2016 (10) TMI 402 - HC - Income Tax

High Court: Exercise books distribution = advertisement. Net expenditure for disallowance. Section 80I deduction not pursued.

The High Court ruled in favor of the Revenue, determining that the free distribution of exercise note books constituted advertisement. However, the Court ... Expenditure on free distribution of exercise note books - whether was in the nature of advertisement, publicity and sales promotion within the meaning of subsection (3A) read with subsection (3B) of section 37? - Held that:- The issue stands concluded against the applicant assessee by the decision of Andhra Pradesh High Court in Commissioner of Income Tax Vs. Ampro Food Products [ 1995 (2) TMI 54 - ANDHRA PRADESH High Court ]on identical facts, namely, distribution of note books, the Andhra Pradesh High Court held that the same was in the nature of sales promotion / advertisement. - Decided against assessee. Invoking the provisions of Sec.37(3A) r.w.s. 37(3B) in respect of the expenditure on account of advertisement, particularly in view of the fact that the said expenditure was never claimed by way of deduction - Held that:- Gujarat High Court in Vadilal Industries Ltd. (2008 (4) TMI 765 - GUJARAT HIGH COURT) has held that only the net amount of expenditure on advertisement / sales promotion i.e. gross expenditure less amount recovered by the applicant / assessee from its dealer can be considered for disallowance under Section 37(3A) of the Act. It also observed that where no claim for expenditure under Section 37 of the Act is made then no disallowance under sub-Section (3A) of Section 37 of the Act can be made. The question as posed for our opinion itself records as a fact, that no expenditure was claimed by the applicant assessee in respect of the advertisement expenses sought to be disallowed under Section 37(3A) of the Act.- Decided against revenue Issues:1. Interpretation of expenditure on free distribution of exercise note books as advertisement.2. Applicability of provisions of Sec.37(3A) r.w.s. 37(3B) on advertisement expenditure.3. Disallowance of deduction u/s 80I on interest income.Analysis:Issue 1 - Interpretation of Expenditure on Exercise Note Books:The High Court considered the question of whether the free distribution of exercise note books constituted advertisement or sales promotion. The applicant's counsel acknowledged a previous decision by the Andhra Pradesh High Court, which held a similar case as sales promotion. Consequently, the Court ruled in favor of the Revenue, stating that the distribution of note books was indeed in the nature of advertisement.Issue 2 - Applicability of Sec.37(3A) r.w.s. 37(3B) on Advertisement Expenditure:Regarding the advertisement expenditure for Assessment Years 1984-85 and 1985-86, the Court examined the agreement between the applicant and its distributors. The applicant contended that only the surplus amount, after recovering expenses from distributors, should be considered as expenditure. The Revenue argued for the entire amount to be subjected to disallowance under Section 37(3A). Citing a decision by the Gujarat High Court, the Court agreed that only the net expenditure should be considered for disallowance. Since the applicant did not claim the expenditure as a deduction, the Court ruled in favor of the applicant, emphasizing that Section 37(3A) applies only when a deduction is claimed.Issue 3 - Disallowance of Deduction u/s 80I on Interest Income:The applicant did not press the question related to the disallowance of deduction under Section 80I for the Assessment Year 1986-87. Consequently, the Court did not address this issue in the judgment.In conclusion, the High Court disposed of the reference, ruling in favor of the Revenue on the interpretation of expenditure on exercise note books as advertisement. However, it sided with the applicant on the applicability of Section 37(3A) and did not address the question of disallowance of deduction under Section 80I due to the applicant not pressing the issue.