2009 (2) TMI 420 - HC - Income Tax

Business Expenditure- The appellant-company is a manufacturer of Indian made foreign liquor. According to them, they are depending to a large extent on orders from the military canteen for the sale of its products. The company a liquor manufacturer, is banned from direct media and television advertising of its products. The military authorities on the other hand are debarred from directly accepting any free samples from a liquor manufacturer. As per the Canteen Stores Department Rules, the liquor required for any function are to be procured from the canteens only against actual payments. The company from the point of commercial expediency offers samples of its products at various military functions so that the personnel develop a taste for it and the company secures bigger orders from the Canteen Stores Department. The assessing officer disallow the sale promotion expenses on account of liquor supplied at the time of the Canteen stores department parties on the ground that it was clear entertainment of the customers. This was upheld by Commissioner (Appeals) and Tribunal. Held that- the amount spent by the unit towards purchase of that liquor was reimbursed by the assessee not to any individual but to the Army Unit itself which went into the coffer of the Government. There was no bar in taking such reimbursement as evidenced by receipt. Thus the amount spent by way of commercial expediency for promoting the assessee s product. It was deductible. Thus allow the appeal.

Summary

Issues Involved:
1. Whether the Tribunal was justified in law in holding that reimbursement made to a unit of Government of India by cheque is against public policy.
2. Whether the Tribunal was right in law in holding that the expenditure incurred by the appellant for sales promotion is not allowable under section 37 on the ground that it is allegedly in the nature of unlawful consideration granted to military personnel.

Detailed Analysis:

Issue 1: Reimbursement Against Public Policy

The appellant-company, a manufacturer of Indian made foreign liquor, relied heavily on orders from military canteens, constituting 45% of its total turnover for the accounting year 1990-91. Due to restrictions on direct advertising, the company offered samples of its products at military functions to promote sales. The military establishments purchased the liquor from Canteen Stores Departments (CSD) and sought reimbursement from the company. The Tribunal held that such reimbursements were against public policy.

However, the appellant argued that reimbursing the regiment/unit for the liquor consumed was not against public policy as the trade in liquor, though res extra commercium, was permitted by the State. The reimbursement was made to the regiment/unit and not to individual personnel, ensuring compliance with the Bombay Prohibition Act, 1949. The court noted that public policy would only be a concern if the contract was immoral or against State interest, which was not the case here. The reimbursement was for promoting sales, a legitimate business activity, and thus not against public policy.

Issue 2: Expenditure for Sales Promotion

The Assessing Officer disallowed the sales promotion expenses of Rs. 3,80,036, considering it as entertainment expenditure. The Commissioner of Income-tax (Appeals) upheld this, stating that the expenses, though for sales promotion, were through wrongful measures and against public policy. The Tribunal confirmed this view.

The appellant contended that the expenditure was a common commercial practice for promoting sales and not entertainment. The court referred to several judgments, including *Maddi Venkataraman and Co. P. Ltd. v. CIT* and *Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT*, to establish that expenditure incurred for business promotion, even if voluntary, is allowable if it is for commercial expediency and not for unlawful activities.

The court noted that the army unit purchased liquor through CSD and the reimbursement was made to the unit, not individuals, and thus was not a bribe or illegal gratification. The expenditure was for promoting the company's products, a legitimate business activity, and not against public policy. Therefore, the expenditure was allowable under section 37.

Conclusion:

The court concluded that the reimbursement made to the regiment/unit for liquor consumed was not against public policy and that the expenditure incurred for sales promotion was allowable under section 37. Consequently, both questions were answered in the negative against the Revenue and in favor of the assessee. The appeal was disposed of accordingly.