TMI Blog2011 (6) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... PAL RAO, D. MANMOHAN, JJ. ORDER D. Manmohan, Vice President (As a Third Member). On account of difference of opinion between the Hon'ble Accountant Member and Hon'ble Judicial Member, while disposing of the appeal, the following question was framed with a request to the Hon'ble President to refer the matter to Third Member : "Whether in the facts and circumstances of the case, the learned CIT(A) was justified in deleting the disallowance of Rs. 4,14,20,843 made by the AO out of advertisement and publicity expenses incurred by the assessee." 2. Hon'ble President was pleased to nominate me as Third Member and thus this appeal was listed for hearing to render a decision on the question as framed above. 3. Though facts were extensively dealt with by the learned A.M. as well as learned J.M., in their respective orders, to understand the issues, on which there was a difference of opinion, brief facts are set out herein. 3.1 Assessee-company was engaged in the business of distribution and marketing of National Geographical Channel and History Channel. In the process it also rendered post production services. However, w.e.f. 1st July, 2004 the assessee-company entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Therefore, assessee claimed that the said expenditure is allowable under section 37(1) of the Act, being expenditure incurred wholly and exclusively for the purpose of business. Reliance was placed upon several case law in support of its contention that though the principal companies abroad were also benefited by the advertisement expenditure incurred by the assessee-company, so long as the assessee was benefited by the expenditure and if it is spent wholly and exclusively, for the purpose of business the same is allowable as deduction. 4. The Assessing Officer however held that the expenditure incurred by the assessee benefited the principals abroad and hence expenditure incurred by the assessee-company has to be proportionately disallowed. Assessing Officer therefore allowed 1/3rd of the expenditure as having incurred wholly and exclusively for the purpose of business. 5. On an appeal filed by the assessee, learned CIT(A) observed that though the Assessing Officer sought to disallow the expenditure under section 37(1) read with section 40A(2) of the Act, in fact the said expenditure is not covered under section 40A(2) of the Act since payments were made to third partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the advertisement expenditure was not disputed by the Assessing Officer; rather he accepted the nexus of the said expenditure with the business of the assessee, by virtue of the fact that 33.33% of the expenditure was allowed under section 37(1) of the Act. There was not even a single instance pointed out by the Assessing Officer to show any unverifiable element involved in the advertisement expenditure claimed by the assessee. Under the circumstances, learned A.M. observed that merely because the expenditure benefited not only to the assessee-company but also to its principals abroad, expenditure cannot be said to have been incurred for non business purposes. Applying the decision of the Apex Court in the case of Sassoon J. David Co. Ltd. v. CIT [ ] 118 ITR 261 learned A.M. concluded that so long as the expenditure is incurred 'wholly and exclusively for the purpose of business', even if it is incurred voluntarily and without any necessity, it cannot be disallowed solely on that basis. In this regard, he relied upon the decision of the ITAT, Mumbai Bench in the case of Nestle India Ltd. v. DCIT [ ] 111 TTJ 498. 7. Learned J.M. was however of the view that impugned expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure is not allowable as deduction under section 37(1) read with section 40A(2) of the Act. In this regard the Assessing Officer noticed that the principals have not expended any amount towards advertisement and promotion in India and thus considering the fact that substantial amount in the form of lump sum fee paid by assessee for obtaining the distribution rights, expenditure incurred by the assessee on advertisements has to be treated as excessive and unreasonable and thus he disallowed 66.67% of the total claim. 8. Learned Judicial Member observed that the expression "wholly", used in section 37(1), refers to quantum of expenditure whereas the expression "exclusively" refers to the object or motive of the act behind the expenditure. Thus in order to consider as to whether expenditure was incurred "wholly and exclusively" for the purpose of business, within the meaning of section 37(1) of the Act, the authorities concerned have to be satisfied with the object and motive of the expenditure. In other words, unless the object and motive of the expenditure is wholly for promoting the business of the assessee, expenditure will not qualify for deduction. He again referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llen General Mills Co. Ltd. [1976] 103 ITR 66 wherein the Court observed that the test of commercial expediency cannot be reduced in the shape of ritualistic formula, nor can it be put in a water tight compartment; the test merely means that the Court will place itself in the position of a businessman and find out whether the expenditure incurred would be said to have been laid out for the purpose of business or the transaction was merely a subterfuge for the purpose of sharing the profits ascertained in a particular manner. Applying the aforementioned formula, learned Judicial Member observed that as per the terms and conditions of the agreements, publicity and research expenditure has to be borne by the principals and if assessee incurs any expenditure, it should be with the prior approval of the principals. Since the assessee has incurred expenditure on advertisement, to promote the business of the, principals, and not for the business or trade of assessee's own name, learned Judicial Member concluded that the sum of Rs.6.21 crores will not qualify the test of commercial expediency. However, he chose to restore the Order of the Assessing Officer implying thereby that 1/3rd of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book to submit that none of the decisions cited before the Bench were taken note of by the learned Judicial Member. He contended that in the case of Sassoon J. David Co. Ltd. (supra) the Hon'ble Apex Court observed that the expression "wholly and exclusively" does not mean "necessarily" and the fact that some body other than the assessee was also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 37(1) of the Act. He further submitted that the expression "exclusively" might, in a broader sense, refer to the object or motive of the act behind the expenditure but, in the instant case, the motive or object towards the expenditure was not disputed by the Assessing Officer as otherwise he would not have even allowed 1/3rd of the expenditure. He also submitted that an agent is also a businessman carrying on agency business and thus the thin line of difference which is sought to be projected by the learned Judicial Member to differentiate this case to hold that the case falls outside the ambit of section 37(1) of the Act, has no relevance in the instant case. He thus strongly supported the Order passed by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as the Order passed by the learned Judicial Member. 15. Joining the issue, learned Counsel, appearing on behalf of the assessee, submitted that though the agreement is for a period of one year but it is renewable at the option of the assessee subject to certain terms and conditions and even though the transactions are between assessee and a foreign national the Transfer Pricing Officer did not find anything objectionable in the expenditure incurred by the assessee and no adjustments were made on that count in the order passed under section 92CA(3) of the Act. 16. As regards the deferred revenue expenditure theory propounded by the learned DR, learned Counsel submitted that in the instant case it was not the case of either the tax authorities or the Division Bench of the Appellate Tribunal that it was a deferred revenue expenditure. Hence, the parties addressing the issue, a Third Member, cannot raise a new issue at this stage, since the Third Member has to confine himself to the question framed and referred to by the Hon'ble President. In the instant case the Assessing Officer has not disputed the nature of expenditure. The fact that he has allowed 1/3rd of the total expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred by the assessee is more than the total income declared and thus it cannot be said to be exclusively incurred for the purpose of business overlooking the fact that expenditure has to be compared with gross revenue and not with reference to income declared by the assessee. In the instant case the gross revenue is more than Rs. 40 crores whereas the expenditure incurred by the assessee is only Rs. 6.21 crores on advertisement. Even taking cue from the circular issued by the CBDT, the gross total income declared by the assessee is more than 10 per cent of the gross revenue and the total income declared by the assessee is after debiting a sum of Rs. 6.21 crores and thus income declared by the assessee cannot be said to be low. Consequently, the expenditure cannot be said to be excessive or unreasonable. 19. Learned Judicial Member was of the opinion that having regard to the decision of the Hon'ble Madras High Court in the case of T.S. Hajee Moosa Co. (supra), and the decisions of the Hon'ble Apex Court in the case of Travancore Titanium Product Ltd. and Panipat Woollen and General Mills Co. Ltd. (supra) the expression "exclusively" has to be understood in a way that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER (JULY 29, 2011) P.M. Jagtap, Accountant Member. - As there was a difference of opinion between the Accountant Member and the Judicial Member, the following question was referred to a Third Member : "Whether in the facts and circumstances of the case, the learned CIT(A) was justified in deleting the disallowance of Rs. 4,14,20,843 made by the A.O. out of advertisement and publicity expenses incurred by the assessee." 2. The Hon'ble Vice President, Shri D. Manmohan sitting as a Third Member, vide his order dated 17th June, 2011 has concurred with the view of the Accountant Member and has answered the question in the affirmative i.e. in favour of the assessee. The matter, therefore, has been placed before us to pass a confirmatory order in accordance with the majority view. 3. At this stage, the learned CIT-DR, Shri Pavan Ved has sought to raise an altogether new plea. Relying on the decision of Hon'ble Supreme Court in the case of United India Insurance Co. Ltd. v. Rajendra Singh (Special Leave Petition (civil) 8479 of 1999 dated 14-3-2000), he has contended that he is entitled to raise such plea at any stage of the proceedings. As submitted by him, an attempt w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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