9911796707
TMI Blog2025 (1) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... well as actual reversal of provisions and to the portion of unutilized provisions are being reversed in the subsequent assessment year and this is the regularly followed method of accounting, therefore, we do not see any reason to sustain the additions made by the AO. Accordingly, the abovesaid sales promotion expenses claimed by the assessee are allowed on the basis of matching the relevant expenses with the revenue recorded during the year. Allowability of insurance expenditure - AO observed that the assessee has made the payment to National Insurance Company Limited and for what purpose, they could not explain - HELD THAT:- From the receipt, it shows that the assessee has enhanced the sum of insurance during the current year and the insurance amounts for such enhancement were effective from 09.04.2012. The assessee has already made the premium payments of Rs. 6,45,256/- and fresh insurance renewal was taken for the FY 2012-13. Since the assessee has taken an open policy for transportation of goods, the assessee has created a provision as well as claimed expenditure of Rs. 3,20,000/- which is part of the premium policy already paid by the assessee of Rs. 6,45,256/-. Since the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with questionnaire were issued and served on the assessee. In response, ld. AR of the assessee attended the proceedings from time to time and filed the relevant information as called for. 4. The assessee is engaged in business of trading, distribution and leasing of documentation devices i.e. multi function peripherals consisting of printer, facsimiles, copies including their related consumables, option equipment and service parts. Based on the information submitted by the assessee, assessee has filed Form No.3CEB and accordingly reference was made to Transfer Pricing Officer for determination of Arm s Length Price u/s 92CA (3). No adverse inference was drawn by the TPO. The assessment was completed after making test check. During assessment proceedings, Assessing Officer observed that assessee has claimed expenses on account of warranty, advertisement expenses, sales promotion expenses, insurance, professional charges and claimed interest on delayed payments and after considering the submissions of the assessee, the Assessing Officer made disallowance of above said expenditure to the extent of Rs. 46,08,120/- 5. Aggrieved with the above order, assessee preferred an appeal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings, the Assessing Officer observed that assessee has claimed an amount of Rs. 457,01,356/- as sales promotion under the head business promotion expenses . The assessee was asked to file copy of accounts with justification of the expenses with documentary evidences. Assessee filed letter dated 14.03.2016 along with annexures. On perusal of the details submitted by the assessee, Assessing Officer observed that an amount of Rs. 2,42,789/- remained payable giving therewith no names or address of any person. In the narration, it was mentioned that it was reversed in next year. He observed that this purely give the status of the amount that it is fictitious liability created by the assessee for which no payment could have been made. With the above observation, Assessing Officer disallowed the same. 9. The assessee filed an appeal before the ld. CIT (A) and filed detailed submissions before him. After considering the detailed submissions, ld. CIT (A) sustained the addition based on the findings of the Assessing Officer that it is a fictitious liability created by the assessee. 10. Aggrieved assessee is in appeal before us. 11. At the time of hearing, ld. AR for the assessee submitted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the market Cost of appreciation certificates to be issued to the employees for achieving the sales target Other estimate included cost of trophies, standees, T-shirts, caps creatives etc. for the trip All the above-mentioned estimates were on the basis of prevailing market rates and can easily be checked from vendors/ service providers in the market The Appellant would also like to bring to your kind attention the following party wise details of actual expenditure incurred on the above-mentioned Scheme and trip to Singapore against the provision of INR 2,724,940 created in AY 2012-13 for the said purpose: S. No. Name of the Parties Amount of actual expenditure incurred against the said provision (in INR) Purpose and Documentary evidence 1 International Travel House Limited 2,701,995 Hotel booking, air tickets, meals charges etc. for the Singapore Trip Bills were submitted to the Ld. AO at the time of assessment (Please refer to Page 170of the PB for the copy of bills) 3 Activate 91,543 Charges for Standees, trophies, Tshirt etc. to be given to the employees under the Scheme in Singapore Actual bills were submitted to the Ld. AO at the time of assessment (Please refer to Page 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to airport and back for the employees 35 600 21,000 Air Travel from upcountry (i.e. from their place of residence in India to the place from the flight for Thailand was to be boarded 8 9,000 72,000 Conference cost in Bangkok, Thailand including air fare 35 45,000 15,75,000 Travelling allowances to the employees 35 1,600 56,000 Fund for T-shirt printing and customized notepad printing, etc.) NA NA 25,000 Total provision created 17,50,000 Total actual expenditure incurred against the above. The Appellant 13,95,173 Actual bills were submitted to the Ld. AO at the time of assessment (Please refer to Page 173 to 174 of the PB for the copy of the said bill) All the above-mentioned estimates were on the basis of prevailing market rates and can easily be checked from vendors/ service providers in the market. From the above table, your Honour would appreciate that approximately 80% of the provision amount has been utilised. Further, the remaining 20% was reversed by the Appellant in AY 2013-14 and included in the income of AY 2013-14 on which applicable tax was paid Therefore, this itself demonstrates that the said provision is reasonable and cannot be alleged to be excessive or unreasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be made if the following conditions are satisfied: An enterprise has a present obligation as a result of past event; It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation A reliable estimate can be made of the amount of obligation. The appellant follows mercantile basis of accounting and following accrual concept and matching principle of accounting, it is required to provide for all known liabilities. The same is also in tune with the accounting standards notified by Central Board of Direct taxes ( CBDT ). Accordingly, the Appellant made the provision for sales promotion on scientific basis and in tune with the accounting standards and ICDS. Aforesaid transaction is revenue neutral The Appellant invites the Hon ble CIT(A) s attention to the method of accounting followed by the Appellant in respect of sales promotion expense provision. An appropriate amount based on a scientific basis (i.e., cost estimate which is prepared on prevailing market price) was taken by the Appellant by debiting the profit and loss account and by crediting the provision for sales promotion in the balance sheet during the AY 2012-13. This is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during AY 2012-13. However, the liability was quantified and discharged in the subsequent year. 2.3.4. Conclusion The liability to incur sales promotion expenses have arisen in AY 2012-13. It is well settled law that the same shall be allowed as deduction in the same year irrespective of the fact that the quantification and discharge of the same may be in subsequent year. It is well settled law that provisions created on reasonable and scientific basis shall be allowed as deduction. The provision for sale promotion expenses have been created on scientific basis keeping in view the cost estimate of air travel ticket, accommodation etc. of employees visiting Singapore etc. The appellant had also submitted the total provision and utilization from AY 2011-12 to AY 2013-14 which clearly indicates that average utilization of provision is up to 88%. Please refer page 256 of the PB for utilization schedule for provisions. Further, section 37 of the Act provides that the expenses, not being the personal or capital expenditure, not covered specifically under any other section and incurred wholly and exclusively for the purpose of business or profession shall be deductible as business expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the relevant expenses with the revenue recorded during the year. 14. With regard to ground no.3, relevant facts are, Assessing Officer observed that assessee claimed insurance expenditure of Rs. 3,20,000/-. The assessee was asked to file the relevant evidence and for what purpose. Assessee in its reply dated 14.03.2016 filed an annexure along with a letter. After considering the same, the Assessing Officer observed that the assessee has made the payment of Rs. 3,20,000/- to National Insurance Company Limited and for what purpose, they could not explain. Since the liability could not be ascertained during the year under consideration, he disallowed the same. 15. Aggrieved assessee preferred an appeal before the ld. CIT (A) and filed the additional evidences. The same was remanded back to Assessing Officer. In the remand report, the Assessing Officer has observed that as per the bank statement produced, total amount of Rs. 3,65,170/- was debited to National Insurance Company Ltd. on 12.04.2012. The receipt of the insurance policy is dated 13.07.2011 i.e. pertaining to AY 2012-13. Therefore, from the perusal of the above, it is not clear if the bank payment responds to the receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed expenditure of Rs. 3,20,000/- which is part of the premium policy already paid by the assessee of Rs. 6,45,256/-. Since the payment was made to National Insurance Company Ltd., a part of the policies taken for transportation and the existing policy is being renewed ever year based on the premium it pays. Therefore, the assessee also filed affidavit indicating the above shows that the genuineness of the transaction since the provisions of Rs. 3,20,000/- is part of the actual payment made by the assessee of Rs. 6,45256/-, therefore, it is an allowable expenditure. Accordingly, the same is allowed. 19. With regard to grant of interest on delayed payment, the relevant facts are, during assessment proceedings, the Assessing Officer observed that assessee has claimed expenses of Rs. 34.87 lakhs under the head finance cost . Assessee has claimed interest on late payment to Kilburn Office Automation Ltd. (Kilburn) of Rs. 26,91,378/- as interest on late payment. When the assessee was asked to explain it was submitted that the assessee made the payment on account of Business Transfer Agreement entered into with Kilburn. As per the Business Transfer Agreement, the assessee was allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant as per the prevailing rate on the assets acquired is also legally not justifiable. Before reaching on the aforesaid conclusion, the Ld.. AO ought to have appreciated that the business of Kilburn was purchased by the Appellant on 'as-is' basis, that is to say that the business of Kilburn was functioning when the Appellant entered into and acquired the same. It can be safely said that9the assets acquired by way of the BTA, were already 'put to use' on the date of transfer (i.e. on 31 August 2.011) and any interest paid after the asset is put to use shall be allowed as deduction to the Appellant (instead of adding it to the cost of the asset for the purpose of claiming depreciation as falsely held by the id. AO). In this regard, the Appellant would like to bring to your Honour's kind attention the following provisions of the Act: Explanation 8 of section 43 states that for the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not a revenue expenditure relatable to the cost of acquisition Both the Hon'ble Tribunal and CIT(A) concluded in favor of the assessee by applying explanation 8 to section 43 of the Act and allowing the interest paid on unpaid purchase consideration on slump sale as revenue expenditure. Aggrieved by the order of the Hon'ble Tribunal, the Income Tax Department preferred an appeal before the Hon'ble Gujarat High Court Based on the above facts of the case, the question of law before the Hon ble Gujarat High Court was as follows: Whether the Tribunal is right in law and on facts to delete the disallowance of Rs. 1,57,63,526/- on account of interest expenditure on unpaid purchase consideration? Judgement of the Hon'ble Gujarat High Court Explanation 8 to Section 43 (1) of the Act requires reproduction at this stage Explanation 8 - For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctioning when the Appellant entered into and acquired the same. It can be safety said that the assets acquired by way of the BTA, were already 'put to use on the date of transfer. Accordingly the interest of INR 26,91,378 paid by the Appellant to Kilburn on the amount held back and after the asset is put to use shall be allowed as deduction to the Appellant (instead of adding it to the cost of the asset for the purpose of claiming depreciation as falsely held by the Id. AO). Interest of INR 26,91,378 paid by the appellant to Kilburn, being compensatory in nature should be allowed as deduction. The appellant humbly submits that, the law is well settled that if any expenditure incurred as interest expense is compensatory in nature, deduction has to be allowed under section 37(1) of the Act in respect thereof. If the expenditure is found to be penal in character, no deduction can be allowed in respect thereof. The general idea for payment of interest on delayed payments is that creditors are entitled to compensation for the deprivation. It is this compensation which is allowable as a deduction under section 37(1) In this regard, the Appellant would like to place reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As there was no dispute in the instant case that the payment of interest represented expenditure laid out wholly and exclusively for the purpose of the business, it was allowable as a deduction under section 37(1) . CIT v. Hindustan Conductors (P.) Ltd. [2000] 108 TAXMAN 258 (BOM.) In the case it was held that: 'Interest' is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. As the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date it may be regarded either as representing the profit he might have made if he had use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation Conclusion The Appellant respectfully submits that, based on the above mentioned provisions of the Act and judicial precedents, there is no doubt that, interest on delay in payment made to Kilburn of INR 26,91,378 is a contractual obligation arising out of the agreement entered into with Kilburn. Further, such interest is a revenue business expenditure which should be allowed as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is allowable expenditure as revenue expenditure. 23. Considered the rival submissions and material placed on record. We observed that based on the business transfer agreement as an obligation, assessee has remitted the amount of Rs. 4,15,60,000/- and based on the above agreement, assessee was allowed to settle the amount in 12 installments and whatever the amount withheld by the assessee based on the agreement, it is to be paid @ 12% interest per annum alongwith the instalment. Based on the above, assessee has settled the liability amount of Rs. 4,15,60,000/- along with interest. The payment of interest is in the interest of assessee to safeguard its own interest. During the period of withholding of the principal amount, the assessee was enjoying the amount and also settled as per the convenient settlement basis and safeguarded its own interests. We observed that the Assessing Officer has treated the same as part of the capital expenditure. Based on the agreement and factual matrix, we observed that the assessee has utilized the funds and also it is for the assessee s convenience to settle the abovesaid amount in 12 installments. Therefore, it is not part of the principal amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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