TMI Blog1993 (3) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... wasteful expenditure incurred on items like advertisement, publicity, etc., are covered by the provision and not expenditure on actual services received by the assessee when section 37(3A) read with section 37(3B) of the Income-tax Act, 1961, includes within its fold expenditure incurred on running and maintenance of aircraft and motor cars and payments made to hotels also ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the expenditure on commission and discount to wholesale dealers and agents amounting to Rs. 6,31,76,886 is not covered by section 37(3A) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the expenditure of Rs. 1,87,411 on miscellaneous advertisements is not covered by section 37(3A) of the Income-tax Act, 1961 ? 4. Whether, in view of the fact that before the Commissioner of Income-tax, the assessee admitted that, to a large extent, the amount of Rs. 9,94,891 represented interest relatable to the security deposits made by the employees, the Tribunal was justified in not agreeing with the finding of the Commissioner that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of section 37(3A) of the Act to the amount paid as trade discount and sales commission. We have heard the rival contentions. The Revenue's case is that section 37(3A) of the Act has application to any expenditure that a trader has to incur for the purpose of effecting sales. We fail to be persuaded by such an extreme proposition. The import of the expression " sales promotion ", in the context of section 37(3A), has already been examined by us in CIT v. The Statesman Ltd. [1992] 198 ITR 582 (Income-tax Reference No. 86 of 1990 ), where the judgment was delivered on October 10, 1991. The facts there are on all fours with the present case except that the commission was paid to the distribution agents for the newspaper. But the fundamental unity is that, in both cases, commission had to be paid to maintain the distribution or selling net. In the aforesaid case, it was held that the expression " sales promotion ", though of wide amplitude and undefined, is to be understood in its meaning 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 of his product b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope of operation of the said provision. According to the Explanatory Notes issued by the Board, the expenditure which is avoidable or ostentatious in nature alone is sought to be curbed under the provisions. In these days of monopolistic competition, advertisements and publicity drives are carried by producing or manufacturing concerns to such an excess as warrants restraint by reason of the socially wasteful nature of such expenses. That is why the Board has explained that the provisions of sections 37(3A) and 37(3B) have been brought in to eliminate avoidable and ostentatious expenses on advertisement, publicity and other sales drives of like nature. This restriction cannot, therefore, operate on selling cost which is the ordinary and normal incident of business. The provision cannot be construed as restricting anything and everything connected with sales, such as transportation of goods for sale, collection of sale proceeds and so on. " In the present case also, it is not the case of the Revenue that the expenditure is of the nature of advertisement or other conspicuous mode of popularising the assessee's product. The expenditure here represents commission paid to whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on expenses attracting the provisions of section 37(3A) of the Act. The facts are that the assessee has over one thousand retail shops throughout the country. During festivals and other occasions in the area where such retail shops are situated, the assessee has to make contributions to local puja and festival committees or organisations to avoid confrontation and for smooth running of its retail shops. Mr. Bajoria, learned counsel for the assessee, submitted that these expenses are not for any advertisements and/or festoons or banners put up for the company's products in and/or during any such festivals or for any other advertising or publicity activity. The expenditure incurred by the assessee for advertisements and sales promotion expenses including those incurred during the festivals for putting festoons, banners or other publicity and advertisement have been separately considered by the Assessing Officer in the order of assessment and 20 per cent. of such expenditure has been disallowed under section 37(3A) of the Act. Considering that such retail shops are over one thousand, the average expenditure per shop for the area at the highest would be only about Rs. 188 which canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ops could be said to be sales promotion expenditure. It is a notorious fact that, in the festival months, the shops in this part of the country have to pay contributions towards community celebrations to keep the youths in the neighbourhood of the shop happy to ensure smooth conduct of the business. The expenditure can be said to be an expenditure required to maintain the business. No element is there in the expenditure that could be termed as sales promotion. It is not payment to solicit new market for its goods, but to keep up good relations with the population in the close neighbourhood. It is a practical necessity in the ordinary carrying on of the business. Anyway, the necessity in the expenditure is a matter of nexus of the expenditure with the business. But it is not the case of the Revenue that the expenditure is not incidental to the business. The contention is that the expenditure being expenditure for promotion of sales, it should suffer a cut to the extent of 20 per cent. in terms of section 37(3A). The Revenue has, however, singularly failed to make out a case that such contributions really can by any means partake of advertisement, publicity or sales promotion. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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