2014 (12) TMI 295 - AT - Income Tax

Discount allowed to customers disallowed - Discount allowed to customers are supported by vouchers or not Held that - Assessee allowed discount to various customers on the sale of Tractors - The amount of discount which has been disallowed relates to the discount allowed to the customers who have obtained bank finance in order to purchase the Tractors from the assessee - assessee has refunded a portion of the sale price received by it and the same has been explained to be discount allowed to the customers - the relevant material, namely, copies of bank loan sanction letters, sale bills, copy of discount vouchers, ledger account of customers, etc. were produced by the assessee and the same have been verified by the AO - assessee company has further explained that the business of Tractors is a competitive business where the main customers are farmers who do not enjoy liquidity and they often approach banks for finance - assessee was guided by the objective of enhancing its profits and the aforesaid methodology of effecting sale was adopted - No doubt, it may not be the best of the practices, so however, the expenditure cannot be disallowed merely for that reason - the expenditure otherwise is verifiable and there is no adverse evidence on record - the disallowance sustained by the CIT(A) is not justified thus, the order of the CIT(A) is set aside and the AO is directed to delete the addition Decided in favour of assessee. Disallowance made u/s 40(A)(b) - payments made to the relatives reasonable or not Held that - One of the items of expense relates to rent paid to Late Mr. D.M. Bhansali and Smt. Tarabai D. Bhansali of ₹ 1,14,000/- with respect to a property taken on rent - assessee had given specific instance in the vicinity, whereby Kopergaon Peoples Co-op. bank Ltd. has leased out a premises to LIC and Bank of Baroda @ ₹ 5 to ₹ 8 per sq.ft. - there is no reason advanced by the lower authorities to reject the explanation furnished by the assessee - there is no justification to disallow an ad-hoc sum for being excessive within the meaning of section 40A(2)(a) of the Act. In respect of the expenditure of rent paid to Mr. Arvind D. Bhansali and Sanjay D. Bhansali also for the Ahmednagar premises and the workshop at Kopergaon respectively, assessee had pointed out that the rentals paid to the sister concern were reasonable - the monthly rent paid is around ₹ 1.25 per sq.ft. and ₹ 0.40 sq.ft. per month the rentals are quite reasonable, and in any case, the Assessing Officer has not referred to any comparable case to establish excessiveness vis- -vis the market rates - the ad-hoc disallowance is not merited. Interest paid to certain depositors who are persons specified in section 40A(2)(b) Held that - The total interest expense is ₹ 23,14,080 - interest has been paid @ 12% per annum assessee pointed out that in the period corresponding to the AY under consideration Prime Lending Rate (PLR) rates of the nationalized and Co-op. Banks were round 14% to 15% and therefore the interest paid by the assessee @ 12% to the related parties was quite justified - the interest expenditure incurred @ 12% on deposits raised from the related parties is reasonable and does not call for any disallowance of section 40A(2)(a) of the Act. Purchases from sister concern disallowed Held that - The material was before the lower authorities and there is no rebuttal of the assertions made by the assessee - the invocation of section 40A(2)(a) of the Act cannot be upheld with respect to the expenditure incurred by the assessee on account of purchases from sister concerns thus, the order of the CIT(A) is set aside. Travelling expenses disallowed u/s 40A(2)(a) Held that - The amount represents reimbursement of travelling expenses incurred by the Managing Director of the assessee company, who had travelled to other places for official work - the expense cannot be subject to a disallowance u/s 40A(2)(a) of the Act as expenses are claimed to have been incurred for the business purpose - The payments are not in the form of perquisites or for any other benefit to the Director, but the some actual expenses incurred on carrying out work for the assessee company - Such a disallowance is not envisaged in section 40A(2)(a) of the Act thus, the order of the CIT(A) is set aside Decided in favour of assessee. Incentives and commission disallowed Held that - The factum of the assessee incurring expenses by way of commission/incentives in the course of carrying out in business of Tractor and TVS bike stands established - a sweeping and whole-sale disallowance of the expenditure is quite improper, having regard to the facts and circumstances of the case - there is no particular infirmity or falsity brought out by the AO based on any verification exercise so as to justify the disallowance of the expenditure in its entirety - assessee had furnished agreement and also pointed out that it has deducted tax at source on certain payment made towards commission/incentives - the material furnished by the assessee in support of the expenditure has not been found to be devoid of bonafides assessee relied upon CIT vs. Modern Terry Towels 2012 (8) TMI 776 - BOMBAY HIGH COURT wherein it has been held that for allowability of expenditure it is not necessary for the assessee to submit confirmations from the other party, but the allowability has to be decided on the basis of entirety of facts and circumstances of the case thus, the order of the CIT(A) is set aside Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of discount allowed to customers.
2. Disallowance under section 40A(2)(b) for payments to relatives.
3. Disallowance of expenditure under the head incentives and commission.

Issue-wise Detailed Analysis:

1. Disallowance of Discount Allowed to Customers:

The first issue concerns the disallowance of Rs. 25,56,135/- related to discounts allowed to customers. The assessee company, a dealer of Swaraj Tractors and Trailers, allowed discounts to customers through internal vouchers rather than on sale invoices. The Assessing Officer (AO) disallowed the entire amount, questioning the genuineness of the discounts. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, citing lack of evidence for the genuineness of the discounts. The assessee argued that discounts were given to customers who obtained bank finance, and the entire sale price was received from the banks before allowing discounts through vouchers. The Tribunal found that the practice, though not ideal, was not illegal, and the discounts were verifiable with no adverse evidence. Therefore, the Tribunal directed the AO to delete the addition of Rs. 25,56,135/-.

2. Disallowance under Section 40A(2)(b) for Payments to Relatives:

The second issue pertains to the disallowance of Rs. 9,66,704/- under section 40A(2)(a) of the Income-tax Act, 1961. The AO found payments to specified persons under section 40A(2)(b) excessive and unreasonable, disallowing 10% of the total payments. The CIT(A) upheld this disallowance. The Tribunal noted that the AO did not specify any payment as excessive or unreasonable compared to market value. The assessee provided evidence showing the reasonableness of rent paid, interest on deposits, and purchases from sister concerns. The Tribunal found the rent paid comparable to market rates, the interest rate reasonable, and the purchase prices consistent with those charged to other customers. Consequently, the Tribunal directed the deletion of the disallowance.

3. Disallowance of Expenditure under the Head Incentives and Commission:

The third issue involves the disallowance of Rs. 13,99,440/- for incentives and commission. The AO disallowed the entire amount due to lack of confirmations from recipients. The CIT(A) upheld this disallowance. The assessee argued that the expenses were incurred in the course of business and provided agreements and evidence of tax deduction at source. The Tribunal noted that similar expenses were allowed in previous years and that the AO had no adverse evidence against the claims. The Tribunal found the disallowance based on conjectures rather than evidence. Citing a judgment from the Bombay High Court, the Tribunal emphasized that the allowability of expenditure should be based on the entirety of facts and circumstances. Thus, the Tribunal directed the AO to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of disallowances for discounts, payments to relatives, and incentives and commission, emphasizing the importance of verifiable evidence and reasonable business practices.