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TMI Blog2001 (12) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT(A) s confirming the disallowance of marketing expenses amounting to of Rs. 62,28,570 for the assessment year 1995-96, Rs. 1,54,71,570 for the assessment year 1996-97 and Rs. 3,75,70,361 for the assessment year 1997-98. 4. The assessee company runs a brewery in which various types of beer is manufactured. Although this company was fully owned and managed by the Government of Orissa, effective May 1994, management of this brewery was handed over to Shaw Wallace Co. Ltd. and, subsequently, 90% of the shareholding, which was held by the Government of Orissa, was also transferred to the Shaw Wallace Co. Ltd. In effect, at the relevant point of time, Shaw Wallace Co. Ltd. was a majority shareholder in the assessee company. 5. Let us begin with the facts as narrated by the Assessing Officer in the assessment order. During the course of assessment proceedings for the assessment year 1995-96, Assessing Officer noticed that the assessee has claimed deduction of Rs. 62,28,570 towards marketing expenses paid to Shaw Wallace Co. Ltd. (hereinafter referred to as SW ) which was, according to the assessee, looking after entire marketing and publicity of assessee s products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t marketing services, if any, supplied by M/s SWC to the assessee is not supported by any evidence and that the cost of such marketing services, if any, has to be reasonable depending upon the services rendered . The Assessing Officer also noticed that in 1997-98, almost 29.2% of the sale proceeds has been diverted to SWC in the garb of payment for marketing services, which is not justified on any grounds. It was also observed that SW, a major shareholder in the assessee company, has unduly used its influence for diversion of profits from the assessee company by way of payment for marketing services a device adopted only for evasion of taxes. In substance, thus, marketing expenses amounting to of Rs. 62,28,570 for the assessment year 1995-96, Rs. 1,54,71,570 for the assessment year 1996-97 and Rs. 3,75,70,361 for the assessment year 1997-98, were disallowed. Aggrieved inter alia by this disallowance, assessee carried the matter in appeal to the CIT(A). 6. In appeal, CIT(A) observed that a very dismal picture emerges, in respect of three assessment years in appeal, considering the expenditure incurred to effect the requisite sales vis-a-vis the total income returned for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the backdrop of these facts, let us take a look at clauses 4, 5 and clause 6 of the agreement dated 1st June, 1994 signed between SW and the assessee: " 4. East Coast (the assessee) shall be required to supply minimum of one lakh cases per annum during the pendency of this agreement to SW. SW has also agreed to take from East Coast the aforesaid quantity. This quantity can be increased or decreased as per mutual consent. The quantity of beer shall be lifted equally by SW in the four quarters i.e., 25,000 cases minimum per quarter. 5. The ex-brewery prices of Beer to be supplied by East Coast to SW shall be as under : Rs. Per Case Haywards Diet/ Haywards Lager Beer86.00 Haywards 2000 Beer98.00 Haywards 5000 Beer103.00 This price is all inclusive (including cost of manufacture, brewing and packing material etc.) on ex-brewery basis. After the indent to be placed by SW, East Coast will arrange to supply the quantity in such places as will be advised by SW from time to time. East Coast has agreed to allow discount to be mutually agreed later, on all of the above brands during the off season period from October to February. Price as agreed above, will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments made by the assessee to SW, on account of royalty and marketing services are totally devoid of any commercial justification. We find that the Assessing Officer himself has observed that the cost of such marketing services, if any, has to be reasonable depending upon the services rendered but then no efforts are made, either at the assessment or at the first appellate level, to examine what will constitute reasonable payment for rendering such marketing services . We may, in this context, refer to the provision contained in sub-section (2) of section 40A. Clause ( a ) of sub-section (2) provides that, where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to in clause ( b ) of the sub-section, and the Income-tax Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Learned CIT(A) has stated that "Seeing the capital employed - would it not have been more prudent to invest this capital in reputed banks, sit back and enjoy interest income which, even at this low rates paid by such banks, would have been more and secure?", but then it is not for the revenue to decide whether the assessee should have invested the money in business or in bank fixed deposits. As regards learned CIT(A) s reliance on Shahibag Entrepreneurs Pvt. Ltd. s case ( supra ), we may also quote Hon ble Gujarat High Court s observation, in the same case, that, "In most cases, the question (of commercial expediency) will be as to the nature of the relation between the expenditure and the business, whether the benefit is remote or near, prospective or immediate, imaginary or real and so forth." As we have already expressed our views that the assessee was indeed benefited by the services for which payment is said to have been made, and even the Assessing Officer did not doubt that there were no benefits accruing to the assessee under the arrangements with the SW, the test of commercial expediency is satisfied on the facts of this case. We have noticed that, according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the basis of material on record. 12. Ground Nos. 1 and 2 in this appeal, as indeed in all the three appeals before us, are, accordingly, allowed for statistical purposes. 13. By way of ground No. 3, assessee has challenged CIT(A) s sustaining the disallowance of Rs. 97,936 out of sales promotion expenses, business promotion expenses. However, as no specific arguments have been advanced in support of this ground, we treat the same as not pressed and dismiss the same summarily. 14. Ground No. 3 is, accordingly, dismissed. 15. By way of ground No. 4, assessee has challenged disallowance of Rs. 19,87,285 on account of bad debts written off, advances written off and cash and bank balance written off. The break up is as follows : Rs. Bad debts written off18,72,569 Advances written off98,605 Cash and bank balance written off16,121. 16. Briefly stated, material facts of the case are that the assessee claimed the deduction on account of the above write off but it appears that all the necessary details were not filed along-with the income-tax return. It was in this backdrop of facts that the Assessing Officer disallowed the claim with the following obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance on account of expenditure in connection with the guest house. We, therefore, confirm the action of the CIT(A) and decline to interefere in the matter. 21. Ground No. 5 is thus dismissed. 22. By way of ground No. 6, the assessee has challenged CIT(A) s confirming the disallowance of Rs. 20,000 out of vehicle running expenses. 23. As the Assessing Officer has made this disallowance for want of details of expenditure and in the absence of explanation about the purpose of this expenditure, and as some of the issues are being restored to the file of the Assessing Officer anyway, we deem it desirable to restore this issue also to the file of the Assessing Officer. The Assessing Officer shall pass fresh orders on this issue also, after calling for such explanations and such details as he may find appropriate, in accordance with the law. Ground No. 6 is, accordingly, allowed for statistical purposes. 24. In ground No. 7, assessee has challenged CIT(A) s confirming the disallowance of Rs. 37,304 as unpaid sales tax liability. According to the assessee, this amount was shown as payable as at the date of the balance sheet but the same was paid before the due date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own order in the immediately preceding year, in paragraph 20 above, we dismiss this ground and confirm the action of the CIT(A). 36. Ground No. 5 is thus dismissed. 37. As regards ground No. 6, as the matter is being restored to the file of the Assessing Officer and he has to make fresh computation of income, after taking into account losses, if any, of the earlier years, no specific adjudication is required. No issue is raised under ground No. 7 and accordingly, no adjudication is required on this issue also. Ground Nos. 6 and 7 are, accordingly, dismissed as infructuous. 38. In the result, appeal for the assessment year 1996-97 is partly allowed for statistical purposes. 39. We now come to appeal for the assessment year 1997-98. 40. In terms of detailed discussions and our observations in paragraphs 3 to 11 above, ground Nos. 1 and 2 are allowed for statistical purposes. 41. By way of ground No. 3, assessee has challenged CIT(A) s sustaining the disallowance of Rs. 1,54,557 out of sales promotion expenses, business promotion expenses. However, as no specific arguments have been advanced in support of this ground, we treat the same as not pressed and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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