2022 (12) TMI 22 - AT - Income Tax

Disallowance of expenditure on account of sales-commission - Expenditure on business purposes only - CIT- A deleted the addition - HELD THAT - Both sides fairly agree that the issue is directly covered by the decision of ITAT, Indore Bench in assessee s own case for AY 2011-12 2016 (1) TMI 1490 - ITAT INDORE and AY 2012-13 2018 (7) TMI 2288 - ITAT INDORE upheld by Hon ble High Court of Madhya Pradesh in 2018 (4) TMI 1578 - MADHYA PRADESH HIGH COURT a copy of the judgement is also filed. As the issue is squarely covered, we do not find any reason to deviate from the consistent view being taken and also upheld by the higher forum i.e. Hon ble High Court. We are, therefore, inclined to uphold the action of Ld. CIT(A) in this regard and dismiss Ground No. 1 of the revenue. Disallowance u/s 14A - assessee made investment in shares of companies from which exempted-dividend was earned - AO has worked out the amount of disallowance in terms of Rule 8D, which consists of two components, viz. (i) interest-component, and (ii) standard disallowance for other expenses - CIT(A) scaled down the quantum of disallowance by deleting interest-portion - HELD THAT - ITAT in assessee s own case in preceding AY 2012- 13 2018 (7) TMI 2288 - ITAT INDORE is directly favouring the claim of assessee that no disallowance is required to be made for interest-component. Ld. DR fairly agreed to this submission of Ld. AR. Dismiss Ground No. 2 of the revenue. Disallowance of interest expenditure u/s 40(A)(2)(b) - AO disallowed 3% excess interest - HELD THAT - AO has simply made a blanket comparison of the interest rate of 15% paid to specified persons against 12% interest-payment to other persons and came to a straight-forward conclusion that interest-payment is excessive. We feel that such a blanket comparison without going into the fair market rate or the legitimate needs of business or the benefit derived by assessee therefrom is not sufficient for section 40A(2). Section 40A(2)(b) is a disallowance provision, therefore a heavy burden lies on the head of Ld. AO to prove the existence of required parameters and then only he can make a disallowance. Having failed to do so, in our view, the disallowance made by AO is not in accordance with the requirement of section 40A(2). Alternatively, the assessee is justified in claiming that the bank rate of interest is a universal rate of industry and can be said to be fair, subject to the adjustments on account of the variations between the terms like security-requirement by bank, levy of charges, fulfillment of formalities etc. Therefore, 3% margin on account of these factors cannot be said to be excessive or unreasonable. We are satisfied that 15% interest-rate paid by assessee on unsecured loans taken from relative cannot be said to be unreasonable. In view of these reasoning, we do not find adequate reason for the disallowance made by Ld. AO. Accordingly, we are inclined to delete the disallowance.

Summary

Issues Involved:
1. Disallowance of sales commission expenses under Section 37 of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act regarding interest expenses incurred for investment in subsidiaries and administrative expenses.
3. Disallowance of interest expenses under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

Revenue's Appeal - Ground No. 1: Disallowance of Sales Commission Expenses

The primary issue here is the disallowance of Rs. 1,50,22,016/- claimed by the assessee as sales commission expenses. The assessee paid this amount to agents/brokers for their services in promoting and selling agricultural sprayers and related items. The Assessing Officer (AO) disallowed this deduction, deeming it bogus, as he believed that the nature of the assessee's business, which largely involved sales through government nodal agencies, did not necessitate such commission payments.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction, noting that similar disallowances in previous assessment years (2011-12 and 2012-13) were overturned by the Income Tax Appellate Tribunal (ITAT) and upheld by the High Court. The ITAT, in this case, agreed with the CIT(A) and upheld the deletion of the disallowance, citing consistency with past decisions.

Revenue's Appeal - Ground No. 2: Disallowance under Section 14A

This issue pertains to the disallowance of Rs. 9,75,779/- under Section 14A, which the AO calculated based on Rule 8D, including interest and other expenses related to investments in shares yielding exempt dividends. The CIT(A) reduced this disallowance significantly, removing the interest component by noting that the assessee had sufficient own funds to cover the investments.

The ITAT upheld the CIT(A)'s decision, referencing the assessee's own funds exceeding the investment amount and previous ITAT rulings in the assessee's favor. Thus, the disallowance of the interest component was deemed unnecessary.

Assessee's Cross-Objection - Grounds No. 1 and 2: Disallowance of Interest Expenses

The sole issue here is the disallowance of Rs. 6,82,710/- under Section 40A(2)(b), where the AO noted that the assessee paid 15% interest to specified persons (related parties) compared to 12% to others. The AO disallowed the difference, considering it excessive.

The CIT(A) upheld this disallowance, but the ITAT disagreed, emphasizing that the AO did not adequately justify the excessiveness based on fair market value or legitimate business needs. The ITAT noted that the 15% interest rate could be justified considering the lack of security, charges, and formalities compared to bank loans. Thus, the ITAT deleted the disallowance, allowing the assessee's cross-objection.

Conclusion:

The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both the sales commission and Section 14A disallowances. Conversely, the ITAT allowed the assessee's cross-objection, deleting the disallowance of interest expenses under Section 40A(2)(b). The judgment underscores the importance of consistent application of past rulings and the necessity for the AO to substantiate disallowances with adequate reasoning.