By TIOL News Service

MUMBAI, NOV 07, 2016: THE ISSUE IS - Whether only the net amount of expenditure on advertisement/sales promotion, i.e. gross expenditure less amount recovered by the assessee from its dealer, can be considered for disallowance u/s 37(3A) - YES IS THE VERDICT.

Facts of the case:

The assessee is a Trust. It had entered into an agreement with its distributors under which it was agreed that besides bearing expenditure on transportation, octroi, loading / unloading charges, it would also be responsible for advertisement and sales promotion. The agreement also provided that the advertisement / sales promotion expenditure which is incurred would be recoverable from the distributors. For AY 1984-85, assessee expended a sum of Rs.22.68 lakhs on advertisement / sales promotion. However, in terms of the agreement with the distributors, the applicant assessee collected an amount of Rs.27.93 lakhs from its distributors on account of sales promotion / advertisement expenses, leaving a surplus of Rs.5.34 lakhs. It is the appellant's case that this surplus alone has to be added to the income of the assessee as income from other sources. In the aforesaid facts, the applicant assessee had not claimed the amount of Rs.22.68 lakhs as its expenditure.

High Court's holding:

1. It is found that the Gujarat HC in Vadilal Industries Ltd. has held that only the net amount of expenditure on advertisement / sales promotion i.e. gross expenditure less amount recovered by the assessee from its dealer can be considered for disallowance u/s 37(3A). It also observed that where no claim for expenditure u/s 37 is made then no disallowance under subSection (3A) of Section 37 can be made. There is some merit in the submission made by Mr. Patil. However, we are not considering the alternative submission as the question as framed for our opinion itself states that the expenditure was never claimed as a deduction i.e. u/s 37. Therefore, the occasion to apply subSection (3A) of Section 37 to disallow only part thereof will not arise. We are in respectful agreement with underlined observations in Vadilal Industries Ltd.

2. In fact, Section 37(1) is a general provision which provides for allowing any expenditure not being capital or personal in nature and expended wholly for the purpose of the business or profession as deduction in computing profits and gains of business. Section 37(3A) states that notwithstanding the deduction allowed under subSection (1) of Section 37, expenditure in respect of particular types /classes as mentioned in Section 37(3B) shall not be allowed in excess of specified percentage. It, therefore, follows that subsection (3A) of Section 37 can only apply where deduction u/s 37(1) is claimed. The question as posed for our opinion itself records as a fact, that no expenditure was claimed by assessee in respect of the advertisement expenses sought to be disallowed u/s 37(3A).

(See 2016-TIOL-2738-HC-MUM-IT)