1999 (1) TMI 16 - HC - Income Tax

Business Expenditure, Advertisement Expenditure, Prescribed Ceiling, Subsidy, Question Of Law, Entertainment Expenditure

Issues Involved:

1. Disallowance of Rs. 1,07,570 as advertisement expenditure.
2. Classification of transport subsidy as revenue receipt.
3. Classification of expenditure of Rs. 87,249 as entertainment expenditure.
4. Disallowance of Rs. 25,000 each for horse race and golf competition sponsorships.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 1,07,570 as Advertisement Expenditure:

The applicant company presented 180 silver boxes to dealers, costing Rs. 1,16,570, during a dealers' conference. The Revenue treated this expenditure as entertainment expenses under section 37(2A) of the Income-tax Act, allowing only Rs. 50 per box under rule 6B of the Income-tax Rules. The Tribunal confirmed this disallowance, considering the presentation of silver boxes as advertisement expenditure. The court examined various dictionary definitions of "advertisement" and concluded that the presentation to dealers, who are not potential buyers, does not constitute advertisement. The court cited several precedents, including CIT v. Santosh Agencies and CIT v. Modi Spinning and Weaving Mills Co. Ltd., to support its view that such presentations are not advertisements. The court held that the Tribunal's interpretation was erroneous and answered the question in favor of the assessee.

2. Classification of Transport Subsidy as Revenue Receipt:

The court considered whether the transport subsidy granted under the Transport Subsidy Scheme, 1971, amounting to Rs. 3,26,912, was a revenue receipt. The court referred to the Supreme Court's decision in Sahney Steel and Press Works Ltd. v. CIT, which held that subsidies given as production incentives are operational subsidies and not capital subsidies. The court analyzed the Transport Subsidy Scheme and concluded that it was designed to recoup the additional transport costs incurred by manufacturers in backward areas, making it a revenue receipt. The court affirmed the Tribunal's decision, answering the question in favor of the Revenue.

3. Classification of Expenditure of Rs. 87,249 as Entertainment Expenditure:

The Tribunal upheld the disallowance of Rs. 87,429 incurred for holding a dealers' conference in Kathmandu, treating it as entertainment expenditure under Explanation 2 to section 37(2A) of the Income-tax Act. The court noted that the Tribunal did not properly consider whether the expenses under different heads (payments to clubs, hotel bills, meals, and sales promotion) amounted to entertainment. The court cited several cases, including CIT v. Eskaps (India) P. Ltd. and CIT v. Indo Asian Switchgears (P.) Ltd., which held that holding dealers' conferences is a business expenditure, not entertainment. The court remitted the matter back to the Tribunal for reconsideration.

4. Disallowance of Rs. 25,000 Each for Horse Race and Golf Competition Sponsorships:

The assessee sponsored a horse race and a golf competition, incurring Rs. 30,000 each, which the Assessing Officer disallowed, considering them as not required for business purposes. The court held that expenses incurred for advertisement must be viewed from the assessee's perspective. Citing cases like CIT v. Delhi Cloth and General Mills Co. Ltd. and CIT v. Aluminium Industries Ltd., the court emphasized that once it is established that the expenditure was incurred for publicity or advertisement, the reasonableness of the expenditure should not be questioned by the Department. The court answered the question in favor of the assessee.

Summary of Answers to Questions:

1. Negative, in favor of the assessee and against the Revenue.
2. Affirmative, in favor of the Revenue and against the assessee.
3. Remitted back to the Tribunal for reconsideration.
4. Negative, in favor of the assessee and against the Revenue.

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