2014 (6) TMI 508 - AT - Income Tax

Disallowance u/s 40(a)(ia) of the Act Business promotion expenses TDS provision Held that - CIT(A) has granted the relief to the assessee by considering the correct facts pointed out by the assessee in respect of the rebates allowed to the customers which was shown under the head business promotion expenses - the correct amount of TDS deducted by the assessee as per the e-TDS return - the assessee raised a fresh plea before the CIT(A) that the expenses debited to the P&L account under the head business promotion expenses also includes a sum towards the bad debts the amount cannot be disallowed by applying the provisions of section 40(a)(ia) - CIT(A) has accepted the explanation of the assessee without getting the fact verified from the AO the AO was not given the opportunity to verify the correctness of the claim and further the claim of bad debts also requires to be examined thus, the matter is to be remitted back to the AO for fresh adjudication Decided partly in favour of Assessee. Deletion of commission income Held that - The commission income is in respect of the air travel insurance and the accrual of income depends on the actual journey undertaken by the passenger - If the passenger decides not to undertake the journey and the ticket is cancelled then the insurance also gets automatically cancelled - The commencement of the policy is dependent upon the commencement of the journey and once the ticket is cancelled then there is no question of commencement of the policy - the revised policy of accounting wherein the revenue of the commission on travel insurance is recognized by the assessee only when there is a commencement of the policy and not on mere sale of policy - the accrual of the revenue depends upon the actual journey undertaken by the passenger, the accounting policy of recognizing the revenue only at the time of commencement of the policy is proper and justified Decided against assessee. Disallowance of payment made - Reimbursement of expenses Held that - The parent company namely TCIL is having taxable income and subjected to the highest rate of tax - the sharing of the expenses is revenue neutral - expenses which were relatable to the area being used by different companies e.g. rent/ electricity / rates the taxes, general maintenance, housekeeping and security were allocated on the basis of area being occupied/used by each of these companies - certain expenses which were directly relatable to the employees for e.g. staff welfare, internet usage and resource input were being allocated on the basis of head count of each company - the basis of allocation of expenses is fair and reasonable - the allocation of expenses relating to resource input is on the basis of head count and secondly because no useful tax planning purpose will be served for this group of companies since the appellant as well as the parent company are paying taxes at the same rate Decided against Revenue.

Summary

Issues Involved:
1. Deletion of disallowance under Section 40(a)(ia) regarding business promotion expenses.
2. Deletion of addition representing commission income.
3. Deletion of disallowance representing payments made to Thomas Cook India Ltd.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(ia) Regarding Business Promotion Expenses:
The primary issue here revolves around the disallowance made under Section 40(a)(ia) of the Income Tax Act concerning business promotion expenses amounting to Rs. 40,50,335/-. The Assessing Officer (AO) disallowed this amount because the assessee had not deducted tax at source for these expenses. The CIT(A) deleted this disallowance, noting that the expenses were rebates given to customers and not payments requiring TDS. The CIT(A) also considered that certain amounts were below the threshold limit for TDS and that some payments were covered by exemption certificates under Section 197(1)(a). The Tribunal upheld the CIT(A)'s decision but remanded the issue of Rs. 19,32,706/- (claimed as bad debts) back to the AO for verification, as this claim was not examined earlier.

2. Deletion of Addition Representing Commission Income:
The second issue concerns the addition of Rs. 15,64,013/- made by the AO, representing commission income that had accrued but was not recognized by the assessee due to a change in accounting policy. The assessee shifted to recognizing commission income on the effective commencement of the insurance policy rather than on the sale of the policy. The CIT(A) accepted this revised accounting method, noting it was consistent with industry practices and accounting standards. The Tribunal upheld the CIT(A)'s decision, acknowledging that the revised policy was appropriate given the nature of the insurance policies and the dependency of revenue accrual on the actual journey undertaken by passengers.

3. Deletion of Disallowance Representing Payments Made to Thomas Cook India Ltd.:
The third issue pertains to the disallowance of Rs. 50,00,000/- out of Rs. 3.37 crore reimbursed to Thomas Cook India Ltd. (TCIL) for services rendered. The AO made an ad-hoc disallowance, questioning the clarity of work done by TCIL employees for the assessee. The CIT(A) deleted the disallowance, finding the allocation of expenses reasonable and based on pre-determined ratios for shared services among group companies. The Tribunal upheld the CIT(A)'s decision, noting that both the assessee and TCIL were taxed at the same rate, making the expense allocation revenue-neutral.

Subsequent Years (A.Y. 2007-08 and 2008-09):
For the assessment years 2007-08 and 2008-09, the revenue raised similar grounds concerning disallowances and additions. The Tribunal dismissed these appeals, following the findings and rationale applied for the assessment year 2006-07.

Conclusion:
The appeal for A.Y. 2006-07 is partly allowed for statistical purposes, remanding the issue of bad debts back to the AO for verification. The appeals for A.Y. 2007-08 and 2008-09 are dismissed. The order was pronounced on 11-06-2014.