Nirma Consumer Card Ltd., Ahmedabad V. The ACIT., Cent.Circle-1(1), Ahmedabad

ITA 497/AHD/2005

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5508 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-05-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 16-02-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJEEV AGARWAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Reopening of assessment; Gift; Business expenditure; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency; Onus to prove; Revenue expenditure; Capital expenditure; Set aside
• Section: 37(1); 80G; 207; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.497/AHD/2005 ASSESSMENT YEAR:2001-02 DATE OF HEARING:4.5.10 DRAFTED:6.5.10 NIRMA CONSUMER CARD LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACN5355N V/S . ASSTT. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(1), AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.2368/AHD/2005 ASSESSMENT YEAR: 2002-03 NIRMA CONSUMER CARD LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACN5355N V/S . ASSTT. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(1), AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.1004/AHD/2006 ASSESSMENT YEAR:2000-01 NIRMA CONSUMER CARD LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACN5355N V/S . ASSTT. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(1), AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.3799/AHD/2007 ASSESSMENT YEAR: 2001-02 NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 2 DY. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(2), ROOM NO.303, 3 RD FLOOR, AAYKAR BHAVAN, ASHRAM ROAD, AHMEDABAD V/S . NIRMA CONSUMER CARE LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.3927/AHD/2008 ASSESSMENT YEAR: 2004-05 NIRMA CONSUMER CARD LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACN5355N V/S . DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.422/AHD/2009 ASSESSMENT YEAR: 2000-01 DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD V/S . M/S. NIRMA CONSUMER CARE LTD. NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD (APPELLANT) .. (RESPONDENT) ITA NO.423/AHD/2009 ASSESSMENT YEAR: 2002-03 DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD V/S . M/S NIRMA CONSUMER CARE LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD (APPELLANT) .. (RESPONDENT) NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 3 ITA NO.848/AHD/2009 ASSESSMENT YEAR:2005-06 NIRMA CONSUMER CARD LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACN5355N V/S . DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5, AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI, S.N. SOPARKAR & SHRI HIMANSHU SHAH, AR REVENUE BY:- SHRI RAJEEV AGARWAL, CIT-DR O R D E R PER BENCH:- OUT OF THESE 8 APPEALS FIVE BY ASSESSEE AND 3 BY REVENUE ARE ARISING OUT OF COMMISSIONER OF INCOME-TAX(APPEALS)-I, II & XI, AHMEDABAD IN APPEAL NOS. CIT(A)-I/CENTRAL CIRCLE.1(1)/27/05-06 DT. 08-02-200 6; CIT(A)-II/65/04-05 DATED 25-11- 2004; CIT(A)-I/CENTRAL CIRCLE.1(1)/48/05-06 DATED 2 6/09-2005 CIT(A)-CENTRAL CIRCLE.II/470, 474, 475,476/07-08 BY DATED 22-01-20 09, 07-12-2008; CIT(A)- II/CENTRAL CIRCLE(1))I/300/06-7 DATED 17-07-2007. T HE ASSESSMENTS WERE FRAMED BY THE ACIT, CENTRAL CIRCLE-11, AHMEDABAD U/S.143(3) R .W.S.147 O THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE OR DER DATED 29-03-2005 FOR ASSESSMENT YEAR 2000-01, U/S.143(3) FOR ASSESSMENT YEARS 2001-02, 2002-03, 2004-05 & 2005-06 VIDE DATED 30-03-2004, 29-03-2005 ,15-12-2006 AND 28-12-2007. THE PENALTY UNDER DISPUTE FOR ASSESSMENT YEAR 2000- 01 AND 2002-03 WAS LEVIED BY THE DCIT, CENTRAL CIRCLE-1(1), AHMEDABAD U/S.271(1) (C) OF THE ACT. VIDE ORDERS OF EVEN DATE 23-03-2007, FOR ASSESSMENT YEAR 2001-02 B Y THE ACIT, CENTRAL CIRCLE- 1(1), AHMEDABAD VIDE ORDER DATED 07-03-2006. 2. THE FIRST EFFECTIVE COMMON ISSUE IN THESE APPEAL S OF THE ASSESSEE IN ITA NOS.497/AHD/2005, 2368/AHD/2005, 1004/AHD/2006, 392 7/AHD/2008 AND NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 4 848/AHD/2009 IS AGAINST THE ORDER OF CIT(A) IN UPHOLDING OF DISA LLOWANCE OF ADVERTISEMENT EXPENSES. FOR THIS, ASSESSEE HAS RAI SED FOLLOWING GROUND NO.2 :- 2. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE LEARNED CIT- XI HAS GRIEVOUSLY ERRED IN UPHOLDING THE DISALLOWAN CE OF ADVERTISEMENT EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS, U/S.37(1) OF THE I.T. ACT TO THE TUNE OF RS.1 CRORE . 3. THE ASSESSEE-COMPANY IS ENGAGED IN BUSINESS OF S ELLING & MARKETING OF VARIOUS BRANCHES OF NIRMA PRODUCTS. THE ASSESSING O FFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED FROM THE RETURN OF I NCOME THAT THE ASSESSEE- COMPANY HAS MADE PAYMENTS TO THE PERSONS COVERED U/ S.40A(2)(B) OF THE ACT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THE ASSESS EE-COMPANY WAS ASKED TO FURNISH THE DETAILS OF PAYMENTS MADE TO RELATED PAR TIES. NERF IS A REGISTERED CHARITABLE INSTITUTE U/S.12A OF THE ACT AND ASSESSE E SUBMITTED THAT NERF IS PRIMARILY ENGAGED IN RUNNING CHARITABLE / EDUCATIONAL ACTIVIT IES AT ITS CAMPUS ON THE SARKHEJ GANDHINAGAR HIGHWAY, AHMEDABAD, WHERE IT HAS A CAMP US OF 2.20.000 SQ.MTS. ON WHICH EDUCATIONAL INSTITUTIONS LIKE NIRMA INSTITUTE OF TECHNOLOGY, NIRMA INSTITUTE OF MANAGEMENT AND NIRMA INSTITUTE OF DIPLOMA STUDIES A RE RUN. THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH NERF DAT ED 5-4-1999 UNDER WHICH THE ASSESSEE COMPANY MADE A PAYMENT OF RS.8 CRORE TO NE RF TOWARDS ITS CORPUS FUND FOR THE PERIOD OF EIGHT YEARS. AS PER THE TERMS OF THIS AGREEMENT, THIS PAYMENT WAS MADE AS AN ADVANCE BY THE ASSESSEE COMPANY IN LIEU OF THE EXCLUSIVE USE OF CAMPUS AND VEHICLES OF NERF FOR THE PURPOSE OF PUTT ING UP HOARDING, SIGN BOARDS AND OTHER ADVERTISEMENTS OF NIRMA BRAND OF PRODUCTS . FROM A.Y. 2000-01 ONWARDS ON ACCOUNT OF THE PAYMENT OF RS.8 CRORE TO NERF, TH E ASSESSEE COMPANY HAD DEBITED RS.1 CRORE PER YEAR IN ITS BOOKS AS ADVERTI SEMENT EXPENSES. FROM THE INFORMATION, AO NOTED THAT DURING THE YEAR UNDER CO NSIDERATION, THE ASSESSEE- COMPANY HAD DEBITED A SUM OF RS.1 CRORE AS PAYMENT TO NIRMA EDUCATION & RESEARCH FOUNDATION (NERF IN SHORT) FOR ADVERTISEME NT EXPENSES. THE ASSESSEE- COMPANY WAS ASKED TO FURNISH DETAILS OF THESE EXPEN SES AND ALSO FILED THE AGREEMENT WITH NERF UNDER WHICH THE PAYMENTS HAVE B EEN MADE. THE ASSESSEE CLAIMED BEFORE THE AO THAT THE DEBIT OF RS.1 CRORE WAS ON ACCOUNT OF PAYMENT OF NERF AND THE ASSESSEE SUBMITTED THE FOLLOWING DETAI LS:- I) NERF IS A REGISTERED CHARITABLE INSTITUTE U/S.1 2A OF THE INCOME-TAX ACT. NERF IS PRIMARILY ENGAGED IN RUNNING CHARITABLE / E DUCATIONAL ACTIVITIES AT ITS CAMPUS ON THE SARKHEJ GANDHINAGAR HIGHWAY, AHMEDABA D. IT HAS A CAMPUS NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 5 OF 2.20.000 SQ.MTS. ON WHICH EDUCATIONAL INSTITUTIO NS LIKE NIRMA INSTITUTE OF TECHNOLOGY, NIRMA INSTITUTE OF MANAGEMENT AND NIRMA INSTITUTE OF DIPLOMA STUDIES ARE RUN. II) THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEM ENT WITH NERF DATED 5- 4-1999 UNDER WHICH THE ASSESSEE COMPANY MADE A PAYM ENT OF RS.8,00,00,000 TO NERF TOWARDS ITS CORPUS FUND. III) AS PER THE TERMS OF THIS AGREEMENT, THIS PAYME NT WAS MADE AS AN ADVANCE BY THE ASSESSEE COMPANY IN LIEU OF THE EXCL USIVE USE OF CAMPUS AND VEHICLES OF NERF FOR THE PURPOSE OF PUTTING UP HOAR DING, SIGN BOARDS AND OTHER ADVERTISEMENTS OF NIRMA BRAND OF PRODUCTS. IV) THE AGREEMENT DATED 5-4-1999 WAS EFFECTIVE FOR A PERIOD OF 8 YEARS. V) FROM A.Y. 2000-01 ONWARDS ON ACCOUNT OF THE PAYM ENT OF RS.8,00,00,000 TO NERF, THE ASSESSEE COMPANY HAD DEBITED RS.1,00,0 0,000 PER YEAR IN ITS BOOKS AS ADVERTISEMENT EXPENSES. 4. THE ASSESSING OFFICER SUBSEQUENTLY REQUIRED THE ASSESSEE TO PRODUCE THE COPY OF AGREEMENT AND NOTED THE RELEVANT TERMS OF A GREEMENT AS UNDER:- I) NERF IN THE COURSE OF AND FOR THE PURPOSE OF CA RRYING ON ITS PUBLIC CHARITABLE / EDUCATIONAL ACTIVITIES, HAS ACQUIRED A LARGE PIECE OF LAND ADMEASURING APPROXIMATELY 2,20,000 SQ.MT. UPON WHIC H AN EDUCATIONAL CAMPUS HAVING THREE EDUCATIONAL INSTITUTES HAS BEEN SET UP. II) THESE THREE INSTITUTIONS NAMELY, NIRMA INSTITUT E OF TECHNOLOGY (NIT) NIRMA INSTITUTE OF MANAGEMENT (NIM) AND NIRMA INSTITUTE O F DIPLOMA STUDIES (NIDS) ARE SET UP ON THE ABOVE CAMPUS AT THE SARKHEJ-GANDH INAGAR HIGHWAY, POT. CHANDLODIA, CHHARODI, AHMEDABAD AND HAVE ACQUIRED E XCELLENT REPUTATION ATTRACTING STUDENTS, PROFESSORS AND VISITORS FROM A LL OVER INDIA / WORLD AS IT HAS COLLABORATION WITH A FOREIGN UNIVERSITY. III) IN ORDER TO AUGMENT ITS RESOURCES NERF HAS BEE N CONSIDERING VARIOUS WAYS AND MEANS INCLUDING UTILIZATION OF THE LARGE S PACE FOR EARNING INCOME OR FUNDS FOR THE PURPOSE OF CARRYING ON ITS PUBLIC /CH ARITABLE / EDUCATION ACTIVITIES. IV) NCCL IS ENGAGED IN THE BUSINESS OF DEALING IN A ND SALE OF CONSUMER PRODUCTS MAINLY UNDER THE BRAND NAME NIRMA AND OTHE R BRAND NAMES AND IS KEENLY INTERESTED IN UTILIZING THE SPACE AND THE FA CILITIES AVAILABLE ON THE AFORESAID CAMPUS FOR THE PURPOSE OF ADVERTISEMENT A ND SALES PROMOTION. V) THE PARTIES HAVE HELD MUTUAL DISCUSSIONS AND NER F HAS AGREED TO ALLOW NCCL TO MAKE USE OF THE STRATEGIC POINTS IN ITS CAM PUS FOR THE PURPOSE OF PUTTING UP HOARDINGS, SIGN-BOARDS, NEON SIGNS OR OT HER ADVERTISEMENT MATERIAL AND ALSO ON THE VEHICLES BELONGING TO OR USED BY NE RF FOR THE CONVENIENCE AND TRANSPORT OF STUDENTS ON CERTAIN TERMS AND COND ITIONS. VI) THE SAID NCWL HAS AGREED TO JOIN AS CONFIRMING PARTY TO THIS AGREEMENT. NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 6 NOW THIS AGREEMENT WITNESSES AND THE PARTIES HERE T O HEREBY MUTUALLY AGREE AS FOLLOWS:- I) IN CONSIDERATION OF PAYMENT OF RS.800 LAKHS TO B E MADE IN ADVANCE BY NCCL ON ITS BEHALF TOWARDS CORPUS FUND OF NERF, NER F AGREES TO ALLOW NCCL TO DO THE FOLLOWING:- A) TO PUT UP OR INSTALL OR OTHERWISE DISPLAY HOARDI NGS. SIGN BOARDS, NEON AN ETC. AT SUCH BALANCE OR PLACES IN OR AROUND THE AFORESAID CAMPUS SUBJECT TO THE CONDITION THAT IT WILL NOT SP OIL ENVIRONMENT AND BEAUTY OF CAMPUS AND ALSO WILL NOT OBSTRUCT OR INCONVENIENCE THE SMOOTH TRAFFIC OR OTHER ACTIVITIES OF NERF. THI S ISSUE WILL BE RESOLVED BY HOLDING PERIODICAL MEETINGS BETWEEN REP RESENTATIVES OF THE TWO PARTIES. NCCL SHALL INFORM NERF IN ADVANCE THE PLACE SELECTED AND THE MODE AND MANNER OF ADVERTISEMENT. B) ALLOW NCCL TO ADVERTISE ITS PRODUCTS ON ALL OR A NY OF THE VEHICLES AS MAY BE AGREED TO BY THE PARTIES AND AT SUCH PLACE O F PLACES ON THE VEHICLE AND TO DO ALL SUCH INCIDENTAL THINGS SUCH A S PAINTINGS OF VEHICLE TO MAKE ADVERTISEMENTS ATTRACTIVE. C) TO PUT UP AND DISPLAY HOARDINGS AND SIGN BOARDS AT THE TIME OF VARIOUS SEMINARS, LECTURES OR OTHER FUNCTIONS ORGAN IZED AT THE AFORE- SAID CAMPUS, AND TO DISPLAY OR DISTRIBUTE PAMPHLETS LEAF-LETS GIFT ARTICLES SAMPLES OR ANY OTHER ADVERTISEMENT, ADVERT ISEMENT MATERIALS TO DELEGATES AT SUCH FUNCTIONS. II) THIS AGREEMENT SHALL REMAIN IN FORCE FOR A PERI OD OF 8 YEARS EFFECTIVE FROM DATE OF THIS AGREEMENT AND NERF SHALL HAVE NO RIGHT TO TERMINATE THE SAME UNILATERALLY BEFORE THE EXPIRY OF THE SAID PERIOD. III) IT IS MADE CLEAR AND UNDERSTOOD BY PARTIES THA T THE CONSIDERATION AS AGREED ABOVE IS FOR MAKING USE OF THE SPACE AND FACILITIES FOR THE PURPOSE OF ADVERTISEMENT AND SALE PROMOTION OF NCCL PRODUCTS F OR THE AGREED PERIOD AND NO VARIATION SHALL BE ALLOWED TO EITHER PARTY O N THE GROUND OF NON-USER OR LESSER USE OF THE SPACE AND FACILITIES PLACED AT TH E DISPOSAL OF NCCL. (EMPHASIS SUPPLIED) 5. THE ASSESSING OFFICER STATED THAT ALL CONDITIONS OF SECTION 37(1) HAVE NOT BEEN COMPLIED WITH. DURING THE ASSESSMENT PROCEEDIN GS DESPITE REPEATED OPPORTUNITIES NO DETAILS AS TO SPECIFIC HOARDINGS, BILL-BOARDS ETC. ON WHICH ADVERTISEMENTS WERE BROUGHT OUT BY NERF HAVE BEEN S UBMITTED. HENCE, THE ASSESSEE-COMPANY HAS FAILED TO ESTABLISH THE NEXUS BETWEEN THE DONATION AND THE BUSINESS, THEREFORE THE PAYMENT MADE AS PER THE AGR EEMENT IS CONSIDERED AS NON- BUSINESS EXPENDITURE BUT AS A DONATION. THE PROVIS IONS OF SECTION 37 PROVIDE THAT ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATUR E DESCRIBED IN SECTIONS 30 TO 36 NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 7 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. ACCORDING TO HIM, THE REQUIREMENT OF THIS SECTION IS THAT THE EXPENDITURE SHOULD BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS OR PROFESSION AND THE BURDEN TO PROVE THAT THE EXPENDITURE INCURRED BY THE ASSES SEE WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ON THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT IN THE PRESENT CASE, THE ASSESSEE-COMPAN Y HAS SQUARELY FAILED TO DISCHARGE THIS ONUS AND AS PER SUBMISSION DATED 24- 03-2004 THE LIST OF TRUSTEES OF NERF FROM ASSESSMENT YEAR 2001-02 WAS SUBMITTED, FR OM THE PERUSAL OF THE SAME, IT IS CLEAR THAT DURING THE YEAR OUT OF 3 DIRECTORS OF THE ASSESSEE-COMPANY 2 DIRECTORS WERE ALSO TRUSTEES OF NERF. FURTHER, AC CORDING TO HIM, OUT OF TOTAL 7 TRUSTEES OF NAERF 4 TRUSTEES WERE ON THE BOARD OF NIRMA LTD., THE COMPANY WHICH WHOLLY OWNS THE SHARES OF THE ASSESSEE-COMPANY. FRO M THIS, THE CLOSE NEXUS BETWEEN THE DONEE TRUST NERF AND THE DONOR I.E. ASS ESSEE-COMPANY IS ESTABLISHED. THE AO VIEWED THIS IN CONJUNCTION WITH THE SUBMISSI ON OF THE ASSESSEE-COMPANY THAT NO DETAILS WITH REGARD TO THE PHYSICAL PLACEME NT OF HOARDINGS ETC., WERE MAINTAINED, IT IS ESTABLISHED THAT THE MONEY LAID O UT BY THE COMPANY AS PER AGREEMENT DATED 05-04-1999 WAS NOTHING BUT DONATION TO THE CORPUS FUND OF AN ASSOCIATED TRUST. ACCORDING TO HIM, THE TERMS OF TH E AGREEMENT AS PER MUTUAL CONVENIENCE WERE DRAFTED TO ENABLE THE ASSESSEE-COM PANY TO GIVE THIS DONATION THE COLOUR OF BUSINESS EXPENSES. IN VIEW OF THE ABOVE, IT WAS HELD BY THE AO THAT THE ASSESSEE CLAIM OF EXPENSE OF RS.1 CRORE U/S.37(1) O F THE ACT IS INADMISSIBLE AND RS.8 CRORE LAID OUT BY THE ASSESSEE-COMPANY AS PER AGREEMENT DATED 05-04-1999 WAS NOTHING BUT DONATION TO THE CORPUS OF THE TRUST NERF. THE AO DEALT WITH THIS DONATION AS PER PROVISIONS OF SECTION 80G OF THE AC T. ACCORDING TO THE AO THE CLAIM OF EXPENSE OF RS.1 CRORE PAID TO NERF IS COVERED BY PROVISIONS OF SECTION 40A(2)(B) THE ASSESSEE-COMPANY HAS SQUARELY FAILED TO ESTABLI SH THE REASONABLENESS OF THE EXPENSES WITH REGARD TO THE SERVICES RENDERED BY TH E NERF AND THE ASSESSEE- COMPANY HAS ALSO FAILED TO ESTABLISH THAT ANY BENEF IT WAS IN FACT DERIVED BY IT FROM PAYMENTS MADE TO NERF AND IT IS HELD THAT WHOLE OF THIS EXPENSE IS DISALLOWABLE U/S.40A(2)(A). AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 8 6. THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY GIVING FOLLOWING FINDINGS IN PARA-3.2 TO 3.2.3 :- 3.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND SUB MISSIONS OF THE APPELLANT CAREFULLY. I HAVE ALSO GONE THROUGH THE OBSERVATION S OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. THE APPELLANT COMPANY HAD ENT ERED INTO THE AGREEMENT WITH NERF DATED 5.4.1999 UNDER WHICH IT H \PAID RS.8 CRORE TO NERF TOWARDS CORPUS OF THE TRUST AND THEREAFTER, WR ITTEN OFF RS.1 CRORE IN THE BOOKS OF ACCOUNTS AS IT CLAIMED TO HAVE RECEIVED EX CLUSIVE RIGHTS OF ADVERTISEMENT IN THE PREMISES OF NERF FOR EIGHT YEA RS AND CLAIMED SUCH EXPENSES AS REVENUE EXPENDITURE ALLOWABLE U/S.37(1) OF THE I.T. ACT. FOR ALLOWING EXPENDITURE U/S.37(1) WHAT IS RELEVANT IS THE TRUE NATURE OF THE PAYMENT OF RS.8 CRORE MADE BY THE APPELLANT COMPANY TO THE NERF. NERF IS A REGISTERED CHARITABLE INSTITUTE U/S.12A OF THE INCOME-TAX ACT. NERF IS PRIMARILY ENGAGED IN RUNNING CHARITABLE / EDUCATION AL ACTIVITIES AT ITS CAMPUS ON THE SARKHEJ GANDHINAGAR HIGH WAY, AHMEDABAD. OUT OF THE SEVEN TRUSTEES OF NERF, FOUR TRUSTEES WERE ON THE BOARD OF THE DIR ECTORS OF NIRMA LIMITED WHICH OWNS THE SHARES OF THE APPELLANT COMPANY. DUR ING THE YEAR UNDER CONSIDERATION, OUT OF THREE DIRECTORS OF THE APPELL ANT COMPANY, TWO DIRECTORS WERE ALSO TRUSTEES OF NERF. THUS, IT IS AN ESTABLIS HED FACT THAT THERE IS A CLOSE RELATIONSHIP, BETWEEN THE APPELLANT COMPANY A ND NIRMA EDUCATION AND RESEARCH FOUNDATION. THE PAYMENT OF RS.8 CRORE WAS NOT MADE DURING THE YEAR UNDER CONSIDERATION BUT IN THE YEAR 1999 AS PE R AGREEMENT DATED 5-4- 1999. THE PAYMENT HAS BEEN MADE TOWARDS THE CORPUS OF NERF AND IS BASICALLY OF THE NATURE OF DONATION AND NOT OF BUSI NESS EXPENDITURE. THE APPELLANT COMPANY COULD HAVE BEEN ELIGIBLE FOR DEDU CTION U/S.80G OF THE I.T. ACT FOR THE A.Y. 2000-2001 AS THE DEDUCTION U/S.80G IS ALLOWED ONLY IN THE YEAR IN WHICH THE DONATION HAS BEEN MADE. HOWEVER, AS MENTIONED BY THE ASSESSING OFFICER AT PARA-10 OF THE ASSESSMENT ORDE R, THE GROSS TOTAL INCOME OF THE APPELLANT COMPANY WAS RS.45,87,420/- FOR A.Y . 2000-2001 AND APPELLANT COMPANYS CLAIM OF DEDUCTION U/S.80G WOUL D HAVE BEEN RESTRICTED TO RS.4,58,742/- ONLY. I AGREE WITH THE FINDING OF THE ASSESSING OFFICER THAT THE REAL REASON BEHIND THE ATTEMPT TO GIVE THE DONATION GIVEN BY THE APPELLANT COMPANY TO AN ASSOCIATED TRUST A COLOUR OF BUSINESS EXPENDITURE SO THAT THE APPELLANT COMPANY COULD CLAIM THE DEDUCTION OF ENTI RE AMOUNT. THE AGREEMENT HAS BEEN DRAFTED IN SUCH A WAY THAT THE T RUST GETS THE AMOUNT OF RS.8 CRORE TOWARDS ITS CORPUS IN ONE YEAR ONLY AND THE APPELLANT COMPANY GESTS DEDUCTION OF RS.1 CRORE FOR EIGHT YEARS. AFTE R CONSIDERING ALL THESE FACTS, I AM OF THE VIEW THAT THE TRUE NATURE OF PAYMENT OF RS.8 CRORE IS DONATION AND NOT BUSINESS EXPENDITURE. RELIANCE IS ALSO PLACED O N THE HONBLE BOMAY HIGH COURTS DECISION IN THE CASE OF VOLTAS LTD. VS. CIT 207 ITR 54 (BOM). THE HONBLE HIGH COURT HELD THAT WHERE THE PAYMENT HAS BEEN MADE BY THE ASSESSEE TO A FUND ESTABLISHED FOR CHARITABLE PURPO SE, IT MAY BEEN TITLED TO GET DEDUCTION IN RESPECT OF SUCH PAYMENT UNDER SECTION 80G, IF THE REQUIREMENTS OF THAT SECTION ARE FULFILLED. IT CANNOT BE DEDUCTI ON UNDER SECTION 37(1) IN RESPECT THEREOF SIMPLY BE CONTENDING THAT, AS A PRU DENT BUSINESSMAN, IN ITS OPINION, SUCH DONATIONS MIGHT HELP ITS BUSINESS INS THE LONG RUN. THE OPINION OF THE BUSINESSMAN IS NOT BINDING ON THE TAXING AUT HORITIES. IN FACT, IT IS THE TAXING AUTHORITIES WHO ARE TO BE SATISFIED THAT THE PAYMENT MEETS THE REQUIREMENTS OF SECTION 37(1) OR NOT. IN VIEW OF TH E FACTS DISCUSSED ABOVE, IT IS NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 9 CLEAR THAT THE PAYMENT MADE TO NERF BY THE APPELLAN T COMPANY WAS OF THE NATURE OF DONATION TOWARDS THE CORPUS OF NERF IN TH E YEAR 1999 AND THERE IS NO JUSTIFICATION FOR ALLOWING PART PAYMENT OF THE S AME IN THE YEAR UNDER CONSIDERATION AS ADVERTISEMENT EXPENSES. 3.2.1 WITHOUT PREJUDICE TO THE ABOVE, IT IS CLARIFI ED HERE THAT THE APPELLANT COMPANY IS NOT ENTITLED FOR ALLOWANCE OF THE SAME U /S.37(1). SECTION 37(1) PROVIDES THAT ANY EXPENDITURE (NOT BEING EXPENDITUR E OF THE NATURE DESCRIBED U/S.30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) LAID OUT OF EXPENDED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTATION THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS OF BUSI NESS OR PROFESSION. THE ONUS HAS BEEN LAID ON THE ASSESSEE TO PROVE THAT TH E EXPENDITURE HAS ACTUALLY BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINE SS PURPOSES AND IT NOT OF CAPITAL OR PERSONAL NATURE. IT MAY BE POINTED OUT H ERE THAT THE ASSESSING OFFICER, WHILE GIVING THE FINDING IN THIS CASE HAS STATED VERY CLEARLY THAT THE APPELLANT COMPANY DID NOT PRODUCE THE DETAILS OF TH E ADVERTISEMENTS PUT UP BY NERF AND NECESSARY DOCUMENTATION REGARDING PERIO DICAL MEETINGS BETWEEN THE ASSESSEE COMPANY AND NERF, WHICH AS PER TERMS OF THE AGREEMENT, THE ASSESSEE COMPANY WAS REQUIRED TO MAI NTAIN. THIS CONFIRMS THE ASSESSING OFFICERS VIEW THAT THE ASSESSEE HAS FAILED TO DISCHARGE ITS ONUS TO PROVE THAT THE EXPENSES ARE ALLOWABLE. 3.2.2 ONE OF THE CONTENTIONS OF THE A.R OF THE APPE LLANT IS THAT THE APPELLANT COMPANY ENTERED INTO AGREEMENT WITH NERF FOR THE RE ASONS OF COMMERCIAL AND BUSINESS EXPEDIENCY. IT HAS BEEN SATED THAT AS FAR AS THE APPELLANT COMPANY IS CONCERNED IT HAD ENTERED INTO A COMMERCI AL ARRANGEMENT WITH NER\F FOR UTILISING THE SPACE OF NERF FOR ITS COMME RCIAL ADVANTAGE. HOWEVER, A CAREFUL READING OF THE AGREEMENT REVEALE D THAT THE AGREEMENT HAS BEEN SO DRAFTED TO MAKE BELIEVE THAT A REAL AGREEME NT EXISTS FOR THE BUSINESS PURPOSES. IT HAS ALREADY BEEN MENTIONED THAT OUT OF THE SEVEN TRUSTEES OF NERF. 4 TRUSTEES WERE ON THE BOARD OF DIRECTORS OF NIRMA LIMITED, OF WHICH THE APPELLANT COMPANY IS SUBSIDIARY COMPANY. OUT OF THE THREE DIRECTORS OF THE APPELLANT COMPANY, TWO WERE TRUSTEES OF NERF. THE A RRANGEMENT OF FLOW OF FUNDS FROM THE APPELLANT COMPANY TO NERF HAS BEEN M ADE IN SUCH A WAY THAT NERF GETS FINDS OF RS.8 CRORE IN ITS CORPUS WH ICH IS ACTUALLY DONATION AND THE APPELLANT COMPANY CAN ALSO CLAIM DEDUCTION OF R S.1 CRORE EVERY YEAR FOR COMING EIGHT YEARS. ALL THE INSTITUTES OF NERF LIKE NIRMA INSTITUTE OF MANAGEMENT. NIRMA INSTITUTE OF TECHNOLOGY ETC. ARE ALREADY NAMED AFTER BRAND NAME NIRMA. THE APPELLANTS PLEA THAT IT GO T EXCLUSIVE RIGHTS FOR ADVERTISEMENT FOR EIGHT YEARS SO THAT THE COMPETITO RS OF NIRMA ARE NOT ABLE TO PUT THEIR HOARDINGS IS UNACCEPTABLE. IT IS HIGHLY I MPROBABLE THAT AN INSTITUTE WHICH IS NAMED AFTER NIRMA BRAND WOULD CARRY OUT AD VERTISEMENTS OF ITS BUSINESS RIVALS. THE USE OF THE WORD NIRMA AS THE F IRST WORD IN THE NAMES OF ALL THE INSTITUTES ITSELF SERVES THE PURPOSE. IN VI EW OF THESE FACTS, ESPECIALLY (I) THE TRUSTEES OF NERF AND THE DIRECTORS OF THE APPEL LANT COMPANY ARE COMMON, (II) THE FLOW OF FUNDS TO THE CORPUS OF NER F HAS BEEN FORM THE DIRECTOR/PROMOTERS OF NIRMA LIMITED, ITS ASSOCIATE CONCERNS, AND FAMILY TRUSTS AND (III) ALL THE INSTITUTES OF NERF BEAR THE NAME NIRMA, IT IS PROVED THAT THERE IS CLOSE ASSOCIATION BETWEEN THE APPELLANT CO MPANY AND NERF. IN NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 10 THESE CIRCUMSTANCES, THE AGREEMENT ENTERED INTO BY THE APPELLANT COMPANY WITH NERF IS FOR EXTRA COMMERCIAL CONSIDERATION, IN THE AGREEMENT IS CONTRIVED AND HAS BEEN MADE WITH THE SOLE PURPOSE T O MAKE THE APPELLANT ENABLE TO GET DEDUCTION OF DONATION MADE BY IT IN T HE GARB OF ADVERTISEMENT. 3.2.3 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES AND LEGAL POSITION, I AM OF THE VIEW THAT THE ACTION OF THE ASSESSING OFFICER I N DISALLOWING CLAIM OF THE APPELLANT OF RS.1 CRORE AS ADVERTISEMENT IS JUSTIFI ED AND IT DOES NOT CALL FOR ANY INTERFERENCE. AGGRIEVED, THE ASSESSEE CAME IN SECOND APPEALS BEFO RE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO GONE THROUG H THE ASSESSMENT ORDER AS WELL AS ORDER OF CIT(A) AND ALSO ASSESSEES PAPER BOOKS CONTAINING PAGE-1 TO 184. THE LD. COUNSEL FOR THE ASSESSEE BEFORE US STATED THAT THE PAYMENT OF RS.800 LAKHS WAS MADE TOWARDS THE CORPUS FUND OF NERF DID NOT MAKE T HE PAYMENT AS DONATION VIS-A- VIS THE ASSESSEE BECAUSE THE ASSESSEE HAD ENTERED I NTO A COMMERCIAL ARRANGEMENT WITH NERF FOR UTILIZING THE SPACE OF NERF FOR ITS C OMMERCIAL ADVANTAGE AND ALL THE REMEDIES AGAINST BREACH OF CONTRACT WERE AVAILABLE TO IT AND THE AGREEMENT DID NOT REQUIRE THE ASSESSEE TO MAINTAIN PHYSICAL DETAILS O F THE ADVERTISEMENTS PUT UP BY A NERF NOR MAINTAIN DOCUMENTATION OF THE PERIODICAL M EETINGS AS IS EVIDENT FROM PARAGRAPH 1 (I) OF THE AGREEMENT. ACCORDING TO LD. COUNSEL, THE PERIODICAL MEETINGS BETWEEN THE REPRESENTATIVE IN FACT WERE TO BE HELD ONLY TO RESOLVE ISSUES ON PUTTING UP ON INSTALLATION OR DISPLAY OF HOARDINGS, SIGNBOA RDS ETC. WHICH SPOILT THE ENVIRONMENT OR BEAUTY OF THE CAMPUS OR OBSTRUCTED O R INCONVENIENCE THE SMOOTH TRAFFIC OR THE ACTIVITIES OF NERF AND THE ASSESSEE VIDE ITS LETTER DATED 27-01-2004 SPELT OUT THE BENEFITS AVAILABLE TO ITS BUSINESS AN D HAD ESTABLISHED THE NEXUS BETWEEN ITS BUSINESS AND THE PAYMENTS MADE TO NERF. HE STATED THAT THE NERF WAS NOT THE ONLY LOCATION WHERE HOARDINGS, BILL BOA RDS ETC. HAD BEEN PUT UP BY THE ASSESSEE AND HAD DEBITED TO ITS ACCOUNTS THE COST I NCURRED ON HOARDINGS, BILLBOARDS, ETC. FROM TIME-TO-TIME. HE ARGUED THAT IT IS NOT PR ACTICABLE FOR THE ASSESSEE TO MAINTAIN SEPARATE PLACE-WISE EXPENSE RECORDS OF EAC H AND EVERY HOARDINGS, BILLBOARD ETC. PUT UP. HE FURTHER STATED THAT IN AB SENCE OF ANY EVIDENCE TO THE CONTRARY THE AGREEMENT AND THE EXPLANATION OF THE A SSESSEE COULD NOT BE DISBELIEVED MERELY BECAUSE TWO DIRECTORS OF THE ASS ESSEE-COMPANY WERE ALSO TRUSTEES OF NERF AND FOUR OUT OF SEVEN TRUSTEES OF NERF WERE ON THE BOARD OF NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 11 DIRECTORS OF NIRMA LTD. AND THE HOLDING COMPANY OF THE ASSESSEE-COMPANY OR THE TRUSTEES OF NERF BASED ON WHICH THE DISALLOWANCES C OULD HAS BEEN MADE. FOR THIS, HE STATED THAT NO STATEMENT HAS BEEN RECORDED THAT THE AGREEMENT DOES NOT BRING OUT THE TRUE NATURE OF THE ARRANGEMENT ENTERED INTO BETWEEN THE ASSESSEE AND NERF. 8. WE FIND THE RELEVANT FACTS FROM RECORDS, WHICH ARE SUMMARIZED AS UNDER:- I) AT THE CAMPUS, NUMBER OF STUDENTS EXPECTED ARE O VER 4,500 APART FROM THE VISIT OF VARIOUS DIGNITARIES AND OTHER ACADEMICIANS AND OTHER RESPECTABLE PERSONALITIES OF THE SOCIETY AS A WHOLE, WHICH ARE NORMALLY COVERED INTO THE MEDIA NIRMA GETS FLASHED TIME AND AGAIN II) AT THE CAMPUS, THE ASSESSEE HAVE EXCLUSIVE RIGH T TO DISPLAY AS WELL AS SALE THE NIRMA NIMA BRAND PRODUCTS. HERE IT IS PERTINENT TO NOTE THAT PEPSI HAS PAID RS.7 LACS FOR 2 YEARS FOR SUCH RIGHT. III) AT THE TIME OF NATIONAL SPORT EVENTS LIKE ROBO CON 2003 PROMINENT BANNERS, MORE THAN 20 IN NUMBER WERE DISPLAYED LIVE BY DOORDARSHAN. IV) APART FROM SUCH EVENTS, AT THE CAMPUS VARIOUS N ATIONAL AND INTERNATIONAL EVENTS, BEING EDUCATIONAL OR CULTURAL ARE TAKING PL ACE, VARIOUS SEMINARS, EXECUTIVE PROGRAMMES, CONFERENCES, CONVOCATIONS, ET C. ARE BEING HELD WHEREIN DOMESTIC AND INTERNATIONAL PERSONALITIES DO PARTICIPATE, WHICH ENHANCES THE VALUE OF NIRMA. V) AS PER THE UNDERSTANDING THE CONFERENCE FACILITI ES FOR ASSESSEES DEALERS MEET ETC. IS ALSO AVAILABLE AND IN FACT HAS BEEN UT ILIZED. VI) NIRMA ART GALLERY, WHICH CAN HELP IN BREACHING EMOTIONAL BINDING BETWEEN BRAND AND CUSTOMERS BEING EVENT WHERE STUDENTS, DEA LERS, EMPLOYEES, DELEGATES AND VARIOUS OTHER VISITORS DO HAVE ON OPP ORTUNITY TO VISIT, SITUATED AT THE CAMPUS. VII) FOR CONDUCTING VARIOUS SURVEYS OF PRODUCT FOR TESTING CONCEPT, TESTING BY ITS CONTENT OR ADVERTISING EXTENSIVE USAGE OF SUCH FACILITIES AVAILABLE AT THE CAMPUS, WHICH ARE AVAILABLE TO THE ASSESSEE. WE FURTHER FIND THAT THE FOUNDATION WAS NAMED AT NI RMA EDUCATION AND RESEARCH FOUNDATION AND THE USE BY THE FOUNDATION OF THE NAM E NIRMA THEY FORGED AN ASSOCIATION WITH THE ASSESSEES BUSINESS. IN SUCH A SITUATION, IT WOULD HAVE BUSINESS HARA-KIRI TO HAVE PERMITTED A COMPETITOR TO ADVERTI SE AT THE CAMPUS OF NERF. THE ASSESSEE THEREFORE ENTERED INTO THE AGREEMENT WITH NERF SO THAT THE CAMPUS WOULD BE EXCLUSIVELY AVAILABLE TO THE ASSESSEE FOR ADVERT ISING TO THE EXCLUSION OF IS NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 12 COMPETITORS. WE FIND THAT THE ASSESSEE THEREFORE PA ID THIS AMOUNT TO NERF WAS FOR THE PURPOSE OF BUSINESS ONLY, WHICH IS ELIGIBLE FOR DEDUCTION U/S.37(1) OF THE ACT. WE FIND THAT THE EXPENDITURE THOUGH TERMED AS DONATIO N IS NOT DONATION BUT BUSINESS EXPENDITURE AND WHERE THE ASSESSEE HAS GIVEN ADEQU ATE PROOFS TO PROVE OR SUBSTANTIATE ITS CLAIM THAT IT IS A BUSINESS EXPEND ITURE, THERE IS NO BAR IN ALLOWING DEDUCTION IN RESPECT OF SUCH PAYMENT. THE ASSESSEE HAS SUBSTANTIATED ITS CLAIM BY PROVIDING THE COPY OF THE AGREEMENT ENTERED INTO WI TH NERF TO THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE LE TTER DATED 31-04-2004. WE FIND FROM THE RECORDS THAT THE ASSESSEE-COMPANY WAS THE WHOLLY OWNED SUBSIDIARY OF NIRMA LTD, WHICH FINDING HAS BEEN RECORDED IN THE A SSESSMENT ORDER ALSO AND THE PROVISIONS OF SECTION 40A(2)(B) WERE NOT ATTRACTED VIS--VIS THE ASSESSEE-COMPANY AND NERF. IN SUCH A CASE THE ASSESSEE WAS NOT REQUI RED TO ESTABLISH THE REASONABLENESS OF THE EXPENDITURES WITH REGARD TO T HE SERVICES RENDERED BY NERF AND THAT BENEFIT WAS IN FACT DERIVED BY IT BUT THE ONLY REQUIREMENT OF SECTION 37 WAS THAT EXPENDITURE NOT BEING CAPITAL OR PERSONAL IN N ATURE SHOULD HAVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS. AN AGREEMENT MAY BE E NTERED INTO FOR COMMERCIAL EXPEDIENCY AND ONCE IT IS ESTABLISHED THAT AN EXPEN DITURE IS INCURRED FOR THE PURPOSES OF THE BUSINESS, THE EXPENDITURE IS ALLOWA BLE IRRESPECTIVE OF WHETHER BENEFIT HAS BEEN DERIVED THEREFROM OR NOT. ALSO THE EXPENDITURE REFERRED TO IN SECTION 37 OF THE ACT HAS TO BE INTERPRETED VERY WIDELY AND THE QUESTION WHETHER IT WAS THE EXPENDITURE FOR THE PURPOSE OF BUSINESS OR PROFESSI ON SHOULD BE EXAMINED FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. THE WORDS F OR THE PURPOSE OF BUSINESS SHOULD NOT BE LIMITED TO THE MEANING OF EARNING PRO FIT ALONE BUT BUSINESS EXPEDIENCY OR COMMERCIAL EXPEDIENCY MAY REQUIRE INCURRING OF C ERTAIN EXPENDITURE. THE TERM COMMERCIAL EXPEDIENCY MEANS EVERYTHING THAT SERVE S TO PROMOTE COMMERCE AND INCLUDES EVERY MEANS SUITABLE TO THAT END AND OF HO NBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. MOTOR INDUSTRIES CO. LTD. (1977) 223 ITR 112, 137-38 (KAR) HAS HELD THAT THE COMMERCIAL EXPEDIENCY OF A BUSINESSMA NS. DECISION TO INCUR AN EXPENDITURE CANNOT BE TESTED ON THE TOUCH STONE OF STRICT LEGAL LIABILITY TO INCUR SUCH AN EXPENDITURE AND SUCH DECISIONS IS THE VERY NATUR E OF THINGS HAVE TO BE TAKEN FROM THE BUSINESSMAN POINT OF VIEW AND HAVE TO BE RESPEC TED BY THE AUTHORITIES, NO MATTER THAT IT MAY APPEAR TO THE LATTER THAT THE EX PENDITURE INCURRED WAS UNNECESSARY OR AVOIDABLE. FOR THE PURPOSE OF CLAIMING DEDUCTION IT IS NOT NECESSARY THAT THE EXPENDITURE SHOULD HAVE RESULTED INTO SOME BENEFIT TO THE ASSESSEE. IT IS LEGALLY NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 13 SETTLED POSITION THAT IF THE EXPENDITURE HAS BEEN I NCURRED BY THE ASSESSEE VOLUNTARILY, EVEN WITHOUT NECESSITY, BUT IF IT IS FOR PROMOTING THE BUSINESS AND THE DEDUCTION WOULD BE PERMISSIBLE. SECTION 80G AND SECTION 37 AR E NOT MUTUALLY EXCLUSIVELY IF THE SUM CLAIMED BY WAY OF DEDUCTION THOUGH TERMED AS D ONATION COULD BE CONSIDERED AS AN EXPENDITURE FALLING UNDER SECTION 37 AND THE ASSESSEE CAN CLAIM ITS ALLOWANCE IN ENTIRETY, WHERE THE EXPENDITURE IS LAID WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS DEDUCTION IS ALLOWABLE U/S 37 EVEN THOUGH THE NOMENCLATURE OF THE EXPENDITURE MIGHT BE DONATION. 9. AS ARGUED BY THE LD. COUNSEL FOR THE ASSESSEE TH AT THE FINANCE ACT 1997 OMITTED SUBSECTION (2)(3)(4) OF SECTION 37 WHICH PR OVIDES FOR CERTAIN CEILING ON EXPENDITURE IN THE NATURE OF ENTERTAINMENT EXPENSES , TRAVELING EXPENSES, ADVERTISEMENT EXPENSE ETC. AS THESE ARTIFICIAL REST RICTIONS ARE OUT OF TUNE WITH THE CONCEPT OF REAL INCOME, AND THE OMISSION HAS BEEN M ADE IN ORDER TO REMOVE ALL SUCH CEILING AND TO ALLOW THE EXPENDITURE INCURRED FOR T HE PURPOSE. AN ANALYSIS OF SECTION 37(1) SHOWS THAT I. ANY EXPENDITURE II. NOT BEING IN NATURE OF CAPITAL EXPENDITURE OR III. PERSONAL EXPENSES OF THE ASSESSEE IV. LAID OUT OR EXPENDED. V. WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BU SINESS SHALL BE ALLOWED IN COMPUTING INCOME CHARGEABLE UND ER THE HEAD PROFIT & GAINS FROM BUSINESS AND PROFESSIONS. ACCORDINGLY, WE ARE OF THE VIEW THAT THE PAYMENT MA DE TO NERF IN TERMS OF AGREEMENT IS CERTAINLY EXPENDITURE AND HAS BEEN MAD E IN LIEU OF ALLOWING THE USE STRATEGIC POINTS IN ITS CAMPUS ETC IS CERTAINLY AN OUTGOING AND AS IT HAS BEEN CATEGORICALLY AGREED UPON, THERE IS NO POSSIBILITY OF ANY AMOUNT COMING BACK TO ASSESSEE ON THE GROUND FOR NON-USER OR LESSER USE O F THE SPACE. FURTHER, IT IS CERTAINLY AN EXPENDITURE FOR THE ASSESSEE AND NATUR E OF RECEIPT IN THE HANDS OF NERF CANNOT CHANGE THE NATURE CHARACTER OF PAYMENT. IF T HE EXPENDITURE IS INCURRED FOR THE PURPOSE OF RUNNING THE BUSINESS AND TO MEET WITH LE GITIMATE NEED OF BUSINESS I.E. ADVERTISEMENT EXPENSES, IT IS REVENUE EXPENDITURE. THE AIM AND OBJECT OF THE EXPENDITURE WOULD DETERMINE THE CHARACTER OF THE EX PENDITURE AS THE OBJECT IS TO MAKE KNOWN THE BRAND NIRMA MORE EMPHATICALLY IN N EW AND COMING GENERATION NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 14 AND IT IS CERTAINLY FOR A FIXED PERIOD, WHICH IS NO T EXCEEDING EIGHT YEARS, THE NATURE OF EXPENDITURE IS REVENUE AND NOT CAPITAL. FURTHER, ME RELY SPREAD OVER OF EXPENDITURE FOR EIGHT YEAR WILL NOT CHANGE THE TRUE NATURE OF E XPENDITURE, WHICH IS REVENUE EXPENDITURE, BY ALLOWING THE ENTIRE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PROFIT AND LOSS OF A PARTI CULAR YEAR AND THEREFORE IN TERMS OF AGREEMENT SPREAD OVER ADVERTISEMENT IS CERTAINLY RE VENUE IN NATURE. THE ENTIRE SPENT IS FOR PROMOTING NIRMA AND FOR THAT FACILIT IES AND PLATFORM MADE AVAILABLE BY NERF TO YOUR ASSESSEE IN TERMS OF THE AGREEMENT. AC CORDINGLY, WE ARE OF THE VIEW THAT THE EXPENDITURE OF RS.1 CRORE HAS BEEN VERY WE LL SPENT AND HELPED IN ENHANCING THE BRAND VALUE OF NIRMA. ACCORDINGLY, THIS EXPEND ITURE IS ALLOWABLE AND THE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE ARE REVERSED . THIS COMMON ISSUE OF THE ASSESSEES APPEALS IS ALLOWED. 10. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IN ITA NO.1004/AHD/2006 IS AS REGARDS TO THE REOPENING OF ASSESSMENT. AT THE OUTS ET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT HE HAS INSTRUCTIONS FRO M THE ASSESSEE NOT TO PRESS THIS ISSUE. ACCORDINGLY, HE HAS NOT PRESSED THIS ISSUE A ND THE SAME IS DISMISSED AS NOT PRESSED. 11. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE A SSESSEE IN ITA NO.497/AHD/2005, 3927/AHD/2008, 848/AHD/2009, 1004/ AHD/2006 AND 2368/AHD/2005 IS AS REGARDS TO THE ORDER OF CIT(A) IS CHARGING OF INTEREST U/S.234B AND 234C OF THE ACT. THIS BEING A CONSEQUENTIAL ISS UE NEEDS NO ADJUDICATION. 12. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSES SEE IN ITA NO.1004/AHD/2006 AND 848/AHD/2009 IS AS REGARDS TO THE ORDER OF CIT(A) IN NOT DECIDING THE GROUND REGARDING CHARGING OF INTEREST U/S.234D OF THE ACT. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OUTSET, STATED THA T THIS ISSUE HAS NOT BEEN DECIDED BY THE SPECIAL BENCH OF THIS TRIBUNAL DELHI BENCH I N THE CASE OF ITO V EKTA PROMOTERS(P) LTD. (2008) 113 ITD 719 (DEL) (SB), WH EREIN IT IS STATED THAT THE PROVISIONS OF SECTION 234D ARE PROSPECTIVE AND NOT RETROSPECTIVE AND ACCORDINGLY THE SAME WILL NOT APPLY IN THE PRESENT CASE. HE STATED THAT THIS ISSUE CAN BE SET ASIDE TO THE FILE OF CIT(A), FOR HIS DECISION IN TERMS OF DE CISION OF SPECIAL BENCH IN THE CASE OF EKTA PROMOTERS(P) LTD. THE LD. CIT-DR HAS NOT OBJEC TED TO THE REMITTING OF THIS ISSUE NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 15 TO THE FILE OF CIT(A). ACCORDINGLY, WE REMIT THIS I SSUE TO THE FILE OF CIT(A) TO DECIDE BY CONSIDERING THE DECISION OF SPECIAL BENCH IN THE CA SE OF EKTA PROMOTERS(P) LTD. 13. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSES SEE IN ITA NO.1004/AHD/2006 AND ITA NO. 848/AHD/2009 IS AS REGARDS TO THE ORDER OF CIT(A) REGARDING WITHDRAWAL OF INTEREST U/S.244A OF THE AC T. AFTER HEARING BOTH THE SIDES, WE ARE OF THE VIEW THAT THE CIT(A) HAS NOT DISCUSSED F ULL FACTS ON THIS ISSUE AND ACCORDINGLY SAME IS SET ASIDE TO THE FILE OF CIT(A) FOR FRESH CONSIDERATION. 14. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSES SEE IN ITA NO.2368/AHD/2005, 3927/AHD/2008 AND 848/AHD/2009 IS AS REGARDS TO THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF BAD DEBS O F RS.1,14,19,069/-, RS.2,23,63,430/- AND RS.9,80,276/-. 15. THE BRIEF FACTS IN REGARD TO THIS COMMON ISSUE ARE THAT THE ASSESSING OFFICER MADE DISALLOWANCE OF ASSESSEES CLAIM OF BAD DEBT W RITTEN OFF AMOUNTING TO RS.1,14,19,069/- IN ASSESSMENT YEAR 2002-03, AMOUNT ING TO RS.2,23,63,430/- IN ASSESSMENT YEAR 2004-05 AND A SUM OF RS.9,80,276/- IN ASSESSMENT YEAR 2005-05 ON ACCOUNT OF THE ASSESSEE SUPPLIED GOODS TO ITS CU STOMERS, WHO HAVE DEFAULTED THE PAYING OFF THE BALANCES. THE ASSESSING OFFICER RECO RDING A FINDING IN THE ASSESSMENT ORDER THAT THE BAD DEBTS CLAIMED CONSTITUTED RUNNIN G ACCOUNTS IN WHICH PAYMENTS HAVE BEEN RECEIVED EVEN DURING THE PERIODS UNDER AP PEAL. THE LD. COUNSEL FOR THE ASSESSEE BEFORE US STATED THAT NOW THE THIS COMMON ISSUE HAS BECOME SETTLED AND IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DEC ISION OF HONBLE SUPREME COURT IN CIVIL APPEAL NO.5293 OF 2003 IN THE CASE OF T.R.F. LTD. V. CIT, WHEREIN THE HONBLE APEX COURT HAS INTERPRETED THE PROVISIONS O F SECTION 36(1)(VII) OF THE ACT AS UNDER:- IN THESE APPEALS, WE ARE CONCERNED WITH ASSESSMENT YEAR 1990-1991 AND ASSESSMENT YEAR 1993-1994. PRIOR TO 1 ST APRIL, 1989, EVERY ASSESSEE HAD TO ESTABLISH, AS A MATTER OF FACT, THAT THE DEBT ADVAN CED BY THE ASSESSEE HAD, IN FACT, BECOME IRRECOVERABLE. THAT POSITION GOT ALTER ED BY DELETION OF THE WORD ESTABLISHED, WHICH EARLIER EXISTED IN SECTION 36( 1)(VII) OF THE INCOME TAX ACT, 1961 [ACT, FOR SHORT]. FOR THE SAKE OF CLARITY, WE RE-PRODUCE HEREINBELOW PROVISIONS OF SECTION 36(1)(VI) OF THE ACT, BOTH PRIOR TO 1 ST APRIL, 1989: PRE-1 ST APRIL, 1989: NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 16 OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 - - (I) TO (VI) XXX XXX XXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF ANY DEBT, OR PART THEREOF, WHICH IS ESTABLISHED TO HAVE BECOME A BAD DEBT IN THE PREVIOUS YEAR. POST-1 ST APRIL, 1989: OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 (I) TO (VI) XXX XXX XXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS IN THE ACCOUNTS OF THE ASSESSEE FOR THE ASSESSEE FOR THE PREVIOUS YEAR. THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, H AS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. 16. WE FIND THAT THE ASSESSEE IN ALL THE THREE YEAR S HAVE WRITTEN OFF THE BAD DEBTS AND THIS FACT IS UNDISPUTED. IN VIEW OF THE RATIO L AID DOWN BY THE HONBLE APEX COURT, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, WE REVERSE THE ORDERS OF THE LOWER AUTHORITIES ON THIS COMMON ISSUE AND APPEALS OF THE ASSESSEE ARE ALLOWED. 17. THE NEXT ADDITIONAL ISSUE IN THIS APPEAL OF ASS ESSEE IN ITA NO.497/AHD/2005 IS AS REGARDS TO ASSESSING OFFICER HAS GROSSLY ERRE D IN NOT ALLOWING CLAIM OF PREVIOUS YEAR EXPENSES OF RS.28,31,104/- ACCOUNTED IN ASSESS MENT YEAR 2002-03 BUT PERTAINING TO CURRENT ASSESSMENT YEAR. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THIS ISSUE WAS NEVER RAISED BEFORE ANY OF THE NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 17 AUTHORITIES BELOW AND THE FACTS ARE NOT EMANATING O UT OF THE ORDER OF ASSESSING OFFICER OR THAT OF THE CIT(A). THIS IS ENTIRELY A N EW ISSUE AND FACT NEEDS INVESTIGATION, AT THIS STAGE, WE CANNOT ADMIT THIS AND ACCORDINGLY THE SAME IS DISMISSED AS UNADMITTED. 19. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IN ITA NO.3927/AHD/2008 IS AS REGARDS TO THE ORDER OF CIT(A) IN CONFIRMING THE DI SALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.3,07,286/-. 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE BRIEF FACTS LEADING TO THE ISSUE ARE THAT THE ASSESSING OFFICER HAS NOT ALLOWED THE PRIOR PERIOD EXPENSES O F RS.3,07,286/- DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSEE CLAIMED THA T IN ACCOUNTING YEAR 2004-05 IT HAD EARNED PRIOR PERIOD INCOME NET OF RS.2,83,26 9/- AFTER CONSIDERING PRIOR PERIOD EXPENSES OF RS.3,62,362/- AND OUT OF THIS AMOUNT OF RS.3,07,286/- PERTAINS TO ASSESSMENT YEAR 2004-05. ACCORDING TO ASSESSEE, THE PRIOR PERIOD EXPENSES OF RS.3,62,362/- HAS BEEN EXCLUDED FROM THE COMPUTATIO N OF INCOME FOR ASSESSMENT YEAR 2005-06 AND ACCORDINGLY THE AMOUNT OF RS.3,07, 286/- SHOULD HAVE BEEN ALLOWED IN THIS ASSESSMENT YEAR. THE AO HAS DISALLO WED THE SAME. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A) AND HE REJE CTED THE SAME. WE FIND THAT ONCE THE ASSESSEE HAS EXCLUDED A SUM OF RS.3,62,362 /- FROM THE COMPUTATION OF ASSESSMENT YEAR 2005-06, THE AO SHOULD HAVE ALLOWED THE PRIOR PERIOD EXPENSES FROM ASSESSMENT YEAR 2004-05 BUT THIS IS SUBJECT TO VERIFICATION BY THE ASSESSING OFFICER BECAUSE THE FACTS NEEDS VERIFICATION. ACCOR DINGLY, THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 21. THE NEXT COMMON ISSUE IN THESE THREE APPEALS OF THE REVENUE IN ITA NOS.422-423/AHD/2009 AND 3799/AHD/2007 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING THE LEVY OF PENALTY U/S.271(1)(C) OF THE A CT ON DISALLOWANCE OF ADVERTISEMENT EXPENSES OF RS.1 CRORE IN EACH OF THE ASSESSMENT YE ARS. 22. AT THE OUTSET WE FIND THAT THIS ISSUE HAS ALREA DY BEEN ALLOWED ON MERITS IN FAVOUR OF THE ASSESSEE, IN THIS VERY ORDER, VIDE PARA-9, CONSEQUENTLY PENALTY ORDERS WILL NOT SURVIVE. ACCORDINGLY, WE CONFIRM THE ORDER OF CIT(A) DELETING THE PENALTY. NIRMA CONSUMER CARD LTD. V.ACIT CC-1(1) ABD EIGHT APPEALS AYS 00-01 TO 04-05 PAGE 18 23. THE NEXT ISSUE IN THIS APPEAL OF THE REVENUE IN ITA NO.423/AHD/2009 IS AS REGARDS TO THE ORDER OF CIT(A) IN DELETING THE LEVY OF PENALTY U/S.271(1)(C) OF THE ACT ON DISALLOWANCE OF BAD DEBTS. 24. AT THE OUTSET WE FIND THAT THIS ISSUE HAS ALREA DY BEEN ALLOWED ON MERITS IN FAVOUR OF THE ASSESSEE, IN THIS VERY ORDER, VIDE PARA-16, CONSEQUENTLY PENALTY ORDERS WILL NOT SURVIVE. ACCORDINGLY, WE CONFIRM THE ORDER OF CIT(A) DELETING THE PENALTY. 25. IN THE RESULT, ALL THE ASSESSEES APPEALS ARE PARTL Y ALLOWED AND THAT OF REVENUES APPEALS ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30/07/2010 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 30/07/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD