Iqbal Naim Pasha for Applicants.
Shaik Haider for Respondent.
Date of hearing: 1st December, 1994.
JUDGMENT
MAMOON KAZI, J.---In the assessment year 1978-79 the applicants claimed Rs.3,360,134 as sales promotion expenses but the assessing officer disallowed Rs.6,11,629 on the ground that under Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 any expenditure in excess of five per cent of the turn over could not be permitted.
On appeal, the Commissioner of Income-tax allowed the entire expenses claimed by the applicants and ordered deletion of add-backs during the relevant years.
The Department filed appeal before the learned Income Tax Appellate Tribunal, which reversed the order of the Commissioner, Income Tax and upheld the order passed by the assessing officer. The reasons, which prevailed with the learned Tribunal have been given by it thus:
"From perusal of this rule it appears that the Central Licensing Board was vested with the power of cancelling or suspending a licence if it found a licensee violating the provisions of the Ordinance or the Rules. Mr. Alam, however, contended that in view of the PLD 1981 SC 293, CIT v. Alpha Insurance Company, since the respondent spent the money wholly and exclusively for business purposes therefore it was rightly allowed by learned Commissioner of Income Tax (Appeals). With due respect to him, in our judgment, Alpha Insurance Co. case (supra) revolves round its own peculiar facts. The Insurance .Act and the Rules framed there under lay down the procedure for maintenance of the account books of the insurance companies as well, as the assessment of their profits. It is true that. Rule 40-C of the Insurance Rules provided a prohibition, against exceeding the management expenses but it was not neither absolute or irremediable or punitive. Their Lordships of Supreme Court took it to be regulatory, supervisory and corrective power exercisable by the Controller of Insurance and in view of this conclusion held that the power of the assessing authority under Rule 6 of the First Schedule to the repealed Income Tax Act, did not, like Rule 2 of the same Schedule, or, on the strength of section 40-C of the Insurance Act and Rule 40 of the Insurance Rules, extended to disallowance of excess management incurred in excess of the limit prescribed under section 40-C of the Insurance Act and Rule 40 of the Insurance Rules were not in the nature of penalty, fine or forfeiture for the purpose of their admissibility for deduction as business expenses under section 10 bf the repealed Income Tax Act. But on the contrary, Rule 12 of the Drug Rules provides for the cancellation or suspension of the licence if the licensee violates any of the provisions of the Ordinance or the Rules. Not only that it also provides for an opportunity of hearing before licence is cancelled or suspended and on top of it also grants a right to appeal to the licensee. Thus, the case of Alpha Insurance Co. does not come to the rescue of the respondents. On the other hand, PLD 1981 (Trib.) 71 very much supports the assessing officer. This is a case of a Scheduled Bank which had to pay penal interest to State Bank of Pakistan under section 36(1) of the State Bank of Pakistan Act, 1956 because of infraction of law. In that case, the point involved was as to whether the penal interest paid by the Scheduled Bank in view of infraction of law was an admissible expenditure. The then President and the present Chairman of the Tribunal speaking for the Bench answered the question against the Scheduled Bank. Respectfully following it we, therefore, vacate the order of learned Commissioner of Income Tax (Appeal) and restore that of the assessing officer with the result that in assessment year 1978-79, Rs.6,11,629 would stand disallowed as ordered by the Income Tax Officer."
However, the applicants were not satisfied and, therefore, the following question has been referred to this Court for determination:
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in disallowing Rs.6,11,629 being the excess between the total amount expended on advertising and. Sales Promotion and the prescribed limit of 5% of turnover permitted to be spent as such expenditure under Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976, under the provision of section 10(2)(xvi) of the Repealed Income tax Act, 1922."
We would like to point out that the view taken by the learned Appellate Tribunal, on the face of it, seems to be erroneous. No doubt, Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 indicates that no, person shall spend more than five per cent of his turnover on advertising, sampling and other promotional activities in respect of drugs and Rule 12 provides for cancellation or suspension of a licence by the Central Licensing Board in cast any provision of the Drugs Ordinance or the Rules framed there under is violated by a licensee. But, the penalty provided by the said Rule cannot be extended to the provisions of Income Tax Ordinance as no such penalty has been provided by the provisions of the said Ordinance. Reference in this regard may be made to the case of Commissioner of Income Tax v. Alpha Insurance Co. Ltd. PLD 1981 SC 293, also referred to by the learned Tribunal in its order. In this case, rule 40-C of the Insurance Rules provided a prohibition against, exceeding the management expenses. Their Lordships of the Supreme Court held that such rule could not be extended to disallowance of excess management expenses by the assessing authority. Reference has also been made by Mr. Iqbal Nasim Pasha to an earlier judgment of this Court in M/s. General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi (1986 PTD 52). In this case a distinction was clearly drawn between a case where a trader has actually incurred expenses in connection with his business but in violation of some law and a case where a penalty has been imposed on him due to transgression of some law.
We are consequently of the view that the view taken by the learned Appellate Tribunal is unsustainable and the question is answered in the negative. The parties are left to bear their own costs in view of the question referred.
M.B.A./P-316/K????????? ?????????????????????????????????????????????????????????? Order accordingly.