9911796707
TMI Blog1993 (10) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... cigarettes spread all over the country, stipulating the amount of contribution, the expenditure to be incurred on advertisement in various forms and manners, the amount to be retained by the company to meet its expenditure etc. The agreement between GPI and the assessee- company permits the assessee-company to undertake the advertisement of brand of cigarette listed in schedule or in other brands introduced by GPI from time to time. It is also entitled to carry on advertisement activity on behalf of other whole-sale dealers who may enter into specific contract with it. The agreement specifically provides that the assessee-company shall spend 90% of the total contribution on advertising and promotional activities and other related services. Balance 10% of the contribution shall be earmarked to cover assessee-company's personal, administrative and other overhead costs including profit margin. The agreements were modified w.e.f.1st Jan., 1984and provided 80% of the total contributions to be spent on advertising, promotional and other related services and earmarked remaining 20% to cover assessee's personal and administrative cost and other overheads. The assessee received 10% or 20% a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, Deoband and its clauses. Further, he made reference to the following contributions received during the year Period Advertisement contribution Rate of service charges Service charges . Rs . Rs 1-10-1983to31-12-1983 39,09,223 10% 3,99,022 1-1-1984to30-9-1984 1,14,91,948 20.% 22,98,389 . 1,54,82,171 . 26,97,412 Add: Addl. service charges 7,950 . . Exhibition charges 4,50,000, . 4,57,950 . . . 31,55,362" It was also pointed out that the assessee was unable to specify as to how the expenses have been incurred in respect of individual wholesale dealer, i.e., whether the services rendered are commensurate with the contributions received and there is doubt that the assessee might not have rendered any services to most of the wholesale dealers. Thus, he expressed the following objections in the assessment order. (1) It is possible that the assessee might not have rendered any services to most of the wholesale dealers. (2) The assessee is doing advertising work for the promotion and sale of industry's product as a whole. This means that the assessee is not bound to act upon the agreements entered into with the individual wholesale dealer. (3) This agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from clients" was brought to tax. 4. Before the CIT(A), the assessee pointed out that the individual agreements with wholesale dealers stipulate as under: "(i) W.D.'s shall make advertising contribution to Hindustan Marketing & Advertising Co. Ltd. (HMA) as a percentage of Net Retail Printed Selling Price (excluding local taxes) of the cigarettes purchased. (ii) The contributions from the W.D.'s shall be pooled together and spent by HMA on advertising, both regionally as well as nationally through a variety of media as well as any other means to promote the sale of cigarettes. (iii) HMA shall be liable to spend a minimum percentage of the total advertising contribution accrued towards advertising, promotion and other related activities and the balance amount (i.e. 10%/20%) shall be the income of HMA to cover its personnel, administrative and other overhead costs including profit margin. The unspent advertising contribution, at the close of each year, shall be spent within 6 months thereafter (cls. 9 & 10) of agreement." The assessee also filed reply to most of the objections made by the Assessing Officer as under: "1. The observations that the assessee might not have render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted accounting principles and there was no justification at all for the Assessing Officer to have sought to change the accounting treatment given by the appellant company consistently since it commenced business in September, 1981. Your attention is also drawn to the Indian Accounting Standard No. 9 on "Revenue Recognition" brought out by the Institute of Chartered Accountants of India from which it would be clear that the contributions received from the wholesale dealers cannot constitute income in the hands of the appellant company." It was also pointed out that the amount received from the wholesale dealers had been accepted as advances and the unspent amount at the close of the year has been treated as advance from customers in both the earlier two years, as per terms of agreement (cls. 9 & 10). Therefore, it cannot constitute the income of the assessee. In view of the 'Pool Concept' the question of specifying expenses related to the individual wholesale dealers does not arise and nor does the question of measurement of individual services to contributions received. Therefore, the observation of the Assessing Officer is uncalled for. Keeping in view the explanation given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uashed by the Tribunal vide order dt.30th June, 1988in ITA Nos. 2189 & 2190/Del/87. Therefore, the method of accounting followed by the assessee has been accepted upto the highest stage. It was further submitted that the accounting treatment given to the contributions received from the wholesale dealers is in accordance with accepted accounting principles and there was no justification at all for the Assessing Officer to have sought to change the accounting treatment given by the assessee. In this connection, our attention was invited to the Indian Accounting Standards No. 9 an "Revenue Recognition" brought out by the Institute of Chartered Accountants of India. It was further pointed out that as per agreement between the assessee and GPI, the GPI has given permission to the assessee to undertake advertising and sale promotion of the brand of cigarettes as listed in the Schedule strictly in terms of agreement. According to this agreement, the assessee may appoint such other agencies or parties as it may consider necessary for carrying out the advertising programme. The proprietory rights of GPI in the said brand names or trade marks remains with the GPI. As per this agreement, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) have gone through the entire evidence available on record. We entirely agree with the finding given by the CIT(A) on this point. Besides what the CIT(A) has stated, we would like to mention here that the assessee has entered into agreements with each of the wholesaler a sample copy of which was filed as part of the paper book. As per cl. 9 of the agreement the assessee received an amount. Its service charges are limited to only 10% or 20% of the contributions as the case may be, and the balance is expressly earmarked for expenditure on advertisement and promotional activities in accordance with the agreement with the wholesale dealers. The statement showing contributions received and expenditure incurred filed before us, would go to show that right from the asst. yr. 1983-84 to asst. yr. 1989-90, the assessee has been carrying forward the unspent balance to the next assessment year. Invariably, we find that the assessee had been incurring expenditure in ensuing near six months from the close of the relevant assessment year, more than the amount brought forward from the previous assessment year. Therefore, it is not true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l one, because it was always open to the IT authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case." In view of this decision the unspent amount is a liability of the assessee and it is a money kept in trust which at source stands allocated to specific purpose, has nothing to do to meet the assessee's own expenditure. Therefore, the entire amount received from the wholesale dealers for the purpose of advertisement and promotional activities cannot be treated as a trading receipt. Only 10%/20% service charges represent assessee's own trading receipt. We, therefore, agree with the view taken by the CIT(A) on this point. We find force in the arguments of the learned counsel for the assessee. 8. The next grievance in revenue appeal is that the CIT(A) erred in holding that a sum of Rs. 6,24,000 spent out of local sale promotion account was a business expenses. The assessee had debited Rs. 19,60,922 which includes Rs. 6,24,000 expenses related to the business activities. The assessee has incurred expenditure on sponsoring the following tournaments and functions: . Rs AllIndiaRai Bhadur Gujjar Mal Modi Basket Ball Tournament 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion that the expenditure has been incurred for sponsoring various sports and various cultural activities only for the purpose of business and during the course of business. Since the assessee is an advertisement agent, it has undertaken sponsorship of these programmes for the purpose of advertisement, i.e., carrying on of business. Therefore, the addition was deleted. 10. The learned Departmental Representative supported the action of the Assessing Officer. As against this, the learned counsel for the assessee relied on the order of the CIT(A). 11. We have considered the rival submissions and have gone through the detailed reply of the assessee mentioned in letter dt.18th Jan., 1989. Keeping in view the business of the assessee as advertising and marketing of a particular product, we are of the opinion that the activities undertaken by the assessee were under an agreement for advertisement and marketing the products. The expenditure incurred on such nights and sports for the purpose of advertising the products is entirely for the business of advertisement and marketing. This sponsorship of programmes builds up the image of the pruducts. Therefore, we are of the opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held as stock of the wholesale dealers on whose behalf the advertisement expenses were spent. The material has no market value and, hence, no value of closing stock was taken. The Assessing Officer did not accpet the assessee's arguments and made an ad hoc addition of Rs. 5 lakhs. 13. Before the CIT(A), the assessee had made following submissions to explain position vide letter dt.18th Jan., 1989: "The accounting policy consistently followed by the appellant company is to charge the advertisement contribution pool account. All expenditure was incurred on production of advertisement material such as posters, dummy packs, danglors, stickers, etc. This is well accepted account principle since there is no saleable value of such printed material. Since printed advertisement material does not even have any scrap value as outdated or defective or surplus left overs invariably destroyed rather than be sold and scrapped and subject to misuse. It is normally accepted accounting practice to value closing stocks on lower of cost or net relisable value and since the net realisable value, as explained above, of the advertisement material is nil." Keeping in view the explanation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business carried on by the assessee and the fact that this expenditure had been incurred on the senior employees of the company who conducted business even at the residence, we entirely agree with the finding given by the CIT(A). We do not find any justification to interfere in his order. 19. The next grievance in the Revenue appeal is that the CIT(A) erred in deleting an addition of Rs. 2,83,135 in the repair account. The assessee-company incurred an expenditure of Rs. 3,14,594 on repairs of its business premises 50-51, Community Centre, New Friends Colony,New Delhi. The Assessing Officer observed that the assessee-company has moved into a new premises on1st May, 1985and has incurred the initial expenditure to this extent for furnishing, making alterations, etc. Therefore, he disallowed treating the expenditure as capital nature and has allowed depreciation @ 10% on this expenditure. The case of the assessee was that the assessee-company took the lease contractually from the owners of the property under an agreement dt.22nd March, 1984. The assessee-company took the possession of the premises in the beginning of March, 1984 and partly shifted to this premises in the first week of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court that it is settled that the question whether expenditure is capital or revenue, must be viewed from the practical point of view. The Supreme Court further pointed out that there is a deluge of cases and no principle can be laid down with substantial accuracy which will be applicable to all the cases. The answer to the question must depend on the facts and circumstances of each case and on the application of the principles of law as laid down by the Courts. The Supreme Court further pointed out in this case referring to certain cases that it is very difficult to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases. Only broad tests could be laid down. It is not necessary to reiterate all these principle but one of the tests was that the aim and object of incurring the expenditure must be guiding (sic) in obtaining the asset in a commercial sense. The aim and object of incurring such expenditure is understandably to make the building which was carrying on business of advertisement and marketing in which entire decoration would include all this which is pointed out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 of the IT Act, 1961." Keeping in view the nature of business carried and repair undertaken by the assessee and various decisions cited above, we are of the opinion that the expediture incurred is revenue in nature and the CIT(A) has rightly deleted this addition. 23. The last grievance in Revenue appeal is that the CIT(A) erred in deleting a sum of Rs. 3,72,303 claimed to be amount spent on free distribution of cigarettes. 24. The assessee-company has a running account with M/s Amulya Aayat Niryat (P) Ltd.,Calcutta. The assessee used to get certain local promotions including sampling done through Amulaya Aayat Niryat atCalcuttaand reimburse the expenses thereof to the later. There was a credit balance of Rs. 7,76,607 in the beginning of the year. During the year several transactions took place which left a credit balance of Rs. 3,72,303 at the close of the year30th Sept., 1984, which has been carried forward to the next year. The Assessing Officer on the basis of seized documents showing a credit note has made enquiries about the credit note: "By amount received on your behalf from M/s HMV now credited to you. Rs. 3,72,330." However, referring to the accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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