Vildirect: IncomeTax-caselaws-1990-VIL-86-ITAT-DEL

1990-VIL-86-ITAT-DEL

Equivalent Citation: ITD 034, 241,

Income Tax Appellate Tribunal DELHI

Date: 04.06.1990

CAMPA BEVERAGES (PRIVATE) LIMITED.

INSPECTING ASSISTANT COMMISSIONER.

BENCH

Member(s) : CH. G. KRISHNAMURTHY., M. C. AGARWAL.

JUDGMENT

Per Agarwal, JM--This is an assessee's second appeal arising out of its assessment for assessment year 1981-82. We have heard the learned counsel for the assessee Shri C.S. Agarwal, Advocate assisted by Shri Anil Sharma, Advocate and Shri D.R. Bahl, Chartered Accountant and the learned standing counsel Shri Rajendra for the Revenue assisted by Shri D.C. Taneja, Advocate.

2. The assessee is a manufacturer of soft drink concentrates of the drinks Campa Cola, Campa Orange and Campa Lemon. The concentrate is sold by the assessee to 28 franchise holders who convert the concentrate into liquid drinks for public consumption and sell the soft drinks in the market. Out of the 28 Franchise holders (hereinafter called bottlers) six private limited companies are controlled by the same Directors and have been described by the authorities below, without controversion by the assessee, as the sister concerns of the assessee. One of them is M/s. Pure Drinks (New Delhi) Pvt. Ltd. The relationship of the assessee with the other five bottling companies has been described by the Assessing Officer in a chart reproduced below :--

Assessee Company Name of Company Name of Directors

Campa Beverages Co. (P.) Ltd. Harjit Kaur- Mg. | Director

(assessee) Charanjit Singh |

Daljit Singh | Directors

Ajit Singh |

Bottling coys. Mohan BottlingCo.Daljit Singh |

(P.) Ltd.,LudhianaCharanjit Singh | Directors

Ajit Singh |

Pure Drinks (P.) Daljit Singh |

Ltd.,Patiala. Charanjit Singh | Directors

Ajit Singh |

Southern Bottlers Ajit Singh |

(P.) Ltd.,Patiala. Charanjit Singh | Directors

Daljit Singh |

Pure Drinks (Cal.) Daljit Singh |

(P.) Ltd. Charanjit Singh | Directors

Harjit Kaur |

PunjabBeverages Daljit Singh |

(P.) Ltd.,Patiala. Charanjit Singh | Directors

Ajit Singh |

3. During the year under consideration the assessee advertised the soft drinks made from the concentrates manufactured by it by incurring some expenditure directly and by allowing the aforesaid five sister concerns to incur some expenditure themselves and agreeing to reimburse the same to them. For this purpose the assessee company purports to have adopted a resolution in a meeting of its Board of Directors held on 2-6-1979 to the following effect :--

"Resolved that keeping in view the necessity for fetching the potential market due to stiff competition in and around the cities of Bombay, Calcutta, Madras, Chandigarh, Punjab, Amritsar, Delhi, Ludhiana, Unnao (Kanpur) etc., the company does make advertisement/publicity through all possible media like T.V., Radio, Screening, Press, Hoarding and other including by way of Sales Promotion, sampling, surveys etc. on mass scale so as to advertise its product all around and that advertisement be made either directly or through some of its Bottlers, or through advertising agencies/Bottlers, etc. subject to the fact that the expenditure on such advertisement shall not exceed Rs. 30 lacs for each area in any financial year and that the expenditure incurred in this connection in the aforesaid areas by Bottlers/Advertising Agents be booked in the books of the company and thereafter be reimbursed to them from time to time. Further resolved that S. Charanjit Singh and/or S. Daljit Singh, Director(s) be and is/are hereby authorised to take further necessary steps to implement the foregoing decision of the Board expeditiously."

4. The assessee's accounting period is from1-7-1979to30-6-1980and, thus, the aforesaid resolution was adopted prior to commencement of the accounting period. During the year under consideration the assessee incurred a total expenditure of Rs. 62,69,892.33 p., the details of which are as under :

Details of expenses - Head wise : Rs.

(i) Television & Screening 17,22,287.39

(ii) Radio 2,05,303.75

(iii) Productions 2,17,184.26

(iv) Press 8,60,673.68

(v) Hoarding 8,81,316.18

(vi) Cost of gifts under various schemes ---

(vii) Cultural Activities & other shows ---

(viii) Selling expenses 83,061.45

(ix) Sampling 21,53,787.58

(x) ExportSalePromotion ---

(xi) Sale Promotion 1,46,278.04

(xii) Beverages Samples ---

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

62,69,892.33

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

Out of the aforesaid expenditure, expenditure to the extent of Rs. 30,77,916.33 paise was incurred directly by the assessee. The expenditure claimed to have been incurred by the bottlers on behalf of the assessee in pursuance of the aforesaid resolution and which the assessee claims to have reimbursed to the aforesaid 5 bottlers (sister concerns) is as below :

Expenses incurred by Bottlers : Rs.

(i) Television & Screening 1,78,530.00

(ii) Radio ---

(iii) Productions 11,652.76

(iv) Press 98,774.01

(v) Hoarding 5,84,642.51

(vi) Cost of Gifts under various schemes ---

(vii) Cultural activities & other shows ---

(viii) Selling Expenses 56,768.93

(ix) Sampling 21,53,787.58

(x) ExportSalePromotion ---

(xi) Sale Promotion 1,07,820.21

(xii) Beverages Samples ---

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

31,91,976.00

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

Out of the aforesaid expenditure of Rs. 31,91,976 claimed to have been incurred by the assessee through the Bottlers the Assessing Officer vide assessment order dated 6-9-1984 disallowed the expenditure of sampling amounting to Rs. 21,53,788. That addition was confirmed by the Commissioner of Income-tax(A) and the assessee then came to this Tribunal in I.T.A.No. 1733(Del)/85 and the Tribunal vide order dated7-8-1986remitted the matter to the Assessing Officer for a fresh decision in the light of the following observations/directions :--

"We have carefully considered the arguments of the learned counsel for the assessee and the Departmental Representative and we have gone through the various details and materials filed in support of the assessee's claim. We are of the view that the disallowance has been made without finding out full facts and ascertaining the position which might have been shown by the various companies. Merely because the bottling companies were such in which the Directors of the assessee company had some interest, will not result in the disallowance of the expenditure if it has actually been incurred and if it was for the purpose of the assessee's business. The assessee was manufacturing the basic concentrate as it was being supplied to the various bottling companies for bottling it in the form of various drinks. The assessee has incurred substantial advertisement expenses for popularising the drinks in various areas. Free sampling is also a known method by which such a consumer articles are popularised. There is nothing basically wrong if in order to increase its own sale of concentrate, the assessee company met a part of the expenditure incurred by the bottling company on free or concessional distribution of its soft drink. Now the question which arises is the verification of facts and the extent to which the assessee has been able to establish the incurring of expenditure. The details having placed before us should have been looked into by the authorities below and that would certainly enable the Assessing Officer to ascertain as to what extent the claim was established. No effort has been made to verify these expenses with the books of these companies which have sent the debit notes. It is only by looking into some details that the Income-tax Officer would record his satisfaction or otherwise about the incurring of the expenditure and the genuineness of the claim. In the absence of such verification it is not proper to disallow such a substantial claim totally on the basis of general arguments or doubts or suspicion. We would, therefore, set aside the order on this point and restore the matter to the Income-tax Officer with a direction that he should ascertain full facts and wherever necessary he may cross-verify these expenses with the other companies. It has been mentioned that forDelhiregion such expenditure was incurred by anotherDelhicompany and the Income-tax Officer may look into the treatment of this expenditure in the hands of that company. After looking into these facts, the Income-tax Officer would come to a definite conclusion about the nature of the expenditure and the allowability or otherwise of the claim."

5. When the matter went back to the Assessing Officer he re-examined the matter. The details of sum of Rs. 21,53,788, vis-a-vis, each bottler as given by the Assessing Officer are as under :

"Name of the Bottler Sampling expenses incurred by Bottlers but taken by

Campa Beverages (assessee)

Rs.

Pure Drinks (P.) Ltd. 1,13,590

Pure Drinks (Cal.) Ltd. 14,49,692

Mohan BottlingCo.(P.) Ltd.,Ludhiana2,62,289

PunjabBottling (P.) Ltd. 2,10,981

Southern Bottlers (P.) Ltd. 1,17,236

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

21,53,788"

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

6. The Assessing Officer asked the assessee to produce evidence regarding the actual incurring of expenses under the head "Sampling" by the bottlers and the checks/control exercised by the assessee with regard to the genuineness of the expenses under the sampling and forming part of the debit notes. It may be clarified here that the expenditure in question was booked in the account books of the assessee on the basis of debit notes issued by the respective bottlers. In response to the query as aforesaid the assessee produced before the Assessing Officer the load report of theLudhianaplant run by Mohan Bottling Co. (P.) Ltd. for the month of March 1980. The Assessing Officer has observed in the assessment order that this summary load report contained details of the sampling done at various sale points but no check or control could be exercised by the assessee company over this type of expenditure by the bottlers. Further, the Assessing Officer observed that no evidence has been produced to justify the sampling done at one point and the criteria adopted for the same and that it is not understood as to how the assessee company has taken entire burden of expenses on sampling without having control over the same and in spite of the fact that the sampling benefited both the bottlers and also in turn the assessee company. The learned Assessing Officer observed that the said sister concerns were suffering losses and their losses for assessment year 1981-82 according to the audited accounts were as under :

Rs.

1. Mohan BottlingCo.(P.) Ltd. 7,38,668

2. Pure Drinks (P.) Ltd. 66,60,749

3. Southern Bottlers (P.) Ltd. 16,14,483

4. Pure Drinks Co. (P.) Ltd. 18,69,199

5.PunjabBeverages (P.) Ltd. 27,94,828

7. The Assessing Officer, thus, formed an impression that the taking up of the sampling expenses was a device to reduce the assessee's own tax liability which could not be approved in view of the judgment of the Hon'ble Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. The Assessing Officer concluded as under :

"3.4 Keeping in view the totality of facts and circumstances of the case I am to conclude that :

(i) the expenditure incurred by Campa Beverages (through the Bottling companies) on sampling was excessive and unreasonable and in any case not proved in full, firstly on the point of its actual incurring and secondly regarding the legitimate needs of the business of the assessee company.

(ii) there was no contractual obligation on Campa Beverages to take the entire burden of expenses on sampling when the benefit was mainly to the bottling company and in turn to the assessee company also.

(iii) the assessee company had no control/check over the extent of the sampling done and what was the criteria laid down for the same is a secret or at least not subject to any verification."

In spite of the aforesaid findings the assessing officer thought that a sum of Rs. 1,68,000 out of the aforesaid expenditure of Rs. 21,53,788 should be allowed. The Assessing Officer thought that 5% of the total sales of the bottling companies should be the reasonable expenditure on sampling and he divided that 5% portion amongst the bottlers and the present assessee in proportion to their respective sales. The actual calculation given by the Assessing Officer is as under :--

"3.6 Therefore, expenses on sampling allowable in the hands of Campa Beverages, is worked out below :--

Name of the concern Sales by theSaleby Campa Bottlers Beverages to bottlers

Rs. Rs.

1. Pure Drinks (P.) Ltd. 34,42,702 2,24,750

2. Pure Drinks (Cal.) Ltd. 80,34,963 12,54,912

3. Mohan BottlingCo.(P.) Ltd. 92,39,545 7,47,989

4.PunjabBottling (P.) Ltd. 67,84,707 10,41,255

5. Southern Bottlers (P.) Ltd. 35,15,810 4,99,410

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

3,10,17,727 37,68,316

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

(b) Sampling expenses taken as reasonable i.e. 5% of the sales by Bottling Cos. i.e. 5% of 310.17 lacs. 15.5 lacs

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

(310.17+37.68)

15.5 x 37.68

= ---------------------------

347.85

= 1.68 lacs."

Thus, this time the assessing officer reduced the disallowance from Rs. 21,53,788 to Rs. 19,85,788.

8. The assessee again appealed to the Commissioner of Income-tax (A) who vide order under appeal has by exercising his power of enhancement restored the disallowance to Rs. 21,53,788. The learned Commissioner of Income-tax(A) concurred with the ITO that the bottling companies, whose expenditure was taken over by the assessee, were sister concerns under the same management and the expenditure was taken over with the above object of tax avoidance. He noticed that the assessee had not taken over the expenditure of the other 23 bottlers, one of whom was another sister concern, M/s. Pure Drinks (New Delhi) Ltd., According to the learned CIT (Appeals) there was a step-motherly treatment with M/s. Pure Drinks (New Delhi) Ltd., which was the largest single buyer of the assessee's concentrates. The CIT(Appeals) took the view that the taking up of the expenditure through the debit notes was not for purposes of assessee's business but for the purposes of reducing its tax liability. He was of the opinion that no portion of the expenditure of Rs. 21,53,788 should be allowed as the expenditure was not for the business interests of the appellant company but for overall tax planning of the directors. He, therefore, enhanced the disallowance to Rs. 21,53,788. The learned CIT(Appeals) noted that there was another bottler of the assessee, namely, Tasty Beverages Co., Kanpur, which was not a sister concern and that the assessee had taken over some expenditure of that bottler also through the debit notes and that expenditure was admissible as an expenditure of the assessee.

9. The assessee is now in this second round of litigation before us and the only point raised in this appeal is about the disallowance of Rs. 21,53,788. During the pendency of the present appeal the assessee filed as additional evidence before the Tribunal the copies of the agreements entered into between the assessee and the 5 bottlers and the copies of letters sent by the assessee company on9-6-1979to the bottlers in question and the letters received by assessee from those bottlers conveying their acceptance. After hearing the parties the Tribunal vide order dated3-12-1989admitted the aforesaid additional evidence and remitted the matter to the assessing officer to examine such additional evidence and submit his report. The assessing officer, i.e., the Deputy Commissioner of Income-tax (Asst.), Special Range-V, New Delhi has sent a report dated 1-6-1989 doubting the genuineness of the letters by the assessee forwarding the copy of the Resolution to the bottlers in question and their respective replies because, according to him, (i) such letters do not bear any despatch number ; (ii) there is no mark to show that the said letters were actually despatched or handed over ; and (iii) the assessee had not maintained any despatch register for the said period.

10. The appeals were thereafter heard on merits. The learned counsel for the assessee contended that the expenditure in question was a bona fide expenditure as it was incurred in order to push up the sales of cold drinks manufactured by using the assessee's product, i.e., concentrates as the base and any increase in the sale of cold drinks would result in corresponding increase in the sale of concentrate by the assessee. According to him, cold drinks aforesaid under the brand name Campa were introduced somewhere in 1979 after the exit of Coca Cola fromIndia. The concentrate was developed by the assessee in its own laboratories and, therefore, a very massive advertisement campaign had to be launched to popularise the drink. According to him free distribution of the cold drinks amongst the customers and prospective buyers was one of the methods of popularising the drinks and this was resorted to by the assessee through the bottlers who were manufacturing the cold drinks. According to him, the motive as to why the assessee chose to reimburse its sister concerns in respect of expenditure on free sampling cannot be investigated. Replying to the charge of lack of supervision and control by the assessee over this expenditure, the learned counsel for the assessee pointed out that according to the ITO's own showing all the companies were controlled by three persons, namely, Daljit Singh, Charanjit Singh and Ajit Singh, who were directors of the assessee as well as the bottling companies and, therefore, when the directors of the respective companies exercised control over this expenditure there was automatic control by the assessee as such directors were the assessee's directors as well. According to him, therefore, control and supervision is in-built in the system and because of the special relationship between the assessee and the bottlers no independent supervision and control was necessary or desired. According to him, the expenditure was genuine and was dictated by the business needs of the company and even if the scheme adopted by the assessee results in reduction of its tax liability, that is only ancillary and its object and purpose cannot be described as fraudulent or a colourable device to defraud the revenue.

11. The learned counsel for the Department, on the other hand, contended that there was no valid agreement between the assessee company and the bottlers under which the assessee may be obliged to take over the expenditure on free sampling incurred by the bottlers and that the absence and non-production of receipt and despatch registers relating to the exchange of letters now filed by the assessee is material when such evidence has been produced at this belated stage. It was also contended that the bottlers were independent companies and separate legal entities and the act of taking over their expenditure by the assessee so as to reduce their losses and to reduce the income of the assessee is a clear device to transfer the loss of the bottlers to the assessee and has to be rejected on the principles of Mcdowell's case. It was further contended that the Resolution dated2-6-1979adopted by the Board of Directors of the assessee does not create any obligation on the assessee to take over the expenditure and the resolution does not prescribe any procedure for the exercise of any control on such expenditure. It was also pointed out that the entire expenditure has been booked at the end of the year which shows that this is merely an afterthought. It was also pointed out that in assessment year 1980-81 no such expenditure was taken over and that in the case of another sister concern M/s. Pure Drinks (New Delhi) Ltd., such expenditure was not taken over by the assessee. On these arguments the learned counsel for the Revenue attempted to sustain the disallowance.

12. In order to determine whether the reimbursement of the expenditure on free sampling can be validly treated as a genuine business expenditure of the assessee, the first point that needs consideration is whether there was an agreement between the assessee and the bottlers aforesaid on this point. Let us, therefore, first examine whether there was a business need for such agreement. Admittedly the assessee was producing the concentrates which as such had no consumer value. Such concentrates had to be converted by some bottler into respective drinks and then sold in the market. In other words the concentrate could not be sold to the consumer of cold drinks. Therefore, the sale of the assessee's concentrate depended on the sale of the cold drinks manufactured by the bottlers out of concentrates purchased from the assessee. It is also in evidence and is admitted that the cold drinks under the brand name Campa were invented by the assessee after, due to government decision, import of Coca Cola concentrate was banned. Therefore, in order to push up the sales of Campa drinks and consequently of the Campa concentrates, it was necessary for the assessee to resort to heavy advertisement and sales promotion. Such advertisement can be done by the assessee as well as by the bottlers or by both. Admittedly a part of the advertising was done by the assessee itself and its direct expenditure was of the order of Rs. 30,77,916 and there was need for some local advertising also in the respective territories. It is for this purpose that the assessee was to have some agreement about advertising with the bottlers. The need for agreements of the type in question, i.e., for reimbursing the expenditure incurred by the bottlers arose from another circumstance due to which the Revenue brands the whole transaction as a device for tax avoidance, but which according to the assessee, was a genuine circumstance necessitating the agreements in question. That circumstance was that the five Franchise holders, about whom we are concerned in these appeals, were suffering losses and could not bear the burden of advertising ; while, on the other hand, the assessee was making a profit and could easily bear that burden in the interest of advancement of its own business interests and by preventing the closure of the bottling plants. It is important to remember that the losses, which the ITO has referred, are the losses after the reimbursement. In other words, if there was no reimbursement the losses would be still higher. In our view, therefore, the need for compensating the five bottlers in question by reimbursement of their advertisement expenditure, including expenditure on free sampling, was a genuine need arising out of commercial expediency. The Department had in its paper book filed the standard form of agreement that, according to it, were executed between the assessee and the Franchise holders. Such specimen agreement is placed at item No. 21 of the Revenue's paper book and reliance was placed on clause 3(j)(vi), which reads as under :--

"(vi) The Manufacturer, may from its own account, do such advertisement of the Beverage within the Territory as may seem advisable, is being at all times expressly understood and agreed, however, that the Manufacturers shall first submit all such advertising to the Company for its approval so that its beverage Base and/or Syrup may not get a bad name and will use, publish, maintain and/or distribute only such advertising of the product as the Company shall approve and authorise."

According to the Revenue under such agreements the burden of advertising was on the Franchise holders. It is to controvert this argument that the assessee has filed the copies of the agreement actually entered into between the assessee and the bottlers, which show that this clause was struck out in all the agreements. The result, therefore, is that according to the Franchise agreements entered into between the assessee and the aforesaid bottlers, there was no specific agreement about the obligation to advertise the drinks. The assessee passed the resolution, as reproduced above, on 2-6-1979 saying that a mass scale advertising campaign has to be launched and advertisement be made either directly or through some of the bottlers subject to the fact that the expenditure on such advertisement shall not exceed Rs. 30 lacs for each area in any financial year. The Resolution authorised that the expenditure incurred by the bottlers be booked in the books of the assessee company and be reimbursed to them from time to time. Although the Assessing Officer was informed of the existence of this resolution during the first stage of the assessment proceedings itself, yet so far it has never been doubted that the Board of Directors of the assessee company adopted this resolution on 2-6-1979, i.e., before the commencement of the accounting year under consideration. Before us also it was not contended that this resolution has been anti-dated and has been created subsequently just to cover up the accounting exercise in question. It was contended by Shri Rajendra, the learned counsel for the Revenue that this resolution was not registered with the Registrar of Companies under sec. 192 of the Companies Act. Such a contention has never been raised by the authorities below and was raised for the first time during the course of arguments in the present appeal. Whether the resolution has been registered in accordance with section 192 is a question of fact and cannot be raised at this belated stage. Further, the provisions of sec. 192 apply to special resolutions of the company or of the Board of Directors and do not seem to apply to ordinary resolutions in respect of transactions with business constituents. This contention, therefore, cannot prevail. The authorities below had doubted the existence of agreement between the assessee and the bottlers by observing that there was no formal agreement and no other evidence except the copy of the Resolution was filed. Admittedly there was no formal written bilateral agreements between the parties, but according to the assessee, after the resolution was passed by the Board of Directors of the assessee it was communicated to the respective bottlers who expressed their consent and the parties by their conduct followed what was stipulated by the resolution, inasmuch as the bottlers incurred substantial expenditure on advertising including free sampling and sent debit notes to the assessee, who in its turn gave the bottlers the required adjustment. A copy of the letter dated9-6-1979, which was sent by the assessee to M/s. Punjab Beverages Pvt. Ltd. has been placed at page 17 of the paper book No. II. The letter reads as under :--

"This has reference to the franchise arrangements made by us with you in regard to bottling of Campa range of products from and out of the beverage base supplied by our Company. You will appreciate that with the exit of the erstwhile Coca-Cola Company fromIndia, concerted efforts are needed to promote the sale of our products with the brand name in the style of 'CAMPA'. With this objective in view, we may have to incur higher expenditure at the initial stages on advertisement/publicity through all possible media on mass scale. Thus keeping in view the discussions you had with us, we have decided to make efforts to launch advertisement campaign and to carry out other publicity work and in order that such a Company be launched on all India level, your involvement in this process is much appreciated; and we accordingly authorise you to do all sorts of advertisement and publicity. In this behalf the Board of Directors had passed a resolution which is being sent to you. It is requested accordingly that you shall favour us with your debit notes at the end of the accounting year in order to enable us to reimburse the expenditure which you had incurred on this account. This resolution would also settle the franchise agreement in respect of condition No. 6 which was deleted. Please confirm and return a duplicate copy for our record."

At the bottom of this letter is an endorsement of acceptance for Punjab Beverages (P.) Ltd., signed by its Accounts Officer. The bottler M/s. Punjab Beverages Pvt. Ltd., acknowledge the receipt and accepted the proposal vide letter dated27-6-1979, copy of which is at page 16 of the paper book. Similar letters were written to the other bottlers in question and their acceptance was received, copies whereof had been placed in the said paper book No. 11. No doubt these copies do not have any fold etc., and the Receipt and Despatch registers were not produced before the authorities below as, according to the assessee, at the relevant time it had not introduced any system of entering the outward letters in a despatch register and that the receipt register was not available after such a long lapse of time. The non-production of the despatch and receipt register is, therefore, properly explained and the absence of fold marks etc., is not very consequential. It is admitted that the administrative office of the assessee and the offices of the five bottlers were located in the same premises atDelhiand, therefore, it is possible that the letters may have been delivered personally. It is important to remember that, as noted above, the expenditure on free sampling was not the only expenditure incurred by the bottlers and reimbursed to them. They had incurred expenditure on various other items like T.V. and screening, newspaper advertisements and advertisement through hoarding etc. The total expenditure reimbursed by the assessee was of the order of Rs. 31,91,976, out of which only Rs. 21,53,788 in respect of one type of expenditure, i.e., on free sampling only has been disallowed and the rest of the expenditure of about Rs. 10.4 lacs has been allowed. Had it been the case of the Revenue that there was no resolution of the nature aforesaid and there was no agreement for reimbursement, then the whole expenditure should have been disallowed. The allowance of about 1/3rd of the expenditure is a tacit acceptance of the assessee's contention that in fact there was such an agreement. We, therefore, hold that there was an agreement between the assessee and the bottlers prior to the commencement of the accounting year, under which the assessee agreed to reimburse the bottlers for their advertising expenditure.

13. We have now to see whether the expenditure of the order of Rs. 21,53,788 was incurrred by the bottlers and is, therefore, a genuine business expenditure of the assessee. The expenditure in question is by way of free distribution of the cold drinks by way of samples. That is why it has been named as free sampling and as held by the Tribunal in earlier order dated7-8-1986free sampling is a known method by which consumer articles are popularised. Such a method is particularly suited when one wants to introduce and popularise things like cold drinks, tea, coffee etc. It was for the purpose of allowing the revenue a second opportunity for verification of the genuineness of this expenditure that the Tribunal vide its order dated 7-8-1986 restored the matter to the assessing officer so that he may with reference to the books of accounts and other records of the bottlers cross-verify these expenses with the other companies. The assessment order ultimately passed by the assessing officer would show that he did not make any such attempt to summon records from the bottlers in question to cross-verify the genuineness and extent of expenditure either it is a remissness or probably because he thought that such records would substantiate the assessee's claim. The assessee on its part produced before the assessing officer the load reports in respect of sampling done by theLudhianaplant of M/s. Mohan Bottling Co. (P.) Ltd. for the month of March 1980. This was done to show that such load report contained full details furnished by the salesmen concerned to the bottler and that the same pattern was followed by all the bottlers. The assessing officer has nowhere said that such details were inadequate or unacceptable. He has, however, observed that no evidence had been produced to justify the sampling done at one point and the criteria adopted for the same. Such evidence was impossible to produce. Such discretion is left to the field staff who in their discretion have to decide how much free samples are to be given and to whom. It cannot be expected that the directions for such things should come from the top management and there should be written evidence in that regard. The assessing officer has observed that it is not understood as to how the assessee company has taken the entire burden of expenses on sampling. There was nothing beyond understanding in this. The bottlers were manufacturing goods out of the concentrates produced by the assessee. If there was no sale of the cold drinks there would be no sale of the concentrate and if the sales of the cold drinks manufactured by the bottlers increase, there would be an automatic increase in the sale of the concentrate. Therefore, any advertisement of the cold drinks is automatically an advertisement of the goods manufactured by the assessee. In the matter of advertisement the manufacturer as well as the retailer can resort to advertisement. It is because of this that all manufacturers advertise their goods. Some other manufacturers like the assessee even advertise goods that are not made by them directly but are made from goods produced by them. For example, we have been seeing the Steel Authority of India propagating through T.V. the use of stainless steel utensils. Such utensils are manufactured by various persons out of stainless steel sheets produced and sold by others. And if the sale of stainless steel goods increases the sale of SAIL products, i.e., stainless steel sheets would automatically increase. Similar is the case of the present assessee. Then various manufacturers allow their dealers to advertise goods in their respective territories. To illustrate the point, we may refer to the film industry in which the film producer authorises the distributor and the distributor in its turn authorises the exhibitor to advertise the film in the respective territory and such expenditure of the distributor is reimbursed by the producer and the expenditure of the exhibitor is reimbursed by the distributor. Therefore, these are ways of advertising and promoting one's business and we do not think why the assessing officer could not understand the reason for which the assessee agreed to reimburse the bottlers.

14. As pointed out earlier, it was contended on behalf of the Revenue that the assessee did not exercise any control over the expenditure and that it is unnatural that the assessee should suffer this heavy expenditure without any actual control. This argument, in our view, has no substance. As we have seen above all the bottlers are what the Revenue authorities call as sister concerns. There are common directors and all of them are private limited companies. That means that in fact the business run through these six companies, the assessee and the so-called sister concerns, is owned and managed by the same persons and, therefore, control and supervision of the expenditure is in-built in the system. If the directors of the bottling company control and supervise the expenditure then those very persons being the directors in the assessee company as well, the assessee automatically controls and supervises the expenditure. It was not even suggested before us that even the management of the respective companies did not exercise any control and supervision on free sampling. It was also not contended or pointed out to us that regarding the balance of expenditure amounting to Rs. 10.4 lacs some different sort of management and control was stipulated. The sales of the five bottling companies in question are of the order of Rs. 3,10,17,727, while the expenditure on free sampling is Rs. 21,53,788. Thus, about 7% of the goods were distributed by way of free sampling. This does not appear to be unreasonable looking to the fact that the drinks in question needed to be popularised to meet the heavy competition from others. Distribution to that extent by free sampling cannot be questioned as a non-genuine expenditure. It is significant to note that the bottlers did exercise proper and adequate control over bottlers expenditure on sampling. We, therefore, hold that the bottlers did incur this expenditure in terms of agreement with the assessee company under which the bottlers were to be reimbursed.

15. It was contended by the learned counsel for the Revenue that similar expenditure of another sister concern M/s. Pure Drinks (New Delhi) Ltd., was not taken over by the assessee company. Admittedly, the drinks became popular quickly in theDelhiterritory and this sister concern was making profits. There was, therefore, patently no need for the assessee to enter into a similar agreement with Pure Drinks (New Delhi) and its case stood on a totally different footing.

16. It was also contended that the sister concerns were separate legal entities and, therefore, there was no need to take over their expenditure by the assessee company. There is a fallacy in this argument. It is not correct to say that when in order to advertise and popularise the soft drinks in question, the bottlers were advertising the drinks in pursuance of the aforesaid agreement with the assessee the expenditure was of the bottlers only. It was an expenditure that was incurred by the bottlers under the authority of the assessee and was to benefit the assessee equally by pushing up the sales of its own concentrates. If the assessee was not to reimburse the bottlers and wanted to do free sampling itself, then it would have had to purchase the drinks from the bottlers in question and have its own establishment for popularising the drinks through free sampling etc. That would have been more expensive and would amount to carrying on coal toNew Castle. Any rational man would adopt only this method which has been adopted by the assessee. As the bottlers would suffering losses they could not continue their business indefinitely in such circumstances. They had to do something to minimise their losses. They could ask the assessee to reduce the prices of the concentrate or they could ask the assessee to meet some of their expenditure on advertising. Thus, out of the two or more alternatives the assessee adopted this method and agreed to reimburse the bottlers the expenditure on advertising. Therefore, the fact that the bottlers were separate legal entities did not impair the genuineness of the business deal. On the other hand, it shows that there was a genuine need for such arrangements in order to protect the interests of the bottlers as well as those of the assessee.

17. It was also contended that the entire expenditure has been booked at the end of the year by the issue of debit notes. This argument is not supported by any material which may cost a cloud of doubt on the genuineness of the disputed transactions. The bottlers were purchasing concentrates from the assessee and, therefore, each of them must have had a running account with the assessee. It is not shown that while the assessee was charging the price of concentrates in cash or short-term credits, the bottlers were incurring expenditure on behalf of the assessee throughout the year on credit. Had it been so something could be said in support of the argument. But if in the circumstances of the case and in the face of the fact that the parties have common management debit notes are issued only at the end of the year that is a circumstance which has no legal consequence.

18. As stated above, the authorities below have placed heavy reliance on McDowell & Co. Ltd. case and have taken pains to show that the entire scheme of reimbursing advertising expenditure to the bottlers was a tax avoidance device. Even in that case the Hon'ble Supreme Court observed that tax planning within the framework of law is acceptable. What the Hon'ble Supreme Court condemned was colourable devices and not genuine devices. There is no tax-payer who does not adopt a device in reducing his tax liability. Many such devices are provided for in the Income-tax Act itself. For example, a person having income from salary may contribute to the Provident Fund more than under the service Rules he is required to contribute, he will get the tax benefit in accordance with law and no one can deny him that benefit simply by saying that he is contributing more only to save income-tax. The government from time to time announces several schemes and reliefs and simply because a person utilises those schemes to save tax he cannot be condemned as a tax dodger. Therefore, every device is not bad. It is only a colourable device, i.e., a transaction which is not genuine, which is to be condemned and rejected. In this case as shown by us in this order there were cogent circumstances that necessitated an arrangement of the type in question failing which the business interests of the assessee company and its share holders would have been adversely affected. Therefore, if by the arrangement in question, which has been actually acted upon, the assessee has taken over expenditure which it could incur in its own rights as well and thereby reducing the losses of the sister concerns and the taxable income of the assessee, the mere fact that a savings in taxes is achieved by the assessee, the transaction cannot be branded as a colourable device. In our view, this was an arrangement that any rational citizen would make and we uphold it as a genuine arrangement necessitated by business, commercial and financial exigencies. No rational person can suggest that this group of persons should have continued to suffer through the losses of sister concerns and yet pay higher tax on income earned through the assessee company, while their real income was lower.

19. Lastly, Shri Rajendra the learned counsel for the Revenue contended that since free sampling, as a means of advertisement, helps both the assessee and the bottlers the expenses on advertising should be shared by both. He neither supported the basis of allocation made by the assessing officer nor advanced any formulae of his own. The expenditure in question, i.e., on free sampling was not the only item of expenditure. If allocation is to be done then the entire expenditure of over Rs. 62 lakhs should have been allocated. But this was not done by the assessing officer. Even the learned counsel for the revenue did not contend that the entire expenditure should have been allocated. In the present case as shown above, advertisement of the drinks was as much necessary for the assessee as it was for the bottlers. Therefore, any expenditure incurred by any one is exclusively for its own business and cannot be shared or forced to be shared merely because expenditure by one would benefit the other also. If the bottlers had incurred the expenditure in question on their own, there would have been no occasion for them to claim anything from the assessee. They have incurred certain expenditure under an agreement with the assessee, with the result that the bottlers are merely incurring expenditure on behalf of the assessee with a right to be paid for. It is, therefore, not the expenditure of the bottlers at all. Whether advertising should be done exclusively by the assessee or by the bottlers or by both is a matter of business discretion and the revenue cannot tell the assessee that it should not have met the burden of advertising exclusively. As shown above, the assessee has properly exercised that discretion and it cannot be quarrelled with. The ratio of Odhams Press Ltd. v. Cook [1941] 9 ITR 92 (Suppl.)(HL), relied by Shri Rajendra, has no application to the facts of the present case. That was a case in which the assessee claimed the business loss of a subsidiary company as its own loss or expenditure. In the case before us it is not so. The assessee is merely claiming deduction for an expenditure incurred by it through an agent, i.e., the bottlers.

20. For the above reasons we hold that the expenditure of Rs. 21,53,788 incurred by the assessee by way of reimbursing the advertising expenditure incurred by the bottlers in pursuance of the agreement in question was an expenditure laid out by the assessee wholly and exclusively for the purposes of its business and was to be allowed in computing the business income of the assessee. The disallowance was, therefore, improper and is hereby deleted.

21. In the result appeal is allowed

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