2008 (4) TMI 374 - AT - Income Tax

ITAT upholds charity collection addition to income & reinstates sales promotion expense disallowance

Deputy Commissioner Of Income-Tax. Versus G. Ramaswamy.

The ITAT upheld the addition of charity collections to the total income assessed for the assessment year 2003-04, reversing the CIT(A)'s decision. ... Business Income Issues:1. Addition of charity collections in the total income assessed.2. Deletion of sales promotion expenses.Analysis:Issue 1 - Addition of Charity Collections:The case involved an appeal by the Department against the order of CIT(A) regarding the addition of charity collections of Rs. 16,71,092 to the total income assessed for the assessment year 2003-04. The AO treated this amount as part of the sale consideration, while the CIT(A) relied on a Supreme Court decision in a similar case to allow the assessee's claim. The CIT(A) concluded that the charity collections were made in the course of business and handed over to a separate charitable trust, thus not constituting trading receipts. However, the ITAT found that the facts of this case were different from the Supreme Court case cited. In this case, there was no evidence that customers made separate payments for charity, unlike the situation in the precedent case. Therefore, the ITAT reversed the CIT(A)'s decision and upheld that of the AO, adding the charity collections to the total income assessed.Issue 2 - Deletion of Sales Promotion Expenses:The second issue pertained to the deletion of sales promotion expenses amounting to Rs. 5,40,000. The AO disallowed this claim as the expenses were not actually incurred during the year, and the provision had been reversed before filing the return of income. The CIT(A, however, allowed the claim, stating that the provision was made under the mercantile system of accounting and was justified based on business exigencies. The ITAT disagreed with this reasoning, finding that there was no concrete evidence to support the accrued liability of Rs. 5,40,000 during the relevant year. The vague explanation provided by the assessee was deemed insufficient, leading to the restoration of the AO's decision to disallow the sales promotion expenses. Consequently, the appeal filed by the Department was allowed on this issue.In conclusion, the ITAT upheld the addition of charity collections to the total income assessed and reversed the deletion of sales promotion expenses, ruling in favor of the Department on both issues.