2017 (4) TMI 1066 - HC - Income Tax

Addition u/s 40A(3) - addition on account of payment made in cash More than ₹ 20,000/- - Held that - The chart of the payments in respect of expenditure incurred by the assessee/ appellant in the aforesaid relevant year as contained in the assessment order itself reveals that all cash transactions are either of ₹ 20,000/- or less though there may be multiple transactions in favour of one and the same party in a single day the aggregate of which exceeds ₹ 20,000/-. However, as in the said assessment year or prior to 1.4.2009 there was no restriction in making cash payment to a single party on the same day of various amounts aggregating to more than ₹ 20,000/- in cash, the same were allowable as deduction towards expenditure under Section 40 A (3) of the Act. Accordingly, the tribunal committed an error of law in confirming the additions of ₹ 1,28,400/- on account of payment made in cash by taking the aggregate of transactions made to one party in a single day to be over ₹ 20,000/-. - Decided in favour of assessee Disallowing the expenses on account of after sale services and advertisement u/s 37 (1) - no agreement for the reimbursement of the said expenses to the supplier or manufacturer - Held that - The assessee/appellant is only a distributor. The advertisement expenses and after sale services are generally provided to the customers by the manufacturer or supplier through service centres. The cost thereof is realized by the manufacturer/supplier from the distributor irrespective of the fact as to whether any after sale services are actually availed by the customer or provided by the service centre. The payment of charges for after sale services to the manufacturer/ supplier is not linked with the actual after sale services. Therefore, the cost of after sale services in any case is payable to the supplier/manufacturer. We are of the view that the expenses for advertisement and after sale services alleged to have been reimbursed by the assessee/appellant to the manufacturer/distributor as has been allowed in the past by the tribunal were allowable under Section 37 (1) of the Act in the relevant year also.- Decided in favour of assessee

Summary

Issues:
1. Interpretation of Section 40 A (3) of the Income Tax Act, 1961 regarding cash payment limits.
2. Disallowance of expenses on account of after-sale services and advertisement under Section 37 (1) of the Act.

Interpretation of Section 40 A (3) - Cash Payment Limits:
The appeal before the Allahabad High Court involved the interpretation of Section 40 A (3) of the Income Tax Act, 1961, specifically focusing on the permissible limit for cash payments. The court analyzed the provision in force during the relevant assessment year, 2001-2002, which restricted cash payments exceeding ?20,000 for claiming deductions. The court highlighted that the limit applied to individual transactions and did not prohibit multiple transactions of the same amount to the same party on the same day. The provision was subsequently amended in 2008 to restrict cash payments to a person in a day up to ?20,000 for deduction purposes. The court emphasized that amendments to taxation laws are prospective unless specified otherwise, and the amendment effective from 2009 could not be applied retrospectively to transactions before its enforcement. The court ruled in favor of the appellant, stating that as there was no restriction on making multiple cash payments exceeding ?20,000 to a single party on the same day before 2009, such transactions were allowable for deduction under Section 40 A (3) for the assessment year 2001-2002.

Disallowance of Expenses under Section 37 (1):
The second issue pertained to the disallowance of expenses on after-sale services and advertisement under Section 37 (1) of the Act. The appellant, a distributor, had shown reimbursement of these costs to the manufacturer/supplier, which was disallowed by the tribunal due to the lack of evidence of actual expenses incurred and any agreement for reimbursement. The appellant argued that the assessing authority had previously allowed these expenses and accepted them in subsequent assessment periods. The court noted that advertisement expenses and after-sale services are typically provided by the manufacturer/supplier to customers, with costs realized from the distributor regardless of actual services availed. Citing precedent, the court emphasized that a consistent view favoring the assessee in past assessments should be maintained unless strong reasons exist for a different approach. Consequently, the court held that the expenses alleged to be reimbursed were allowable under Section 37 (1) of the Act for the relevant year. Both issues were decided in favor of the appellant, leading to the allowance of the appeal.

In conclusion, the Allahabad High Court's judgment addressed the interpretation of cash payment limits under Section 40 A (3) and the disallowance of expenses under Section 37 (1) of the Income Tax Act, 1961, ruling in favor of the appellant on both issues.