Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 2001-02 - Main business of assessee-company was to develop and manage franchisees for running restaurants - It had obtained licences from 'KFC' and Pizza Hut and franchisees operated restaurants under a sub-licence arrangement with assessee-company - Assessee-company had created an intermediary in form of a wholly owned subsidiary, that is, 'Y' to carry on 'co-operative advertising' on behalf of its franchisees based on contributions received from franchisees which was equivalent to 5 per cent of their gross sales under tripartite agreement executed between assessee-company, 'Y' and its franchisees in September, 2000 - Thereafter, assessee-company, in order to incentivise development of Pizza Hut brand in India, formulated a scheme in April, 2001, whereby it offered to reimburse contributions made towards advertisement to extent of 2 per cent of sales of franchisees outlets for period from 1-12-2000 to 30-11-2001, provided they commenced operations/business at or from three additional outlets by 30-11-2001 - For relevant assessment year, it claimed deduction of certain amount on account of accrued marketing expenditure, which was in nature of incentive paid by assessee to its franchisees in terms of aforesaid incentive scheme to be calculated at 2 per cent of sales made by them for period from December, 2000 to March, 2001 - Whether since incentive scheme came to knowledge of franchisees only in April, 2001, assessee-company could not have predicted liability on that account and, therefore, its claim with respect to accrued marketing expenditure was not sustainable in year under consideration - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2001-02 - Assessee-company claimed deduction of certain amount contributed to its subsidiary 'Y' for purpose of advertisement and marketing activities - Out of total contributions, Assessing Officer disallowed certain amount which remained unspent in hands of 'Y' - Whether when assessee was under no obligation to contribute any money to its wholly owned…

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