2015 (10) TMI 403 - HC - Income Tax

Business promotion expenses - ITAT restricted disallowance - Held that - Assessee had stated that the expenses were incurred through debit card and credit card towards fuel, hotel bills and some instances for which supporting bills could not be produced. The ITAT observed that there could be an inflation of expenditure and the possibility of use of certain facilities for personal purposes could not be ruled out. Therefore, the disallowance was restricted to 20%. The view taken by the ITAT is a plausible one. In the facts and circumstances, the Court is not inclined to frame a question of law on this issue. Incentive in selling and distribution expenses - ITAT examined the scheme floated by the Assessee for granting special incentives for achieving certain targets - Held that - It was noticed that the AO did not issue notices to the parties whose details were furnished. The ITAT was satisfied that in the absence of any exercise undertaken by the AO to verify the payments to such parties, there was no justification for the disallowance. The Court finds nothing legally erroneous in the approach of the ITAT in the matter. If the details were furnished by the Assessee were not verified by the AO for their genuineness by making enquiries, there was no basis for disallowing the expenses. The Court, accordingly, declines to frame a question of law on this issue. Technical knowhow fee - ITAT examined the technical collaboration agreement entered into by the Assessee with the SSA - Held that - It was noted that what was being paid was a running royalty on fixed percentage of turnover for the use of the name and technical information. The same payment was allowed as revenue expenditure in the earlier AYs. The AO had failed to demonstrate what capital asset had been acquired by the Assessee in the process. The Court concurs with the view expressed by the ITAT that in the context of the Technical Collaboration Agreement, the claim by the Assessee of royalty paid as revenue expenditure could not have been disallowed. The Court accordingly declines to frame question on this issue.

Summary

Issues:
1. Disallowance of expenses under various heads by the Assessing Officer.
2. Confirmation of disallowance by Commissioner of Income Tax (Appeals).
3. Decision by the Income Tax Appellate Tribunal (ITAT) on the appeals filed by both the Assessee and the Revenue.
4. Appeals filed by the Revenue against the ITAT's order.

Analysis:

Issue 1: Disallowance of Expenses
The Assessing Officer disallowed several expenses claimed by the Assessee, including payments to related parties without TDS deduction. The AO added these amounts to the Assessee's income, citing lack of evidence for services rendered. Disallowances were also made under Section 40(a)(ia) for failure to deduct tax at source. The AO's decision was based on insufficient documentary evidence and non-deduction of TDS on payments.

Issue 2: Confirmation by CIT (A)
The Commissioner of Income Tax (Appeals) upheld the AO's disallowances, stating that the agreements were sham and expenses were not genuine. The CIT (A) confirmed disallowances related to selling and distribution expenses, business promotion expenses, incentives, and liabilities. The CIT (A) also divided the technical knowhow fee into capital and revenue expenditure.

Issue 3: ITAT Decision
The ITAT remanded some issues for re-determination by the AO, while deleting or restricting disallowances on other expenses. The ITAT allowed consistency in claims, reduced disallowances, and accepted the technical knowhow fee as revenue expenditure. The ITAT focused on verifying details provided by the Assessee and considered the genuineness of expenses before making decisions.

Issue 4: Appeals by Revenue
The Revenue filed appeals against the ITAT's order, challenging the decisions on various expense disallowances. The Court noted the ITAT's remand of certain issues and declined to interfere with those decisions. The Court upheld the ITAT's reasoning on consistency in claims, genuineness of expenses, and treatment of technical knowhow fee as revenue expenditure.

In conclusion, the Court dismissed the appeals, finding no substantial question of law for determination. The decisions of the ITAT were upheld regarding the disallowances and treatment of expenses, emphasizing the importance of verifying expenses and maintaining consistency in claims.