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TMI Blog1990 (6) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing officer in a chart reproduced below: Name of Company . Names of Directors . Campa . Harjit Kaur Mg. Director Beverages . Charanjit Singh ) . Co. (P)Ltd.) . Daljit Singh) Directors (Assessee) Bottling Ajit Singh ) . . Companies: Daljit Singh ) . . Mohan Bottling Charanjit Singh) Directors . Co.(P)Ltd.,Ludhiana Ajit Singh ) . . Pure Drinks (P) Daljit Singh ) . . Ltd.,Patiala Charanjit Singh ) Directors . . Ajit Singh ) . . Southern Bottlers Ajit Singh ) . . (P)Ltd.,Patiala. Charanjit Singh ) Directors . . Dajit Singh ) . . Pure Drinks(Cal) Daljit Singh ) . . (P) Ltd., Charanjit Singh ) Directors . . Harjit Kaur ) . . PunjabBevarages Daljit Singh ) . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) Selling expenses 83,061.45 (ix) Sampling 21,53,787.58 (x) ExportSalePromotion (xi) Sale Promotion 1,46,278.58 (xii) Beverages Samples . 62,69,892.33 Out of the aforesaid expenditure, expenditure to the extent of Rs. 30,77,916.33 paise was incurred directly by the assessee. The expenditure claimed to have been incurred by the bottlers on behalf of the assessee in pursuance of the aforesaid resolution and which the assessee claims to have reimbursed to the aforesaid 5 bottlers (sister concerns) is as below: Expenses incurred by Bottlers: (i) Television Screening 1,78,530.00 (ii) Radio (iii) Productions 11,652.76 (iv) Press 98,774.01 (v) Hoarding 5,84,642.51 (vi) Cost of Gifts under various scheme (vii) Cultural activities other shows (viii) Selling Expenses 59,768.93 (ix) Sampling 21,53,787.85 (x) ExportSalePromotion (xi) Sale Promotion 1,07,820.21 (xii) Beverages Samples . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neness of the claim. In the absence of such verification it is not proper to disallow such a substantial claim totally on the basis of general arguments or doubts or suspicion. We would, therefore, set aside the order on this point and restore the matter to the ITO with a direction that he should ascertain full facts and wherever necessary he may cross-verify these expenses with the other companies. It has been mentioned that forDelhiregion such expenditure was incurred by anotherDelhicompany and the ITO may look into treatment of this expenditure in the hands of that company. After looking into these facts, the ITO would come to a definite conclusion about the nature of the expenditure and the allowability or otherwise of the claim." 5. When the matter went back to the Assessing Officer he re-examined the matter. The details of sum of Rs. 21,53,788 vis-a-vis each bottler as given by the Assessing Officer are as under: "Name of the Bottler Sampling expenses incurred by . Bottlers but taken by Campa . Beverages (assessee) Pure Drinks (P) Ltd. 1,13,590 Pure Drinks(Cal.)Ltd. 14,49,692 Moh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case I am to conclude that: (i) the expenditure incurred by Campa Beverages(through the bottling companies) on sampling was excessive and unreasonable and in any case not proved in full, firstly on the point of its actual incurring and secondly, regarding the legitimate needs of the business of the assessee company. (ii)there was no contractual obligation on Campa Bevarages to take the entire burden of expenses on sampling when the benefit was mainly to the bottling company and in turn to the assessee company also. (iii)the assessee company had no control/check over the extent of the sampling done and what was the criteria laid down for the same is a secret or at least not subject to any verification." In respect of the aforesaid findings the Assessing Officer thought that a sum of Rs. 1,68,000 out of the aforesaid expenditure of Rs. 21,53,788 should be allowed. The Assessing Officer thought that 5 per cent of the total sales of the bottling companies should be the reasonable expenditure on sampling and he divided that 5 per cent portion amongst the bottlers and the present assessee in proportion to their respective sales. The actual calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,53,788. The learned CIT(A) noted that there was another bottler of the assessee, namely, Tasty Beverages Co., Kanpur, which was not a sister concern and that the assessee had taken over some expenditure of that bottler also through the debit notes and that that expenditure was admissible as an expenditure of the assessee. 9. The assessee is now in this second round of litigation before us and the only point raised in this appeal is about the disallowance of Rs. 21,53,788. During the tendency of the present appeal the assessee filed as additional evidence before the Tribunal the copies of the agreements entered into between the assessee and the 5 bottlers and the copies of letters sent by the assessee company on 9th June, 1979 to the bottlers in question and the letters received by the assessee from those bottlers conveying their acceptance. After hearing the parties the Tribunal vide order dt.3rd Dec., 1989admitted the aforesaid additional evidence and remitted the matter to the Assessing Officer, to examine such additional evidence and submit his report. The Assessing Officer, i.e., the Dy. CIT (Asst.), Special Range-V,New Delhihas sent a report dt. 1st June, 1989 doubting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness needs of the accompany and even if the scheme adopted by the assessee results in reduction of its tax liability, that is only ancillary and its object and purpose cannot be described as fraudulent or a colourable device to defraud the Revenue. 11. The learned counsel for the Department, on the other hand, contended that there was no valid agreement between the assessee company and the bottlers under which the assessee may be obliged to take over the expenditure on free sampling incurred by the bottlers and that the absence and non-production of receipt and despatch registers relating to the exchange of letters now filed by the assessee is material when such evidence has been produced at this belated stage. It was also contended that the bottlers were independent companies and separate legal entities and the act of taking over their expenditure by the assessee so as to reduce their losses and to reduce the income of the assessee is a clear device to transfer the loss of the bottlers to the assessee and has to be rejected on the principles of McDowell's case. It was further contended that the resolution dt.2nd June, 1979adopted by the Board of Directors of the assessee does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o which the Revenue brands the whole transaction as a device for tax avoidance, but which according to the assessee, was a genuine circumstance necessitating the agreements in question. That circumstance was that the five Franchise holders, about whom we are concerned in these appeals, were suffering losses and could not bear the burden of advertising; while, on the other hand, the assessee was making a profit and could easily bear that burden in the interest of advancement of its own business interests and by preventing the closure of the bottling plants. It is important to remember that the losses, which the ITO has referred, are the losses after the reimbursement. In other words, if there was no reimbursement the losses would be still higher. In our view, therefore, the need for compensating the five bottlers in question by reimbursement of their advertisement expenditure, including expenditure on free sampling, was a genuine need arising out of commercial expediency. The Department had in its paper book filed the standard form of agreement that, according to it, were executed between the assessee and the Franchise holders. Such specimen agreement is placed at item No. 21 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the course of arguments in the present appeal. Whether the resolution has been registered in accordance with s. 192 is a question of fact and cannot be raised at this belated stage. Further, the provisions of s. 192 apply to special resolutions of the accompany or of the Board of Directors and do not seem to apply to ordingar resolutions in respect of transactions with business constituents. This contention, therefore, cannot prevail. The authorities below had doubted the existence of agreement between the assessee and the bottlers by observing that there was no formal agreement and no other evidence except the copy of the resolution was filed. Admittedly there was no formal written, bilateral agreements between the parties, but according to the assessee, after the resolution was passed by the Board of Directors of the assessee it was communicated to the respective bottlers who expressed their consent and the parties by their conduct followed what was stipulated by the resolution, inasmuch as the bottlers incurred substantial expenditure on advertising including free sampling and sent debit notes to the assessee, who in its turn gave the bottlers the required adjustment. A copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, properly explained and the absence of fold marks, etc. is not very consequential. It is admitted that the administrative office of the assessee and the office of the five bottlers were located in the same premises atDelhiand, therefore, it is possible that the electors may have been delivered personally. It is important to remember that, as noted above, the expenditure on free sampling was not the only expenditure incurred by the bottlers and reimbursed to them. They had incurred expenditure re on various other items like T.V. and screening, newspaper advertisements and advertisement through hoarding, etc. The total expenditure reimbursed by the assessee was of the order of Rs. 31,91,976 out of which only Rs. 21,53,788 in respect of one type of expenditure, i.e., on free sampling only has been disallowed and the rest of the expenditure of about Rs. 10.4 lacs has been allowed. Had it been the case of the Revenue that there was no resolution of the nature aforesaid and there was no agreement for reimbursement, then the whole expenditure should have been disallowed. The allowance of about 1/3rd of the expenditure is a tacit acceptance of the assessee's contention that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management and there should be written evidence in that regard. The Assessing Officer has observed that it is not understood as to how the assessee company has taken the entire burden of expenses on sampling. There was nothing beyond understanding in this. The bottlers were manufacturing goods out of the concentrates produced by the assessee. If there was no sale of the cold drinks there would be no sale of the concentrate and if the sales of the cold drinks manufactured by the bottlers increase, there would be an automatic increase in the sale of the concentrate. Therefore, any advertisement of the cold drinks is automatically an advertisement of the goods manufactured by the assessee. In the matter of advertisement the manufacturer as well as the retailer can resort to advertisement. It is because of this that all manufacturers advertise their goods. Some other manufacturers like the assessee even advertise goods that are not made by them directly but are made from goods produced by them. For example, we have been seeing the Steel Authority of India propagating through T.V. the use of stainless steel utensils. Such utensils are maufactued by various persons out of stainless stee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This does not appear to be unreasonable and looking to the fact that the drinks in question needed to be popularised to meet the heavy competition from others, distribution to that extent by free sampling cannot be questioned as a non-genuine expenditure. It is significant to hold that the bottlers did exercise proper and adequate control over bottlers' expenditure on sampling. We, therefore, hold that the bottlers did incur this expenditure in terms of agreement with the assessee company under which the bottlers were to reimbursed. 15. It was contended by the learned counsel for the Revenue that similar expenditure of another sister concern M/s Pure Drinks (New Delhi)Ltd. was not taken over by the assessee company. Admittedly, the drinks became popular quickly in theDelhiterritory and this sister concern was making profits. There was, therefore, patently no need for the assessee to enter into a similar agreement with Pure Drinks (New Delhi) and its case stood on a totally different footing. 16. It was also contended that the sister concerns were separate legal entities and, therefore, there was no need to take over their expenditure by the assessee company. There is a fallacy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued only at the end of the year that is a circumstances which has no legal consequence. 18. As stated above, the authorities below have placed heavy reliance on Mc Dowell Co. Ltd. vs. CTO and have taken pains to show that the entire scheme of reimbursing advertising expenditure to the bottlers was a tax avoidance device. Even in that case the Hon'ble Supreme Court observed that tax planning within the framework of law is acceptable. What the Hon'ble Supreme Court condemned was colourable devices and not genuine devices. There is no taxpayer who does not adopt a device in reducing his tax liability. Many such devices are provided for in the IT Act itself. For example, a person having income from salary may contribute to the Provident Fund more than under the service rules he is required to contribute, he will get the tax benefit in accordance with law and no one can deny him that benefit simply by saying that he is contributing more only to save income tax. The government from time to time announces several schemes and reliefs and simply because a person utilises those schemes to save tax he cannot be condemned as a tax dodger. Therefore, every device is not bad. It is only a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have been no occasion for them to claim anything from the assessee. They have incurred certain expenditure under an agreement with the assessee, with the result that the bottlers are merely incurring expenditure on behalf of the assessee with a right to be paid for. It is, therefore, not the expenditure of the bottlers at all. Whether advertising should be done exclusively by the assessee or by the bottlers or by both is a matter of business discretion and the Revenue cannot tell the assessee that it should not have met the burden of advertising exclusively. As shown above, the assessee has properly exercised that discretion and it cannot be quarrelled with. The ratio of Odhams Press Ltd. vs. Cook (1941) 9 ITR 92 (Suppl.) (HL), relied by Shri Rajendra, has no application to the facts of the present case. That was a case in which the assessee claimed the business loss of a subsidiary company as its own loss or expenditure. In the case before us it is not so. The assessee is merely claiming deduction for an expenditure incurred by it through an agent, i.e., the bottlers. 20. For the above reasons we hold that the expenditure of Rs. 21,53,788 incurred by the assessee by way of re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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