Gauhati High Court
Indian Trading Corporation vs Commissioner Of Income-Tax on 10 February, 1995
JUDGMENT V.D. Gyani, J.
1. The following question of law has been referred under Section 256(2) of the Income-tax Act, 1961, by the Tribunal to this court for its opinion, in compliance with this court's order dated November 25, 1994, passed in Civil Rule No. 36(M) of 1981 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing Rs. 55,000 as an admissible business expenditure on advertisements taken out in the souvenirs published by the Delhi Flying Club Ltd., and the AICC Souvenir Committee incurred wholly and exclusively for the assessee's business ?"
2. The assessee is a duly registered firm following the mercantile system of accounting and the accounting period ended on March 31, 1977. The firm filed its return on July 27, 1977. The assessment year in question is 1977-78. The assessee was appointed as a sole distributor by its principal Indian Tobacco Co. Pvt. Ltd. Two major payments, involving an amount of Rs. 15,000 paid to the Delhi Flying Club Ltd., New Delhi, and Rs. 40,000 to the Souvenir Committee of the AICC, were held to be inadmissible on account of advertisement expenses by the Assessing Officer. According to the assessee, these expenses were incurred as per advice of the principal, I. T. C. Pvt. Ltd. However, the Income-tax Officer was of the view that these payments were donations in disguise and did not fall within the ambit of allowable business expenditure, as according to him both the parties to whom the payments were made fall within the purview of socio-political organisations and donations to such organisations would not be treated as business expenditure. In support of his contention, the Income-tax Officer also referred to a decision in the case of Indian Steel and Wire Products Ltd. v. CIT [1968] 69 ITR 379 (Cal). The Income-tax Officer further observed that there was no nexus between the expenditure on advertisement and the benefits accruing to the assessee's business. Comparing the total sales and gross profit of the assessment year with the two immediately preceding years, the Assessing Officer noted that although the expenditure was only Rs. 23,000 and odd and Rs. 5,000 and odd as against Rs. 1,21,000 as the expenditure on account of advertisement for the assessment year in question. For this reason, the entire amount of Rs. 55,000 expended on account of advertisement was disallowed by the Income-tax Officer as per the assessment order dated August 30, 1978, annexure-A. The assessee took up the matter in appeal before the Appellate Assistant Commissioner who also held that the expenditure was not to be considered for commercial expediency and by his order dated April 30, 1979, annexure-B, confirmed the Income-tax Officer's order. The assessee, therefore, came before the Appellate Tribunal, The Tribunal found that there was no indication that the substantial increase of expenditure on account of advertisement had been dictated by requirements of the business of the assessee for the year under consideration and in view of the fact that for the earlier years, the expenditure incurred by the assessee on account of advertisement was considerably low, the Appellate Tribunal concluded that the assessee had failed to satisfy that the expenditure was incurred wholly and exclusively for the purpose of the business and, ultimately, dismissed the appeal, referring to one of its earlier decisions in the case of Jyoti Flour Mills.
3. Mr. Talukdar, learned standing counsel appearing for the Revenue, placing reliance on a decision in Indian Steel and Wire, Products Ltd. v. CIT [1968] 69 ITR 379 (Cal) (also referred to by the Tribunal) contended that such expenditure on advertisement cannot be considered as allowable business expenditure under the provision of Section 37 of the Income-tax Act, 1961.
4. Dr. Saraf, learned counsel appearing for the assessee, on the other hand, argued that the Tribunal was palpably wrong in upholding the comparative approach of the Assessing Officer comparing the expenditure on the basis of the previous year as it is not a valid criteria. In this connection, he referred to the following two decisions CIT v. Walchand and Co. Pvt. Ltd. [1967] 65 ITR 381 (SC) and CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC).
5. Referring to Sassoon J. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC), learned counsel for the assessee argued that the right approach is to view the case from a businessman's point of view, but compelling necessity to incur the expenditure, is again a factor to be considered by the businessman. The Supreme Court tracing the legislative history of Section 37 of the Income-tax Act, 1961, and referring to the Income-tax Bill of 1961, and also referring to its earlier decision in CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601, quoted with approval the following passage (at page 276) :
"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether the payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee, it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL)). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd v. CIT [1951] SCR 594 ; 20 ITR 1 (SC)). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."
6. It is the commercial expediency and the principles ordinarily governing the commercial trading, which play a dominant role in deciding such question ; the business expenditure is to be viewed from the businessman's point of view and so long as the expenditure incurred is not for an oblique purpose outside the course of business, or wholly gratuitous for some improper motive, the authorities should shun a bureaucratic approach as has been held by the Supreme Court in CIT v. Wakhand and Co. Pvt. Ltd. [1967] 65 ITR 381, in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.
7. It was a case of incurring expenditure on account of increase in the employees' remuneration and the Supreme Court pointed out that it is erroneous to think that increased remuneration can only be justified if there is a corresponding increase in the profits of the assessee.
8. The expression "for the purpose of the business" is wider in its scope than the expression "for the purpose of earning profits". Explaining the same, the Supreme Court in CJT v. Malay atom Plantations Lid. [1964] 53 ITR 140, has observed as follows (at page 150) :
"The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. "
9. In the case at hand, the Income-tax Officer's objection was that the expenditure on advertisement was in the nature of donation, therefore, it was not an expenditure incurred wholly and exclusively for the purpose of business. Learned counsel appearing for the assessee invited attention to a Full Bench decision of the Madhya Pradesh High Court in Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379, where dealing with donations voluntarily made by a registered partnership-firm with the object of obtaining permits of business so as to enable the assessee to earn profits by export and selling of gram in the neighbouring States, the Full Bench held that such donations were allowable under Section 37 of the Act as expenditure incurred wholly or exclusively for the purpose of the assessee's business. The case relied upon by Mr. Talukdar in Indian Steel and Wire Products Ltd. v. CIT [1968] 69 ITR 379 (Cal), was a case where the assessee claimed the deduction in respect of Rs. 1,50,000 paid to the Indian National Congress, it was allowed by the Income-tax Officer, but pending an appeal by the assessee to the Appellate Assistant Commissioner, as regards other matters, the Income-tax Officer issued notice under Section 34 of the Indian Income-tax Act, 1922, to include the aforesaid sum which he had allowed. The Appellate Assistant Commissioner disallowed this claim and the Tribunal agreed with him. On a reference, the High -Court held that on the facts of the case the contribution to the Indian National Congress was not an expenditure incurred wholly or exclusively for earning the profits within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922, and it was not an allowable deduction.
10. As has been explained by the Supreme Court, from the legislative history of Section 37 which corresponds to Section 10(2)(xv) of the Act of 1922 and the circumstances which led to the dropping of the word "necessarily" from Sub-section (1) of Section 37, the expression "wholly and exclusively" used in Section 10(2)(xv) of the 1922 Act, dues not mean "necessarily". Bearing in mind this history and the distinction brought about, the case relied upon by learned counsel for the Revenue, on the facts and circumstances of the case at hand, is not attracted. The assessment year 1977-78 relates to the period when emergency was in force, a fact of which judicial notice can well be taken of. When the payments were made by the assessee to the Delhi Flying Club Ltd., Delhi, and the AICC Souvenir Committee on account of advertisement expenses, as already noted above, the commercial expediency is to he considered from the businessman's standpoint, and on such consideration our answer to the question posed, in view of the foregoing discussion has to be in the negative, that is to say, in favour of the assessee and against the Revenue.