Income Tax Appellate Tribunal - Pune
Dy. Cit vs Thakur Tobacco Products Co. on 8 August, 2001
Equivalent citations: (2004)87TTJ(PUNE)306
ORDER
B.L. Chhibber, A.M. Four grounds have been raised in this appeal by the revenue. Ground No. I reads as under:
"On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 8,75,312 made by the assessing officer on account of disallowance of advertisement expenditure holding that the expenses were not incurred by the assessee-firm and did not also relate to the previous year corresponding to the assessment year 1995-96. "
2. The assessee-firm is in the business of manufacturing the bidis. It had acquired the trade mark "Tauras" for the bidis a few years before the assessment year under appeal. This brand was new in the market. In the beginning, the assessee manufactured the bidis of this brand and sold them itself in the market. But because the brand was not popular and was not wellknown, it incurred losses. Therefore, the assessee decided to give this brand on user basis to its group concerns and charged the royalty therefor. Accordingly, the assessee-firm entered into an oral agreement with M/s S.R. Thakur & Co., M/s Thakur Shankarrao & Co. and M/s P.P. Tobacco Co. allowing them the user of the brand, so that they could sell the bidis with this brand in the market and also in return, the assessee charged the royalty from them.
3. To make the brand popular, it was necessary that some advertisement schemes were undertaken in the beginning. These entities insisted upon the assessee incurring the initial advertisement expenditure on this brand which was in the form of giving free sample bidis to the customers, commission to selling agents etc. etc. The reason being that ultimately after a few years the assessee will reap the benefits of this brand popularity because the understanding with these parties was that they would be able to use the brand only for a few years. Accordingly, the assessee agreed to bear this expenditure.
4. During the year under appeal, the assessee got debit notes from the various parties for the advertisement expenses. The relevant dates of these debit notes are clearly mentioned by the assessing officer in the left column on p. 5 of the assessment order and these dates fall in financial year 1994-95 only and therefore, the assessee claimed the deduction of Rs. 8,75,312 towards such advertisement expenses in the return for this year. The assessing officer disallowed these expenses on the following grounds :
(1) The royalty income does not constitute income from business and therefore, deduction on, account of the advertisement expenses as claimed cannot be allowed to the assessee.
(2) The advertisement expenses were disproportionately high at Rs. 8,75,312 as against returned income of Rs. 83,810 only and hence, it was not allowable as a business expenditure, because the assessee has not acted in the business interest.
5. On appeal, the learned Commissioner (Appeals) deleted the addition observing as under :
"I have considered the facts in the case and the rival submissions. In the first place the fact that the appellant actually incurred these expenses for advertisement by way of sales promotion scheme is NOT disputed by the assessing officer. It is clearly seen that the expenditure is for the purpose of development of market for Tauras brand of bidis. Since the appellant owns the trade mark/label of tauras brand of bidis it clear that the primary burden of defraying the expenses is that of the appellant. The disputes raised by the assessing officer have been properly answered in the representation made during the appellate proceedings. These facts were also made known to the assessing officer during the assessment proceedings and therefore is no new evidence entertained during the appellate proceedings. Sinbe there is no dispute regarding the impugned oral agreement, and since the revenue earned from such oral agreement is charged to tax there is no reason to doubt or disallow the expenditure concerned merely on the ground that there was no written agreement. The expenditure on advertisement was by way of free distribution of Tauras brand of bidis and since actual free distribution of such bidis is also not doubted by the assessing officer, there is ground to hold that the expenditure was genuine and was wholly and exclusively for the purposes of business. The chart shown by the representative of the appellant clearly indicates that by virtue of increasing the turnover and increasing the amounts received year after year that the expenditure was factually for the purposes of development of market as is claimed during the appellate proceeding and the assessment proceedings. Therefore, I do not find any reason for disallowance of these expenses. The expenses are allowed and the appeal succeeds on this ground."
6. I have heard both the parties. It is noted that the Partnership Deed in para 14 on the back-side of p. 14 of the paper book clearly states that the business activity can be that of allowing the labels to be used by others on user basis.
Accordingly, royalty, in my opinion, constitutes business income of the assessee. Secondly, as explained by the assessee above, the assessee was not having enough infrastructure to market this brand of bidis itself and, therefore, it thought of giving this brand on user basis for a year only to the group concerns which had a bigger marketing network and hence, giving an asset on user basis for a short period as a stopgap arrangement to recoup the losses constitutes a business activity as held in the following cases:
(1) CIT v. New India Industries Ltd. (1993) 201 TM 208 (Guj) (2) Everest Hotel v. CIT (1978) 114 ITR 779 (Cal), (3) CIT v. Laxmi Rice Mills (1987) 164 ITR 571 (MP), (4) CIT v. Vikram Cotton Mills (1988) 169 ITR 597 (SC), (5) Universal Plast Ltd. v. CIT (1999) 237 ITR 454 (SC).
Accordingly, I agree with the learned Commissioner (Appeals) that the royalty received was business income particularly because the partnership deed itself provided for that and secondly because the arrangement with these parties was for a short' period only.
7. As regards the observation of the assessing officer that the advertisement expenses were disproportionately, high as against the returned income, in my opinion, the chart on, p. 5 of the order of the Commissioner (Appeals) clarifies this issue. From this chart, it is seen that the assessee has incurred advertisement expenses once for all in this year only and in the later years it has received a substantial amount of royalty. Thus, it is not a case where the assessee acted against its business interests. The advertisement was a one-time expenditure and it is not only that the assessee received higher royalty because of such expenditure for those four years mentioned in the order of the Commissioner (Appeals), but also in the later years as well. It is but natural that in any business, the brand loyalty or goodwill is to be established first and then, comes the business profit. Accordingly, in this case, the assessee reaped the benefits of the advertisement campaign in the later years. Hence, I do not find any merit in the contention of the assessing officer and that of the learned departmental Representative that the assessee did not act in its business interest in taking up the burden of the advertising expenses.
8. As regards the observation of the assessing officer that there was no written agreement, it is to be noted that for allowability of an expenditure under section 37(1) , written agreement is not essential. It is nowhere mentioned in the Act that the expenditure will be allowable under section 37 only if it is supported by a written agreement. In this connection, reliance is placed on p. 2134 of the Commentary of learned Authors Chaturvedi & Pithisaria, 5th Edn. and the decision of the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. CIT (1974) 95 ITR 664 (Pat), Accordingly, I reject the arguments of the assessing officer and the learned departmental Representative that since there was no written agreement, advertisement expenditure, is not allowable under section 37.
9. In the light of above discussion, I concur with the findings of the learned Commissioner (Appeals) and decline to interfere. This ground accordingly fails and is dismissed.
10. Ground No. 2 reads as under :
"On the. facts and in the circumstances of the case, the learned Commissioner (Appeals)- erred in deleting the addition of Rs. 1,,63,878 made by the AO on account of estimation of royalty income."
11. The assessee-firm from April, 1994 to December, 1994 charged the royalty at the rate of Rs. 5.00 per bag of bidis from the above concerns and thereafter from January, 1995 to March, 1995 it increased the royalty to 60 paise per thousand bidis (equal to Rs. 12 per bag) to these concerns. The details are given on p. 7 of the order of the Commissioner (Appeals). The later royalty of 50 paise per thousand bidis amounted to Rs. 12 per bag, the assessing officer, however, in his order estimated royalty even for the earlier period, i.e., April, 1994 to December, 1994 at the rate of Rs. 12 per bag and made an addition of Rs. 1,63,878.
12. On appeal, the Commissioner (Appeals) deleted the addition, observing as under :
"The assessing officer has not pointed out any evidence to prove that any additional amount was receivable or received. Nor has he obtained confirmation from any of the related parties to that effect. There is no scope for making the addition on estimate basis. The addition is deleted and the appeal succeeds on this ground."
13. I have heard both the parties. It is noted that the increase in royalty was from January, 1996 onwards and the assessing officer perhaps in a confused state of mind applied this increased rate for the earlier period also without looking onto the facts of the case properly. Royalty was uniformly charged at the same rate to all the parties as mentioned in the order of the Commissioner (Appeals) on p. 8. Thus, the assessing officer's impression was totally wrong. Secondly, there was no case of any estimation because it is not a case that any defect was found in the accounts on this issue. The very basis of the addition made by the assessing officer is patently wrong because he presumed that the assessee charged royalty at the rate of Rs. 12 per bag for the whole year, without looking into the facts of the case properly. Accordingly, I hold that the Commissioner (Appeals) was justified in deleting the impugned addition. I accordingly decline to interfere and dismiss this ground.
14. Grounds 3 & 4 read as under :
"3 The order of the learned Commissioner (Appeals) on the issue may be vacated and that of the assessing officer be restored.
4. The appellant craves leaves to add, amend or alter any of the above grounds of appeal."
Obviously these grounds are general in nature and call for no comments.
15. In the result, the appeal is dismissed.