Shri Ambuja Petrochemicals Itd. Vs. Deputy Commissioner of Income Tax - Court Judgment

Excerpt:
this appeal by the assessee is directed against the order dated 3-8-1992, of the commissioner (appeals)- iii, hyderabad for the assessment year 1988-89.the first ground that has been raised in this appeal is that the learned commissioner (appeals) erred in sustaining the disallowance of rs. 47,654 under rule 6b of the income tax rules. the assessing officer made the disallowance under rule 6b of a sum of rs. 65,704 being the cost of presentation articles. the learned commissioner (appeals), on verification came to the conclusion that the amount in excess of rs. 50 per article is actually rs. 47,654. he came to the conclusion that the expenditure on presentations is essentially on business promotion and it is advertisement for promoting the business. hence, he directed the assessing officer to disallow under rule 6b the amount in excess of rs. 50 per article i.e. rs. 47,654, after verification. aggrieved by it, the assessee is in appeal before us on this issue.the learned counsel for the appellant contended that articles like dry-fruit packets, suit-lengths, etc., were presented to the representatives of the financial institutions that advanced funds to the appellant that in a similar way articles were presented to dignitaries and government officers for the purpose of creating goodwill and maintaining cordial relations with them for the smooth and efficient running of business, that no element of advertisement was involved in those presentation articles and that the disallowance made under rule 6b is wholly untenable. the learned departmental representative supported the order of the first appellate authority.rule 6b of the income tax rules deals with expenditure on advertisement. rule 6b(1) provides that the allowance in respect of expenditure on advertisement should not inter alia in respect of articles intended for presentation exceed the limits which are set out in that rule. thus, the articles contemplated under rule 6b for presentation must be such articles which advertise the assessee's goods or products in some manner or the other. in the case on hand, the articles that were presented to certain dignitaries and representatives of financial institutions are dry-fruit boxes, suit-lengths, sarees, etc. they did not bear the name of the assessee-company or the logo of the assessee-company. in our view, no element of advertisement is involved in the presentation of the said articles to certain dignitaries. normally, this type of presentations are made to dignitaries for the purpose of creating goodwill and maintaining cordial relations with the authorities concerned for the effective and smooth conduct of the business. it is not meant for the purpose of advertising the products of the company. hence, the disallowance made under rule 6b of the income tax rules is not sustainable. similar view was taken by the bombay high court in the case of cit v. allana sons (p) itd. (1995) 216 itr 690 (bom.) and the delhi high court in the case of cit v. associated india exports. (1991) 188 itr 125 (del). since no element of advertisement is involved in the presentation of these articles, disallowance made under rule 6b of the income tax rules cannot be justified. accordingly, the disallowance in that regard is deleted.the second ground raised by the appellant is that the learned commissioner (appeals) erred in not allowing the interest on funded interest of rs. 5,60,337. the learned counsel for the appellant submitted that as the appellant company was facing financial difficulties, it could not pay interest on term loans, that at the request of the appellant the financial institutions converted the unpaid outstanding interest into term loan which again carried interest at specified rates, that the interest on funded interest is an expenditure wholly and exclusively incurred for the purposes of business and that interest on funded interest has to be allowed as an expenditure under section 36(1)(iii) r/w section 37(1) of the income tax act. the learned departmental representative supported the order of the first appellate authority.regarding the claim of interest on funded interest, the learned commissioner (appeals) held as follows: "regarding the interest on interest on unpaid loans, the same is not allowable as the interest was already allowed in the assessment. the appellant cannot get a second benefit by non-payment of interest even though claimed as deduction in the income-tax assessment." in our considered opinion, the aforementioned view expressed by the learned commissioner (appeals) is not correct. when the arrear interest due on term loans was funded by the financial institutions, the said arrear interest gets converted into a new loan. thus, the interest, when funded by a lender, acquires the character of a loan, having a special rate of interest and repayment terms. payment of interest on funded interest is an expenditure wholly and exclusively incurred for the purposes of business. hence, it cannot be disallowed. accordingly, the order of the first appellate authority on this issue is set aside and the assessing officer is directed to allow the interest on funded interest claimed by the appellant.

Judgment:
This appeal by the assessee is directed against the Order dated 3-8-1992, of the Commissioner (Appeals)- III, Hyderabad for the assessment year 1988-89.

The first ground that has been raised in this appeal is that the learned Commissioner (Appeals) erred in sustaining the disallowance of Rs. 47,654 under rule 6B of the Income Tax Rules. The assessing officer made the disallowance under rule 6B of a sum of Rs. 65,704 being the cost of presentation articles. The learned Commissioner (Appeals), on verification came to the conclusion that the amount in excess of Rs. 50 per article is actually Rs. 47,654. He came to the conclusion that the expenditure on presentations is essentially on business promotion and it is advertisement for promoting the business. Hence, he directed the assessing officer to disallow under rule 6B the amount in excess of Rs. 50 per article i.e. Rs. 47,654, after verification. Aggrieved by it, the assessee is in appeal before us on this issue.

The learned counsel for the appellant contended that articles like dry-fruit packets, suit-lengths, etc., were presented to the representatives of the financial institutions that advanced funds to the appellant that in a similar way articles were presented to dignitaries and government officers for the purpose of creating goodwill and maintaining cordial relations with them for the smooth and efficient running of business, that no element of advertisement was involved in those presentation articles and that the disallowance made under rule 6B is wholly untenable. The learned Departmental Representative supported the order of the first appellate authority.

Rule 6B of the Income Tax Rules deals with expenditure on advertisement. Rule 6B(1) provides that the allowance in respect of expenditure on advertisement should not inter alia in respect of articles intended for presentation exceed the limits which are set out in that rule. Thus, the articles contemplated under rule 6B for presentation must be such articles which advertise the assessee's goods or products in some manner or the other. In the case on hand, the articles that were presented to certain dignitaries and representatives of financial institutions are dry-fruit boxes, suit-lengths, sarees, etc. They did not bear the name of the assessee-company or the logo of the assessee-company. In our view, no element of advertisement is involved in the presentation of the said articles to certain dignitaries. Normally, this type of presentations are made to dignitaries for the purpose of creating goodwill and maintaining cordial relations with the authorities concerned for the effective and smooth conduct of the business. It is not meant for the purpose of advertising the products of the company. Hence, the disallowance made under rule 6B of the Income Tax Rules is not sustainable. Similar view was taken by the Bombay High Court in the case of CIT v. Allana Sons (P) ITD. (1995) 216 ITR 690 (Bom.) and the Delhi High Court in the case of CIT v. Associated India Exports. (1991) 188 ITR 125 (Del). Since no element of advertisement is involved in the presentation of these articles, disallowance made under rule 6B of the Income Tax Rules cannot be justified. Accordingly, the disallowance in that regard is deleted.

The second ground raised by the appellant is that the learned Commissioner (Appeals) erred in not allowing the interest on funded interest of Rs. 5,60,337. The learned counsel for the appellant submitted that as the appellant company was facing financial difficulties, it could not pay interest on term loans, that at the request of the appellant the financial institutions converted the unpaid outstanding interest into term loan which again carried interest at specified rates, that the interest on funded interest is an expenditure wholly and exclusively incurred for the purposes of business and that interest on funded interest has to be allowed as an expenditure under section 36(1)(iii) r/w section 37(1) of the Income Tax Act. The learned Departmental Representative supported the order of the first appellate authority.

Regarding the claim of interest on funded interest, the learned Commissioner (Appeals) held as follows: "Regarding the interest on interest on unpaid loans, the same is not allowable as the interest was already allowed in the assessment. The appellant cannot get a second benefit by non-payment of interest even though claimed as deduction in the income-tax assessment." In our considered opinion, the aforementioned view expressed by the learned Commissioner (Appeals) is not correct. When the arrear interest due on term loans was funded by the financial institutions, the said arrear interest gets converted into a new loan. Thus, the interest, when funded by a lender, acquires the character of a loan, having a special rate of interest and repayment terms. Payment of interest on funded interest is an expenditure wholly and exclusively incurred for the purposes of business. Hence, it cannot be disallowed. Accordingly, the order of the first appellate authority on this issue is set aside and the assessing officer is directed to allow the interest on funded interest claimed by the appellant.