Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Ampro Food Products on 21 February, 1995
Equivalent citations: 1995(2)ALT843, [1995]215ITR904(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. At the instance of the Revenue, the following questions were referred to this court for its opinion under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the expenditure of Rs. 1,24,091 incurred for the purpose of distributing free note books and expenditure of Rs. 1,08,565 incurred for placing gift coupons in the assessee's products, viz., biscuit tins in order to promote sales are not covered by section 37(3A) of the Income-tax Act, 1961 ?
2. On the facts and in the circumstances, is the Appellate Tribunal right in law in directing that the expenditure of Rs. 2,32,656 on note books and gift coupons should be allowed in full under section 37(3) of the Income-tax Act, 1961 ?"
2. The assessee is a manufacturer of food products. The Income-tax Officer and the Appellate Assistant Commissioner treated the expenditure on distribution of note books and gift coupons falling within the meaning of "sales promotion" under section 37(3A) of the Income-tax Act, 1961 (for short, "the Act"). However, on further appeal, the Income-tax Appellate Tribunal, purporting to follow its earlier decisions, held that the said expenditure has to be allowed as deduction under section 37(1) of the Act. The Division Bench of this court which dealt with the reference earlier noted that the Tribunal did not express its opinion on the question as to whether the said expenditure falls within the meaning of the expression "sales promotion" and directed the Tribunal to express its opinion on the said question. That order was passed on January 23, 1989. The Tribunal sent its report holding that the expenditure on the said two items could not be treated to be of the nature of "sales promotion".
3. Mr. S. R. Ashok, learned standing counsel for the Revenue, relies on the judgment of the Karnataka High Court in Smith Kline and French (India) Ltd. v. CIT [1952] 193 ITR 582 and also the judgment of the Calcutta High Court in CIT v. Bata India Ltd. and submits that the expenditure ought to have been treated as expenditure on "sales promotion" and prays that the questions be answered in favour of the Revenue.
4. Mr. Y. Ratnakar, learned counsel for the assessee, brought to our notice the speech of the Finance Minister and has contended that the expenditure to be treated as falling within the meaning of sub-section (3A) of section 37 of the Act, should be extravagant and wasteful expenditure and that the other expenditure could not be treated as expenditure on "sales promotion".
5. We shall notice the provisions of section 37(3A) of the Act as they stood at the relevant assessment year, i.e., 1980-81, which were as follows :
"37. General. -. . ..
(3A) Notwithstanding anything contained in sub-section (1), but without prejudice to the provisions of sub-section (2B) or sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely :-
(i) where such aggregate expenditure 10 per cent. of the adjusted does not exceed 1/4 per cent. of the expenditure;
turn- over or, as the ease may be, gross receipts of the business or profession
(ii) where such aggregate expenditure 12 1/2 per cent. of the exceeds 1/4 per cent., but does not adjusted expenditure;
exceed 1/2 per cent. of the turnover or, as the case may be, gross receipts of the business or profession
(iii) where such aggregate expenditure 15 per cent. of the adjusted exceeds 1/2 per cent. of the turnover expenditure.
or, as the case may be, gross receipts of the business or profession Explanation - For the purposes of this sub-section, -
(a) 'adjusted expenditure' means the aggregate expenditure incurred by the assessee on advertisement, publicity and sales promotion in India as reduced by so much of such expenditure as is not allowed under sub-section (1) and as further reduced by so much of such expenditure as is not allowed under sub-section (2B) or sub-section (3);
(b) 'turnover' and 'gross receipts' mean turnover or gross receipts, as the case may be, as reduced by any discount or rebate allowed by the assessee."
6. Sub-sections (3A), (3B), (3C) and (3D) of section 37 of the Act were inserted by the Finance Act, 1978, with effect from April 1, 1979. We may point out here that section 37 of the Act which is titled as "General", provides that any expenditure not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee, which is 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". The scheme introduced by the Finance Act, 1978, restricts admissibility of aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion. If the same exceeds Rs. 40,000, the expenditure is scaled down with reference to the formula specified therein. Sub-section (3D) of section 37 of the Act excludes the application of the abovesaid provision, viz., sub-section (3A), in the case of newly established business for a period of three years prior to the previous year in question. Thus, it appears to us that by the scheme introduced under the Finance Act, 1978, where the expenditure of newly established industry relates to advertisement, publicity or sales promotion, the whole of it is deductible as permissible expenditure for three years from the date of establishment but from the fourth year, the provisions of sub-section (3A) will apply so as to scale down the expenditure in accordance with the formula contained therein. Admittedly, in this case, the expenditure in question relates to the period after three years of the establishment of the industry; therefore, sub-section (3A) of section 37 of the Act is attracted and as the aggregate expenditure on advertisement, publicity and sales promotion in India exceeds Rs. 40,000, the expenditure has to be scaled down in accordance with the formula specified therein notwithstanding anything contained in sub-section (1) but without prejudice to the provisions of sub-section (2B) or sub-section (3).
7. To substantiate the contention that extravagant and socially wasteful expenditure alone and no other expenditure would come within the mischief of sub-section (3A), reliance is placed on the speech of the Finance Minister.
8. We shall now refer to the speech of the Finance Minister made at the time of the introduction of the Bill of the Finance Act, 1978, which is reported in [1978] 111 ITR (St.) 85. In the said speech, the Finance Minister observed as follows (at page 89) :
"Extravagant and socially wasteful expenditure is often incurred on advertisement, publicity and sales promotion. In order to put a curb on such expenditure at the cost of the exchequer, I propose to provide for the disallowance of a part of such expenditure in the computation of taxable profits. Where the aggregate expenditure on advertisement, publicity and sales promotion in India does not exceed 1/4 per cent. of the turnover or grass receipts of the business or profession, ten per cent. of such expenditure will be disallowed in computing the taxable profits. Where such aggregate expenditure exceeds 1/4 per cent., but does not exceed 1/2 per cent. of the turnover or gross receipts, the disallowance will be made at the rate of 12 1/2 per cent.; and where such expenditure exceeds 1/2 per cent. of the turnover or gross receipts, the disallowance will be made at the rate of 15 per cent. These provisions will not apply in cases where the aggregate expenditure on advertisement, publicity and sales promotion does not exceed Rs. 20,000 in a year. Newly established industrial concerns will also be exempted from this provision for an initial period of three years. This measure will yield Rs. 31 crores in a full year and about Rs. 25 crores in 1978-79."
9. A perusal of the excerpt of the speech of the Finance Minister, quoted above, shows that these provisions were introduced to curb the expenditure of the nature which is extravagant and socially wasteful so as to prevent it from being a burden on the exchequer.
10. Reliance is also placed on Circular No. 240, dated May 17, 1978, which contains explanatory notes on the provisions in the Finance Act. 1978, relating to direct taxes as reproduced in [1979] 117 ITR (St.) 17. Paragraph 12.1 deals with disallowance of a part of expenditure on advertisement, publicity and sales promotion; and it reads as follows :
"12.1. Disallowance of a part expenditure on advertisement, publicity and sales promotion-Sections 37(3A) to (3D). - In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act has inserted new sub-section (3A) in section 37 of the Income-tax Act for the disallowance of a part of such expenditure in the computation of taxable profits. The main features of the new sub-section (3A) read with related sub-sections (3B), (3C) and (3D) inserted in section 37 are as follows
(a) The provision for the disallowance of a specified portion of such expenditure will apply only in relation to expenditure on advertisement, publicity and sales promotion in India.
(b) Although this provision will apply to all categories of tax-payers carrying on any business or profession, no disallowance will be made in cases where the aggregate amount of such expenditure does not exceed Rs. 40,000.
(c) Where a taxpayer has set up an industrial undertaking for the manufacture or production of any articles, no disallowance will be made under this provision in respect of expenditure on advertisement, publicity or sales promotion incurred by the taxpayer for the purposes of the business of such undertaking for three previous years, namely, the previous year in which such undertaking begins to manufacture or produce such articles and the two previous years immediately following that year."
11. The abovequoted paragraph brings out the main features of the scheme of the insertion of sub-sections (3A), (3B), (3C) and (3D) with a view to place a curb on extravagant and socially wasteful expenditure only on advertisement, publicity and sales promotion at the cost of the Exchequer. The circular says that the scheme of the provisions is not to curtail expenditure except on advertisement, publicity and sales promotion over and above Rs. 40,000; the excess expenditure is scaled down in the prescribed manner. The scaling down of expenditure on the aforementioned items has no application in the case of a newly established business for the first three years and the said scheme applies from the fourth year.
12. To understand the provisions of any Act, reference to the speech made at the time of the introduction of the Bill is permissible only when the court finds that the provisions of the Act are vague or ambiguous. Neither the speech nor the circular says that it is only when the expenditure is extravagant or socially wasteful, then only it has to be scaled down as per the provisions of sub-section (3A) of section 37 of the Act as a part of the expenditure incurred by the assessee on advertisement, publicity and sales promotion in accordance with the formula specified therein. However, in our case, the provisions of the Act are neither vague nor ambiguous, hence a reference to the speech is not really called for. For all these reasons, we are unable to accept the contention of Mr. Ratnakar, that when the expenditure sought to be deducted under the head "Sales promotion" is extravagant or socially wasteful, then only section 37(3A) should be applied.
13. It is next contended that "sales promotion" should be given a restricted meaning, that is, the same meaning as that of advertisement and publicity; in other words, the rule of ejusdem generis should be applied in construing the meaning of the expression "sales promotion" in sub-section (3A) of section 37 of the Act. As noticed above, the expenditure incurred on advertisement, publicity and sales promotion, to bring it within the permissible deduction is scaled down under section 37(3A). The concept of the three expressions overlaps in many aspects, for advertisement would also be for the purpose of sales promotion, so also the publicity. All the three expressions, in our view, contemplate not only the introduction of the product but also the efforts made to promote sales either by way of advertisement or publicity or by holding exhibitions, parties, concerts, etc. What is now sought to be contended is that "sales promotion" should be confined to conducting cocktail parties, organising shows, beauty contests, etc., but should not take in the discount given on the sales of the articles whether in cash or in kind. It is true that in its wider meaning, "sales promotion" would include conducting of beauty contests, arranging cocktail parties and organising shows or exhibitions; yet the expenditure incurred in giving incentives to the consumers, for the purpose of increasing the sales, would, in our view, also fall within the ambit of the "sales promotion".
14. In Smith Kline and French (India) Ltd. v. CIT , the Karnataka High Court considered the meaning of the said three expressions. It came to the conclusion that the three expressions could not be always confined to distinct and different concepts. Some aspects of one word would naturally overlap with the meaning attributed to the other word. The nature of the advertisement or publicity depends upon the nature and quality of the article in question. An inducement to the public to any a particular commodity may be formulated in a mode most suitable to the article in question. In that case, the assessee-company which was a manufacturer of drugs claimed the expenditure on distribution of the physicians' sample under section 37, but that expenditure was sought to be restricted as falling within the sweep of sub-section (3A) of section 37. It was contended before the High Court that sales promotion was widely construed by the Tribunal to include expenditure on physicians' samples. This contention was, however, rejected by the High Court. The Karnataka High Court held that the expenditure incurred on distribution of physicians' samples amounts to advertisement, publicity and sales promotion within the meaning of section 37(3A) of the Act.
15. The said expressions fell for consideration of the Calcutta High Court in CIT' v. The Statesman Ltd. . The Calcutta High Court took the view that though the expression "sales promotion" had not been defined, it had to take its colour in the setting in which it had been used. The Bench observed as follows (at page 589) :
"As a matter of fact, the expression 'sales promotion' though one of wide amplitude is not defined. It has, therefore, to be understood in its meaning in the setting in which it occurs. `Sales promotion' necessarily involves an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of the 'sales promotion."
16. This judgment was followed in the subsequent decisions of the Calcutta High Court in CIT v. Bata India Ltd. . The Bench expressed the view that where the statute imposes a restriction on advertisement, publicity and sales promotion, the expression "sales promotion" cannot include the selling expenditure incurred in the ordinary course of the business and it only restricts such expenses as are of like nature as advertisement and publicity. There the question was whether payment of commission to news agents who constitute the distribution net sustaining the circulation of the newspaper, was the ordinary selling cost of the newspaper. The High Court was of the view that the expenditure on commission paid to the wholesale agent was an essential incident of trade and that section 37(3A) of the Act attracts only wasteful expenditure on advertisement and publicity. Though the High Court has expressed the view in a somewhat wider term, wasteful expenditure on advertisements, yet the observation will have to be understood in contradistinction to the essential expenditure of the trade. The Bench, in our view, never intended to say that section 37(3A) is attracted only when the expenditure on advertisement, publicity and sales promotion is wasteful expenditure alone.
17. From the above discussion what follows is that 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, i.e., advertisement, publicity and sales promotion. 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.
18. It is then contended that even if a wider meaning is given to the expression "sales promotion", the expenditure incurred, in the instant case, on the gift coupons and supply of exercise note books, cannot be treated as on "sales promotion". It needs no emphasis to point out that the introduction of the gift coupons or giving of exercise note books as gifts is only by way of an incentive and not by way of necessary expenditure and incentives would definitely come within the purview of "sales promotion". If that be so, the rule of scaling down contained in sub-section (3A) of section 37 of the Act would apply to the expenditure in question. Further, inasmuch as the petitioner placed reliance on the circular dated May 17, 1978 (see [1979] 117 ITR (St.) 17), we may incidentally refer to paragraph 12.4 of the said circular which reads as follows (at page 24) :
"12.4. As the terms 'publicity' and 'sales promotion' have a wide amplitude, expenditure incurred by taxpayers on fashion shows; beauty contests; consumer contests; consumer gift offers; and free samples or gifts will fall within the ambit of new sub-section (3A) of section 37 of the Income-tax Act."
19. From the above circular, it is evident that the expenditure incurred by an assessee not only on fashion shows, beauty contests and consumer contests, but also on consumer gift offers and, free samples or gifts would fall within the ambit of sub-section (3A) of section 37 of the Act.
20. It is then urged that what was in fact given by way of coupon, is a cash discount, so also, by way of exercise note books, is a discount in kind; just as discount in trade cannot be treated as sales promotion, so also, me expenditure on these items should not be treated as expenditure on sales promotion. We are unable to accept this contention for more reasons than one. First, if it is a case of trade discount, it represents reduction in the price itself and cannot be under the head "Expenditure" and, secondly, the assessee itself claimed it as expenditure on advertisement, publicity and sales promotion falling under sub-section (3A) of section 37 of the Act and not as part of the discount in reduction of the price.
21. For all these reasons, we are of the view that the expenditure incurred by the assessee, referred to above, is covered by sub-section (3A) of section 37 of the Act and, accordingly, we answer the first question in the negative, i.e., in favour of the Revenue and against the assessee. The second question which is a consequential question, is also answered in the negative, i.e., in favour of the Revenue and against the assessee.
22. Reference is answered accordingly. No costs.