2014 (5) TMI 239 - AT - Income Tax

Disallowance of Trade discount - Held that - As far as the component of insurance paid to the insurance company, with regard to the various vehicles sold by the assessee, it has been paid per account payee cheques, and there is no material brought on record to doubt the genuineness - The insurance premium was paid by the assessee as a business policy and since was for business consideration, it is allowed as allowable deduction to the assessee - the balance amount of disallowance out of trade discount, the assessee has filed copies of discount vouchers, which bear the signature of the payee also - the assessee could not prove the genuineness of the entire cash payment of Rs.17,24,944/- claimed to have been paid as trade discount to the customers - The possibility of inflation in the figure of trade discount could not be ruled out. The trade discount disallowance also includes the amount written off due to short recoveries from the customers - The claim of the assessee of short recovery could not be supported by the assessee with any evidence on record - it is highly unusual that the assessee shall deliver the vehicles to its customers without receiving full sale proceeds - there is no justification for disallowing the entire trade discount claimed by the assessee, but some disallowance due to various defects pointed out in the order is called for - the disallowance out of trade discount claimed by the assessee is restricted inclusive of the amount written off by the assessee as irrecoverable as against disallowance confirmed by the CIT(A). Disallowance of RTO taxes Held that - The assessee has paid RTO taxes to the Government Department of Road Transport and there is no material brought on record to doubt the genuineness of the said payment - The assessee has explained that a scheme was devised to attract customers, the assessee bore expenses relating to RTO and registration charges of the customers purchasing tractors from the assessee - Necessary entries were passed in the account book of the assessee and expenditure was for the business purpose only thus, allowable u/s 37of the Act Decided in favour of Assessee. Disallowance 25% of the demonstration expenses Held that - Adhoc disallowance was made for want of complete details regarding the meetings, number of attendance etc. - the assessee has claimed that the customers for tractor were illiterate persons of remote area and the tractor brand sold by the assessee was new - the assessee has to give demonstration so as to explain the features and benefits of the product dealt by the assessee thus, the amount is allowed - Decided in favour of Assessee. Disallowance is Out of salary expenses Held that - The payment was to the employees of principal company by way of reimbursement made to the field staff appointed directly by the principal company - CIT(A) has not disputed the basic facts, but confirmed disallowance by invoking the provision of section 40(a)(ia) of the Act, which is not applicable to the facts and circumstances of the case thus, the deduction is allowed Decided in favour of Assessee. Disallowance of 25% of the petrol expenses Held that - There is no justification for any disallowance out of the petrol expenses pertaining to the employees of the assessee - 25% of the petrol expenses relating to the partners is justified - the disallowance at 25% of the petrol expenses is sustained pertaining to the partners Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of trade discount
2. Disallowance of RTO taxes
3. Disallowance of demonstration expenses
4. Disallowance of salary expenses
5. Disallowance of petrol expenses

Disallowance of Trade Discount:
The appellant challenged the disallowance of trade discount by the CIT(A) for the assessment year 2007-2008. The appellant contended that the trade discount included insurance premium paid by cheque and cash components, necessary for sales of tractors. The appellant argued that the insurance amount was paid through account payee cheques to the insurance company, justifying its allowance. However, the Revenue opposed, citing inconsistencies in the trade discount payments and lack of uniformity in policies. The Tribunal examined documents and found the insurance payments genuine but raised concerns about the cash component of trade discount. It noted discrepancies in cash payments and bearer cheques encashment. While acknowledging no uniform policy requirement, the Tribunal upheld some disallowance due to doubts on cash discount genuineness. Ultimately, the Tribunal restricted the disallowance to Rs.17,50,000, inclusive of irrecoverable amounts, differing from the initial disallowance of Rs.45,29,151.

Disallowance of RTO Taxes:
Regarding the disallowance of Rs.10,51,740 for RTO taxes, the appellant clarified that these taxes were paid on behalf of customers to the RTO department. The Revenue contested citing lack of uniform policy and burden of proof on the appellant. The Tribunal found the payments genuine, made to attract customers by bearing registration expenses, and allowed the deduction under Section 37 of the Act.

Disallowance of Demonstration Expenses:
An adhoc disallowance of Rs.87,695 (25% of demonstration expenses) was contested by the appellant, explaining the necessity of demonstrations for illiterate customers in remote areas. The Tribunal accepted the explanation and allowed the entire amount to the appellant.

Disallowance of Salary Expenses:
The AO and CIT(A) disallowed 25% of Rs.4,51,117 salary expenses, alleging lack of proof of actual payment to employees. The appellant argued that these were reimbursements to principal company employees, not subject to TDS provisions. The Tribunal agreed, allowing the deduction as reimbursement without applicability of Section 40(a)(ia).

Disallowance of Petrol Expenses:
Regarding the disallowance of Rs.2,14,800 (25% of petrol expenses), the appellant clarified that these expenses were not for personal use. The Tribunal upheld the disallowance of 25% of petrol expenses related to partners but allowed the rest, resulting in a partial allowance of the appellant's claim.

In conclusion, the Tribunal partly allowed the appellant's appeal, addressing each issue of disallowance with detailed analysis and adjustments in disallowed amounts based on the evidence and arguments presented during the proceedings.