The burden of proof lies on the assessee to demonstrate the commercial expediency of claimed expenses under Section 37 of the Incometax Act.

Headnote:
Incometax - Business Expenditure - Section 37 - [MARKETING EXPENSES] - [MANUFACTURE AND SALE OF BEER] - [Section 256(2) of the Incometax Act, Section 37 of the Incometax Act] - The court examined the claim for marketing expenses and service charges under Section 37 of the Incometax Act. It emphasized the conditions for deduction of business expenditure and the burden of proof on the assessee. The court also considered the ban on liaisoning work and the genuineness of agreements with service providers. The judgment highlighted the need for commercial expediency and the disallowance of expenses not meeting this requirement.
Fact of the Case:

The assessee, involved in the manufacture and sale of beer, claimed marketing expenses and service charges. The assessing authority disallowed part of the expenses, leading to appeals and questions raised before the court.
Finding of the Court:

The court upheld the disallowance of expenses, emphasizing the burden of proof on the assessee and the need for commercial expediency in claiming deductions under Section 37 of the Incometax Act.
Issues: The issues revolved around the genuineness of expenses claimed, the ban on liaisoning work, and the commercial expediency of the expenses under Section 37 of the Incometax Act.
Ratio Decidendi: The judgment emphasized the burden of proof on the assessee, the ban on activities for which expenses were claimed, and the need for commercial expediency in claiming deductions under Section 37 of the Incometax Act.
Final Decision: The court set aside the Tribunal's order and upheld the disallowance of expenses, answering the questions in favor of the Revenue.

Judgment :-

K.S. Radhakrishnan, A.C.J.

Incometax Appellate Tribunal, Cochin Bench, on a direction given by this court in O.P. No.3740 of 1996, referred several questions under Section 256(2) of the Incometax Act, arising out of the order of the Tribunal in I.T.A. No. 874/Coch/93, for the opinion of this court which we have re-framed and stated in paragraph 6 of this judgment.

2. Assesee is involved in the business of manufacture and sale of beer. It follows the mercantile system of accounting. It filed return of income for the assessment year 1990-91 declaring a total income of Rs.56,14,990/-. On going through the accounts it was noticed that the assessee had claimed Rs.59,85,644/- as marketing expenses and service charges. At the same time expenditure under the same head for the period relevant for assessment year 1989-90 claimed was Rs.60,750/-. Due to abnormal increase in the item of expenditure the assessee was directed to furnish a detailed break up of the amount. Following are the details submitted by the assessee.

1. Service charges on Kerala Supplies

(KSBC) at the rate of Rs.2 per dozen paid

to R.J. Associates (387801 x 2)

Coimbatore Rs.7,75,602.00

2. Service Charges on Tamil Nadu Supplies

(TASMAC) at the rate of Rs.13 per dozen

paid to Golden Enterprises (174784 x 13)

Madras Rs.22,72,192,00

3. Corporate Management charges at the

rate of Rs.4 per dozen paid to U.B. Ltd

(on 521450 x 4)

Bangalore Rs.20,85,800.00

4. Trade Scheme Expenditure on

Maharashtra Supplies (HPPL. Western)

India Beverages and Vitari Distributors)

Rs.8,52,050,00

--------------

Total Rs.59,85,644,00

--------------

3. Assessee had stated in the letter dated 27.12.1991 that in view of the extreme competition in all markets, additional expenditure had to be incurred to keep up its share in the market in the State of Kerala and Tamil Nadu. Further they had tapped Maharashtra market for which also marketing expenditure had to be incurred. Assessee had clarified before the assessing authority that R.J. Associates was responsible for securing orders from the Kerala State Beverages (M & M) Corporation Limited on a monthly regular basis for company’s brands. Further it is also stated that the assessee had entered into agreement dated 8.4.1999 for various liaisoning work to be rendered by the concern R.J. Associates which would help the Company to get permit application. The main services to be rendered by the concern M/s. R.J. Enterprises are as follows:

(1) Securing orders from Kerala State Beverages (M & M) Corporation Limited (KSBC) on a monthly regular basis for company’s brands;

(2) Constantly monitoring the stock position of bear in various KSBC depots and report to company;

(3) Getting excise permit from the concerned authorities based on the permit application received from the KSBC

(4) Closely following up the dispatch of the goods received reports from the concerned KSBC depots to their H.O. at Trivandrum; and

(5) Assisting in expediting payments for supplies to KSBC.

Assessee had also made clarification regarding payment of Rs.22,72,192/- effected to M/s Golden Enterprises in respect of the supplies effected to TASMAC. Reference was also made to agreement dated 7.6.1989 entered into by the assessee with M/s. Golden Enterprises to do all such liasoning work with TASMAC to enable the Company to procure orders for company on a regular basis and to constantly monitor the stock position in TASMAC depots and also for arranging redistribution to TASMAC’s retail depots and for payment against supplies to be collected from TASMAC. Assessee had also claimed Rs.20,85,800/- towards corporate and management charges paid to United Breweries Ltd, Bangalore Assessee had also claimed trade scheme expenditure on Maharashtra supplies at Rs.8,52,050/-.

4. Explanation submitted by the assessee was considered by the assessing authority in detail. With regard to the payment effected to M/s. R.J. Associated the assessing authority had sent summons under Section 131 of the Incometax Act to the K

Click Here to Read the rest of this document