1993 (10) TMI 124 - AT - Income Tax

Issues Involved:

1. Deletion of addition of Rs. 31,82,463 representing surplus from wholesalers.
2. Treatment of Rs. 6,24,000 spent on local sale promotion as business expenses.
3. Inclusion of undistributed and unutilized advertisement materials in closing stock.
4. Disallowance under Section 40A(5) regarding residential premises not used for office purposes.
5. Nature of expenditure of Rs. 3,14,594 on repairs of business premises.
6. Addition of Rs. 3,72,303 claimed to be spent on free distribution of cigarettes.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 31,82,463 Representing Surplus from Wholesalers:

The first grievance of the Revenue was the deletion of an addition of Rs. 31,82,463 by the CIT(A), which represented the surplus received from wholesalers and remained unspent with the assessee-company. The assessee, engaged in advertising and marketing, had agreements with wholesalers stipulating the contribution and expenditure on advertisements. The agreements mandated the company to spend 90% (later 80%) of contributions on advertising and retain the balance as service charges. The Assessing Officer treated the entire receipt as trading receipt, but the CIT(A) held that only the service charges constituted trading receipts, and the unspent contributions were advances. The Tribunal agreed with the CIT(A), emphasizing that the unspent amount was a liability and akin to money kept in trust, not trading receipts.

2. Treatment of Rs. 6,24,000 Spent on Local Sale Promotion as Business Expenses:

The second issue was whether Rs. 6,24,000 spent on local sale promotion activities was a business expense. The assessee incurred this expenditure on sponsoring various events to promote cigarette sales. The Assessing Officer disallowed the claim, arguing that these expenses were not for advertisement as per the agreement. However, the CIT(A) allowed the deduction, stating that the expenditure was for business promotion and advertising. The Tribunal upheld the CIT(A)'s decision, citing the business necessity and promotional nature of the expenses, and referenced a similar case where such expenses were allowed as deductions.

3. Inclusion of Undistributed and Unutilized Advertisement Materials in Closing Stock:

The third issue was the inclusion of undistributed and unutilized advertisement materials in the closing stock. The Assessing Officer made an estimated addition of Rs. 5 lakhs for the closing stock, arguing that the assessee had not shown any closing stock. The assessee contended that the advertisement materials had no saleable value and were not part of its stock. The CIT(A) agreed with the assessee, deleting the addition. The Tribunal supported this view, noting that the materials had no market value and could not be considered part of the stock.

4. Disallowance under Section 40A(5) Regarding Residential Premises Not Used for Office Purposes:

The fourth issue concerned the disallowance under Section 40A(5) related to residential premises not used for office purposes. The Assessing Officer disallowed 50% of the accommodation expenses, while the CIT(A) reduced the disallowance to 25%. The Tribunal upheld the CIT(A)'s decision, acknowledging that senior employees used the premises for office purposes, and the expenditure was justified.

5. Nature of Expenditure of Rs. 3,14,594 on Repairs of Business Premises:

The fifth issue was whether the expenditure of Rs. 3,14,594 on repairs of business premises was capital or revenue in nature. The Assessing Officer treated it as capital expenditure, while the CIT(A) considered it revenue expenditure. The Tribunal agreed with the CIT(A), citing various legal precedents and emphasizing that the repairs were necessary for business operations and did not create a new asset.

6. Addition of Rs. 3,72,303 Claimed to be Spent on Free Distribution of Cigarettes:

The final issue was the addition of Rs. 3,72,303 claimed to be spent on free distribution of cigarettes. The Assessing Officer added this amount to the income, doubting the genuineness of the expenditure. The CIT(A) deleted the addition, accepting the assessee's explanation and supporting evidence. The Tribunal upheld the CIT(A)'s decision, recognizing the practice of free sampling as a legitimate business expense.

Conclusion:

The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) on all points. The decisions were based on the contractual obligations, business practices, and accounting principles followed by the assessee. The Tribunal emphasized the importance of adhering to accepted accounting standards and the necessity of expenditures for business promotion and operations.

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