TaxTMI 
TaxTMI 
2023 (9) TMI 1022
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....t to be an allowable expenditure under this provision, the amount of expenditure incurred by the assessee must be (a) paid out of wholly and exclusively for the purpose of business or profession of assessee, (b) must not be capital expenditure, or personal expenses or an allowance of the character described in section 32 to 36 of the Act. 4. The ld DR submitted that in the present case distributors of the assessee were receiving commission income for their services and were liable to pay service tax on such services as per relevant rules. The ld DR submitted that, in addition to commission, the assessee provided financial assistance to ABOs in the form of loan for discharging service tax liability and the amount debited to the account of ABO and subsequently the assessee written off these loans and the assessee claimed the same as revenue expenditure being bad debts. The ld DR submitted that the net effect of the said accounting of claim of assessee was effectively that the assessee assumed liability of services tax which was not payable to him but was payable to the ABOs/ distributors. The ld DR submitted as per judgment of the Hon'ble Supreme Court in the case State of Mad....
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....iability and since the legality of said liability was not clear, the payment was shown as loan in the books of account if assessee and not claimed as an expenditure on account of service tax in the year of payment. The ld counsel submitted that the Hon'ble Supreme Court in the case of State of Madras Vs. GJ Coelho (supra) as noted by the AO in para 3 and 4 of the assessment order, it was held that the expenditure made under the transaction which is so closely related to the business of the assessee that it can be viewed as integral part of conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the business. 6. The ld counsel submitted that there is no denial of the fact that the payment was made to the distributors for reimbursement of service tax liability borne by them and it has been exclusively demonstrated by the assessee that the payment was made only to those ABOs who had actually paid the service tax. Ld counsel submitted that in view of the foregoing factual position and compulsion of the assessee the appellant has made payment to its distributors to sustain their survival and existence the amount paid by t....
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.... the Service Tax Department. After considering all the factors, the appellant decided to write off the amounts paid to the ABOS for meeting the Service Tax liability ull December 2011. As already discussed, the AO has disallowed this amount written off and has made the addition by holding that this sum was not wholly & exclusively incurred for the purposes of the business and also the same is in the nature of capital expenditure. 5.3.1 From the above facts, in order to decide the allowability of the amount written off by the appellant during the year under consideration, the following issues need to be deliberated: Whether the expense claimed by the appellant is capital in nature; Whether the appellant was right in claiming the amount in this year; Whether there was any business/commercial expediency and whether the expense was incurred wholly and exclusively for the purposes of its business. Each of these aspects is discussed as under. 5.3.2 Capital or Revenue: It is observed that the appellant company had made available the funds to the ABO's for making payment of the service tax liability and it was shown in the accounts under the....
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....ssee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon, J. said in Hallstrom's Property Limited v. Federal Commissioner of Taxation(1): "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the justice classification of the legal rights, if any, secured, ....
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....got any benefit of enduring nature by making this payment but the payment was made for smooth running of the business by facilitating its distributors to meet the Service Tax liability. Just because the amount was shown as loan in the balance sheet does not give it a character of "capital in nature". In view of these facts, I am of the view that the amount paid by the appellant and subsequently written off is closely related to the business activities and therefore, the same needs to be treated as revenue expenditure. 5.3.3 Year of Claim From the details furnished by the AR about the payment made to the distributors, it is observed that the payment was made during the FYS 2007-08 to 2011-12. The appellant had created a provision of Rs. 28,05,40,581/- during the FY 2010-11 and the balance of Rs. 10,06,81,865/- in FY 2011-12 and the total amount of Rs. 38,12,22,446/- has been claimed in the year under consideration. With respect to the issue of the year in which the claim can be allowed, the AR has submitted that the liability of the service tax for the nature of business of the appellant was disputed and many distributors were being forced to pay the service tax an....
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....to the service providers i.e. the ABOS. Reference is made to the decision of Hon'ble Apex Court in CIT Vs. Bharat Carbon & Ribbon Mfg. Co. (P) Ltd., 1999 XII SITC 218 wherein it has been observed that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of accounts be decisive or conclusive in the matter. The expression "wholly" in section 37(1) has been used with reference to the quantum, while the expression 'exclusively' refers to the nature or the purpose of the activity in which the expenditure is incurred. In other words, the whole of the expenditure must have been solely and exclusively incurred for business purposes, in order to qualify for allowance under section 37(1) of the Act. The expression "Wholly & exclusively used in section 10(2) (xv) of the Income-tax Act, 1922 (Which corresponds to section 37(1) of the Income-tax Act, 1961) does not mean "necessary". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his ....
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....s machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, that expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sum spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory" In the present case, the appellant has made the payment for smooth running of the business by facilitating its distributors to meet the Service Tax liability and since the legality of the said liability was disputed, the payment was shown as a loan in the books of account and not claimed as an expenditure on account of Service Tax in the year of pay....