Commissioner of Income Tax vs Aluminium Industries Ltd.

K.K. Usha, J.—The Commissioner of Income Tax, Trivandrum, in this petition filed u/s 256(2) of the Income Tax Act, 1961, seeks a direction to the Income Tax Appellate Tribunal, Cochin Bench, to refer the following questions of law for decision of this court :

"Whether, on the facts and in the circumstances of the case--

(i) the assessee is entitled to claim deduction of the expenditure incurred in connection with the inauguration of its new unit ?

(ii) the above expenditure is ''advertisement'' expenditure ?

(iii) the assessee is entitled to claim deduction of the expenditure u/s 37(1) also in view of the fact that the expenditure is before or at the time of the commissioning of the new unit ?"

The assessee which is a public limited company engaged in the manufacture of aluminium conductors, steel wires, machines, circuit breaker, etc., claimed deduction of an amount of Rs. 2,38,689 as business expenditure under the head of "advertisement" for the assessment year 1982-83. The above amount was expended by the assessee in connection with the inauguration ceremony, when its "relay" project was commissioned in January, 1982. The assessing authority rejected the claim on the ground that the assessee had claimed a sum of Rs. 11,52,409 under the head "advertisement" which included expenses of every conceivable item and, therefore, the amount of Rs. 2,38,689 incurred on the inauguration of the project was inordinately high and not dictated by commercial expediency. The assessee''s appeal was allowed by the Commissioner of Income Tax (Appeals) following a decision of the Bombay High Court in Commissioner of Income Tax, Bombay City-I Vs. Nirlon Synthetic Fibres and Chemicals Ltd., . The above finding was affirmed by the Income Tax Appellate Tribunal. On the facts, the Tribunal found that the assessee had actually incurred the expenses as claimed. The Tribunal took the view that the expenditure so incurred was in connection with the assessee''s business and, therefore, an allowable deduction.

It is contended on behalf of the Revenue before us that the amount of Rs. 2,38,689 spent for the inaugural function of a new unit has to be treated as capital expenditure and, therefore, not allowable u/s 37(1) of the Income Tax Act, 1961. It was further contended that the Tribunal has wrongly relied on the decision of the Bombay High Court since the facts of the assessee''s case are entirely different. In Commissioner of Income Tax, Bombay City-I Vs. Nirlon Synthetic Fibres and Chemicals Ltd., , the assessee had claimed only a reasonable sum of Rs. 38,792 as advertisement expenses, whereas the assessee herein has claimed an amount of Rs. 2,38,689 as expenditure for the inaugural function in addition to an amount of Rs. 11,52,409 claimed for different items under the head of "advertisement" expenses.

We find no merit in the contention raised on behalf of the Revenue that the amount spent by the assessee in connection with the inaugural function of its new project is in the nature of capital expenditure as it was incurred not after the commissioning of the new unit. The assessee was already having manufacturing units and the "relay" project which is inaugurated in January, 1982, was one in expansion of its existing business. We are, therefore, of the view that merely because the expenditure was incurred not after the commissioning of the new unit it would not make it any the less an expenditure coming u/s 37(1) if it satisfies all the other conditions. In Chatter Singh Vs. The State, the Allahabad High Court had occasion to consider the question whether an expenditure incurred in connection with the starting of a new branch--the nature of the business remaining the same--is an expenditure in the nature of capital expenditure or revenue expenditure. It was held that where an assessee does not start a new line of business and where for the purpose of extending the business new branches are opened and certain expenses are incurred by way of advertisement, etc., the expenditure cannot be treated as one bringing in an advantage for the enduring benefit of the trade and, therefore, capital expenditure. We are in respectful agreement with the above view.

The only other question to be considered is whether the expenditure incurred in connection with the inaugural function of the "relay" project was wholly and exclusively for the purpose of business of the assessee enabling it to put forward a claim u/s 37(1). Various tests are laid down in different decisions to distinguish between capital and revenue expenditure. Even though those decisions themselves enter a warning that the tests suggested therein are not conclusive, it will be advantageous to refer to the test laid down by Lord Cave in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. The learned law Lord stated as follows (at page 191) :

"A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade."

In Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., the Supreme Court held that the expression "for the purpose of business" has a meaning of a wider range and it will take in different types of expenditure incurred for the carrying on of the business subject to the condition that the assessee shall incur it in his capacity as a person carrying on the business. In BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY., , Shah J., explained the nature of revenue incurred for the purpose of business as follows (at page 59) :

"Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure."

It is now an accepted proposition that the expenditure laid out wholly or exclusively for the purpose of business would include the cost of advertisement. In Chatter Singh Vs. The State, the Allahabad High Court took the view that the expenses incurred for entertainment or taking photographs and printing invitation cards in connection with the opening of a new branch of the assessee-bank can be treated as an amount expended for advertisement and allowable as a revenue expenditure. In Commissioner of Income Tax, Bombay City-I Vs. Tata Iron and Steel Co. Ltd., , the Bombay High Court took the view that there is nothing objectionable in the subtle form of advertisement which was involved in the publication of a brochure on the occasion of the golden jubilee of the company. Expenditure incurred for organising football and hockey tournaments was held to be an allowable claim for its advertising value for the company in Commissioner of Income Tax, Delhi Vs. Delhi Cloth and General Mills Co. Ltd., Delhi, .

The fact that the assessee had incurred an expenditure of Rs. 2,38,689 in connection with the visit of the Chief Minister of Kerala to its factory, the press conference held and other items of expenditure for publicity and advertisement on the commissioning of its "relay" project in January, 1982, is not in dispute. But, according to the assessing authority, since the assessee had already claimed an amount of Rs. 11,52,409 under the head "Advertisement" which includes advertisement of their products, statutory obligations, exhibitions, holdings of meetings, press conference, calling for tenders, etc., the further expenditure of Rs. 2,38,689 incurred on the inauguration of the "relay project" is inordinately high and not incurred in commercial expediency. Once it is found that the expenditure has been, as a matter of fact, incurred by the assessee for publicity or advertisement, it is not for the Department to consider whether commercial expediency justified the expenditure. The reasonableness of the expenditure can be gone into only for the purpose of determining whether in fact the amount was spent. This was the view taken by the Madras High Court in Amarjothi Pictures Vs. Commissioner of Income Tax, Madras, . Therefore, the attempt made by the Revenue to distinguish Commissioner of Income Tax, Bombay City-I Vs. Nirlon Synthetic Fibres and Chemicals Ltd., on the ground that the amount claimed as expenditure incurred for advertisement is unreasonable is only to fail.

The anxiety to invite persons who are holding important and powerful positions to inaugurate a project whether it is a new one or expansion of an existing one is widely prevalent. The reason apparently is that when a V. I. P. takes part in a function the media are inclined to give the news item a place of importance whether it be in the newspapers or other media like television, AIR, etc., and it certainly helps in building up the corporate image. The importance of advertising in this respect is dealt with in the book "Advertising Management Concepts and Cases" by Manendra Mohan at page 320 as follows :

"Advertising can play a major role in supporting the sales of a company manufacturing industrial products. Equally important is the image of the company, which can be created and maintained by industrial advertisements. When a company starts a business or introduces a new product, it may have some significant points of difference from other companies or products. In order to gain recognition, the company has to manage the flow of information about itself and its products. Corporate image comprises the knowledge, feelings, ideas and beliefs associated with a company''s activities. People form a mental image of a company, either directly as in a customer-seller relationship or indirectly through advertisements. Product advertising has an important effect on the corporate image, industrial products may not necessarily differ widely in product performance characteristics. Other factors, which enter into a potential customer''s perceptual map of what kind of company it is to do business with, can help in finalising the sale. A favourable corporate image can also be of advantage in dealing with distributors, employees, competitors, suppliers, the Government and, also, financial circles."

Apart from the publicity which the unit receives through the media, it is felt that a personal contact in the places of power would be helpful for the better management of the business.

In Commissioner of Income Tax, Bombay City-I Vs. Nirlon Synthetic Fibres and Chemicals Ltd., , the Bombay High Court held that the expenditure incurred by a company on the inauguration ceremony of a factory is an allowable deduction in terms of Sub-section (1) of Section 37 of the Income Tax Act, 1961. According to the learned judges such expenditure is a compelling necessity in modern times. In CIT v. Merck Sharp and Dohme of India Ltd. [1985] 140 ITR 332, the Bombay High Court had occasion to consider whether the expenditure incurred by the assessee-company in connection with the foundation stone laying ceremony of its factory where a new plant was being set up for augmenting its production of pharmaceutical products was allowable as business expenditure. It was held that the amount spent by the assessee on account of printing invitation cards, construction of shamiana, hiring furniture and transport in connection with the function can be claimed as business expenditure. Taking a similar view, the Calcutta High Court observed in Commissioner of Income Tax Vs. Hindusthan Aluminium Corporation Ltd., , as follows (at page 212) :

".... The modern trend is to get a factory or a branch inaugurated by the Prime Minister or a Minister or V. I. P., as the case may be. It is the real nature and quality of the payment which would prove decisive. Any payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure. The expenditure in connection with the inauguration is intimately connected with the business of the assessee. It can be compared with the expenditure that may be incurred in opening a new branch of a going concern. It does not pertain to the commencement of new business. By this expenditure, advertisement is made to the public regarding the factory of the assessee and it is made for the purpose of extending the existing business."

The court affirmed the Tribunal''s view in allowing the expenditure incurred by the assessee in connection with the inauguration of the factory at Renukoot on January 7, 1963, by the then Prime Minister of India, Sri Jawaharlal Nehru.

In the present case, when the assessee commissioned its "relay" project in January, 1982, the Chief Minister of Kerala was invited. Press conferences were held and it brought out a newspaper supplement. Those activities caused an expenditure of Rs. 2,38,689 and the assessee claimed deduction as business expenditure under the head of "Advertisement". In the light of the above facts as found by the Tribunal, we are of the view that the Tribunal has correctly held that the expenditure incurred by the assessee is a revenue expenditure allowable as business expenditure.

No referable question of law, therefore, arises out of the order of the Tribunal. In the result, the original petition fails and stands dismissed.