9911796707
TMI Blog2025 (1) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... hort '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 payments and after considering the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (A) and filed detailed submissions before him. After considering the detailed submissions, ld. CIT (A) sustained the addition bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 INR) Purpose and Documentary evidence 1 International Travel House Limited 2,701,995 Hotel booking, air tickets, meals charges etc. for the Singapore Trip Bills were submitted to the Ld. AO at the time of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 above. The Appellant 13,95,173 * Actual bills were submitted to the Ld. AO at the time of assessment (Please refer to Page 173 to 174 of the PB for the copy of the said bill) * All the above-mentioned estimates were on the basis of prevailing market rates and can easily be checked from ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obligation. The appellant follows mercantile basis of accounting and following accrual concept and matching principle of accounting, it is required to provide for all known liabilities. The same is also in tune with the accounting standards notified by Central Board of Direct taxes ("CBDT"). Accordingly, the Appellant made the provision for sales promotion on scientific basis and in tune with the accounting standards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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. Conclusion * The liability to incur sales promotion expenses have arisen in AY 2012-13. It is well settled law that the same shall be allowed as deduction in the same year irrespective of the fact that the quantification and discharge of the same may be in subsequent year. * It is well settled law that provisions created on reasonable and scientific basis shall be allowed as deduction. The provision for sale promotion expenses have been created on scientific basis keeping in view the cost estimate of air travel ticket, accommodat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the revenue recorded during the year. 14. With regard to ground no.3, relevant facts are, Assessing Officer observed that assessee claimed insurance expenditure of Rs. 3,20,000/-. The assessee was asked to file the relevant evidence and for what purpose. Assessee in its reply dated 14.03.2016 filed an annexure along with a letter. After considering the same, the Assessing Officer observed that the assessee has made the payment of Rs. 3,20,000/- to National Insurance Company Limited and for what purpose, they could not explain. Since the liability could not be ascertained during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 expenditure of Rs. 3,20,000/- which is part of the premium policy already paid by the assessee of Rs. 6,45,256/-. Since the payment was made to National Insurance Company Ltd., a part of the policies taken for transportation and the existing policy is being renewed ever year based on the premium it pays. Therefore, the assessee also filed affidavit indicating the above shows that the genuineness of the transaction since the provisions of Rs. 3,20,000/- is part of the actual payment made by the assessee of Rs. 6,45256/-, therefore, it is an allowable expenditure. Accordingly, the same is allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 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 to Kilbum can be claimed by the Appellant as per the prevailing rate on the assets acquired is also legally not justifiable. Before reaching on the aforesaid conclusion, the Ld.. AO ought to have appreciated that the business of Kilburn was purchased by the Appellant on 'as-is' basis, that is to say that the business of Kilburn was functioning when the Appellant entered into and acquired the same. It can be safely said that9the assets acquired by way of the BTA, were already 'put to use' on the date of transfer (i.e. on 31 August 2.011) and any interest paid after the asset is put to use shall be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 interest was a part of total consideration paid by the assessee for acquiring the undertaking. Therefore, such interest amount was not a revenue expenditure relatable to the cost of acquisition * Both the Hon'ble Tribunal and CIT(A) concluded in favor of the assessee by applying explanation 8 to section 43 of the Act and allowing the interest paid on unpaid purchase consideration on slump sale as revenue expenditure. Aggrieved by the order of the Hon'ble Tribunal, the Income Tax Department preferred an appeal before the Hon'ble Gujarat High Court Based on the above facts of the case, the question of law before the Hon'ble Gujarat High Court was as follows: "Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." * Applicable of the above mentioned judgement in the case of the Appellant In the instant case and as mentioned above, the business of Kilburn was purchased by the Appellant on 'as-is' basis, that is to say that the business of Kilburn was functioning when the Appellant entered into and acquired the same. It can be safety said that the assets acquired by way of the BTA, were already 'put to use" on the date of transfer. Accordingly the interest of INR 26,91,378 paid by the Appellant to Kilburn on the amount held back and after the asset is put to use shall be allowed as deduction to the Appellant (instead of adding it to the cost of the asset for the purpose of claiming depreciation as falsely "held by the Id. AO). Interest of INR 26,91,378 paid by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, thus, nothing but compensation paid to the Forest Department for delay in the payment of royalty. By no stretch of imagination, would it be regarded as penalty. It was obvious from the above discussion that the interest payable under clause 7 of the lease deed to the Forest Department for delayed payment of royalty was compensatory in nature. As there was no dispute in the instant case that the payment of interest represented expenditure laid out wholly and exclusively for the purpose of the business, it was allowable as a deduction under section 37(1)". * CIT v. Hindustan Conductors (P.) Ltd. [2000] 108 TAXMAN 258 (BOM.) In the case it was held that: "'Interest' is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. As the essence of interest is that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 22. Aggrieved, assessee is in appeal before us and at the time of hearing, ld. AR of the assessee made the similar submissions before us which were submitted before the first appellate authority and submitted that the assessee has an obligation to pay the interest on the amount withheld by the assessee and to be settled to Kilburn in 12 monthly installments and submitted that the interest payment on such settlement is allowable expenditure as revenue expenditure. 23. Considered the rival submissions and material placed on record. We observed that based on the business transfer agreement as an obligation, assessee has remitted the amount of Rs. 4,15,60,000/- and based on the above agreement, assessee was allowed to settle the amount in 12 installments and whatever the amount withheld by the assessee based on the agreement, it is to be paid @ 12% interest per annum alongwith ..... X X X X Extracts X X X X X X X X Extracts X X X X
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