2022 (11) TMI 821 - AT - Income Tax

Disallowance of Commission Expenses - prior period expenditure - due to poor sales performance, security was forfeited and adjusted - on request the same restored and commission paid in subsequent year after deduction of TDS - HELD THAT - Nature of payment referred is u/s 194H which certainly is provision requiring deduction of tax on any income by way of commission or brokerage. Pertinent to mention is that the ld AO had referred in the assessment order about four amount claimed as commission expenses and these form No. 16A cover up all the four expenses under the head 194H of the Act. The bench is of firm view that the ld CIT(A) has fallen an error in not giving due consideration to the letter dated 24.01.2014 of M/s. Hitkari Potteries Pvt. Ltd which specifically mentioned that the amount lying as security is being forfeited has compensation for loss of commission or short sales. The TDS deduction against the same stands paid by the appellant in present FY. Thus, the findings of the ld CIT(A) holding that payment was on account of royalty and a prior period expense cannot be sustained. The ground no 1 is allowed in favour of the assessee. Addition of business promotion expense - Appellant had voluntarily disallowed towards personal expenses of Managing Director/ Directors - AR submitted that the Tax Authorities below have fallen in error in not appreciating that the personal expenditure of the directors were suo motto deducted while claiming the expenditure - HELD THAT - The bench is of considered opinion that to substantiate the validity of the expenditure of the nature refered above it is necessary to establish that the same can be laid out wholly and exclusively for the purpose of business, however, the assessee failed to establish the same by filing any vouchers or other evidences which would have shown that these expenses were for the procurement of business or for business negotiations or specific business promotion activity. In case of business promotion expenses, the assessee is expected to show that the expenses intended to achieve any specific or general business target or how it could have helped the promotion of business or business interest of the assessee. Specially, when the expenses incurred are not supported by any vouchers and are on heads that same are generally of personal nature like bills of restaurant, hotels, clothing, fashion accessories, duty free shops, cosmetics, spa, gift shops, it becomes all the more necessary that the expenses are explained with some probability of being spent for business promotion and not just personal or for superfluous social networking. Thus AO was not justified to restrict the disallowance to ad hoc 20% and Ld. CIT(A), following due process of law has rightly enhanced the same. The same requires no interference and ground no 2 is decided against the assessee.

Summary

Issues Involved:
1. Disallowance of Commission Expenses under Section 37(1) of the Income Tax Act, 1961.
2. Disallowance of Business Promotion Expenses under Section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Commission Expenses under Section 37(1) of the Income Tax Act, 1961:
The assessee, a Public Limited Company, filed an appeal against the disallowance of Rs. 33,27,279/- as commission expenses. The company had an agreement with M/s Hitkari Potteries Ltd to market their products, which included a minimum commission guarantee. Due to poor sales, the minimum guarantee clause was triggered, leading to a settlement where Hitkari Potteries forfeited the amount deposited by the assessee.

The Tax Authorities disallowed the expense, considering it a prior period expense. However, the Tribunal noted that the assessee provided Form 16A, showing TDS deduction under Section 194H for the relevant amount, which substantiated the claim that the expense was incurred in the current financial year. The Tribunal concluded that the CIT(A) erred in not considering the letter dated 24.01.2014 from Hitkari Potteries and allowed the ground in favor of the assessee.

2. Disallowance of Business Promotion Expenses under Section 37(1) of the Income Tax Act, 1961:
The assessee claimed Rs. 44,74,666/- as business promotion expenses, excluding Rs. 8,91,000/- voluntarily disallowed as personal expenses of the directors. The Tax Authorities disallowed the entire amount, citing lack of supporting bills or vouchers and the personal nature of the expenses.

The Tribunal emphasized that for an expenditure to be allowable under Section 37(1), it must be incurred wholly and exclusively for business purposes. The assessee failed to provide sufficient evidence to substantiate that the expenses were for business promotion. The expenses were primarily for restaurants, hotels, clothing, and other personal items, which did not convincingly demonstrate a business purpose. Consequently, the Tribunal upheld the CIT(A)'s decision to enhance the disallowance to the entire amount claimed, rejecting the assessee's appeal on this ground.

Conclusion:
The appeal was partly allowed. The disallowance of commission expenses was overturned in favor of the assessee, while the disallowance of business promotion expenses was upheld.