Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1985-86 - Whether marketing overhead or salary component of marketing expenditure is not an expenditure governed by sub-section (3A) and sub-section (3B) of section 37 and such expenses, therefore, cannot be disallowed by referring to inapplicability of Explanation (b) on ground that employees to whom salaries had been paid were not employees of assessee - Held, yes FACTS An agreement was entered into between the assessee, a selling agency, and 'M' Ltd., i.e., manufacturing company of liquor, that certain expenses for running the business of manufacture and sale of Indian made foreign liquor were to be shared by the manufacturing company as well by the assessee. Under the terms of agreement, the 'M' Ltd. had issued during the relevant assessment year two debit notes, one being the assessee's proportionate share of expenditure on advertisement and sales promotion and another being the assessee's proportionate share of marketing overheads. In respect of marking expenses incurred by the assessee, a certain sum had been disallowed by the Assessing Officer on the ground that the same was not paid to the employees of the assessee and it could not be excluded from the purview of section 37(3A) of the (3B) because of clause (b) of Explanation appended thereto. The Commissioner (Appeals) confirmed the view taken by the Assessing Officer. On appeal, the Tribunal held that salary would not fall within the ambit of sections 37(3A) and (3B) even though the same was not paid to the employees of the assessee. On appeal : HELD Even in case of computing expenditure incurred on advertisement, publicity or sales promotion, which may be subjected to restrict deduction under section 37(3A), the amount of salaries paid to employees in these activities, as salaries, is not to be included. While considering the allowable expenditure under section 37, the restriction envisaged under section 37(3A), read with sub-section (3B) is not extended to amount of salaries paid to persons employed in the activities relating to advertisement, publicity and sales promotion. Such expenditure on…

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