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Issues Involved:
1. Whether the expenditure of Rs. 50,000 towards advertisements in souvenirs brought out by the Congress Party should be allowed as an allowable expenditure. 2. Whether the expenditure was a disguised donation to a political party. 3. Whether the advertisements failed to serve their purpose and thus should not be allowed as a deduction. Issue-Wise Detailed Analysis: 1. Allowability of Expenditure: The primary issue was whether the expenditure of Rs. 50,000 incurred by the assessee, a private limited company engaged in financing business, towards advertisements in souvenirs brought out by the Congress Party at various districts outside Tamil Nadu, should be allowed as an allowable expenditure. The Income Tax Officer (ITO) initially disallowed the expenditure, considering it more of a donation rather than a business expense. However, on appeal, the Appellate Assistant Commissioner (AAC) allowed Rs. 25,000 as an allowable expenditure and disallowed the remaining Rs. 25,000. The Tribunal, upon further appeal, allowed the entire expenditure, reasoning that the assessee's business could potentially extend beyond Tamil Nadu, and the advertisements could benefit the business. 2. Disguised Donation to a Political Party: The Revenue contended that the expenditure was essentially a donation to the Congress Party, disguised as advertisement expenses. They argued that such payments to a political party cannot be treated as allowable expenditure. However, the court observed that the Revenue did not take this specific stand before the authorities or the Tribunal. The court held that merely because the advertisements were published in souvenirs released by a political party on the eve of elections, it does not transform the expenditure into a donation. The court emphasized that the advertisements were indeed released and published, and the timing or the publisher being a political party does not change the nature of the expenditure. 3. Effectiveness of Advertisements: The Revenue also argued that the advertisements in the souvenirs did not reach a cross-section of the community and thus failed as advertisements. The court, however, noted that the effectiveness of an advertisement is not the criterion for allowability of the expenditure. Advertisements are a recognized medium of publicity, and even if they do not bring immediate or direct benefits, they can still facilitate business indirectly. The court highlighted that the purpose of advertisements is to establish contact with potential customers, and even if a large section of the community did not see the advertisements, it does not negate the business purpose behind them. Conclusion: The court concluded that the expenditure incurred by the assessee was for commercial expediency and aimed at promoting its business. The advertisements, even if published in souvenirs by a political party, were intended to extend the business beyond Tamil Nadu. The court also referred to the Board Circular No. 200 dated June 28, 1976, which stated that no distinction should be made between expenditures on advertisements in souvenirs and other types of advertisements, and such expenditures should be allowed if the conditions under rule 6B of the I.T. Rules, 1962, are fulfilled. The court affirmed the Tribunal's decision to allow the entire expenditure of Rs. 50,000 as an allowable deduction under section 37(1) of the I.T. Act, 1961, and answered the question in the affirmative, against the Revenue. Costs: The assessee was entitled to the costs of the reference, with counsel's fee set at Rs. 500.
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