DCIT CIR 2, KALYAN V. NATIONAL LIQUORS, ULHASNAGAR

ITA 6225/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5495 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 21-10-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: OTHERS DISPOSED OF; ARE MS NATIONAL LIQUORS; SINCE FACTS ARE IDENTICAL; PERT AIN TO DIFFERENT ASSESSES
• Keywords: Gift; Business expenditure
• Section: 142(1); 37(1)

Judgement Text

1 M/S NATIONAL LIQUORS & OTHERS IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI JOGINDER SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) ITA NO. A.Y. APPELLANT RESPONDENT 6209/MUM/2016 2008-09 DCIT, CIR.2, KALYAN SHRI RAMESH P BUDHWANI, PROP. MSPK MARKETING, SHOP NO.1&2, KAILASH COMPLEX, NR BASHARAM SOCIETY, ESIS ROAD, ULHASNAGAR- 421 002 PAN:AATPB5167C 6225/MUM/2016 2012-13 -DO- NATIONAL LIQUORS VICKY MANOJ APARTMENTS, NR KHEMANI BUS STAND, , ULHASNAGAR-421 002 PAN:AAFFN9980R 6210/MUM/2016 2009-10 -DO- SHRI RAMESH P BUDHWANI, PROP. MSPK MARKETING, SHOP NO.1&2, KAILASH COMPLEX, NR BASHARAM SOCIETY, ESIS ROAD, ULHASNAGAR- 421 002 PAN:AATPB5167C 6211/MUM/2016 2010-11 -DO- -DO- 6212/MUM/2016 2012-13 -DO- -DO- 6222/MUM/2016 2011-12 -DO- M/S SHIVRAM LIQUORS, 31-32-33, 2 M/S NATIONAL LIQUORS & OTHERS SEEMA APARTMENTS, C- BUILDING, NR KHEMANI, ULHASNAGAR-421 002 PAN:ABFFS1321N 6221/MUM/2016 2009-10 -DO- NATIONAL LIQUORS VICKY MANOJ APARTMENTS, NR KHEMANI BUS STAND, , ULHASNAGAR-421 002 PAN:AAFFN9980R 6223/MUM/2016 2012-13 -DO- M/S SHIVRAM LIQUORS, 31-32-33, SEEMA APARTMENTS, C- BUILDING, NR KHEMANI, ULHASNAGAR-421 002 PAN:ABFFS1321N DATE OF HEARING 12-06-2018 DATE OF PRONOUNCEMENT 20-07-2018 O R D E R PER BENCH : THIS BUNCH OF 8 APPEALS FILED BY THE REVENUE PERT AIN TO DIFFERENT ASSESSES AND DIRECTED AGAINST SEPARATE, BUT IDENTIC AL ORDERS OF THE CIT(A)-3, THANE FOR THE ASSESSMENT YEARS 2008-09, 2 009-10, 2010-11, 2011-12 AND 2012-13. SINCE FACTS ARE IDENTICAL AND ISSUES ARE COMMON, FOR THE SAKE OF CONVENIENCE, THESE APPEALS WERE HEA RD TOGETHER AND ARE 3 M/S NATIONAL LIQUORS & OTHERS DISPOSED OF BY THIS COMMON ORDER. 2. THE REVENUE HAS RAISED MORE OR LESS COMMON GROUN DS OF APPEAL IN ALL CASES. FOR THE SAKE OF BREVITY, THE GROUNDS OF APPEAL TAKEN IN ITA NO.6225/MUM/2011 FOR AY 2012-13 ARE REPRODUCED HERE UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT(A)~3, THANE, ERRED IN DELETING THE ADDITION OF RS 56,71,8 67/- MADE ON ACCOUNT OF DISALLOWANCE OF SALES PROMOTION EXPENSES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN THE LAW, THE LD. CIT(A)-3, THANE, ERRED IN ALLOWING THE EXPENSES CLA IMED ON CIGARETTE TOBACCO PURCHASES EVEN WITHOUT VERIFYING THE GENUINENESS OF THESE PUR CHASE. 3. THE LD CIT(A) ERRED IN ALLOWING THE EXPENSES CLAIMED ON CIGARETTE TOBACCO PURCHASES WHILE NO DETAILS OF PURCHASE AND THEIR SUBSEQUENT SUPPLIE S TO THE DISTRIBUTORS HAVE BEEN FURNISHED BY THE ASSESSEE DURING THE ASSESSMENT PRO CEEDING. 3. THE BRIEF FACTS OF THE CASE EXTRACTED FROM ITA 6 225/MUM/2016 ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM, WHICH IS E NGAGED IN THE BUSINESS OF WHOLESALERS OF IMFL AND BEER, FILED ITS RETURN O F INCOME FOR AY 2012- 13 ON 27-09-2012 DECLARING TOTAL INCOME OF RS.24,75 ,610. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND STATUTORY NOTICES U/S 143(2) AND 142(1) OF THE ACT, WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED VARIOUS DETAILS, AS CALLED FOR. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS C LAIMED SALES PROMOTION EXPENSES OF RS.60,03,588/- (NET OF VAT). THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS DEBITED EXPENDITURE INCURRED ON ACCOUNT OF PURCHASE OF TOBACCO PRODUCTS (CIGARETTES AND GULTKA) FOR FREE DISTRIBUTION AS GIFT ARTICLES TO ITS CUSTOMERS, THE REFORE, CALLED UPON THE 4 M/S NATIONAL LIQUORS & OTHERS ASSESSEE TO EXPLAIN AS TO WHY SALE PROMOTION EXPENS ES BEING PURCHASE OF TOBACCO PRODUCTS FOR FREE DISTRIBUTION SHALL NOT BE DISALLOWED UNDER THE PROVISIONS OF SECTION 37(1) OF THE INCOME-TAX ACT, 1961. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE, VIDE LETTER DATED 16-03-2015 SUBMITTED THAT THE FIRM IS IN THE BUSINESS OF TRADI NG IN IMFL AND BEER ON WHOLESALE BASIS TO VARIOUS RETAILERS AS WELL AS PER MIT ROOMS, RESTAURANTS, ETC. THE FIRM IS CARRYING OUT ITS BUSINESS UNDER T HE LICENCE ISSUED BY STATE EXCISE DEPARTMENT. IT HAS SOLD ITS PRODUCTS TO VARIOUS RETAILERS. THE MANUFACTURERS OF IMFL AND BEER COME OUT WITH A SALES PROMOTION PLAN AS PER WHICH IT MADE ITS WHOLESALE TRADERS TO PROMOTE ITS BRAND BY GIVING CERTAIN FREE GIFTS, IF A RETAILER BOUGHT A P ARTICULAR BRAND FOR WHICH THE COMPANY WILL GIVE FREE GIFTS. THE ASSESSEE BEI NG A WHOLESALE DEALER IS AUTHORISED AGENT FOR BRANDS OF PINAKINI INDS. PV T LTD, S.B. LIQUOR DISTRIBUTORS P LTD AND POLARIS LIQUOR PVT LTD. THE SE SUPPLIERS ARE MARKETING VARIOUS BRAND IMFL & BEER. THESE COMPANI ES HAVE LAID DOWN CERTAIN CONDITIONS, ONE OF WHICH IS COMPULSORY LIFT ING OF SPECIFIC QUANTITIES OF THEIR PRODUCTS, FAILING WHICH, THE AG ENCY MAY BE LOST. AS A WHOLESALE DISTRIBUTOR ALWAYS UNDER COMPANIES PRESS URE FOR LIFTING OF HUGE QUANTITIES OF THESE PRODUCTS. UNDER TRADE COM PULSION, THE ASSESSEE HAS PURCHASED HUGE QUANTITIES OF PRODUCTS FROM THOSE DISTRIBUTORS; HOWEVER, TO SELL THESE PRODUCTS IN TH E MARKET, THE ASSESSEE 5 M/S NATIONAL LIQUORS & OTHERS HAS COME OUT WITH A SCHEME, AS PER WHICH, IF A RETA ILER BUYS CERTAIN QUANTITY OF PRODUCTS, SELLS FREE CIGARETTES FOR WHI CH IT HAS INCURRED SALES PROMOTION. THE ASSESSEE HAS DISTRIBUTED FREE CIGARE TTES ONLY WITH THE OBJECTIVE OF INCREASING TURNOVER AND IMPROVE CUSTOM ER BASE. THEREFORE, THE SAME CANNOT BE CONSIDERED AS EXPENDITURE INCURR ED WHICH IS PROHIBITED BY ANY LAW OR FOR OFFENCES. THE ASSESSE E FURTHER SUBMITTED THAT CIGARETTES AND OTHER TOBACCO PRODUCTS ARE FEEL Y AVAILABLE IN THE MARKET LIKE GENERAL STORES AND PAN-BEEDI SHOPS AND THE GOVERNMENT HAS NOT PUT ANY BAN WHATSOEVER EITHER ON THE MANUFACTUR E OR SALE OR CONSUMPTION OF TOBACCO PRODUCTS. IN FACT, NO ONE R EQUIRES ANY SPECIAL PERMIT FOR BUYING THESE PRODUCTS. THE ONLY RESTRIC TION ON SALE / DISTRIBUTION IS WITH REFERENCE TO AGE OF THE BUYER AND ALSO WITH THE STATUTORY WARNING REGARDING ILL EFFECTS OF THESE PR ODUCTS ON HEALTH OF THE CONSUMER ON THE PACKING. THEREFORE, FREE DISTRIBUT ION OF TOBACCO PRODUCTS FOR INCREASE IN TURNOVER AND EXPANDING CUS TOMER BASE CANNOT BE CONSIDERED AS EXPENDITURE INCURRED FOR ANY PURPO SE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY ANY LAW AND ALSO WHICH IS HIT BY EXPLANATION (1) TO SECTION 37(1) OF THE INCOME-TAX ACT, 1961. 4. THE AO, AFTER CONSIDERING SUBMISSIONS OF THE ASS ESSEE AND ALSO RELYING UPON THE CASE LAWS CITED BY THE ASSESSEE, O BSERVED THAT THE ASSESSEE HAS INCURRED SALES PROMOTION EXPENSES BEIN G PURCHASE OF 6 M/S NATIONAL LIQUORS & OTHERS TOBACCO PRODUCTS FOR FREE DISTRIBUTION IS HIT BY EX PLANATION (1) TO PROVISIONS OF SECTION 37(1) AND ACCORDINGLY NOT ALL OWABLE AS DEDUCTION. THE AO FURTHER OBSERVED THAT THE GOVERNMENT OF INDI A HAS REGULATED SALE OF TOBACCO PRODUCTS UNDER CIGARETTES AND OTHER TOBACCO PRODUCTS (PROHIBITION OF ADVERTISEMENT) AND REGULATION OF TR ADE & COMMERCE, PRODUCTION, SUPPLY AND DISTRIBUTION ACT, 2003 (COTP ACT), AS PER WHICH SECTION 5(3) PROHIBITS ANY PERSON TO PROMOTE OR AGR EE TO PROMOTE THE USE OR CONSUMPTION OF CIGARETTES OR ANY OTHER TOBACCO P RODUCT UNDER A CONTRACT OR OTHERWISE. THE AO FURTHER OBSERVED THA T SECTION 9(22) OF THE SAID ACT, FURTHER REITERATES THAT IF ANY PERSON CON TRAVENES THE PROVISIONS OF SECTION 5 SHALL, ON CONVICTION, BE PUNISHABLE. THE AO FURTHER REFERRING TO WHO FRAMEWORK CONVENTION ON TOBACCO CONTROL WHO FCTC TO WHICH INDIA IS A PARTY OBSERVED THAT ARTICLE 16 OF WHO FCTC CONVENTION PROHIBITS DISTRIBUTION OF FREE TOBACCO PRODUCT TO T HE PUBLIC AND ESPECIALLY FOR MINORS. THEREFORE, HE OPINED THAT FREE DISTRIB UTION OF TOBACCO PRODUCT IS HIT BY THE PROVISIONS OF SECTION 5 OF COTP ACT, 2003 AND ALSO WHO FCTC CONVENTION AND ACCORDINGLY, ANY EXPENDITURE IN CURRED ON SALES PROMOTION BEING PURCHASE OF TOBACCO PRODUCTS FOR FR EE DISTRIBUTION IS HIT BY EXPLANATION (1) TO SECTION 37(1) OF THE ACT. TH E RELEVANT OBSERVATIONS OF THE AO IS EXTRACTED BELOW:- 6.1. TO SUM UP THE ABOVE DISCUSSION POINT WHICH P ROVE THAT ASSESSEE FIRM HAS VIOLATED THE PROVISIONS OF EXPLANATION TO S.37(L) OF THE 7 M/S NATIONAL LIQUORS & OTHERS I.T.ACT ARE PRECISELY AS FOLLOWS: (I) FREE OF C OST DISTRIBUTION OF TOBACCO PRODUCTS PROMOTES THE CONSUMPTION OF TOBACCO PRODUCTS. (II) AS PER THE MINISTRY OF H EALTH AND FAMILY WELFARE (GOVT. OF INDIA) FREE DISTRIBUTION OF TOBACCO PRODUCTS AMOUNTS TO PROMOTI ON WHICH IS PROHIBITED UNDER THE COTP ACT. (III) THE ASSESSEE FIRM HAS DISTRIBUTION TOBACCO PRODUCTS I.E. CIGARETTE AND GUTKA WORTH RS. 5671867/- FREE OF COST WHICH IS PROHIBITE D UNDER THE COTP ACT. (IV) EXPENSES AMOUNTING TO RS. 5671867/- I NCURRED ON THE ACTIVITY PROHIBITED UNDER COTP ACT, CANNOT BE ALLOWED AS DEDUCTION AS PE R THE PROVISION OF EXPLANATION TO S.37(L) OF THE I.T ACT. (V) THE CA SE LAWS RELIED UPON BY THE ASSESSEE ARE NETHER RELATED TO S.5(3) OF COTP ACT 1961, NOR TO EXPLANATION S.37(L) OF THE I.T.ACT, HENCE ARE DISTINGUISHABLE. 6.2. ON THE ABOVE FACTS AND IN LAW THE ASSESSEE FIR MS REPLY IS NOT TENABLE AND HENCE NOT ACCEPTABLE. THEREFORE AN AMOU NT OF RS. 56,71,86 77- DEBITED TO P& L A/C. UNDER THE HEAD SALES PROMOTION IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE WAS REQUIRED TO DISALLOW THE AFORESAID EXP ENSES AND OFFER IT FOR TAXATION IN THE RETURN OF INCOME FILED . HOWEVER THE ASSESSEE FAILED TO DO SO, HENCE PENALTY PROCEEDINGS U/S.271(1) (C) ARE INITIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 5. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREF ERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE REITERATED ITS SUBMISSIONS MADE BEFORE THE AO AND ALSO FILED ELABO RATE WRITTEN SUBMISSIONS WHICH HAS BEEN REPRODUCED AT PARA 5 ON PAGES 5 TO 26 OF CIT(A)S ORDER. THE SUM AND SUBSTANCE OF THE ARGUM ENTS OF THE ASSESSEE BEFORE THE CIT(A) ARE THAT EXPENSES INCURR ED UNDER THE HEAD, SALES PROMOTION BEING PURCHASE OF TOBACCO PRODUCT S FOR FREE DISTRIBUTION TO INCREASE BUSINESS TURNOVER AND ENHANCE CUSTOMER BASE CANNOT BE 8 M/S NATIONAL LIQUORS & OTHERS CONSIDERED AS EXPENSES INCURRED FOR ANY PURPOSE WHI CH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW AND HENCE, COME WITHIN T HE PROVISIONS OF EXPLANATION (1) TO SECTION 37(1) OF THE ACT. THE A SSESSEE ALSO FILED VARIOUS DETAILS TO NEGATE OBSERVATIONS MADE BY THE AO IN THE LIGHT OF PROVISIONS OF COTP ACT, 2003 AND EXPLANATION TO SEC TION 37(1) OF THE ACT. ACCORDING TO THE ASSESSEE, WHEN THE STATE HAS NOT PUT ANY RESTRICTIONS ON MANUFACTURE, SALE AND CONSUMPTION O F TOBACCO PRODUCTS, MERE PURCHASE OF TOBACCO PRODUCTS IN THE OPEN MARKE T TO BE GIVEN AS FREE GIFTS TO THE CUSTOMERS TO ENHANCE SALES CANNOT BE CONSIDERED AS EXPENDITURE INCURRED FOR THE PURPOSE WHICH IS AN OF FENCE OR WHICH IS PROHIBITED BY LAW. THE ASSESSEE FURTHER SUBMITTED THAT ONCE TRADING OF CIGARETTES AND OTHER TOBACCO PRODUCTS ARE PERMITTED , THE QUESTION OF PUBLIC POLICY WOULD NOT ARISE AS HELD BY THE HONBL E BOMBAY HIGH COURT IN THE CASE OF BRIHAN MAHARASHTRA SUGAR SYNDICATE ( 320 ITR 658). 6. THE CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIO NS OF THE ASSESSEE AND ALSO BY RELYING UPON THE CBDT CIRCULAR NO.772 D ATED 23-12-1998 OBSERVED THAT MERE DISTRIBUTION OF TOBACCO PRODUCTS DOES NOT TANTAMOUNT TO PROMOTION AND CONSUMPTION UNLESS THE DISTRIBUTOR ACTIVELY PROMOTE THE PRODUCT. IF THAT IS THE MEANING OF THE COTP ACT, EV ERY SHOP KEEPER, WHO SELLS TOBACCO PRODUCTS WILL BECOME AN OFFENDER UNDE R THIS ACT, AND WHAT IS PROHIBITED BY LAW IS ONLY SALE OF TOBACCO PRODUC T TO MINORS AND PUBLIC 9 M/S NATIONAL LIQUORS & OTHERS ADVERTISEMENT. THE CIT(A) FURTHER OBSERVED THAT TH E PROVISIONS OF SECTION 5(3) OF COTP ACT, ARE NOT APPLICABLE TO THE ASSESSEE AND HENCE, EXPLANATION (1) TO SECTION 37(1) OF THE ACT, ARE AL SO NOT APPLICABLE AS DISTRIBUTION OF TOBACCO AND GUTKA FOR ASSESSEES SA LES PROMOTION IS A BUSINESS EXPENDITURE WHICH IS INCURRED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE RELEVANT PORTION OF THE ORDER OF THE CIT(A) IS EXTRACTED BELOW:- 5.0 GROUND NO. 1 IS DIRECTED AGAINST THE ADDITION OF RS. 56,71,8677- OUT OF SALES PROMOTION EXPENSES BY APPLY THE PROVIS IONS OF EXPLANATION (1) TO SECTION 37(1) OF THE ACT. (J) I HAVE CAREFULLY CONSIDERED THE SUBMISS IONS OF THE APPELLANT, THE OBSERVATIONS OF THE AO IN THE ASSESSMENT ORDER, CAS E LAWS RELIED UPON BY THE APPELLANT AND THE FACTS OF THE CASE. (II) ON PERUSAL OF THE ABOVE, THE REASONS GIVEN BY THE A O FOR DISALLOWING AN AMOUNT OF RS. 56,71,867/- OUT OF SALES PROMOTION EXPENSES IS NOT JUSTIFIABLE FOR THE REASONS DISCUSSED BELOW:- (A) IN FACT, SECTION5(3) OF COTP ACT, 2003 APPLIES ONLY WHERE A PERSON BY CONTRACT OR OTHERWISE PROMOTES OR A GREES TO_PROMOTE THE CONSUMPTION OF TOBACCO PRODUCTS, WHEREAS IN THE APP ELLANT'S CASE NO SUCH CONTRACT HAS BEEN ENTERED. FURTHER, THE APPELLANT HAS NOT PROMOTED ANY SPECIFIC BRAND OR A SPECIFIC MANUFACTU RE. (B) THE APPELLANT DOES NOT MANUFACTURE OR DEAL IN OR ADVERTISES ANY SUCH PRODUCTS I.E. TOBACCO OR GUTKA. THE MEANING OF 'ADV ERTISE' TO MEAN A PRODUCT IN ORDER TO PROMOTE SALES OF THOSE PRODUCTS . IN THE CASE OF THE APPELLANT, THERE WAS NO INTENTION OR INTEREST IN PR OMOTING THE SALE OF TOBACCO PRODUCTS BUT TO PROMOTE SALES OF ONLY THOSE LIQUOR PRODUCTS WHICH HE DEALS AS A DISTRIBUTOR. (C) IN FACT, THE GOVT. HAS NOT PROHIBITED THE MANUFACTU RE OF TOBACCO PRODUCT AND THE APPELLANT IS ALSO NOT A MANUFACTURE R, THEREFORE THE PROVISIONS OF SECTION 5(3) OF COTP ACT ARE NOT APPL ICABLE. IN THE CASE OF THE APPELLANT, IT IS NOT EVEN CONCERNED WHETHER THE PRODUCTS ARE CONSUMED OR NOT AS THEY ARE DISTRIBUTED BOTH TO SMO KERS AND NON-SMOKERS ALIKE. MERE DISTRIBUTION DOES NOT TANTAMOUNT TO PRO MOTION OF CONSUMPTION, UNLESS THE DISTRIBUTOR ACTIVELY PROMOTES THE PRODUC T. IF THAT IS THE MEANING OF THE COTP ACT, EVERY SHOPKEEPER WHO SELLS TOBACCO PRODUCTS WILL BECOME AN OFFENDER UNDER THIS ACT AND WHAT IS PROHI BITED BY LAW, IS ONLY SALE OF TOBACCO PRODUCTS TO MINORS AND PUBLIC ADVER TISEMENT. (D) THE EXPLANATION TO SECTION 37(1) SPEAKS OF ANY EXPE NDITURE INCURRED FOR ANY PURPOSE WHICH PURPOSE IS AN OFFENC E OR WHICH PURPOSE IS PROHIBITED BY LAW, NO DEDUCTION SHALL BE ALLOWED. T HEREFORE, THERE CANNOT 10 M/S NATIONAL LIQUORS & OTHERS BE ANY DISPUTE THAT THE PURPOSE FOR WHICH THE IMPUG NED EXPENDITURE IS INCURRED IS TO PROMOTE SALE OF LIQUOR PRODUCTS AND THEREFORE, IT IS NEITHER AN OFFENCE NOR PROHIBITED BY ANY LAW. WHAT IS PROHIBIT ED IS ONLY CERTAIN SPECIFIED ACTIVITIES SUCH AS SALE TO MINORS, ADVERT ISEMENT IN MEDIA ETC BUT THIS IS NOT IN THE CASE OF THE APPELLANT. (E) CBDT CIRCULAR_NO.772 DATED 23 RD DECEMBER, 1998 IN PARA 20.1 SPEAKS OF THE AMENDMENT WHICH WILL RESULT IN DISALL OWANCE OF CERTAIN CLAIMS MADE BY ASSESSEE IN RESPECT OF PAYMENT OF EX TORTION MONEY, HAFTA, BRIBES ETC AND UNLAWFUL EXPENDITURE IS NOT AN ALLOW ABLE DEDUCTION. THUS, IN ORDER TO ATTRACT THE EXPLANATION, THE PAYM ENT BY ITSELF MUST CONSTITUTE VIOLATION OF LAW. THE PURCHASE OF TOBACC O PRODUCTS IS NOT A PAYMENT WHICH VIOLATES ANY LAW. (F) THEREFORE, THE PROVISIONS OF SECTION 5(3) OF COTP A CT, 2003, ARE NOT APPLICABLE IN THE CASE OF THE APPELLANT THEREFO RE, EXPLANATION 1 TO SECTION 37(1) OF THE ACT ARE ALSO NOT APPLICABLE AS THE DISTRIBUTION OF TOBACCO AND GUTKA FOR APPELLANT'S SALES PROMOTION O F ITS BUSINESS IS NOT AN OFFENCE AND NOT PROHIBITED BY LAW. (Q ) FOR THE PURPOSE OF DISALLOWANCE UNDER EXPLANATION TO SECTION 37(1), THE FOLLOWING BASIC PRINCIPLES ARE TO BE FULFILLED : A) THE EXPENSE SHOULD HAVE BEEN INCURRED IN PROCEEDINGS LAUNCHED FOR INFR ACTION OF LAW B) THE AO SHOULD EXAMINE THE RELEVANT ACT TO FIND OUT WHET HER THE EXPENSE IS IN THE NATURE OF PENALTY C) EXPENSE SHOULD BE RELATED TO ILLEGALLY NOT TO IRREGULARITY OR PROCEDURAL FORMALITIES' EXPENSES HA VING NEXUS WITH THE OFFENCES ARE ON THE SAME FOOTING AND ARE HIT BY EXP LANATION TO SECTION 37(1). WHEREAS, IN THE CASE OF THE APPELLANT, THE A BOVE CONDITIONS HAVE NOT BEEN VIOLATED AS NO OFFENCE HAS BEEN COMMITTED UNDER ANY LAW. (III) THE AR OF THE APPELLANT HAS PLACED RELIANCE ON VARIOUS JUDICIAL PRONOUNCEMENTS. THE AFORESAID SIMILAR ARGU MENTS WERE CONSIDERED BY THE JURISDICTIONAL HON'BLE HIGH COURT IN THE CASE OF BRIHAN MAHARASHTRA SUGAR SYNDICATE LTD. VS. CIT REPORTED I N 320 ITR 658 AND THE HIGH COURT ON PAGE 661 OBSERVED AS .. '........... CANNOT BE SAID TO BE AGAINST PUBLIC POLICY. IT IS SUBMITTED THAT RIGHT TO TRADE IN LIQUOR MAY BE A TRADE WHICH IS RES-EXTR A COMMERCIUM. NEVERTHELESS THE STATE ALLOWS SALE OF LIQUOR. ONCE THAT BE THE CASE AND TRADING THE LIQUOR IS PERMITTED THE QUESTION OF PUB LIC POLICY WOULD NOT ARISE. PUBLIC POLICY, IT IS SUBMITTED WOULD BE IN THE EVEN T OF THE CONTRACT IS IMMORAL OR AGAINST THE STATE INTEREST. THERE IS NO IMMORALITY INVOLVED IN THE CONTRACT. THERE IS NO BAR IN THE MILITARY OFFICERS IN THE ARMED FORCE DRAWING LIQUOR OR DRINKING. THE VERY FACT THAT THEY CAN PUR CHASE THE SAME FROM CDS MUST RESULT IN REJECTING THAT CONTENTION. THEREFORE, THE ISSUE INVOLVED IN THE APPEAL WAS SQU ARELY COVERED IN PRINCIPLE BY THE AFORESAID DECISION OF THE JURISDIC TIONAL HON'BLE BOMBAY HIGH COURT IN THE CASE OF THE APPELLANT. IN VIEW OF THE ABOVE STATED FACTS AND LEGAL POSITIO N, THE APPEAL OF THE APPELLANT ON THIS GROUND IS ALLOWED AND THE ADD ITION/DISALLOWANCE MADE BY THE AO IS DELETED. 11 M/S NATIONAL LIQUORS & OTHERS 7. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. THE LD.DR SUBMITTED THAT THE LD.CIT(A) WAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF SALES PROMOTION EXPENSES, BEING PURCHASE OF TOBACCO PRODUCTS FOR FR EE DISTRIBUTION WITHOUT APPRECIATING THE FACT THAT THE STATE HAS DI SCOURAGED PROMOTION AND CONSUMPTION OF TOBACCO PRODUCTS BY BRINGING VAR IOUS LEGISLATION. THE LD.DR FURTHER SUBMITTED THAT THE AO HAS BROUGHT OUT CLEAR FACTS IN THE LIGHT OF PROVISIONS OF COTP ACT, 2003 AND WHO F CTC CONVENTION AS PER WHICH ARTICLE 16 PROHIBITS OR PROMOTE PROHIBITI ON OF FREE DISTRIBUTION OF TOBACCO PRODUCTS TO THE PUBLIC, ESPECIALLY TO MINOR S. THOUGH, THE ASSESSEE CLAIMS TO HAVE DISTRIBUTED FREE TOBACCO PR ODUCTS TO ITS CUSTOMERS FOR PURCHASE OF PRODUCTS, THERE IS NO EVI DENCE WITH THE ASSESSEE TO PROVE THAT SUCH PRODUCT HAS NOT BEEN GI VEN TO MINORS. THE PROVISIONS OF SECTION 5(3) OF COTP ACT, PROHIBITS PROMOTION OR AGREE TO PROMOTE OR USE THE CONSUMPTION OF CIGARETTE OR ANY OTHER TOBACCO PRODUCT. IF AN ASSESSEE INCURS ANY EXPENDITURE IN CONTRAVENTION OF PROVISIONS OF COTP ACT, OBVIOUSLY SUCH EXPENDITURE WOULD COME WITHIN THE PURVIEW OF EXPLANATION (1) TO SECTION 37(1) AND ACCORDINGLY, THE AO WAS RIGHT IN DISALLOWING SALES PROMOTION EXPENSES. THE LD.CIT(A) DELETED ADDITIONS MADE BY THE AO WITHOUT ANY COGEN T REASONS AND HENCE, HIS ORDER SHOULD BE SET ASIDE AND ADDITION M ADE BY THE AO 12 M/S NATIONAL LIQUORS & OTHERS SHOULD BE SUSTAINED. 8. NONE APPEARED ON BEHALF OF THE ASSESSEE. WE HAV E HEARD THE LD.DR, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS AN ADMITTED FAC T THAT THE ASSESSEE HAS INCURRED SALES PROMOTION EXPENSES FOR PURCHASE OF T OBACCO PRODUCTS TO BE DISTRIBUTED FREE OF COST TO ITS CUSTOMERS FOR PU RCHASE OF IMFL AND BEER PRODUCTS. IT IS ALSO AN ADMITTED FACT THAT AS PER THE PROVISIONS OF CIGARETTES AND TOBACCO PRODUCTS (PROHIBITION OF ADV ERTISEMENT) & REGULATION OF TRADE & COMMERCE, PRODUCTION, SUPPLY AND DISTRIBUTION OF TOBACCO PRODUCTS ACT, 2003 (COTP ACT) BY WAY OF SEC TION 5(3) PROHIBITS ANY PERSON TO PROMOTE OR AGREE TO PROMOTE THE USE O R CONSUMPTION OF CIGARETTES OR ANY OTHER TOBACCO PRODUCTS UNDER A CO NTRACT OR OTHERWISE. IT IS ALSO AN ADMITTED FACT THAT WHO FRAMEWORK CONV ENTION 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. ACCO RDING TO THE ASSESSEE, WHEN THE STATE HAS NOT IMPOSED ANY BAN OR RESTRICTION ON PRODUCTION, SALE AND CONSUMPTION OF TOBACCO PRODUCT S, MERE PURCHASE OF TOBACCO PRODUCTS IN THE OPEN MARKET FOR FREE DISTRI BUTION TO INCREASE SALES TURNOVER AND EXPAND CUSTOMER BASE CANNOT BE C ONSIDERED AS EXPENSES INCURRED FOR ANY PURPOSE WHICH IS AN OFFEN CE OR WHICH IS 13 M/S NATIONAL LIQUORS & OTHERS PROHIBITED BY LAW AND HIT BY THE PROVISIONS OF EXPL ANATION (1) TO SECTION 37(1) OF THE ACT. 9. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE GOVERNMENT POLICY IS TO DISCOURAGE USAGE OF TOBACCO PRODUCTS B Y THE GENERAL PUBLIC. TO REGULATE AND CONTROL TOBACCO PRODUCTS, THE GOVER NMENT 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 PROMOTI ON WHICH IS PROHIBITED UNDER THE COTP ACT, 2003. IN THIS LEGAL BACK GROUN D, WHEN WE ANALYSIS EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS SALES PROMOTION, IT IS OBVIOUSLY CERTAIN THAT THE ASSESSEE HAS INCURRED EX PENDITURE 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 NATU RE OF SALES PROMOTION EXPENSES WHICH HAS BEEN INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS, BUT SUCH EXPENSES ARE IN THE N ATURE OF EXPENDITURE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHI CH IS PROHIBITED BY LAW. ALTHOUGH, THE STATE HAS NOT IMPOSED ANY RESTR ICTION 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 SPECIFICA LLY BANS PROMOTION OF FREE DISTRIBUTION OF TOBACCO PRODUCTS, UNDER WHATEV ER MAY BE THE CIRCUMSTANCES. IN THIS CASE, THE ASSESSEE HAS INCU RRED SALES PROMOTION EXPENSES FOR FREE DISTRIBUTION OF TOBACCO PRODUCTS WHICH IS IN OUR CONSIDERED OPINION, EXPENDITURE INCURRED FOR THE PU RPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW AND HIT BY EX PLANATION (1) TO SECTION 37(1) OF THE INCOME-TAX ACT, 1961. THEREFORE, WE A RE OF THE CONSIDERED VIEW THAT THE AO WAS RIGHT IN DISALLOWING SALES PRO MOTION EXPENSES U/S 37(1) OF THE ACT. THE LD.CIT(A) WITHOUT APPRECIATI NG 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 L D.CIT(A) ARE RENDERED UNDER DIFFERENT SET OF FACTS AND HENCE, WI LL 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 TO WARDS DISALLOWANCE OF SALES PROMOTION EXPENSES. 10. IN THE RESULT, APPEAL FILED BY THE REVENUE IS A LLOWED. 11. THE FACTS AND ISSUES INVOLVED IN ALL OTHER APPE ALS ARE IDENTICAL TO THE ISSUE DISCUSSED IN ITA NO. 6225/MUM/2016, IN THE PR ECEDING PARAGRAPHS. THE REASONS GIVEN BY US IN THE PRECEDI NG PARAGRAPHS, SHALL MUTATIS MUTANDIS APPLY TO THESE APPEALS ALSO. THER EFORE, FOR THE DETAILED REASONS GIVEN THEREIN, WE REVERSE THE ORDERS PASSED BY THE CIT(A) AND 15 M/S NATIONAL LIQUORS & OTHERS RESTORE THE ADDITION MADE BY THE AO TOWARDS SALES P ROMOTION EXPENSES. 12. IN THE RESULT, ALL THE 8 APPEALS FILED BY THE R EVENUE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JULY, 2018. SD/- SD/- (JOGINDER SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 20 TH JULY, 2018 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER SR.PS, ITAT, MUMBAI