Advertisement and business promotion expenses incurred on commercial expediency would not be disallowed even if somebody else is benefited

By TG Team Income Tax Featured , Judiciary May 16, 2011

TaxGuru Citation: 2011 taxguru.in 403
Case Name: DCIT Vs. Maruti Countrywide Auto Financial Services Pvt Ltd. (ITAT Delhi)
Courts: ITAT Delhi

ITAT Delhi (the Tribunal) in the case of DCIT Vs. Maruti Countrywide Auto Financial Services Pvt Ltd. [201 1-TIOL-283- ITAT-DEL] held that expenditure on advertisement and business promotion incurred on the ground of commercial expediency would be treated as normal business expenditure even if somebody other than the taxpayer was also benefited by the said expenditure.

Facts of the case

The taxpayer was a Non Banking Finance Company engaged in the business of auto finance, lease and hire purchase. As per agreement between the tax payer and Maruti Udyog Ltd (Maruti), the taxpayer has to pay royalty at the rate of 0.35 percent of net loan value disbursed to Maruti.
In Assessment Year 2005-06, taxpayer had incurred advertisement and business promotion expenditure on print and electronic media amounting to INR 72 million and it has also paid royalty amounting to INR 16.73 million to Maruti.
The Assessing Officer considered that major part of advertisement spends was towards brand promotion of Maruti and disallowed INR 3 1.52 million holding this expenditure were not incurred wholly and exclusively for the purpose of business of the taxpayer.

Taxpayer’s contentions

The joint venture and shareholders agreement does not provide for any obligation cast upon the taxpayer to incur such expenditure. Expenditure had no relation with the payment of royalty.
The taxpayer placed reliance on decisions in the CIT v Chandulal Keshavial & Co. [1960] 38 ITR 601 (SC) and Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) to contend that any expenditure incurred on the ground of commercial expediency would be treated as normal business expenditure even if somebody other than the taxpayer was also benefited by the said expenditure.
Any expenditure incurred voluntarily on the ground of commercial expediency and in order to facilitate the carrying on of the business would be deductible under Section 37 of the Income-tax Act, 196 1(the Act).

Tax department’s Contentions