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TMI Blog2003 (12) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... imed by the assessee are in the nature of a contractual obligation and are, accordingly, allowable as expenditure incurred by the assessee for the assessment year 1992-93? 2. Whether, on the facts and in the circumstances of the case and having regard to the Supreme Court's decision in the case of McDowell and Co. Ltd. [1985] 154 ITR 148 the Appellate Tribunal was right in law in failing to appreciate that the expenditure claimed by the assessee was only a device to avoid tax on income earned by the assessee?" The two assessees are agents of a company Dynavision (hereinafter referred to as "the company"), which manufactured television sets. According to the assessees, 70 per cent. of the production of that company was marketed through them. The company was promoted by persons whose relatives are partners in the two assessee firms. However, the majority of the shares in that company are not held by those promoters. Substantial part is held by the public sector companies and a large part by private shareholders, and about 26 per cent. by the promoters. The managing director of the company belongs to the promoters group. Several officers of the State Government are on the board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 992, for the sums which corresponded to the sharing arrangement set out in that letter. As the asses sees followed the mercantile system of accounting, they had claimed the amounts shown in their books of entry as having been credited to the account of the company in accordance with the contents of that letter of March 20, 1992, as expenditure for that year. The assessees had also produced before the Assessing Officer the debit notes issued by the company on April 30, 1992, for these sums. The sums in the case of the assessee, Associated Electrical Agencies, are Rs. 72,28,025 towards marketing expenses and Rs. 45,11,700 towards the difference in price for the TV sets. In the case of Apex Agencies (Hyderabad), the sums are Rs. 72,28,025 towards marketing expenses and Rs. 22,74,075 towards the difference in price for the TV sets. The Assessing Officer, while accepting that the assessees maintained their books on mercantile system was, nevertheless, of the view that this was a post-accounting exercise undertaken solely for the purpose of reducing the taxable profit of the assessees and that the letter, dated March 20, 1992, issued by the company was not capable of being regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to find out as to whether the assessees were acting reasonably in the interest of their own business. The Tribunal accepted the assessees' case that they were indeed acting in the interest of the business, as their business was primarily that of acting as agents for the sale of the products manufactured by the company, and by agreeing to share any sum of the expenditure which was necessary for the company to incur for promoting the products manufactured by it and marketed by the assessees they were in effect advancing the cause of their own business. It also accepted the assessees' claim that the expenditure incurred was commercially expedient for the assessees. It also accepted the assessees' case that the expenditure in fact had been incurred as necessary entries had been made in the books of account. The Tribunal also took note of the fact that these amounts had been shown in the books of account of the company and that there had been no disallowance of expenditure by the Assessing Officer. The Tribunal concluded with the finding that the expenses as claimed by the asses sees were allowable as they were incurred indirectly to facilitate the carrying on of the business or to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... showing the payments made by the assessees to the company in the subsequent year at the end of which it was the company which owed monies to the assessees although at the commencement of the year the asses sees owed a substantial sum to the company. The reasons given by the Tribunal, for taking the view that it did, cannot be said to be arbitrary or irrational, having regard to the facts available on record. It was not the case of the Revenue that any part of the monies agreed to be paid by the assessees to the company and for which sums credit had been given in the books of the assessees have subsequently come back to the assessees in any other manner. While it is no doubt true that there was no legal compulsion on the assessee to agree to pay the sums which are mentioned in the letter of the managing director of the company, there was also no legal bar to their agreeing to pay a higher price for supplies already received if they felt that it was in their long term interest to pay such a higher price. It was also open to them to agree to bear a part of the advertising and marketing costs as those costs were incurred with a view to enlarge the market and to improve the sales. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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