2017 (4) TMI 709 - AT - Income Tax

Disallowance of Transportation Charges - Held that - The Hon ble Apex Court in S.A. Builders (2006 (12) TMI 82 - SUPREME COURT ) while dealing with the Commercial Expediency relating to section 37 held that decision relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 the expression used is for the purpose of business . It was further held that consistently it has been held in decision relating to section 37 that expression for the purpose of business includes expenditure voluntarily incurred for Commercial Expediency, and it is immaterial, if a 3rd party also benefits thereby. The expression Commercial Expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may have been incurred under any legal obligation, but yet it is allowable as business expenditure, if it was incurred under Commercial Expediency. In our opinion the transport expenses were incurred by the assessee under business expediency. Thus, in view of the above discussion the disallowance of Transportation Charges of ₹ 14,76,363/- claimed as expenses on account of Transport Outward Claim were allowable expenses, which we delete. - Decided in favour of assessee Disallowance on account of rejection of material - Held that - The rejected material is destroyed by the MNC to avoid the misuse. Thereafter the customer sends their debit notes for rejected material. The contention of the assessee was not accepted by the AO holding that the assessee failed to file sufficient evidence in support of their claim that the goods were manufactured, delivered to the buyers and were destroyed after rejection. The ld CIT(A) also concluded that the assessee failed to substantiate as to how the quality and printing issue lead to rejection of the goods. The assessee has not filed any confirmation from such client to support their contention and confirmed the disallowance. We have noticed that the lower authorities have not rejected the books of accounts. No findings were given on the debit notes filed by the assessee before the authorities below. Considering the submission of the ld AR for the assessee that similar disallowance was claimed in the preceding years and was allowed to the assessee, we deem it appropriate to restore this ground of appeal to the file of AO to consider it afresh and pass order in accordance with law. The AO is directed to examine the delivery challans of goods supplied and the debit note issued thereafter for rejected goods. Needless to say the AO will provide opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purpose.

Summary

Issues:
1. Disallowance of Transportation Charges
2. Disallowance of material rejection cost

Issue 1: Disallowance of Transportation Charges

The appeal was against the disallowance of Transportation Charges amounting to &8377; 14,76,363. The assessee contended that the charges were reimbursed by a group of companies, and the expenses were incurred under business expediency. The Assessing Officer (AO) disallowed the charges, stating the expenses were not wholly and exclusively for business purposes. The CIT(A) upheld the disallowance. However, the tribunal found in favor of the assessee, citing the principle of "Commercial Expediency." Referring to the Supreme Court's decision in S.A. Builders Ltd. v. CIT, it was held that expenses incurred voluntarily for commercial expediency, even if a third party benefits, are allowable. The tribunal concluded that the Transportation Charges were incurred under business expediency and allowed the deduction.

Issue 2: Disallowance of material rejection cost

The appeal also challenged the disallowance of &8377; 13,92,822 on account of rejection of material. The assessee explained that rejected finished goods, self-adhesive labels, were destroyed due to quality issues, and Pharma Companies sent debit notes for the rejected material. The AO disallowed the cost, questioning the proof of quality issues and lack of buyer confirmation. The CIT(A) upheld the disallowance, stating the assessee failed to substantiate the quality and printing issues leading to rejection. The tribunal noted that no findings were given on the debit notes submitted by the assessee. Considering the lack of rejection of books of accounts and past allowances, the tribunal directed the AO to reexamine the issue, focusing on delivery challans and debit notes, and provide an opportunity for the assessee to be heard. Therefore, this ground of appeal was allowed for statistical purposes.

In conclusion, the tribunal allowed the appeal of the assessee, overturning the disallowance of both Transportation Charges and material rejection costs. The judgment emphasized the importance of business expediency and the need for expenses to be incurred for commercial purposes, even if benefiting a third party.