Madras High Court
Commissioner Of Income-Tax vs Ananda Corporation on 15 June, 1998
Equivalent citations: [2000]245ITR217(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The question referred to us at the instance of the Revenue arising" out of the assessment of the respondent's income for the assessment year 1980-81 is as to "whether the Appellate Tribunal was correct in law and had valid materials to hold that prize scheme expenditure of Rs. 20,850 and price scheme gift expenditure of Rs. 50,460 are not expenditure in the nature of advertisement for the assessee's business and hence the ceiling prescribed under Section 37(3A) is not applicable to these expenditure ?"
2. In the statement of case the nature of the business carried on by the assessee has been set out by the Tribunal as under :
"The assessee is a registered firm. The assessee was engaged in the business of dealing in cloth, wholesale and retail and it was running certain prize scheme under which there were about 20 prize groups of 200 members in each group contributing rupees ten per member. According to this scheme there will be a draw on the 15th of every month and the member winning a prize in the draw will be supplied goods to the extent of Rs. 150 which will be credited to the sales account and debited to the benefit scheme prize group account. The monthly subscription paid by each member will be credited to the said benefit scheme prize group account. Each group is said to be for a period of 15 months and if a member gets the prize within the 15 months, the difference between the amount paid and the total goods supplied will be debited to the prize scheme account. The members' account will be credited and prize scheme group account will be debited. In this way the total expenses amounted to Rs. 20,850 representing the value of the goods supplied to the members who won the prize in the year of account. The Tribunal found that besides the above, the assessee also used to give gift articles to each member at the time of joining the prize scheme such as tiffin bags, suit cases, travelling bags, etc., to attract more members for increasing the turnover. The assessee claimed deduction of the prize scheme expenses of Rs. 20,850 and prize scheme gift expenses of Rs. 59,460 in the relevant year under appeal. The Income-tax Officer held that the expenses were in the nature of advertisement for the assessee's business and disallowed 15 per cent. thereof by reference to Section 37(3A) of the Income-tax Act."
3. The disallowance so made by the Income-tax Officer was set aside by the Appellate Assistant Commissioner and the said setting aside was upheld by the Appellate Tribunal. Before us learned counsel for the Revenue submitted that the Tribunal was clearly in error in setting aside the disallowance that had been made by the Income-tax Officer and the view of the Tribunal, that the whole scheme was intended to raise working capital without the liability to pay interest thereon, and that the incentives offered to the members to enrol were really in the nature of payments made to the members in lieu of interest was clearly untenable. The total amount raised by the assessee by adopting these prize schemes was over rupees four lakhs. The members who were enrolled had at no point of time been told that in lieu of interest the members would receive prizes. On the other hand, in order to induce the prospective members to join the scheme these prizes have been offered as an incentive or inducement to create an impression in the minds of the prospective members that by enrolling in the scheme, he would receive the benefits over and above what mere payment of subscription would entitle him to and in the scheme he would at the time of joining receive a gift and also during the operation of the scheme have an opportunity to win a prize and in case of his success in winning such a prize he would have the advantage of retaining the prize without having to pay the balance of the monthly subscription. The scheme so devised by the assessee, therefore, was clearly a scheme, which was meant to promote the sales through promoting the enrolment of members in the group.
4. Learned counsel for the assessee, on the other hand, submitted that the expenditure incurred on these prizes was the bare minimum which the assessee was required to incur to carry on the trade and, therefore, the expenditure on the bare minimum which the assessee was required for carrying on the trade would not fall within the scope of the expressions advertisement, publicity and sales promotion. Counsel relied upon the judgment of the Andhra Pradesh High Court in the case of CIT v. Ampro Food Products [1995] 215 ITR 904, as also the judgment of the same High Court in the case of CIT v. J and J Dechane Laboratories (P.) Ltd. [1996] 222 ITR 11. In the first case it was held that the introduction of the gift coupons or giving of exercise note books as gifts by a manufacturer of a food item was only by way of an incentive and not by way of necessary expenditure and incentives would definitely come within the purview of sales promotion and Section 37(3A) would apply. This decision does not help the assessee but, on the other hand, supports the case of the Revenue.
5. In the later case reported in CIT v. J and J Dechane Laboratories (P.) Ltd. [1996] 222 ITR 11 (AP), the court referring to its earlier decision in the case of Ampro Food Products [1995] 215 ITR 904, reiterated the view that the expenditure of the nature which is essential to the running of the business a bare minimum to carry on the trade would not fall within the meaning of the three expressions, advertisement, publicity and sales promotion. The court also held that the other expenditure incurred under any of the three heads would be within the mischief of the provisions of Sub-section (3A) of Section 37 of the Act and, therefore, will have to be scaled down. On the facts, it was held by the court that the physicians' samples are necessary to ascertain the efficacy of the medicine which are thereby introduced in the market and in such cases giving physicians samples for a reasonable period had to be regarded as essential to the business of manufacture and sale of medicine. The court also expressed the view that if a particular medicine has been introduced into the market and its use was established giving free samples would only be a sales promotion and advertisement.
6. In this case it cannot be held that the offering of prizes is the bare minimum which the assessee was required to do in order to carry oh his trade. The trade of the assessee was the sale of cloth. In order to promote his business the assessee devised the scheme with the object of securing potential customers to purchase the cloth by forming the groups and collecting from the members of the group a simple sum of rupees ten each month. In order to induce them to join the group a free gift was offered, such as tiffin bag, travelling bag and suit cases. That gift was available uniformly to each and every member. Such gift was offered obviously with a view to induce the persons to join the group by holding out the prospect of free gifts. After the enrolment of the members, by having the monthly draw, the members were again tempted by the prospect of receiving a prize on such a draw the effect of which was to relieve them of their obligation to pay subscription for the remaining months. The prize scheme as also the offering of gifts at the time of enrolment was clearly meant to induce prospective customers to enrol. The fact that by these methods the assessee was also able to raise a substantial sum of over four lakh rupees which became available to him without the burden of having to pay interest thereon and that sum was available for use in his business or elsewhere does not in any way alter the fact that the amount so collected was collected by offering prizes which were really in the nature of sales promotion. The assessee himself had admitted that as the object of the prizes that had been offered by him while referring to the prize scheme and the expenditure account the assessee had informed the Department, that the scheme "represents gift articles paid to each member at the time of joining the prize scheme. Such gift articles represents tiffin bags, travelling bags, suit cases, etc. The purpose of incurring the expenditure is to attract more members thereby increasing the turnover. This method is being adopted by various dealers in the town. This is a kind of advertisement and we are also getting money without interest for the purpose of the business." The assessee was right in stating that by offering certain prizes the assessee was attracting more members and thereby increasing its turnover. The expenditure incurred with that object and which object admittedly had also been substantially attained, was clearly in the nature of sales promotion expenditure. The prizes offered to those lucky winners of the lucky draw was also clearly an inducement made to promote enrolment and to increase the turnover and secure interest free funds for the business of the assessee.
7. Having regard to the object served by inducing the new members to enrol in the schemes, the expenditure must be held to be expenditure in the nature of sales promotion expenditure. That expenditure cannot be regarded as a bare minimum for running the schemes. The Tribunal was in error in holding otherwise. The question referred to us is therefore answered in favour of the Revenue and against the assessee. The Revenue shall be entitled to costs in the sum of Rs. 750.