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2011 (6) TMI 326 - AT - Income TaxDisallowance - Advertisement and publicity expenses - section 40A(2) of the Act - the assessee incurred the expenditure as per the agreement entered into with the foreign principals and earning of income therefrom is subject to the condition of incurring expenditure on advertisement and thus it has to be considered as amount spent wholly and exclusively for the purpose of business - held that - the Apex Court in the case of Sassoon J. David & Co. Ltd. & Co. Ltd. v. CIT 1989 -TMI - 23844 - BOMBAY High Court , merely because a third party is benefited by virtue of such expenditure, it cannot take the case out of the purview of section 37(1) of the Act - Assessing Officer has not disputed the fact that subscription fees/distribution revenue is not fixed but variable and depends upon the popularity and viewer-ship of the channels in which event it has to be assumed that the expenditure on advertisement is intimately connected to the revenue earned by the assessee - Decided in favour of assessee.
Issues Involved:
1. Whether the CIT(A) was justified in deleting the disallowance of Rs. 4,14,20,843 made by the AO out of advertisement and publicity expenses incurred by the assessee. Issue-wise Detailed Analysis: 1. Justification of Deleting the Disallowance of Advertisement and Publicity Expenses: Background and Facts: The assessee-company, engaged in the distribution and marketing of television channels, entered into advertising sales representation agreements with foreign principals. The assessee incurred advertisement and publicity expenses amounting to Rs. 6.21 crores, claiming these expenses as deductible under section 37(1) of the Income Tax Act, 1961, arguing that the expenses were incurred wholly and exclusively for business purposes. The Assessing Officer (AO) allowed only 1/3rd of the expenditure, disallowing the remaining 2/3rd on the grounds that the expenses also benefited the foreign principals. CIT(A) Observations: The CIT(A) observed that the AO's disallowance under section 37(1) read with section 40A(2) was incorrect, as the payments were made to third parties and not to the principals. The CIT(A) noted that the genuineness of the expenditure was not disputed and that the AO had not identified any instance where the expenditure was not incurred wholly and exclusively for business purposes. The CIT(A) emphasized that the expenditure had a direct nexus with the assessee's revenue and was not excessive or unreasonable, thereby allowing the full deduction of the expenses. Accountant Member's View: The Accountant Member agreed with the CIT(A), stating that the commercial expediency of the expenditure was not disputed by the AO, who had accepted the nexus between the expenditure and the business by allowing 1/3rd of it. The Accountant Member cited the decision of the Apex Court in Sassoon J. David & Co. Ltd. v. CIT, which held that expenditure incurred wholly and exclusively for business purposes is deductible, even if it also benefits third parties. Judicial Member's View: The Judicial Member disagreed, arguing that the expenditure was not incurred wholly and exclusively for the assessee's business but primarily benefited the foreign principals. He highlighted that the assessee acted as an agent without decision-making authority over the advertisements and that the expenditure was disproportionate to the income declared. The Judicial Member cited case law to support the view that expenditure with dual purposes does not qualify for deduction under section 37(1). Third Member's Decision: The Third Member, nominated to resolve the difference of opinion, concurred with the Accountant Member. The Third Member noted that the expenditure was incurred as per the agreements with the foreign principals and was necessary for earning revenue. The Third Member emphasized that the AO's partial allowance of the expenditure indicated acceptance of its business purpose. The Third Member concluded that the expenditure was incurred wholly and exclusively for business purposes and was therefore deductible under section 37(1). Final Order: The Hon'ble Vice President, acting as the Third Member, answered the question in favor of the assessee, agreeing with the CIT(A) and the Accountant Member. The Division Bench then passed a confirmatory order in accordance with the majority view, dismissing the Revenue's appeal and upholding the deletion of the disallowance of Rs. 4,14,20,843. Conclusion: The Tribunal concluded that the CIT(A) was justified in deleting the disallowance made by the AO, as the advertisement and publicity expenses were incurred wholly and exclusively for the purpose of the assessee's business and were therefore deductible under section 37(1) of the Income Tax Act, 1961.
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