The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has upheld the deletion of disallowance of sponsorship expenses under Section 37 of the Income Tax Act 1961 holding that the Assessing Officer (AO) could not decide what was good for promoting business.
The assessee, Agni Estates & Foundations Pvt. Ltd claimed sponsorship expenses of Rs.280 Lacs. It was submitted that M/s Vels Srinivasa College of Engineering and Technology had proposed a rebranding of its name. The college had accepted the proposal of renaming it as AGNI College of Technology. The brand AGNI was being promoted by the assessee in the society by this way. The college had spent a lot on its branding campaign and a part of it was sponsored by the assessee. Thus, it was a form of brand building for the assessee.
The AO, upon perusal of agreement, observed that as per contractual terms, Agni College of Technology (ACT) was to use the logo of the assessee company in all its promotional campaigns in any form of advertisement and the cost of such sponsorship would be Rs.250 Lacs for every financial year starting from financial year 2012-13 for 5 years. This fee was to be spent by the college for the promotional activities.
The AO observed that the amount was spent by the college on functions / celebration expenses, advertisement expenses, promotional expenses, record notes and other stationery items. The AO further observed that the said expenditure, being the regular nature of expenditure for a college, could not be termed as sponsorship expense for printing logo on its books. With respect to the other items also, it could not be properly deduced that the entire amount was spent towards promoting the assessee company, which has a distinctly different business line with that of the college.
The requirements of Section 37(1) of the Income Tax Act were that the expenditure is incurred wholly and exclusively for the purposes of the business and this condition was not satisfied in the present case. The expenses of record notes and other stationery items was merely an after-thought which was evidenced by the post-dated agreement with retrospective effect. Therefore, this expenditure was disallowed in full.
R. Vijayaraghavan, appeared on behalf of the assessee and submitted that the trust college was using the logo of the assessee company on all the stationery items and record note as per the agreement. Therefore, the expenses were related to business promotion of the assessee company and hence, allowable expenditure and D. Hema Bhupal appeared on behalf of the revenue.
The two-member Bench of V. Durga Rao, (Judicial Member) and Manoj Kumar Aggarwal, (Accountant Member) observed that the AO to decide what would be good for the assessee in promoting its business and therefore, decision could not be arrived at by the Assessing Officer based on his own personal perceptions and it should be left to the decision of the assessee, who is the best person, who knows that what would be best for his business activity. The Bench dismissed the appeal filed by the revenue.
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