2005 (3) TMI 83 - HC - Income Tax

Deduction u/s 37 - business or commercial expediency burden of proof - trade discount scheme expenditure - payment in respect of the supplies effected payment towards service charges - corporate and management charges - marketing service charges - Tribunal has committed a grave error in not properly understanding the transaction entered into between the assessee and others. We therefore set aside the order of the Tribunal and uphold that of the Commissioner (Appeals) and held that the assessee had not discharged the burden that it is entitled to deduction under section 37

Issues Involved:
1. Whether the assessee discharged the burden of proof for the claim of Rs. 7,75,602.
2. Whether the assessee discharged the burden of proof for the claim of Rs. 22,72,192.
3. Whether the payment to Golden Enterprises was for business purposes or in business interest.
4. Disallowance of corporate management charges paid to United Breweries Limited.
5. Disallowance of trade scheme expenditure on Maharashtra supplies.

Issue-wise Detailed Analysis:

1. Burden of Proof for Rs. 7,75,602:
The assessee claimed Rs. 7,75,602 as service charges paid to R.J. Associates for securing orders from the Kerala State Beverages Corporation (KSBC), monitoring stock, obtaining excise permits, and expediting payments. The assessing authority, after issuing summons to KSBC, found no liaisoning work was done by R.J. Associates. The Tribunal, however, accepted the assessee's claim based on affidavits and agreements. The High Court held that the assessee failed to discharge the burden of proof required under section 37 of the Income-tax Act, as the liaisoning work was banned by KSBC, and the partners of R.J. Associates had no knowledge of marketing activities.

2. Burden of Proof for Rs. 22,72,192:
The assessee claimed Rs. 22,72,192 paid to Golden Enterprises for liaisoning work with TASMAC. The assessing authority, after summoning TASMAC officials and visiting Golden Enterprises, found no evidence of such work. The Tribunal accepted the claim, but the High Court disagreed, stating the assessee did not prove the expenditure was wholly and exclusively for business purposes, and the existence of an agreement alone was insufficient.

3. Payment to Golden Enterprises:
The Tribunal held that the payment to Golden Enterprises was for business purposes. However, the High Court found no evidence supporting this, as TASMAC officials denied any liaisoning work by Golden Enterprises. The High Court concluded the payment was not for commercial expediency but to divert profits, thus not allowable under section 37.

4. Disallowance of Corporate Management Charges:
The assessee claimed Rs. 20,85,800 as corporate management charges paid to United Breweries Limited, which the assessing authority partly disallowed. The Tribunal allowed Rs. 3 per dozen but disallowed Re. 1. The High Court upheld the disallowance, stating there was no sufficient material to justify the payment, as it was not made for business or commercial expediency but to reduce tax liability.

5. Disallowance of Trade Scheme Expenditure:
The assessee claimed Rs. 8,52,050 as trade scheme expenditure on Maharashtra supplies. The assessing authority disallowed this, stating no further expenditure was incurred as sales were reinvoiced by United Breweries Limited. The High Court agreed, finding no reassessment warranted and upholding the assessing authority's decision.

Conclusion:
The High Court set aside the Tribunal's order, upholding the Commissioner (Appeals) and assessing authority's findings. The assessee failed to discharge the burden of proof for the claimed deductions under section 37 of the Income-tax Act. The judgment was in favor of the Revenue.

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