TMI Blog1995 (2) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... s a manufacturer of food products. The Income-tax Officer and the Appellate Assistant Commissioner treated the expenditure on distribution of note books and gift coupons falling within the meaning of " sales promotion " under section 37(3A) of the Income-tax Act, 1961 (for short, "the Act"). However, on further appeal, the Income-tax Appellate Tribunal, purporting to follow its earlier decisions, held that the said expenditure has to be allowed as deduction under section 37(1) of the Act. The Division Bench of this court which dealt with the reference earlier noted that the Tribunal did not express its opinion on the question as to whether the said expenditure falls within the meaning of the expression " sales promotion " and directed the Tribunal to express its opinion on the said question. That order was passed on January 23, 1989. The Tribunal sent its report holding that the expenditure on the said two items could not be treated to be of the nature of "sales promotion". Mr. S. R. Ashok, learned standing counsel for the Revenue, relies on the judgment of the Karnataka High Court in Smith Kline and French (India) Ltd. v. CIT [1992] 193 ITR 582 and also the judgment of the Calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3B), (3C) and (3D) of section 37 of the Act were inserted by the Finance Act, 1978, with effect from April 1, 1979. We may point out here that section 37 of the Act which is titled as "General", provides that any expenditure not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee, which is laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The scheme introduced by the Finance Act, 1978, restricts admissibility of aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion. If the same exceeds Rs. 40,000, the expenditure is scaled down with reference to the formula specified therein. Sub-section (3D) of section 37 of the Act excludes the application of the abovesaid provision, viz., sub-section (3A), in the case of newly established business for a period of three years prior to the previous year in question. Thus, it appears to us that by the scheme introduced under the Finance Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Newly established industrial concerns will also be exempted from this provision for an initial period of three years. This measure will yield Rs. 31 crores in a full year and about Rs. 25 crores in 1978-79. A perusal of the excerpt of the speech of the Finance Minister, quoted above, shows that these provisions were introduced to curb the expenditure of the nature which is extravagant and socially wasteful so as to prevent it from being a burden on the exchequer. Reliance is also placed on Circular No. 240, dated May 17, 1978, which contains explanatory notes on the provisions in the Finance Act, 1978, relating to direct taxes. Paragraph 12.1 deals with disallowance of a part of expenditure on advertisement, publicity and sales promotion, and it reads as follows : " 12.1. Disallowance of a part of expenditure on advertisement, publicity and sales promotion--Sections 37(3A) to (3D).--In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act has inserted new sub-section (3A) in section 37 of the Income-tax Act for the disallowance of a part of such expenditure in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Act are neither vague nor ambiguous, hence a reference to the speech is not really called for. For all these reasons, we are unable to accept the contention of Mr. Ratnakar, that when the expenditure sought to be deducted under the head " Sales promotion " is extravagant or socially wasteful, then only section 37(3A) should be applied. It is next contended that " sales promotion " should be given a restricted meaning, that is, the same meaning as that of advertisement and publicity ; in other words, the rule of ejusdem generis should be applied in construing the meaning of the expression "sales promotion" in sub-section (3A) of section 37 of the Act. As noticed above, the expenditure incurred on advertisement, publicity and sales promotion, to bring it within the permissible deduction is scaled down under section 37(3A). The concept of the three expressions overlaps in many aspects, for advertisement would also be for the purpose of sales promotion, so also the publicity. All the three expressions, in our view, contemplate not only the introduction of the product but also the efforts made to promote sales either by way of advertisement or publicity or by ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning in the setting in which it occurs. 'Sales promotion' necessarily involves an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of the 'sales promotion'." This judgment was followed in the subsequent decisions of the Calcutta High Court in CIT v. Bata India Ltd. [1993] 201 ITR 884. The Bench expressed the view that where the statute imposes a restriction on advertisement, publicity and sales promotion, the expression "sales promotion" cannot include the selling expenditure incurred in the ordinary course of the business and it only restricts such expenses as are of like nature as advertisement and publicity. There the question was whether payment of commission to news agents who constitute the distribution net sustaining the circulation of the newspaper, was the ordinary selling cost of the newspaper. The High Court was of the view that the expenditure on commission paid to the wholesale agent was an essential incident of trade and that section 37(3A) of the Act attracts only wastef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that what was in fact given by way of coupon, is a cash discount, so also, by way of exercise note books, is a discount in kind ; just as discount in trade cannot be treated as sales promotion, so also, the expenditure on these items should not be treated as expenditure on sales promotion. We are unable to accept this contention for more reasons than one. First, if it is a case of trade discount, it represents reduction in the price itself and cannot be under the head "Expenditure" and, secondly, the assessee itself claimed it as expenditure on advertisement, publicity and sales promotion falling under sub-section (3A) of section 37 of the Act and not as part of the discount in reduction of the price. For all these reasons, we are of the view that the expenditure incurred by the assessee, referred to above, is covered by sub-section (3A) of section 37 of the Act and, accordingly, we answer the first question in the negative, i.e., in favour of the Revenue and against the assessee. The second question which is a consequential question, is also answered in the negative, i.e., in favour of the Revenue and against the assessee. Reference is answered accordingly. No costs. - - Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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