Infrastructure Fee Deduction Restricted to 5% of Actual Advertising Receipts, Not Gross Bills

By | June 24, 2025
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Infrastructure Fee Deduction Restricted to 5% of Actual Advertising Receipts, Not Gross Bills

Issue:

Whether the Tribunal was justified in restricting the deduction for “infrastructure fee” under Section 37(1) of the Income-tax Act, 1961, to 5% of the actual advertising receipts, in accordance with the agreement, rather than allowing it on gross advertising bills.

Facts:

For the assessment year 1993-94, the assessee-company had entered into an agreement to pay 5% of its total advertising receipts as an “infrastructure fee” to Prime Time. The assessee claimed a deduction for this infrastructure fee based on its gross advertising receipts. The Assessing Officer (AO), however, restricted the deduction to 5% of the actual receipts as reflected in the profit and loss account. On appeal, the Commissioner (Appeals) further restricted the deduction to 15% of the actual receipts. The Tribunal, in turn, upheld the order of the Assessing Officer, aligning with the 5% of actual receipts.

Decision:

Yes, the court held that the Tribunal was justified in restricting the deduction to 5% of actual receipts in accordance with the agreement and not on gross advertising bills. The decision was in favor of the revenue.

Key Takeaways:

  • Arm’s Length Principle and Commercial Expediency (Section 37(1)): Section 37(1) allows for the deduction of expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession. While the expenditure must be for business purposes, its reasonableness and compliance with underlying agreements are crucial.
  • “Actual Receipts” vs. “Gross Bills”: The distinction between “gross advertising bills” (what might be billed to clients) and “actual receipts” (what is genuinely realized and accounted for in the profit and loss account) is critical. The deduction for an expense tied to “receipts” must logically align with the income that is actually recognized.
  • Adherence to Agreement Terms: The agreement clearly stipulated 5% of “total advertising receipts.” If the actual receipts were lower than gross bills due to discounts, bad debts, or other reasons, then the expense tied to a percentage of “receipts” should correlate with the actual realized receipts.
  • No Interference with Factual Finding: The Tribunal’s finding that the deduction should be based on actual receipts, which aligns with the agreement, is a factual interpretation that higher courts generally do not interfere with unless it is perverse or based on no evidence.
  • Burden of Proof: The assessee claiming the deduction has the burden to demonstrate that the expenditure was genuinely incurred and allowable as per the terms of the agreement and the provisions of the Income-tax Act.
  • In Favor of Revenue: The outcome confirms the revenue’s position that the deduction should be limited to the percentage of actual income earned.
HIGH COURT OF BOMBAY
Star Time Communication (I) (P.) Ltd.
v.
Commissioner of Income-tax
ALOK ARADHE, CJ.
M.S. Karnik, J.
INCOME TAX APPEAL NO.389 OF 2003
APRIL  22, 2025
B. M. Chatterji, Sr. Adv., Shreyash J. Shah and Udyan Mukharjee, Advs. for the Appellant. Suresh Kumar, for the Respondent.
ORDER
Alok Aradhe, CJ. – This appeal under Section 260A of the Income Tax Act, 1961 (1961 Act), has been filed by the assessee. The subject matter of the appeal pertains to Assessment Year 1993-94. The appeal was admitted on the following substantial question of law:
Whether on the facts and circumstances of the case and in law the Income Tax Appellate Tribunal was right in coming to the conclusion that the appellant was entitled to only 5% of the receipts of the appellant and not 5% of the gross advertising bills raised?
2. Facts leading to filing of this appeal, briefly stated, are that the assessee is a company incorporated on 29th April 1992. The assessee entered into an agreement dated 27th July 1992 (said agreement) with Prime Time Media Services Pvt. Ltd. Under clause-3 of the said agreement, the assessee was required to pay Prime Time Media Services Pvt. 5% of the total receipts from advertising. The assessee filed return of income for the Assessment Year (AY) 1993-94 declaring total income of Rs.7,57,746/-. (Rupees seven lac fifty-seven thousand seven hundred forty-six only). The Assessing Officer, during the course of assessment proceedings, by order dated 14th February 1995, noticed that the assessee had claimed sum of Rs.22,36,544/- (Rupees twenty-two lac thirty-six thousand five hundred forty-four only) as infrastructure fee on the basis of said agreement.
3. The assessee disclosed the total income from advertisement at Rs.63,43,480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only) in its profit and loss account. Out of aforesaid amount of Rs.63,43,480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only), a sum of Rs.4,66,068/- (Rupees four lac sixty-six thousand sixtyeight only) was shown to be outstanding as on 31st March 1993. The Assessing Officer, therefore, restricted the infrastructure fee to the extent of Rs.2,93,870/- (Rupees two lac ninety-three thousand eight hundred seventy only) being 5% of the amount of Rs.58,77,412/- (Rupees fifty-eight lac seventy-seven thousand four hundred twelve only).
4. Being aggrieved by the aforesaid order dated 14th February 1995 passed by the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), inter alia; held that payment of 15% of total advertising revenue actually received by the assessee is a reasonable payment to Prime Time Media Services Pvt. Ltd. and computed the amount at Rs.8,81,611/-(Rupees eight lac eighty-one thousand six hundred eleven only) being 15% of the sum of Rs.58,77,412/- (Rupees fifty-eight lac seventy-seven thousand four hundred twelve only). The Commissioner of Income Tax (Appeals) restricted the disallowance to Rs.10,61,063/- (Rupees ten lac sixty-one thousand sixty-three only) as against Rs.19,42,641/- (Rupees nineteen lac forty-two thousand six hundred forty-one only) and granted a relief to the extent of Rs.8,81,611/- (Rupees eight lac eighty-one thousand six hundred eleven only). The Commissioner of Income Tax (Appeals) partly allowed the appeal preferred by the assessee by order dated 14th December 1995.
5. The assessee, thereupon, preferred an appeal before the Income Tax Appellate Tribunal (Tribunal). The Tribunal, by an order dated 31st March 2003, inter alia; held that on reasonable interpretation of the agreement entered into by the assessee with Prime Time Media Services Pvt. Ltd., it is evident that the assessee is not entitled to any further relief. In the result, the appeal preferred by the assessee was dismissed. In the aforesaid factual background, this appeal has been filed.
6. Learned senior counsel for the appellant submitted that the Tribunal was not justified in confirming the quantum of disallowance and has not adverted to the issue whether the expenditure payment was real and not done wholly and exclusively for the purpose of business of the assessee. It is further submitted that the Assessing Officer is not entitled to restrict the allowance of expenditure from 5% on total receipts but 5% on total income as per the profit and loss statement, as the same amounts to challenging the business prerogative of the assessee. It is also submitted that the Assessing Officer has failed to demonstrate any benchmark for infrastructure fee as payable in the industry in which the assessee is carrying on the business. It is contended that it is not open to the Tribunal to rewrite the agreement between the parties and restrict the expenditure to Rs.8,81,611/- (Rupees eight lac eighty-one thousand six hundred eleven only). It is urged that the total receipts are Rs.4,47,30,880/- (Four crores forty-seven lac thirty thousand eight hundred eighty only) and the same ought to have been taken into account by the Assessing Officer, Commissioner of Income Tax (Appeals) and the Tribunal. In support of the aforesaid submission, reliance has been placed on decisions of the Supreme Court in COMMISSIONER OF INCOME TAX, BOMBAY v. WALCHAND & CO. (PVT) LTD., BOMBAY 1967 SCC OnLine SC 119 and a division bench judgment of the Karnataka High Court in INGERSOLL-RAND (INDIA) LIMITED v. COMMISSIONER OF INCOME-TAX AND ANOTHER (Karnataka)
7. On the other hand, learned counsel for the revenue has contended that the assessee himself has disclosed the total income from advertising at Rs.63,43,480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only), which is evident from the profit and loss account of the assessee. Therefore, it is not open for the assessee to claim infrastructure fee at a total amount of Rs.4,47,30,880/- (Four crores fortyseven lac thirty thousand eight hundred eighty only). It is submitted that the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal have recorded findings of fact, which cannot be termed as perverse and therefore, no interference in this appeal under Section 260A of the 1961 Act, is called for.
8. We have considered the submissions made on both the sides and have perused the record. Before proceeding further, it is apposite to take note of the principles laid down by Supreme Court in WALCHAND & CO. (PVT) LTD., BOMBAY (supra). In the said case, the Supreme Court has held that in applying the test of commercial expediency for determining, whether the expenditure was wholly or exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. Similar view was taken by the Supreme Court in J. K. WOOLLEN MANUFACTURERS v. COMMISSIONER OF INCOME TAX, U.P. 612 ITR Vol.72 and it was held that it is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. It was further held that it is not the function of the Tribunal to determine the remuneration, which in their view, should be paid to an employee of the assessee.
9. The scope of appeal under Section 260A of the 1961 Act is well settled. This Court, in an appeal under Section 260A, can interfere with the findings of fact only if when the same is shown to be perverse [See : SYEDA RAHIMUNNISA v. MALAN BI BY L.RS. AND ORS.(2016) 10 SCC 315 and PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE & ORS v. SOFTBRANDS INDIA P.LTD.
10. In the backdrop of the aforementioned well settled legal principles, we may advert to the facts of the case in hand. Clause-3 of the agreement dated 27th July 1992 reads as under:
“Clause 3
In consideration of the same, STARTIME will pay to PRIMETIME 5% of the total receipts of STARTIME from advertising.”
11. Thus, under clause-3 of the said agreement, the assessee had to pay 5% of the total receipts of STARTIME from the advertising. As per the profit and loss account annexed by the assessee, it is evident that the assessee has disclosed his income for the period ending 31st March 1993 at Rs.63,43,480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only). The Assessing Officer, therefore, in accordance with the terms of the agreement, found that the assessee had to pay PRIMETIME only 5% of the receipts i.e. receipt of Rs.58,77,412/- (Rupees fifty-eight lac seventy-seven thousand four hundred twelve only). As per the terms and conditions of the agreement, the assessee was required to pay 5% of the receipt of the assessee and not on 5% of the gross advertising bills. The Commissioner of Income Tax (Appeals) found that reasonable payment liable would be 15% of the receipts i.e. Rs.58,77,412/- (Rupees fiftyeight lac seventy-seven thousand four hundred twelve only), which was quantified at Rs.8,81,611/- (Rupees eight lac eighty-one thousand six hundred eleven only). It is pertinent to note that though the order was passed against the revenue, it did not challenge the order of appellate authority before the Tribunal. However, the assessee filed an appeal before the Tribunal, which has been dismissed. The findings of fact recorded by the Assessing Officer, Commissioner of Income Tax (Appeals) and the tribunal with regard to the income from the advertisement i.e. sum of Rs.63,43,480/- (Rupees sixty-three lac forty-three thousand four hundred eighty only), which is evident from the profit and loss account of the assessee, does not, by no stretch of imagination, can be said to be either perverse or based on no evidence. The aforesaid findings of fact do not call for any interference in this appeal.
12. For the aforementioned reasons, the substantial question of law is answered in the affirmative and against the assessee.
13. In the result, the appeal fails and is hereby dismissed.