ORDER
Kathuria, Accountant Member
1. This appeal by the assessee for assessment year 1984-85, is directed against the order dated 3-3-1988, passed by CIT (Appeals)-XII, New Delhi.
2. The assessee firm is a wholesale dealer of M/s Godfrey Philips India Ltd., the manufacturer of cigarettes. Before we come to the main issue raised in this appeal, it may be proper to dispose of the other grounds of appeal. Ground No. 2 challenges the action of the Ld. CIT (Appeals) in holding that sampling expenses of Rs. 95,623 had correctly been considered for the purposes of Section 37(3 A) of the IT Act, 1961. At the time of hearing, Shri C.S. Aggarwal, Ld. Counsel for the assessee, submitted that there was no merit in the assessee’s ground and accordingly this ground was not pressed and is, therefore, treated as dismissed.
3. Ground No. 3 challenges the disallowance of vehicle maintenance expenses and depreciation of car to the extent of l/4th. It was submitted that the disallowance was excessive. In our opinion, when there are 5 partners, the disallowance of l/4th vehicle maintenance expenses and depreciation is eminently justified and is hereby confirmed.
4. Ground No. 4 upholding the disallowance of Rs. 2,500 out of telephone expenses was not pressed at the time of hearing and is, therefore, treated as dismissed.
5. Ground No. 5, is with regard to the charging of interest under Section 217 of the Act. At the time of hearing, Shri Aggarwal submitted that this ground was merely consequential in nature. The assessing officer is, therefore, directed to charge interest under Section 217 on the total income of the assessee as determined by this order.
6. Now, we come to the main issue which is contained in Ground No. 1 of the assessee’s appeal.
7. Brief facts of the case are that in the trading account, the assessee showed an expenditure of Rs. 8,27,465 on sales promotion. This item of expenditure normally appears on the Profit & Loss A/c. The assessing officer, therefore, examined the nature of these expenses and found that the total payments of sales promotion expenses actually amounted to Rs. 52,34,829. The sales promotion receipts were shown at Rs. 44,07,364 and that is how the net balance of Rs. 8,27,465 was shown on the debit side of the trading account by the assessee. The assessing officer, therefore, called for the explanation of the assessee as to why the entire amount of Rs. 52,34,829 be not considered for the purposes of Section 37(3A) of the Act and disallowance made accordingly. The assessee submitted replies vide letters dated 4-3-1987 and 23-3-1983. The assessing officer, however, held that a sum of Rs. 44,07,364 from the purchases represented trading receipts and that the expenditure incurred by the assessee on sales promotion amounted to Rs. 52,34,329. On this basis the disallowance under the aforesaid section was made by the assessing officer.
8. The CIT (Appeals) confirmed the action of the assessing officer in this regard.
9. Shri C.S. Aggarwal, the Ld. Counsel for the assessee, submitted that the sale bills issued by the firm carried a stamp which noted that sale price was “inclusive of sales promotion expenses @ 3%”. It was submitted that there was an agreement with Hindustan Marketing & Advertisement Co. (P.) Ltd., according to which payments were made to the said advertising agency at a fixed percentage of the sales. It was submitted that the sub-dealers of the assessee firm agreed to pay contribution towards Hindustan Marketing & Advertisement Co. (P.) Ltd. because the advertisement of the goods sold by the assessee firm as well as the sub-dealers was helping the sub-dealers as well. According to the Ld. Counsel it is against this background that the sub-dealers and mobile dealers agreed to pay sale promotion expenses @ 3%. According to the Ld. Counsel, the assessee firm maintained a separate Sales Promotion Expenses A/c in which the expenses paid and the amounts received were indicated. It was vehemently argued that the expenditure actually borne by the assessee with regard to sales promotion expenses amounted to Rs. 8,27,465 only and that the assessee had voluntarily offered the same in the return as covered by Section 37(3A) of the Act. It was submitted that on the one hand, the departmental authorities took the receipt of Rs. 44,07,364 as trading receipts, but at the same time they did not treat this amount as the trading payment. It was submitted that the amount recovered by the assessee firm from authorised sub-dealers was clearly identified as amount received on account of sales promotion expenses and that in the fitness of things only the net amount of Rs. 8,27,465 had to be considered for the purposes of Section 37(3A) of the Act. Relying on the decision of the Supreme Court in Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1, it was submitted that the Court had to make an equitable construction of a taxing statute and that in the present case only the net amount had to be considered for the purposes of Section 37(3A). The Ld. Counsel submitted that in the earlier years also the assessee firm had charged amounts towards sales promotion expenses from the sub-dealers, but since a provision like Section 37(3A) was not on the statute book and the profits of the assessee were in no way affected, the entries were not properly and perfectly reflected in the books of account. It was vehemently argued that in the assessee’s case, disallowance under Section 37(3A) should be restricted to the net amount of Rs. 8,27,465.
10. The Ld. D.R. on the other hand, strongly supported the orders of the departmental authorities. It was submitted that there was no agreement between the assessee and the sub-dealers for charging sales promotion expenses separately. According to him, the super-imposing of a stamp on the sale vouchers did not alter the nature and character of the transaction which was one of sale. According to the Ld. D.R., the entire amount received along with the alleged sales promotion expenses represented the sale proceeds of the assessee. It was submitted that the assessee had employed a clear device in this regard. According to the Ld. D.R., in law as well as according to accountancy principle, the entire amount of Rs. 52,34,829 had to be considered as the expenditure on sales promotion incurred by the assessee and not the net amount. It was also submitted that the assessee had not brought any evidence to show that in the earlier years as well, sales promotion expenses had been recovered from the sub-dealers. It was argued that in the absence of an agreement with the sub-dealers such a proposition could not be inferred. He strongly supported the orders of the departmental authorities.
11. We have carefully considered the rival submissions as also the facts on record. Section 37(3 A) and Section 37(3 A) were brought on the statute book by the Finance Act, 1983 w.e.f. 1-4-1984, whereby the Legislature had put certain restrictions on advertisement and publicity expenses. In his speech, the Finance Minister while piloting the Finance Bill, 1983 said that “with a view to inculcating a climate of austerity and providing a disincentive to unproductive, avoidable and ostentatious spending by trade and industry, I propose to provide that 20% of such expenditure will be disallowed in computing the taxable profits”. The Central Board of Direct Taxes issued a Circular No. 372 dated 8-12-1983 which explained the provisions of the Finance Act, 1983. In this circular also it was stated that certain amendments to Section 37 of the Act had been made with a view to “curbing certain categories of avoidable or ostentatious expenditure by assessees carrying on business or profession”.
The Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 has held that the speech made by the mover of the Finance Bill explaining the reason for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the subject and purpose for which the legislation is enacted. According to the Supreme Court, this is in accord with the recent trend in juristic thought. In this judgment, the Supreme Court also explained the well-established rule of contemporanea expositio and held that the contemporaneous instructions issued by the authorities entrusted with the task of administering the taxing statute can certainly be taken into account in construing the object of a provision of law.
12. From the above, it is clear that while examining this case, we have to see whether the purpose for which Section 37(3A) was enacted is advanced or thwarted by the action of the assessee.
13. We may mention at this stage that the facts in the case of Keshavji Ravji & Co. (supra) are distinguishable. In that case, the question was whether in the case of interest paid by the firm to the partners and the interest received by the firm from the partners the net amount of interest should be disallowed under Section 40(6) of the Act or the amount paid by the firm to the partners alone should he disallowed. The Supreme Court held that on an equitable construction, only the net amount of interest should be allowed under Section 40(b) of the Act. That case, therefore, turned on its own facts in an altogether different context and we do not understand as to how the ratio of that decision could apply to the instant case.
14. We find that the assessee firm entered into an agreement with M/s Hindustan Marketing & Advertisement Co. (P.) Ltd. sometime in 1981. Though, a copy of this agreement has not been filed before us, the record indicates that the advertisement charges were to be paid by the assessee firm to the said advertisement agency as a fixed percentage of sales. The Ld. Counsel for the assessee, apart from making an averment that in the earlier years also sales promotion expenses were recovered from the sub-dealers, has failed to adduce any evidence in this regard. It is further found that in the earlier years, the assessee firm has been spending considerable sums of money by way of sales promotion expenses which would be clear from the following chart:
Asst. Year Sales Promotion Sales Sales Promotion
Expenses Receipts
(Rs.) (Rs.) (Rs.)
1981-82 18,24,417 (2.6%) 7,62,42,128 -
1982-83 27,11,147 (2.3%) 12,14,57,481 -
1983-84 40,46,145 (2.8%) 14,52,71,597 -
1984-85 52,34,829 (3.7%) 14,26,23,644 44,07,364
15. From the above it will be seen that in the immediately preceding asst. year, the assessee firm had incurred sales promotion expenses amounting to Rs. 40,46,145. In the year under consideration, the expenditure has gone up to Rs. 52,34,829. It would also be noticed that the expenditure on sales promotion expenses has been increasing year after year. The payments to M/s Hindustan Marketing & Advertisement Co. (P.) Ltd. have been made on the basis of agreement entered into in 1981. The assessee has not filed copy of agreement, if any, entered into by the assessee with the sub-dealers with regard to the recovery of sales promotion expenses. As per the agreement of 1981 referred to above, it was the assessee’s liability to pay a fixed percentage of sales as advertisement charges to M/s Hindustan Marketing & Advertisement Co. (P.) Ltd. The payments were made accordingly, the amount of Rs. 52,34,829 was, therefore, incurred by the assessee in its own right. The argument of the Ld. Counsel for the assessee that the amount incurred by the assessee was the amount actually borne by it is not convincing. At the cost of repetition it is stated that it was the assessee’s liability to pay to the advertising agency a particular amount in terms of the agreement of 1981. In that context, the entire amount of Rs. 52,34,829 was the expenditure incurred by the assessee on advertisement and publicity. The sale bills issued by the assessee do not have a separate column regarding the recovery of sales promotion expenses from the sub-dealers or the mobile dealers. The assessee has employed a clear and conscious device by super-imposing the stamp to give an impression as if the sales promotion expenses were received separately. This was done only to defeat and circumvent the provisions of Section 37(3A) of the Act. The amount of Rs. 44,07,364, in our view, is part of the sale proceeds of the assessee firm, and even if it is received on account of sales promotion expenses, it is a trading receipt of the assessee in view of the ratio laid down by the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542. There is no evidence on record that the sub-dealers or the mobile dealers had incurred the expenditure of Rs. 44,07,364 towards sales promotion expenses in their own right. The incurring of the expenditure on this account was by the assessee only.
16. In the Paper Book, the assessee has filed copies of the price lists issued by Godfrey Philips India Ltd. These price lists indicate the price to the wholesale bulk purchasers and the recommended maximum retail price. It is noteworthy that in all these price lists, it is clearly indicated that “it will be open to you to charge prices lower than mentioned in the above price list”. This clearly shows that the dealers could charge a price lower than the one fixed by the manufacturing company and that nobody could charge a higher price. The assessee, therefore, charged the price fixed by the manufacturer and there was no warrant for charging separate sales promotion expenses from the sub-dealers.
17. In the earlier years, it appears the sales promotion expenses were debited directly to the Profit & Loss A/c. According to the accountancy principles, such expenses are debitable to the Profit & Loss A/c. It appears that when the assessee received the entire amount of sale proceeds as sale proceeds and wanted to transfer a sum of Rs. 44,07,364 to the sales promotion expenses account, it was confronted with a dilemma. To overcome that dilemma the assessee had to show net debit balance of Rs. 8,27,465 in the trading account itself in the year under consideration. There is, however, no running away from the fact that the entire amount of Rs. 52,34,829 was incurred by the assessee as its liability in terms of the agreement of 1981 entered into by it with M/s Hindustan Marketing & Advertisement Co. (P.) Ltd. Thus, for purposes of Section 37(3A), the entire amount of Rs. 52,34,829 has to be taken into consideration. We hold accordingly.
18. It is significant to note that the expenditure on advertisement in the year under consideration has in fact gone up to Rs. 52,34,829, though the assessee has tried to present it on a reduced scale. While the Legislature intended to curb the extravagance of such expenditure, the expenditure in fact has considerably gone up with the result that the assessee had to employ a device to show as if the expenditure has gone down from Rs. 40,46,145 in the immediately preceding year to Rs. 8,27,465 in the year under consideration.
19. We also do not appreciate the argument of the Ld. Counsel for the assessee that though the net profit earned is only Rs. 3,76,760, the assessee will be saddled with a huge liability if the entire amount of Rs. 52,34,829 were considered as covered by Section 37(3A) of the Act. In this connection, we would only say that if an assessee chooses to circumvent the law and plays with fire, it cannot complain of burnt fingers later on.
20. Taking into consideration the entire facts and circumstances of the case, we uphold the order of the CIT (Appeals) in this regard.
21. In the result, the appeal is dismissed.