2019 (10) TMI 832 - AT - Income Tax

Disallowance of written off amount treated as bad debts in books of accounts being compensation paid to distributor and expenses for business needs and exigency of the appellant - HELD THAT - As agreed that if the recipient of the above sum fails to adhere to the any of the terms and conditions of the contract he should be liable to pay the assessee-liquidated damages of INR 260,000 along with 24% interest p.a. on the above amount. This clearly shows that the above party was one of the distributor of the Bihar region of the assessee. The above liability for payment has arisen during the year, as the agreement is dated 6th day of February 2010. In view of this though above sum is not a bad debt but the compensation paid by the assessee, which has accrued during the year as a liability on the assessee and it has been paid. It is also not the case of the AO that above sum is paid for infraction of any of the laws. In view of the above facts, the above expenditure has been wholly and exclusively incurred by the assessee for the purposes of the business and therefore it is allowable u/s 37 (1) - CIT-A has not considered the above aspect and confirmed the disallowance. In view of this, we reverse the order of the learned CIT capital and direct the learned assessing officer to grant deduction of the above sum to the assessee. Disallowance of advertisement expenses - HELD THAT - It is not the claim of the lower authorities that the assessee has incurred the advertisement and sales promotion expenditure not for the purposes of the business of such expenditure are in genuine. The only claim of the learned assessing officer is that the assessee has incurred huge expenditure and therefore it has resulted into enduring benefit. No such enduring benefit has been defined by the revenue authorities. The claim of the assessee is that these are the routine expenditure incurred by the assessee and therefore they cannot be disallowed. In view of the decision of the coordinate bench in assessee s own case for earlier years, we reverse the order of the lower authorities and direct the learned assessing officer to delete the disallowance Disallowance of travelling and conveyance expenses - disallowance by holding that 25% of the total expenses are disallowable in absence of the details filed - HELD THAT - These expenses have mostly been incurred through impressed account of the various staff. Therefore looking at to the nature of the business of the assessee as well as the smallness of the amount and when the complete details are available in the Ledger account itself in the form of narration of those expenditure, it is not proper for the lower authority to disallow the above expenditure on ad hoc basis. Identically is the fact with respect to local conveyance expenditure for which the details are furnished by the assessee. In view of this we reverse, the order of the lower authorities so far is with respect to disallowances of 25% of the total expenditure disallowed out of entertainment as well as the local conveyance expenditure. With respect to the disallowance even before us no information is provided and therefore the disallowance to that extent is confirmed. Accordingly ground number 2 (3) of the appeal is partly allowed. Disallowance of direct and indirect expenditure - HELD THAT - Merely because the expenditure are on the higher side this year compared to the earlier years, when there is no defect pointed out in the details submitted by the assessee and further the explanation given by the assessee was not found to be false, there is no provision in the income tax act which authorizes the lower authorities to disallow the expenditure by applying a fixed percentage without finding that any of the expenditure has been incurred for non-business purposes. CIT-A has also held that the genuineness of the expenditure has to be established. However, he did not find any instances that any of the expenditure incurred by the assessee is not genuine. Merely making an assertion that tremendous increase under almost each had a fixed expenditure leads to establish non-genuineness only. Such a sweeping finding of the CIT- A is not sustainable in view of absence of any finding by the lower authorities that assessee has incurred non-genuine expenditure of any instance. The explanation given by the assessee has not at all been examined by the learned CIT- A to give such a categorical finding about the genuineness of these expenditure. In view of this we reverse the finding of the lower authorities and direct AO to delete the disallowance of various direct and indirect expenditure incurred by the assessee.

Summary

Issues Involved:
1. General ground of appeal.
2. Disallowance of bad debts written off.
3. Disallowance of advertisement expenses.
4. Disallowance of travelling and conveyance expenses.
5. Disallowance due to fall in gross profit ratio/net profit ratio.

Issue-wise Detailed Analysis:

1. General Ground of Appeal:
The first ground of appeal was general in nature. No arguments were advanced against it, leading to its dismissal.

2. Disallowance of Bad Debts Written Off:
The assessee contested the disallowance of ?1,30,000 written off as bad debts, which was compensation paid to a distributor. The assessing officer disallowed this amount, stating it was not allowable under Section 36 of the Income Tax Act. The CIT (A) confirmed this disallowance under Sections 36 and 37(1). However, the Tribunal found that the compensation was paid as part of a business agreement and was wholly and exclusively for business purposes. Therefore, it was allowable under Section 37(1). The Tribunal directed the assessing officer to grant the deduction, reversing the CIT (A)'s order.

3. Disallowance of Advertisement Expenses:
The assessee challenged the disallowance of ?80,52,355 out of advertisement expenses, which the assessing officer treated as deferred revenue expenditure. The CIT (A) upheld this disallowance. The Tribunal noted that similar issues in previous years were resolved in favor of the assessee, where such expenses were deemed routine and not resulting in enduring benefits. Citing precedents, the Tribunal reversed the lower authorities' orders and directed the assessing officer to delete the disallowance.

4. Disallowance of Travelling and Conveyance Expenses:
The assessee disputed the disallowance of ?13,32,095, which was 25% of the total travelling and conveyance expenses. The assessing officer disallowed these expenses due to insufficient details. The Tribunal found that the assessee had provided detailed ledger accounts showing the purpose and recipients of these expenses. Given the nature of the business and the small amounts involved, the Tribunal deemed the disallowance on an ad hoc basis inappropriate. However, the disallowance of ?2,41,023 for foreign travel of doctors was upheld due to lack of information. The Tribunal partly allowed this ground of appeal.

5. Disallowance Due to Fall in Gross Profit Ratio/Net Profit Ratio:
The assessee contested the disallowance of ?5,53,05,206 out of various expenses due to a fall in gross profit and net profit ratios. The assessing officer noted a significant increase in expenses compared to turnover and disallowed 20% of total expenses. The CIT (A) confirmed this disallowance. The Tribunal observed that the assessing officer did not point out any specific non-business expenditure and that the assessee had provided detailed explanations and evidence for the increased expenses. The Tribunal found no basis for the disallowance and directed the assessing officer to delete it, reversing the lower authorities' findings.

Conclusion:
The appeal was partly allowed, with the Tribunal reversing the disallowances related to bad debts, advertisement expenses, and various other expenses while upholding a minor disallowance related to foreign travel of doctors. The order was pronounced in the open court on 18/07/2019.