2011 (1) TMI 305 - HC - Income Tax

Allowing - Deduction of hire-charges u/s 37(1) - it was not disputed that the coolers were in fact hired by Pepsi and as per the agreement with the 20th Century Finance Corporation Ltd., the coolers were installed in the premises of various distributors including in the premises of the assessee - It was also not in dispute that the amount in respect of coolers installed in the territory assigned to the assessee, was, in fact, paid by the assessee to Pepsi - So much so, Pepsi had given a certificate to this effect confirming that the aforesaid charges were recovered by it from the assessee in respect of visi coolers - Hence, the Tribunal rightly allowed this claim as business expenditure which could not be denied merely on the ground that there was no written agreement between Pepsi and the assessee for payment of the aforesaid amount - The amount is represented as hire charges for the coolers which were installed in the premises of the assessee and it would be clearly business expenditure. Advertisement and publicity expenditure - The agreement entered into between the assessee and Pepsi shows that the assessee was given a particular territory in Haryana, boundaries whereof are specifically defined in the agreement for the purposes of bottling, selling and distributing of the beverages - Naturally, therefore, in order to augment its profits in the said territory, it was the business decision of the assessee to advertise and publicize the product for maximizing its sale. The expenditure was, thus, incurred by the assessee for its own benefit. Clause 18 of the agreement authorized the assessee to undertake appropriate advertising and sales promotion activity for the beverage. Membership fee - since the Assessing Officer had allowed the deduction of 50 per cent of Rs. 2 lakhs u/s 37(2) of the Act, it was clear that the Assessing Officer himself accepted the fact that the expenditure incurred was for the business purpose, otherwise, the entire amount would have been disallowed by the Assessing Officer - Held that the assessee was entitled to entire deduction as claimed.

Issues Involved:
1. Deduction of hire charges under section 37(1) of the Income-tax Act.
2. Deduction of expenditure on advertisement and publicity under section 37(1) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deduction of Hire Charges:

The first issue concerns whether the Income Tax Appellate Tribunal (ITAT) was correct in law in allowing the deduction of hire charges under section 37(1) of the Income-tax Act solely on the ground that the expenditure benefited the assessee, despite the absence of an agreement between Pepsi and the assessee for the payment of hire charges.

The assessee, a franchisee of M/s. Pepsi Food (Pvt.) Ltd. (Pepsi), was manufacturing Pepsi brand soft drinks. Pepsi had entered into a lease agreement with M/s. 20th Century Finance Corporation Ltd. for visi coolers, which were installed at various franchisees' premises, including the assessee's. Pepsi paid the hire charges to 20th Century Finance Corporation Ltd. and subsequently recovered Rs. 3,45,177 from the assessee as its share of hire charges. The assessee claimed this amount as business expenditure under section 37 of the Income-tax Act, which was disallowed by the Assessing Officer and CIT(A) due to the lack of a written agreement between Pepsi and the assessee.

The Tribunal reversed this decision, noting that it was undisputed that the coolers were hired by Pepsi and installed in the assessee's premises, and the amount was indeed paid by the assessee to Pepsi. The Tribunal allowed the claim as business expenditure, concluding that the absence of a written agreement should not deny the deduction, given that the amount represented hire charges for coolers installed in the assessee's premises.

2. Deduction of Advertisement and Publicity Expenditure:

The second issue pertains to whether the ITAT was correct in allowing the deduction under section 37(1) for expenditure incurred on advertisement and publicity, despite the fact that the assessee was merely a bottler with no rights in Pepsi's goodwill and trademark.

The assessee incurred an expenditure of Rs. 91,99,946 on advertisement and publicity, supported by various bills. The Assessing Officer disallowed 10% of the expenses, arguing that the expenditure benefited Pepsi. The CIT(A) increased the disallowance to 50%, citing three reasons: the expenditure was exorbitantly high, there was no agreement for incurring or sharing the expenditure, and the expenditure primarily benefited Pepsi.

The Tribunal, however, allowed the entire expenditure, referencing the Supreme Court judgment in Sassoon J. Davis & Co. (P.) Ltd. v. CIT, which held that expenditure incurred for promoting business to earn profits should not be disallowed merely because a third party benefits. The Tribunal emphasized that the expenditure was incurred exclusively for business purposes and thus allowable under section 37(1).

The Court upheld the Tribunal's decision, reiterating that the expenditure was incurred wholly and exclusively for business purposes, satisfying all conditions under section 37(1). The Court referenced its own judgment in CIT v. Dalmia Cement (P.) Ltd., which clarified that "wholly or exclusively" does not mean "necessarily," and expenditure can be claimed if it promotes business and earns profits, even if voluntarily incurred. The Court also noted the Supreme Court's approval of this view in S.A. Builders Ltd. v. CIT.

The Court concluded that the assessee's expenditure on advertisement and publicity was for its own benefit, aiming to maximize sales in its designated territory, and any incidental benefit to Pepsi did not disqualify the expenditure from being deductible under section 37(1).

Conclusion:

The appeals were dismissed, affirming the Tribunal's approach as consistent with the law. The Court held that the deductions for hire charges and advertisement expenditure were allowable under section 37(1) of the Income-tax Act, as they were incurred wholly and exclusively for business purposes.

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