1998 (4) TMI 156 - AT - Income Tax

Appeal partly allowed: Expenditure disallowed, bonus liability issue remitted for verification.

The appeal was partly allowed. The disallowance of Rs. 1 lakh claimed as business expenditure was upheld, as it was deemed not a normal business ... - Issues Involved:1. Disallowance of Rs. 1 lakh claimed as business expenditure.2. Disallowance of Rs. 54,298 under Section 43B for outstanding liability towards bonus.Issue-Wise Detailed Analysis:1. Disallowance of Rs. 1 lakh claimed as business expenditure:The primary issue revolves around the disallowance of Rs. 1 lakh claimed by the assessee as business expenditure. The assessee, a partnership firm engaged as a customs house agent, issued 11 out-agency receipts to Bakul Cashew Co. without actual delivery of goods. Bakul Cashew Co. used these receipts to secure an advance of Rs. 17,93,700 from Corporation Bank. When Bakul Cashew Co. failed to deliver the goods, the bank initiated legal action against both Bakul Cashew Co. and the assessee. To settle the matter, the assessee agreed to repay the bank in installments and paid Rs. 1 lakh during the relevant assessment year.The Assessing Officer (AO) disallowed the claim, stating that the liability arose not in the normal course of business but due to the issuance of incorrect receipts. The AO further noted that Bakul Cashew Co. admitted their liability to repay the assessee, indicating that the payment was an advance on behalf of the client, not a business expenditure.The CIT(A) upheld the AO's decision, emphasizing that the payment was made on behalf of Bakul Cashew Co., who was the real debtor. The CIT(A) noted that since the assessee was entitled to recover the amount from Bakul Cashew Co., the payment did not qualify as a deductible business expenditure.The assessee argued that the payment was made to preserve their business reputation and avoid adverse action from the bank, which threatened to blacklist them. They claimed the payment was either a business expenditure or a loss incidental to business under Section 37 of the IT Act. They cited the Kerala High Court's decision in CIT vs. Smt. Thressiamma Abraham and the Supreme Court's decision in CIT vs. Malayalam Plantations to support their claim.The Departmental Representative countered that issuing bogus receipts was not a normal business activity and allowing such a deduction would be against public policy. They argued that the assessee's eagerness to settle indicated a desire to avoid exposure of their malpractice.The Tribunal concluded that the issuance of 11 incorrect receipts over three months was not a genuine mistake but a deliberate act. They held that the payment was not a normal business expenditure and allowing it as a deduction would be against public policy, referencing the Supreme Court's decision in Maddi Venkataraman & Co. (P) Ltd. vs. CIT. The Tribunal upheld the CIT(A)'s order, disallowing the deduction under Section 37.2. Disallowance of Rs. 54,298 under Section 43B for outstanding liability towards bonus:The second issue concerns the disallowance of Rs. 54,298 under Section 43B for outstanding bonus liability. The AO disallowed the claim because the bonus was not paid before the due date for filing the return of income. The CIT(A) upheld this disallowance.The assessee contended that a significant portion of the bonus liability was discharged before 31st October 1990, leaving only Rs. 21,956 unpaid. They submitted a statement detailing the provision for bonus and actual payments to various employees, which was not previously presented to the AO or CIT(A).The Tribunal found it necessary to remit the matter back to the AO to verify the actual disbursement of the bonus before the due date for filing the return. The AO was instructed to restrict the addition under Section 43B to the amount outstanding as of the due date for filing the return.Conclusion:The appeal was partly allowed. The disallowance of Rs. 1 lakh as business expenditure was upheld, while the issue of disallowance under Section 43B was remitted back to the AO for verification and appropriate adjustment.