2017 (8) TMI 361 - AT - Income Tax

Disallowance of payment of donation / charity - allowable business expenditure - - Held that - It is to be noted that any expenditure incurred to earn the income is allowable, but the assessee states that it is unavoidable expenses to carry out business. If the assessees want to do any charity it is their wish to do so and cannot be treated as expenditure in the course of business, as there is no business exigency established and also these cannot be treated expended wholly and exclusively for the purpose of business as specified in sec.37(1) of the Act. Many times these donations are made so as to maintain social status rather than business necessity. Therefore, we are of the opinion that the lower authorities are justified in dismissing this ground of appeal. Disallowance of interest u/s.40A(2)(a) - excessive interest payment - assessee firm has paid interest to the relatives @ 18% p.a. as against assessee had availed bank loans for which interest paid is 13% - Held that - For availing the loans from the banks, assessee has to give main security as well as collateral security and has to execute various loans documents and third party guarantee also. The procedures involved in availing loans from the banks are very cumbersome. While granting the bank loan, they will see the various factors like turnover of the assessee, security, marketing conditions, credit worthiness of the parties etc. and it takes long time to get a loan from banks. The bank is also charging compound interest method. Considering this, assessee availed, when it is required an urgent amount, loans from specified persons and which made the assessee to pay rate of interest @ 18% per annum and which is without executing any documents and assessee is able to get money at call. Being so, there is variation of 5%, which is higher than the bank rate of interest cannot be found that excessive or unreasonable as compared to the prevailing marketing conditions. Any market, provide borrowings interest ranging from 30 to 36%, as such in our opinion, the interest paid by the assessee to specified persons u/s.40A(2)(b) of the Act is very reasonable and the same to be allowed. Accordingly, we do not find any infirmity in the order of the CIT(Appeals) in allowing the claim of assessee. Accrual of liability - Disallowance in respect of claim of bonus redemption - passing of discount - Held that - We do not find any merit, the assessee has provided the liability as soon as the first customer made first purchase, 1% of the first purchase value and liability to give discount to the customer accrued as soon as the first purchase was made. The only passing of discount to the customers is only at second purchase. The assessee is legally bound to pass the reward or discount to the customer as soon as the first purchase was made and if the customer does not make claim for such a discount, the accrual liability not stopped, the assessee is bound to honour its claim. Being so, the quantification of such liability is already determined. There is no dispute regarding quantification of such liability. In such circumstances, the ratio laid down by Supreme Court in the case of Bharat Earth Movers Vs. CIT (supra) is directly applicable to the facts of the present case. Accordingly, we have no hesitation in confirming the order of the CIT(Appeals) on this issue. Hence, this ground of Revenue stands dismissed.

Issues Involved:
1. Addition with reference to valuation of closing stock.
2. Disallowance of payment of donation.
3. Disallowance of claim of expenditure relating to repairs.
4. Allowability of additional grounds regarding expenditure on leasehold property.
5. Disallowance of interest under Section 40A(2)(a) of the Income Tax Act.
6. Disallowance in respect of claim of bonus redemption expenses.

Detailed Analysis:

1. Addition with Reference to Valuation of Closing Stock:
The primary issue was the addition related to the valuation of closing stock. The assessee had changed the method of valuation from the accounting year ending 31.03.2006, applying a provision based on the age of the stock. The provision percentages varied across different assessment years. The Assessing Officer (AO) disallowed the provision, considering it arbitrary and inconsistent. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, referencing earlier Tribunal orders. The Tribunal also rejected the assessee's appeal, stating that the method lacked consistency and seemed like an afterthought to reduce income post-search action.

2. Disallowance of Payment of Donation:
The assessee added back a portion of the donation debited to the profit and loss account but not the entire amount. The AO disallowed the remaining donation amount, which was upheld by the CIT(A). The Tribunal agreed with the lower authorities, stating that donations made for social status rather than business necessity cannot be considered as business expenditure under Section 37(1) of the Act.

3. Disallowance of Claim of Expenditure Relating to Repairs:
The AO disallowed certain repair expenses due to the absence of supporting bills and invoices. The CIT(A) allowed expenses supported by bills and disallowed the rest. The Tribunal remanded the issue back to the AO for fresh consideration, allowing the assessee an opportunity to produce the necessary bills and vouchers.

4. Allowability of Additional Grounds Regarding Expenditure on Leasehold Property:
The assessee raised additional grounds concerning expenditures on leasehold properties, arguing they should be allowed as revenue expenditure based on the AO's conclusions for subsequent assessment years. The Tribunal admitted these additional grounds and remitted the issue back to the AO for fresh consideration, following the Tribunal's earlier decision in the assessee's own case.

5. Disallowance of Interest Under Section 40A(2)(a) of the Income Tax Act:
The AO disallowed interest paid to specified persons under Section 40A(2)(b) of the Act, considering it excessive compared to interest paid to banks and partners. The CIT(A) deleted the disallowance, noting the flexibility and hassle-free nature of borrowing from family members. The Tribunal upheld the CIT(A)'s decision, finding the 18% interest rate reasonable given the market conditions and the nature of the borrowings.

6. Disallowance in Respect of Claim of Bonus Redemption Expenses:
The AO disallowed the provision for bonus redemption expenses, treating it as a contingent liability. The CIT(A) directed the AO to delete the addition, considering the liability certain and scientifically assessed. The Tribunal upheld the CIT(A)'s decision, referencing Supreme Court judgments that supported the allowance of such provisions if they are based on scientific methods and represent a certain liability.

Conclusion:
The Tribunal's detailed analysis addressed each issue comprehensively, upholding the CIT(A)'s decisions on donations, interest disallowance, and bonus redemption expenses, while remanding the repair expenses and additional grounds on leasehold property expenditures back to the AO for fresh consideration. The valuation of closing stock issue was decided against the assessee, reaffirming the need for consistency in accounting methods.

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