DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(2), BANGALORE vs. SARASOULE PVT. LTD., BANGALORE

Page 3 of 11 and there was no expense incurred specially to contribute to the value of the brand. However, the AO did not agree with the contention of the assessee by observing as under: “6. The Marketing expense comprises of Radio, Newspaper, Mobile Advertising, Photoshoot expense and other advertisement cost attributable to marketing the products under the Brand Name `RUOSH'. There is no doubt that the expenses are incurred for the increase of sales of the product which indirectly is also boosting the Brand image which is eventually helping the brand name to be stronger and stronger. This cannot be denied that indirectly Brand Name `RUOSH' is also getting publicity and brand value is increasing on account of Marketing expenditure incurred by the assessee but the entire expenditure incurred for marketing cannot be disallowed on account of Brand Building and the same will be not justifiable. J 10.7 If the Brand would have been owned by the assessee himself, then the same could have been claimed as revenue expenditure but in this present case the brand is owned by the Director of the Company and not by the company itself. Hence it cannot be denied that there is a component of personal expenditure and the same is not allowed u/s 37(1) of the IT Act, 1961. It will be justifiable to state that 20% of the expenditure incurred as stated above is in the nature of personal expenditure incurred for the purpose of Brand RUOSH building. Hence, 20% of Rs.9,14,16,22 amounting to Rs.1,82,83,244/- is disallowed u/s 37(1) of the IT Act, 1961 added back to the Income for the previous year.”

4. On appeal, the ld. CIT(A) deleted the disallowance made by the AO by observing as under: “4.3 The only way in which it can be ascertained as to whether there was any personal benefit that accrued to the director or not is by looking at the IT Returns of the Director, who is the owner of this brand. A perusal of the return of income shows that the director has no business income, much less any business income attributable to the exploitation of the brand "ROUSII". 4.4 On a careful appraisal of facts, it is decided that since it is not in dispute that the said expenditure is revenue in nature and the director who owns the brand has no business income at all, it would be fair to say that there is no clement or component of personal expenditure that is involved. Therefore, it is held that the 20% disallowance that has been made needs to be deleted and is held as such. Therefore, in result the grounds of appeal no. 2, 3 & 4 stands allowed.”

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5. Being aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us.

6. The ld. DR before us submitted that the assessee in the statement furnished u/s 132(4) of the Act has admitted making the disallowance of Rs. 5 crores, which is a vital piece of evidence. Therefore, the assessee cannot retract from the same without any plausible reason. The ld. DR in support of his contention relied on the judgment of Hon’ble Supreme Court in the case of Roshan Lal Sanchiti v. Principal Commissioner of Income-tax reported in 150 Taxmann.com 228. The ld. DR further submitted that since brand owns by the Director and, therefore, the benefit out of expenses for building brand value cannot be denied.

- 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 5 of 11 without any corroborative material and, therefore, based on the statement, no addition is warranted.

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10.1 The Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. Vs CIT reported in 118 ITR 261 has also observed as under: 20. The next contention urged on behalf of the Department was that since Davids and Tatas were indirectly benefited by the retrench-ment of the services of the employees of the Company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the Company. It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed" The introduction of the word "necessarily" in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48: "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous .

- 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 7 of 11 or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party—Usher's Wiltshire Brewerv v. Bruce 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby — [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."

10.2 The Hon’ble High Court of Delhi in the case of CIT Vs. Agra Beverages Corporation Pvt. Ltd. reported in 11 taxmann.com 350 has observed as under: 9. The agreement entered into between the assessee and Pepsi shows that the assessee was given a particular territory in Haryana, boundaries whereof are specifically defined in the agreement for the purposes of bottling, selling and distributing of the beverages. This entire territory within which the assessee was to operate, the assessee was not only supposed to bottle the beverages, it was also given rights to sell and distribute the project of the Pepsi in the defined territory during the currency of the said agreement. Naturally, therefore, in order to augment its profits in the said territory, it was the business decision of the assessee to advertise and publicize the product for maximizing its sale. The expenditure was, thus, incurred by the assessee for its own benefit. Clause 18 of the agreement authorized the assessee to undertake appropriate advertising and sales promotion activity for the beverage. If in the process, Pepsi or its trademark also benefited, that would not militate against the assessee as far as claiming the deduction under section 37 of the Act is concerned, once all the characteristics of the said provision stood satisfied.

10.3 In the present case, it is the admitted position that the expense incurred by the assessee is going to give benefit to third party who is .

- 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 8 of 11 also the director of the company but that can’t be a reason or yard stick for making the disallowance of the expenses incurred by the assessee. The AO has nowhere doubted on the genuineness of the expenses discussed above and likewise such expenses were also not capital in nature. In view of the above we are of the opinion that the expenses incurred by the assessee were exclusively for the purpose of the business which satisfies the test laid down by the Hon’ble Court discussed above, therefore, the same cannot be disturbed merely on the reasoning that some incidental benefit is going to the third-party. Admittedly, in the case on hand the brand value is owned by the director which is being used by the company. The director in the company has not charged any royalty against the use of such brand by the assessee. As such the assessee is running its business after exploiting the brand value of the director and in this connection the assessee has incurred the expenses which are incidental to the business of the assessee. Therefore, we are of the view that such expenses can’t be disallowed as alleged by the AO.

10.4 Regarding the contention of the learned DR that the assessee in his statement has accepted to offer an income of ₹ 5 crores furnished under section 132(4) of the Act, it is not out of place to mentioned that even the CBDT by way of instruction bearing number F. No. 286/98/2013-IT(Inv. III) dated 18th December 2014 has discouraged its officers to make any addition based on the statement obtained during survey/search proceedings until and unless it is corroborated by the documentary evidence. The relevant extract of the instruction of the CBDT reads as under:

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Page 9 of 11 Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light.

10.5 Regarding the admission by the assessee for the disallowance of AMP expenses, it is also pertinent to note that the AO himself has not considered such disallowance based on the statement furnished by the assessee in the assessment order. As such the assessee in the statement under section 132(4) of the Act has accepted to make the disallowance of Rs. 5 crores whereas the AO has worked out the disallowance 1.82 crores only. Therefore, we are of the view that no reference can be made to the statement furnished by the assessee during the search proceedings. In view of the above, we hold that there is no infirmity in the order of the ld. CIT-A and thus we uphold the same. Hence, the ground of appeal filed by the revenue is hereby dismissed.

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Order pronounced in court on 26th day of November, 2024