Ita v. M.m. Kumar, J

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 15 of 2002Date of Decision 26.04.2010 The Commissioner of Income-tax, Patiala ---Appellant Versus M/s. Punjab Tractors Ltd., Mohali ---Respondent CORAM:HON'BLE MR. JUSTICE M.M. KUMARHON'BLE MR. JUSTICE JITENDRA CHAUHAN M.M. Kumar, J. The Revenue has approached this Court by invoking Section260A of the Income Tax Act, 1961 (for brevity 'the Act') challengingthe order dated 19.04.2001 passed by the Income-tax AppellateTribunal, Chandigarh Bench, Chandigarh (for brevity 'the Tribunal) inITA No. 96/Chandi/95 in respect of the assessment year 1989-90. While admitting the appeal, a Division Bench of this Court hasframed the following question of law: “Whether on the facts and circumstances of the case the Tribunal was right in holding that theexpenditure incurred by the assessee on presentation ofarticles which did not contain the logo of the assesseewas not meant for advertisement but for businesspromotion in general and, therefore, not disallowableunder Rule 6-B of the Income Tax Rules?” In order to adjudicate on the aforesaid question, it may first benecessary to notice few facts. The assessment in respect ofassessment year 1989-90 was completed under Section 143(3) andthe following additions were made: (A)disallowance of expenses under Rule 6-B. (B)disallowance of rent paid on account of guest house underSection 37(4) of the Act.Section 37(4) of the Act. (C)Disallowance of entertainment expenses under Section 37(2A). The assessee filed an appeal before the CIT(A) whodeleted the additions made on account of payment of rent paid toguest house and other items. The Revenue being dissatisfied withthe view taken by the CIT (A) preferred a further appeal before theTribunal, which has dismissed the same vide order dated19.04.2001. However, matter came up for adjudication before the Division Bench of this Court, the question of law produced in thepreceding paragraph was considered to have emerged fordetermination of this Court. It is appropriate to notice that theassessee-respondent has claimed expenditure of Rs. 1,05,306/- onaccount of export promotion, publicity expenses and advertisementoutside India. Another sum of Rs. 37,933 was also claimed for articlepresented or intended for presentation where expenditure on eacharticle had exceeded Rs. 50/-. The Assessing Officer held thatexpenses on these articles cannot be held fully exclusively forbusiness purposes as the logo or name of the company was notinscribed on all the items. The Assessing Officer in his order dated23.03.1990 has expressed following view on the aforesaid issue: “The expenses on these article cannot be held fullyexclusively for business purpose as the logo or name ofthe company was not inscribed on all the items.However, it is, difficult to find out exactly as to whatwas the value of items on which the company's name orlogo was inscribed can be held for advertisement,publicity or sale promotion. Items having neither logonor the name of the company are purely presentationarticles without any publicity value besides there arearticles having more than Rs. 50/- per item which isinadmissible under rule 6B even if the same has gotsome publicity value. Considered all these facts and inview of the facts mentioned above 50% of the ITA No. 15 of 2002 -4- expenses are disallowed under Rule 6-B and also on theground that the same were not for business purposesfully and exclusively. The disallowance is in addition tothe disallowance offered by the assessee company atRs. 63,770/- and already considered u/s 143(1). Thedisallowance to be made now is computed as under:Expenses on Foreign Advertisement andRs. 1,05,306/-publicity.Expenses on articles for presentation orRs. 37,933/-intended having value more than Rs. 50/-.BalanceRs. 1,43,239/-50% of which comes to Rs. 71,720/- ITA No. 15 of 2002 -4- expenses are disallowed under Rule 6-B and also on theground that the same were not for business purposesfully and exclusively. The disallowance is in addition tothe disallowance offered by the assessee company atRs. 63,770/- and already considered u/s 143(1). Thedisallowance to be made now is computed as under:Expenses on Foreign Advertisement andRs. 1,05,306/-publicity.Expenses on articles for presentation orRs. 37,933/-intended having value more than Rs. 50/-.BalanceRs. 1,43,239/-50% of which comes to Rs. 71,720/- The CIT(A) accepted the contention of the assessee thata sum of Rs. 1,05,306 was fully and exclusively in relation toparticipation by the assessee in various trade exhibition held atKualalampur, Dubai and advertisement in Radio Sport. Hence, thesewere allowable. In respect of disallowance of Rs. 37,933/- madeunder Rule 6B, the CIT(A) accepted the contention of the assesseethat the expenditure incurred on the gift items could not have beendisallowed under Rule 6-B. In that regard reliance has been placedon a judgment of the Tribunal in the case of Himachal PradeshAgro Industries Corp. Ltd., Khalini Shimla vs. IAC(Assessment) rendered in ITA No. 638 and 709 in respect ofassessment year 1984-85. The CIT(A) directed that the expenditureincurred on gift items, which did not contain any logo or reference tocompany'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 been upheld on the ground that issue was covered in favour ofassessee vide order dated 15.03.1994 passed by the Tribunal inassessee's own case for the assessment year 1981-82 rendered inI.T.A. No. 1304 of 1988. Reliance was also placed on the decisiondated 26.04.1993 rendered in I.T.A. No. 638 of 1988 in the case ofH.P. Agro Corporation Ltd. (supra). Accordingly, the Tribunal held infavour of the assessing opining that the expenditure incurred onpresentation of articles which did not contain logo of the assesseewas allowable and was not required to be meant for advertisement.The purpose of presenting those gifts was business promotion ingeneral. The Tribunal held that CIT(A) was absolutely justified inallowing those expenses, holding that Rule 6-B was not attracted. We have heard learned counsel for the parties and haveperused the paper book with their able assistance, in order todetermine the issue, it would first be necessary to read Rule 6-B ofthe Income Tax Act, which is as under: “Expenditure on advertisement. 6B(1) The allowance in respect of expenditure onadvertisement shall not in the following cases exceed-advertisement shall not in the following cases exceed- (a) in respect of articles intended for presentation,[2000] on each such article;[2000] on each such article; (b) in respect of any advertisement outside Indiainvolving payment in foreign currency, theamount covered by foreign exchange granted to,or permitted to be acquired by, the assessee forthis purpose under the law relating to the foreignexchange for the time being in force.involving payment in foreign currency, theamount covered by foreign exchange granted to,or permitted to be acquired by, the assessee forthis purpose under the law relating to the foreignexchange for the time being in force. (2)(i) Where the [Assessing Officer] is of opinion thatany expenditure on advertisement of the naturedescribed in clause (ii) is excessive or unreasonablehaving regard to the legitimate business needs of theassessee and the benefit derived by or accruing to himtherefrom, that portion of the expenditure which is soconsidered by him to be excessive or unreasonable shallnot be allowed as a deduction in computing the totalincome; (ii) the expenditure referred to in clause (i) is thatincurred on advertisement involving payment-incurred on advertisement involving payment- (2)(i) Where the [Assessing Officer] is of opinion thatany expenditure on advertisement of the naturedescribed in clause (ii) is excessive or unreasonablehaving regard to the legitimate business needs of theassessee and the benefit derived by or accruing to himtherefrom, that portion of the expenditure which is soconsidered by him to be excessive or unreasonable shallnot be allowed as a deduction in computing the totalincome; (ii) the expenditure referred to in clause (i) is thatincurred on advertisement involving payment-incurred on advertisement involving payment- (A) to a person (including in the case of a company,firm, an association of persons or a Hinduundivided family, a director, partner or member,as the case may be, of such company, firm,association or family) who has a substantialinterest in the business of the assessee, or to arelative of such person; orfirm, an association of persons or a Hinduundivided family, a director, partner or member,as the case may be, of such company, firm,association or family) who has a substantialinterest in the business of the assessee, or to arelative of such person; or (B) to a person who carries on the business of, orprofession as, a publicity or advertising agent,where the assessee, or in a case where theassessee is a company, firm, an association ofpersons or a Hindu undivided family, any director,partner or member, as the case may be, of suchcompany, firm, association or family, or anyrelative of such assessee or such director, partneror member, has a substantial interest in thebusiness or profession of that person.profession as, a publicity or advertising agent,where the assessee, or in a case where theassessee is a company, firm, an association ofpersons or a Hindu undivided family, any director,partner or member, as the case may be, of suchcompany, firm, association or family, or anyrelative of such assessee or such director, partneror member, has a substantial interest in thebusiness or profession of that person. (3)Any expenditure on advertisement for whichpayment 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 ismade by a crossed cheque drawn on a bank or by acrossed bank draft; Provided that where an allowance has been madein the assessment for any year in respect of any liabilityincurred by the assessee for expenditure onadvertisementexceeding[Rs.10,000]andsubsequently during any previous year the assesseemakes payment in respect thereof otherwise than inaccordance with the provisions of the clause, theallowance originally made shall be deemed to havebeen wrongly made and the [Assessing Officer] mayrecompute the total income of the assessee for theprevious year in which such liability was incurred andmake the necessary amendment; and the provisions ofsection 154 shall, so far as may be, apply thereto, theperiod of four years specified in sub-section (7) of thatsection being reckoned from the end of the assessmentyear next following the previous year in which thepayment 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; clause (41) of section 2; (ii)a person shall be deemed to have a substantialinterest in a business or profession, if-interest in a business or profession, if- Explanation : For the purpose of this rule,- (i)“relative” shall have the meaning assigned to it in clause (41) of section 2; clause (41) of section 2; (ii)a person shall be deemed to have a substantialinterest in a business or profession, if-interest in a business or profession, if- (a)in a case where a business or profession is carriedon by a company, such person is the beneficialowner of shares, not being shares entitled to afixed rate of dividend whether with or without afurther right to participate in profits, carrying notless than twenty per cent of the voting power; andon by a company, such person is the beneficialowner of shares, not being shares entitled to afixed rate of dividend whether with or without afurther right to participate in profits, carrying notless than twenty per cent of the voting power; and (b) in any other case, such person is beneficially ITA No. 15 of 2002 entitled to not less than twenty per cent of theprofits of such business or profession. A close scrutiny of the Rule would show that the it strictlyapplies to the expenditure incurred on advertisement. Rule 6-B (1)envisages permissible allowance in respect of advertisement andthen it goes on specifying those item.It is obvious from the plainreading of the Rule 6B (1) (a) that allowance in respect ofexpenditure on advertisement must not exceed the pecuniary limitspecified. In such a case the element of advertisement would enterconsideration and it can be legitimately claim in such a case that'articles intended for presentation' must have some logo of theassessee company. It is only then that requirement of expressionadvertisement would deem to be fulfilled. The aforesaid constructionis the natural consequence of reading Rule 6B (1), which uses theexpression '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 Indiainvolving foreign currency'. Rest of the provision in Rule 6B (2) and(3) hardly pose any difficulty concerning interpretation. It is thusclear that an article for presentation meant for sale promotion wouldnot attract the application of Rule 6B and cannot on that countqualify for disallowance. Therefore, the question of law has to beanswered against the revenue and in favour of the assessee. In view of the aforesaid discussion, the substantivequestion of law is answered against the revenue and in favour of the assessee. The order of the Tribunal is accordingly upheld and theappeal is dismissed. (M.M. KUMAR)JUDGE April 26, 2010Atul (JITENDRA CHAUHAN) JUDGE