2005 (9) TMI 216 - AT - Income Tax

Summary

Issues Involved:
1. Deleting the addition of Rs. 10,25,000 on account of sales promotion expenses.
2. Disallowance of deduction under Section 80-I on account of correct apportionment of expenses to various units.
3. Addition of Rs. 1,03,237 made on account of prior period expenses.
4. Deleting the addition of Rs. 38,14,044 being the income not accrued.
5. Deleting the addition of Rs. 2,79,085 made under Section 40A(3) of the Act.

Issue-wise Detailed Analysis:

1. Deleting the Addition of Rs. 10,25,000 on Account of Sales Promotion Expenses:
During the assessment proceedings, the AO noticed that the assessee claimed Rs. 11,46,385 as sales promotion expenses, including Rs. 10,25,000 paid to Bermaco Valves (P) Ltd. as marketing support charges. The AO disallowed Rs. 10,25,000 due to lack of details on services rendered. The CIT(A) deleted the addition, deeming the expenses bona fide and reasonable. The learned Departmental Representative argued that the assessee failed to prove the services rendered, while the learned Authorised Representative provided evidence of job orders resulting from the payment. The Tribunal found that the assessee received job orders worth Rs. 12.52 crores and that the expenses were incurred wholly and exclusively for business purposes. The CIT(A)'s decision to delete the addition was confirmed.

2. Disallowance of Deduction Under Section 80-I on Account of Correct Apportionment of Expenses to Various Units:
The assessee claimed Rs. 5,78,305 under Section 80-I but the AO disallowed it, citing improper apportionment of expenses between the head office and manufacturing division. The CIT(A) allowed the deduction, noting that the expenses were properly apportioned. The learned Departmental Representative supported the AO's order, while the learned Authorised Representative argued that the apportionment was done correctly based on employees, sales, and administrative needs. The Tribunal directed the AO to accept the apportionment made by the auditor unless contrary evidence is found, thereby setting aside the CIT(A)'s order and remanding the matter back to the AO.

3. Addition of Rs. 1,03,237 Made on Account of Prior Period Expenses:
The AO added Rs. 1,03,237 as prior period expenses, but the CIT(A) deleted the addition, referencing a jurisdictional High Court judgment. The learned Departmental Representative supported the AO, while the learned Authorised Representative argued that the expenses were quantified and determined in the relevant accounting year. The Tribunal found that the expenses were allowable as they were quantified in the accounting year, thus confirming the CIT(A)'s order.

4. Deleting the Addition of Rs. 38,14,044 Being the Income Not Accrued:
The AO added Rs. 38,14,044 to the income, noting it was claimed as not forming part of the income due to disputes with Indian Acrylics Ltd. The CIT(A) deleted the addition, citing that the income had not accrued to the assessee and referenced several judgments. The learned Departmental Representative supported the AO, while the learned Authorised Representative provided detailed facts about the disputed amount. The Tribunal agreed with the CIT(A) that the income had not accrued, confirming the deletion of the addition but noted that any amount received in subsequent years would be subject to tax.

5. Deleting the Addition of Rs. 2,79,085 Made Under Section 40A(3) of the Act:
The AO added Rs. 3,35,094 for cash payments exceeding the limit, but the CIT(A) deleted Rs. 2,79,055, noting the payments were made in exceptional and unavoidable circumstances. The learned Departmental Representative supported the AO, while the learned Authorised Representative argued that the payments were genuine business expenses. The Tribunal found that the cash payments were made in exceptional circumstances and were covered by Rule 6DD(j) and relevant judgments, confirming the CIT(A)'s deletion of the addition.

Conclusion:
The appeal is partly allowed for statistical purposes. The Tribunal confirmed the CIT(A)'s decisions on deleting additions related to sales promotion expenses, prior period expenses, and cash payments under Section 40A(3). The matter of apportionment of expenses under Section 80-I was remanded back to the AO for reassessment based on audited statements. The deletion of the addition related to non-accrued income was confirmed, with a note that any future realization would be taxable.