1989 (8) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Whether the expenditure incurred by the assessee is hit by the provisions of rule 6B of the Income-tax Rules.
2. Whether the expenditure on lucky draw prizes can be considered as advertisement expenditure.
3. Applicability of section 37(3) and section 37(3A) of the Income-tax Act to the expenditure incurred.
4. Whether the expenditure can be treated as trade discount, sales promotion, or publicity expenses.

Detailed Analysis:

1. Applicability of Rule 6B of the Income-tax Rules:
The primary issue is whether the expenditure incurred by the assessee on lucky draw prizes is hit by the provisions of rule 6B of the Income-tax Rules. The Income-tax Officer (ITO) disallowed the expenditure under rule 6B, considering it as advertisement expenditure. The Commissioner of Income-tax (Appeals) [CIT(A)] held that the expenditure was in the nature of a trade discount and therefore not advertisement expenditure. The Tribunal had to determine if rule 6B was applicable.

2. Advertisement Expenditure:
The ITO treated the expenditure on lucky draw prizes as advertisement expenditure and disallowed it under rule 6B. The CIT(A), however, held that the expenditure was more of a trade discount and not advertisement. The CIT(A) relied on a previous decision of the Tribunal in the case of Coromandel Wine Corpn., where it was held that gifts given to customers as part of a sales scheme were trade discounts. The Tribunal had to decide if the expenditure was indeed advertisement expenditure or not.

3. Applicability of Section 37(3) and Section 37(3A):
The CIT(A) also held that even if the expenditure was considered advertisement expenditure, it would fall under section 37(3A) of the Income-tax Act, which allows disallowance only if the expenditure exceeds Rs. 1 lakh. Since the expenditure in this case was below Rs. 1 lakh, no disallowance could be made. The department argued that section 37(3) and rule 6B should still be considered, and the expenditure should be disallowed under section 37(3).

4. Trade Discount, Sales Promotion, or Publicity Expenses:
The assessee argued that the expenditure was not advertisement but rather a trade discount, sales promotion, or publicity expenses. The CIT(A) accepted this argument, stating that the expenditure was allowable as trade discount or sales promotion/publicity expenses. The Tribunal had to evaluate if the expenditure could be classified under these categories instead of advertisement.

Tribunal's Findings:

On Rule 6B and Advertisement Expenditure:
The Tribunal, after considering the submissions, held that the expenditure was indeed advertisement expenditure. The Tribunal referred to the dictionary meaning of 'advertisement' and concluded that the expenditure on lucky draw prizes was a form of advertisement aimed at increasing sales. The Tribunal rejected the argument that the expenditure was a trade discount or sales promotion/publicity expenses. The Tribunal noted that the scheme involved giving presents to customers based on a lucky draw, which is a form of advertisement.

On Section 37(3) and Section 37(3A):
The Tribunal agreed with the department that section 37(3) and rule 6B should be considered before applying section 37(3A). The Tribunal clarified that section 37(3A) applies only after disallowing expenditure under section 37(3) and other provisions of the Act. Therefore, the CIT(A)'s finding that section 37(3A) alone applies was incorrect. The Tribunal held that the expenditure was disallowable under section 37(3) and rule 6B.

On Trade Discount, Sales Promotion, or Publicity Expenses:
The Tribunal distinguished the present case from the Coromandel Wine Corpn. case, noting that in the latter, every customer was entitled to a gift, making it a trade discount. In the present case, the lucky draw involved an element of chance, and not all customers were guaranteed a gift. Therefore, the expenditure could not be considered a trade discount. The Tribunal concluded that the expenditure was for advertisement and not for sales promotion or publicity.

Separate Judgment by Judicial Member:
The Judicial Member disagreed with the finding that the expenditure was advertisement expenditure. He argued that the expenditure was more akin to sales promotion or trade discount. He cited previous decisions of the Tribunal in similar cases, where such expenditures were considered trade discounts or sales promotion expenses. He also referred to High Court decisions supporting the view that the expenditure was not advertisement. The Judicial Member opined that the expenditure should be regarded as sales promotion, publicity expenses, or trade discount, and not advertisement.

Third Member's Decision:
The Third Member, agreeing with the Judicial Member, held that the expenditure was not advertisement expenditure. He emphasized that the expenditure was part of a sales promotion scheme funded by the sale of free liquor cases received from Shaw Wallace Co. The Third Member concluded that the expenditure was more in the nature of sales promotion or trade discount and not advertisement. The matter was resolved in favor of the assessee, and the expenditure was allowed as a deduction.

Conclusion:
The Tribunal, by majority, held that the expenditure incurred by the assessee on lucky draw prizes was not advertisement expenditure and therefore not disallowable under rule 6B or section 37(3). The expenditure was considered as sales promotion or trade discount, and the assessee's appeal was allowed.