(a) Income-tax---

----Payments not deductible---Company---Remuneration payable to Director--Ceiling limit would be Rs.72,000---Only excess over Rs.72,000 cannot be allowed as deduction---Indian Income Tax Act, 1961, S. 40(c).

(b) Income-tax---

----Business expenditure---Business promotion expenses---Expenditure on advertisement---Expenditure disallowed merely on ground that presentation items of articles were of value of more than Rs.50---Tribunal finding that presentation was made for business promotion and not for purpose of advertisement---Expenditure allowable deduction---Indian Income Tax Act, 1961, S.37(3)---Indian Income Tax Rules, 1962, R. 6B.

For the assessment years 1978-79 and 1979-80, the assessee claimed deduction under section 37 of the Income Tax' Act, 1961, to the extent of Rs.79,912 and Rs.50,585, respectively, under the head "Business promotion expenses". The Inspecting Assistant Commissioner disallowed the expenditure to the extent of Rs.74,863 and Rs.46,502, respectively, on the ground that in accordance with rule 6B of the Income-tax Rules, 1962, any presentation made valued at above Rs.50 was not admissible. The Commissioner of Income-tax (Appeals) found that the disallowance was not justified since it was not for advertisement. The Tribunal affirmed the order of the Commissioner of Income-tax (Appeals). On a reference:

Held, affirming the order of the Tribunal, that rule 6B of the Income Tax Rules, 1962, has to be understood only in the context of the restrictive provisions contained under section 37(3) of the Act which means that if an article of value of above Rs.50 is presented, then expenditure claimed on this count can be disallowed, only if it is found as of fact that the said presentation was made with the intention of advertising the articles dealt in by the assessee. But, in the present case, as found from the order of the Assessing Officer, he had disallowed the expenses in question by reading merely rule 6B in isolation, as if it provided that any expenditure claimed out of the gross business income on account of gift of articles of more than Rs.50 had to be ipso facto disallowed. Before the Assessing Officer, though a specific contention was raised by the assessee that the articles presented to their clients were of sandalwood or ivory pieces which were meant only as a measure of business promotion and not for any advertisement of their products, the Assessing Officer without examining the said aspect in its proper perspective, mechanically applied the restrictive conditions contained in rule 6B of the Rules, by merely holding that since the presentation items were of value more than Rs.50, therefore, the same were not allowable as business expenditure. The presentation was made just for business promotion and not for the purposes of any advertisement. Therefore, the Tribunal was justified in deleting the disallowance of the business promotion expenses:

Held also, that the Tribunal was justified in holding that only section 40(c) of the Income Tax Act, 1961, would apply in respect of payment made to the director and that the ceiling limit would be Rs.72,000.

International Instruments (P.) Ltd. v. CIT (1981) 130 ITR 315 (Kar.) fol.

M.V. Seshachala for the Commissioner.

G. Sarangan with S. Parthasarathy for the Assessee

JUDGMENT

G. C. BHARUKA, J.---HeardMr. M. V. Seshachala, learned standing counsel for the Income-tax Department, and Mr. G. Sarangan, learned Senior Advocate with Mr. S. Parthasarathy, learned counsel for the respondent.

In this reference under section 256(2) of the Income Tax Act, 1961(in short the "Act"), we are required to record our opinion on the following questions of law.

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in deleting the addition of Rs.74,863 for the assessment year 1978-79 and Rs.46,502 for the assessment year 1979-80 being the disallowance of expenses of presentation article made to customers exceeding Rs.50 each item by applying rule 6B?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that only section 40(c) would apply in the instant case, in respect of payment made to a director and that the ceiling limit would be Rs.72,000?"

In so far as the second question of law is concerned, the same has been answered by this Court under its order, dated December 5, 1989, following the decision in the case of International Instruments (P.) Ltd. v. CIT (1981) 130 ITR 315.

The assessee is a private limited company carrying on business in insecticides, pest control operations and export of coffee mainly to the USSR. For the assessment years 1978-79 and 1979-80, the assessee had claimed deduction under section 37 of-the Act to the tune of Rs.79,912 and 50,565, respectively, under the head "Business promotion expenses" which were disallowed by the Inspecting Assistant Commissioner to the extent of Rs.74,863 and Rs.46,502, respectively, since according to him as per rule 6B of the Income-tax Rules, 1962 (in short the "Rules"), any presentation made above Rs.50 was not admissible.

The assessee questioned the said disallowance before the Commissioner, of Income-tax (Appeals). The appellate authority found that the said disallowance was uncalled for, since according to him it was not for advertisement. The appeal taken by the Revenue to the Tribunal proved futile, since the Tribunal also agreed with the view taken by the Commissioner of. Income-tax (Appeals).

For the present purpose, section 37(3) of the Act and rule 6B of the Rules are material provisions and, therefore, these are being noticed hereunder:

"37. General....(3) Notwithstanding anything contained in subsection (1), any expenditure incurred by an assessee, after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be Subsection"

"Rule 6B. Expenditure on advertisement---(1) The allowance in respect of expenditure on advertisement shall not in the following cases exceed--

(a) in respect of articles intended for presentation, Rs.50 on each such article-?

On a reading of the said provisions, it cannot be seriously disputed that rule 6B of the Rules has to be understood only in the context of the restrictive provisions contained under section 37(3) of the Act which means that if an article of value of above Rs.50 is presented then expenditure claimed on this count can be disallowed, only if it is found as of fact that the said presentation was made with the intention of advertising the articles dealt in by the assessee. But, in the present case, as were found from the order of the Assessing Officer, that he has disallowed the expenses in question by reading merely rule 6B in isolation as if it provides that any expenditure claimed out of the gross business income on account of gift of articles of more than Rs.50 has to be ipso facto disallowed. Before the Assessing Officer, though a specific contention was raised by the assessee that the articles presented to their clients were of sandalwood or ivory pieces Which were meant only as a measure of business promotion and not for any advertisement of their products but the learned Assessing Officer without examining the said aspect in its proper perspective, mechanically applied the restrictive conditions contained in rule 6B of the Rules, by merely holding that since the presentation items were of value-of more than Rs.50, therefore, the same are not admissible as business expenditure.

On the contrary, both the appellate authorities as well as the Tribunal as a matter of fact found that the presentations were made just for business promotion and not for the purpose of any advertisement. In the said view 6f the matter, in our opinion, - the Tribunal was right in deleting the disallowance in question.

For the reasons aforesaid, we answer the first question in favour of the assessee and against the Revenue. No costs.

M.B.A./ 3376/FC ?????????????????????????????????????????????????????????????????? Reference answered