2016 (2) TMI 1093 - AT - Income Tax

Addition u/s 36(1)(iii) - Held that - From the perusal of the ledger account of M/s J.V. Steel Traders, it is quite clear that it is a regular supplier of the assessee since 1.4.2005. The purchases were being made and payments were given in regular course of business. Even the advance given during the year is an advance against purchases. It is also not in dispute that of M/s J.V. Steel Traders is not related to the assessee. The observations of the CIT (Appeals) that the item sold by of M/s J.V. Steel Traders is not a unique item is not relevant to the issue in question. It is the prudence of businessman how to run his business, the department cannot dictate its terms as how to deal with the parties. It is none of the department s concern as to when the advance has to be given to supplier and when not. There is no need for the learned CIT (Appeals) to ask the assessee the evidence to prove the other reasons for giving advances. There may be thousands of reasons for giving such advances, which the assessee is not obliged to answer to the department, it in his business acumen according to which he takes these business decisions. It is not in dispute that M/s J.V. Steel Traders is a regular supplier and advances have been given during the regular course of business. Regular debit and credit entries are appearing in the ledger account. The purchases were made in the earlier as well as subsequent years. These reasons are enough to prove that advance was made out of commercial expediency. - Decided in favour of assessee.

Summary

Issues:
1. Addition under section 36(1)(iii) of the Income Tax Act, 1961 for interest-free advances made to a supplier.
2. Disallowance of tour expenses claimed by the assessee.

Issue 1: Addition under section 36(1)(iii) of the Income Tax Act
The assessee had given advances to a supplier, M/s J.V. Steel Traders, during the assessment years 2008-09 and 2009-10. The Assessing Officer disallowed a proportionate amount of the interest-free advances, considering them as non-business-related. The assessee contended that the advances were made for commercial expediency to secure supplies at reasonable prices due to fluctuating steel prices. The CIT (Appeals) upheld the addition made by the Assessing Officer. However, the ITAT disagreed with the CIT (Appeals) and directed the Assessing Officer to delete the addition under section 36(1)(iii) of the Act. The ITAT found that the advances were made out of commercial expediency, as evidenced by regular transactions with the supplier and the business necessity to secure supplies. The ITAT also noted that the department cannot dictate the terms of business decisions made by the assessee.

Issue 2: Disallowance of tour expenses
The Assessing Officer disallowed a portion of tour expenses claimed by the assessee, citing that one of the trips was made by an individual who was neither an employee nor an agent of the assessee, and no commission was earned during the year. The CIT (Appeals) upheld the disallowance, stating that the assessee failed to prove the genuineness of the expenses and that they were not incurred wholly and exclusively for business purposes. The ITAT agreed with the CIT (Appeals) that the onus to prove the foreign trip expenses rested with the assessee, which it failed to do. Without documentary evidence substantiating the business purpose of the trip, the ITAT upheld the disallowance of the expenses. Therefore, the appeal related to the disallowance of tour expenses was decided against the assessee.

In conclusion, the ITAT allowed the appeal related to the addition under section 36(1)(iii) of the Income Tax Act, directing the deletion of the addition made by the Assessing Officer. However, the appeal concerning the disallowance of tour expenses was partly allowed, with the disallowance being upheld due to the lack of substantiating evidence for the business purpose of the expenses incurred.