2017 (10) TMI 685 - AT - Income Tax

Addition of expenditure on subscription deposit scheme - addition as sales with regard to the magazine were not included on credit in the profit and loss account - Held that - It is not denied that such deposits are refundable. These are refundable as and when demanded by the subscribers and from that date the supply of magazine is discontinued. Merely because the relevant income on receipt according to the ld Assessing Officer is not credited to the profit and loss account such disallowance is made. According to us the assessee is getting a benefit of interest free deposit for the purposes of the business of the assessee in lieu of the cost of the above magazine. It is not the case of the Revenue that money is utilized for other than business purposes and expenditure incurred and claimed against business income. The ld CIT(A) has held that assessee is saving interest cost by collecting this deposit and therefore such saving of interest has definitely gone in increasing the profit of the assessee. In view of this no infirmity in the order of the ld CIT(A) in deleting the disallowance on account of expenditure made under subscription deposit scheme. - Decided in favour of assessee. Addition u/s 40A(2) - AO disallowed payment pertaining to 33 parties out of 34 parties @2% of such expenditure holding it in excess of the prevailing market rate - CIT(A) deleted the above disallowance - Held that - Assessing Officer is not authorized to disallow 2% of the total expenditure but to disallow only the expenditure which is unreasonable and excessive after considering the circumstances provided u/s 40A(2) of the Act. Thus we set aside the whole issue back to the file of the ld Assessing Officer to examine the payment made to the related parties after considering the nature and rate of services provided by them to the assessee and then compare their fair market value, legitimate need of the assessee and benefit derived by the assessee and then if there is any amount found to be unreasonable or excessive then only disallow to that extent. The assessee is further directed to submit before the Assessing Officer above details. The AO is further directed to examine the matter in a fair and reasonable manner bearing in mind that the provision is intended to check, evasion of tax through excessive and unreasonable payment to related parties. In the result ground No. 2 of the appeal of the revenue is allowed with above direction.

Summary

Issues Involved:
1. Disallowance of expenditure under the subscription deposit scheme.
2. Disallowance under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure under the Subscription Deposit Scheme:
Facts:
The assessee, a company engaged in printing and publishing, claimed a deduction of ?24,11,392 under the subscription deposit scheme. The scheme involved customers depositing a fixed amount to receive magazines free of cost until the membership continued. The deposits were utilized for business purposes and were refundable upon request, ceasing the magazine supply.

Assessment Proceedings:
The Assessing Officer (AO) disallowed the expenditure, arguing that sales from the magazines were not credited to the profit and loss account and that the deposits were not utilized for the assessee's business but benefited sister concerns.

CIT(A) Order:
The CIT(A) allowed the expenditure, stating that the deposits were indeed used for business purposes, saved interest costs, and the magazines' purchase costs were debited to the profit and loss account.

Arguments:
- Revenue: The expenditure did not match the revenue booked.
- Assessee: The scheme was commercially expedient, enhancing the reader base, and the deposits were utilized for business purposes, saving interest costs.

ITAT Decision:
The ITAT upheld the CIT(A)'s order, confirming that the deposits were used for business purposes and saved interest costs, which increased the assessee's profits. The disallowance was deleted as the expenditure was found to be legitimate and necessary for business.

2. Disallowance under Section 40A(2)(b) of the Income Tax Act:
Facts:
The assessee made payments to 34 related parties amounting to ?65,52,116. The AO disallowed 2% of the expenditure (?12,97,879) for 33 parties, citing excessiveness compared to market rates.

Assessment Proceedings:
The AO found the rates provided by the assessee for similar work by unrelated parties were for different periods and rejected the justification for payments to related parties. The AO accepted the explanation for only one related party, Delhi Press Samachar Patra Pvt. Ltd.

CIT(A) Order:
The CIT(A) deleted the disallowance, stating that the related parties were assessed to tax, and there was no diversion of profits. The disallowance was deemed based on suspicion without adverse material.

Arguments:
- Revenue: Relied on the AO's findings.
- Assessee: Provided comparative charts showing lower rates charged by related parties compared to market rates, and argued that the payments were reasonable and for business purposes.

ITAT Decision:
The ITAT found that the AO did not have sufficient details on the nature of services and rates charged by related parties. The case was remanded back to the AO to examine the payments afresh, considering the nature and rates of services, fair market value, legitimate business needs, and benefits derived. The AO was directed to disallow only the excessive or unreasonable expenditure after a thorough examination.

Conclusion:
- Subscription Deposit Scheme: The disallowance was deleted as the deposits were used for business purposes, saving interest costs, and increasing profits.
- Section 40A(2)(b) Disallowance: The issue was remanded back to the AO for a detailed examination of the payments to related parties, considering fair market value and business needs.

Result:
- Appeal for AY 2009-10: Partly allowed for statistical purposes.
- Appeals for AY 2008-09, 2010-11, 2011-12: Similar grounds were raised, and the decisions followed the same reasoning as for AY 2009-10, resulting in partial allowance for statistical purposes.