1. This is a departmental appeal. The question is whether a part of the expenditure incurred by the assessee in the course of their business to increase the sales is hit by provisions of rule 6B of the Income-tax Rules.
2. The assessee is a dealer of wines and spirits manufactured by M/s.
Shaw Wallance Company, Vijayawada. This company had a scheme for increasing sales. For every 5 cases purchased by the dealers, the company was giving one case free. The assessee also introduced a scheme as an incentive for furthering the sales. On purchase of every six cases, the assessee would give the customer one lucky draw coupon. This scheme was in force for the month of September 1983. After this period was over, a draw was arranged and the persons holding the lucky coupons were given prizes like Refrigerator, Steel Almirah, Phillips Radio etc.
In purchasing these presents, the assessee had incurred an expenditure of Rs. 40,382. Out of this, a part of expenditure i.e. Rs. 8,104 was in respect of a party given at the end of the prize scheme. The balance of the expenditure represented the cost of the goods purchased.
3. Before the Income-tax Officer, the assessee had claimed that these expenditure are allowable. The Income-tax Officer, however, held that the expenditure incurred in purchase of the gifts and presents for the lucky draw would be hit by the provisions of rule 6B. He considered the cost of each item and after allowing Rs. 50 against the cost of such item, the balance amount of expenditure was disallowed. Such disallowance amounted to Rs. 34,949.
4. Against this finding, the assessee appealed. The Commissioner (Appeals) relying on an order of the Hyderabad Bench of the Tribunal held that the cost of the presents amounted to a trade discount and therefore it cannot be considered as advertisement expenditure. Apart from that, he also held that these expenditure which should be considered as an advertisement expenditure comes under Section 37(3A).
Under this section, a disallowance of expenditure can be made only if the expenditure exceeds Rs. 1 lac. In this case, the total expenditure was below Rs. 1,00,000 and therefore nothing can be disallowed. He also held that there was no need to invoke the provisions of rule 6B since the expenditure incurred would be allowable as trade discount as well as sales promotion or publicity expenditure.
5. Against this finding, the department has come on appeal. Sri Santhanam for the department submitted that the Commissioner's finding that the expenditure would be allowable under Section 37(3A) since the total expenditure was less than Rs. 1 lac is not correct. He submitted that expenditure on advertisement is covered by Section 37(3). Any expenditure which cannot be disallowed under Section 37(3) will alone be considered under Section 37(3A). For this submission, he relied on the decision of the Madras Bench of the Tribunal in A. Habeebur Rahman & Sons v. Fifth ITO [1984] 10 ITD 703. He, therefore, submitted that the provisions of Section 37(3) and rule 6B will still have to be considered. He further submitted that the finding of the Commissioner that the expenditure is in the nature of a trade discount is also not correct. The Commissioner had relied on a decision of the Tribunal in the case of Coromandel Wine Corporation of Vijayawada [IT Appeal No.871 (Hyd.) of 1982]. The operative part of this Tribunal's order is found extracted in ITO v. Sundeep Wines [1984] 8 ITD 799, at page 801.
He pointed out that in the scheme considered by the Tribunal in that case every customer was entitled to a gift and it was in those circumstances that the Tribunal held that the gift was a trade discount. The facts, in this case are different. The winning of presents was a matter of chance.
6. Sri Sreerama Rao, the learned counsel for the assessee submitted that two issues should be considered. The first issue is whether such expenditure is an advertisement expenditure at all. Second, if it is an advertisement expenditure whether the provisions of rule 6B would be applicable. Taking up the second point he submitted that the scheme envisaged giving presents to the winner of lucky draw. Presentation always means giving something free. In this case, according to Sri Sreerama Rao there was nothing given free. Each of the customer who had purchased the minimum quantity of goods is entitled to a coupon. Giving of this coupon to the customer is a matter of contract. The coupon enables the customer to participate in a lucky draw. The winning of the present is a matter of chance. Thus, the customer getting a present is partly a contractual arrangement and partly a matter of chance. That being so, there was no present at all involved which will come under rule 6B, 7. With regard to the decision of the Madras Bench of the Tribunal in the case of A. Habeebur Rahman & Sons (supra) relied on by the department, he submitted that the disallowance made by the Income-tax Officer was not under Section 37(3A) but only under rule 6B. Therefore, there was no need to consider the provisions of Section 37(3A) as it stood for the asst. year 1984-85. Besides, he submitted the provision considered by the Madras Bench was entirely different from the provisions now applicable, the Madras Bench was considering Section 37(3A) as it stood before its omission by the Finance Act, 1980. We are concerned with Section 37(3A) introduced by the Finance Act, 1983.
These two provisions are entirely different and has nothing to do with each other. Further, he pointed out the provision considered by the Madras Bench had contained the expression "without prejudice to the provisions of the other sections". It is on the strength of this expression that the Madras Bench held that the provision would be applicable over and above the application of rule 6B.8. With regard to the first issue that there was no advertisement at all, he submitted that in the scheme framed by the assessee there was no element of advertisement. The expression "advertisement" must be understood to mean advertisement of goods dealt with by the assessee.
there must be an imparting knowledge to the potential customer in this case. There was no advertisement in respect of the goods dealt by the assessee. The expenditure incurred were in respect of refrigerators, Almirahs etc. Whereas the assessee was dealing in wines and spirits, there was no attempt made to impart knowledge to the customer, the merits of the goods were not advertised. Therefore, it is not advertisement expenditure at all. It may be sales promotion expenditure but not all sales promotion expenditure can be considered as 'advertisement expenditure'.
9. Shri Santhanam brought to our notice the Explanation to Section 37(3B) which stated that the expenditure to be considered is the expenditure after any of amounts have been disallowed under any other sections of the Act. It means according to Sri Santhanam that the expenditure considered under Section 37(3A) is the expenditure which is not already disallowed under Section 37(3).
10. We have considered the submissions. As Sri Sreerama Rao pointed out that the Income-tax Officer has disallowed the expenditure only under the provisions of rule 6B. In this appeal, we have to consider only whether under this rule any amount of expenditure can be disallowed. It is the Commissioner (Appeals) who had brought in Section 37(3A) and had given a finding that under this section nothing can be disallowed because the total expenditure is less than Rs. 1 lac. By implication, he had also given a finding that if Section 37(3A) applies then Section 37(3) and rule 6B would not apply. It is therefore necessary to clear the ground to give a finding whether Section 37(3A) would apply and further whether if it applies rule 6B would not apply.
11. In our opinion, Sri Santhanam is correct in his submission that whether Section 37(3A) would apply or not is immaterial and if the expenditure is such that Section 37(3) would apply then that provision has to be applied. Section 37(3A) reads as follows:- Notwithstanding anything contained in Sub-section (1) where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in Sub-section (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall no be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession.
Section 37(3B) gives the list of expenditure which are to be considered under Section 37(3A). They are expenditure on advertisement, publicity and sale promotion or running and maintenance of aircraft and motor cars. There is an Explanation for both the Sub-sections (3A) and (3B).
(a) The expenditure specified in Clause (i) to Clause (iii) of Sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act.
It will be seen from this that the expression makes clear that the provisions of Sub-sections (3A) and (3B) would be applied only after ascertaining what is the expenditure which are to be disallowed under any other provisions of the Act including Section 37(3). Thus, there is no overlapping of Section 37(3) and 37(3A), each operate on different fields. It is only after Section 37(3) has exhausted that Section 37(3A) would be brought into operation. Therefore, the finding of the Commissioner that the amount could be considered under Section 37(3A) is not supported by the words found in the statute. It is true that the Madras Bench of the Tribunal in the case of A. Habeebur Rahman & Sons (supra) was considering a different provision altogether. Nevertheless the interpretation given is more or less the same as ours.
12. It now remains for us to consider the two issues i.e. whether it represents advertisement expenditure and whether provisions of rule 6B would apply. We have no doubt in our mind that the expenditure is an advertisement expenditure. Sri Sreerama Rao submitted that the advertisement must be in respect of goods dealt with by the assessee.
Further, the advertisement should be about the merits of the goods. The meaning of 'advertisement' according to Concise Oxford Dictionary is 'public announcement (esp. in newspapers, or posters, by television, etc.); advertising,... 'Advertise' has been similarly defined to mean 'generally or publicly known; (esp.) describe (goods) publicity with a view to increasing sales.' There could be advertisements about the goods dealt with or about the premises in which the assessee is doing business. It will not be correct to say that the expenditure on advertisement contemplated in Sub-section (3) is mere advertisement of the goods dealt with by the assessee. In a general way, if the assessee advertises that in buying goods from them, the customers have a chance of winning a prize, it is an advertisement, it might also be a method of sales promotion but even then it does not cease to be an 'advertisement'. Sri Sreerama Rao submitted that the assessee had purchased goods like Refrigerators and they were not dealt with in as stocks. It was immaterial. These goods are purchased as part of the advertisement campaign by the assessee to increase sales. These represent advertisement expenditure.
13. Again it was submitted that there was no imparting of knowledge.
This is also not an essential element of advertisement. As Sri Santhanam pointed out the advertisement expenditure contemplated in Sub-section (3) includes the expenditure in purchase of articles intended for presentation. Now in presentation articles, there need not be any imparting of knowledge. If such a condition has to be fulfilled before an expenditure can be considered as an expenditure on advertisement, the provisions of rule 6B would not be applicable at all. It may be made nugatory. We are not prepared to give such an interpretation which would restrict the meaning of the expression to such expenditure which would only impart knowledge to the potential customers. We are satisfied that the expenditure is for advertisement.
14. The question next to be considered is whether the provisions of rule 6B would be applicable. Now Sreerama Rao's submission is that there was no presentation at all. The potential customer is given a coupon which enables him to take part in the lucky draw. According to him, winning of the presents is partly contractual and partly chance.
Now a customer is entitled to a coupon if he purchases a minimum quantity of the goods. This coupon enables him to be to take part in the lucky draw. The assessee had already decided on giving presents to few of the customers. Now the scheme of lucky draw is only to determine which of these customers would get the presents. That they would give presents is already decided by the assessee What they had not decided is the recipient of the presents. The scheme of lucky draw is a method adopted by the assessee to identify the donee. The intention to give presents is always there. It is not any the less intended merely because at the tune of drawing the scheme, the assessee did not know which of the customer would be presented. After all rule 6B merely says that there should be expenditure in respect of articles intended for presentation on the date of incurring the expenditure. It is not necessary that the assessee should know to whom the present be given.
We, therefore, do not find any merit in this submission.
15. The decision of this Bench in the case of Sundeep Wines (supra) had been referred to in the course of the proceedings. That decision had followed an earlier decision of the Tribunal in the case of Coromandel Wine Corpn. (supra). The Commissioner(Appeals) had relied upon this decision in giving a finding that the expenditure is in the nature of trade discount. In both these cases, there was no element of chance.
Every customer who buys certain minimum goods was entitled to a present. The present was as much as part of their contract as the purchase of the goods. It is on these facts that this Bench held that the presents represented trade discount in kind. The facts in the case before us are entirely different. No customer under the scheme can be sure of getting present and therefore it can never be considered as a trade discount.
16. For these reasons, we are of opinion that the provisions of rule 6B would be applicable and the disallowance made by the Income-tax Officer is correct. The departmental appeal is allowed and the order of the Income-tax Officer on this point is restored.
1. I had the advantage of going through the order proposed by my learned Brother. I am unable to agree with the finding of my learned Brother that the expenditure disallowed viz., Rs. 34,949 represents advertisement expenses.
2. The assessee is a registered firm of 11 partners dealing in wholesale and retail trade in wines. The relevant assessment year under consideration is 1984-85 for which the previous year ended by 31-3-1984. The profit and loss account prepared for the relevant accounting year disclosed, inter alia, the following two items of expenditure: The Income-tax Officer stated that the above two items are to be processed by applying the provisions of Sub-sections (2A), (3), (3A) of Section 37 of the I.T. Act. the Income-tax Officer called upon the assessee firm to furnish details of prize account and the lucky draw expenses to verify if the expenditure is within the limit laid down under Section 37(3)/(3A) of the I.T. Act and rule 6B of the I.T. Rules.
The assessee stated to have furnished the details. The Income-tax Officer called upon as to why the presentation articles should not be limited to Rs. 50 in each case by applying the provisions of rule 6B.In this connection, the assessee was stated to have written two letters dated 19-3-1985. In those letters it was purported to have been stated that the lucky draw was conducted with a view to boost up the sales, thereby realising more profit and therefore the expenditure should not be treated as advertisement by applying rule 6B of the I.T. Rules. The Income-tax Officer stated that such of the expenditure which does not directly fall under Section 37(1) has to be processed by applying the provisions of Sub-sections (3), (3A) and (2A) of Section 37.
Accordingly he disallowed the amount of Rs. 34,949 from out of lucky draw expenses totalling to Rs. 40,382.
3. Aggrieved by the assessment dated 21-3-1985 the assessee firm went in appeal before the CIT(A), Visakhapatnam. In the said appeal the application of rule 6B of the I.T. Rules to the expenditure in question was assailed. It was argued on behalf of the assessee firm that the said expenditure is a business expenditure incurred in the ordinary course of business. It was submitted that the assessee firm were dealers of wine supplied by M/s Shaw Wallace Company, Vijayawada. The said company was stated to have introduced a scheme of giving one free case of wine for every five cases of wine purchased from them. The assessee firm not only availed that facility from the principal distributor but said to have improved it in such a manner to increase its sales. The assessee firm purchased a large quantity of stock as would enable it to get 60 free cases of wine. The free cases of wine were sold and from out of the money realised the assessee wanted to implement its own scheme. The scheme was in force from 1-9-1983 to 30-9-1983. Under the scheme of purchase of every six cases of Haywards Fine Brandy, Haywards Fine Whisky, Old Tavern Whisky and Haywards Picadilly Gin put together in one lot or separately within the scheme period, one Lucky Draw Coupon will be given. A draw would be conducted in which first, second and third prizes would be selected apart from giving 44 consolation prizes. The first prize holder would be given Godrej Refrigerator, second prize holder would be given Steel almirah, the third prize holder will be given Phillips clock-cum-Radio and the consolation prize holders would each be given silver tumbler. It is the case of the assessee that there was a clear nexus between the expenditure on the one hand and the income shown on the sale of free liquor cases on the other. The assessee relied upon the Karnataka High Court decision in Mysore Sales International Ltd. v. CIT [1979] 117 ITR 64 before the CIT(A). Alternatively, it was canvassed before him that the distribution of articles exceeding the value of Rs. 50 was intended for making the customers purchase maximum quantity and amounts to a trade discount and in this connection the assessee firm relied upon the order of the B-Bench of this Tribunal in K. Narayana Chetty & Co. v.ITO [IT Appeal Nos. 1027 and 1029 (Hyd.) of 1985 dated 29-4-1983]. The learned CIT(A) held that there was a more direct way of allowing appellant's claim. Sub-s. (3A). of Section 37 was introduced by the Finance Act, 1983, with effect from 1-4-1984. Under the said provision only 20% of the aggregate expenditure on advertisement, publicity and sales promotion can be disallowed provided the expenditure exceeds Rs. 1 lakh. While agreeing that the expenditure can be called advertisement expenditure the learned CIT(A) held that they can also be treated as publicity and sales promotion expenditure. He found that the aggregate expenditure did not exceed Rs. 1 lakh and there was no need to exercise the axe in restricting the claim, if presentation articles of less than Rs. 50 are allowable under rule 6B. Presentation articles of over Rs. 50 are allowable, according to the CIT(A), both as trade discount as well as sales promotion or publicity expenses. In that view of the matter he allowed Rs. 34,949. Against the said impugned order dated 31-7-1985 the present second appeal was preferred by the revenue and thus the matter stands for our consideration.
4. We have heard Sri N. Santhanam, the learned departmental representative and Sri Ch. Sree Rama Rao, learned counsel for the assessee.
5. Sub-sections (3A) to (3D) were inserted in Section 37 and also omitted from the said section in two spells. In the first spell they were inserted by Section 8 of the Finance Act, 1978 with effect from 1-4-1979 and they were omitted by Section 10 of the Finance Act, 1980 with effect form 1-4-1981. In the second spell Sub-sections (3A) to (3D) were introduced into Section 37 by Finance Act, 1983, with effect from 1-4-1984 and they stood omitted by the Finance Act 1.985 with effect from 1-4-1986. There is no dispute that the case on hand had to be considered with reference to the provisions obtaining in the second spell as the assessment year was 1984-85 for which the law as it stood from 1-4-1985 should apply. If we examine the main features of the provisions prevailing in the first spell it would be seen that those provisions contemplated graded disallowance of expenditure on advertisement, publicity and sales promotion exceeding Rs. 40,000. Such graded disallowance was to be made of the aggregate expenditure with reference to 'adjusted expenditure'. The words 'adjusted expenditure' carried definition and in the Explanation it was held to mean aggregate expenditure incurred by the assessee on advertisement, publicity and sales promotion in India as reduced by so much expenditure as is not allowed under Sub-section (1) and as further reduced by so much of such expenditure as is not allowed under Sub-section (2B) or Sub-section (3) or both. Further Sub-section (3A) not only contained a non obstante clause with regard to Sub-section (1) but also intended to operate without prejudice to the provisions of Sub-section (2B) or Sub-section (3). So to my mind it appears that the true meaning of Sub-section (3A)as it related to expenditure under subs. (3) was that an advertisement expenditure should be excluded not only while computing Rs. 40,000 but also while computing adjusted expenditure as the said term stands defined. The expenditure on publicity and sales promotion does not stand excluded but they should be computed while determining the aggregate expenditure.
6. A comparison of the provisions of Sub-section (3A) in the two spells mentioned above reveal more similarities rather than differences. One of the differences is that the concept of 'adjusted expenditure' was done away with. The base amount of Rs. 40,000 also disappeared. In the provision of the first spell, perhaps the base amount and the aggregate amount should comprise of all the three categories of expenditure - advertisement, publicity and sales promotion -whereas the aggregate amount in the provision of the second spell may consist of one or more items of Sub-section (3B). Sub-s. (3B) listed out items of expenditure contemplated in Sub-section (3A) as follows: 7. According to the second spell provision of 20% disallowance was contemplated only if the aggregate expenditure falling under one or more items specified under Sub-section (3B) exceeds one hundred thousand rupees. The graded disallowance prevailing in the provisions of the first spell was substituted by a. flat rale disallowance of 20% of expenditure exceeding Rs. 1 lakh. Previously the allowance. depended upon the turnover whereas in the later provision it was done away with.
For the application of the provisions in the second spell it is enough if expenditure of one or other type mentioned in Sub-section (3B) is/are incurred.
8. The Explanation under Sub-section (3B) clearly states that the aggregate expenditure should not include expenditure as is not allowed under other provisions of the Act. This would give an indication that the disallowance under Sub-section (3) of Section 37 also should not be allowed to go into the aggregate expenditure. Thus, a comparison of the provisions under both the spells would reveal that though there were certain changes in form the main content and intendment remained the same. So even under Sub-section (3A) of Section 37 as it stood in the second spell only advertisements which are governed by Sub-section (3) of Section 37 and rule 6B of the I.T. Rules would have to be excluded.
Suppose, the expenditure could not be called or did not properly come under the term 'advertisement' and suppose, the expenditure properly comes under the to 'Publicity or sales promotion expenses then neither Sub-section (3) of Section 37 nor rule 6B of the I.T. Rules apply.
9. We have to consider whether this scheme run by the assessee firm amounted to advertisement as contended by the learned departmental representative or represents expenditure on sales promotion or publicity or trade discount, as contended by the learned counsel for the assessee.
10. The learned departmental representative relied upon the decision of the Madras Bench in A. Habeebur Rahman & Sons' case (supra). What all decided in that case was the correct figure of 'adjusted expenditure' on the basis of which the disallowance is made. According to the assessee in that case Rs. 1,20,264 for assessment year 1979-80 which was not disallowable under Section 37(3) should not be included in the computation of 'adjusted expenditure' and the balance of Rs. 51,489 alone should be treated as adjusted expenditure. Rejecting this contention the Tribunal held at page 708 of the reported decision as follows: ...even if the entire expenditure of the assessee on advertisement is within that rule and could not be disallowed under Sub-section (3) yet the overall ceiling under Sub-section (3A) would apply if the aggregate expenditure exceeds the limits. Thus, the assessee would not be able to get out of the overall ceiling prescribed under Sub-section (3A) by merely pointing out that individual items of expenditure were within the limits prescribed under Sub-section (3).
This is exactly the reason why the expression 'without prejudice to the provisions of Sub-section (3)' has been utilised in Sub-section (3A).
Therefore it can be seen that the Madras Bench in the above case said only to have examined the ambit of the Sub-section (3) vis-a-vis Sub-section (3A) and does not even touch upon the aspect of what is advertisement and what is publicity and sales promotion expenses. In my opinion, the said decision has no relevance at all for the purpose of this appeal.
11. Now let us see what is the true meaning of the word 'advertisement'. We had the occasion to consider the dictionary meaning as well as its meaning in ordinary parlance as a businessman understands it in this Bench's order in K. Narayana Chetty & Co.'s case (supra). While giving the dictionary meaning as we find in Concise Oxford Dictionary advertisement is 'public announcement (esp. in newspapers, or posters, by television etc.); advertising,..' 'Advertise' has been similarly defined to mean 'generally or publicly known; (esp.) describe (goods), publicity with a view to increasing sales; notify;..." The learned Members held in the said order that though dictionaries need not always be sole or reliable guide on such matters, they find the meaning assigned to the word 'advertisement' by the dictionary is the one assigned in commercial and popular parlance.
The learned Tribunal also held that the word 'advertisement' has not been defined in statute and hence they will be justified in assigning it the same sense as was given in the commercial world. Advertisement is publicity to the world at large with a view to attract potential customers. They further held that it is mainly addressed to future customers though it may also be intended to retain present customers in a general sense. There is no quid pro quo between the outlay and the result. In the case before the learned Members of the Tribunal the assessee was a commission agent for certain agarbatti manufacturers.
The assessee had borne 40% share in the sales promotion expenses and advertisement expenses as an agent of one manufacturer and 1/3rd share as an agent of another manufacturer. The manufacturers had introduced what they called Pooja Sales Scheme under which brief cases and suit cases were sent by them inter alia, to the commission agents like the assessee, for distribution to the agents and dealers along with goods in the event of the prescribed minimum offtake. For example, the arrangement of the assessee with M/s Onam Agarbatti Co. was that the assessee will bear part of the cost of distribution of canvas bags, calendars and VIP brief cases to agents and dealers. Brief case was to be distributed only to persons who purchase goods worth Rs. 5,000 at a time. Canvas bag was similarly distributed along with purchase of six units. So was the position regarding suit cases in arrangement with M/s Subagh Perfumery Works. The assessee claimed that the expenditure was in the nature of a discount. The Income-tax Officer disallowed it. The Income-tax Officer rectified his order by adding some more amount to the disallowance alleged to be representing short disallowance. On those facts the question directly cropped up whether the suit cases and other gift articles constituted advertisement coming under Section 37(3) and rule 6B. The Tribunal held as follows: What the assessee has practised is a third variation in which there is neither extra financial discount or additional quantity supply but a different article is given as "gift" for bulk offtakes. Here again though it may be called as gift, it is not really a gift inasmuch as it is a discount, in different form for bulk purchase.
From the customer's "viewpoint, it is only an abatement for bulk orders. Any other view would ignore the realities of commercial transactions and lay undue emphasis on mere nomenclature.... We are therefore of the view that the expenditure on suit cases and brief cases shared by the assessee under a scheme to be given to only those who have taken the prescribed quantities could not be treated as advertisement expenses.
They also postulated that the expenditure can be construed as abatement of commission earned by the assessee and not an expenditure much less expenditure under Section 37(3).
12. We have followed this decision in Sundeep Wines' case (supra) representing A-Bench order of this Tribunal to which I am a party. In that case an amount of Rs. 44,330 was claimed as an expenditure representing 'presentations and compliments' given to customers. The Income-tax Officer allowed the value of articles below Rs. 50 and disallowed the rest of Rs. 32,465 saying that the expenditure represented articles of value of more than Rs. 50. There also the assessee claimed that they were nothing more than the discounts in kind inasmuch as the assessee had a sales promotion scheme under which the assessee gave away watches and time pieces depending upon the offtake.
The Income-tax Officer held that the expenditure represent advertisement expenditure and therefore it should not be allowed as a deduction under Section 37(3A). The first appellate authority allowed the appeal filed before him. In that case also a scheme was framed under which the assessee gave a HMT watch if the offtake was over Rs. 30,000, a Manov watch for an offtake over Rs. 25,000, a Jaz time piece for offtake over Rs. 15,000 and a Jayco time piece if the offtake is above Rs. 8,000. In that case also the assessee was doing liquor business. Following the earlier orders of this Tribunal dated 29-4-1983 cited supra we have confirmed the order of the lower appellate authority when he found that the expenditure represents cash discount and does not partake the character of advertisement. The decision in Sundeep Wines' case (supra) is an extreme case where every customer whose offtake exceeds the limit prescribed was given prizes of different varieties. In such a case also we have held that it does not amount to advertisement and it can be said to be a trade discount.
However, in this case if the offtake is six cases or more then the customer would be given only a coupon which entitles him to participate in the lucky draw. The purchase of six cases of liquors would not automatically guarantee him a prize. It would only guarantee him a lucky draw coupon. Even the draw was conducted only after the scheme period is over. By the date of the draw the persons who participated in the lucky draw scheme no longer remain as prospective customers. They already became past customers. Getting a prize in a draw depends upon luck. A person who purchases only six cases of the specified liquor in the scheme, may get the first prize whereas a person who had purchased 10 such cases and got 10 lucky draw coupons may not get any prize whatsoever or may have to rest content with only a consolation prize.
Further the CIT(A) had clearly recorded that the whole scheme was conducted with the money realised from the sale of 60 free cases of wine. The assessee firm itself because of its bulk purchases from M/s Shaw Wallace & Company, got. 60 cases free of charge and from out of the realised price of those 60 cases it had conducted the scheme. Under the circumstances it can as well be said that the expenditure represents abatement of commission earned by the assessee itself. I wish to follow the two earlier orders of this Tribunal mentioned above and hold that the expenditure should be regarded not an expenditure on advertisement coming under Section 37(3) or rule 6B of the I.T. Rules but it should be regarded either as publicity expenses or as sales promotion expenses or a trade discount given to selected customers. It may also be viewed as an abatement of commission earned by the assessee itself.
13. Further there are High Court decisions also which deal with the concept of advertisement. It is unfortunate that neither side brought to our notice any High Court decision dealing with the true meaning of the word advertisement. But in order to support my stand I have picked up some decisions on this topic.
14. The first decision to which I may refer is Amarjothi Pictures v.CIT [1968] 69 ITR 755 (Mad,). In that case on the occasion of silver jubilee run of picture 'Kalyana Parisu' the assessee who was engaged in the distribution and exhibition of the said film celebrated the silver jubilee of the said picture. On the occasion of the celebration there was presentation of shields to the theatres, artistes and others. The Madras High Court held that evidently the object of the celebration was publicity and that publicity would only have been with a view to step up the collections, at a time when the collections might otherwise be dwindling. Though the facts of the case are not on all fours similar but the pattern of presentation of articles appeared to be similar.
15. Another case which may elucidate the point in controversy is the Gujarat High Court decision in CIT v. Dascroi Taluka Co-operative Purchase & Sales Union Ltd. [1980] 126 ITR 413. In that case also on the eve of silver jubilee celebration of the society which was engaged in the business of distribution of sugar, kerosene, steel, etc., to its members comprising both individuals as well as societies sent certain of its employees to Bombay for purchase of wall clocks for presentation to co-operative societies who are members of the assessee. So also, the assessee purchased stainless steel utensils which were also distributed to the members of the society. The Tribunal in that case held that though the expenses incurred were with a view to encourage the business activities which, in turn, were calculated to increase the business of the assessee itself, these items could not be regarded as advertisement expenses because there was no question of advertising its products or publicising the same among the member-societies who were already having business transactions with the assessee and, therefore, the expenditure was not governed by any limitation prescribed under Section 37(3). The Gujarat High Court affirmed the decision of the Tribunal and it held as follows as per head-note of the decision: assessee-society's members -individual members as well as other co-operative societies - who were members of the assessee-society.
The amounts spent for giving presents to the members of the assessee-society on the occasion of the silver jubilee were expenditure incurred wholly and exclusively for the purpose of its business since the amounts were spent for keeping alive its good image amongst its members, for generating goodwill and for ensuring the continuity of business with the member-societies. Since the amounts were spent only for generating goodwill and inducing the members to continue to maintain good relations with the assessee-society and the presents were not distributed to all its customers, members as well as non-members, but only to its members, the amounts were not spent by way of advertisement and hence the provisions of Section 37(3) and r. 6B of the I.T. Rules, 1962, were not attracted.
Therefore it can be seen that in the Gujarat case the articles were distributed among all the members of the society as well as among the co-operative societies who are members of the assessee society. Even then it was considered to be an expenditure incurred for generating goodwill and inducing the members to continue to maintain good relations with the assessee-society and because the presents were not distributed to all its customers, members as well as non-members, but only to its members the amounts were not spent by way of advertisement and on that ground the provisions of Section 37(3) and rule 6B of the I.T. Rules were held not attracted. In this case also let alone all the customers even all the persons who had made bulk purchases of more than six cases were not given prizes. Only such of the few among them who got first, second, third and consolation prizes only were given prizes.
Therefore the intendment of the lucky draw scheme was only for generating goodwill and to induce the customers of the assessee firm to continue to maintain good relations with it and also to augment sales.
In any view of the matter, the expenditure cannot be said to be for purposes of advertisement. Therefore, I hold that in view of all the above the expenditure of Rs. 34,949 cannot be disallowed as the said expenditure may be treated either as publicity or as sales promotion expenses or trade discount granted to some of the customers or as abatement of commission earned by the assessee itself from M/s Shaw Wallace & Co., Vijayawada. In my opinion, the appeal filed by the revenue is devoid of merits and hence it is to be dismissed.
We, the Members of Hyderabad Bench 'B', having heard the assessee and the department in I.T.A. No. 1572/Hyd/85 have differed in our findings in one of the questions raised in the appeal. The points of difference is referred to the President for being placed before the Third Member.
(1) "On the facts and circumstances of the case can it be said that the expenditure amounting to Rs. 34,949 is advertisement expenditure within the meaning of Section 37(3A) as it stood for the assessment year 1984-85? (2) "On the facts and circumstances of the case can it be said that the said expenditure can be treated either as (i) publicity or (ii) sales promotion expenses or (iii) trade discount granted to some of the customers or (iv) abatement of commission earned by the assessee itself from its principal M/s. Shaw Wallace Co., Vijayawada? 1. This case has come to me as a Third Member, on a difference of opinion between the learned Members of the Hyderabad Bench 'B'. I shall briefly narrate the relevant facts. The assessee is a firm carrying on wholesale and retail business in wines at Srikakulam. For the assessment year under appeal for which the previous year ended on 31-3-1984, the assessee claimed that in order to arrive at a sales of Rs. 55.70 lacs, it has to allow certain expenditure towards sales promotion, publicity and claimed, inter alia, a sum of Rs. 40,382 as lucky draw expenses as a deduction. The expenditure claimed On lucky draw consisted of various presents made of different varieties and different values. With a view to verify whether the expenditure claimed came within the limits prescribed under Section 37(3) and (3A) and rule 6B of the Income-tax Rules, the I.T.O. required the assessee to furnish the details, in response to which the assessee submitted that the lucky draw was conducted with a view to boost the sales, thereby realising more profit. It was further pointed out that the assessee was acting as the agent of Shaw Wallace Company, and Shaw Wallace Liquors announced a scheme under which on the purchase of every six cases of Haywards Fine Brandy, Haywards Fine Whisky, Old Tavern Whisky and Haywards Picadilly Gin put together in one lot or separately within the scheme period, that is the month of September, 1983, one Lucky Draw Coupon would be issued and in the draw, the first prize would be 165 Litres Godrej Refrigerator, the second prize would be 61/2' Steel Almirah and the third prize would be Phillips Clock-cum-Radio and thereafter consolation prizes of silver tumbler. There were 44 consolation prizes, three third prizes and two second prizes. It was to purchase these items of presentation that a total sum of Rs. 40,382 was incurred. The ITO considered that by this expenditure, the assessee had been advertising its products and, therefore, the stipulations provided in rule 6B applied and also it came within the provisions of Section 37(3A) and also (2A) of that section. He, therefore, disallowed a total sum of Rs. 34,949, the details of which are furnished at page 3 of the assessment order which I am not reproducing here. The prizes were in excess of the value of Rs. 50, were considered as advertisement and were disallowed.
2. Against this order, an appeal was preferred before the C.I.T.(Appeals), Visakhapatnam. The C.I.T. (Appeals) came to the conclusion that the assessee was entitled to succeed on three grounds. One was the scheme announced was such that it provided a clear nexus between the expenditure on one hand and the income shown and the sale of the free liquor cases on the other. In this context, the decision of the Karnataka High Court in Mysore Sales International Ltd.'s case .(supra) directly applied. Secondly, there was, an order of the Tribunal passed by the Hyderabad Bench 'B' in the case of K. Narayana Chetty & Co.
(supra) where under, identical circumstances the expenditure was allowed as a deduction, holding that the expenditure incurred by the assessee would not come within the meaning of expression 'advertisement' but would come under the expenditure of sales promotion and publicity and, therefore, in that case that the prizes given by way of gifts were more like trade discount offered, rather than as an advertisement coming within the meaning of the expression as used in rule 6B. The third reason was Sub-section (3A) of Section 37 as introduced by the Finance Act, 1983 w.e.f. 1-4-1984 entitled the I.T.O.to disallow only 20% of the aggregate of the expenditure incurred on advertisement, publicity and sales promotion in excess of Rs. 1 lac that is to say if the expenditure incurred on these three items put together exceeded Rs. 1 lac only then 20% of the excess could be disallowed under that section. Since in this case, the expenditure was below Rs. 1 lac, section (3A) was not attracted at all. Thus holding that the presentation of articles of over Rs. 50 were allowable both as trade discounts as well as sales promotion, publicity expenses, the C.I.T. allowed the claim of the assessee.
3. The department was aggrieved by the order of the C.I.T. and filed an appeal before the Tribunal and after hearing the case, the learned Members of the Tribunal came to different conclusions. The learned Accountant Member held that the C.I.T. (Appeals) was not right in saying that Section 37(3A) applied to the facts of this case and if that section applied, rule 6B would not apply. Then addressing himself to the question as to whether the expenditure incurred could be called 'advertisement' expenditure within the meaning of rule 6B, he held in categorical terms that expenditure was on 'advertisement'. He rejected the contention advanced on behalf of the assessee that the advertisement of goods referred to in rule 6B must be in respect of goods dealt with by the assessee. By referring to the meaning of the word 'advertisement' according to the dictionaries, he held that the assessee was only advertising its goods and, therefore, rule 6B was clearly attracted. According to him even sales promotion was a mode of advertisement and in any case does not cease to be advertisement. The amount incurred on purchase of presentation articles and the presentation of articles, subject to satisfaction of certain conditions are the ultimate aims of promoting sales, did amount to advertisement.
An argument was advanced that the presentation of articles must be such as to impart a certain amount of knowledge about the virtues of the goods dealt with by the assessee and if such a knowledge was not imparted, the presentation of article ceases to be an exercise in advertisement. The learned Accountant Member rejected this argument as nugatory to the provisions of rule 6B. Another argument that was addressed but rejected by the learned Accountant Member was that winning of the presents was partly contractual and partly chance. A customer was entitled to a coupon if he purchased a minimum quantity of the goods. That coupon enabled him to take part in the lucky draw.
Winning in the draw, while it was a chance, eligibility to participate in the draw was contractual and, therefore, there was a chance and such a thing would not amount to advertisement. The learned Accountant Member met this argument by pointing out that the assessee had already decided on giving the presents to a few of customers. The lucky draw was only to determine which of those customers would get the presents.
That they would get the presents having already been decided, the mere speculation about the recipient of the presents did not make the scheme less than advertisement. According to him rule 6B only stipulates that there should be expenditure in respect of articles intended for presentation on the date of incurring the expenditure and that intention was more than clear when the draw was announced. Merely because the recipients were not identified, it could not be said that the intention was lacking on the date of the presentation of articles.
Then referring to a decision of the Hyderabad Bench reported in 8 I.T.D. 799 on which the C.I.T. relied in giving the relief to the assessee, the learned Accountant Member distinguished it by saying that unlike in this case, in that case, there was no element of chance as every customer in that case who bought certain minimum goods was entitled to a present, the present had become as much of a part of the contract as the purchase of the goods and, therefore, the Bench could hold there that the presents represented trade discounts. Since there was an element of chance in this case, the amount spent on presentations could not be considered as trade discounts.
4. As against this order of the learned Accountant Member, the learned Judicial Member took a contrary view. According to him, under Sub-section (3A) of Section 37, as it stood at the relevant time, it related to expenditure referred to in Sub-section (3) which meant that advertisement expenditure should be excluded while computing the limit of Rs. 40,000 mentioned in that section. According to him, under section (3A), the aggregate of expenditure incurred on advertisement, publicity and sales promotion should be considered and since Sub-section (3A) contained a non obstante clause, it excluded the operation of Sub-section (1) of Section 37 and also Sub-section (3) and since Sub-section (3) dealt with expenditure on advertisement, the expenditure incurred on advertisement must be excluded from considering the limit of Rs. 40,000 referred in Sub-section (3A). This is somehow not the point on which the learned Accountant Member had expressed any opinion. Considering whether the expenditure incurred by the assessee firm amounted to advertisement or it represented expenditure on sales promotion or publicity or offering of trade discount, he held that the expression "advertisement" as seen from the meaning given to it in the dictionaries meant publicity to the world at large with a view to attract potential customers and that it was addressed mainly to future customers, although it had for itself the aim to retain the present customers, and that there was no quid pro quo between the outlay and the result. Placing reliance upon the decision of the I.T.A.T.Hyderabad Bench 'B' in K. Narayana Chetty & Co. 's case (supra), which was distinguished by the learned Accountant Member, the Judicial Member held that the facts of that case and the decision given therein fitted in with the facts of the present case and on the same rationale, the expenditure incurred here could be considered only as an abatement in prices and, therefore, a trade discount and not an expenditure incurred on advertisement. He then mentioned that that decision was followed in another decision in the case of Sandeep Wines (supra). There also identical situation arose and the expenditure incurred under similar circumstances was held to be trade discount. There also like in the present case, there was a scheme for presentation of articles and there also rule 6B was applied in respect of expenditure incurred on each article costing more than Rs. 50 but the Tribunal held that such expenditure was not advertisement but only trade discount. The learned Judicial Member further pointed out that mere purchase of liquor above the stated quantity would not automatically guarantee a prize to the purchaser except that it would guarantee him a lucky draw coupon and at the time the draw was conducted, the person who purchased was not a customer any more and became past customer and, therefore, the expenditure was not an expenditure on advertisement but only a discount offered in a different form to those past customers. The learned Judicial Member referred to another fact namely that the assessee made certain bulk purchases from the producers namely Shaw Wallace Co. and on account of that got 60 cases of liquor free of charge and it was out of the sale proceeds of those sixty cases, the assessee conducted the scheme by purchasing the presentation articles which, meant that the assessee parted with a part of the commission received. For this reason and for the reason that this matter has been concluded already by the Hyderabad Benches in two earlier cases, he held that the expenditure in question should be regarded as expenditure either by way of publicity or by way of sales-promotion or as trade discount or as abatement of commission but certainly not as advertisement. He also relied upon a decision of the Gujarat High Court in the case of Dascroi Taluka Co-operative Purchase & Sales Union Ltd. (supra) for the row that the amount incurred in question could be said to be an amount incurred in generating goodwill and in maintaining the image which did not amount to advertisement. Thus the difference arose between the two Members and the point of difference was formulated in the following manner which I am now called upon to resolve by expressing my opinion: 1. On the facts and circumstances of the case, can it be said that the expenditure amounting to Rs. 34,949 is advertisement expenditure within the meaning of Section 37(3A) as it stood for the assessment year 1984-85? 2. On the facts and circumstances of the case, can it be said that the said expenditure can be treated either as (i) publicity or (ii) sales promotion expenses or (iii) trade discount granted to some of the customers or (iv) abatement of commission earned by the assessee itself from its principal M/s Shaw Wallace Co., Vijayawada? 5. I have heard Shri Rama Rao for the assessee and also the learned departmental representative Shri Radha Krishnamurthy for considerable length. Shri Rama Rao's argument was naturally relying upon every word of the order of the Judicial Member, that the expenditure in question did not amount to advertisement at all but this was only a case of abatement of Shaw Wallace Co. and what the assessee did was to part with that commission in a mode that it generated interest in his customers and incidentally helped increase the sales. He admitted that the C.I.T. was not correct in saying that Section 37(3) did not apply nor Section 37(3A). He submitted that he would agree with that portion of the order of the learned Accountant Member but he submitted that he (the Accountant Member) was not justified in drawing a conclusion adverse to the assessee by pointing out some distinguishing features which did not exist from the orders of the Tribunal which had already decided this point in the earlier two cases. He also referred to a decision of a Special Bench of the I.T.A.T. in First ITO v. French Dyes & Chemicals (1) (P.) Ltd. [1984] 10 ITD 240 (Bom.) for the meaning of the word "advertisement" and submitted that that expression was not to be brought into use in this case at all. He then referred to Sub-section (3A), Sub-section (3B) of Section 37 which were omitted w.e.f. 1-4-1986 and contrasting the language used in Section 37(3) submitted that if the expression 'advertisement' used in Section 37(3) included publicity and sales-promotion, then there was no need for using that expression in Section (3B) again along with other expression 'publicity and sales promotion'. He pointed out that when the Legislature used the expressions 'publicity' and 'sales promotion' in addition to the expression 'advertisement' in Section 37(3B), it clearly meant that the expression 'advertisement' did not cover publicity and sales-promotion and if expenditure was incurred on publicity or sales-promotion that would not amount to advertisement within the meaning of Section 37(3) and if it does not come within the meaning of Section 37(3) the provisions made in rule 6B are not at all to be applied. He then referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Raj Bros. [1988] 171 ITR 249/37 Taxman 226 to point out that Section 37(3) authorised allowance of expenditure on certain items as per the quantification made under rule 6B and Section 37(3A) was devised in order to impose a further limit on the aggregate expenditure on account of the items specified in Sub-section (3) and that the limits specified in Section 37(3A) was without prejudice to the provisions contained in Section 37(3) and, therefore, the expenditure on account of advertisement, publicity and sales-promotion should in the first instance be subject to the limits specified in Section 37(3) and the aggregate of such expenditure should further be subject to the limits specified in Section 37(3A). Relying upon this decision, he submitted that the distinction between the expenditure incurred on advertisement, publicity and sales promotion was distinctly brought out and when a definite distinction was drawn that distinction must be borne in mind while deciding whether the expenditure incurred by the assessee in this case was on advertisement or on sales promotion and publicity or allowing the commission to the customers or by way of trade discount. He pointed out that the customer of the assessee may be a teetotaller and yet lured by the offer of presentation of article might buy the products offer for sale by the assessee which did not amount to advertisement at all except the sales promotion. He submitted that there was a definite line of distinction that could be drawn between the expenditure incurred on advertisement and expenditure incurred on publicity and sales promotion. While there was no overlapping and while expenditure incurred on any one of the three may ultimately result in maximisation of profits yet the distinction between the three has to be borne in mind. The assessees may adopt different schemes for sales promotion and if a scheme involves a lottery like the one in the present case, there could be no question of presentation of article and if there was no presentation of article, there was no question for applying rule 6B. The matter was, therefore, contractual and the matter of chance. The orders passed by the earlier Benches should have been followed here also instead of differing from them.
6. The learned departmental representative on the other hand submitted that the expenditure incurred in this case was wholly and exclusively on advertisement and, there was no question of sales promotion or publicity involved in this case. He agreed that the expenditure incurred on sales promotion could be distinguished from presentation of articles but in the present case, there was a presentation of articles involved which amounted to advertisement and was hit by rule 6B of the Income-tax Rules. The expenditure in this case may not be directly on advertisement but it was interlinked or connected with advertisement and, therefore, on advertisement falling within the scope of Section 37(3) of the Income-tax Act. He submitted that the distinction drawn by the learned Accountant Member from the earlier two orders of the Tribunal was very sound, valid and should be upheld. In a case where articles were presented to advertise the product, it could not be said that the value of the articles so presented amounted to trade discount or offer of commission. There would have been a reduction in sale price amounting to trade discount if articles were presented to the same customers who bought the goods with the hope that he would get the presentation of articles which would ultimately reduce his purchase price but when articles were sold with an offer of presentation of an article to general public without any specification leaving it to chance for the lottery, there cannot be any scope for offering any deduction in price which could be termed as trade discount. He further submitted that the decision of the Andhra Pradesh High Court in Raj Bros.' case (supra) does not help the assessee at all and on the contrary, the ratio laid down by this decision would go to support the department's view.
7. After careful consideration of the arguments addressed to me and after careful perusal of the orders passed by my learned Brothers, the orders passed by the earlier Benches of the Tribunal, and that of the High Court, I thought that it will be correct and appropriate and also justified to follow the view expressed by the Tribunal in two earlier cases, as I don't find much difference in facts or the objects of the schemes. I do not propose to discuss in my opinion anything about the decision in the Andhra Pradesh High Court as in my view it is not necessary for me to go to that extent as the matter was already concluded by decisions of the Tribunal. Moreover the point that arose in the case before me did not arise for consideration before the High Court. The High Court explained in that case the meaning of the word 'advertisement' or whether the expression "advertisement" is distinguishable from publicity and sales promotion the words used in Section 37(3B). However, I find great force in the argument addressed by the learned counsel for the assessee Sh. Rama Rao that when legislature deliberately used the expressions advertisement, publicity and sales promotion in Section 37(3B)(i), it must mean that the expression 'advertisement' was not comprehensive enough to include publicity and sales promotion and there could be circumstances or instances where publicity and sales promotion could be different from advertisement. Rule 6B is attracted only when Sub-section (3) of Section 37 is applied. If under Sub-section (3) the expression 'advertisement' does not include publicity and sales-promotion, the expenditure incurred on publicity and sales promotion would not be covered by the expression 'advertisement' unless it is said that the expenditure incurred on publicity, sales promotion and advertisement are one and the same and that the expressions used in Section 37(3B) are synonymous or interchangeable which I think, it is not so. In the present case, as pointed out by the learned Judicial Member which did not find a disapproval in the order passed by the learned Accountant Member or in the arguments addressed to me by the learned departmental representative, that the presentation articles were met out of the free liquor cases received by the assessee from Shaw Wallace Co. Thus, the expenditure incurred on presentation articles is directly traceable or relatable to the commission received from the producers Shah Wallace Co. The presentation of articles by the assessee to its customers, subject' to the satisfaction of certain conditions of lottery etc.
which were to introduce with a view to generate certain amount of interest and a novelty of sales promotion and publicity for the goods sold by the assessee could only be said to be passing a part of the commission received to the customers in a different way. If that is so, the expenditure could not be regarded as expenditure on advertisement.
I do not propose to dwell in this opinion on the meaning of the expression 'advertisement' because this issue has already been decided by two earlier Benches; if I may say so in a lucid manner. I am in entire agreement with those views expressed. Following the view expressed by the earlier two Benches, I felt no difficulty in agreeing with the view propounded by the learned Judicial Member, that the expenditure incurred in this case could not be said to be expenditure on advertisement as that expression was used in Section 37(3). The purpose of enacting Section 37(3) is to put a curb upon high and aggressive advertisement just to promote sales and that too at the cost of the exchequer because whenever the amount spent upon advertisement is allowed as an expenditure, the revenue due to the Government to that extent is lost and to that extent it amounts to a subsidy provided by the exchequer on advertisement which is not the purpose of the exchequer. If this is the object of enacting Section 37(3) then the object of Section 37(3B) is to further restrict the expenditure on sales promotion and publicity. Therefore, there is a clear distinction as I see between the advertisement on one hand, publicity and sales promotion on the other and one cannot be taken to mean the other.
8. For these reasons, I am inclined to agree with the view expressed by the learned Judicial Member. Before I part with, I would like to point out that merely because some element of chance was introduced in the scheme of presentation of articles in this case, it did not convert the basic features of the scheme from those that were discussed in the earlier two orders of the Tribunal in order that the amount Incurred in this case could be said to be the amount incurred on advertisement.
Element of chance or no element of chance, the scheme is basically the same namely parting off a part of the commission to the customers with a view to induce them to buy more of the goods sold by the assessee.
9. The matter will now go before the Regular Bench for the disposal of the appeal in accordance with the opinion of the majority.