1986 (5) TMI 49 - AT - Income Tax

Summary

Issues:
1. Whether a part of the expenditure incurred by the assessee for sales promotion could be considered as advertisement expenditure and disallowed under s. 37(3A).

Analysis:
The main issue in this case was whether a portion of the expenditure incurred by the assessee for sales promotion could be categorized as advertisement expenditure and disallowed under section 37(3A) of the Income Tax Act. The assessee, a textile firm, had incurred expenses for advertisements, and the Income Tax Officer (ITO) disallowed a percentage of these expenses under the provision of s. 37(3A). The assessee contended that a specific amount of the total expenditure should not be considered as advertisement expenses, thus reducing the total expenditure below the disallowance limit. However, the Commissioner of Income Tax (Appeals) did not accept this argument, stating that the disputed amount was indeed advertisement expenditure.

For the assessment year 1979-80, the total expenditure was Rs. 55,796, out of which the ITO disallowed Rs. 8,370 under s. 37(3A). The assessee argued that certain expenses, such as painting of the name board and souvenirs, should not be considered as advertisement expenses. The tribunal acknowledged that the name board painting did not involve advertisement but concluded that the remaining expenses were indeed for informing customers about the available goods, thus qualifying as advertisement expenditure. Therefore, except for the name board painting amount, the rest of the expenses were considered as advertisement expenditure under s. 37(3A).

In the assessment year 1980-81, the total expenditure was Rs. 1,39,530, with Rs. 20,929 disallowed by the ITO under s. 37(3A. The tribunal excluded certain items from the purview of s. 37(3A), such as painting and packing materials, as they were not solely for advertisement purposes. The tribunal also disagreed with the ITO's disallowance of traveling expenses, telephone expenses, and sundry expenses, stating that these were legitimate business expenses and should not be disallowed. Consequently, the tribunal partly allowed both appeals, making adjustments to the disallowed amounts based on the nature of the expenses and their relevance to advertisement expenditure.