Sales promotion rewards to dealers escaped disallowance, while long-unclaimed worker liabilities triggered cessation income treatment

Sales-promotion articles awarded to dealers under an inami scheme were not treated as advertisement gifts to customers, so Rule 6B read with section 37(3) did not apply and the disallowance was deleted. By contrast, the unpaid bidi workers' liability was found to have remained unclaimed and unchanged for many years, with no identifiable claimants or supporting material showing a subsisting obligation. Applying the preponderance-of-probability test and surrounding circumstances, the liability was held to have ceased, bringing section 41(1) into operation and restoring the addition.

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Issues: (i) Whether expenditure incurred on sales-promotion articles given as rewards to dealers was hit by Rule 6B read with section 37(3); (ii) whether unpaid bidi workers' liability had ceased so as to attract section 41(1).

Issue (i): Whether expenditure incurred on sales-promotion articles given as rewards to dealers was hit by Rule 6B read with section 37(3).

Analysis: The articles were not given to customers as presents in the course of advertisement, but were awarded to dealers for achieving sales targets under an inami scheme. The factual basis for treating the expenditure as advertisement expense was not made out, and the statutory restriction on gifts to customers did not fit the nature of the payments.

Conclusion: The deletion of the disallowance on this head was upheld and the issue was decided in favour of the assessee.

Issue (ii): Whether unpaid bidi workers' liability had ceased so as to attract section 41(1).

Analysis: The liability had remained unchanged for about a decade, no payment had been made for many years, and the assessee failed to produce identifiable particulars of the workers or any material showing subsisting claims. In tax proceedings, the existence and continuation of liability are tested on the basis of preponderance of probability and surrounding circumstances, and the Revenue can discharge its burden by showing that the alleged liability has no real claimant in existence during the relevant year.

Conclusion: Section 41(1) was held applicable and the addition was restored in favour of the Revenue.

Final Conclusion: The appeal succeeded only on the liability cessation issue, while the disallowance relating to sales-promotion expenditure remained deleted.

Ratio Decidendi: For section 41(1), the Revenue may establish cessation of liability by showing, on the balance of probabilities and from surrounding circumstances, that the alleged liability has no real subsisting claimant in the relevant year.

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