Karnataka High Court
Widia (India) Ltd. vs Commissioner Of Income-Tax on 13 July, 2001
Equivalent citations: (2001)169CTR(KAR)393, ILR2001KAR4445, [2001]251ITR577(KAR), [2001]251ITR577(KARN), 2001 AIR - KANT. H. C. R. 2067
Author: D.V. Shylendra Kumar
Bench: A.M. Farooq, D.V. Shylendra Kumar
JUDGMENT D.V. Shylendra kumar, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short), made at the instance of the assessee, the Bangalore Bench of the Income-tax Appellate Tribunal, has referred the following question for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred by the assessee towards conducting seminars and exhibitions would fall under the purview of Section 37(3A) of the Income-tax, Act, for the purpose of disallowance on the ground that such expenditure was of the nature of advertisement and sales promotion expenses and when in any case, the two sums of Rs. 1,34,687.88 and Rs. 5,978.60 out of the said expenditure were clearly of the nature of payments made to hotels ?"
2. The brief facts, as could be made out from the statement of the case and other material on record are that for the assessment year 1984-85, the assessee, which is a precision tools manufacturing company limited, filed a return of its income and in respect of certain items of expenditure, claimed as deductible expenditure under Section 37 of the Act, had also indicated that some amounts in the said expenditure, did attract the provisions of Section 37(3A) of the Act and accordingly had disallowed 20 per cent, of such items of expenditure which attracted the provisions of Section 37(3A) of the Act.
3. The Assessing Officer completed the assessment as per the assessment order dated August 29, 1986, and annexure III to the assessment order indicates the items of expenditure in respect of which the provisions of Section 37(3A) of the Act were attracted and accordingly 20 per cent, of such expenditure had been disallowed for claiming deduction under Section 37 of the Act.
4. The Commissioner of Income-tax, on a perusal of the assessment order, was of the view that a few more items of expenditure in respect of which the assessee had claimed deduction under Section 37 also attracted the provisions of Section 37(3A) of the Act and such items of expenditure noticed by the Commissioner of Income-tax were "expenses incurred" in connection with holding or conducting certain seminars and hotel charges and conveyance charges incurred in connection with such seminars ; that, the Commissioner being of the view that such items of expenditure also being "expenditure" in the nature of advertisement or sales promotion attracting the provisions of Section 37(3A) of the Act and the Assessing Officer having not applied the provisions of Section 37(3A) of the Act in respect of these items of expenditure and such action having resulted in loss to the Revenue, invoked his powers under Section 263 of the Act, issued notice to the assessee and after hearing the assessee, passed an order with directions to the Assessing Officer to modify the assessment order so as to deduct 20 per cent. of the amount of expenditure claimed and allowed earlier, incurred on holding of conferences/seminars and payment made to hotels. The assessee being aggrieved by this revisional order of the Commissioner, appealed to the Income-tax Appellate Tribunal. The Appellate Tribunal found, as a matter of fact, that the activity of the assessee in holding the seminars/conferences wherein dealers and representatives of the assessee-company participated and for the purpose of educating them on the latest precision tools produced by the assessee, held that it was essentially an "expenditure" in the nature of advertising expenditure as it was done with a view to promote the sales of the assessee in respect of such products. The Tribunal also found that the payments made to hotels in connection with the holding of seminars nevertheless constituted a "payment made to hotels" and an expenditure which the assessee had claimed as deductible expenditure and as such continued to be an expenditure in the nature of hotel expenses, also attracting the provisions of Section 37(3A) of the Act and in this view of the matter, dismissed the appeal.
5. The assessee, being aggrieved by this order, sought for referring the question of law said to be arising out of the order of the Tribunal, for the opinion of this court.
6. The Tribunal has slightly modified the question of law as was sought for reference by the assessee and has referred for our opinion, the question of law in the modified form, as indicated above.
7. Sri G. Sarangan, learned senior counsel appearing on behalf of the assessee, has vehemently tried to impresses that the "expenditure" incurred by the assessee in connection with the holding of conferences/seminars wherein the dealers and distributors of the assessee-company participated and who are educated about the products of the assessee-company, particularly, about their latest technical advancement, technical superiority and for making the dealers familiar with the manner of operation and application of the products of the assessee-company, did not amount to either an activity in the nature of advertising the product of the company to the general public or an activity meant for promoting the sale of the products of the assessee-company. In this regard learned counsel submitted that the seminars/conferences are exclusively for the dealers and distributors of the company and not meant for publicising the products of the assessee-company. It is the submission of learned counsel that holding of the seminar was not largely intended for making the product of the company popular among the general public and for promoting the sales by such popularisation of the products of the company. The thrust of the argument of learned counsel was that the activity of conducting seminars and conferences was more in the nature of rendering a service to the dealers/distributors and for educating the dealers about the latest technical innovations imparted in the products of the asssessee-company and as such cannot be treated as an activity for the sales promotion or an activity in the nature of advertising the product of the company. Learned counsel submits that payments made to hotels in respect of such seminars/conferences had not been included for the purpose of deduction under Section 37(3A) of the Act as they were expenses incurred in connection with the housing or lodging of these delegates who had come to attend the seminar and for providing them food. The conveyance charges were also in connection with the transporting of such delegates and as such the entire expenditure incurred in connection with the holding of such seminar did not attract the provisions of Section 37(3A) of the Act.
8. In support of these submissions made by learned counsel, reliance was placed on the following decisions which were brought to our notice :
(i) CIT v. A. P. Small Scale Industries Development Corporation ;
(ii) Griffen Laboratories Ltd. v. CIT ;
(iii) CIT v. Torrent Laboratores Pvt. Ltd. ;
(iv) Eskayef (now known as Smith Kline Beecham Pharmaceuticals (India) Ltd.) v. CIT ;
(v) Dolphin Laboratories Ltd. v. CIT ; and
(iv) Innosearch Ltd. v. CIT . Sri Seshachala, learned standing counsel appearing on behalf of the Revenue, on the other hand, submitted that the expenditure incurred being admittedly expenditure incidental to the manufacturing activity of the assessee-company and very much incidental with the ultimate object of selling the products of the company, the exercise of conducting conferences and seminars were necessarily aimed at creating public awareness amongst the customers of the assessee as to the functional utility of the products of the company and also as to how the products of the company are technologically superior in comparison to the similar products of other manufacturers and even assuming that the contention on behalf of the assessee to the effect that such conferences/seminars did not further the sales products of the company, nevertheless, retaining the existing clientele and the assessee's share in the particular product sold in the market, does amount to an activity both in the nature of advertising the product of the assessee and maintaining the sales level of the products. Learned counsel for the Revenue has placed reliance on the Division Bench decision of this court in Smith Kline and French (India) Ltd. v. CIT [1992] 193 ITR 582, which has been affirmed by the Supreme Court in Eskayef v. CIT . We shall examine the question of answering the reference in the light of the rival submissions made by learned counsel and in the context of the judicial opinion that has evolved in the cases decided till now.
9. In CIT v. A. P. Small Scale Industries Development Corporation , a Division Bench of the Andhra Pradesh High Court was of the view that expenses incurred, by an assessee towards printing of brochures and information material with the object of promoting industrial development in the State of Andhra Pradesh, did not amount to an expenditure in the nature of an advertisement expenditure attracting the provisions of Section 37(3A) of the Act and as such took the view that the Revenue could not have disallowed 20 per cent, of such expenses. The Andhra Pradesh High Court noticed in this case that the assessee was a Small Scale Industries Development Corporation, a public sector undertaking owned by the Government of Andhra Pradesh and did not in the first instance carry on any commercial activity but was essentially a service organisation. The brochures and information material were to encourage the participation of entrepreneurs and small scale industrialists in the industrial development of the State and in this view of the matter, the court held that it cannot be construed as an expenditure in the nature of an advertising expenditure. Here it was found as a matter of fact that the expenditure was not in the nature of an advertising expense as such.
10. In Griffen Laboratories' case also, it was held that the expenditure incurred on account, of literature for appraising the medical practitioners about the contents and utility of the products of the company did not attract the provisions of Section 37(3A) of the Act. A Division Bench of the Calcutta High Court, in coming to this conclusion, referred to the budget speech of the Finance Minister in the context of introduction of the provisions of Section 37(3A) of the Act and noticed that the Minister had indicated that the provisions were being introduced to curb lavish spending and being of the view that the expenses incurred towards cost of producing of medical literature and journals distributed by the assessee-company was definitely not one which can be termed as "lavish spending" and, as such, did not attract the provisions of Section 37(3A) of the Act.
11. In Torrent Laboratories' case also, the expenditure incurred for printing of calendars and informative literature for doctors was held as not attracting the provisions of Section 37(3A) of the Act, particularly as the Tribunal itself had concluded that it was not an expenditure in the nature of advertisement for sales promotion. Here, the court was of the view that distribution of such medical literature and journals being very much essential, having regard to the nature of business of the assessee and its products, the activity cannot be termed as "an activity in the nature of an advertisement".
12. In the case of Smith Kline and French (India) Ltd.'s case [1992] 193 ITR 582, a Division Bench of this court was of the view that the expenditure incurred towards distribution of free samples of medicines not confined to the introductory stage of new medicine, but prolonged over a period of time, was an "expenditure" meant more to promote the product and amounting to an "expenditure" in the nature of an advertisement and sales promotion. This view of the High Court was affirmed by the Supreme Court in Eskayef v. CIT .
13. In Dolphin Laboratories' case [2000] 249 ITR 538, a Division Bench of the Calcutta High Court, in consonance with the earlier judicial opinion, on the scope of operation of Section 37(3A) of the Act and maintaining the distinction between "expenditure incurred in connection with distribution of medicines by way of free samples" and "advertising expenses incurred in connection with distribution of literature providing for technical data and results of research activity", held that the latter type of expenses cannot be included for disallowance under Section 37(3A) of the Act, Learned counsel for the assessee has placed emphasis on this decision of the Division Bench of the Calcutta High Court and has submitted that even after the affirmation of the decision of the Division Bench of this court in the case of Eskayef v. CIT , the Calcutta High Court after noticing the said decision, still took the view that a distinction could be drawn between such "an expenditure towards distribution of free medical samples" and "expenses towards medical literature". Learned counsel, drawing support from this decision submits that a distinction should be made between the expenditure incurred in connection with holding of conferences or seminars which are essentially meant to educate the dealers and distributors, from expenditure incurred purely for promoting the products of the company and accordingly urges that an "expenditure incurred towards seminars and all other connected expenditure" incurred in the context of holding seminars, did not attract the provisions of Section 37(3A).
14. In the case of Innosearch Ltd. v. CIT , a Division Bench of the Gujarat High Court, noticing that the Tribunal itself had come to the conclusion about the expenses incurred in respect of items like danglers, posters and streamers depicting the products of the assessee for display in retail counter shops, being for the purpose of advertisement, and the Tribunal, as a matter of finding of fact having found that as an expenditure on advertisement, declined to answer the question on the premise that no question of law arose, as the conclusion of the Tribunal was based on fact. The view taken by the Tribunal was not disturbed and the High Court declined to answer the reference on this aspect as one not involving a question of law. However, in the instant case, what we notice is that though the Tribunal has based its conclusion on a finding of fact, the question as to whether the provisions of Section 37(3A) are attracted to a situation of this nature and the activity of the assessee constitutes an activity of the nature referred to in Sections 37(3A) and 37(3B) of the Act, is a mixed question of fact and law, We proceed to examine the matter and give our answer as under :
15. We have given our anxious considerations to the question involved and the submissions made by learned counsel. If one looks at the legislative history of the provisions of Section 37(3A) of the Act which was on the statute intermittently, it becomes clear that in respect of an item of expenditure which is otherwise allowable as a deductible expenditure, certain restriction was sought to be imposed by restricting the deduction up to 80 per cent, of the actual expenditure claimed. The very fact that it is a deductible expenditure under Section 37 of the Act indicates that the "expenditure" is an expenditure incidental and necessarily for the carrying on of the activity of the assessee. If so, if the expenditure is of such activity which can come within the meaning of the specified activities under Section 37(3A) read with Section 37(3B) of the Act (as it stood at the relevant point of time), it is obvious that the courts will have to give effect to these provisions and cannot relieve the rigour of the provisions of Section 37(3A) of the Act by a process of interpretation.
16. If courts should have recourse to such process of interpretations in such situations, it virtually amounts to frustrating the provisions of Section 37(3A) of the Act. In the present case, there are two items of expenditure--(1) expenditure incurred for holding of seminars, and (2) expenditure incurred on hotel payments. In so far as the second item is concerned, on the face of it, it is an expenditure which is mentioned and covered under Sections 37(3A) and 37(3B) of the Act and it cannot be excluded by a process of interpretation. The hotel expenses incurred by the assessee, straightaway attract the provisions of Section 37(3A) of the Act.
17. In so far as expenditure incurred towards holding of seminars is concerned, the Tribunal itself has given a clear and categorical finding that the seminars and exhibitions were held to attract prospective customers and this was "certainly an act of not only advertising the products of the assessee, but also trying to promote the sales of such products". Further, the Tribunal found that the expenditure, though may not be in the nature of entertainment expenditure, nevertheless, is an expenditure for advertising the products of the assessee and to promote sales of such products. In the light of such a categorical finding of the Tribunal, our task becomes much easier and the distinction sought to be made by learned counsel by placing reliance on the cases referred to above and discussed, pales into insignificance. As already discussed above, when once there is a finding that expenditure incurred in connection with the holding of a seminar is nothing but an expenditure in the nature of an advertisement and for promoting the sales of the products of the assessee-company, we have no difficulty in holding that such expenditure definitely attracts the provisions of Section 37(3A) of the Act.
18. In this view of the matter, we answer the question referred for our opinion in the affirmative and against the assessee. No order as to costs.