2010 (7) TMI 156 - HC - Income Tax

New Vehicle and Handling charges - Interest free advances to relatives of the partners Discount and commission expenses Additions on the basis of book entries discount and commission expenses - Held that - As to the provisions of section 40A(2)(b), the same can be invoked only where it is shown that the expenditure is excessive or unreasonable having regard to the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee - M/s. Gautam Auto Limited (sister concern) was liable to pay taxes at the same rate as the assessee, if not higher. There is no case made out by the Department that any tax avoidance has been attempted by these arrangements - it is not at all stated as to whether the claim of the assessee was otherwise bogus for claiming petrol expenses deduction allowed Regarding advance to sister concern - the nexus between the borrowed funds and the interest free advances made by the assessee to its sister concern is to be established. - in cases like the instant one, where the finding of fact is arrived at that the money which was borrowed from the bank is utilized by the assessee for its own business purposes and that the money has not been given to the relatives of the partners, this condition stands satisfied and in such an eventuality the question of establishing the nexus or the business expediency does not arise at all. Deduction allowed The fact of the matter is that incentive credits received by the assessee were duly account for in the books of account of the assessee the basis of which annual income statement has been prepared. An income chargeable to tax cannot be generated for the reason only that in the opinion of the assessing authorities, certain entries should have been found place in the books of account under another head. Regarding discounts and commission - As pointed out by the assessing officer, the assessee had made claims for the aforesaid discounts and commissions of marginally low amounts for the period of 11 months, i.e., April, 1999 to February, 2000. It is only in March, 2000 that a whopping claim is made. No explanation is coming forward as to why such a claim of huge amount was made in the month of March, 2000. In March, 2000, only 10% of the sales were effected. If the discounts were given to the customers every month when the sales were made, there was no reason not to show those discounts in those months. That apart, most important aspect which cannot be ignored is the contradictory explanation given by the assessee which falsifies the genuineness of this claim. this issue decided against the assessee and in favor of revenue additions allowed

Issues Involved:
1. New Vehicle and Handling Charges
2. Petrol Expenses
3. Interest-Free Advances to Relatives of the Partners
4. Receipts Not Declared by the Assessee
5. Discount and Commission Expenses

Detailed Analysis:

1. New Vehicle and Handling Charges:
The assessee claimed deductions for "new vehicle and handling charges" amounting to Rs.67,90,438.70. The primary contention was regarding storage charges paid to M/s. Gautam Auto Ltd. for parking auto-rickshaws. The Assessing Officer (AO) disallowed these claims, doubting the existence of the storage premises. However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's proof, including lease deeds and payment records. The Income Tax Appellate Tribunal (ITAT) concurred, noting that the premises were indeed utilized by the assessee and payments were made, thus allowing the deductions. The High Court agreed with ITAT's approach, affirming the deletion of the addition and allowing the expenditure claimed.

2. Petrol Expenses:
The AO observed heavy petrol expenses, suspecting them to be inflated since initial petrol costs are typically charged to the buyer. The CIT(A) accepted the assessee's explanation that petrol was filled as part of the sales policy and used for vehicle cleaning. The ITAT upheld this finding, and the High Court agreed, noting it as a factual determination with no substantial question of law arising.

3. Interest-Free Advances to Relatives of the Partners:
The AO disallowed deductions for bank charges and interest, arguing that the assessee had given interest-free loans to relatives while borrowing from banks. The CIT(A) found that the borrowed funds were used for business purposes, and the surplus funds were given as interest-free loans. The High Court cited Supreme Court and Bombay High Court precedents, asserting that the availability of surplus funds does not negate the deduction for interest on borrowed funds. The court confirmed that the assessee met all conditions for claiming such deductions, dismissing the AO's disallowance.

4. Receipts Not Declared by the Assessee:
The AO added Rs.42,66,200/- as income, arguing that the assessee did not declare incentive credit notes, vehicle charges, and warranty claims from M/s. Bajaj Auto Ltd. The CIT(A) and AO verified and reconciled these entries, allowing partial relief. The ITAT deleted the remaining addition, noting that the incentive credits were duly accounted for in the assessee's books. The High Court agreed, finding no substantial question of law on this aspect.

5. Discount and Commission Expenses:
The assessee claimed Rs.24,39,800/- as discount and commission expenses. The AO rejected this claim, citing inconsistencies and lack of evidence. The CIT(A) upheld the AO's decision, noting the demand for vehicles negated the need for discounts. The ITAT allowed the deduction, criticizing the CIT(A) for not admitting additional evidence. The High Court disagreed with the ITAT, noting the unexplained high claim in March 2000 and the contradictory explanations provided by the assessee. The court found the ITAT's findings perverse and unsupported by evidence, thus reversing the ITAT's decision and upholding the AO's disallowance.

Conclusion:
The High Court upheld the ITAT's decisions on new vehicle and handling charges, petrol expenses, interest-free advances, and receipts not declared by the assessee. However, it reversed the ITAT's decision on discount and commission expenses, finding the claim unsupported and inconsistent. The appeal was allowed in part, favoring the Revenue on the issue of discount and commission expenses.

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