2020 (8) TMI 122 - AT - Income Tax

Disallowing overseas sampling cost - Bogus expenditure - HELD THAT - Revenue has not disputed the assessee's sampling cost per se by doubting genuineness thereof. As it is rightly pointed out by the CIT(A) in his above extracted lower appellate discussion, there is also no material even as per the AO that the impugned samples have been in anyway sold outside books or the same has been included in the closing stock. We wish to make it clear that the assessee is engaged in highly competitive designer clothes market wherein the market samples may not always fetch any income in a segment having ever involving fashion trends. DR also fails to dispute that the assessee has been adopting the very criteria of claiming the sampling cost/samples then not including it in the closing stock since no more relevant in the export market. We thus affirm the CIT(A)'s foregoing conclusion and decline Revenue's first substantive ground. Disallowance of Puja expenses as restricted to 50% in the lower appellate proceedings - HELD THAT - Both parties fail to dispute that such Puja expenses in business premises are a routine expenditure item nor the assessee has been able to provide all the corresponding details in the case records. Under these circumstances, we deem it appropriate that a lumpsum disallowance of ₹10,000/- only shall meet the ends of justice with a rider that the same shall not be treated as a precedent in any other assessment year. The Revenue s instant second substantive ground fails and the assessee's first substantive ground in its cross objection stands partly accepted. Director's remuneration u/s 80IA(7) - Revenue's case before us is that the Assessing Officer had rightly allocated the assessee's director's remuneration qua eligible and non eligible units u/s 80IA(7) of the Act going by the corresponding profit ratio - HELD THAT - Revenue fails to dispute that it is not the profit but turnover criteria which is more suitable involving such a factual backdrop of eligible and non eligible units since the former may or may not involve deduction in earlier years under the provisions of the Act whereas the turnover benchmark is always applicable even it involves losses as well. We also note that the assessee has been constantly following past practice throughout in allocating its expenses on turnover basis only. We therefore uphold the CIT(A)'s impugned action directing the Assessing Officer to adopt the very benchmark for allocating the assessee's director's remuneration between eligible and non eligible units. The Revenue's instant third substantive ground fails. Section 14A r.w.s. Rule 8D(2)(ii) disallowance of proportionate interest expenditure - HELD THAT - We find that the CIT(A)'s lower appellate discussion has directed the Assessing Officer to take into action only those investments which have yielded exempt income going by hon'ble jurisdiction high court's decision in DCIT vs. REI Agro Industries Ltd . 2014 (4) TMI 713 - CALCUTTA HIGH COURT . Revenue fails in its fourth substantive ground as well. Provident fund/ESI payments disallowance u/s 36(1)(va) r.w.s. 2(24)(x) - HELD THAT - We notice herein as well that the assessee has paid the impugned sum well before the due date of filing return as per hon'ble jurisdiction high court's decision in CIT vs. Vijay Shree Ltd. 2011 (9) TMI 30 - CALCUTTA HIGH COURT . CIT(A)'s findings to this effect are affirmed therefore

Issues Involved:

1. Disallowance of Sampling Cost
2. Disallowance of Puja Expenses
3. Apportionment of Director's Remuneration under Section 80IA(7)
4. Disallowance of Proportionate Interest Expenditure under Section 14A r.w.s. Rule 8D(2)(ii)
5. Disallowance of Provident Fund/ESI Payments under Section 36(1)(va) r.w.s. 2(24)(x)

Detailed Analysis:

1. Disallowance of Sampling Cost:

The Revenue's primary grievance was the CIT(A)'s reversal of the Assessing Officer's disallowance of ?1,45,48,484/- for overseas sampling cost. The AO had argued that the assessee failed to include the sample expenses in the closing stock. The CIT(A) noted that the sampling costs were consistently treated as revenue expenditure in previous years and allowed by predecessor AOs. The assessee maintained that these samples were not saleable and were used for understanding fashion trends. The CIT(A) found no evidence from the AO to suggest that the samples were sold or retained as stock. The Tribunal affirmed the CIT(A)'s conclusion, noting the competitive nature of the fashion industry and the lack of evidence to dispute the genuineness of the sampling costs. The Revenue's appeal on this ground was dismissed.

2. Disallowance of Puja Expenses:

The Revenue contested the CIT(A)'s decision to restrict the disallowance of Puja expenses to 50%. The Tribunal noted that such expenses were routine but the assessee failed to provide complete details. A lumpsum disallowance of ?10,000/- was deemed appropriate, and this decision was not to be treated as a precedent. The Revenue's second substantive ground failed, and the assessee's cross objection was partly accepted.

3. Apportionment of Director's Remuneration under Section 80IA(7):

The issue involved the allocation of director's remuneration between eligible and non-eligible units. The AO had allocated the remuneration based on profit ratio, while the CIT(A) directed allocation based on turnover ratio. The Tribunal upheld the CIT(A)'s decision, noting that turnover is a more suitable criterion as it remains applicable even if there are losses. The Revenue's appeal on this ground failed, and the assessee's cross objection supporting the CIT(A) was rendered infructuous.

4. Disallowance of Proportionate Interest Expenditure under Section 14A r.w.s. Rule 8D(2)(ii):

The CIT(A) had directed the AO to consider only those investments that yielded exempt income, in line with the jurisdictional high court's decision in DCIT vs. REI Agro Industries Ltd. The Revenue failed to provide a compelling argument against this directive. The Tribunal affirmed the CIT(A)'s decision, and the Revenue's appeal on this ground failed. The assessee's corresponding cross objection was rendered infructuous.

5. Disallowance of Provident Fund/ESI Payments under Section 36(1)(va) r.w.s. 2(24)(x):

The CIT(A) had deleted the disallowance of ?10,28,162/- for provident fund/ESI payments, noting that the payments were made before the due date for filing returns, as per the jurisdictional high court's decision in CIT vs. Vijay Shree Ltd. The Tribunal affirmed the CIT(A)'s findings, and the Revenue's appeal on this ground was dismissed. The assessee's corresponding cross objection was rendered infructuous.

Conclusion:

The Revenue's appeal ITA No. 739/Kol/2018 was dismissed, and the assessee's Cross Objection No. 57/Kol/2018 was partly allowed. The order was pronounced after a delay due to the COVID-19 pandemic, with the period of delay being excluded based on the decision in DCIT vs. JSW Limited.

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