1991 (9) TMI 124 - AT - Income Tax

Issues Involved:
1. Sampling expenses under Section 37(3A) of the IT Act, 1961.
2. Disallowance of vehicle maintenance expenses and depreciation of car.
3. Disallowance of telephone expenses.
4. Charging of interest under Section 217 of the IT Act.
5. Disallowance of sales promotion expenses under Section 37(3A) of the IT Act.

Detailed Analysis:

1. Sampling Expenses under Section 37(3A) of the IT Act, 1961:

- Issue: The assessee challenged the action of the CIT (Appeals) in holding that sampling expenses of Rs. 95,623 were correctly considered for the purposes of section 37(3A) of the IT Act, 1961.
- Resolution: The assessee's counsel submitted that there was no merit in this ground, and it was not pressed during the hearing. Consequently, this ground was dismissed.

2. Disallowance of Vehicle Maintenance Expenses and Depreciation of Car:

- Issue: The assessee contested the disallowance of vehicle maintenance expenses and depreciation of the car to the extent of 1/4th, arguing that the disallowance was excessive.
- Resolution: The Tribunal found that with 5 partners, the disallowance of 1/4th of vehicle maintenance expenses and depreciation was justified and confirmed the disallowance.

3. Disallowance of Telephone Expenses:

- Issue: The assessee challenged the disallowance of Rs. 2,500 out of telephone expenses.
- Resolution: This ground was not pressed during the hearing and was thus dismissed.

4. Charging of Interest under Section 217 of the IT Act:

- Issue: The assessee contested the charging of interest under section 217 of the Act.
- Resolution: The counsel for the assessee indicated that this ground was consequential. The Tribunal directed the assessing officer to charge interest under section 217 based on the total income determined by the order.

5. Disallowance of Sales Promotion Expenses under Section 37(3A) of the IT Act:

- Issue: The main issue was whether the entire amount of Rs. 52,34,829 incurred on sales promotion expenses should be considered for disallowance under section 37(3A) of the IT Act, 1961.
- Facts: The assessee showed an expenditure of Rs. 8,27,465 on sales promotion in the trading account. The assessing officer found that the total payments for sales promotion expenses amounted to Rs. 52,34,829, with sales promotion receipts shown at Rs. 44,07,364. The net balance of Rs. 8,27,465 was shown on the debit side of the trading account. The assessing officer questioned why the entire amount of Rs. 52,34,829 should not be considered for disallowance under section 37(3A).
- Assessee's Argument: The assessee argued that the sale bills included a stamp indicating that the sale price was "inclusive of sales promotion expenses @ 3%". Payments were made to an advertising agency at a fixed percentage of sales, and sub-dealers agreed to contribute towards these expenses. The assessee maintained a separate Sales Promotion Expenses Account, showing that the actual expenditure borne was Rs. 8,27,465. The assessee contended that only the net amount should be considered for disallowance under section 37(3A).
- Department's Argument: The Department argued that there was no agreement with sub-dealers for charging sales promotion expenses separately. The entire amount received, including sales promotion expenses, represented the sale proceeds. The Department maintained that the entire amount of Rs. 52,34,829 should be considered as sales promotion expenditure.
- Tribunal's Analysis: The Tribunal noted that section 37(3A) was enacted to curb avoidable or ostentatious expenditure. The Tribunal distinguished the case from Keshavji Ravji & Co. v. CIT, where the Supreme Court allowed net interest to be disallowed under section 40(b). The Tribunal found that the assessee's agreement with Hindustan Marketing & Advertisement Co. (P.) Ltd. required payment of advertisement charges as a fixed percentage of sales. The Tribunal observed that the assessee failed to provide evidence of recovering sales promotion expenses from sub-dealers in earlier years. The Tribunal concluded that the entire amount of Rs. 52,34,829 was incurred by the assessee as its liability under the agreement and should be considered for disallowance under section 37(3A).
- Conclusion: The Tribunal upheld the order of the CIT (Appeals) and confirmed that the entire amount of Rs. 52,34,829 should be considered for disallowance under section 37(3A). The appeal was dismissed.

Final Judgment:
The appeal was dismissed, and the order of the CIT (Appeals) was upheld in its entirety.

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