Commissioner of Income Tax vs Sabena Detergents (P) Ltd.

P.D. Dinakaran, J.—I The above tax case appeal is preferred by the Revenue against the order of the Tribunal, dt. 23rd Nov., 2006 made

in ITA. No. 1750/Mad/1999 for the asst. yr. 1996-97, raising the substantial question of law, viz.,

Whether the Tribunal was right in holding that the advertisement expenditure incurred for promoting the pickles manufactured by its sister-concern,

for which the assessee is the distributor and selling agent, is allowable as the assessee''s business expenditure?

under the following facts and circumstances of the case.

The assessment year involved in this appeal is 1996-97. The assessee is a private limited company engaged in the business of trading in scouring

powder, pickles, etc. During the relevant assessment year, the assessee claimed expenditure for advertisement of pickles marketed by it, which are

manufactured by its sister-concerns. But, the AO noting that the advertisement expenditure includes a sum of Rs. 25,69,405 towards expenditure

incurred for promoting the products manufactured by its sister-concerns and observing that there is no memorandum of understanding or

agreement between the assessee company and the manufacturing company in this regard, by assessment order dt. 31st March, 1999, held that the

advertisement expenditure incurred by the assessee on behalf of its sister-concerns cannot be allowed as expenses attributable to its business.

Accordingly, the said sum of Rs. 25,69,405 claimed by the assessee towards advertisement expenditure was disallowed and added back to the

total income of the assessee.

2.1. Against the said assessment order of the AO, the assessee preferred an appeal before the CIT(A). The CIT(A) has found that the assessee

had been acting as an agent for marketing the products manufactured by its sister-concerns, viz., Telkar brand pickles and M/s Telkar Food

Products (P) Ltd., and that as per the letter dt. 31st March, 1995 of the principal manufacturer, viz., M/s Telkar Food Products (P) Ltd., the

assessee has to bear the cost of exhibition, display and screening of advertisements, in order to promote and boost the sale of pickles

manufactured by the sister-concerns. Even though the principal manufacturer would provide basic advertisement matters, the assessee had incurred

expenditure to the tune of Rs. 25,69,405 towards display and screening of advertisements during exhibition. However, the CIT(A) has found that

though the assessee contended that by virtue of the letter of the pricipal manufacturer, it was required to bear the cost of exhibition, display and

screening of advertisements, the said letter dt. 31st March, 1995 is only a self-serving evidence and in the absence of any validly executed

agreement or understanding between the assessee and its sister-concerns, the expenditure incurred towards display and screening of

advertisements during exhibition cannot be allowed and jthus, dismissed the appeal by his order dt. 15th Oct., 1999.

2.2. On further appeal by the assessee, the Tribunal, while appreciating the contentions made on behalf of the assessee that the assessee company

is engaged in the business of trading in scouring powder, pickles, etc., manufactured by its sister-concerns and operating its business in Andhra

Pradesh, Karnataka, Kerala and Tamil Nadu, held that the advertisement expenditure incurred by the assessee cannot be strictly construed as

expenditure incurred for promoting the products manufactured by its sister-concerns, but also for the purpose of assessee''s trade, as the assessee

itself is a marketing agent to the pickles as well as Sabena scouring powder manufactured by its sister-concerns and is a sole distributor of the said

products and thus, allowed the expenditure in favour of the assessee. Hence, the present appeal by the Revenue raising the substantial question of

law already referred to above.

Before deciding the substantial question of law raised in this appeal, it is apt to refer Section 37(1) of the IT Act, 1961, (hereinafter referred to

as the Act''), which permits the assessee to claim any expenditure by way of deduction in computing the income chargeable under the head ""Profits

and gains of business or profession"", which reads as follows:

(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or

personal expenses of the assessee, 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"".

Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is prohibited by

law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect

of such expenditure.

A careful reading of Section 37(1) of the Act makes it clear that for allowing any expenditure while computing the income chargeable under the

head ""Profits and gains of business or profession"", such expenditure must be (a) paid out wholly and exclusively for the purpose of business or

profession and (b) must not be (i) capital expenditure, (ii) personal expenses and (iii) an allowance of the character described in Section 30 to 36

of the Act.

Full Bench of the apex Court in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., , while interpreting the expression ""for the

purpose of the business"" used in Section 10(2)(xv) of the IT Act, 1922 (hereinafter referred to as the old Act''), held as hereunder:

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 rationalisation 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 the carrying

on of a business; it may comprehend many other acts incidental to the carrying on of the 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. It cannot include sums spent by the

assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.

5.1. In the instant case, it is the clear case of the assessee that it is not only acting as an agent to the products manufactured by its sister-concerns,

but also engaged in the business of trading in scouring powder, pickles, etc. In other words, the marketing of the products manufactured by M/s

Telkar Food Products (P) Ltd., by itself, is a trade undertaken by the assessee and the expenses in question claimed by the assessee are the

expenses incurred during the course of such marketing.

5.2. In the abovesaid decision, Justice Subba Rao, as he then was, speaking for the Full Bench of the apex Court, placed reliance on the decision

of the House of Lords in COMMISSIONER OF Income Tax MADRAS Vs. MAHARAJAH OF PITHAPURAM., whereunder it was held that

the amount spent wholly and exclusively for the purpose of the company''s trade was an allowable deduction for the purpose of computing the

profits of the company for Income Tax purposes and accordingly, the expression ""for the purpose of business"" is to be given a liberal meaning, as it

includes the purpose to promote the business of trade.

5.3. The decision of the House of Lords in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. (1954) 26 ITR 195 was also relied upon by the apex

Court, whereunder the question that arose was whether the expenditure incurred by a company engaged in sugar refining, in a propaganda

campaign to oppose the threatened nationalisation of the industry, was an admissible deduction. In the said case, it was held that Lord Davey''s

formula includes expenditure for the purpose of preventing a person from being disabled from carrying on and earning profits in the trade. The

resultant tests would be (i) whether the expenditure was incurred for the purpose of carrying on the business to earn profits in the trade and for

removing obstacles and impediments in the conduct of the business; and (ii) whether the assessee paid the amount in his capacity as businessman

or in his personal capacity.

5.4. In the instant case, we do not find any difficulty to hold that both the tests referred to above were satisfied by the assessee, in that, the

assessee company has incurred expenses to earn profits in its business of marketing and it had incurred expenses not in its personal capacity as an

agent to the products manufactured by its sister-concerns, but in its capacity as a businessman in marketing the products by itself.

The above well-settled legal position is being recapitulated by several decisions, as stated hereunder.

6.1. Justice Shah, as he then was, speaking for the Full Bench of the apex Court in Travancore Titanium Products Ltd. Vs. Commissioner of

Income Tax, Kerala, held that to claim the expenditure incurred as a permissible deduction u/s 10(2)(xv) of the old Act (now u/s 37(1) of the Act),

there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the

assessee as a trader, and not as owner of assets even if they are assets of the business. It is thus held that the nature of the expenditure or outgoing

must be adjudged in the light of accepted commercial practice and trading principles and the expenditure must be incidental of the business and

must be necessitated or justified by commercial expediency and that it must also be directly and intimately connected with the business and be laid

out by the taxpayer in his character as a trader.

6.2. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of

the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue, vide

Commissioner of Income Tax, Bombay Vs. Walchand and Co. Private Ltd., .

6.3. In Sassoon J. David & Co. (P) Ltd. v. CIT (1979) 10 CTR (SC) 383 : (1976) 118 ITR 261 , while interpreting the words ""any expenditure

laid out or expended wholly and exclusively for the purposes of the business or profession"" to assail that the expression ""wholly and exclusively

used in Section 10(2)(xv) of the old Act [now Section 37(1) of the Act], does not mean ""necessarily"", the apex Court has held that ordinarily, it is

for the assessee to decide whether any expenditure should be incurred in the course of his or its business and such expenditure may be incurred

voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction u/s 10(2)

(xv) of the old Act, even though there was no compelling necessity to incur such expenditure. It was further held that the fact that somebody other

than the assessee (like in the instant case, the sister-concerns) is also benefited by the expenditure should not come in the way of an expenditure

being allowed by way of deduction u/s 10(2)(xv) of the old Act [now Section 37(1) of the Act], if it satisfies otherwise the tests laid down by law,

referred to above.

6.4. Recently, the apex Court, in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, , interpreting the

words ""for the purpose of business"" used in Section 37(1) of the Act, while computing the income chargeable under the head ""Profits and gains of

business or profession"", reiterated its earlier views referred to above and held that such expenditure is to be tested in the light of the commercial

expediency, which is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The

expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of

commercial expediency. It is further held that the expenditure incurred for the purpose of business meant in Section 37(1) of the Act includes the

expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. It is not for the authorities or

the Court to examine the purpose for which the assessee incurred the expenses for its commercial expediency. What is relevant is whether the

amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning

profits. Once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the

business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board

of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case and no businessman

can be compelled to maximize his profit.

For all these reasons, we do not see any question of law, much less a substantial question of law, that arises for consideration in this appeal.

Accordingly, the tax case appeal is dismissed.