1993 (7) TMI 120 - AT - Income Tax

Revision Of Order Orders Prejudicial To Revenue Sales Promotion Expenses Business Expenditure Powers Of Tribunal

Summary

Issues Involved:
1. Incorrect allowance of Rs. 7,16,300 as provision for stock.
2. Incorrect allowance of Rs. 5,98,939 under the head 'Miscellaneous expenses'.
3. Non-inclusion of Rs. 23,11,661 being bonus paid to the assessee's dealers for the purpose of disallowance under section 37(3A) of the Act.
4. Wrong allowance of Rs. 1,55,80,867 being royalty paid by the assessee company.

Issue-wise Detailed Analysis:

1. Incorrect Allowance of Rs. 7,16,300 as Provision for Stock:
The assessee did not contest this issue, and the appeal is limited to the other two issues. Therefore, the order of the Commissioner of Income-tax (CIT) on this point is accepted as correct.

2. Incorrect Allowance of Rs. 5,98,939 under the Head 'Miscellaneous Expenses':
Similar to the first issue, the assessee did not dispute this matter. Thus, the CIT's order on this point is also accepted as correct.

3. Non-inclusion of Rs. 23,11,661 Being Bonus Paid to the Assessee's Dealers for the Purpose of Disallowance under Section 37(3A) of the Act:
The CIT considered the bonus paid to dealers as "sales promotion expenses" and thus subject to disallowance under section 37(3A). The Tribunal, however, found this conclusion incorrect. The bonus schemes were based on the performance and actual sales made by the dealers, forming part of the selling expenses. The Tribunal referenced the Calcutta High Court's decision in CIT v. Hindusthan Motors Ltd., which held that commission and brokerage payments directly linked to actual sales are not to be disallowed under section 37(3A). Therefore, the Tribunal concluded that the bonus payments were part of the selling expenses and not sales promotion expenses. The CIT's order on this issue was thus cancelled.

4. Wrong Allowance of Rs. 1,55,80,867 Being Royalty Paid by the Assessee Company:
The CIT treated the royalty payments as capital expenditure, but the Tribunal disagreed. The royalty payments were made to EMI Records Ltd., various artists, film producers, and authors of songs, and were linked to the sales of gramophone records and music cassettes. The agreements were typically for three to five years, with no outright purchase of rights, and the payments were recurring and based on sales. The Tribunal referenced several Supreme Court decisions, including Travancore Sugars & Chemicals Ltd. and Empire Jute Co. Ltd., concluding that the royalty payments were revenue expenditures. The Tribunal emphasized that the payments were for obtaining raw material (music) necessary for the assessee's business and were not for acquiring any capital asset. The Tribunal also noted that the CIT had rendered a clear finding on the merits of the issue, allowing the Tribunal to review and overturn the CIT's decision. Consequently, the Tribunal cancelled the CIT's order on this point and restored the Income-tax Officer's original assessment.

Conclusion:
The Tribunal allowed the appeal, cancelling the CIT's order regarding the bonus payments and royalty expenditures, and upheld the original assessment by the Income-tax Officer. The issues concerning the provision for stock and miscellaneous expenses were not contested by the assessee and were accepted as correct.