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TMI Blog2023 (9) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... at the payment was shown as loan in the books of account and not claimed as an expenditure on account of service tax in the year of payment since the legality of said liability was not clear and disputed. As to whether the liability has to be borne by the assessee i.e. service receiver or the distributor i.e. service providers. In such a situation when the assessee company has paid amount to its distributors who had actually paid the service tax amount to the exchequer is a kind of adhoc reimbursement of expenditure or liability of service tax. Thus without keeping in view the hardship of the distributors and the liability of the services tax the company decided to write off the amount of loan debited to the respective account of the distributors/ ABOs then the ld CIT(A) was right in concluding that the payment was made by the appellant are directly related to the business activity of the assessee and it was incurred wholly and exclusively for the purpose of business of the assessee due to commercial expediency and the same was allowable as business expenditure. Decided in favour of assessee. - SHRI C.M. GARG, JUDICIAL MEMBER AND DR. B. R. R. KUMAR, ACCOUNTANT MEMBER Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld DR submitted that the AO was right in disallowing the payment of service tax by the assessee to its distributors showing the same as debts and subsequently treating the same as bad debts is a clear example of claiming revenue expenditure in the garb of bad debts which is not permissible in the law. The ld DR lastly submitted that the AO has rightly disallowed the impugned amount and added back to the total income of the assessee being not wholly and exclusively incurred for the purpose of business of the assessee. Therefore, the AO was right in making addition in the case of the assessee. The ld DR prayed that the ld CIT(A) has granted the relief to the assessee without any basis therefore, the impugned first appellate order may kindly be set aside by restoring that of the AO. 5. Replying to the above, ld counsel of the assessee submitted that the assessee is a company is working through its distributors and the chain of distributors is sole source of the assessee to reach its customers. The ld counsel submitted that there was service tax liability created on the distributors due to application of new GST Rules and distributors were facing great hardship in making payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee considering the entire facts and circumstances and commercial expediency of business of the assessee. The ld counsel lastly submitted that the findings arrived by the ld CIT(A) are quite correct and sustainable therefore, impugned first appellate order may kindly be upheld dismissing the ground of revenue. 7. On careful consideration of the above submission, first of all we find it necessary and appropriate to reproduce the relevant operative part of the first appellate order which reads as under:- 5.3 I have gone through the facts of the case and the submission made by the AR. It has been contended that the appellant is selling the goods directly to customers through independent distributors who are known as Amway Business Owners (ABOs). The ABOs are entitled to commission as per their entitlement. Earlier no Service Tax was being charged and paid by the ABOs but later on, the ABOS started receiving quarries from the Service Tax Department on the ground that they are taxable under the category of Business Auxiliary Services. However, the issue of liability of the Service Tax was not clear. Since the Service Tax Department was asking the ABOS to pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en submitted that the advances given are not round figures but have been worked out after verification of service tax burden of the relevant ABO. Advances have been extended to around five hundred such ABOs. At the time of write off, further verification was made by the appellant and only in those cases where service tax was found to have been paid, were written off. It is to be observed that in order to treat an expenditure as capital in nature, it should result in some enduring benefits to the appellant or creation of some asset. Reference is made to the decision of Hon'ble Supreme Court in the case of Empire Jute Co Ltd vs CIT (1980)124 ITR 1, In which it has been held that- There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. Commissioner of Income-tax(2) The same test was formulated' by Lord Clyde in Robert Addze Son's Collieries Ltd. v. Inland Revenue(3) in these words: Is it part of the company's working expenses, is it expenditure laid out as part of the process of profit earning ? or, on the other hand, is it a capital outlay, is it expenditure necessary for the acquisition of property or of rights of permanent character, the possession of which is a condition of carrying on its trade at all ? It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit- earning. It was, to use Lord Soumnar's words, an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on. It was part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure. Similarly, the Apex Court had an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the appellant wanted the distributors to contest the service tax liability with the department and therefore, it had stated the payment to be in the nature of refundable loan. In the year under consideration, the appellant reconciled to the fact that service tax liability was mandatory and cannot be avoided and therefore, it decided to waive of the amount of refundable advances paid to the distributors earlier. In addition, the AR has furnished the details of the total income and tax paid by the appellant during the last five years from which it is observed that the appellant has shown positive profit in all these years and has been paying the tax at the maximum marginal rate. By doing so, the AR has contended that the claim is revenue neutral with respect to the year of claim. Based on these facts, I am of the view that the claim made by the appellant during the year consideration is justified. 5.3.4 Business expediency/expenditure incurred for the purposes of the business In this regard, it has been submitted that that ABOS are very essential to the successful running of the business of the appellant. The appellant company has made available the funds to the ABOS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to earn profits, business purposes are wider than profit-making purposes. Business expediency does not require that expenses should be incurred only for earning immediate profits. Expenses incurred though not directly related to earning to income, may be allowable deductions if they are related to the carrying on of the business (Birla Cotton Spinning Weaving Mills Ltd. Vs. CIT (1967) 64 ITR 568 (Cal)). It is for the assessee to decide how best to protect his own interest. It is not open to Income-tax department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure (CIT Vs. Dhanrajgiri Raja Narasingiri (1973) 91 ITR 544 (SC)). Expression commercial expediency is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. Commercial men are best experienced in commercial expediency (Indian Steel Wire Products Ltd. Vs. CIT (1968) 69 ITR 379 (Cal)). In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purposes of the business, reasonableness of the expenditure has to be adjudged from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and subsequently written off is closely related to the business activities and therefore, the same was incurred due to commercial expediency. 5.3.5 After considering all the above facts and the legal discussion, I am of the opinion that the payments made by the appellant are directly related to the business activities and the claim made by it is allowable as a business expenditure. Accordingly, the addition made by the AO is deleted and ground of appeal is allowed. 8. In view of the above, first of all, we note that there is no quarrel or dispute regarding quantum of expenditure/ bad debts claimed by the assessee. We further noted neither the AO nor the ld CIT DR before us disputed the fact that the assessee made payment of service tax to its distributors who had actually paid the amount of service tax to the exchequer and thus, it was a kind of reimbursement of service tax liability of the assessee to its distributors. It is a fact of common knowledge that the liability of service tax was arose due to application of new taxation of law such as GST and the issue as to whether such liability was to be borne by the distributors of the assessee company or the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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