TMI Blog1993 (10) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ulating 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% as per agreements as service charges. During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer referred to one specimen agreements entered into between the assessee and M/s Mulakh Raj Om Parkash, General Merchants, Main Bazar, 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 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C F agents." (8) Reliance on decision of the Supreme Court in (1959) 36 ITR 519 (SC) and (1964) 53 ITR 75 (SC)." Thereby the Assessing Officer treated the entire receipt from the wholesale dealers as part of trading receipt and all the expenditure incurred during the year was allowed as expenses. The balance unspent amount of Rs. 31,82,463 shown as "advance 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 pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt on the peculiar facts of that case wherein practice the deposits were not refunded and whereas in the appellant company's case the amounts in question are clearly in the nature of "advance against expenses". The assessee also submitted as under: "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 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). Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istilling Ltd. vs. CIT (1959) 35 ITR 519 (SC). As against this, the learned counsel for the assessee Shri Vivek Mehra supported the action of the CIT(A) and pointed out that in earlier year the Assessing Officer has accepted the method of accounting followed by the assessee. However, the CIT reopened the assessment of the assessee for asst. yr. 1984-85 under s. 263 which was quashed 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .79 lakhs 1987-88 88.58 lakhs 104.62 lakhs 1988-89 86.85 lakhs 90.86 lakhs 6. Thus it was pointed out that whatever balance was carried forward to next assessment year, that amount was within six months spent by the assessee. Therefore, it is not true to say that the assessee had not been spending the balance amount for advertisement and promotional activities. The unspent amount never belonged to the assessee at any point of time. Reliance was placed on the decision of the Supreme Court 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 accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of business. These amounts have been paid to various institutes which are in one way or the other connected with Modi Group of Industries. This is not an expense of advertisement but was incurred to help these institutes. In view of these arguments, expenditure is disallowed." 9. When this matter came before the CIT(A), he observed that the genuineness of the expenditure has not been objected. The only objection is that it is not laid out for the purpose of business. All the vouchers alongwith supporting documents in respect of publicity material were produced before the ITO. Referring to cls. 3 4 of the agreement, he came 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted and unutilised advertisement materials did not form part of closing stock. The Assessing Officer made an estimated addition of Rs. 5 lakhs in the closing stock of the assessee on the ground that the assessee had not shown closing stock in its books of account though the assessee had stock of various advertisement material for various glaring and forwarding agents. No valuation of the stock was given. The case of the assessee was that the advertisement material constituted only printed posters, stickers, dummy packs, etc., which being printed have no saleable value. It was further pointed out that it cannot constitute the assessee's stock as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmodation provided to the employees cannot be taken for the purpose of residence when it is partly used for the purpose of office and partly for residence. The Assessing Officer disallowed 50% of the same. However, the CIT(A) reduced the disallowance to 25% of the value of accommodation for calculating the value of perquisites in the hands of the employees under s. 40A(5). The Revenue is aggrieved. 17. 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). 18. We have considered the rival submissions. Keeping in view the nature of 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, Communit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Empire Jute Co. Ltd. As against this, the learned counsel for the assessee supported the action of the CIT(A) and placed reliance on the following decisions: (1) Nila Products Ltd. vs. CIT (1983) 36 CTR (Bom) 405 : (1984) 148 ITR 99 (Bom); (2) Cultural Enterprises Corpn. vs. CIT (1992) 196 ITR 488 (Cal). 22. We have considered the rival submissions. We are of the opinion that the expression "capital expenditure" has been more or less settled by a series of decisions by the Hon'ble Supreme Court. The latest one is in the case of CIT vs. British India Corpn. Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC). It was pointed out in this case by the Hon'ble 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where a sum of money is spent for repairs in a particular year because of the fact that regular repairs are allowed to fall into arrears and repairs on an extensive scale have to be undertaken to remedy the effect of several years' negligence, the expenses for such arrear repairs are allowable as revenue expenditure. It may possible happen that large scale repairs have to be carried out to restore the property a habitable or unsable state. Such cost of arrear repairs would also be on the revenue account. The repairs may not be allowable as current repairs but still the cost of such repairs would be an admissible revenue expenditure under the residual section, viz., s. 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.,Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sement is later claimed from the assessee-company. Copy of account shows debit entries on account of service charges for various months and expenditure incurred in various months. On the basis of this, a sum of Rs. 3,72,330 was held not representing any expenses claimed by the assessee in the profit and loss account rather it is an expenditure incurred by the assessee for promotional activities. Thus, he deleted the same. 26. The learned Departmental Representative supported the action of the Assessing Officer. The learned counsel for the assessee relied on the order of the CIT(A). 27. We have considered the rival submissions. Keeping in view the explanation given by the assessee that free samples of cigarettes is a very normal trade practice and is rightly done in almost all the areas. Therefore, the assitance of local dealers to conduct local promotion compaign including sampling is taken by the assessee and the amount is reimbursed to them. The CIT(A) further found that the expenses claimed are supported by vouchers and complete details of sampling of cigarettes are given. Further, the assessee is authorised to carry out such local promotion activities vide cl. 6 of the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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