2015 (2) TMI 54 - AT - Income Tax

Loyalty commission - non genuineness of expenditure - whether be treated as capital expenditure and to allow depreciation on it? - Held that - In this case genuineness of the payment claimed to have been made to PSL as loyalty commission is not disputed. It is also undisputed fact that it is an arm s length transaction. We find that PSL has made purchases from the assessee-company to the tune of ₹ 1.60 crores in financial year 2005-06, ₹ 2.92 crores in financial year 2006-07, ₹ 2.70 crores in financial year 2007-08 and ₹ 1.17 crores in financial year 2008-09 (till November, 2008). Considering the high volume of supplies made by the assessee-company to PSL , it could not be said that the purpose of the said payment of commission could not be established by the assessee. It is not abnormal to enter into an agreement with intending heavy-weight purchaser party before entering into actual sale transacton with the said party. The purpose of the payment of loyalty commission was clearly for business of the assessee, and it is not for the department to sit over the judgment of the assessee that how the business has to be conducted and the expenditure incurred could not be disallowed, till it shows that the payment itself was not genuine or was made for some purpose other than the business purpose of the assessee. No valid reason for the said disallowance could be made out by the Revenue. In these facts, we are of the view that the amount of loyalty commission paid by the assessee could not be disallowed. CIT(A) has passed a well reasoned speaking order on this issue. The assessee has derived enduring benefits by paying loyalty commission to PSL and has effected sales in crores in the subsequent years to PSL. It is not the case of the assessee that PSL has procured the goods from the assessee-company only for relevant Asstt.Year 2006-07. We find that the assessee is well aware of the fact that by paying loyalty commission, it shall be entitled to enduring benefits for subsequent many years, and PSL will retain as its customer. In these facts of the case, we confirm the order of the CIT(A) in holding that the assessee has paid the amount for enduring benefits for many years, and therefore, it should be treated as capital expenditure and depreciation to be allowed on this amount. Levy of penalty u/s.271(1)(c) - Held that - The only dispute was whether the expenditure of loyalty commission was capital or revenue in nature. There can always be an honest difference of opinion on this issue between the parties. Merely because certain expenditure was held to be capital in nature and allowed depreciation thereon, it could not be said that the assessee is guilty of concealment of income or filing of inaccurate particulars of income. - Decided in favour of assessee.

Issues involved:
1. Treatment of loyalty commission as capital expenditure.
2. Allowance of depreciation on loyalty commission.
3. Classification of bank interest as capital expenditure.
4. Quantification of unabsorbed depreciation.
5. Levy of penalty under section 271(1)(c) of the Act.

Issue 1: Treatment of loyalty commission as capital expenditure:
The Revenue contended that loyalty commission paid to a specific party lacked a clear business purpose and should be disallowed as inadmissible expenditure. The Assessee argued that the commission was paid to secure preferred supplier status and was a legitimate business expense. The Tribunal found the payment genuine and an arm's length transaction, justifying the business purpose. The Tribunal dismissed the Revenue's appeal, stating that the loyalty commission was paid for business reasons and not subject to disallowance.

Issue 2: Allowance of depreciation on loyalty commission:
The Assessee's contention was that the loyalty commission should be treated as revenue expenditure under section 37(1) of the IT Act. However, the Tribunal upheld the CIT(A)'s decision that the commission provided enduring benefits and should be considered a capital expenditure. Consequently, the Tribunal dismissed the Assessee's appeal, affirming the depreciation allowance on the loyalty commission.

Issue 3: Classification of bank interest as capital expenditure:
The CIT(A) ruled that bank interest paid before machinery utilization should be capitalized, allowing for depreciation. The Tribunal upheld this decision, emphasizing the timing of interest payment in relation to asset use. The Tribunal confirmed the CIT(A)'s order, dismissing the Assessee's claim that the interest should be treated as revenue expenditure.

Issue 4: Quantification of unabsorbed depreciation:
The Tribunal noted that the CIT(A) did not address the issue of unabsorbed depreciation quantification. Consequently, the Tribunal remanded this issue to the CIT(A) for a decision after providing both parties with a fair hearing opportunity.

Issue 5: Levy of penalty under section 271(1)(c) of the Act:
The Revenue sought a penalty under section 271(1)(c) concerning the loyalty commission and interest expenses. The Assessee argued that all relevant information was disclosed, and the penalty should not apply due to a genuine difference in the nature of expenditure. The Tribunal agreed with the Assessee, citing the disclosure of facts and the genuine nature of the expenditure. The penalty was canceled based on the decision in CIT Vs. Reliance Petroproducts Pvt. Ltd., 322 ITR 158 (SC), and the Revenue's appeal was dismissed.

In conclusion, the Tribunal dismissed the Revenue's appeals and partially allowed the Assessee's appeal for statistical purposes. The judgments focused on the treatment of loyalty commission, depreciation allowance, bank interest classification, unabsorbed depreciation quantification, and the levy of a penalty under section 271(1)(c) of the Act.

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