1995 (2) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure on distributing free notebooks and placing gift coupons in products falls under "sales promotion" u/s 37(3A) of the Income-tax Act, 1961.
2. Whether the expenditure on notebooks and gift coupons should be allowed in full u/s 37(3) of the Income-tax Act, 1961.

Summary:

Issue 1: Expenditure on Free Notebooks and Gift Coupons as "Sales Promotion" u/s 37(3A)
The court examined whether the expenditure of Rs. 1,24,091 on distributing free notebooks and Rs. 1,08,565 on placing gift coupons in biscuit tins qualifies as "sales promotion" under section 37(3A) of the Income-tax Act, 1961. The Income-tax Officer and the Appellate Assistant Commissioner had treated this expenditure as falling within "sales promotion." The Tribunal, however, initially allowed it as a deduction u/s 37(1) but was directed by the Division Bench to reconsider whether it falls under "sales promotion." The Tribunal later reported that the expenditure does not qualify as "sales promotion."

The court referred to the Finance Minister's speech and Circular No. 240, which aimed to curb extravagant and socially wasteful expenditure on advertisement, publicity, and sales promotion. The court noted that the provisions of section 37(3A) are neither vague nor ambiguous, and thus, the speech of the Finance Minister was not necessary for interpretation. The court concluded that "sales promotion" includes efforts to promote sales, such as giving incentives to consumers, and thus, the expenditure on gift coupons and notebooks falls within this category.

Issue 2: Allowance of Expenditure u/s 37(3)
The court addressed whether the expenditure on notebooks and gift coupons should be allowed in full under section 37(3). The court emphasized that the expenditure on consumer gift offers and free samples or gifts falls within the ambit of section 37(3A). The court rejected the contention that these expenditures should be treated as trade discounts, noting that trade discounts represent a reduction in price and not expenditure.

The court concluded that the expenditure incurred by the assessee is covered by section 37(3A) and must be scaled down according to the formula specified therein. Therefore, the first question was answered in the negative, in favor of the Revenue, and against the assessee. Consequently, the second question was also answered in the negative, in favor of the Revenue, and against the assessee.

Conclusion:
The reference was answered in favor of the Revenue, with no costs awarded.