2021 (9) TMI 914 - AT - Income Tax

Addition u/s 28(iv) or 43(1) - Receipt of Special Redistributors' Incentive - Addition u/s 28(iv) being the amount of cost of demo van disbursed by M/s. Usha International Ltd. - As per assessee case of the assessee is covered by Explanation 10 to Section 43(1) - failure of the assessee to submit any proof regarding the utilisation of the incentive amount in question for purchase of van, the AO treated the incentive amount as the business income of the assessee as per Section 28(iv) - assessee in the present case is a partnership firm which is engaged in the business of distribution of agro machineries i.e. pumping set, generator set, agricultural engines, power tiller, lubricants, spare parts etc and works as dealer/redistributor of other companies - HELD THAT - The amount of incentive in question thus was received from M/s. Usha International Ltd. for the specific purpose of purchase of van which was to be utilised for the display and demonstration of the logo of M/s. Usha International Ltd. and since the said amount was actually utilised for purchase of van in the immediately succeeding year, find merit in the contention of the assessee that it was a case where a portion of cost of asset claimed by the assessee had been met directly by M/s. Usha International Ltd. in the form of subsidy or grant and it was rightly excluded by the assessee from the actual cost of the asset in order to determine the cost of acquisition for the purpose of Section 43(1) of the Act as specifically provided in Explanation 10 thereto. The amount of incentive received by the assessee from M/s. Usha International Ltd. specifically for the purchase of van was not in the nature of any benefit or perquisite which had arisen from business so as to treat the value of the same as business income of the assessee in terms of Section 28(iv) - assessee that the case of the assessee is covered by Explanation 10 to Section 43(1) of the Act and not by Section 28(iv) of the Act. Therefore, delete the addition made by the AO u/s. 28(iv) . Addition of freight inward expenses - HELD THAT - As freight inward expenses claimed by the assessee were incurred in cash and the same were supported by only self-made vouchers - The claim of the assessee for the freight inward expenses to that extent, in my opinion, therefore was not fully verifiable as rightly held by the authorities. However, find some merit in the alternative contention raised by the ld. Counsel for the assessee that the disallowance of 15% made by the AO and confirmed by the ld. CIT(A) is excessive and unreasonable keeping in view the nature of the business of the assessee and it would be fair and reasonable to restrict the same to 7.5%. Accordingly modify the order of the ld. CIT(A) on this issue and direct the AO to restrict the disallowance of 15% to 7.5%. Ground No. 2 of the assessee's appeal is treated as partly allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Addition of ?4,08,200/- under Section 28(iv) of the Income Tax Act.
3. Disallowance of ?1,92,383/- out of freight inward expenses.
4. Addition of ?15,014/- on account of difference in closing balance in the account of M/s. Usha International Ltd.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed the appeal with a delay of 49 days, citing the COVID-19 lockdown as the reason. The Tribunal found the reason satisfactory and condoned the delay. The respondent did not object to this condonation.

2. Addition of ?4,08,200/- under Section 28(iv) of the Income Tax Act:
The assessee, a partnership firm engaged in the distribution of agro machineries, received a "Special Redistributors' Incentive" of ?4,08,200/- from M/s. Usha International Ltd. for purchasing a van for product promotion. The Assessing Officer (AO) treated this incentive as business income under Section 28(iv) of the Act, arguing that it was a benefit arising from business activities. The assessee contended that the amount was a subsidy for purchasing the van and should be reduced from the cost of acquisition as per Explanation 10 to Section 43(1) of the Act.

The AO rejected this argument, stating that the incentive was a trading receipt linked to the assessee's sales performance. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the incentive was a business benefit, taxable under Section 28(iv).

Upon appeal, the Tribunal considered the specific purpose of the incentive and the subsequent purchase of the van. It concluded that the incentive was not a business benefit but a subsidy for asset acquisition, covered by Explanation 10 to Section 43(1). Therefore, the Tribunal deleted the addition made by the AO and confirmed by the CIT(A).

3. Disallowance of ?1,92,383/- out of Freight Inward Expenses:
The AO disallowed 15% of the freight inward expenses amounting to ?1,92,383/- due to unverifiable cash payments supported only by self-made vouchers. The CIT(A) upheld this disallowance. The Tribunal acknowledged the unverifiable nature of the expenses but found the 15% disallowance excessive. It reduced the disallowance to 7.5%, considering the nature of the assessee's business.

4. Addition of ?15,014/- on Account of Difference in Closing Balance:
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this issue.

Conclusion:
The appeal was partly allowed. The Tribunal condoned the delay in filing, deleted the addition under Section 28(iv), reduced the disallowance of freight inward expenses to 7.5%, and dismissed the unpressed ground regarding the closing balance difference.