MRF Ltd. Vs DCIT (Madras High Court)
The Madras High Court considered the assessee’s appeals under Section 260A of the Income Tax Act, 1961 against the common order dated 11.03.2011 passed by the Income Tax Appellate Tribunal, Chennai, for assessment years 2006-07 and 2007-08. The dispute concerned disallowance of Rs.1.70 Crores incurred by MRF for establishing and operating the MRF Pace Foundation.
The Assessing Officer had treated the expenditure as being of a charitable nature. The assessee contended that it was one of the largest corporate sponsors of sports in India, particularly cricket, and that training pace bowlers through the Pace Foundation promoted the MRF brand and generated publicity. The Foundation selected young pace bowlers, provided systematic and scientific training and periodically invited foreign coaches, trainers and therapists. The assessee stated that several trainees subsequently represented national, State and District teams and that the Foundation’s activities generated substantial television-media publicity for MRF. It also pointed out that its products were exported to 65 countries, including cricket-playing countries, and relied upon JCIT vs. ITC Limited [2008 112 ITD 57].
The Assessing Officer rejected the claim on the ground that MRF had not sponsored a sporting event for sales promotion but had established the Pace Foundation for training fast bowlers. According to the Assessing Officer, such expenditure could not be equated with sponsorship expenditure involving hoardings and media advertisements. The Assessing Officer also questioned how promotion of bowling activity in India could affect tyre sales in other countries and added Rs.1.70 Crores to the assessee’s total income.
The CIT(A), however, allowed the assessee’s appeal. Relying upon CIT vs. Malayalam Plantations Ltd. and CIT vs. Delhi Cloth and General Mills Co. Ltd., the CIT(A) held that the expenditure fell within the principles governing business expenditure. The CIT(A) observed that training pace bowlers promoted the corporate image and brand of MRF through its association with the MRF Academy and that the manner in which sales were promoted was a matter of business expediency for the assessee.
The Tribunal reversed the CIT(A)’s decision and restored the Assessing Officer’s order. It held that the expenditure was not for sponsorship of cricket and that establishment of the Pace Foundation for training bowlers could not be treated as a business activity. The assessee therefore approached the High Court.
The High Court examined the legal principle of commercial expediency and referred to CIT vs. Dalmia Cemet (Bharat) Ltd., where it was held that commercial expediency encompasses everything serving to promote commerce and that the Revenue cannot place itself in the position of a businessman or Board of Directors to determine what expenditure is reasonable. The Court noted that this principle was approved by the Supreme Court in Hero Cycles (P) Ltd. vs. CIT, which also took note of S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Another.
The Court held that it was not for the Assessing Officer to decide what would be beneficial for the assessee in promoting its business. Such decisions were to be left to the assessee, who was best placed to determine what was appropriate for its business activity.
The Court further held that the MRF Pace Foundation was part of the assessee-organisation and that the expenditure had been claimed as business expenditure under Section 37. The Court rejected the premise that the expenditure constituted a donation or charity. It observed that the Assessing Officer had assumed facts not appearing on record by comparing the expenditure with donations.
The Court distinguished the decisions relied upon by the Revenue, including Nahar Spinning Mills Ltd. vs. CIT, Ludhiana, CIT vs. Industrial Development Corporation of Orissa Ltd., CIT vs. Jeevandas Laljiee & Sons and CIT vs. Infosys Technologies Ltd., observing that those decisions could not assist the Revenue because the expenditure incurred by MRF was not a donation.
The Court also considered CIT vs. Malayalam Plantations Ltd. and observed that the expression “for the purpose of business” is wider than “for the purpose of earning profits”. The Court held that the decision supported the legal principle concerning the scope of business expenditure, although the facts of that case were different.
Other decisions relied upon by the Revenue were also distinguished. Atofina Peroxides India Ltd. vs. Deputy Commissioner of Income Tax, Chennai concerned a contribution to a hospital; CIT vs. Sambandam Spinning Mills (P) Ltd. concerned travelling expenses; ACIT vs. Kuber Singh Bhagwandas concerned a donation; and CIT vs. Madras Refineries Ltd. involved a remand because the Assessing Officer had not examined the assessee’s claim that assistance to residents near its factory constituted business expenditure.
The High Court found that the assessee had placed material before the Assessing Officer and CIT(A) explaining how training pace bowlers assisted its business activity and that these contentions had not been found to be false or baseless. The Court accepted the CIT(A)’s observation that MRF derived popularity from its close association with cricket and that the expenditure could be compared with other forms of advertising, including hoardings, publicity material and conventional advertising.
The Court further noted that there was no finding by either the Assessing Officer or the Tribunal that the expenditure was not genuine. The Revenue also fairly submitted that other expenditure claimed by the assessee towards sponsorship and advertisement had been allowed in its entirety.
Accordingly, the Madras High Court held that the Tribunal had erred in reversing the CIT(A)’s order. The tax case appeals were allowed, the Tribunal’s order was set aside, and the CIT(A)’s order was restored. The substantial questions of law were answered in favour of the assessee. No costs.
Cases Discussed
- JCIT vs. ITC Limited [2008 112 ITD 57] — relied upon by the assessee before the Assessing Officer in support of the allowability of the expenditure as business expenditure.
- CIT vs. Malayalam Plantations Ltd., [(1964) 153 ITR 0140] — considered on the scope of expenditure incurred “for the purpose of business” and distinguished on facts insofar as the Revenue sought to rely upon it against the assessee.
- CIT vs. Delhi Cloth and General Mills Co. Ltd., [(1978) 115 ITR 0659 (Delhi)] — considered on business promotion, commercial expediency and the power of the Revenue to examine the purpose and genuineness rather than determine business expediency or quantum.
- CIT vs. Dalmia Cemet (Bharat) Ltd., [(2002) 254 ITR 0377 (Del)] — considered on the principle that the Revenue cannot place itself in the position of a businessman or Board of Directors to determine reasonable business expenditure.
- Hero Cycles (P) Ltd. vs. CIT [(2015) 379 ITR 0347 (SC)] — relied upon for the principle that once nexus between expenditure and business purpose is established, the Revenue cannot assume the role of the businessman or Board of Directors.
- S.A.Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Another [2007 (288) ITR 1 (SC)] — taken note of by the Supreme Court in the context of commercial expediency.
- Nahar Spinning Mills Ltd. vs. CIT, Ludhiana [(2014) 226 Taxman 364 (Punjab & Haryana)] — distinguished as relating to circumstances different from the expenditure incurred by MRF.
- CIT vs. Industrial Development Corporation of Orissa Ltd. [(2001) 249 ITR 0401 (Orissa)] — distinguished along with other cases concerning expenditure of a different character.
- CIT vs. Jeevandas Laljiee & Sons [(2000) 245 ITR 0719 (Madras)] — distinguished as not assisting the Revenue on the facts of the present case.
- CIT vs. Infosys Technologies Ltd. [(2012) 349 ITR 588 (Karnataka)] — distinguished as not assisting the Revenue because the expenditure before the Court was not a donation.
- Atofina Peroxides India Ltd. vs. Deputy Commissioner of Income Tax, Chennai [T.C.(A) Nos.670 & 671 of 2010, dated 29.01.2020] — distinguished because it concerned contribution to a hospital.
- CIT vs. Sambandam Spinning Mills (P) Ltd. [(2003) 263 ITR 0115 (Mad)] — distinguished because it concerned travelling expenses of directors.
- ACIT vs. Kuber Singh Bhagwandas [(1979) 118 ITR 0379 (MP)] — distinguished because it concerned a donation.
- CIT vs. Madras Refineries Ltd., [(2009) 313 ITR 3034 (SC)] — distinguished because the Supreme Court had remanded that matter for fresh examination where there was no factual finding on the business-expenditure claim.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
These appeals, by the assessee filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), are directed against the common order dated 11.03.2011, passed by the Income Tax Appellate Tribunal ‘A’ Bench, Chennai (for brevity “the Tribunal”) in I.T.A.Nos.1678/Mds/2010 and 1679/Mds/2010 for the assessment years 2006-07 and 2007-08 respectively.
2. The appeals were admitted on 20.12.2019, to decide the following substantial questions of law:-
“(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred towards business promotion in the form of MRF Pace Foundation is being charity in nature and hence not an allowable deduction?
ii. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred towards business should be only in the nature of advertisement by way of sponsorship of sport and not by any other mode? and
iii. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that by providing training through MRF Pace Foundation it does not get huge publicity for allowing the expenditure u/s.37 of the Act?”
3.We have elaborately heard Mr.Vikram Vijayaraghavan, learned counsel for the appellant/assessee for M/s.Subbaraya Aiyar, Padmanabhan and Ramamani; and Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the respondent/Revenue.
4. The issue, which is subject matter of these appeals, pertains to disallowance of the amount of expenditure incurred by the assessee to the tune of Rs.1.70 Crores for the purpose of establishing MRF Pace Foundation and matters connected therewith.
5.The assessee filed their return of income for the relevant assessment year and the return was initially processed under Section 143(1) of the Act, subsequently, selected for scrutiny and notice under Section 143(2) of the Act was issued. Among other things, the assessee was called upon to explain with regard to the expenditure on the MRF Pace Foundation. The Assessing Officer noted that the assessee is engaged in giving training to pace bowlers in India and claimed that the expenditure has been incurred wholly and exclusively for the purpose of business.
6.The Assessing Officer was of the prima facie view that the expenditure incurred would fall within the purview as “charitable nature” and asked to show cause as to why the same cannot be added to the total income of the current year. The response of the assessee was that they are one of the largest corporate sponsors of sports in India especially cricket, as millions in the country closely follow the game. The promotion of this sport in the form of product endorsement, training of bowlers through Pace Foundation, has made MRF a household name in India. The Foundation selects young men and trains them in the art of pace bowling. The trainees undergo systematic and scientific training and they are taught the latest techniques. The Foundation periodically invites foreign coaches/trainers/therapists to instruct the wards. It was further stated that the former Australian pace bowler, Dennis Lillie is the Chief Coach and he makes periodical visits to India for this. Several of the wards that passed through the Foundation, have got into the national team and State/District teams, some of them have brought laurels to the country. Because of this, MRF gets huge publicity especially in TV Media and promotes the MRF brand, thereby helping sale of MRF products in India and in other countries.
7. The assessee further stated that they export their products to 65 countries, some of which are cricket playing countries and therefore, promotion of this sport makes a lot of business sense and the expenditure incurred is wholly and exclusively for the purposes of the company’s business and is therefore, an allowable expenditure. The assessee placed reliance on the decision of the Calcutta Tribunal in JCIT vs. ITC Limited [2008 112 ITD 57] and stated that based on the legal position, the expenditure is purely an expenditure incurred for the purpose of business.
8. The Assessing Officer did not agree with the assessee on the ground that they have not sponsored any sports activity for its sales promotion, instead it has formed Pace Foundation for the purpose of training fast bowlers for the game of cricket, the expenditure cannot be treated on par with the expenditure incurred for sponsorship of sports and other events. Further, the Assessing Officer held that the activity of the assessee is purely charitable in nature.
9. The contention of the assessee that they get huge publicity and increased sales was rejected by observing that the Pace Foundation of the assessee-company has been mainly engaged in imparting bowling and training and the expenses cannot be considered as expenses related to sponsorship of cricket wherein, the company will get publicity by way of display of hoardings and media advertisement. Furthermore, it was stated that the assessee exports to 65 countries and among them only a few are cricket playing countries and it is not known as to how promoting bowling activity in one country shall have impact in the promotion of sale of tyres in other countries. Further, the Assessing Officer held that the expenditure incurred for traffic signal and sponsorship of sports etc., cannot be equated with the promotion of cricket by the assessee by way of training the pace bowlers. On the above grounds, a sum of Rs.1.70 Crores was added to the total income of the current year.
10.Aggrieved by the same, the assessee preferred appeal before the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai (for brevity “the CIT(A)”). The CIT(A) after noting the decision of the Hon’ble Supreme Court in CIT vs. Malayalam Plantations Ltd., [(1964) 153 ITR 0140], held that if the facts of the case are considered based on the principles laid down by the Hon’ble Supreme Court, it is discernible that the expenditure incurred by the assessee falls within the parameters laid down therein. Further, the CIT(A) held that on account of training pace bowlers, the corporate image and brand of the company is promoted widely because of its association with the MRF Academy.
11. Further, the CIT(A) faulted the Assessing Officer for having overlooked the fact that in the contribution to training in pace bowling, the assessee has not only contributed to the game, but also enhanced its own image because of the publicity for its contribution. Further, on the legal issue, it was stated that the promotion of sales is always expedient for the promotion of business and how and in what manner sales can be promoted are matters of business expediency in the field of which the assessee is not only the expert, but also the sole decider. The CIT(A) took note of the decision relied on by the assessee in the case of CIT vs. Delhi Cloth and General Mills Co. Ltd. [(1978) 115 ITR 0659 (Delhi)]. With the above observations, the appeal was allowed by order dated 26.07.2010.
12. Aggrieved by the same, the Revenue preferred appeals before the Tribunal contending that the CIT(A) committed an error in deleting the addition of Rs.1.70 Crores being the expenditure on MRF Pace Foundation. It was contended that the amount spent was in the nature of appropriation of profit and not a charge on profit and hence, does not fall under Section 37(1) of the Act. The assessee was also on appeals before the Tribunal on other issues, which we are not concerned. The Tribunal allowed the Revenue’s appeals and restored the order passed by the Assessing Officer.
13. The Tribunal was of the view that the assessee having not sponsored any sport activity for its sales promotion, but formed Pace Foundation for training bowlers and such activity cannot, by any stretch of imagination, be treated as business activity. Further, the Tribunal observed that if such expenses are allowed to this assessee or any other assessee, they can evade tax by such gimmick. Further, the expenses in question are not for the sponsorship of cricket so as to get publicity through hoardings and media advertisements. That the case of the assessee is it exports its products to 65 countries, out of which some are cricket loving countries and even then it is not known how promoting bowling activity in one country would affect the sale of tyres in other countries. With these observations, the appeals filed by the Revenue were allowed. Challenging the same, the assessee is before us by way of these appeals.
14. Before we examine the correctness of the reasons assigned for reversing the order passed by the CIT(A), we need to take note of the legal position as to how and in what manner, business decisions can be taken by the assessee and whether the Assessing Officer would be justified in deciding what would be best for the assessee and for the health of its business. We are guided by a few decisions, which were relied on by Mr.Vikram Vijayaraghavan.
15. In CIT vs. Dalmia Cemet (Bharat) Ltd. [(2002) 254 ITR 0377 (Del)], it was pointed out that the term “commercial expediency” is not a term of art; it means everything that serves to promote commerce and includes every means suitable to that end. Further, it was held that the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the Board of Directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case.
16. The said decision was approved by the Hon’ble Supreme Court in Hero Cycles (P) Ltd., vs. CIT [(2015) 379 ITR 0347 (SC)] wherein it was held that once it was established that there was nexus between expenditure and purpose of business, Revenue could not justifiably claim to put itself in the arm-chair of a businessman or in the position of Board of Directors and decide how much was reasonable expenditure. The Hon’ble Supreme Court took note of the decision in the case of S.A.Builders Ltd. vs. Commissioner of Income Tax (Appeals) and Another [2007 (288) ITR 1 (SC)].
17. Thus, in the light of the above legal position, it is not for the Assessing Officer to decide what would be good for the assessee in promoting its business and therefore, decision cannot be arrived at by the Assessing Officer based on his own personal perceptions and it should be left to the decision of the assessee, who is the best person, who knows that what would be best for his business activity.
18. Bearing the above legal principle in mind, if we test the correctness of the orders passed by the Assessing Officer, the CIT(A) and the Tribunal, we have no hesitation to hold that the order passed by the CIT(A) is a well reasoned order. We support such conclusion with the following reasons.
18.1. Admittedly, MRF Pace Foundation is part of the assessee-organisation and the expenditure incurred for the Foundation has been claimed as a business expenditure under Section 37 of the Act. Therefore, it is clear that the Assessing Officer assumed certain matters, which were not on record and attempted to compare the expenditure incurred to that of giving donations.
18.2. Firstly, the concept of charity or donation can never be implanted to the present facts, which were clearly explained by the assessee in their reply to the show cause notice issued by the Assessing Officer. Once we steer clear of this issue, by holding that it is never the case of the assessee that what was spent was in the nature of donation, the Assessing Officer cannot draw a parallel or assume certain facts, which are not on record. If such is our conclusion, then the decisions relied on by Mr.T.Ravikumar in the case of Nahar Spinning Mills Ltd. vs. CIT, Ludhiana [(2014) 226 Taxman 364 (Punjab & Haryana)]; CIT vs. Industrial Development Corporation of Orissa Ltd. [(2001) 249 ITR 0401 (Orissa)]; CIT vs. Jeevandas Laljiee & Sons [(2000) 245 ITR 0719 (Madras)]; and CIT vs. Infosys Technologies Ltd. [(2012) 349 ITR 588 (Karnataka)] can never be of any assistance to the case of the Revenue.
19. Mr.T.Ravikumar, placed reliance on the decision in Malayalam Plantations Ltd. (supra) more particularly, the observations in paragraph 8 of the said decision. In fact, the legal issues, which should be culled out from the observations are that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits”. It was further held that the range, for the purpose of business, is wide, it may take in not only the day to day running of a business, but also the rationalization of its administration and modernization of its machinery; it may include measures for preservation of the business and for protection of its assets and property from expropriation, coercive process or assertion etc.
The decision explains the scope of the expression “for the purpose of business”. Therefore, we could safely use the said decision to support our above conclusion. On facts, the case was totally different and cannot assist the Revenue.
20.In Atofina Peroxides India Ltd. vs. Deputy Commissioner of Income Tax, Chennai [T.C.(A) Nos.670 & 671 of 2010, dated 29.01.2020], one of the questions was with regard to admissibility of contribution paid to a hospital, which is not the case before us, as Pace Foundation is part of the assessee-company. The decision in the case of CIT vs. Sambandam Spinning Mills (P) Ltd. [(2003) 263 ITR 0115 (Mad)] pertains to travelling expenses of the Managing Director, his wife and another Director accompanying him. The decision is wholly distinguishable on facts. Equally the decision of the Hon’ble Full Bench of the Madhya Pradesh High Court in ACIT vs. Kuber Singh Bhagwandas [(1979) 118 ITR 0379 (MP)], as it also pertains to a case of donation. The decision of the Hon’ble Supreme Court in CIT vs. Madras Refineries Ltd., [(2009) 313 ITR 3034 (SC)] was a case of remand by the Hon’ble Supreme Court because the Assessing Officer did not examine the claim of the assessee that the aid given to the residents living in the vicinity of the factory of the assessee therein as a business expenditure. Since there was no factual finding, the matter stood remanded to the Assessing Officer for fresh decision. Therefore, the said decision cannot be treated as a precedent.
21. As already observed, the expenditure incurred by the assessee in the Pace Foundation cannot be regarded as a donation and it was never the case of the assessee, nor there was anything on record for the Assessing Officer to draw such a conclusion. Secondly, the assessee has been able to point out certain facts before the Assessing Officer as well as before the First Appellate Authority as to how the training of pace bowlers has helped them in a business activity. The contentions placed by the assessee have not been found to be false or baseless. In such circumstances, it is best for the Department to leave it to the assessee to take a decision as to what is best for them and for the health of the company. These aspects were rightly taken note of by the CIT(A) by observing that the assessee-company is able to get popularity because of its close association with the game of cricket and it is comparable to any other mode of advertisement establishing hoardings, publicity material and other conventional modes of advertisement.
22. Further, the CIT(A) rightly took note of the decision in Delhi Cloth and General Mills Co. Ltd. (supra) by observing that the power of the Revenue is confined only to examine the purpose of genuineness of the expenditure and not the expediency or the quantum. Nowhere there is any observation either made by the Assessing Officer or the Tribunal that the expenditure was not genuine. In fact, Mr.T.Ravikumar would fairly submit that all other expenditure, which have been claimed by the assessee towards sponsorship, advertisement, have been allowed in its entirety. The Tribunal fell in error in coming to a conclusion that donations were extended towards the Pace Foundation, when the fact remains that the assessee has established the foundation and it is part and parcel of the assessee themselves and not a separate entity to draw any such inference of donation.
23.Thus, for the above reasons, we hold the Tribunal committed an error in reversing the order of the CIT(A).
24. In the result, the tax case appeals are allowed, the order passed by the Tribunal is set aside and the order passed by the CIT(A) is restored. The substantial questions of law are answered in favour of the assessee. No costs.
