Karnataka H.C : Whether, on the facts and in the circumstances of the case, the value of presentation articles bearing the name of the appellant-company, despite not being intended for distribution, for promoting or boosting the appellant’s sales but for extending general courtesy to business associates has any advertisement value so as to suffer consequence of provision of r. 6B of the IT Rules, 1962 ?

High Court Of Karnataka

Motor Industries Co. Ltd. vs. DCIT

Section 37(3), Rule 6B,

Asst. Year 1990-91

R. Gururajan & Jawad Rahim, JJ.

IT Appeal No. 396 of 2001

21st July, 2006

Counsel Appeared

Soli E. Dastur & P.J. Pardiwalla for King & Partridge, for the Assessee : M.V. Seschachala, for the Revenue


R. Gururajan, J. :

Motor Industries Company Ltd. (for short “MICO”), is before this Court seeking an answer to the following question of law on the following facts : “Whether, on the facts and in the circumstances of the case, the value of presentation articles bearing the name of the appellant-company, despite not being intended for distribution, for promoting or boosting the appellant’s sales but for extending general courtesy to business associates has any advertisement value so as to suffer consequence of provision of r. 6B of the IT Rules, 1962 ?”

The appellant-MICO is covered by the IT laws. The appellant incurred expenditure in procuring presentation articles for the year ending 31st March, 1990, relevant to the asst. yr. 1990-91. The said articles do not have any advertisement value. It was intended for presentation to business associates for extending general courtesy. It was not considered to be amounting to advertisement for suffering partial disallowance under r. 6B of the IT Rules, 1962. The Department treated such articles also as falling within the scope of r. 6B of the Rules and arrived at the amount disallowable at Rs. 1,69,883 as representing the value in excess of Rs. 50 each while passing the appellant’s assessment under s. 143(3) of the Act in terms of an order dt. 12th March, 1993. An unsuccessful appeal was filed before the appellate authority. Thereafter, the matter was taken before the Tribunal by the appellant-MICO. The respondent-Department also preferred an appeal before the Tribunal on other issues covered by the very order. Both the appeals were heard together and the Tribunal has chosen to disallow the claim of the appellant. It is in these circumstances, the appellant is before us challenging the said order by raising the abovereferred question of law for our consideration in the case on hand. Heard Sri Dastur, learned senior counsel appearing for the appellant-company. He referred to us s. 37 of the IT Act and also r. 6B of the Rules in support of his submissions. He says that the material facts would show that the expenses incurred by the company cannot be said to be for advertisement as held by the authorities. It was not the intention of the company to advertise by way of such presentation by way of request to its business associates. He therefore, wants the question of law to be decided in his favour.

4. Per contra, Sri Seschachala, learned counsel supports the order by contending that necessary details were not provided with reference to the articles presented by the appellant-company. According to him, the appellant is a manufacturer and any reference to the appellant’s name in the presentation of the articles would certainly have an advertisement value and that therefore the authorities are justified in the case on hand.

5. After hearing, we have carefully perused the material placed on record.

6. From the material on record, it is seen that the Dy. CIT (Asst.) has noticed the tax audit report and the note made thereunder. Thereafter, the AO has noticed that the details had to be called statutorily. Ultimately, he disallowed the claim of Rs. 1,69,883 in terms of r. 6B of the Rules. When the same was challenged before the appellate authority, the appellate authority has noticed in para 10 of the claim of the appellant-company. Thereafter, he has chosen to say that this issue was decided against the appellant in the earlier years and in the absence of any details, this ground is dismissed. When the second appeal was filed, the Tribunal in para 11 of the order has chosen to say that in the earlier year, the Tribunal has come to a conclusion that the article presented contains the name of the assessee with an intention of getting articles manufactured by it and as such the Tribunal came to the conclusion that the expense incurred and claimed by the assessee is only towards advertisement expenses. Following the said judgment, this point was decided against the assessee. In the light of the argument of Sri Dastur, learned counsel, we have seen s. 37(3) of the IT Act. Sec. 37(3) as it stood then would read as under : “Notwithstanding anything contained in sub-s. (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including anyaccommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed.”

7. Rule 6B reads as under : “Expenditure on advertisement.—The allowance in respect of expenditure on advertisement shall not in the following cases exceed— (a) in respect of articles intended for presentation,— (i) where the amount of such expenditure does not exceed Rs. 1,000 on each such article, the whole of such amount; (ii) in any other case, Rs. 1,000 on each such article as increased by a sum equal to 50 per cent of the expenditure in excess of Rs. 1,000 on 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. (2)(i) Where the AO is of opinion that any expenditure on advertisement of the nature described in cl. (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 cl. (i) is that incurred on advertisement involving payment — ……….”

In the light of this provision, we have carefully seen the material placed on record. It may be true that the presentation may carry the name of the appellant-company. That by itself would not amount to an advertisement as sought to be made out in the case on hand. Advertising a product involves an intention and also it involves several factors including the person to whom it is presented, how it is presented and when it is presented. For instance, if a company manufactures a particular consumable article, if it starts presenting the same with its emblem and name in a large gathering to a large people, then it may amount to an advertisement in a real sense. Presentation of an article with the name of the company to a dignitary or a VIP would not by itself amount to an advertisement as held by the authority. Unless sufficient accepted materials are forthcoming with regard to the details of advertising nature, a gift made to a dignitary or a VIP cannot be categorised as advertisement as sought to be held by the authority. Moreover, in the case on hand, the appellant is a large company spending lakhs of rupees for advertising expenses. The sum involved is hardly Rs. 1,60,000 and that amount is claimed to be an expense towards gift. Such gift expenses cannot be termed as advertising expenses by the authority in the given circumstances.

As a matter of fact, at the time of arguments, Sri Dastur, learned counsel places before us the details of complimentary articles. A reading of the details would show that leather articles, nylon bags, umbrellas, glass jugs, etc., were provided as gift articles to the dignitaries. A mere name in the articles does not by itself convert the said gift articles as having any advertisement value in terms of the law governing tax in such matters.

On the facts of this case and in the given circumstances, we are of the view that the authorities are not correct in disallowing this claim. In these circumstances we deem it proper to answer this question in favour of the assessee. No costs.

[Citation : 285 ITR 365]

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