2021 (3) TMI 319 - AT - Income Tax

Accrual of income - assessment year - Addition by treating the advance received from the parent company as the income for the relevant assessment year - HELD THAT - It does not fit in the order of the things that having accepted the offering of ₹ 2.67 crores received by the assessee in the financial year 2010-11 to tax in the assessment year 2012-13 and also having accepted the offering of ₹ 3.05 crores received by the assessee in the financial year 2011-12 to tax in the Assessment Year 2013-14, the learned Assessing Officer would have held that all the amounts that were received during the financial year 2011-12, irrespective of the fact that corresponding services were rendered during that year are not, should be brought to tax in the assessment year 2012-13 itself. We hold that the reasoning adopted by the Ld. CIT(A) and the conclusions reached by him in deleting this amount of ₹ 3.05 crores which is in fact the advance amount but retreated by Assessing Officer as income for the assessment year 2012-13, are perfectly legal and not warrant any interference. We, accordingly, declined to interfere with the same and dismiss grounds 1 to 3 Revenue's appeal. Disallowance of business promotion expenses - HELD THAT - There is no dispute that the assessee produced the details and documents like sample invoices, copy of Ledger, summary mentioning the category of gifts and the list of people to whom gifts were given etc were furnished before the authorities and no discrepancies are specifically pointed out with any of these documents. AO himself admitted that it is customary under Indian tradition to offer gifts on the festive occasions like Diwali Festival. Ld. CIT(A) held that maintenance of cordial relations with customers are required for obtaining the market information which is for the furtherance of the assessee's business. By no stretch of imagination could be said that offering of gifts by a businessman to is customers is barred by any law for the time being in force. Now coming to the quantum of disallowance learned AO made it at 60% whereas the Ld. CIT(A) restricted the same to 20%. As observed by is about, no discrepancies found with the books of accounts of the assessee as to the incurring of these expenses or to show that there is any illegality of purpose of this expense. In the absence of any concrete basis to determine the disallowance of the expense and in the absence of a specific finding that the expenses were not exclusively and fully for the purpose of business, we find it difficult to sustain the disallowance year at 60% or 20%. With this view of the matter we delete the addition made by disallowing the business promotion expenses.

Summary

Issues Involved:
1. Addition of ?3,05,73,000/- as income for the assessment year 2012-13.
2. Disallowance of business promotion expenses.

Detailed Analysis:

1. Addition of ?3,05,73,000/- as Income for the Assessment Year 2012-13:
The Revenue challenged the deletion of the addition of ?3,05,73,000/- made by the Assessing Officer (AO) by treating the advance received from the parent company as income for the relevant assessment year. The AO argued that the assessee failed to provide sufficient correspondence and evidence regarding the final adjustment amount as per the contract with the parent company. The AO emphasized that each assessment year is distinct and the principle of res judicata does not apply to Income Tax proceedings.

In contrast, the assessee contended that the opening balance of "income received in advance" of ?2.67 crores as on 1/4/2011 was offered to tax in the assessment year 2012-13, and the closing balance of ?3.05 crores as on 31/3/2012 was offered to tax in the subsequent year. The assessee provided financial details and copies of Foreign Inward Remittance Certificates (FIRC) to support their claim. The Transfer Pricing Officer (TPO) had accepted the Arms Length Price (ALP) of the remuneration received by the assessee.

The Tribunal reviewed the agreement between the assessee and its parent entity, which stipulated quarterly invoicing and payment, with a final adjustment based on actual costs. The Tribunal noted that the AO had accepted similar transactions in previous and subsequent years without objection, and the tax rates for the relevant years were the same, making it a revenue-neutral transaction. The Tribunal concluded that the AO's decision to treat the advance amount as income for the assessment year 2012-13 was unwarranted and upheld the CIT(A)'s decision to delete the addition.

2. Disallowance of Business Promotion Expenses:
The AO disallowed 60% of the business promotion expenses, arguing that the assessee failed to justify the need for such expenses, especially since its only client was its parent company. The AO allowed 40% of the expenses, considering them customary gifts during festive occasions.

The CIT(A) found that the assessee incurred these expenses to maintain business relationships and obtain market information. The CIT(A) restricted the disallowance to 20%, considering the business expediency and the nature of services provided by the assessee.

The Revenue argued that the AO's disallowance was justified due to the lack of proper justification for the expenses. The assessee countered that the disallowance was arbitrary and not based on any legal provisions. The assessee provided detailed documentation, including sample invoices and lists of recipients, and argued that offering gifts was not prohibited by law.

The Tribunal noted that the AO did not find any discrepancies in the assessee's books of accounts or the documentation provided. The Tribunal also acknowledged that offering gifts during festive occasions is a common business practice in India. The Tribunal found no concrete basis for the disallowance and concluded that the expenses were incurred exclusively for business purposes. Therefore, the Tribunal deleted the addition made by disallowing the business promotion expenses.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the cross objections filed by the assessee, upholding the CIT(A)'s decisions on both issues. The order was pronounced in open court on 9th February 2021.