2009 (3) TMI 215 - AT - Income Tax

Disallowance on Payments made to the Munshis u/s. 40(a)(ia) - business of handmade Biri sticks - violation in view of the provisions laid down in s. 40(a)(ia) - CIT(A) held that the payment made to the Munshis are covered u/s.194H - HELD THAT - In view of the fact that the Munshis are also part of the labourers and their payments are made on piece-rated workers at one lakh Biris. In our considered opinion, this cannot be considered as commission as defined in Explanation (i) to s. 194H. Therefore, the provisions of s. 194H are not applicable in the present facts of the case. Hence, we set aside the orders of CIT(A) and allow the ground taken by the assessee and dismiss the ground taken by the Revenue. Disallowance on Commission payment to directors - C1T(A) deleted the disallowance made by the AO, observing that the commission paid to the directors is not in the nature of commission or brokerage as envisaged u/s.194H nor as fees for professional or technical services, considered in s. 194J. HELD THAT - Assessee company has paid this commission to the directors as per their terms of employment for the work done in their capacity as whole-time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisites. Therefore, in our considered opinion, the order of CIT(A) is justified. Therefore, this ground of the Revenue is dismissed. Disallowance of sales promotion (prize coupons) - We are of the considered view that CIT(A) is justified in coming to the opinion that there being no infringement of law, the expenses under consideration does not fall within the mischief of the Explanation to s. 37(1). Since the assessee is trying to increase the sales of its brand of Biris among the others available in the market and this expenditure will not fall within the mischief of prohibitory regulation introduced to curb proliferation of tobacco addiction in the society, which is harmful for the public health. Ad hoc restriction of the disallowance and allowing balance as allowable expenditure to the assessee is not justifiable. In our considered opinion, the assessee is liable to substantiate the expenditure incurred by him on account of the said scheme at least even from the accounts of the agents from which the said expenditure has been reimbursed to the agents or adjusted from their commission. Therefore, we consider it to set aside the issue to the file of the AO to redecide this issue, as per law and direct the assessee also to produce the relevant accounts of the different agents to the effect that the assessee has actually incurred the said expenditure against the said scheme. Thus, the issue raised by the Revenue as well as the assessee is allowed for statistical purposes. Addition u/s. 40 (a)(ia) - expenditure incurred on carriage inward - It is observed that the assessee had not deducted tax at source in respect of expenditure payable/paid to the transport contractors of the said amount. Therefore, we are of the considered opinion that the action of the Revenue authorities is justifiable. Thus, we find no infirmity in the order of CIT(A) in confirming the addition made by AO. This ground of the assessee is rejected. The appeal of the Revenue as well as the appeal of the assessee are deemed to be partly allowed for statistical purposes.

Issues Involved:
1. Disallowance of Biri binding charges under Section 40(a)(ia).
2. Disallowance of commission paid to directors under Section 40(a)(ia).
3. Disallowance of sales promotion (prize coupons) expenses.
4. Disallowance of carriage inward charges under Section 40(a)(ia).

Detailed Analysis:

1. Disallowance of Biri Binding Charges:
The Assessing Officer (AO) disallowed Rs. 6,57,68,993.72 on account of Biri binding charges under Section 40(a)(ia) as the assessee failed to deduct tax at source on payments made to contractors. The AO noted that the company engaged numerous home workers through 364 contractors, who were not on the company's payroll, and thus, there was no employer-employee relationship. The Commissioner of Income Tax (Appeals) [CIT(A)] gave partial relief, allowing Rs. 6,19,70,784 as wages but confirmed the disallowance of Rs. 37,98,209 paid to Munshis, categorizing it as commission under Section 194H. The Tribunal, however, disagreed with the CIT(A) regarding Munshis, stating that their payments were piece-rated and not commission, thus not falling under Section 194H. Consequently, the Tribunal allowed the assessee's appeal on this issue and dismissed the Revenue's appeal.

2. Disallowance of Commission Paid to Directors:
The AO disallowed Rs. 5,94,036 paid as commission to directors for non-deduction of tax at source, treating it as commission under Section 194H. The CIT(A) deleted the disallowance, stating that the commission paid to directors was not in the nature of commission or brokerage under Section 194H, nor fees for professional or technical services under Section 194J. The Tribunal upheld the CIT(A)'s decision, noting that the commission was an incentive in addition to salary and did not fall under the purview of Sections 194H or 194J. Thus, the Tribunal dismissed the Revenue's appeal on this issue.

3. Disallowance of Sales Promotion (Prize Coupons) Expenses:
The AO disallowed Rs. 46,03,324 claimed for prize coupons, citing lack of evidence and prohibition on advertising tobacco products. The CIT(A) allowed Rs. 15,00,000, stating that the prize coupon scheme did not violate advertising regulations and was aimed at boosting sales. However, due to lack of supporting evidence, the CIT(A) restricted the allowance. The Tribunal found the CIT(A)'s ad hoc restriction unjustifiable and remanded the issue back to the AO for re-examination, directing the assessee to produce relevant evidence. Thus, the Tribunal allowed the appeals of both the assessee and the Revenue for statistical purposes.

4. Disallowance of Carriage Inward Charges:
The AO disallowed Rs. 5,94,567 for non-deduction of tax at source on payments to transport contractors under Section 40(a)(ia). The CIT(A) confirmed the disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to deduct tax at source on the specified amount, thus justifying the Revenue's action. Consequently, the Tribunal rejected the assessee's appeal on this issue.

Conclusion:
The Tribunal's final decision resulted in partial relief to the assessee regarding Biri binding charges and remanded the sales promotion expenses issue for re-examination, while upholding the disallowance of commission paid to directors and carriage inward charges. Both the appeals of the Revenue and the assessee were deemed partly allowed for statistical purposes.

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