2013 (5) TMI 415 - HC - Income Tax

Expenditure incurred on the maintenance of any office for the purposes of advertisement, publicity, sales promotion - whether will fall within the meaning of section 37(3B)(iv)? - Held that - The assessee company instead of maintaining the office for the purposes of advertisement, publicity and sale promotion itself had agreed to such activity being done on its behalf by the Calcutta Company. It seems that 8% of the sale realization was agreed to be paid to the Calcutta Company at Calcutta in view of it maintaining office and infrastructure for advertising the product of the assessee company. It is a tool employed by the assessee company to have the advantage of using infrastructure maintained by Calcutta Company for advertising its own goods without taking upon itself the burden to bear the entire expenditure in case separate office in this regard is maintained by itself. This according to the assessee has resulted in curbing the actual expenditure which might have been much more in case a separate office, staff etc. is maintained by itself. Thus, dis-allowance of expenditure and thereby compelling the assessee to maintain such infrastructure itself will only result in wasteful expenditure which is sought to be curbed by inserting sub section (3A) and (3B) by the Finance Act, 1978. Sub section (3B) does not mention that the office for purposes of advertisement, publicity and sale promotion should be maintained by the assessee itself. On the contrary the use of the word any office in clause (iv) of sub section (3B) of section 37, without it being circumscribed by words like itself or of it s own leads to irresistible conclusion that expenditure can be made by the assessee company itself or by employing some person or agency on its behalf and in both cases, such expenditure qualifies for total exemption without any dis-allowance under clause (iii) of sub section (3A) of section 37 of the Act. In favour of assessee.

Summary

Issues Involved:
1. Interpretation of Section 37(3B)(iv) of the Income Tax Act, 1961 regarding the maintenance of an office for advertisement, publicity, and sales promotion.
2. Legality of the expenditure incurred by the assessee through another company for sales promotion.
3. Applicability of disallowance under Section 37(2A) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interpretation of Section 37(3B)(iv) of the Income Tax Act, 1961:
The primary issue was whether the expenditure incurred by the assessee through M/s. Dey's Medical Stores Manufacturing Pvt. Ltd., Calcutta, amounted to the maintenance of any office for advertisement, publicity, and sales promotion within the meaning of Section 37(3B)(iv) of the Income Tax Act, 1961. The Tribunal held that the phrase "any office" in Section 37(3B)(iv) is broad enough to include an office maintained by another entity on behalf of the assessee. The court supported this interpretation, emphasizing that the word "any" can mean "all," "every," "some," or "one," depending on the context. The court concluded that the legislative intent was to allow such expenditures if they are necessary for the business and not extravagant.

2. Legality of the Expenditure Incurred by the Assessee Through Another Company for Sales Promotion:
The assessee had an agreement with the Calcutta Company for sales promotion, paying 8% of the net sales as reimbursement for the expenses incurred by the Calcutta Company. The court examined whether this arrangement was a mere profit-sharing device or a legitimate business expenditure. Citing precedents like British Sugar Manufacturers vs. Harris and Travancore Sugars And Chemicals Ltd. v. Commissioner of Income Tax, the court determined that the payments were for services rendered and thus constituted allowable business expenditure. The court emphasized that the nature of the transaction should be judged from the commercial point of view, considering the surrounding circumstances.

3. Applicability of Disallowance under Section 37(2A) of the Income Tax Act, 1961:
The Inspecting Assistant Commissioner initially disallowed 15% of the expenditure under Section 37(3A)(iii), arguing that the office must be maintained by the assessee itself. However, the Commissioner of Income Tax (Appeals) and the Tribunal disagreed, stating that the expenditure qualifies for exemption under Section 37(3B)(iv) as long as it is reimbursed by the assessee. The court upheld this view, noting that the legislative intent was to curb wasteful expenditure, not necessary business expenses. The court concluded that the expenditure incurred by the Calcutta Company on behalf of the assessee for maintaining sales promotion offices and other infrastructure is allowable under Section 37 of the Act.

Conclusion:
The court answered all the questions in favor of the assessee, affirming that the expenditure incurred through the Calcutta Company for sales promotion qualifies for exemption under Section 37(3B)(iv) and does not warrant disallowance under Section 37(2A). The judgment emphasized the importance of interpreting the statute in light of its clear expressions and legislative intent, avoiding any assumptions or importation of provisions not explicitly stated.