2011 (12) TMI 613 - AT - Income Tax

Sales promotion expenses - Allowable business expenditure - exemption on excise duty refund - Capital receipt -

Summary

Issues Involved:
1. Disallowance of Sales Promotion Expenses.
2. Taxability of Excise Duty Refund and eligibility for deduction under section 80IB of the Income Tax Act, 1961.

Issue 1: Disallowance of Sales Promotion Expenses

The assessee claimed a total expenditure of Rs. 6,32,080 on Sales Promotion Expenses, asserting that these were incurred for business activities and should be allowed as business expenditure. The Assessing Officer (AO) disallowed Rs. 3,33,754 of these expenses, deeming them personal in nature, particularly focusing on expenses related to club membership and foreign tours of a partner, Shri Uday Kairon. The CIT (Appeals) upheld this disallowance.

The learned A.R. for the assessee argued that the expenses were commensurate with the business turnover and necessary for marketing in multiple states. Despite some ambiguity in the vouchers, the nature of the expenditure was claimed to be business-related.

The Tribunal noted that the AO disallowed expenses incurred by Shri Uday Kairon, totaling Rs. 2,42,270, including Rs. 1,29,775 for a foreign tour to China, which was considered business-related. The remaining expenses incurred by different branches amounted to Rs. 3,89,810. The Tribunal held that these branch expenses should be allowed in entirety, and the foreign tour expenses were also to be allowed. Consequently, the disallowance was restricted to Rs. 60,000. Thus, the ground of appeal was partly allowed.

Issue 2: Taxability of Excise Duty Refund and Eligibility for Deduction under Section 80IB

The assessee received an excise duty refund of Rs. 139.80 lacs and claimed it as exempt, arguing it had a direct nexus with manufacturing activities and was eligible for deduction under section 80IB. The AO, however, viewed the refund as a promotional reimbursement unrelated to the manufacturing process and not eligible for the deduction, relying on the Supreme Court's decision in Liberty India Vs. CIT.

The learned A.R. for the assessee cited various judgments, including CIT Vs. Dharam Pal Prem Chand and the Jammu & Kashmir High Court's decision in M/s Shree Balaji Alloys & Others Vs. CIT, arguing that the refund should be considered a capital receipt, not taxable.

The learned D.R. for the Revenue contended that the assessee, being under the jurisdiction of the Punjab & Haryana High Court, should follow the precedent set in CIT Abhishek Industries, which dealt with subsidies related to government notifications.

The Tribunal admitted the additional ground of appeal regarding the excise duty refund being a capital receipt. Referring to the Jammu & Kashmir High Court's decision in M/s Shree Balaji Alloys & Others, which held that such incentives were capital receipts, the Tribunal concluded that the excise duty refund of Rs. 139.80 lacs was a capital receipt and not taxable. Consequently, the additional ground of appeal was allowed, and the issue of eligibility for deduction under section 80IB was dismissed in limine.

Conclusion

The appeal was partly allowed. The disallowance of sales promotion expenses was restricted to Rs. 60,000, and the excise duty refund was held to be a capital receipt, not taxable.