2016 (5) TMI 688 - AT - Income Tax

Appeal partially allowed for deduction of bad advances and review of expenses. Sales promotion expenses disallowed.

Parag C. Boghani Versus Income-tax Officer, Wd-35 (1), Kolkata

The Tribunal partially allowed the appeal, directing the AO to permit the deduction for bad advances and review reimbursement expenses. The disallowance ... Disallowance towards bad debts and advances - Held that:- The claim of bad debts in respect of debts due from Bajaj Glass Centre amounting to ₹ 1,13,343/-, we find that assessee had actually sold materials worth ₹ 4,13,343/- vide Bill No. PE/0607/0032 dated 13.07.2006 and had received only ₹ 3 lacs against the same and the party had withheld the balance due to inferior quality of material supplied. Under these circumstances, the assessee chose to write off the balance sum of ₹ 1,13,343/- in his books as irrecoverable and claimed the same as bad debt in the return of income. It is not in dispute that the assessee had duly offered the sale made to said party as income in the return of income of earlier year. We find that assessee is duly entitled for the same as deduction u/s. 36(1)(vii) of the Act read with section 36(2) of the Act. - Decided in favour of assessee Disallowance of C&F charges invoking the provisions of section 40(a)(ia) read with section 194C - Held that:- We find that from the perusal of the bills submitted by the assessee in his paper book and from the perusal of the orders of the lower authorities, there is no clear finding given with regard to the fact as to whether profit element has been loaded by C&F Agent in his bills seeking reimbursement of expenses. We find that this finding is very crucial to decide the impugned issue before us. We hold that no tax needs to be deducted u/s. 194C of the Act for the reimbursement portion. In the facts and circumstances of the case, we deem it fit and appropriate in the interest of justice and fair play to set aside this issue to the file of the Ld. AO to give a clear finding from the verification of the bills as to whether any profit element is loaded by the C&F Agent while seeking reimbursement of expenses from the assessee. The assessee is also directed to adduce adequate cooperation and produce evidences in support of his contentions. - Decided in favour of assessee for statistical purposes. Disallowance of sales promotion expenses - Held that:- We find that incurrence of these expenses by the assessee are in the normal course of business and adequate evidences were also submitted in this regard. In any case, there cannot be any addition made by the lower authorities on estimated basis without bringing any material on record for justifying the said addition. - Decided in favour of assessee. Issues Involved:1. Disallowance of bad debts and advances.2. Disallowance of C&F charges under section 40(a)(ia) read with section 194C.3. Disallowance of sales promotion expenses.Detailed Analysis:1. Disallowance of Bad Debts and Advances:The first issue pertains to whether the Assessing Officer (AO) was justified in disallowing Rs. 4,89,356/- towards bad debts and advances. The assessee, engaged in the business of importing timber and PVC flex, made advance payments to suppliers and C&F agents but did not receive the materials and services in full. Consequently, the assessee wrote off these advances as bad debts and claimed them as deductions. The AO disallowed this claim, stating that the assessee could not establish how these debts and advances had become bad, a decision upheld by the CIT(A).Upon appeal, it was found that the assessee had paid trade advances during the normal course of business which were not recovered either in cash or kind. The Tribunal concluded that these amounts are allowable as deductions under section 28 of the Income-tax Act, 1961, upon write-off. The Tribunal relied on the Supreme Court decision in CIT Vs. Mysore Sugar Co. (1962) and the Bombay High Court decision in Harshad J. Choksi Vs. CIT (2012) to support its conclusion that even if the debts are not deductible as bad debts, they can be considered as business losses. Consequently, the Tribunal directed the AO to allow the deduction for the bad advances.Regarding the bad debt from Bajaj Glass Centre amounting to Rs. 1,13,343/-, the Tribunal noted that the assessee had sold materials worth Rs. 4,13,343/- but received only Rs. 3,00,000/- due to the inferior quality of materials supplied. Since the sale was offered as income in the earlier year, the assessee was entitled to a deduction under section 36(1)(vii) read with section 36(2). Therefore, the Tribunal allowed the assessee's claim.2. Disallowance of C&F Charges:The second issue involved the disallowance of Rs. 9,23,328/- in C&F charges by invoking section 40(a)(ia) read with section 194C. The assessee engaged Dura International Services as a clearing agent, who incurred expenses on behalf of the assessee and raised separate bills for service charges. The AO observed that tax should be deducted on the gross amount paid, including reimbursements, and disallowed the expenses for non-deduction of tax at source. This disallowance was upheld by the CIT(A).Upon appeal, the Tribunal examined the reimbursement details and supporting bills. The Tribunal found no clear finding on whether the C&F agent included any profit element in the reimbursement bills. It held that no tax needs to be deducted on the reimbursement portion and set aside the issue to the AO for verification. The AO was directed to verify if any profit element was included in the reimbursement and decide accordingly.3. Disallowance of Sales Promotion Expenses:The third issue concerned the disallowance of Rs. 2,86,466/- in sales promotion expenses. The AO disallowed 10% of the total sales promotion expenses on an estimated basis, which was upheld by the CIT(A). The assessee argued that these expenses were incurred in the normal course of business to increase turnover and had provided purchase bills for the materials distributed as gifts to customers.The Tribunal noted that the turnover and net profit of the assessee had increased substantially, indicating the effectiveness of the sales promotion expenses. It found that the expenses were incurred in the normal course of business and were supported by adequate evidence. The Tribunal held that the disallowance on an estimated basis without any material justification was unwarranted and allowed the assessee's claim.Conclusion:The Tribunal allowed the appeal partly for statistical purposes, directing the AO to allow the deduction for bad advances and verify the reimbursement expenses. The disallowance of sales promotion expenses was also overturned. Ground nos. 5 and 6 were dismissed as not pressed. The order was pronounced on 13.05.2016.