2003 (5) TMI 30 - HC - Income Tax

Once the marketing expenditures are excluded from the purview of expenses on advertisement, publicity and sales promotion and such expenses do not fall in any other categories of expenditure detailed in sub-section (3B) of section 37, the question of invoking any part of section 37(3A), read with sub-section (3B) cannot arise - it is obvious that on account of marketing overheads or salary component of marketing expenditure is not an expenditure governed by sub-section (3A) and sub-section (3B) of section 37. Such expenses cannot be disallowed by referring to the inapplicability of Explanation (b) on the ground that the employees to whom salaries have been paid were not the employees of the assessee. The entire amount shared by the assessee as marketing overheads for running its business was one single indivisible expense incurred wholly and exclusively for the purpose of its business, hence allowable u/s 37

Summary

Issues Involved:
1. Whether the salary amounting to Rs. 29,80,610 falls within the ambit of section 37(3A), read with section 37(3B) of the Income-tax Act.
2. Whether interest once granted under section 244(1A) can be subsequently withdrawn.

Issue-wise Detailed Analysis:

Issue 1: Applicability of Section 37(3A) and 37(3B) to Salary Amounting to Rs. 29,80,610

The Revenue contended that Rs. 29,80,610, shown as salaries forming part of the "marketing expenditure" incurred by M/s. McDowell Limited and debited to the assessee's account, should not be allowable under section 37(3A) and 37(3B) of the Income-tax Act because it was not paid to the employees of the assessee. The Revenue argued that this amount represents salaries paid by McDowells to its employees, not the assessee's employees, and thus should be disallowed under the specific provisions of clause (b) of the Explanation appended to section 37(3B).

The respondents countered that the expenses debited to the profit and loss account as the assessee's share of marketing were not of any category inhibited by section 37(3A) and 37(3B). They argued that the assessee incurred a consolidated sum as marketing expenditure, which was not spent on separate heads, such as salaries to its employees. The details provided by McDowells were only for verifying the amount of the share demanded from the assessee.

The court examined the provisions of section 37(3A) and 37(3B), which were in force for the assessment years 1984-85 and 1985-86. Section 37(3A) restricts the deduction of certain expenses, including advertisement, publicity, and sales promotion, if they exceed a specified limit. However, clause (b) of the Explanation to section 37(3B) excludes remuneration paid to employees of the assessee engaged in these activities from such restricted deductions.

The court found that the marketing expenses, including the salary component, were excluded from the purview of expenses on advertisement, publicity, and sales promotion under section 37(3B). Therefore, the invocation of clause (b) of the Explanation was ruled out. The court concluded that the marketing overheads or salary component of marketing expenditure is not governed by section 37(3A) and 37(3B) and cannot be disallowed on the ground that the employees were not those of the assessee.

The court observed that the assessee shared a proportionate amount of total marketing expenditure incurred by McDowells, which included various overheads. The assessee's share was a single indivisible expense incurred wholly and exclusively for the purpose of its business, hence allowable under section 37 of the Act.

Issue 2: Withdrawal of Interest Granted Under Section 244(1A)

The Tribunal's decision on this issue was based on a judgment of the Gujarat High Court in Cibatul Ltd. v. IAC of I.T. [1993] 201 ITR 507, which held that the Assessing Officer is not empowered to withdraw interest granted under section 244(1A) of the Act. The Supreme Court dismissed the appeal against this judgment, thereby affirming the Gujarat High Court's decision and settling the legal controversy.

The court noted that since the decision of the Gujarat High Court, which was in favor of the assessee, had been affirmed by the Supreme Court, the question of law regarding the withdrawal of interest under section 244(1A) no longer remained substantial. The issue was settled by the Supreme Court's decision, and thus, it did not require further consideration in this appeal.

Conclusion:

The court dismissed the appeal, holding that the salary amounting to Rs. 29,80,610 was not subject to disallowance under section 37(3A) and 37(3B) as it was part of the marketing expenditure incurred by McDowells and shared by the assessee. Additionally, the issue of withdrawal of interest under section 244(1A) was settled by the Supreme Court, and thus, no substantial question of law remained. There was no order as to costs.