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TMI Blog1989 (8) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... dio etc. In purchasing these presents, the assessee had incurred an expenditure of Rs. 40,382. Out of this, a part of expenditure i.e. Rs. 8,104 was in respect of a party given at the end of the prize scheme. The balance of the expenditure represented the cost of the goods purchased. 3. Before the Income-tax Officer, the assessee had claimed that these expenditure are allowable. The Income-tax Officer, however, held that the expenditure incurred in purchase of the gifts and presents for the lucky draw would be hit by the provisions of rule 6B. He considered the cost of each item and after allowing Rs. 50 against the cost of such item, the balance amount of expenditure was disallowed. Such disallowance amounted to Rs. 34,949. 4. Against this finding, the assessee appealed. The Commissioner (Appeals) relying on an order of the Hyderabad Bench of the Tribunal held that the cost of the presents amounted to a trade discount and therefore it cannot be considered as advertisement expenditure. Apart from that, he also held that these expenditure which should be considered as an advertisement expenditure comes under s. 37(3A). Under this section, a disallowance of expenditure can be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The coupon enables the customer to participate in a lucky draw. The winning of the present is a matter of chance. Thus, the customer getting a present is partly a contractual arrangement and partly a matter of chance. That being so, there was no present at all involved which will come under rule 6B. 7. With regard to the decision of the Madras Bench of the Tribunal in the case of A. Habeebur Rahman & Sons relied on by the department, he submitted that the disallowance made by the Income-tax Officer was not under s. 37(3A) but only under rule 6B. Therefore, there was no need to consider the provisions of section 37(3A) as it stood for the asst. year 1984-85. Besides, he submitted the provision considered by the Madras Bench was entirely different from the provisions now applicable. the Madras Bench was considering section 37(3A) as it stood before its omission by the Finance Act, 1980. We are concerned with section 37(3A) introduced by the Finance Act, 1983. These two provisions are entirely different and has nothing to do with each other. Further, he pointed out the provision considered by the Madras Bench had contained the expression " without prejudice to the provisions of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws: "Notwithstanding anything contained in sub-section (1) where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall no be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession". Section 37(3B) gives the list of expenditure which are to be considered under s. 37(3A). They are expenditure on advertisement, publicity and sale promotion or running and maintenance of aircraft and motor cars. There is an Explanation for both the sub-sections (3A) and (3B). Explanation (a) reads as follows: (a) The expenditure specified in clause (i) to clause (iii) of sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act." It will be seen from this that the expression makes clear that the provisions of sub-sections (3A) and (3B) would be applied only after ascertaining what is the expenditure which are to be disallowed under any other pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cles intended for presentation. Now in presentation articles, there need not be any imparting of knowledge. If such a condition has to be fulfilled before an expenditure can be considered as an expenditure on advertisement, the provisions of rule 6B would not be applicable at all. It may be made nugatory. We are not prepared to give such an interpretation which would restrict the meaning of the expression to such expenditure which would only impart knowledge to the potential customers. We are satisfied that the expenditure is for advertisement. 14. The question next to be considered is whether the provisions of rule 6B would be applicable. Now Sreerama Rao's submission is that there was no presentation at all. The potential customer is given a coupon which enables him to take part in the lucky draw. According to him, winning of the presents is partly contractual and partly chance. Now a customer is entitled to a coupon if he purchases a minimum quantity of the goods. This coupon enables him to be to take part in the lucky draw. The assessee had already decided on giving presents to few of the customers. Now the scheme of lucky draw is only to determine which of these customers wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two items of expenditure: (i) Cost of prizes etc. Rs. 7,490 (ii) Lucky draw expenses Rs. 40,382 The Income-tax Officer stated that the above two items are to be processed by applying the provisions of sub-sections (2A), (3), (3A) of section 37 of the I.T. Act. the Income-tax Officer called upon the assessee firm to furnish details of prize account and the lucky draw expenses to verify if the expenditure is within the limit laid down under s. 37(3)/(3A) of the I.T. Act and rule 6B of the I.T. Rules. The assessee stated to have furnished the details. The Income-tax Officer called upon as to why the presentation articles should not be limited to Rs. 50 in each case by applying the provisions of rule 6B. In this connection, the assessee was stated to have written two letters dated 19-3-1985. In those letters it was purported to have been stated that the lucky draw was conducted with a view to boost up the sales, thereby realising more profit and therefore the expenditure should not be treated as advertisement by applying rule 6B of the I.T. Rules. The Income-tax Officer stated that such of the expenditure which does not directly fall under s. 37(1) has to be processed by applying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal in K. Narayana Chetty & Co. v. ITO [IT Appeal Nos. 1027 and 1029 (Hyd.) of 1985 dated 29-4-1983]. The learned CIT(A) held that there was a more direct way of allowing appellant's claim. Sub-s. (3A). of s. 37 was introduced by the Finance Act, 1983, with effect from 1-4-1984. Under the said provision only 20% of the aggregate expenditure on advertisement, publicity and sales promotion can be disallowed provided the expenditure exceeds Rs. 1 lakh. While agreeing that the expenditure can be called advertisement expenditure the learned CIT(A) held that they can also be treated as publicity and sales promotion expenditure. He found that the aggregate expenditure did not exceed Rs. 1 lakh and there was no need to exercise the axe in restricting the claim if presentation articles of less than Rs. 50 are allowable under rule 6B. Presentation articles of over Rs. 50 are allowable, according to the CIT(A), both as trade discount as well as sales promotion or publicity expenses. In that view of the matter he allowed Rs. 34,949. Against the said impugned order dated 31-7-1985 the present second appeal was preferred by the revenue and thus the matter stands for our consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se amount of Rs. 40,000 also disappeared. In the provision of the first spell, perhaps the base amount and the aggregate amount should comprise of all the three categories of expenditure - advertisement, publicity and sales promotion - whereas the aggregate amount in the provision of the second spell may consist of one or more items of sub-s. (3B). Sub-s. (3B) listed out items of expenditure contemplated in sub-s. (3A) as follows: 1. advertisement, publicity and sales promotion; or 2. running and maintenance of aircraft or motor cars; or 3. payments made to hotels. 7. According to the second spell provision of 20% disallowance was contemplated only if the aggregate expenditure falling under one or more items specified under sub-s. (3B) exceeds one hundred thousand rupees. The graded disallowance prevailing in the provisions of the first spell was substituted by a flat rate disallowance of 20% of expenditure exceeding Rs. 1 lakh. Previously the allowance depended upon the turnover whereas in the later provision it was done away with. For the application of the provisions in the second spell it is enough if expenditure of one or other type mentioned in sub-s. (3B) is/are incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in sub-s. (3A). Therefore it can be seen that the Madras Bench in the above case said only to have examined the ambit of the sub-s. (3) vis-a-vis sub-s. (3A) and does not even touch upon the aspect of what is advertisement and what is publicity and sales promotion expenses. In my opinion, the said decision has no relevance at all for the purpose of this appeal. 11. Now let us see what is the true meaning of the word 'advertisement'. We had the occasion to consider the dictionary meaning as well as its meaning in ordinary parlance as a businessman understands it in this Bench's order in K. Narayana Chetty & Co.'s case. While giving the dictionary meaning as we find in Concise Oxford Dictionary advertisement is 'public announcement (esp. in newspapers, or posters, by television etc.); advertising,..' 'Advertise' has been similarly defined to mean 'generally or publicly known; (esp.) describe (goods), publicity with a view to increasing sales; notify; . . . ' The learned Members held in the said order that though dictionaries need not always be sole or reliable guide on such matters, they find the meaning assigned to the word 'advertisement' by the dictionary is the one assigned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n abatement for bulk orders. Any other view would ignore the realities of commercial transactions and lay undue emphasis on mere nomenclature.... We are therefore of the view that the expenditure on suit cases and brief cases shared by the assessee under a scheme to be given to only those who have taken the prescribed quantities could not be treated as advertisement expenses." They also postulated that the expenditure can be construed as abatement of commission earned by the assessee and not an expenditure much less expenditure under s. 37(3). 12. We have followed this decision in Sundeep Wines' case representing A-Bench order of this Tribunal to which I am a party. In that case an amount of Rs. 44,330 was claimed as an expenditure representing 'presentations and compliments' given to customers. The Income-tax Officer allowed the value of articles below Rs. 50 and disallowed the rest of Rs. 32,465 saying that the expenditure represented articles of value of more than Rs. 50. There also the assessee claimed that they were nothing more than the discounts in kind inasmuch as the assessee had a sales promotion scheme under which the assessee gave away watches and time pieces dependin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the two earlier orders of this Tribunal mentioned above and hold that the expenditure should be regarded not an expenditure on advertisement coming under s. 37(3) or rule 6B of the I.T.Rules but it should be regarded either as publicity expenses or as sales promotion expenses or a trade discount given to selected customers. It may also be viewed as an abatement of commission earned by the assessee itself. 13. Further there are High Court decisions also which deal with the concept of advertisement. It is unfortunate that neither side brought to our notice any High Court decision dealing with the true meaning of the word advertisement. But in order to support my stand I have picked up some decisions on this topic. 14. The first decision to which I may refer is Amarjothi Pictures v. CIT [1968] 69 ITR 755 (Mad.). In that case on the occasion of silver jubilee run of picture 'Kalyana Parisu' the assessee who was engaged in the distribution and exhibition of the said film celebrated the silver jubilee of the said picture. On the occasion of the celebration there was presentation of shields to the theatres, artistes and others. The Madras High Court held that evidently the object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers, but only to its members, the amounts were not spent by way of advertisement and hence the provisions of s. 37(3) and r. 6B of the I.T. Rules, 1962, were not attracted." Therefore it can be seen that in the Gujarat case the articles were distributed among all the members of the society as well as among the co-operative societies who are members of the assessee society. Even then it was considered to be an expenditure incurred for generating goodwill and inducing the members to continue to maintain good relations with the assessee-society and because the presents were not distributed to all its customers, members as well as non-members, but only to its members the amounts were not spent by way of advertisement and on that ground the provisions of s.37(3) and rule 6B of the I.T. Rules were held not attracted. In this case also let alone all the customers even all the persons who had made bulk purchases of more than six cases were not given prizes. Only such of the few among them who got first, second, third and consolation prizes only were given prizes. Therefore the intendment of the lucky draw scheme was only for generating good will and to induce the customers of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and rule 6B of the Income-tax Rules, the I.T.O. required the assessee to furnish the details, in response to which the assessee submitted that the lucky draw was conducted with a view to boost the sales, thereby realising more profit. It was further pointed cut that the assessee was acting as the agent of Shaw Wallace Company, and Shaw Wallace Liquors announced a scheme under which on the purchase of every six cases of Haywards Fine Brandy, Haywards Fine Whisky, Old Tavern Whisky and Haywards Picadilly Gin put together in one lot or separately within the scheme period, that is the month of September, 1983, one Lucky Draw Coupon would be issued and in the draw, the first prize would be 165 Litres Godrej Refrigerator, the second prize would be 6 1/2' Steel Almirah and the third prize would be Phillips Clock-cum-Radio and thereafter consolation prizes of silver tumbler. There were 44 consolation prizes, three third prizes and two second prizes. It was to purchase these items of presentation that a total sum of Rs. 40,382 was incurred. The ITO considered that by this expenditure, the assessee had been advertising its products and, therefore, the stipulations provided in rule 6B applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als) was not right in saying that section 37(3A) applied to the facts of this case and if that section applied, rule 6B would not apply. Then addressing himself to the question as to whether the expenditure incurred could be called 'advertisement' expenditure within the meaning of rule 6B, he held in categorical terms that expenditure was on ',advertisement'. He rejected the contention advanced on behalf of the assessee that the advertisement of goods referred to in rule 6B must be in respect of goods dealt with by the assessee. By referring to the meaning of the word 'advertisement' according to the dictionaries, he held that the assessee was only advertising its goods and, therefore, rule 6B was clearly attracted. According to him even sales promotion was a mode of advertisement and in any case, does not cease to be advertisement. The amount incurred on purchase of presentation articles and the presentation of articles, subject to satisfaction of certain conditions are the ultimate aims of promoting sales, did amount to advertisement. An argument was advanced that the presentation of articles must be such as to impart a certain amount of knowledge about the virtues of the goods d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-section (3) which meant that advertisement expenditure should be excluded while computing the limit of Rs. 40,000 mentioned in that section. According to him, under section (3A), the aggregate of expenditure incurred on advertisement, publicity and sales promotion should be considered and since sub-section (3A) contained a non obstante clause, it excluded the operation of sub-section (1) of sec. 37 and also sub-section (3) and since sub-section (3) dealt with expenditure on advertisement, the expenditure incurred on advertisement must be excluded from considering the limit of Rs. 40,000 referred in sub-section (3A).This is somehow not the point on which the learned Accountant Member had expressed any opinion. Considering whether the expenditure incurred by the assessee firm amounted to advertisement or it represented expenditure on sales promotion or publicity or offering of trade discount, he held that the expression "advertisement" as seen from the meaning given to it in the dictionaries meant publicity to the world at large with a view to attract potential customers and that it was addressed mainly to future customers, although it had for itself the aim to retain the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... croi Taluka Co-operative Purchase & Sales Union Ltd. for the row that the amount incurred in question could be said to be an amount incurred in generating goodwill and in maintaining the image which did not amount to advertisement. Thus the difference arose between the two Members and the point of difference was formulated in the following manner which I am now called upon to resolve by expressing my opinion: "1. On the facts and circumstances of the case, can it be said that the expenditure amounting to Rs. 34,949 is advertisement expenditure within the meaning of section 37(3A) as it stood for the assessment year 1984-85? 2 On the facts and circumstances of the case, can it be said that the said expenditure can be treated either as (i) publicity or (ii) sales promotion expenses or (iii) trade discount granted to some of the customers or (iv) abatement of commission earned by the assessee itself from its principal M/s Shaw Wallace Co., Vijayawada?" 5. I have heard Shri Rama Rao for the assessee and also the learned departmental representative Shri Radha Krishnamurthy for considerable length. Shri Rama Rao's argument was naturally relying upon every word of the order of the Judi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 37(3A) was without prejudice to the provisions contained in section 37(3) and, therefore, the expenditure on account of advertisement, publicity and sales-promotion should in the first instance be subject to the limits specified in section 37(3) and the aggregate of such expenditure should further be subject to the limits specified in sec. 37(3A). Relying upon this decision, he submitted that the distinction between the expenditure incurred on advertisement, publicity and sales promotion was distinctly brought out and when a definite distinction was drawn that distinction must be borne in mind while deciding whether the expenditure incurred by the assessee in this case was on advertisement or on sales promotion and publicity or allowing the commission to the customers or by way of trade discount, He pointed out that the customer of the assessee may be a teetotaller and yet lured by the offer of presentation of article might buy the products offer for sale by the assessee which did not amount to advertisement at all except the sales promotion. He submitted that there was a definite line of distinction that could be drawn between the expenditure incurred on advertisement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the contrary, the ratio laid down by this decision would go to support the department's view 7. After careful consideration of the arguments addressed to me and after careful perusal of the orders passed by my learned Brothers, the orders passed by the earlier Benches of the Tribunal, and that of the High Court, I thought that it will be correct and appropriate and also justified to follow the view expressed by the Tribunal in two earlier cases, as I don't find much difference in facts or the objects of the schemes. I do not propose to discuss in my opinion anything about the decision in the Andhra Pradesh High Court as in my view it is not necessary for me to go to that extent as the matter was already concluded by decisions of the Tribunal. Moreover the point that arose in the case before me did not arise for consideration before the High Court. The High Court explained in that case the meaning of the word 'advertisement' or whether the expression "advertisement" is distinguishable from publicity and sales promotion the words used in section 37(3B). However, I find great force in the argument addressed by the learned counsel for the assessee Sh. Rama Rao that when legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(3) is to put a curb upon high and aggressive advertisement just to promote sales and that too at the cost of the exchequer because whenever the amount spent upon advertisement is allowed as an expenditure, the revenue due to the Government to that extent is lost and to that extent it amounts to a subsidy provided by the exchequer on advertisement which is not the purpose of the exchequer. If this is the object of enacting sec. 37(3) then the object of sec. 37(3B) is to further restrict the expenditure on sales promotion and publicity. Therefore, there is a clear distinction as I see between the advertisement on one hand, publicity and sales promotion on the other and one cannot be taken to mean the other. 8. For these reasons, l am inclined to agree with the view expressed by the learned Judicial Member. Before I part with, I would like to point out that merely because some element of chance was introduced in the scheme of presentation of articles in this case, it did not convert the basic features of the scheme from those that were discussed in the earlier two orders of the Tribunal in order that the amount incurred in this case could be said to be the amount incurred on adve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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