2022 (9) TMI 760 - AT - Income Tax

Tribunal upholds sales promotion expenses disallowance, partially allows Section 14A appeal for book profit.

The Tribunal dismissed the appeals for the assessment years 2008-09 and 2009-10, upholding the disallowances of sales promotion expenses and expenses ... Disallowance of sales promotion expenses - Cash expenditure - Applicability of section 40A(3) - Addition made as assessee is selling the liquor products to Tamilnadu State Marketing Corporation (TASMAC) a public sector undertaking of the Government of Tamil Nadu and the products are delivered at the Depots of TASMAC and employees of TASMAC are employees of the Government thus there is no question of incurring any such expenses for promotion of the sale - HELD THAT:- CIT(A) has observed that the payments made to the contract employees of retail/distributing arm of State Government i.e. TASMAC or Kerala State Beverages Corporation (KSBC) fall under explanation to section 37(1) of the Act for the reason that the employees of TASMAC or KSBC are indirectly employees of the Government as TASMAC and KSBC are Government undertakings and any payment made to these person otherwise than a legal remuneration is an offense under the Prevention of Corruption Act. Further, it was observed that most of the expenses are incurred by cash and the provisions of section 40A(3) of the Act are attracted and moreover, the assessee has also not made out his case to show that it falls under Rule 6DD of Income Tax Rules, 1962. Under the above facts and circumstances and since the assessee has not been able to substantiate with any form of evidence towards sales promotion expenses, we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the assessee is dismissed for the assessment years under consideration. Disallowance u/s 14A of the Act r.w. Rule 8D - necessity of recording satisfaction - HELD THAT:- AO was fully satisfied that the provisions of Rule 8D has to be invoked based on the materials available on record. Therefore, it cannot be said that the Assessing Officer has not recorded satisfaction. Under the above facts and circumstances, the ground raised by the assessee is dismissed. Disallowance u/s 14A vis-àvis computation of book profits u/s 115JB - Since, the issue is covered by case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] and by the decision of Sobha Developers Ltd. [2021 (1) TMI 378 - KARNATAKA HIGH COURT]. We set aside the order of the ld. CIT(A) on this issue and direct the Assessing Officer to delete the addition. Issues Involved:1. Disallowance of sales promotion expenses.2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.3. Application of Section 40A(3) and Section 40(a)(ia) of the Income Tax Act.4. Violation of principles of natural justice.Detailed Analysis:1. Disallowance of Sales Promotion Expenses:The primary issue concerns the confirmation of disallowance of sales promotion expenses claimed by the assessee. The Assessing Officer (AO) disallowed sums of Rs. 1,15,84,285/-, Rs. 4,73,74,018/-, and Rs. 3,40,30,732/- for the assessment years 2008-09, 2009-10, and 2010-11 respectively. The AO reasoned that the assessee sold liquor products to Tamilnadu State Marketing Corporation (TASMAC) and Kerala State Beverages Corporation (KSBC), which are government undertakings responsible for marketing and sales, thus negating the need for the assessee to incur sales promotion expenses. The AO and CIT(A) invoked the provisions of explanation to Section 37(1) of the Income Tax Act, stating that payments to TASMAC and KSBC employees, who are indirectly government employees, could be considered an offense under the Prevention of Corruption Act. The expenses were also disallowed under Section 40A(3) due to cash payments and Section 40(a)(ia) for non-deduction of TDS.The Tribunal upheld the disallowance, agreeing with the CIT(A) that the assessee failed to substantiate the genuineness of the expenses, did not provide details of recipients, and could not prove that the payments fell under the exceptions of Rule 6DD.2. Disallowance under Section 14A read with Rule 8D:The second issue pertains to the disallowance of expenses under Section 14A read with Rule 8D, related to earning exempt income. The AO noted that the assessee earned dividend income and disallowed expenses attributable to earning this income, amounting to Rs. 50,81,323/-, Rs. 5,70,595/-, and Rs. 5,31,095/- for the respective assessment years. The assessee argued that the AO did not record proper satisfaction before invoking Rule 8D and that disallowance under Section 14A should not apply to book profit computation under Section 115JB.The Tribunal found that the AO had recorded satisfaction based on examination of the books, justifying the invocation of Rule 8D. However, for the assessment year 2010-11, the Tribunal referred to the Special Bench decision in ACIT v. Vireet Investment (P) Ltd. and the Karnataka High Court decision in Sobha Developers Ltd. v. DCIT, concluding that disallowance under Section 14A should not be added to book profit under Section 115JB. Thus, the Tribunal directed the AO to delete the addition for the assessment year 2010-11.3. Application of Section 40A(3) and Section 40(a)(ia):The AO applied Section 40A(3) due to cash payments exceeding the prescribed limit and Section 40(a)(ia) for non-deduction of TDS on certain payments. The CIT(A) confirmed these disallowances, noting that the assessee did not demonstrate that the payments fell under the exceptions of Rule 6DD.The Tribunal upheld the application of these sections, agreeing with the CIT(A) that the assessee failed to provide necessary details and evidence to justify the payments under the exceptions.4. Violation of Principles of Natural Justice:The assessee contended that there was no proper opportunity given before passing the impugned order, thus violating principles of natural justice. However, the Tribunal did not find merit in this argument, as the assessee had opportunities to present evidence and arguments during the proceedings.Conclusion:The Tribunal dismissed the appeals for the assessment years 2008-09 and 2009-10, upholding the disallowances made by the AO and CIT(A). For the assessment year 2010-11, the Tribunal partly allowed the appeal by directing the AO to delete the addition under Section 14A for book profit computation under Section 115JB. The order was pronounced on 30th August 2022 in Chennai.