The Commissioner of Income-tax, Patiala v. M/s. Punjab Tractors Ltd., Mohali

Judgment

1. To be referred to the Reporters or not?

2. Whether the judgment should be reported in the Digest? M.M. Kumar, J. The Revenue has approached this Court by invoking Section 260A of the Income Tax Act, 1961 (for brevity 'the Act') challenging the order dated 19.04.2001 passed by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for brevity 'the Tribunal) in ITA No. 96/Chandi/95 in respect of the assessment year 1989-90. ITA No. 15 of 2002 -2- While admitting the appeal, a Division Bench of this Court has framed the following question of law: “Whether on the facts and circumstances of the case the Tribunal was right in holding that the expenditure incurred by the assessee on presentation of articles which did not contain the logo of the assessee was not meant for advertisement but for business promotion in general and, therefore, not disallowable under Rule 6-B of the Income Tax Rules?”

In order to adjudicate on the aforesaid question, it may first be necessary to notice few facts. The assessment in respect of assessment year 1989-90 was completed under Section 143(3) and the following additions were made: (A) disallowance of expenses under Rule 6-B. (B) disallowance of rent paid on account of guest house under Section 37(4) of the Act. (C) Disallowance of entertainment expenses under Section 37(2A). The assessee filed an appeal before the CIT(A) who deleted the additions made on account of payment of rent paid to guest house and other items. The Revenue being dissatisfied with the view taken by the CIT (A) preferred a further appeal before the Tribunal, which has dismissed the same vide order dated

19.04.2001. However, matter came up for adjudication before the ITA No. 15 of 2002 -3- Division Bench of this Court, the question of law produced in the preceding paragraph was considered to have emerged for determination of this Court. It is appropriate to notice that the assessee-respondent has claimed expenditure of Rs. 1,05,306/- on account of export promotion, publicity expenses and advertisement outside India. Another sum of Rs. 37,933 was also claimed for article presented or intended for presentation where expenditure on each article had exceeded Rs. 50/-. The Assessing Officer held that expenses on these articles cannot be held fully exclusively for business purposes as the logo or name of the company was not inscribed on all the items. The Assessing Officer in his order dated

23.03.1990 has expressed following view on the aforesaid issue: “The expenses on these article cannot be held fully exclusively for business purpose as the logo or name of the company was not inscribed on all the items. However, it is, difficult to find out exactly as to what was the value of items on which the company's name or logo was inscribed can be held for advertisement, publicity or sale promotion. Items having neither logo nor the name of the company are purely presentation articles without any publicity value besides there are articles having more than Rs. 50/- per item which is inadmissible under rule 6B even if the same has got some publicity value. Considered all these facts and in view of the facts mentioned above 50% of the ITA No. 15 of 2002 -4- expenses are disallowed under Rule 6-B and also on the ground that the same were not for business purposes fully and exclusively. The disallowance is in addition to the disallowance offered by the assessee company at Rs. 63,770/- and already considered u/s 143(1). The disallowance to be made now is computed as under: Expenses on Foreign Advertisement and publicity. Rs. 1,05,306/- Expenses on articles for presentation or intended having value more than Rs. 50/-. Rs. 37,933/- Balance 50% of which comes to Rs. 1,43,239/- Rs. 71,720/- The CIT(A) accepted the contention of the assessee that a sum of Rs. 1,05,306 was fully and exclusively in relation to participation by the assessee in various trade exhibition held at Kualalampur, Dubai and advertisement in Radio Sport. Hence, these were allowable. In respect of disallowance of Rs. 37,933/- made under Rule 6B, the CIT(A) accepted the contention of the assessee that the expenditure incurred on the gift items could not have been disallowed under Rule 6-B. In that regard reliance has been placed on a judgment of the Tribunal in the case of Himachal Pradesh Agro Industries Corp. Ltd., Khalini Shimla vs. IAC (Assessment) rendered in ITA No. 638 and 709 in respect of assessment year 1984-85. The CIT(A) directed that the expenditure incurred on gift items, which did not contain any logo or reference to company's name were to be allowed in full. On further appeal to the Tribunal, order of the CIT(A) has ITA No. 15 of 2002 -5- been upheld on the ground that issue was covered in favour of assessee vide order dated 15.03.1994 passed by the Tribunal in assessee's own case for the assessment year 1981-82 rendered in I.T.A. No. 1304 of 1988. Reliance was also placed on the decision dated 26.04.1993 rendered in I.T.A. No. 638 of 1988 in the case of H.P. Agro Corporation Ltd. (supra). Accordingly, the Tribunal held in favour of the assessing opining that the expenditure incurred on presentation of articles which did not contain logo of the assessee was allowable and was not required to be meant for advertisement. The purpose of presenting those gifts was business promotion in general. The Tribunal held that CIT(A) was absolutely justified in allowing those expenses, holding that Rule 6-B was not attracted. We have heard learned counsel for the parties and have perused the paper book with their able assistance, in order to determine the issue, it would first be necessary to read Rule 6-B of the Income Tax Act, which is as under: “Expenditure on advertisement. 6B (1) The allowance in respect of expenditure on advertisement shall not in the following cases exceed- (a) in respect of articles intended for presentation, [2000] on each such article; (b) in respect of any advertisement outside India involving payment in foreign currency, the amount covered by foreign exchange granted to, or permitted to be acquired by, the assessee for this purpose under the law relating to the foreign exchange for the time being in force. ITA No. 15 of 2002 -6- (2)(i) Where the [Assessing Officer] is of opinion that any expenditure on advertisement of the nature described in clause (ii) is excessive or unreasonable having regard to the legitimate business needs of the assessee and the benefit derived by or accruing to him therefrom, that portion of the expenditure which is so considered by him to be excessive or unreasonable shall not be allowed as a deduction in computing the total income; (ii) the expenditure referred to in clause (i) is that incurred on advertisement involving payment- (A) to a person (including in the case of a company, firm, an association of persons or a Hindu undivided family, a director, partner or member, as the case may be, of such company, firm, association or family) who has a substantial interest in the business of the assessee, or to a relative of such person; or (B) to a person who carries on the business of, or profession as, a publicity or advertising agent, where the assessee, or in a case where the assessee is a company, firm, an association of persons or a Hindu undivided family, any director, partner or member, as the case may be, of such company, firm, association or family, or any relative of such assessee or such director, partner or member, has a substantial interest in the business or profession of that person. (3) Any expenditure on advertisement for which payment has been made in a sum exceeding [Rs. 10,000] shall not be allowed as a deduction in ITA No. 15 of 2002 -7- computing the total income unless such payment is made by a crossed cheque drawn on a bank or by a crossed bank draft; Provided that where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for expenditure on advertisement exceeding [Rs. 10,000] and subsequently during any previous year the assessee makes payment in respect thereof otherwise than in accordance with the provisions of the clause, the allowance originally made shall be deemed to have been wrongly made and the [Assessing Officer] may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made. Explanation : For the purpose of this rule,- (i) “relative” shall have the meaning assigned to it in clause (41) of section 2; (ii) a person shall be deemed to have a substantial interest in a business or profession, if- (a) in a case where a business or profession is carried on by a company, such person is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits, carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is beneficially ITA No. 15 of 2002 -8- entitled to not less than twenty per cent of the profits of such business or profession. A close scrutiny of the Rule would show that the it strictly applies to the expenditure incurred on advertisement. Rule 6-B (1) envisages permissible allowance in respect of advertisement and then it goes on specifying those item. It is obvious from the plain reading of the Rule 6B (1) (a) that allowance in respect of expenditure on advertisement must not exceed the pecuniary limit specified. In such a case the element of advertisement would enter consideration and it can be legitimately claim in such a case that 'articles intended for presentation' must have some logo of the assessee company. It is only then that requirement of expression advertisement would deem to be fulfilled. The aforesaid construction is the natural consequence of reading Rule 6B (1), which uses the expression 'advertisement' and any expression used in clauses (a) and (b) would take colour from that expression whether in respect of 'article intended for presentation' or 'any advertisement outside India involving foreign currency'. Rest of the provision in Rule 6B (2) and (3) hardly pose any difficulty concerning interpretation. It is thus clear that an article for presentation meant for sale promotion would not attract the application of Rule 6B and cannot on that count qualify for disallowance. Therefore, the question of law has to be answered against the revenue and in favour of the assessee. In view of the aforesaid discussion, the substantive question of law is answered against the revenue and in favour of the ITA No. 15 of 2002 -9- assessee. The order of the Tribunal is accordingly upheld and the appeal is dismissed. (M.M. KUMAR) JUDGE (JITENDRA CHAUHAN) JUDGE April 26, 2010 Atul