2012 (12) TMI 593 - AT - Income Tax

Tax Appeal: Sales Promotion Expenses Reduced, Employee Contributions Allowed, Interest Expenses Disallowed

The Tribunal partially allowed the appeal in a tax case involving disallowance of sales promotion expenses, employees' contributions to ESI and PF, and ... Disallowance of 50% unmarked sales promotion expenses – AO made addition due to absence of bills and vouchers - Expenditure includes commission on number of cases sold and lifted - Incentive to increase sales by the depots located at various parts of the country – Held that:- As the assessee rightly contended the fact that such expenses are necessary and part of the business. The only factor which goes against the assessee is the absence of bills and vouchers. In the given facts and circumstances, restrict the disallowance of sales promotion expenses to 25% of unmarked sales promotion expenses. Issue partly allowed in favour of assessee Disallowance of the employees contribution to ESI and PF – Deposit beyond the due date but before filling of ROI – Held that:- Following the decision in case of AIMIL Limited (2009 (12) TMI 38 - DELHI HIGH COURT) that Sec.43B extended to employees’ contribution as well which are paid after the due date under the PF law but before the due date for filing the return. Allow deduction. In favour of assessee Disallowance of interest u/s 14A – Expense in relation to earn exempt income - Whether interest expenses relatable to borrowed funds which are used for making investment in the share capital of a firm can be said to be expenditure incurred for earning income not includible in the total income – Held that:- The intend of the assessee not to earn tax free income in the form of share of profits from the firm. Once it is found that the provisions of Sec.14-A are applicable then irrespective of the fact that there was no receipt of share of profits from the firm in the present year or the argument that the disallowance cannot exceed the amount of share of profits received from the firm, cannot be accepted. Therefore, disallowance has to be sustained. In favour of revenue Issues Involved:1. Disallowance of sales promotion expenses.2. Disallowance of employees' contribution to ESI and PF.3. Disallowance of interest expenses under Section 14A of the Income Tax Act.Detailed Analysis:1. Disallowance of Sales Promotion Expenses:The assessee, a company engaged in the business of manufacturing Indian Made Foreign Liquor (IMFL), claimed a deduction of Rs.2,54,32,000/- as sales promotion expenses. The Assessing Officer (AO) disallowed 50% of the unmarked sales promotion expenses amounting to Rs.22,42,507/- due to the absence of bills and vouchers, despite the authorized representative of the assessee agreeing to the addition.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the turnover increased from Rs.103 Crores to Rs.120 Crores, but the net profit declined, indicating possible inflation of expenses. The CIT(A) found the AO's determination logical and legally justified.Upon appeal, the Tribunal found that the revenue authorities assumed the assessee inflated expenses to reduce taxable income. Given the necessity of such expenses in the business and the absence of bills and vouchers, the Tribunal deemed it fair to restrict the disallowance to 25% of the unmarked sales promotion expenses, amounting to Rs.11,21,253/-.This ground of appeal was partly allowed.2. Disallowance of Employees' Contribution to ESI and PF:The AO disallowed Rs.54,390/- towards ESI and Rs.32,17,465/- towards PF contributions made beyond the due dates as per the relevant laws. The CIT(A) confirmed the AO's decision.The Tribunal referenced the Delhi High Court's decision in CIT Vs. AIMIL Limited, which held that employees' contributions paid after the due date but before the filing of the return of income are allowable as deductions. The Tribunal noted that the assessee had made the payments before the due date for filing the return of income and directed the AO to allow the deduction.This ground of appeal was allowed.3. Disallowance of Interest Expenses under Section 14A:The AO noticed investments in equity shares and capital contributions in a firm, M/s Lakshmi Estates, and disallowed interest expenses under Section 14A of the Income Tax Act. The AO computed the disallowance as Rs.59,11,624/- using Rule 8D of the Income Tax Rules.The CIT(A) confirmed the AO's order, stating that even without tax-free income, investments yielding tax-free income justify disallowance under Section 14A.The Tribunal considered the assessee's argument that the capital invested in M/s Lakshmi Estates should not be considered for disallowance under Section 14A, referencing the ITAT Mumbai's decision in ACIT Vs. M/s Novel Enterprises and the Karnataka High Court's decision in CCI Ltd. Vs. JCIT. However, the Tribunal noted that the Karnataka High Court in Mahesh G. Shetty & Others Vs. CIT and the Special Bench of ITAT Ahmedabad in Shri Vishnu Anant Mahajan Vs. ACIT supported the revenue's stance.The Tribunal concluded that the borrowed funds used for business purposes before conversion into capital contribution in the firm did not yield tax-free income. However, post-conversion, the share of profits from the firm, being tax-exempt, justified the disallowance under Section 14A. The Tribunal sustained the disallowance, dismissing the third ground of appeal.In the result, the appeal was partly allowed.