Characterisation of sales promotion expenditure required a factual finding before deduction under the Income-tax Act could be decided.

Expenditure on distributing free notebooks and placing gift coupons in biscuit tins for sales promotion had to be characterised first as sales promotion expenditure under section 37(3A) of the Income-tax Act, 1961 before any deduction issue under section 37(1) could be resolved. The authorities had treated it as sales promotion expenditure, but the Tribunal allowed deduction by relying on earlier decisions without recording a clear finding on the actual nature of the expenditure. Because the tax consequence depended on that factual determination, the matter required the Tribunal to decide whether the expenditure was in fact incurred on sales promotion.

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Issues: Whether expenditure incurred on distributing free notebooks and placing gift coupons in biscuit tins for promoting sales could be treated as sales promotion expenditure within the meaning of section 37(3A) of the Income-tax Act, 1961, and whether deduction of such expenditure could be allowed in full under section 37(1) of the Income-tax Act, 1961.

Analysis: The question referred turned on the proper characterization of the expenditure. The authorities below had treated the expenditure as sales promotion expenditure, while the Tribunal allowed the deduction by following its earlier decisions without recording a clear finding on whether the expenditure was in fact incurred on sales promotion. As the legal consequence depended on that factual determination, the matter required a finding on the nature of the expenditure before the reference question could be answered.

Outcome: The Tribunal was called upon to record a finding on whether the expenditure could be treated as expenditure incurred on sales promotion.

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