2010 (11) TMI 451 - AT - Income Tax

Disallowance - Rebate given to the subscribers of the chits - Business expenditure or not - Since,to avoid competition and to encourage the subscribers to pay the monthly instalment in time if the assessee consciously decides to give 1 per cent discount/rebate, the tax authorities cannot say that it is not necessary for conducting the business - The tax authorities at best can verify whether such discount/rebate was given or not - In this case the discount/rebate given by the assessee is not in dispute - Therefore, the rebate of 1 per cent given by the assessee to the subscribers for payment of subscription amount in time has to be necessarily considered as business expenditure u/s. 37(1) of the Act - Do not find any reason to disallow the claim of the assessee merely because there is an enabling provision in the Chit Fund Act for levy of penalty and interest for delayed payment of subscription - Decided in favour of assessee.

Summary

Issues:
Disallowance of rebate given to subscribers of chits.

Analysis:
The appeals were against a common order related to asst. yrs. 2004-05 and 2005-06. The main issue was the disallowance of a 1% discount/rebate given to subscribers of chits by the assessee firm. The assessee argued that this discount was an allowable expenditure under s. 37(1) of the IT Act, 1961, as it aimed to encourage timely payments. On the other hand, the Departmental Representative contended that the Chit Fund Act already provided mechanisms for recovering payments, making the discount unnecessary.

The Tribunal considered both arguments and examined the Chit Fund Act's provisions. It noted that while the Act allowed for penalties and interest on delayed payments, it was at the discretion of the chit company to enforce them. The Tribunal emphasized that the decision to offer a discount/rebate was a business strategy, and the mere existence of provisions for penalties in the Act did not render the discount irrelevant for conducting business successfully.

The Tribunal highlighted that tax authorities should not interfere with a businessman's decision to offer discounts that are deemed necessary for business operations. It stated that the discount/rebate given by the assessee was not disputed and was a legitimate business expenditure under s. 37(1) of the Act. Therefore, the Tribunal held that the discount/rebate of 1% given to subscribers for timely payments should be considered a valid business expense, overturning the lower authority's decision to disallow it.

Conclusively, the Tribunal set aside the lower authority's order and directed the Assessing Officer to delete the addition of the 1% discount/rebate. As a result, both appeals of the assessee were allowed.