COMMISSIONER OF INCOME-TAX VS MESSRS ZAFA PHARMACEUTICAL LABORATORIES (PVT.) LTD.
2002 P T D 117
[Karachi High Court]
Before Zahid Qurban Alavi and Muhammad Mujeebullah Siddiqui, JJ
COMMISSIONER OF INCOME-TAX
Versus
Messrs ZAFA PHARMACEUTICAL LABORATORIES (PVT.) LTD.
Income Tax Reference No. 158 of 1993, decided on /01/.
th
September, 2001. (a) Income Tax Ordinance (XXXI of 1979)---
----S. 23---Drugs (Licensing, Registering and Advertising) Rules, 1976, R.33---Deduction---Disallowance' of expenses with reference to R.33 of Drugs (Licensing, Registering and Advertising) Rules, 1976--Validity-- Rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976 could not be extended to disallow the expenses claimed under the head advertising and sales promotion, otherwise spent to connection with the business---Any disallowance made with reference to R.33 of the Rules was not sustainable in law.
Beecham Pakistan Ltd. v. Commissioner of Income-tax 1995 PTD 577 rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 136(1)---Drugs (Licensing, Registering and Advertising) Rules, 1976, R.33---Reference to High Court---Question whether Tribunal was justified to confirm the deletion of the add-backs made out of salary and allowances paid to medical representatives of a pharmaceutical company and field force in view of Explanation added to R. 33 of Drugs (Licensing, Registering and Advertising) Rules, 1976 was answered in affirmative by the High Court with the observation that no exception could be taken to the finding of Tribunal, confirming the-deletion of add backs made out of salary and allowances paid to said Medical Representatives.
Beecham Pakistan Ltd. v. Commissioner v, Income-tax 1995 PTD 577 rel.
M. G. Hassan for Applicant.
Ikram Hussain holding brief for Rehan Hassan Naqvi for Respondents.
Date of hearing: 5th September, 2001.
JUDGMENT
MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In this reference under section 136(1) of the Income Tax Ordinance, 1979, the Income Tax Appellate Tribunal, Karachi Bench, has referred the following question for our opinion:---
"Whether on the facts and circumstances of the case, the Tribunal was justified to confirm the deletion of the add-backs made out of salary and allowances paid to Medical Representatives and the field force in view of Explanation added to rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976 which was introduced by S.R.O. 691(1)/1991, dated 29th July, 1991?"
Heard Mr. M.G. Hassan, learned counsel for the Revenue and Mr. Ikram Hussain, Advocate holding brief for Mr. Rehan Hassan Naqvi, Advocate for the respondent.
The relevant facts giving rise to this reference are that the respondent is a Pharmaceutical Company, who claimed certain expenses in respect of Advertising, Sampling, Salaries and Travelling of Medical Representatives. The Assessing Officer, disallowed a portion of the expenses which exceeded the limit prescribed in Rule 33 of the Drugs Rules, 1976.
The respondent preferred first appeal, assailing the disallowance contending that the Assessing Officer, had no jurisdiction to make addition with reference to rule 33 of the Drugs Rules, 1976. It was urged that the income was to be computed under sections 22, 23 and 24 of the Income Tax Ordinance, 1979 and in these provisions no restriction was imposed on the quantum of expenses allowable under the head "advertising, sampling, salaries and travelling of medical representatives". The learned CIT (Appeals) did not accept the contention and by placing reliance on an order of Income-tax Appellate Tribunal, held that the I.T.O. was justified to disallow the excessive expenditure. However, he accepted the plea that the salaries and allowances of medical representative should not be included while working out the excess under the said rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976. Reliance was placed by the learned CIT (Appeals) on a letter of Ministry of Health, dated 13-3-1990, in which it was clarified that the limit of 5% of turnover prescribed by the above rule 33, does not cover salaries and allowances of medical representatives and field force. He, therefore, directed the Assessing Officer, to exclude the salaries and the benefits of the medical representatives while working out the excess expenses on sale promotion and advertising.
Feeling aggrieved with the above directions the Assessing Officer, preferred appeal before the Income Tax Appellate Tribunal, assailing the directions. A Division Bench of the Income Tax Appellate Tribunal, repelled the contention vide order, dated 10-9-1991 in I.T.A. No. 201/HQ of 1990-91.
Being still dissatisfied, the Commissioner of Income Tax Companies-II, Karachi, submitted a reference application which was allowed and the question reproduced in the opening part of this judgment was referred under section 136(1) of the Income Tax Ordinance, 1979, seeking opinion of this Court.
The learned counsel for the respondent, has submitted that the initial objection raised on behalf of respondent before the Assessing Officer and the CIT (Appeals) to the effect that Assessing Officer has no jurisdiction to disallow any claim with reference to rule 33 of the Drugs Rules, 1976, stands decided by 'a Division Bench of this Court against the revenue in the case of Beecham Pakistan Ltd. v. Commissioner of Income-tax 1995 PTD 577. He has further submitted that since it has been held that rule 33 of the Drugs Rules, 1976, cannot be invoked for the purposes of making disallowance, therefore, the question of making any disallowance in part or under any subhead with reference to the said rule does not arise.
On the other hand Mr. M.G. Hassan, learned counsel for the Revenue, has though conceded that in the above-cited case a Division Bench of this Court, has held that the penalty provided under rule 33 of the Drugs Rules, for spending more than 5% of the turnover on advertising and other promotional activities in respect of drugs, cannot be extended to the provisions of Income Tax Ordinance, as no such penalty has been provided by the provisions of the said Ordinance, but the question under reference is not in respect of the applicability of rule 33 of the Drugs Rules, 1976, but to the deletion of addition out of salaries and allowances paid to the medical representatives.
We have carefully considered the contentions raised by the learned Advocates for the parties. It would be appropriate to reproduce the relevant findings in the case of Beecham Pakistan Ltd. v.
Commissioner of Income Tax (supra) which reads as follows:---
----"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 percent 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 case any provision of the Drugs Ordinance or the Rules framed thereunder 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 SCMR 293. Also referred to by the learned Tribunal in its order. In this case, rule 40C 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 Naim Pasha to an earlier judgment of this Court in Messrs General Tyre & 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 had 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 above finding was given while determining the following question referred to this Court:---
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in disallowing Rs. 6,11,529 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."
After a clear finding that rule 33 of the Drugs Rules, cannot be extended to disallow the expenses claimed under the head advertising and sales promotion, otherwise spent in connection with the business, it is obvious that any disallowance made with reference to Rule 33 of the Drugs Rules, 1976, is not sustainable in law.
Consequently, we are of the view that no exception can be taken to the finding of Tribunal, confirming the deletion of the add back made out of salary and allowance paid to Medical Representatives. The question referred is answered in affirmative. The parties are left to bear their own costs.
A copy of this judgment be sent under the signature and seal of the Registrar of this Court to the Registrar, Income Tax Appellate Tribunal, Karachi. The Tribunal should pass such orders as are necessary to dispose of the case conformably to this judgment.
C.M.A./M..B.A./C-33/K Reference answered.