JUDGMENT
N. V. Balasubramanian J.
1. This is a petition filed by the Commissioner of Income-tax Madras, under section 256(2) of the Income-tax Act 1961, to direct the Appellate Tribunal to state a case and refer the following questions of law for the opinion of this court :
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in directing the Assessing Officer to allow deduction of the payment made by the assessee to the Karnataka State Lawn Tennis Association that the expenditure was wholly and exclusively for the purpose of the business allowable under section 37(1) of the Income-tax Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Assessing Officer to allow deduction of service charges amounting to Rs. 3,29,17,500 ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in basing its conclusion on the papers that had not been produced before the Assessing Officer before he completed the assessment in spite of reasonable opportunity and whether that vitiated the findings of the Tribunal ?”
2. The assessee is a partnership firm, engaged in the business of purchase and sale of Indian made foreign liquor (IMFL). It is a distributor for IMFL products manufactured by McDowell and Co. Ltd. in the State of Karnataka. The assessee, during the course of assessment proceedings for the assessment year 1986-87, relevant previous years for which ended on December 31, 1985, claimed deduction of a sum of Rs. 1,25,000 paid to the Karnataka State Lawn Tennis Association under the head, “Sales promotion expenses”. The assessee also claimed tax deduction on the payment of Rs. 3,29,17,500 as service charges. The Income-tax Officer held that in so far as the payment of Rs. 1,25,000 to the Karnataka State Lawn Tennis Association is concerned, the assessee did not produce any evidence to prove that the amount was really paid during year. The assessing Officer, therefore, held that the expenditure was not incurred wholly and exclusively for the purposes of business of the assessee and disallowed the claim of the assessee. As regards other claim of Rs. 3,29,17,500, the Income-tax Officer disallowed the claim on the ground that the assessee did not give the details of the nature of services rendered by the several opportunities given by the Assessing Officer. The Assessing Officer held that the assessee was having its own staff and there was no need to engage an outside agency to perform the marketing services. The Assessing Officer, therefore, held that there is no evidence to prove that those persons had rendered services, and hence, the payment of Rs. 3,29,17,500 was held to be made for extra commercial consideration.
3. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) held that the payment to the Karnataka State Lawn Tennis Association was made in connection with with the tournaments conducted by the said association during the course of which there was a display of banners showing the products dealt with by the assessee. The Commissioner (Appeals), therefore, held that the display could be regarded as publicity of the assessee’s products and the expenditure incurred in connection with the same could be regarded as spent for business purposes. He, therefore, held that the payment is allowable as business expenditure. As regards the payment made by the assessee towards service charges, the Commissioner (Appeals) found that there was an agreement entered into between the assessee and McDowell and Co. Ltd., for marking IMFL products. According to the Commissioner (Appeals), the agreement contemplated rendering of marking services by McDowell and Co. Ltd., and there was some material to that McDowell and Co. Ltd. was helping the assessee with the latest marketing techniques and, hence, the payment can be allowed as business expenditure. The Revenue preferred an appeal before the Appellate Tribunal challenging the finding of the Commissioner (Appeals). The Tribunal held that the Karnataka State Lawn Tennis Association conducted a tournament and at the time of the tournament, there was display of banners showing the products of the assessee and therefore, the payment made to the Karnataka State Lawn Tennis Association would be regarded as expenditure wholly and exclusively for the purposes of business. As regards the deduction of service charges amounting to Rs. 3,29,17,500, the Tribunal held that from the materials placed before the Commissioner (Appeals), it was proved the McDowell and Co., Ltd., has rendered services to the assessee for distribution of IMFL products in the State of Karnataka. The Tribunal further found that McDowell and Co. Ltd. has booked the orders by sending its own representatives, collected the demand drafts from the purchasers of the assessee’s products forwarded them to the assessee and suggested various incentive schemes to push up the sales, etc. The Appellate Tribunal also noticed that there was an agreement dated January 10, 1985, between Balaji Traders and McDowell and Co. Ltd., and Balaji Traders had a licence for the whole-sale distribution of IMFL in the State of Karnataka and due to misunderstanding between McDowell and Co. Ltd., and Balaji Traders, McDowell and Co. Ltd. Directed Balaji Traders to transfer 69,000 cases to the assessee and the marketing of the cases was the responsibility of the assessee and the assessee had to pay service charges to McDowell and Co. Ltd., in respect of the said 69,000 cases also. The Tribunal, therefore, held that the payment of service charges to McDowell and Co. Ltd., which is part of the total of the sum of Rs. 3,29,17,500 is allowable as business expenditure.
4. The Revenue filed an application before the Tribunal to state a case and refer the questions set out in paragraph 1 (page 591). The Appellate Tribunal held that no referable question of law arose out of the orders of the Appellate Tribunal and rejected the reference application. The Revenue filed the present petition seeking a direction of this court of the Appellate Tribunal to state a case and refer the questions.
5. In so far as the first question is concerned, the finding of the Appellate Tribunal is clear that the assessee made payment to the Karnataka State Lawn Tennis Association and the said association conducted a tournament and in the tournament conducted by the said association, there was a display of banners showing the products manufactured by the assessee. It cannot be disputed that there was a publicity of the assessee’s products by the display of banners in the tournament conducted by the said association. The main purpose of the payments is for the promotion of the assessee’s business and, hence, the expenditure incurred by the assessee was rightly regarded by the Appellate Tribunal as business expenditure. There is a close nexus between payment made to the Karnataka State Lawn Tennis Association and the business of the assessee. Therefore, we are of the opinion that the Tribunal has come to the correct conclusion in holding that the payment to the said association is an allowable business expenditure. We, therefore, hold that the first question sought for by the Revenue is not a referable question of law and we reject the same.
6. In so far as questions Nos. 2 and 3 are concerned, they relate to the allowability of payment of service charges of McDowell and Co. Ltd. Mr. C. V. Rajan, learned counsel for the Revenue, has submitted that in the case of another assessee, this court has called for a statement of case and directed to refer a similar question of law in T.C.P. No. 56 of 1995 by order dated September 7, 1996, and in T.C.P. No. 437 of 1996, by order dated March 5, 1997. He further submitted that the question whether the payment is allowable as business expenditure gives rise to a question of law and, therefore, the Tribunal was not correct in holding that no referable question of law arose out of the order of the Appellate Tribunal. Mr. V. Ramachandran, learned senior counsel appearing for the assessee, vehemently argued that the Appellate Tribunal found that McDowell and Co. Ltd., has rendered certain services and on the basis of the materials, the Tribunal has come to the conclusion that the payments were made for the services rendered by McDowell and Co. Ltd. According to him, the Assessing Officer rejected the claim of the assessee only on the basis of suspicion and the Appellate Tribunal has come to the correct conclusion after going through the entire materials. Therefore, he submitted that the Tribunal was correct in holding that the payments were allowable as business expenditure. As regards the third question, learned senior counsel for the assessee submitted that the said question does not arise out of the order of the Appellate Tribunal as the question as framed is an unfair question. According to learned senior counsel for the assessee, no grounds were raised, no arguments were advanced and no findings were given by the Appellate Tribunal in so far as the third question is concerned and in the absence of any other material, no other conclusion is possible than that was arrived at by the Appellate Tribunal. He, therefore, submitted that this court should reject both the questions as well.
7. We have carefully considered the rival submissions of the parties. The question whether the payment is allowable as business expenditure is a mixed question of law and fact. We are not expressing any opinion on merits of the case as it will prejudice the rights of the parties, at the time of final hearing in the tax case. The Supreme Court in CIT v. Gannon Dunkerley and Co. Ltd. [1987] 167 ITR 637, held that the question whether the expenditure incurred by the assessee by way of secret commission is deductible or not under section 37(1) of the Income-tax Act, 1961, in computing the business income of the assessee is a question of law. Similarly, the Supreme Court in Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439, held that the mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. The Supreme Court in CIT v. Greaves Cotton and Co., Ltd. [1968] 68 ITR 200, has also taken a view that the question whether a certain expenditure was laid out or expended wholly or exclusively for the purpose of the assessee’s business is a question which involves, in the first place, the ascertainment of facts by the Appellate Tribunal, and in the second place, the application of the correct principle of law to the facts so found and, therefore, the question is a mixed question of fact and law. Hence, we are of the opinion that the second question as framed and suggested by the Revenue does arise out of the order of the Appellant Tribunal.
8. In so far as the third question is concerned, we are of the opinion that the third question also arises out of the order of the Appellate Tribunal, even though Mr. V. Ramachandran, learned senior counsel for the assessee, urged that the third question does not arise out of the order of the Appellate Tribunal.
9. Accordingly, we direct the Appellate Tribunal to state a case and refer questions of law Nos. 2 and 3 set out in paragraph 1 (page 591). The Appellate Tribunal is also directed to enclose along with the statement of the case the copies of paper books stated to have been filed before the Appellate Tribunal at the time of hearing of the appeal. Accordingly, we reject the petition in so far as question No. 1 is concerned but direct the Appellate Tribunal to state a case and refer the questions of law Nos. 2 and 3. The petition is ordered accordingly. No costs.