Madhya Pradesh H.C : Whether, on the facts and in the circumstances of the case, the advertisement and sales promotion expenses incurred by the appellant for the purpose of business were rightly disallowed by the Tribunal ignoring past practice ?

High Court Of Madhya Pradesh : Indore Bench

Hemraj Nebhomal Sons vs. CIT

Section 37(1)

Asst. Year 1989-90, 1990-91

A.M. Sapre & Ashok Kumar Tiwari, JJ.

IT Ref. Nos. 6 & 7 of 2000

7th March, 2005

Counsel Appeared :

S.C. Bagadia with D.K. Chhabra, for the Assessee : R.L. Jain with Ku. V. Mandlik, for the Revenue

ORDER

A.M. Sapre, J. :

The decision rendered in this reference shall also govern the disposal of reference being IT Ref. No. 7 of 2000, as both the references involve identical points.

2. This is an income-tax reference made under s. 256(1) of the IT Act at the instance of assessee by the Tribunal (ITAT) in RA No. 135/136/Ind/1997, dt. 13th March, 2000, which in turn arise out of an appellate order dt. 1st Sept., 1997, passed in ITA No. 917/918/Ind/1993 to answer following two questions of law said to arise out of the aforesaid appellate order :

“1. Whether the Tribunal erred in law in maintaining disallowance on account of advertisement and sale promotion expenses without appreciating the facts and circumstances of the case and by ignoring the decision of the Supreme Court and jurisdictional High Court relied on by the appellant ?

Whether, on the facts and in the circumstances of the case, the advertisement and sales promotion expenses incurred by the appellant for the purpose of business were rightly disallowed by the Tribunal ignoring past practice ?”

Heard Shri S.C. Bagadia, learned senior counsel with Shri D.K. Chhabra, learned counsel for the applicant/assessee, and Shri R.L. Jain, learned senior counsel with Ku. V. Mandlik, learned counsel for the non-applicant/Revenue.

The question relates to asst. yrs. 1989-90 and 1990-91. In substance, the question arose before the AO as to whether assessee is entitled to claim the deduction of Rs. 1,40,402 and Rs. 1,44,174 which they claimed to have incurred towards advertisement and sales promotion of their products (Bidi). The AO disallowed them. The CIT(A) allowed them but Tribunal disallowed them by agreeing with AO and hence, assessee has come up in reference under s. 256(1) of the Act which initially Tribunal declined. This Court then in exercise of powers conferred under s. 256(2) of the Act, directed the Tribunal to refer to aforementioned two questions at the instance of assessee.

The assessee is a firm. It is engaged in the business of purchase and sale of Bidi in Indore. The assessee claimed in two assessment years aforementioned, sum by way of expenditure incurred in advertisement and sales promotion. In the opinion of AO, it was not incurred for the legitimate need of business of the firm and hence, the AO disallowed the expenditure. This view was reversed by CIT(A) but it was again restored by Tribunal resulting in its disallowance against assessee.

Having heard learned counsel for the parties and having perused record of the case, we are of the opinion that questions referred to this Court have to be answered in favour of assessee and against the Revenue. Sec. 37(1) of the Act permits the assessee to claim any expenditure by way of deduction in computing the income chargeable under the head “Profits and gains of business or profession”. Sec. 37 reads as under : “Sec. 37(1)—Any expenditure (not being expenditure of the nature described in ss. 30 to 36 [****] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’. Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.” An analysis of s. 37(1) shows that— I. any expenditure II. not being expenditure of the nature described in ss. 30 to 36 (for asst. yrs. 1976-77 to 198586, and s. 80VV) and III. not being in the nature of capital expenditure or IV. personal expenses of the assessee V. laid out or expended VI. wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

In other words, to be an allowable expenditure within these provisions, the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business or profession, and further (b) must not be (i) capital expenditure, (ii) personal expense, or (iii) an allowance of the character described in ss. 30 to 36 (for asst. yrs. 1976-77 to 1985-86, and s. 80VV). When we apply the aforesaid requirement of s. 37(1) to the case of assessee in hand, we notice that they have fulfilled the criteria laid down in s. 37(1) for claiming deduction. In other words, the expenditure incurred by the assessee is essentially and/or exclusively related to their business. Any expenditure incurred for advertisement of Bidi and/or for promoting its sale, then in such case, it has to be so regarded as an expenditure incurred for business carried on by the assessee. It being an admitted fact that the assessee is engaged in the business of purchase and sale of Bidi and secondly, the amount in question having been actually spent, i.e., incurred by the assessee for their Bidi business, they are entitled to claim deduction of the amount so spent/incurred in the relevant assessment years.

In our opinion, once the aforementioned conditions are found satisfied, then it is not proper on the part of AO, i.e., taxing authorities to probe on the question as to whether the expenditure was legitimate or necessary, etc. This type of inquiry is neither contemplated nor called for. In other words, in order to disallow the expenditure, the inquiry has to (be) confined to cases falling in Explanation and sub-s. (2B) of s. 37. It is only when the AO finds that claim so made is bogus or false or not incurred as a fact, it can be disallowed, else not.

In view of aforesaid discussion, we are of the opinion that the question Nos. 1 and 2 are answered against the Revenue and in favour of assessee. In other words, we answer the questions by holding that expenses/expenditure incurred by the assessee towards advertisement and sales promotion for the purpose of business for the years in question, i.e., 1989-90 and 1990-91 are allowable deductions under s. 37 of the Act and hence, Tribunal was not right in holding that they are not allowable one. No costs.

[Citation : 278 ITR 345]

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