K. KACHARDAS PATEL SPECI-FIC FAMILY TRUST. vs. THE C.I.T.CENTRAL GUJARATAHMEDABAD.

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ITR/754/1998HC Bombay03 October 2016Author: HON'BLE SHRI JUSTICE M.S. SANKLECHA, HON'BLE SHRI JUSTICE S.C. GUPTE8 pages
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What did the High Court hold?

The High Court addressed each question as follows: Regarding Question (i): The Court answered the question in the affirmative, in favour of the revenue and against the assessee. This was based on the assessee's counsel fairly stating that the issue was concluded against them by the Andhra Pradesh High Court's decision in CIT vs. Ampro Food Products, which held that the distribution of note books was in the nature of sales promotion/advertisement on identical facts. Regarding Question (ii): The Court answered the question in the negative, in favour of the assessee and against the revenue. The Court agreed with the Gujarat High Court's decision in CIT vs. Vadilal Industries Ltd., which held that only the net amount of expenditure (gross expenditure less amount recovered from dealers) can be considered for disallowance under Section 37(3A). Crucially, the Court noted that the question itself stated that the expenditure was never claimed as a deduction. Since Section 37(3A) applies only when a deduction is claimed under Section 37(1), and no such claim was made, the provisions of Section 37(3A) could not be invoked for disallowance. The Court found merit in the assessee's submission that if no expenditure was claimed, no disallowance could be made. Regarding Question (iii): The assessee's counsel stated they were not pressing this question. Therefore, the question was returned unanswered as not pressed. The reference was disposed of accordingly.

What were the facts?

This case involves an Income Tax Reference filed by K. Kachradas Patel Specific Family Trust (the assessee) against the Commissioner of Income Tax, Central, Gujarat (the revenue). The reference pertains to Assessment Years 1984-85, 1985-86, and 1986-87. The Tribunal sought the opinion of the High Court on substantial questions of law arising from its previous order. The assessee's counsel appeared, while no one appeared for the revenue. The service upon the respondent revenue was completed on January 1, 1999.

What were the issues?

The Tribunal had to decide three substantial questions of law: 1. Whether the Tribunal was justified in holding that expenditure of Rs. 13,97,962 (Rs. 16,25,038 for AY 1985-86) on free distribution of exercise notebooks was in the nature of advertisement, publicity, and sales promotion under Section 37(3A) read with Section 37(3B) of the Income Tax Act, 1961, despite the assessee's contention that it was by way of discount. 2. Whether the Tribunal was justified in invoking Section 37(3A) read with Section 37(3B) for expenditure of Rs. 22,68,796 (Rs. 37,55,543 for AY 1985-86) on advertisement, given that the expenditure was not claimed as a deduction and was incurred on behalf of consignment agents who were subject to disallowance under the same provisions. 3. Whether the Tribunal was justified in disallowing the deduction under Section 80I on interest income of Rs. 51,03,976 on the grounds that it did not form part of business income. Assessee's arguments: For issue 1, the assessee's counsel conceded that the issue was concluded against them by the Andhra Pradesh High Court's decision in CIT vs. Ampro Food Products. For issue 2, the assessee argued that only the net amount after recovery from distributors should be considered for disallowance, or alternatively, that Section 37(3A) and 37(3B) cannot be invoked if no expenditure was claimed as a deduction. Reliance was placed on CIT vs. Vadilal Industries Ltd. For issue 3, the assessee's counsel stated that they were not pressing this question. Revenue's arguments: No arguments were recorded for the revenue in the judgment.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 37(3A),Section 37(3B),Section 80I,Section 256(1)

AI-generated summary — verify with the full judgment below

754-98-ITR=.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO. 754 OF 1998 K. Kachradas Patel Specific Family Trust 24/26, Cama Building, Dalal Street, Mumbai .. Applicant v/s. The Commissioner of Income Tax, Central, Gujarat .. Respondent Mr. Ashok Patil i/b Vipul Joshi and S.M. Lala for the applicant None for the respondent

CORAM : M.S. SANKLECHA &

S.C. GUPTE, J.J. RESERVED ON :  27/09/2016 PRONOUNCED On : 03/10/2016 JUDGEMENT ­ (Per M.S. Sanklecha, J.) :­

1.

The service upon the respondent Revenue was completed on 1st January,   1999   and   affidavit­of­service   dated   27th  August,   2015   is already on record.

2.

By this Reference under Section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal (Tribunal) seeks our opinion in respect of Assessment Year 1984­85, 1985­86 and 1986­87 on the following substantial questions of law :­ Uday S. Jagtap 1 of 8 CNR No : HCBM020047731998 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc (i) Whether in the facts and circumstances of the case and in law, the Tribunal was justified in holding that the expenditure of Rs.13,97,962/­ (Rs.16,25,038 for A.Y. 1985­86) on the free distribution   of   exercise   note   books   was   in   the   nature   of advertisement,   publicity   and   sales   promotion   within   the meaning   of   sub­section   (3A)   read   with   sub­section   (3B)   of section 37 of the Act, particularly in view of the contention of the assessee, that free distribution of exercise note books was by way of discount and not by way of advertisement? (ii) Whether in the facts and circumstances of the case and in law, the Tribunal was justified in invoking the provisions of Sec.37(3A)   r.w.s.   37(3B)   in   respect   of   the   expenditure   of Rs.22,68,796/­ (Rs.37,55,543/­ for A.Y. 1985­86), on account of advertisement, particularly in view of the fact that the said expenditure was never claimed by way of deduction and the said expenditure incurred by the assessee for and on behalf of the Consignment Agent was subjected to disallowance under the provisions   of   Sec.37(3A)  r.w.s.   37(3B)   in   the   hands   of   the Consignment Agents? (iii) Whether in the facts and circumstances of the case and in law, the Tribunal was justified in disallowing the deduction u/s 80I of the Act on the interest income of Rs.51,03,976/­ on the ground that the said interest income did not form part of the business income and was, therefore, not eligible for deduction under Section 80­I of the Act? Uday S. Jagtap 2 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc

3.

Regarding Question (i) :­

(a) High Court held that the same was in the nature of sales promotion / advertisement. (b) In the above view, he does not dispute the applicability of Ampro Food Products (supra) to the present facts.   Consequently, question (i) as raised for our opinion is answered in the affirmative i.e. in favour of the respondent Revenue and against the applicant assessee.

4.

Regarding question (ii) :­

(a) This issue arises for Assessment Years 1984­85 and 1985­86. The facts  are  identical  except   the  amounts  involved.     For  the  present purposes, we take figures of A.Y. 1984­85, though our answer to the question would apply to both the Assessment Years. (b) The applicant assessee had entered into an agreement with its distributors under which it was agreed that besides bearing expenditure Uday S. Jagtap 3 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc on transportation, octroi, loading / unloading charges, it would also be responsible for advertisement and sales promotion.     The agreement also provided that the advertisement / sales promotion expenditure which is incurred would be recoverable from the distributors. (c) For   the   assessment   year   1984­85,   the   applicant   assessee expended a sum of Rs.22.68 lakhs on advertisement / sales promotion. However, in terms of the agreement with the distributors, the applicant assessee collected an amount of Rs.27.93 lakhs from its distributors on account of sales promotion / advertisement expenses, leaving a surplus of Rs.5.34 lakhs.   It is the appellant's case that this surplus alone has to be added to the income of the assessee as income from other sources. In   the   aforesaid   facts,   the   applicant   assessee   had   not   claimed   the amount of Rs.22.68 lakhs as its expenditure. (d) As against this, the Revenue contended that in view of Sub­ sections 3A and 3B of Section 37 of the Act, as in force at the relevant time,   the   entire   amount   of   Rs.22.68   lakhs   spent   on   account   of advertisement has to be subjected to its rigour.  The contention of the applicant assessee is that it has not claimed any expenditure, as a deduction for the reason that it was incurred by the Distributors was negatived. (e) Before us, Mr. Patil, learned Counsel  for  the applicant urges that Uday S. Jagtap 4 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc in any case, the amount to be considered as expenditure is only the net amount after excluding the amount recovered from its distributors. This was in the alternative to his submission that as is evident from the question as framed, no expenditure under Section 37 of the Act has been claimed as a deduction and, therefore, sub­Sections 3A and 3B of 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 sub­Section (3A) of Section 37 of the Act can be made. (g) The relevant observations of the Gujarat High Court in Vadilal Industries Ltd (supra) are as under :­ “12. Therefore,   the   first   thing   is   to   determine   what   is   the expenditure   claimed   by   the   assessee;   is   it   the   gross   amount Uday S. Jagtap 5 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc debited to the “Advertisement and sales promotion account”, or is it   the   net   amount   after   considering   the   credit   to   the “Advertisement and sales promotion account”.  To determine the same, the pronouncement of the Apex Court as to the meaning of the term “expenditure” in the case of Indian Molasses Co. (P) Ltd. (supra)   may   be   usefully   reproduced.     It   is   stated   that   : “Expenditure” is equal to “expense” and “expense” is money laid out by calculation and intention though in many uses of the word this element may not be present, as and when we speak of a joke at another's expense.  But the idea of “spending” in the sense of “paying out or away” money is the primary meaning and it is with that meaning that we are concerned.   “Expenditure” is thus what is “paid out or away” and is something which is gone irretrievably.”

13.

Applying the aforesaid tests to the facts of the case, it is not possible   to   state   that   the   gross   amount   debited   to   the “Advertisement and sales promotion account” was the amount which was paid out or paid away, nor can it be termed to be something  gone  out   irretrievably.    In  fact,  the   corresponding credit side of the very same account shows that a major portion of   the   amount   had   already   been   recovered   by   the   assessee company from its dealers and in the circumstances, it is not possible to accept the contention of the Revenue that the gross amount is an amount of expenditure incurred.     If there is no expenditure, there could be no question of making any claim for deduction.   In absence of any claim there can be no question, whether the amount is allowable or otherwise.   In other words, there cannot be any disallowance of an amount which is not Uday S. Jagtap 6 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc claimed as a deduction.     The Tribunal has recorded a finding that the assessee has claimed an expenditure of Rs.46,473 only; that   would   be   the   only   amount   which   would   come   up   for consideration as being allowable or otherwise under S.37(1) of the Act.    The scheme of the Act itself envisages that only after amount   is   determined   under   S.37(1)   of   the   Act   as   being allowable   and   the   same   falls   within   any   of   the   specified categories of S.37(3B) of the Act, can be question of partial disallowance under S.37(3A) of the Act arise.”

(emphasis supplied) (h) There   is   some   merit   in   the   submission   made   by   Mr.   Patil. However, we are not considering the alternative submission as the question as framed for our opinion itself states that the expenditure was never   claimed   as   a   deduction   i.e.   under   Section   37   of   the   Act. Therefore, the occasion to apply sub­Section (3A) of Section 37 of the Act to disallow only part thereof will not arise. (i) We are in respectful agreement with underlined observations in Vadilal Industries Ltd. (supra).   In fact, Section 37(1) of the Act is a general  provision  which  provides  for  allowing  any  expenditure not being   capital   or   personal   in   nature   and   expended   wholly   for   the purpose of the business or profession as deduction in computing profits and   gains   of   business.       Section   37(3A)   of   the   Act   states   that notwithstanding   the   deduction   allowed   under   sub­Section   (1)   of Uday S. Jagtap 7 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02

754-98-ITR=.doc Section 37 of the Act, expenditure in respect of particular types / classes as mentioned in Section 37(3B) of the Act shall not be allowed in excess of specified percentage.  It, therefore, follows that sub­section (3A) of Section 37 of the Act can only apply where deduction under Section 37(1) of the Act is claimed.   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. (j) Therefore, question no.(ii) as formulated for our opinion has to be answered in the negative i.e. in favour of the applicant assessee and against the respondent Revenue.

5.

Regarding Question (iii) :­

At the very outset, Mr. Patil, learned Counsel appearing for the applicant assessee in support of the Reference, on instructions, states that he is not pressing question (iii) which relates to A.Y. 1986­87. In view of the above, question (iii) as raised for our consideration is being returned unanswered as not pressed.

6.

The Reference is disposed of in the above terms.  No order as to costs.

(S.C. GUPTE, J.)

(M.S. SANKLECHA, J.) Uday S. Jagtap 8 of 8 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:01:02 Powered by TCPDF (www.tcpdf.org)

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