2020 (5) TMI 237 - HC - Income Tax

Discount to the customer - Disallowance as it is disproportionately higher to the percentage of discount granted in earlier year though there is increase in the turnover and the rate of tax paid - HELD THAT - AO has not doubted the books of accounts of the appellant. AO has held that there is nothing on record to say that assessee was adopting any uniform policy in respect of discount and it was being given in the uniform way to the customers. The amount on account of discounts and rebates has been disallowed. CIT(Appeals) has held that the burden of proof lies on the assessee in order to claim that the expenditure falls under Section 37(1) - Claim of the assessee under this head is not fully verifiable in nature. Tribunal vide impugned order negatived the assessee s contention on the ground that because the turnover has increased in the subsequent year therefore higher rate of discount is to be allowed cannot be accepted because the discount and rebate is at percentage basis and not on the basis of the turnover. Books of accounts of the assessee as well as the material produced by the assessee was not disputed by the AO - merely because there was variations in the previous and subsequent year with regard to the discount and rebates, AO should not have disallowed the claim of the appellant with regard to the discount and rebates and profits.In the subsequent year, even though the amount incurred by the appellant on account of discount and rebates was ₹ 26,33,892/-, however, the profit has increased to ₹ 42,50,777/-, which was accepted by the Revenue - Disallowing the amount claimed by the assessee on account of discount and rebates is not correct - Decided in favour of the assessee.

Summary

Issues:
- Disallowance of expenditure on ad-hoc basis
- Nexus between expenditure and business purpose
- Burden of proof on the assessee
- Uniform policy for granting discounts
- Disallowance of claim by lower authorities
- Increase in turnover affecting discount rate

Analysis:

The judgment revolves around the disallowance of certain expenditures claimed by the appellant partnership firm under the Income Tax Act, 1961. The Assessing Officer disallowed the expenditure on an ad-hoc basis, leading to an increased total income for the appellant. The Commissioner of Income Tax (Appeals) partly allowed the appeal but sustained certain additions related to discounts and rebates claimed by the appellant. The Tribunal further partly allowed the appeal, sustaining only 25% of the claimed amount. The main contention by the appellant was that the expenditure was wholly and exclusively for business purposes, citing the Supreme Court decisions in Sassoon J. David and Co. Pvt. Ltd., and S.A. Builders Ltd.

The appellant argued that there was a clear nexus between the expenditure and the business purpose, emphasizing that the Revenue cannot dictate what constitutes reasonable expenditure for a business. The appellant highlighted that the Assessing Officer erred in disallowing the claimed amount based on comparison with the previous year without considering the turnover increase. The Revenue, on the other hand, asserted that the burden of proof lay on the assessee to substantiate the business expenditure, which they failed to do regarding discounts and rebates.

The High Court analyzed the case, referring to the Supreme Court decision in S.A. Builders Ltd., emphasizing that the Revenue should not interfere with business expenditure decisions unless there is a clear violation. The Court noted that the Assessing Officer did not dispute the appellant's books of accounts and materials, indicating a lack of justification for disallowing the claimed discounts and rebates. The Court found that the lower authorities erred in disallowing the appellant's claim solely based on variations in discounts and rebates between different years without concrete evidence to support the disallowance.

Ultimately, the High Court ruled in favor of the appellant, quashing the orders of the lower authorities that disallowed the claim for discounts and rebates. The judgment highlighted the importance of establishing a clear nexus between business expenditure and purpose, emphasizing that the Revenue should not intervene arbitrarily in determining reasonable business expenses.