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Judgment
Ratnam, J.—The following question has been referred under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as ""the Act""), for the
opinion of this court at the instance of the Revenue :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the entire sum of Rs. 50,000 paid by
the assessee towards advertisments in souvenirs to be brought out by the Congress Party at various district level outside Tamil Nadu should be
allowed as an allowable expenditure ?
The assessee is a private limited company carrying on finaning business. During the year of account relevant to the assessment year 1973-74,
the assessee incurred an expenditure of Rs. 50,000 towards publication of advertisement in several issues of souvenirs brought out by the
Congress Committees at various districts outside Tamil Nadu. In the course of the assessment proceedings, the assessee claimed that the
expenditure of Rs. 50,000 should be subjected to tax treatment as an allowable expenditure in the souvenirs were published on the same day just
before the elections and assessee had no business activity in the places where the souvenirs were published, the expenditure incurred by the
assessee was more in the nature of a donation rather than expenditure incurred towards publication of advertisement expenses. On appeal by the
assessee contending that the advertisements published by it in the souvenirs had as much publicity value as advertisements in the ordinary trade
journals and other newspapers and, therefore, the expenditure on such advertisements should be treated as an allowable one, the AAC held that
publicity element as a result of the advertisements in souvenirs was not the same as that which resulted from such publications in trade journals and
dailies and that a part of the expenditure incurred should be disallowed as relating to purposes other than the business of the assessee. On this
conclusion, the allowable expenditure was restricted to Rs. 25,000 was upheld. On further appeals to the Tribunal by the Revenue as well as the
assessee in relation to the expenditure of Rs. 25,000 allowed and disallowed, respectively, the Tribunal found that the assessee was doing financing
business on an extensive scale and that there was no material to show that the business of the assessee was such that it was not capable of being
extended to states outside Tamil Nadu or that it would not be beneficial for the assessee to so extend its business beyond the boundaries of Tamil
Nadu. Besides, the Tribunal examined two specimen advertisements in the sovenirs made available to it and concluded that having regard to the
legitimate business needs of the assessee and the benefit that could be derived or would accrue to the assessee, the claim of the assessee should be
allowed in full and dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee, as the requirements of rule
6B of the I.T. Rules were otherwise satisfied.
The learned counsel for the Revenue submitted that the assessee in this case had in fact and in reality made a donation to the Congress Party
under the garb of incurring the expenditure on advertisements and that such a payment to made to a political party cannot be treated as an
allowable expenditure in computing the income of the assessee. Reliance was also placed by the learned counsel upon the Statement of Objects
and Reasons in the Bill for the introduction of the Taxation Laws(Amendment) Act, 1978, particularly in relation to the insertion of s. 37(2B) in the
Act, for contending that payments made for advertisement in souvenirs and brochures and the like published by political parties are disguised
donations made with the object of circumventing the ban on company donations and also securing a deduction in the computation of taxable profits
and that therefore, the expenditure incurred by an assessee for purposes of advertisement in souvenirs and brochures should not be allowed as a
deduction in computing the taxable [profits. Counsel also pointed out that an advertisement, as normally understood, should be for the benefit of a
cross section of the society which is expected to see the advertisement, read and react to the same and since the souvenirs brought out by a
political party at district levels would not serve this purpose, the amount expended by the assessee on such advertisements cannot be properly
made the subject matter of allowable deduction.
On the other hand, the learned counsel for the assessee, while disputing that the expenditure incurred was a disguised donation to a political
party, contended that the expenses in question for the publication of the advertisements in the souvenirs were incurred with a view to expand and
promote the business of the assessee and that even though no direct or immediate benefit was reaped by the assessee or the assessee was not
enable to earn more income immediately, yet, if the advertisements, even indirectly facilitated the carrying on of the business of assessee, the
expenditure incurred thereon could be justified on the basis of commercial expediency and allowable as well and the motive for the incurring of the
expenditure would be really not relevant. Attention was also drawn in this connection by the learned counsel for the assessee to Circular No. 200
dated June 28, 1976, for contending that in the matter of considering claims in respect of the expenditure on advertisements, no distinction need be
drawn between the expenditure on advertisements in souvenirs and other types of advertisements and that the Department, at any rate, would be
bound by the circular issued and cannot, therefore, be heard to contend that the expenses incurred by way of advertisement charges should be
disallowed. Strong reliance was also placed by the learned counsel for the assessee in support of these submissions on the decisions in British
Electrical and Pumps (P.) Ltd. Vs. Commissioner of Income Tax, and K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, .
We have carefully considered the aforesaid submissions. Even at the outset, we may observe that in the course of the proceedings before the
authorities, the Revenue did not take up the specific stand that the expenditure admittedly incurred by the assessee, ostensibly for advertisements,
was really in the nature of a donation to a political party. Indeed, before the Tribunal, no attempt was made by the Revenue to sustain the
disallowance of the expenditure incurred by the assessee on the ground that it was really in the nature of a donation to a political party. We are
unable to agree that merely because the advertisements given by the assessee were published in the souvenirs released by a political party on the
eve of elections, they ceased to be advertisements and the expenses incurred should be labelled as a disguised donation to a political party. That
advertisements were released by the assessee and were also published in the souvenirs is not a matter of dispute. The timing of the publication of
the advertisements in the souvenirs or the circumstance that the souvenirs were published by a political party would not, in out view, transform the
expenditure incurred by the assessee for advertisements regarding its business into a donation to a political party. we cannot, therefore, either
entertain or accept the contention of the counsel for the Revenue that the expenditure incurred by the assessee on the advertisements published in
the souvenirs to political party, and, therefore, not allowable as expenditure in the computation of the income of the assessee.
Reliance placed by the Revenue on the Statement of Objects and Reasons in the Bill for the introduction of s. 13A and s. 37(2B) in the Act is
also of no avail. No doubt, in a democratic set up, political parties are essential. Subjecting to tax the income of the political parties would
effectively reduce their utilisable and employable funds and this would adversely affect their capacity to finance their activities from a legitimate
source of income. With a view, therefore, to exempt from Income Tax, the income received or derived by political parties from investment in
movable or immovable properties and also by way of voluntary contributions, s. 13A was introduced and this was subject of course to the
fulfilment of certain conditions mentioned therein. Further, with a view to prevent donations being made, not on considerations of commercial
expediency, but, with the object of circumventing the ban on company donations under the clock of advertisements in souvenirs, brochures, etc.,
published by political parties and at the same time securing an allowance in the computation of the income, s. 37(2B) was conceived of.
Contribution or donations to political parties have been consistently held to be not allowable expenditure primarily on the ground that its
connections with business is rather remote and invariably no nexus between the expenditure and the business can be established. In those cases,
the donors, who could not claim the contributions or donations as allowable items of expenditure in computing their income, might attempt to
secure the benefit f such allowance or expenditure by relating it to an advertisement in any souvenir or brochure of the like published by the political
party, It is this that has been prevented by the introduction of s. 37(2B) of the Act. Section 13A of the Act was inserted by the Taxation Laws
(Amendment) Act, 1+978, with effect from April 1, 1979, while s. 37(2B), which was omitted by the Finance Act, 1976, with effect from April 1,
1977, was inserted again by the Taxation Laws (Amendment) Act, 1978, with effect from April 1, 1979. The assessment year with which we are
concerned is 1973-74. Taking that into account and the object with which ss. 13A and 37(2B) have been introduced, on the facts of this case,
where the publication of the advertisements in the souvenirs and the incurring of expenditure by the assessee in that regard during the accounting
year relevant to assessment year 1973-74 are nor disputed, it cannot be stated that the expenditure incurred by the assessee should be treated as a
disguised donation to a political part. We are, therefore, not inclined to accept the contention of the learned counsel for the Revenue.
We now proceed to consider the contention of the Revenue that even as advertisements, the publications in the souvenirs had not reached a
cross section of the community and, therefore, they had failed as advertisements, in that they had not served any purpose and consequently,
tisements, in that they had not served any purpose and consequently, the amount expended by the assessee cannot be allowed as a deduction. We
gave to bear in mind that basically an advertisement in a souvenir brought out by an organisation or institution is nothing but a media through which
those in business attempt to establish contact with customers with a view to push their products in the market or pursue more extensively their
business activity. In that attempt, those who publish such advertisement may either succeed or fail. But that is really not the criterion while
considering the question of the allowability of the expenses incurred in connection therewith as a deduction in the computation of income. Such
advertisement, though they may not bring any direct or immediate benefit, it is not impossible that on seeing an advertisement, at some time or
other, the advertiser may secure a new customer, and that would enable him or it to push his or its products in the market or to have a contract
with the customer with a view to facilitate the carrying on of his or its business. Indeed, it cannot be gainsaid that souvenirs are one p the
recognised media of publicity. Depending upon the capacity to meet the expenditure, a businessman can advertise in more than one newspaper or
magazine or in several issues of the same newspaper or magazine. We do not see how the publication of the advertisement in more than one
souvenir published by the same organisation or party will not qualify for the deduction, if the expenditure in that regard had been established to
have been incurred. It is only with a view to communicate and spread far and wide the business activities of a particular advertiser that normally
advertisement is resorted to. It may be that most often souvenirs are handle only on the occasion of their release and thereafter not given a second
look. Even so, it is quite that some person in a remote corner lays his hands on the souvenir and then finds out that his business requirement will be
met or satisfied by the company or the person who had inserted the advertisement. In that case, the purpose of the advertisement is fulfilled, though
it may still be that really a large section of the community might not have come across the advertisement published in such souvenirs. Beside, there
in an assumption in the argument of the Revenue that the souvenirs did not reach the society and that its members did not at all benefit by them for
which there is no warrant at all. We are, therefore, unable to accept the argument that us advertisement, the publications made in the souvenirs
have failed and the expenses have to be disallowed on this score.
We have already noticed that on the materials made available, the expenditure incurred by the assessee was not given as a bounty to be the
political party which had brought our the souvenirs. The expenditure incurred by the assessee for the purpose of these advertisement might not
have been voluntary, but it cannot be denied that it had been incurred for the benefit of the assessee as amounts expended for commercial
expediency, which means and includes everything that serves to promote commerce and includes every means suitable to such an end. Earlier, it
had been noticed that advertisements either in newspapers or magazines or souvenirs, etc., help companies and members for the business
community to create and establish contact with the customers for the purpose of enabling the companies or the businessmen to promote their
business and push the products manufactured by them in the market. Indeed, the motive with which the amounts are expended for inserting
advertisement is really not material so long as the expenditure is incurred for the purpose of the business. Undoubtedly, there is an element of
advertisement resulting in a greater awareness regarding the facilities available for finance extended by the assessee to customers of different kind
as a result of the insertions in the souvenirs. It may be that in some cases such advertisements may be delayed benefit also directly or indirectly. In
some cases, there may be no direct or indirect benefit at all. But so long as the propose of inserting the advertisements is covered by expediency,
them, if such as expenditure indirectly facilitates the carrying on of the business, then it would be an expenditure laid out wholly and exclusively for
the purpose 150 (SC), the Supreme Court observed :
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 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 precondition 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.
In the light of the aforesaid statement of the law laid down by the Supreme Court, we may consider the circumstances under which and the
reason for which the advertisements were released by the assessee. For the assessment year with which we are concerned, the assessed income of
the assessee from its financing business was about 66 lakhs of rupees. That indicates the large volume of business carried on by the assessee on an
extensive scale. Financing business knows no geographical limits, boundaries, borders or frontiers. The assessee thought that it would be more
profitable and advantageous to it to further extend its business our side the State of Tamil Nadu. The advertisement in the souvenir had been
examined by the Tribunal and indeed was also made available for our inspection. The advertisement brings our prominently the business activities
of the assessee and the ready availability of finance for such purposes as business of the assessee outside the Tamilnadu State and it cannot be said
in souvenirs published by organisations out side the State were not for business. We are, therefore, of the view that the amount of Rs. 50,000
expended by the assessee for advertisements in the souvenirs was done having been expended for commercial expediency. We may also point out
that though such advertisements may not have the result of enabling assessee to earn income in that year or immediately, if it enables the assessee
either to extend its business or to extend and promote its business even in the future, such an expenditure would be deductible. It is not necessary
in such cases that there should be a profit in the very year in which the allowance is claimed or the expenditure is incurred. We are, therefore, of
the view that the expenditure in this case incurred by the assessee would be one laid out or expended wholly or exclusively for the purpose of the
business and would be eligible for a deduction under s. 37(1) of the Act. We many point that in British Electrical and Pumps (P.) Ltd. Vs.
Commissioner of Income Tax, , it has been held that expenditure incurred not with a view to a direct and immediate benefit for purposes of
commercial expediency but in order indirectly to facility the carrying on of the business is expenditure laid out wholly and exclusively for purposes
the trade, within the meaning of s. 37 of the Act and that the primary of motive in incurring the expenditure admissible to a deduction need not be
directly earn income there by.
We have earlier referred to the Board Circular No. 200 dated June 28, 1976, which, it is nor disputed, would be applicable to the case of the
assessee. Therein, the Board has adverted to the hardship caused to assessees as a result of disallowance of the part of the expenditure on
advertisements in souvenirs and clarified that no distinction need be made regarding the expenditure on advertisements in souvenirs and other type
may be allowed, if the conditions under rule 6B of the I.T. Rules, 1962, are fulfilled and there is evidence that the expenditure had been incurred.
In this case, the authorities below were satisfied that the expenditure had been incurred by the assessee and that the conditions under rule 6B of the
I.T. Rules, 1962, were also satisfied. This circular, as pointed out by the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam
and Another, , would be binding on the Revenue on administering or executing the provisions in the Act. Thus, on a consideration of the different
facets of the question, we are of the view that the view that the Tribunal was right in its conclusion that the expenditure of Rs. 50,000 incurred by
the assessee towards advertisement charges in souvenirs would be an allowable item of expenditure. We, therefore, answer the question in the
affirmative and against the Revenue. The assessee will be entitled to the costs of this reference. Counsel''s fee Rs. 500 (one set).