Rajasthan High Court - Jaipur
Commissioner Of Income Tax vs Udaipur Distillary Co. Ltd. on 9 May, 2003
Equivalent citations: (2003)183CTR(RAJ)614, RLW2004(1)RAJ644
JUDGMENT Rajesh Balia, J.
1.Heard learned counsel for the parties.
2. This appeal relates to the asst. yr. 1985-86. The order under appeal is a composite order passed on 27th June, 2001, in nine appeals by the Tribunal, in respect of the asst. yr. 1985-86.
3. According to Revenue-appellant, following two substantial questions of law arises in this appeal:
"(1) Whether, on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the salary amounting to Rs. 29,80,610 will not fall within the ambit of Section 37(3A) r/w Section 37(3B) even though the same was not paid to the employees of the assessee, overlooking the provisions of Clause (b) of Explanation appended to Section 37(3B) of the IT Act ?
(02) Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that interest once granted under Section 244(1A) cannot be withdrawn subsequently ?"
4. So far as question No. 2 is concerned, the decision of the Tribunal is based on a judgment of Gujarat High Court in Cibatul Ltd. v. IAC (1993) 201 ITR 507 (Guj). The appeal against which has been dismissed by the Hon'ble Supreme Court: Reference in this connection may be made to (1993) 203 ITR (St) 23 (SC).
5. That case relates to the question whether the AO is empowered to withdraw interest granted under Section 244(1A) of the Act. That question has been answered against the Revenue. Since the decision of Gujarat High Court in favour of the assessee has been affirmed by the Hon'ble Supreme Court/which amounts to declaration of law setting any controversy about the issue, it cannot be said that the question No. 2 any more remains a substantial question, of law arising for consideration in this appeal. It stands answered by aforesaid decision of Hon'ble Supreme Court.
6. So far as the first question is concerned, in our opinion, on the accepted premises by the parties, it is also misconceived.
7. As per the learned counsel for the appellant Rs. 29,80,610, which has been shown as salaries forming part of the 'marketing expenditure' incurred by M/s McDowell Ltd. and debited to the assessee's account as his share of marketing expenditure, which has been transacting Indian made foreign liquor (IMFL) manufactured by McDowells is not allowable, on a conjoint reading of Sub-sections (3A) and (3B) of Section 37 of the Act.
8. The contention raised by the learned counsel for the appellant is that part of this amount represents the amount spent on salaries of McDowells employees. However, salary has been paid actually by McDowells to its employees and this amount has not been incurred by the assessee as salary payable to its own employees. Therefore, in view of specific provision contained in Clause (b) of the Explanation appended to Sub-section (3A) and Sub-section (3B) of Section 37 of the Act, the assessee is not entitled to claim such deduction on account of salary to the employees who are engaged with McDowells.
9. On the other hand it was urged by learned counsel for the respondents that the amount of expenses debited to P&L a/c of the assessee as its share of marketing are not of any category inhibited by Sub-sections (3A) and (3B) of Section 37 of the Act is a fact which has been accepted by the Revenue and which is not disputed. The assessee's share in expenses relating to category mentioned in Section 37(3B) have also been separately dealt with by the Revenue. That being so, every part of expenses relating to general marketing infrastructure and not any part of expenses envisaged under Section 37(3B) are allowed in full, unless it could be said that the same are not actually incurred. In no circumstances any part of expenses forming part of market expenditure in question cannot be disallowed or reduced by invoking Sub-sections (3A) and (3B) of Section 37 of the Act. It was also urged that, what the assessee has incurred by way of marketing expenditure is one consolidated sum debited to McDowells company. It has not incurred expenses on separate heads e.g., since no part of expenses in question were spent by way of payment of salaries by the assessee to its employees. The details furnished by McDowells is only to justify and verify the amount of share demanded from assessee as his share of total marketing expenditure.
10. To understand the scheme and the arguments raised by the learned counsel for the appellant, we deem it appropriate to reproduce the provisions of Sub-section (3A) and Sub-section (3B) of Section 37 which were introduced in the statute book by the Finance Act, 1988, w.e.f. 1st April, 1984, and were omitted by the Finance Act, 1985, w.e.f. 1st April, 1986. The two provisions remained in force for the asst. yr. 1984-85 and 1986-86. We are concerned in this appeal with the asst. yr. 1985-86.
The provision as stood in statute book at relevant time reads as under :
"Section 37(3B)--Notwithstanding anything contained in Sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in Sub-section (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession".
Original sub-section was inserted by the Finance Act, 1978, w.e.f. 1st April, 1979, and was later omitted by the Finance (No. 2) Act, 1980, w.e.f. 1st April, 1981.
"Section 37(3B) The expenditure, referred to in Sub-section (3A) is that incurred on :
(i) advertisement, publicity and sales promotion; or
(ii) running and maintenance, of aircraft and motor cars; or
(iii) payments made to hotels.
Explanation : For the purposes of Sub-sections (3A) and (3B),
(a) the expenditure specified in Clause (i) to Clause (iii) of Sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as it is not allowed under any other provision of this Act;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities;
(c) expenditure on running and maintenance of aircraft and motor cars shall include :
(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire;
(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directions also."
11. Sub-section (3A) permits only partial deduction in respect of certain expenses which have been detailed in Sub-section (3B).
Sub-section (3B) details the expenses which are to be dealt with under Sub-section (3A). Clause (i) of Section 37(3B) refers to expenditure incurred on (i) advertisement, (ii) publicity, and (iii) sales promotion. The other expenses dealt with under Sub-section (3B) are running and maintenance of aircraft under Clause (ii) and payment made to hotels under Clause (iii) with which we are not concerned.
12. Clause (b) of Explanation excludes from expenditure on advertisement, publicity and sales promotion any remuneration paid to employees of the assessee engaged in one or more of the said activities. In other words, even in case of computing expenditure incurred on advertisement, publicity or sales promotion, which may be subjected to restricted deduction under Section 37(3B), the amount of salaries paid to employees in these activities, as salaries, is not to be included. To say otherwise, while considering the allowable expenditure under Section 37, the restriction envisaged under Section 37(3A) r/w (3B) is not extended to amount of salaries paid to persons employed in the activities relating to advertisement, publicity and sales promotion. Such expenditure on account of salaries paid to employees engaged in the said activities is to be considered as uninhibited allowable business expenditure, as any other expenses incurred wholly and exclusively for the purposes of business, not otherwise specifically dealt with under the Act.
13. The core of the issue in this appeal is whether the amount of salary which is the contentious issue between the parties is allowable expenditure in its entirety or to be governed by Sub-section (3A) r/w Sub-section (3B) of Section 37 of the Act.
14. First of all, the salary must be paid to the employees of the assessee engaged in advertisement, publicity and sales promotion. That is to say this question would arise only when the salaries are forming part of expenditure on advertisement, publicity and sales promotion. Salary paid to the employees not engaged in any of these activities are not governed by Sub-section (3A) or Sub-section (3B) of Section 37.
15. The question which immediately calls for attention is whether the amount sought to be disallowed by the Revenue as expenditure while assessing the total expenditure in question can be treated in the first instance as salary paid to employees of the assessee engaged in one or more of the said activities ?
16. In the facts and circumstances, of the case as found by the assessing authority as well as by the Tribunal that under the terms of agreement between the assessee and McDowells, the manufacturer of IMFL, certain expenses for running the business of manufacture and sale of Indian made foreign liquor were to be shared by manufacturing company as well as by the selling agencies. Under the terms of said agreement McDowells, has issued during the previous asst. yr. 1985-86, two debit notes, one amounting to Rs. 44,52,200 being the assessee's proportionate share of expenditure on advertisement and sales promotion and another debit memo was issued for Rs. 61,85,000 being the assessee's proportionate share of marketing overheads. The division of expenses incurred by McDowells and shared by the assessee proportionately under these two heads separately is not in dispute. This is also not in dispute between the parties that marketing expenses is not governed by the expression 'expenses incurred' on advertisement, publicity and sales promotion activities.
17. In fact, the marketing expenses excludes the salary component which has been allowed fully as deduction by the assessing authority, Rs. 29,80,610 have been disallowed on the ground that the same are not paid to the employees of the assessee and, therefore, they cannot be excluded from the purview of Section 37(3A) and (3B) because of Clause (b) of Explanation appended thereto.
18. In our opinion the contention on the face of it is fallacious. Once the marketing expenditures are excluded from the purview of expenses on advertisement, publicity and sales promotion and such expenses do not fall in any other categories of expenditure detailed in Sub-section (3B) of Section 37, the question of invoking any part of Section 37(3A) r/w (3B) cannot arise. The Explanation relates to expenditure falling within the purview of expenses mentioned in Clauses (i) to (iii) of Section 3B. When the principal amount of expenses does not come within the ambit of Sub-section (3B) of Section 37 of the Act, the invocation or exclusion of Clause (b) of Explanation is also, ruled out. Therefore, in. our opinion it is obvious that on account of marketing overhead or salary component of marketing, expenditure is not an expenditure governed by Sub-section (3A) and Sub-section (3B) of Section 37. Such expenses cannot be disallowed by referring to inapplicability of Expln. (b) on the ground that the employees to whom salaries have been paid were not the employees of the assessee.
19. Apparently, the AO as well as the CIT(A) have overlooked the basic premises that called for consideration is that assessee is sharing in lump sum proportionate expenses incurred by McDowells on total marketing infrastructure for sale of products of McDowells. Such expenditure includes expenditure on advertisement, publicity and sales promotion. The assessee is to pay a lump sum amount as his proportionate share in the expenses. It is a matter of accounting details between the parties to satisfy the mutual trust about accuracy of proportionate share of expenditure claimed by McDowels from the assessee, and assessee accepting that liability by debiting that sum in his books of account.
20. So far as the assessee is concerned, it is not relevant for him to question as to what different component forms part of marketing expenditure as expenditure to be shared by him. It is under the terms of agreement, he has shared proportionate share of total expenditure incurred by McDowells on various overheads. All expenses are primarily incurred on different counts by M/s McDowells. The assessee shares only the proportionate total expenditure determined as per the total amount spent by the McDowells. Therefore, from any angle, the finding of the Tribunal that the expenses do not form part of any of the activities included in Sub-section (3B) and, therefore, it is not subject to Clause (b) to Explanation is unexceptionable.
21. Once the proportionate marketing expenses shared by assessee have been accepted as allowable expenses and the same being not part of the expenses related to advertisement, publicity and sales promotion, there was no warrant to enquire about exclusion or non-exclusion of the part of it with reference to the salary not paid by it but incurred by McDowell as a part of its overhead expenses with reference to Section 37(3A) and (3B).
22. It is not the finding of the Tribunal nor it is the contention of the Revenue that Rs. 29,80,610 were not the part of expenditure incurred by McDowells on marketing overheads. In the absence of such finding, issue between the parties on finding reached by and. accepted by the Revenue, the question of disallowance of salary on the ground which weighed with assessing authority really did not arise for consideration at all.
23. It remains a finding of fact that the entire amount shared by the assessee as marketing overheads for running its business was one single indivisible expenses incurred wholly and exclusively for the purpose of its business, hence allowable under Section 37 of the Act.
24. Accordingly, this appeal is dismissed. There will be no order as to costs.