TaxTMI 
TaxTMI 
2025 (1) TMI 597
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....tion 40A(7) of the Income-tax Act, 1961 (for short 'the Act') amounting to Rs. 23,00,702/- and other disallowance as per computation of income. The case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) along with questionnaire were issued and served on the assessee. In response, ld. AR of the assessee attended the proceedings from time to time and filed the relevant information as called for. 4. The assessee is engaged in business of trading, distribution and leasing of documentation devices i.e. multi function peripherals consisting of printer, facsimiles, copies including their related consumables, option equipment and service parts. Based on the information submitted by the assessee, assessee has filed Form No.3CEB and accordingly reference was made to Transfer Pricing Officer for determination of Arm's Length Price u/s 92CA (3). No adverse inference was drawn by the TPO. The assessment was completed after making test check. During assessment proceedings, Assessing Officer observed that assessee has claimed expenses on account of warranty, advertisement expenses, sales promotion expenses, insurance, professional charges and claimed interest on delayed pa....
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.... to Section 43 of the Act. The above grounds of appeal are without prejudice and notwithstanding each other." 7. Ground No.1 is general in nature, hence does not require any specific adjudication. 8. With regard to Ground No.2 i.e. disallowance of sales promotion expenses, the relevant facts are, during assessment proceedings, the Assessing Officer observed that assessee has claimed an amount of Rs. 457,01,356/- as sales promotion under the head 'business promotion expenses'. The assessee was asked to file copy of accounts with justification of the expenses with documentary evidences. Assessee filed letter dated 14.03.2016 along with annexures. On perusal of the details submitted by the assessee, Assessing Officer observed that an amount of Rs. 2,42,789/- remained payable giving therewith no names or address of any person. In the narration, it was mentioned that it was reversed in next year. He observed that this purely give the status of the amount that it is fictitious liability created by the assessee for which no payment could have been made. With the above observation, Assessing Officer disallowed the same. 9. The assessee filed an appeal before the ld. CIT (....
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....er to page 169 of the PB for the said cost estimate under the Scheme). The said cost estimate was prepared considering the following: * List of employees who achieved their sales target during AY 2012-13 and were eligible for Singapore trip under the Scheme * Air ticket fare till Singapore was estimated for the identified employees. Your Honour would appreciate that, this fare was on the basis of prevailing rates in the market * Cost of appreciation certificates to be issued to the employees for achieving the sales target * Other estimate included cost of trophies, standees, T-shirts, caps creatives etc. for the trip * All the above-mentioned estimates were on the basis of prevailing market rates and can easily be checked from vendors/ service providers in the market The Appellant would also like to bring to your kind attention the following party wise details of actual expenditure incurred on the above-mentioned Scheme and trip to Singapore against the provision of INR 2,724,940 created in AY 2012-13 for the said purpose: S. No. Name of the Parties Amount of actual expenditure incurred against the said provision (in IN....
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....rdingly, the Appellant, on scientific basis made provision of INR 1,750,000 in respect of strategy meet to be held in Thailand, keeping in view the cost estimate for the purpose of air travel ticket, accommodation etc. of the employees attending the said strategy meet. The said cost estimate was prepared considering the following: * First the number of employees who would attend the meet in Thailand were identified during AY 2012-13 * The below cost items were included in the estimate: Particulars Number of employees Rate per person on the basis of prevailing market price Total amount Travel from residence to airport and back for the employees 35 600 21,000 Air Travel from upcountry (i.e. from their place of residence in India to the place from the flight for Thailand was to be boarded 8 9,000 72,000 Conference cost in Bangkok, Thailand including air fare 35 45,000 15,75,000 Travelling allowances to the employees 35 1,600 56,000 Fund for T-shirt printing and customized notepad printing, etc.) NA NA 25,000 Total provision created 17,50,000 Total actual expenditure incurred against the ....
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....n products achieved during the period AY 2012-13 (Please refer to Page 177 of the PB for the copy of the contest) * The gifts offered in the above-mentioned schemes were iphone/ipad, gift vouchers worth INR 8000/ 20,000 etc. The Appellant created a provision of INR 145,000 in its books of account under the above-mentioned schemes, based on the market price of the said gifts to be distributed * However, as no claims were received from the employees, the said provision was reversed by the Appellant in AY 2013-14 and applicable tax was also paid there on in AY 2013-14 2.3.2. Accounting treatment followed by the Appellant for creation of sales promotion expenses and subsequent shortfall/ reversal * The provisions of Accounting Standard 29 as well as Income Computation and Disclosure Standards (ICDS)- X provides that a provision is required to be made if the following conditions are satisfied: * An enterprise has a present obligation as a result of past event; * It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation * A reliable estimate can be made of the amount of ....
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.... result of past event * The appellant made payments after 31st March 2012, thereby leading to outflow of resources * The provision was made based on cost estimate and scientific basis, and thus a reliable estimate could be made CIT V/s Hero Management Services Ltd. [2014] 360 ITR 68 (Delhi) (Kindly refer to Page 189 to 191 of the PB for a copy of the judgement) The Court allowed certain business expenses incurred during the year and payments were made in subsequent year. It is a settled law that the liability is in present though it will be discharged at a future date even if such date is not certain. The provisions created by appellant related to the expenses incurred during the year but paid/reversed in the subsequent years. Bharat Earth Movers V/s CIT [2000] 112 Taxman 61 (SC) (Kindly refer to Page 192 to 195 of the PB for a copy of the judgement) Deduction of liability can be claimed in the year in which it arises, irrespective of its quantification and date of discharge in future. The liability to make payment of claims to vendors arose during AY 2012-13. However, the liability was quantified and discharged in the subsequent year. 2.3.4. ....
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....d on the actual utilisation. Since assessee has to pick the relevant expenditure based on the concept of matching principle and accordingly we observed that assessee has settled about 88% of the gross provision created for this purpose. As per the method of accounting adopted by the assessee, the assessee reverses the unutilized or unsettled portion of the provisions during the next assessment year. This is being followed consistently by the assessee. Further we observed that whether the expenditure is booked in this year or reversed in the subsequent year, it has effect revenue neutral considering the fact that tax rates are similar for both the years under consideration. Therefore, the assessee has brought on record complete details of creation of provisions as well as actual reversal of provisions and to the portion of unutilized provisions are being reversed in the subsequent assessment year and this is the regularly followed method of accounting, therefore, we do not see any reason to sustain the additions made by the Assessing Officer. Accordingly, the abovesaid sales promotion expenses claimed by the assessee are allowed on the basis of matching the relevant expenses with th....
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.... 17. On the other hand, ld. DR for the Revenue relied upon the orders of the authorities below. 18. Considered the rival submissions and material placed on record. We observed that the Assessing Officer has disallowed provisions for insurance premium created during the year. However before us, assessee has filed a receipt containing the details of open policy created for the purposes of transportation of its products to customers and dealers. The open policy submitted before us shows that the insurance of the continuous policy was effective form 09.04.2012 for FY 2012-13 and as per the record submitted before us, it shows that it is an open policy renewed ever year based on the premium paid by the assessee for the relevant assessment year. From the receipt, it shows that the assessee has enhanced the sum of insurance during the current year and the insurance amounts for such enhancement were effective from 09.04.2012. The assessee has already made the premium payments of Rs. 6,45,256/- and fresh insurance renewal was taken for the FY 2012-13. Since the assessee has taken an open policy for transportation of goods, the assessee has created a provision as well as claimed expendi....
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....sum. The copy of the BTA was submitted before the Ld. AO vide submission dated 2.1 January 2016. (Kindly refer to page 239-269 of the paper book) The purpose of holding back the above amount by the' Appellant was that, if any contingent liabilities or breaches of the Agreement by Kilburn are found after the closing date, such liabilities shall be deducted from the Holdback amount by the Appellant. The said purpose is also clearly mentioned in Clause 5.3 (d)(ii) of the BTA (Kindly refer to Page No. 249 of the Paper for the said Clause in the BTA) The Appellant humbly submits that the 'interest of INR 2,691,378 paid on the above holdback amount is in the nature of revenue expenditure and shall be allowed as deduction while computing the total income of the Appellant. It is in the nature of compensation for the amount of sales consideration held back as indemnity by the Appellant. The contention of the Ld. AO that, interest paid by the Appellant forms part of the assets acquired under the BTA from Kilburn and therefore treating it as capital expenditure in not tenable in law. Further, finding of the Ld. AO that depreciation on the said interest paid ....
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.... the Income Tax Department against the Gujarat High Court's ruling. The Hon'ble Gujarat High Court ruling in favor of the assessee held that, in view of introduction of Explanation 8 to section 43(1)), interest which was paid after slum sale was effected and once factory assets were operational could not be capitalized and therefore, such interest expenses would be revenue in nature. * Detailed summary of the above mentioned judgement of the Hon'ble Gujarat High Court in the case of Commissioner of Income-tax- IV v. Sandvik Chokshi Ltd. - [2015] 55 taxmahn.com 451 (Gujarat) (Kindly refer to Page No. 400-405 of the Paper Book for a copy of the judgement) Facts of the case are as follows: * The assessee, a joint venture company, acquired the undertaking of one of venturers as a going concern on 'as is where is basis' at a slump price which included fixed assets, current assets, raw materials, advances, cash and bank balance, liabilities, etc. * The Assessing Officer found that amount of interest claimed by the assessee was towards the delay in payment of sale consideration to joint venturer and therefore, he concluded that inter....
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....atable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included in the actual cost of such assets. Parliament, in the above Explanation, has taken full care to couch the Explanation in the widest possible terms to avoid any further controversy in regard to the very issue on the basis of the manner of payment of interest or time of payment thereof. This has been done by the use of expression "where any amount is paid or is payable as interest. In the matter on hand, CIT [A] as well as the Tribunal have noticed that in view of introduction of Explanation 8 lo Section 43-(i) of the Act which was held retrospective in nature, the interest cannot be capitalized which was paid after the slump sale was effected and the factory was in operation, and therefore, such expenses were revenue in nature. The directions given to the Assessing Officer to allow the amount of interest of Rs 1.57 Crores[rounded off] is in accordance with the provision of law. No question of law much less substantial question of law arises. The present Tax Appeal resultantly fails and the same is dismissed in limine." * Applicab....
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....usiness "Interest', as understood in the commercial world, is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. The essence of interest is that it is a payment that becomes due because the creditor has not had his money at the due date, It may be regarded either as representing the profit he might have made if he had the use of money or, conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. It is this compensation which is allowable as a deduction under section 37(1). In the instant case, the liability to pay interest was not statutory. It was contractual It was by virtue of the provision in clause 7 of the lease deed that the assessee was liable to pay interest at the rate of 9 per cent per annum for the period of delay in the payment of royalty. It was the arrear of royalty that carried interest. The liability to pay interest was as certain as the liability to pay royalty" "If royalty was not paid within the stipulated period, a larger sum was payable as royalty. Interest payable under clause 7 of the lease deed was,....
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....t the business of Kilburn was purchased by the Appellant on 'as-is' basis, and the assets acquired by way of the BTA, were already 'put to use' on the date of transfer (i.e. on 31 August 2011) and any interest paid after the asset is put to use shall be allowed as deduction to the Appellant. The appellant has stated that the same is allowable according to the provisions of Explanation 8 of section 43 and the proviso to section 36( 1)(iii) which deals with deduction of interest expenditure. The appellant has stated that on a conjoint reading of the above provisions, it is clear that any interest paid after the capital asset is put to use would not form part of the cost of the asset and would be allowed as deduction, being revenue in .nature. 4.7.3.3. The submissions filed by the appellant have been considered and not found to be tenable. The case laws cited are distinguishable in facts. The AO has rightly held that: since this amount is related to acquiring the business assets, the amount of Rs. 26,91,378/- is to be treated as part of the business assets and is capital in nature. I do not find any reason to interfere with the AO's, order on this issue." ....