Commissioner Of Income Taxchennai v. Sabena Detergents Private Ltd.,(Now Known As Ecof Detergentspvt. Ltd.)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 07.06.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) No.458 of 2007 Commissioner of Income TaxChennai. ..Appellant/Respondent Vs. Sabena Detergents Private Ltd.,(Now Known as Ecof DetergentsPvt. Ltd.) 310, T.T.K.Road,Chennai. ..Respondent/Appellant Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'C' Bench dated23.11.2006 in ITA No.1750/Mds/1999 for the assessment year 1996-97,against the Order of the Commissioner of Income Tax (A) IV Chennai dated15.10.99 and made in ITA.No.251/99-2000/Com.Iv (4) against the Order ofthe Deputy Commissioner of Income Tax, Company Circle IV (4) Chennai-6dated 31.3.99 and made in PAN/GIR No.2273-S. For Appellant: Mr.J.Naresh Kumar, Jr.S.C. J U D G M E N T (Delivered by P.D.DINAKARAN,J.) The above tax case appeal is preferred by the Revenue against theorder of the Income-tax Appellate Tribunal dated 23.11.2006 made inI.T.A.No.1750/Mds/1999 for the assessment year 1996-97, raising thesubstantial question of law, viz., " Whether the Tribunal was right in holding that theadvertisement expenditure incurred for promoting the picklesmanufactured by its sister concern, for which the assessee is thedistributor and selling agent, is allowable as the assessee'sbusiness expenditure ?" under the following facts and circumstances of the case.https://hcservices.ecourts.gov.in/hcservices/ 2.1. The assessment year involved in this appeal is 1996-97. Theassessee is a private limited company engaged in the business of tradingin scouring powder, pickles, etc. During the relevant assessment year,the assessee claimed expenditure for advertisement of pickles marketed byit, which are manufactured by its sister concerns. But, the AssessingOfficer noting that the advertisement expenditure includes a sum ofRs.25,69,405/- towards expenditure incurred for promoting the productsmanufactured by its sister concerns and observing that there is nomemorandum of understanding or agreement between the assessee company andthe manufacturing company in this regard, by assessment order dated31.3.99, held that the advertisement expenditure incurred by the assesseeon behalf of its sister concerns cannot be allowed as expensesattributable to its business. Accordingly, the said sum of Rs.25,69,405/-claimed by the assessee towards advertisement expenditure was disallowedand added back to the total income of the assessee. 2.2. Against the said assessment order of the Assessing Officer, theassessee preferred an appeal before the Commissioner of Income-tax(Appeals). The Commissioner has found that the assessee had been actingas an agent for marketing the products manufactured by its sisterconcerns, viz., Telkar Brand Tickles and M/s.Telkar Food Products PrivateLimited, and that as per the letter dated 31.3.95 of the principalmanufacturer, viz., M/s.Telkar Food Products Private Limited, the assesseehas to bear the cost of exhibition, display and screening ofadvertisements, in order to promote and boost the sale of picklesmanufactured by the sister concerns. Even though the principalmanufacturer would provide basic advertisement matters, the assessee hadincurred expenditure to the tune of Rs.25,69,405/- towards display andscreening of advertisements during exhibition. However, the Commissionerhas found that though the assessee contended that by virtue of the letterof the pricipal manufacturer, it was required to bear the cost ofexhibition, display and screening of advertisements, the said letter dated31.3.95 is only a self-serving evidence and in the absence of any validlyexecuted agreement or understanding between the assessee and its sisterconcerns, the expenditure incurred towards display and screening ofadvertisements during exhibition cannot be allowed and thus, dismissed theappeal by his order dated 15.10.1999. 2.3. On further appeal by the assessee, the Income-tax AppellateTribunal, while appreciating the contentions made on behalf of theassessee that the assessee company is engaged in the business of tradingin scouring powder, pickles, etc. manufactured by its sister concerns andoperating its business in Andhra Pradesh, Karnataka, Kerala and TamilNadu, held that the advertisement expenditure incurred by the assesseecannot be strictly construed as expenditure incurred for promoting theproducts manufactured by its sister concerns, but also for the purpose ofassessee's trade, as the assessee itself is a marketing agent to thepickles as well as Sabena Scouring powder manufactured by its sisterconcerns and is a sole distributor of the said products and thus, allowedthe expenditure in favour of the assessee. Hence, the present appeal bythe Revenue raising the substantial question of law already referred toabove. https://hcservices.ecourts.gov.in/hcservices/ 3. Before deciding the substantial question of law raised in thisappeal, it is apt to refer Section 37(1) of the Income-tax Act, 1961(hereinafter referred to as 'the Act'), which permits the assessee toclaim any expenditure by way of deduction in computing the incomechargeable under the head "Profits and gains of business or profession",which reads as follows:- "37. (1) Any expenditure (not being expenditure of the naturedescribed in sections 30 to 36 and not being in the nature ofcapital expenditure or personal expenses of the assessee, laidout or expended wholly and exclusively for the purposes of thebusiness or profession shall be allowed in computing the incomechargeable under the head "Profits and gains of business orprofession". Explanation – For the removal of doubts, it is hereby declaredthat any expenditure incurred by an assessee for any purposewhich is prohibited by law shall not be deemed to have beenincurred for the purpose of business or profession and nodeduction or allowance shall be made in respect of suchexpenditure." "37. (1) Any expenditure (not being expenditure of the naturedescribed in sections 30 to 36 and not being in the nature ofcapital expenditure or personal expenses of the assessee, laidout or expended wholly and exclusively for the purposes of thebusiness or profession shall be allowed in computing the incomechargeable under the head "Profits and gains of business orprofession". Explanation – For the removal of doubts, it is hereby declaredthat any expenditure incurred by an assessee for any purposewhich is prohibited by law shall not be deemed to have beenincurred for the purpose of business or profession and nodeduction or allowance shall be made in respect of suchexpenditure." 4. A careful reading of Section 37(1) of the Act makes it clear thatfor allowing any expenditure while computing the income chargeable underthe head "Profits and gains of business or profession", such expendituremust be (a) paid out wholly and exclusively for the purpose of business orprofession and (b) must not be (i) capital expenditure, (ii) personalexpenses and (iii) an allowance of the character described in Section 30to 36 of the Act. 5.1. A Full Bench of the Apex Court in COMMISSIONER OF INCOME-TAX v.MALAYALAM PLANTATIONS LTD. [1964] 53 I.T.R. 140, while interpreting theexpression "for the purpose of the business" used in Section 10(2)(xv) ofthe Income-tax Act, 1922 (hereinafter referred to as 'the old Act'), heldas hereunder:- "The expression "for the purpose of the business" is wider inscope than the expression "for the purpose of earning profits".Its range is wide; it may take in not only the day to dayrunning of a business but also the rationalisation of itsadministration and modernisation of its machinery; it mayinclude measures for the preservation of the business and forthe protection of its assets and property from expropriation,coercive process or assertion of hostile title; it may alsocomprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; itmay comprehend many other acts incidental to the carrying on ofthe business. However wide the meaning of the expression maybe, its limits are implicit in it. The purpose shall be for thepurpose of the business, that is to say, the expenditureincurred shall be for the carrying on of the business and theassessee shall incur it in his capacity as a person carrying onthe business. It cannot include sums spent by the assessee asagent of a third party, whether the origin of the agency ishttps://hcservices.ecourts.gov.in/hcservices/ voluntary or statutory." 5.2. In the instant case, it is the clear case of the assessee thatit is not only acting as an agent to the products manufactured by itssister concerns, but also engaged in the business of trading in scouringpowder, pickles, etc. In other words, the marketing of the productsmanufactured by M/s.Telkar Food Products Private Limited, by itself, is atrade undertaken by the assessee and the expenses in question claimed bythe assessee are the expenses incurred during the course of suchmarketing. 5.3. In the above said decision, Justice.Subba Rao, as he then was,speaking for the Full Bench of the Apex Court, placed reliance on thedecision of the House of Lords in Southern v. Borax Consolidated Ltd.[1942] 10 I.T.R. 1, whereunder it was held that the amount spent whollyand exclusively for the purpose of the company's trade was a allowablededuction for the purpose of computing the profits of the company forincome-tax purposes and accordingly, the expression "for the purpose ofbusiness" is to be given a liberal meaning, as it includes the purpose topromote the business of trade. 5.3. In the above said decision, Justice.Subba Rao, as he then was,speaking for the Full Bench of the Apex Court, placed reliance on thedecision of the House of Lords in Southern v. Borax Consolidated Ltd.[1942] 10 I.T.R. 1, whereunder it was held that the amount spent whollyand exclusively for the purpose of the company's trade was a allowablededuction for the purpose of computing the profits of the company forincome-tax purposes and accordingly, the expression "for the purpose ofbusiness" is to be given a liberal meaning, as it includes the purpose topromote the business of trade. 5.4. The decision of the House of Lords in Morgan v. Tate and LyleLtd. [1954] 26 I.T.R. 195, was also relied upon by the Apex Court,whereunder the question that arose was whether the expenditure incurred bya company engaged in sugar refining, in a propaganda campaign to opposethe threatened nationalisation of the industry, was an admissiblededuction. In the said case, it was held that Lord Davey's formulaincludes expenditure for the purpose of preventing a person from beingdisabled from carrying on and earning profits in the trade. The resultanttests would be (i) whether the was expenditure incurred for the purpose ofcarrying on the business to earn profits in the trade and for removingobstacles and impediments in the conduct of the business; and (ii) whetherthe assessee paid the amount in his capacity as businessman or in hispersonal capacity. 5.5. In the instant case, we do not find any difficulty to hold thatboth the tests referred to above were satisfied by the assessee, in that,the assessee company has incurred expenses to earn profits in its businessof marketing and it had incurred expenses not in its personal capacity asan agent to the products manufactured by its sister concerns, but in itscapacity as a businessman in marketing the products by itself. 6.1. The above well settled legal position are being recapitulated byseveral decisions, as stated hereunder. 6.2. Justice.Shah, as he then was, speaking for the Full Bench ofthe Apex Court in Travancore Titanium Product Ltd. v. Commissioner ofIncome-tax [1966] 60 I.T.R. 277, held that to claim the expenditureincurred as a permissible deduction under Section 10(2)(xv) of the oldAct, (now under Section 37(1) of the Act), there must be a direct andintimate connection between the expenditure and the business, i.e.,between the expenditure and the character of the assessee as a trader, andnot as owner of assets even if they are assets of the business. It ishttps://hcservices.ecourts.gov.in/hcservices/ thus held that the nature of the expenditure or outgoing must be adjudgedin the light of accepted commercial practice and trading principles andthe expenditure must be incidental of the business and must benecessitated or justified by commercial expediency and that it must alsobe directly and intimately connected with the business and be laid out bythe taxpayer in his character as a trader. 6.3. In applying the test of commercial expediency for determiningwhether the expenditure was wholly and exclusively laid out for thepurpose of the business, reasonableness of the expenditure has to beadjudged from the point of view of the businessman and not of the revenue,vide Commissioner of Income-tax v. Walchand and Co. Private Ltd. [1967] 65I.T.R. 381. thus held that the nature of the expenditure or outgoing must be adjudgedin the light of accepted commercial practice and trading principles andthe expenditure must be incidental of the business and must benecessitated or justified by commercial expediency and that it must alsobe directly and intimately connected with the business and be laid out bythe taxpayer in his character as a trader. 6.3. In applying the test of commercial expediency for determiningwhether the expenditure was wholly and exclusively laid out for thepurpose of the business, reasonableness of the expenditure has to beadjudged from the point of view of the businessman and not of the revenue,vide Commissioner of Income-tax v. Walchand and Co. Private Ltd. [1967] 65I.T.R. 381. 6.4. In Sassoon J.David and Co.P.Ltd. v. Commissioner of Income-tax, [1979] 118 I.T.R. 261, while interpreting the words "any expenditurelaid out or expended wholly and exclusively for the purposes of thebusiness or profession" to assail that the expression "wholly andexclusively" used in Section 10(2)(xv) of the old Act (now Section 37(1)of the Act), does not mean "necessarily", the Apex Court has held thatordinarily, it is for the assessee to decide whether any expenditureshould be incurred in the course of his or its business and suchexpenditure may be incurred voluntarily and without any necessity and ifit is incurred for promoting the business and to earn profits, theassessee can claim deduction under section 10(2)(xv) of the old Act, eventhough there was no compelling necessity to incur such expenditure. Itwas further held that the fact that somebody other than the assessee (likein the instant case, the sister concerns) is also benefitted by theexpenditure should not come in the way of an expenditure being allowed byway of deduction under section 10(2)(xv) of the old Act (now Section 37(1)of the Act), if it satisfies otherwise the tests laid down by law,referred to above. 6.5. Recently, the Apex Court, in S.A.Builders Ltd. v. Commissionerof Income-tax (Appeals), [2007] 288 I.T.R. Page 1, interpreting the words"for the purpose of business" used in Section 37(1) of the Act, whilecomputing the income chargeable under the head "Profits and gains ofbusiness or profession", reiterated its earlier views referred to aboveand held that such expenditure is to be tested in the light of thecommercial expediency, which is one of wide import and includes suchexpenditure as a prudent businessman incurs for the purpose of business.The expenditure may not have been incurred under any legal obligation, butyet it is allowable as business expenditure if it was incurred on groundsof commercial expediency. It is further held that the expenditureincurred for the purpose of business meant in Section 37(1) of the Actincludes the expenditure voluntarily incurred for commercial expediencyand it is immaterial if a third party also benefits thereby. It is notfor the authorities or the Court to examine the purpose for which theassessee incurred the expenses for its commercial expediency. What isrelevant is whether the amount was advanced as a measure of commercialexpediency and not from the point of view whether the amount was advancedfor earning profits. Once it is established that there was nexus betweenhttps://hcservices.ecourts.gov.in/hcservices/ the expenditure and the purpose of the business (which need notnecessarily be the business of the assessee itself), the Revenue cannotjustifiably claim to put itself in the arm-chair of the businessman or inthe position of the Board of Directors and assume the role to decide howmuch is reasonable expenditure having regard to the circumstances of thecase and no businessman can be compelled to maximize his profit. the expenditure and the purpose of the business (which need notnecessarily be the business of the assessee itself), the Revenue cannotjustifiably claim to put itself in the arm-chair of the businessman or inthe position of the Board of Directors and assume the role to decide howmuch is reasonable expenditure having regard to the circumstances of thecase and no businessman can be compelled to maximize his profit. For all these reasons, we do not see any question of law much less asubstantial question of law that arises for consideration in this appeal.Accordingly, the tax case appeal is dismissed. sra Sd/-Asst.Registrar/true copy/ Sub Asst.Registrar To: 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "C",Rajaji Bhavan, III Floor,Besant Nagar, Chennai-90. (5 Copies) 2.The Commissioner of IncomeTax (Appeals)IV, Chennai. 3.The Deputy Commissioner of Income Tax, Company Circle IV(4), Chennai. 4. The Commissioner of Income Tax, Chennai. +1 cc to Mrs.Pushya Sitaraman, Senior Standing Counsel for IT Sr.No.32835. Senior Standing Counsel for IT Sr.No.32835. NG(CO)dcp/21.6.07 TC (A) No.458 of 2007. https://hcservices.ecourts.gov.in/hcservices/