DCIT CIR 2, KALYAN vs. NATIONAL LIQUORS, ULHASNAGAR

hence, his order should be set aside and addition made by the AO

12 M/s National Liquors & Others should be sustained.

It is also an admitted fact that WHO framework Convention on tobacco control (WHO FCTC), Article 16 prohibits or permits the prohibition of the distribution of free tobacco products to the public, especially to minors.

These facts are not disputed by the assessee. According to the assessee, when the State has not imposed any ban or restriction on production, sale and consumption of tobacco products, mere purchase of tobacco products in the open market for free distribution to increase sales turnover and expand customer base cannot be considered as expenses incurred for any purpose which is an offence or which is 13 M/s National Liquors & Others prohibited by law and hit by the provisions of Explanation (1) to section 37(1) of the Act.

To regulate and control tobacco products, the government has brought out various legislation. The provisions of section 5(3) of (COTP Act) , 2003 specifically prohibits any person promotes or distribution of free cigarette product to general public and especially to minors. As per the Ministry of Health & Family Welfare, Government of India, free distribution of tobacco products amounts to promotion which is prohibited under the COTP Act, 2003. In this legal back ground, when we analysis expenditure incurred by the assessee towards sales promotion, it is obviously certain that the assessee has incurred expenditure for purchase of tobacco product to be distributed free of cost to its customers to enhance its sales and customer base. Although, expenditure incurred by the assessee is in the nature of sales promotion expenses which has been incurred wholly and exclusively for the purpose of business, but such expenses are in the nature of expenditure incurred for any purpose which is an offence or which is prohibited by law. Although, the State has not imposed any restriction on production, sale and consumption of tobacco products, it is the duty of the every

14 M/s National Liquors & Others general public to adhere to the law which specifically bans promotion of free distribution of tobacco products, under whatever may be the circumstances. In this case, the assessee has incurred sales promotion expenses for free distribution of tobacco products which is in our considered opinion, expenditure incurred for the purpose which is an offence or which is prohibited by law and hit by Explanation (1) to section 37(1) of the Income-tax Act, 1961. Therefore, we are of the considered view that the AO was right in disallowing sales promotion expenses u/s 37(1) of the Act. The Ld.CIT(A) without appreciating the facts, has deleted addition made by the AO. We further notice that the case laws relied upon by the assessee and considered by the Ld.CIT(A) are rendered under different set of facts and hence, will not come to the rescue of the assessee. We, therefore, reverse the order passed by the Ld.CIT(A) and uphold the addition made by the AO towards disallowance of sales promotion expenses.