2025 (11) TMI 743 - AT - Income Tax

Tax department's rebates and discounts addition returned for fresh adjudication; advances written off allowed as ordinary business loss

ITAT restored the addition for rebates and discounts to the file of the AO for fresh adjudication, finding the CIT(A) lacked detailed justification and ... Addition being expenses on Rebate and Discount - such Rebates and Discounts are no verifiable from the bills to the customers and not proved to have incurred wholly and exclusively for the purpose of its business - CIT(A) deleted addition - HELD THAT:- We find merit in the arguments/contentions/ submissions of the Ld. Sr. DR that the Ld. CIT(A) has not given detailed justification for relief. We are therefore, of the considered view that this issue is squarely covered by the decision of the Tribunal in the assessee’s own case [2020 (8) TMI 129 - ITAT DELHI] Therefore, we deem it fit to restore this issue to the file of the Ld. AO. Thus, the ground No. 1 of the Revenue is allowed for statistical purpose as above. Disallowance of advances written off - CIT(A) allowed claim - HELD THAT:- We find that the advances have been given in the normal course of business, which became unrecoverable. We find merit in the finding of the Ld. CIT(A) that this loss is in the nature of business loss and is thus allowable. Therefore, keeping in view on the decision of Mysore Sugar Co. Ltd. [1962 (5) TMI 3 - SUPREME COURT] and Harsad J Choksi [2012 (8) TMI 710 - BOMBAY HIGH COURT] and Badri Das Daga [1958 (4) TMI 2 - SUPREME COURT] we are of the considered view that the said amount written off is nothing but a business loss and is thus allowable. ISSUES PRESENTED AND CONSIDERED 1. Whether expenses claimed as rebates and discounts (paid to an associated enterprise which purportedly passed them to foreign customers) are allowable under the Act where no direct tripartite agreement or independent third-party evidence is placed on record to demonstrate that rebates/discounts actually reached the customers and were incurred wholly and exclusively for business. 2. Whether an amount debited as 'Advances and Deposits Written Off' (comprising excess TDS written off and security deposits written off) is an allowable business loss/expense under the Act or is to be disallowed for want of documentary proof or because it represents a capital item/transfer of profit. 3. Whether the disallowance/addition of the written-off advances is correctly characterized as capital in nature (specifically the security deposit portion) or is revenue/business loss. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of rebates and discounts paid via an associated enterprise Legal framework: Deductibility requires that an expense be incurred 'wholly and exclusively' for business. Where payments to related parties are routed through an associated enterprise (AE), the assessing officer may require evidence that the economic burden of the expense was borne by the assessee and that the payment actually benefited/was passed on to the end customers. Precedent treatment: The Tribunal's earlier decision in the taxpayer's own preceding assessment year was considered persuasive and followed by the Tribunal in the present matter; the assessing officer's findings requiring examination of MOUs/agreements were noted. Interpretation and reasoning: The Tribunal found that the assessing officer had disallowed rebates/discounts because there was no tripartite agreement or independent evidence demonstrating that amounts paid to the AE were passed on to customers, and because the AO suspected a device to transfer profits to the holding company. The appellate authority below deleted the addition but did not furnish a detailed, speaking rationale or identify specific documentary basis for deletion. The Tribunal concluded that the matter is squarely covered by the Tribunal's earlier decision and that, in the absence of a reasoned appellate finding on the record, the correct course is to remit the issue to the assessing officer for fresh verification. The assessee is to demonstrate that discounts/rebates ultimately reached customers and the AO is to verify in light of Agreements/MOUs, providing reasonable opportunity of hearing. Ratio vs. Obiter: Ratio - where related-party routing of rebates/discounts lacks documentary proof that amounts reached the customers, the addition may be sustained unless the assessee can demonstrate passage of benefit; remand to AO for verification is appropriate where appellate order lacks detailed justification. Obiter - reliance generally on the Tribunal's prior decision without elaboration is insufficient to supplant AO's fact-finding. Conclusion: The Tribunal set aside the appellate deletion on this issue and remitted the matter to the AO to verify, on evidentiary record (agreements/MOUs and corroboratory documents), whether rebates/discounts paid to the AE were in fact passed to customers and incurred wholly and exclusively for business. Ground relating to rebate/discounts is allowed for statistical purpose by way of remand. Issue 2 - Allowability of 'Advances and Deposits Written Off' (INR 41,18,161/-) Legal framework: Amounts written off as advances or deposits may be allowable as business losses under the Act if they arise in the ordinary course of business and are shown to be irrecoverable; the assessee bears the evidentiary burden to show nature and circumstances of the write-off, but absence of contemporaneous documents is not dispositive if material on record supports business loss. Precedent treatment: The Tribunal relied on higher court authorities recognizing that unrecoverable advances given in the ordinary course of business amount to allowable business losses (decisions of apex and high courts cited by the Tribunal were applied to support allowance). Interpretation and reasoning: The AO disallowed the write-offs for lack of proof as to payment, reason and timing. The appellate authority accepted the assessee's explanation that the advances were given in the normal course of business and became unrecoverable, treating the amounts as business loss. The Tribunal found no material presented by Revenue to contradict the appellate finding, and held that the AO's disallowance was not well-reasoned. Applying the cited precedent, the Tribunal concluded that the write-off constitutes a business loss and is allowable. Ratio vs. Obiter: Ratio - where advances/deposits given in the normal course of business become irrecoverable, they can be allowable business losses if supported by relevant material; an AO must articulate reasons and cannot disallow merely on absence of certain documents when record supports the loss. Obiter - procedural observations about the AO's insufficiency of reasoning and the appellate authority's acceptance of evidence. Conclusion: The Tribunal upheld the appellate authority's deletion of the addition of INR 41,18,161/- (advances and deposits written off), treating it as an allowable business loss. Grounds asserting disallowance of these amounts are dismissed. Issue 3 - Character of specific written-off component alleged to be capital (security deposit of INR 8,00,000) Legal framework: Determination whether an expenditure is capital or revenue depends on its nature and the circumstances; security deposits typically are capital if they relate to acquisition of lasting benefit, but may be revenue if advances in ordinary course of business subsequently found irrecoverable. Precedent treatment: The Tribunal relied on established case law distinguishing capital items from revenue losses and recognizing the allowability of irrecoverable business advances as revenue losses where appropriate. Interpretation and reasoning: The Tribunal accepted the appellate authority's finding that the security deposit formed part of advances given in ordinary course and became irrecoverable; accordingly, it treated the amount as business loss rather than capital expenditure. The Revenue failed to produce material to show capital character or otherwise contradict the finding. Ratio vs. Obiter: Ratio - where a security deposit, given in the ordinary course of business and later written off as irrecoverable, lacks indicia of capital nature, it may be treated as an allowable revenue loss. Obiter - none beyond application of cited authorities. Conclusion: The Tribunal concluded that the security deposit portion (INR 8,00,000) is not capital in nature but a business loss and is allowable; the Revenue's ground challenging its allowability is dismissed. Cross-references and Procedural Directions The Tribunal directed that on remand the assessing officer shall verify the rebate/discount issue in light of Agreements/MOUs and corroboratory documents and shall give reasonable and sufficient opportunity of being heard to the assessee. The Tribunal followed its prior decision on identical issues and applied higher court authorities to sustain the allowability of written-off advances.