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2021 (4) TMI 501 - HC - Income TaxDisallowance of the amount of expenditure incurred for the purpose of establishing MRF Pace Foundation - Allowable business expenditure u/s 37(1) - Assessing Officer was of the prima facie view that the expenditure incurred would fall within the purview as charitable nature and asked to show cause as to why the same cannot be added to the total income of the current year - CIT-A allowed the assessee claim - contention of the assessee that they get huge publicity and increased sales was rejected by observing that the Pace Foundation of the assessee-company has been mainly engaged in imparting bowling and training and the expenses cannot be considered as expenses related to sponsorship of cricket wherein, the company will get publicity by way of display of hoardings and media advertisement - Tribunal was of the view that the assessee having not sponsored any sport activity for its sales promotion, but formed Pace Foundation for training bowlers and such activity cannot, by any stretch of imagination, be treated as business activity - HELD THAT - It is not for the Assessing Officer to decide what would be good for the assessee in promoting its business and therefore, decision cannot be arrived at by the Assessing Officer based on his own personal perceptions and it should be left to the decision of the assessee, who is the best person, who knows that what would be best for his business activity. Bearing the above legal principle in mind, if we test the correctness of the orders passed by the Assessing Officer, the CIT(A) and the Tribunal, we have no hesitation to hold that the order passed by the CIT(A) is a well reasoned order. We support such conclusion with the following reasons. Admittedly, MRF Pace Foundation is part of the assessee-organisation and the expenditure incurred for the Foundation has been claimed as a business expenditure under Section 37 of the Act. Therefore, it is clear that the Assessing Officer assumed certain matters, which were not on record and attempted to compare the expenditure incurred to that of giving donations. Firstly, the concept of charity or donation can never be implanted to the present facts, which were clearly explained by the assessee in their reply to the show cause notice issued by the Assessing Officer. Once we steer clear of this issue, by holding that it is never the case of the assessee that what was spent was in the nature of donation, the Assessing Officer cannot draw a parallel or assume certain facts, which are not on record. As already observed, the expenditure incurred by the assessee in the Pace Foundation cannot be regarded as a donation and it was never the case of the assessee, nor there was anything on record for the Assessing Officer to draw such a conclusion. Secondly, the assessee has been able to point out certain facts before the Assessing Officer as well as before the First Appellate Authority as to how the training of pace bowlers has helped them in a business activity. The contentions placed by the assessee have not been found to be false or baseless. In such circumstances, it is best for the Department to leave it to the assessee to take a decision as to what is best for them and for the health of the company. These aspects were rightly taken note of by the CIT(A) by observing that the assessee-company is able to get popularity because of its close association with the game of cricket and it is comparable to any other mode of advertisement establishing hoardings, publicity material and other conventional modes of advertisement. CIT(A) rightly took note of the decision in Delhi Cloth and General Mills Co. Ltd. 1978 (4) TMI 75 - DELHI HIGH COURT by observing that the power of the Revenue is confined only to examine the purpose of genuineness of the expenditure and not the expediency or the quantum. Nowhere there is any observation either made by the Assessing Officer or the Tribunal that the expenditure was not genuine. In fact, Mr.T.Ravikumar would fairly submit that all other expenditure, which have been claimed by the assessee towards sponsorship, advertisement, have been allowed in its entirety. The Tribunal fell in error in coming to a conclusion that donations were extended towards the Pace Foundation, when the fact remains that the assessee has established the foundation and it is part and parcel of the assessee themselves and not a separate entity to draw any such inference of donation. Thus we hold the Tribunal committed an error in reversing the order of the CIT(A). - Decided in favour of assessee.
Issues Involved:
1. Whether the expenditure incurred towards business promotion via MRF Pace Foundation is charitable in nature and hence not an allowable deduction. 2. Whether the expenditure towards business should only be in the form of advertisement by sponsorship of sport and not by any other mode. 3. Whether providing training through MRF Pace Foundation results in significant publicity to justify the expenditure under Section 37 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Nature of Expenditure: Charitable or Business Promotion? The core issue is whether the expenditure incurred by the assessee for establishing and running the MRF Pace Foundation can be considered a charitable activity or a business promotion expense. The Assessing Officer (AO) initially categorized the expenditure as charitable, suggesting it should be added to the total income. The assessee argued that the Foundation’s activities, which include training pace bowlers, significantly promote the MRF brand, thereby benefiting their business. The CIT(A) supported this view, noting that the expenditure enhances the company’s corporate image and brand. The Tribunal, however, disagreed, stating that forming a foundation for training bowlers cannot be considered a business activity. 2. Mode of Business Promotion: Advertisement vs. Other Modes The Tribunal held that business promotion expenditure should be in the form of advertisement through sponsorship of sports, not through other means like training. The assessee contended that the Foundation’s activities generated substantial publicity and promoted the MRF brand, which is a legitimate business promotion method. The CIT(A) agreed, emphasizing that the manner of promoting sales is a matter of business expediency, which should be decided by the business itself, not by the AO. The Tribunal’s view was that the expenses did not equate to traditional sponsorship activities that provide direct publicity through hoardings and media advertisements. 3. Publicity and Business Benefits from MRF Pace Foundation The AO and Tribunal questioned the direct business benefits and publicity derived from the MRF Pace Foundation. The assessee provided evidence that the Foundation’s activities, including training conducted by renowned coaches like Dennis Lillie, brought significant media attention and promoted the MRF brand. The CIT(A) found the assessee’s arguments credible and noted that the Foundation’s association with cricket provided publicity comparable to traditional advertising methods. The Tribunal, however, was skeptical about the extent of publicity and its impact on sales, especially in non-cricket playing countries. Conclusion: The High Court concluded that the CIT(A)’s decision was well-reasoned and supported by legal precedents. The Court emphasized that business decisions, including the manner of promoting sales, should be left to the assessee. The AO should not impose personal perceptions on what constitutes reasonable business expenditure. The Court noted that the expenditure on the MRF Pace Foundation was not charitable or a donation but a legitimate business promotion expense. The Tribunal erred in reversing the CIT(A)’s order, and the High Court restored the CIT(A)’s decision, allowing the expenditure as a business deduction under Section 37 of the Income Tax Act. The substantial questions of law were answered in favor of the assessee.
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