2025 (4) TMI 1274 - HC - Income Tax

Determination of expenses as percentage of receipt based on Contract - Entitlement to only 5% of the receipts of the appellant and not 5% of the gross advertising bills raised - HELD THAT - Under clause-3 of the said agreement the assessee had to pay 5% of the total receipts of STARTIME from the advertising. As per the profit and loss account annexed by the assessee it is evident that the assessee has disclosed his income for the period ending 31st March 1993 at Rs. 63, 43, 480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only). AO therefore in accordance with the terms of the agreement found that the assessee had to pay PRIMETIME only 5% of the receipts i.e. receipt of Rs. 58, 77, 412/- (Rupees fifty-eight lac seventy-seven thousand four hundred twelve only). As per the terms and conditions of the agreement the assessee was required to pay 5% of the receipt of the assessee and not on 5% of the gross advertising bills. Though the order was passed against the revenue it did not challenge the order of appellate authority before the Tribunal. However the assessee filed an appeal before the Tribunal which has been dismissed. The findings of fact recorded by the Assessing Officer Commissioner of Income Tax (Appeals) and the tribunal with regard to the income from the advertisement i.e. sum of Rs. 63, 43, 480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only) which is evident from the profit and loss account of the assessee does not by no stretch of imagination can be said to be either perverse or based on no evidence. The aforesaid findings of fact do not call for any interference in this appeal. Decided against the assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether, on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal (Tribunal) was correct in concluding that the appellant (assessee) was entitled to claim only 5% of the receipts from advertising as infrastructure fee payable to Prime Time Media Services Pvt. Ltd., rather than 5% of the gross advertising bills raised. This issue involved interpretation of the agreement between the parties and the appropriate quantum of expenditure allowable under the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Interpretation of the Agreement and Quantum of Allowable Expenditure

Relevant legal framework and precedents: The dispute centered on the interpretation of clause 3 of the agreement dated 27th July 1992, which stipulated that the assessee would pay 5% of the total receipts from advertising to Prime Time Media Services Pvt. Ltd. The legal framework involved Section 260A of the Income Tax Act, 1961, governing appeals to the High Court, and principles relating to the allowance of business expenditure under the Act.

Precedents cited included the Supreme Court decision in Commissioner of Income Tax, Bombay vs. Walchand & Co. (Pvt) Ltd., which established that the reasonableness of expenditure should be judged from the businessman's perspective and not that of the revenue, and that the Tribunal may disallow expenditure if it finds the payment was not real or not wholly and exclusively for business purposes. Similarly, J.K. Woollen Manufacturers vs. Commissioner of Income Tax, U.P. reinforced that the Tribunal should not substitute its own view of what remuneration should be paid but assess the reality and business purpose of the expenditure.

Court's interpretation and reasoning: The Court examined the terms of the agreement, especially clause 3, which explicitly required payment of 5% of the total receipts from advertising. The assessee's profit and loss account disclosed total income from advertising of Rs. 63,43,480/-. The Assessing Officer (AO) restricted the infrastructure fee claim to 5% of the receipts actually received (Rs. 58,77,412/-), disallowing claims based on gross advertising bills or higher amounts.

The Commissioner of Income Tax (Appeals) increased the allowable payment to 15% of the receipts, quantifying it at Rs. 8,81,611/-, but this was not challenged by the revenue before the Tribunal. The Tribunal upheld the AO's interpretation, finding no entitlement to claim beyond 5% of actual receipts.

The Court noted that the assessee's contention that the fee should be calculated on gross advertising bills (amounting to Rs. 4,47,30,880/-) was inconsistent with the documented income and the terms of the agreement. It held that the findings of fact by the AO, Commissioner of Income Tax (Appeals), and Tribunal regarding the income from advertising and the corresponding infrastructure fee were supported by evidence and not perverse.

Key evidence and findings: The key evidence was the profit and loss account of the assessee showing total income from advertising, the agreement clause specifying 5% of total receipts, and the assessment orders restricting the infrastructure fee accordingly. The Tribunal's dismissal of the appeal was based on a reasonable interpretation of these facts and the agreement.

Application of law to facts: Applying the principles from the cited Supreme Court decisions, the Court emphasized that the expenditure must be wholly and exclusively for business purposes and reasonable from the businessman's viewpoint. The AO and appellate authorities' approach aligned with these principles, as they did not arbitrarily reduce the expenditure but adhered to the contractual terms and actual receipts.

Treatment of competing arguments: The assessee argued that the AO and Tribunal improperly restricted the expenditure and failed to consider the full gross advertising bills, as well as the real nature of the payment. They also contended that the business prerogative to determine expenditure was being challenged and that no industry benchmark was provided by the revenue. The Court rejected these contentions, noting the absence of evidence supporting the assessee's higher claim and affirming the correctness of the authorities' factual findings.

Conclusions: The Court concluded that the Tribunal was justified in limiting the infrastructure fee to 5% of the actual receipts from advertising, as per the agreement and supported by the assessee's own accounts. The findings were neither perverse nor unsupported by evidence, and the appeal under Section 260A did not warrant interference.

3. SIGNIFICANT HOLDINGS

The Court held:

"In applying the test of commercial expediency for determining whether the expenditure was wholly or exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue."

"It is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee."

"Clause 3 of the agreement clearly stipulates payment of 5% of the total receipts from advertising and not 5% of the gross advertising bills."

"The findings of fact recorded by the Assessing Officer, Commissioner of Income Tax (Appeals) and the Tribunal with regard to the income from the advertisement which is evident from the profit and loss account of the assessee, cannot be said to be either perverse or based on no evidence."

Core principles established include the primacy of the contractual terms in determining allowable expenditure, the standard of reasonableness judged from the businessman's perspective, and the limited scope of appellate interference under Section 260A of the Income Tax Act, 1961, which restricts the Court from overturning factual findings unless they are perverse.

Final determination was that the assessee was entitled only to claim 5% of the receipts from advertising as infrastructure fee payable under the agreement, not 5% of the gross advertising bills, and the appeal was dismissed accordingly.

← Previous Next →