Assistant Commissioner of Income Tax, Trivandrum V. M/s Kerala Automobiles Ltd, Trivandrum

ITA 248/COCH/2009

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0891 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2011
• Appeal Filed By: Department
• Bench Allotted: DB
• Assessment Year: 2003-2004
• Appeal Filed On: 04-05-2009
• Court: TRIBUNAL
• Department Lawyers: DR BABU JOSEPH
• Assessee Lawyers: R SRIDHAR CAAR
• Keywords: Gift; Business expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH, COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY AR ORA, AM I.T.A. NO. 248/COCH/2009 ASSESSMENT YEAR : 2003-04 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), TRIVANDRUM. VS. M/S. KERALA AUTOMOBILES LTD., ARALAMOODU, TRIVANDRUM. [PAN: AABCK 0142M] (REVENUE -APPELLANT) (ASSESSEE -RESPONDENT) REVENUE BY DR. BABU JOSEPH, SR. DR ASSESSEE BY SHRI R.SRIDHAR, CA-AR O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE REVENUE, ARISING OUT OF T HE ORDER BY THE COMMISSIONER OF INCOME-TAX-I, TRIVANDRUM (`CIT(A) FOR SHORT) DA TED 26.12.2008 FOR THE ASSESSMENT YEAR (A.Y.) 2003-04. 2. THE APPEAL RAISED SEVERAL ISSUES, WHICH WE SHALL TAKE UP IN SERIATIM. THE SECOND AND THIRD GROUNDS OF APPEAL; THE FIRST BEING GENERA L IN NATURE WARRANTING NO ADJUDICATION, RELATES TO THE DISALLOWANCE OF EXPENDITURE CLAIMED UNDER THE HEAD OF ACCOUNT: `ADVERTISEMENT AND PUBLICITY BY THE ASSESSEE IN TH E SUM OF ` 2,59,850/- . THE ASSESSING OFFICER (AO) DISALLOWED THE SAME STATING THE PAYMEN TS TO BE IN THE NATURE OF DONATIONS. IN APPEAL, IT WAS EXPLAINED THAT THE ASSESSEE, A PU BLIC SECTOR UNDERTAKING OF THE STATE GOVERNMENT, ENGAGED IN THE PRODUCTION AND MANUFACTU RE OF AUTORICKSHAWS, IS NOT AUTHORIZED TO GIVE DONATIONS TO ANY PRIVATE PARTY. HOWEVER, IT HAS UNDERTAKEN PUBLICITY EXPENDITURE BY SUBSCRIBING TO THE SOUVENIRS/PUBLICA TIONS, ON THE OCCASION OF SEMINARS AND CONFERENCES OR OTHERWISE, TO VARIOUS TRADE COUNCILS AND MERCHANT ASSOCIATIONS. SIMILARLY, IT HAS PUBLISHED ITS PRODUCTS IN THE VARIOUS CALEND ARS, DIARIES AND SPONSORSHIP BANNERS. IN ITA.NO.248 /COCH./2009 2 VIEW OF THE SAME, THE LD. CIT(A) ALLOWED THE ASSESS EES CLAIM. AGGRIEVED, THE REVENUE IS IN APPEAL. 3. BEFORE US, LIKE SUBMISSIONS STOOD RAISED. THE L D. AR WOULD SUBMIT THAT THE ASSESSEES ACCOUNTS, APART FROM BEING AUDITED U/S. 44AB OF THE INCOME-TAX ACT, 1961 (THE ACT HEREINAFTER) ARE ALSO SUBJECT TO AN AUDI T BY THE COMPTROLLER AND ACCOUNTANT GENERAL OF INDIA (CAG), AND THE CHARGE BY THE REVEN UE OF THE IMPUGNED PAYMENTS AS BEING DONATIONS IS COMPLETELY MISPLACED, AS WOULD B E EVIDENT FROM THE DETAILS OF THE EXPENDITURE TABULATED AT ANNEXURE A TO THE PAPER-BO OK, AND THE LD. CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE THEREOF. 4. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED T HE MATERIAL AVAILABLE ON RECORD. THE QUESTION BEFORE US IS SIMPLE, I.E., WHETHER THE CLA IMED EXPENDITURE IS DEDUCTIBLE AS BUSINESS EXPENDITURE U/S. 37(1) OF THE ACT UNDER FI RST PRINCIPLES. WE HAVE PERUSED ANNEXURE A FOR THE PURPOSE. CLEARLY NONE OF THE EX PENDITURE IS A DONATION IN THE STRICT SENSE. HOWEVER, WHEN THE RECIPIENT ORGANISATION HAS NO INTEREST IN THE ASSESSEES BUSINESS, SUBSCRIBING TO A SOUVENIR ISSUED BY IT WO ULD ONLY BE IN THE MANNER OF INDIRECTLY ASSISTING THE RECIPIENT ORGANISATION WITH FUNDS AND , THUS, ONLY IN THE NATURE OF DONATION. THE ISSUE IS NOT ONE OF THE NOMENCLATURE EMPLOYED I N ACCOUNTS, BUT OF THE CHARACTER OF THE EXPENDITURE OR THE PURPOSE FOR WHICH THE FUNDS OF T HE BUSINESS ARE LAID OUT. THIS ISSUE WAS HIGHLIGHTED DURING THE HEARING WHEREAT THE LD. AR WAS REQUIRED TO SPECIFY THE BUSINESS PURPOSE OF AN ADVERTISEMENT IN THE SOUVENI R ISSUED BY A MEDICAL COLLEGE ( ` 1500 ) OR, SAY, A DISTRICT LIBRARY COUNCIL, OR BY THE MUNI CIPALITY, ETC. SIMILAR IS THE CASE FOR THE ADVERTISEMENTS PLACED IN THE PUBLICATIONS BY VA RIOUS ASSOCIATIONS, WHICH WE OBSERVE TO BE NOT TRADE ASSOCIATIONS, MUCH LESS IN THE ASSE SSEES TRADE. IT WAS EXPLAINED BY HIM THAT THE INTEREST GROUPS HAVE TO BE PLACATED BY PLA CING SUCH ADVERTISEMENTS. THAT, HOWEVER, WOULD NOT SATISFY THE TERMS OF SECTION 37( 1) OF THE ACT, WHICH STAND CLEARLY SPELLED OUT BY THE SECTION ITSELF, I.E., AS BEING L AID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE, AND HAVE BEEN FURTHER SUBJECT TO ELUCIDATION BY THE HIGHER COURTS OF LAW. NO DOUBT, THE ASSESSEE AS A BUSINESSMAN IS TO SAFEGUARD OR WATCH ITS BUSINESS INTEREST AND DECIDE `WHERE TO OUTLAY THE FUNDS AND `HOW MUCH, I.E., IN VIEW ITA.NO.248 /COCH./2009 3 OF THE ACTUAL OR PERCEIVED BENEFIT INURING TO THE B USINESS THEREBY, BUT THE PURPOSE OF THE SAME HAS NECESSARILY TO BE FOR OR TOWARD BUSINESS, AND WHICH CONDITION IS IN FACT IMPLICIT IN THE FOREGOING STATEMENT. IF THIS IS NOT BORNE IN MIND, ANY SUBSCRIPTION TO ANY ORGANISATION WOULD QUALIFY AS A PERMISSIBLE BUSINES S DEDUCTION. THE LD. CIT(A) HAS NOT EXAMINED THE ISSUE FROM THIS ANGLE, WHICH WE CONSID ER AS PRIMARY, AND WOULD ALSO REQUIRE DELINEATING THE SCOPE OF BUSINESS, A CLEAR NEXUS WITH WHICH IS A MUST TO QUALIFY THE EXPENDITURE AS A BUSINESS EXPENDITURE. THE LAW IN THE MATTER IS WELL-SETTLED, AND FOR WHICH WE MAY DRAW ATTENTION TO THE DECISIONS, INTER ALIA , IN THE CASE OF SASSOON J. DAVID & CO. VS. CIT (1979), 118 ITR 261 (SC) AND RAM BAHADUR THAKUR LTD. VS. CIT , 261 ITR 390 (KER.) (FB). WE, THEREFORE, REMIT THIS ISSUE B ACK TO THE FILE OF THE LD. CIT(A) TO DECIDE THE SAME IN ACCORDANCE WITH LAW, KEEPING IN VIEW OUR FOREGOING DELINEATION THEREOF, ISSUING DEFINITE FINDINGS IN RESPECT OF EA CH OF THE PAYMENT CATEGORIES, WHICH WE OBSERVE TO BE ABOUT 7 OR 8, WITH THERE BEING SEVERA L PAYEE GROUPS, VIZ. EMPLOYEES ASSOCIATIONS, RESIDENT ASSOCIATIONS, RELIGIOUS ASSO CIATIONS, AND AFTER HEARING BOTH THE PARTIES. WE DECIDE ACCORDINGLY. 5. GROUND NOS. 4 & 5 RELATE TO THE DISALLOWANCE IN THE SUM OF ` 2,03,169/ - IN RESPECT OF SELLING EXPENSES. AN EXAMINATION OF THE ASSESSE ES SELLING EXPENSES BY THE AO REVEALED IT TO INCLUDE EXPENDITURE ON GIFTS ON ACCO UNT OF DEALERS CONFERENCE IN A TOTAL OF ` 2,07,024/ - . HE DISALLOWED THE SAME AS THESE WERE CLEARLY NOT F OR BUSINESS PURPOSE, LISTING THE SAME AT ANNEXURE B TO HIS ORDER. IN APPEAL, TH E ASSESSEE CLARIFIED THAT ONLY EXPENSES FOR ` 3855/- (SL. NOS. 1 & 7 OF ANNEXURE B) ARE IN FACT WEDDING GIFTS, WHILE THE BALANCE ARE FOR COMPLIMENTS FOR DEALERS MEETS OR OTHERWISE BY WAY OF INCENTIVES TO THEM FOR ACHIEVING TARGETS. THE LD. CIT(A), ON VERIFICATION , FOUND THE ASSESSEES CONTENTION IN THIS REGARD AS CORRECT, AND CONFIRMED THE DISALLOWANCE QUA WEDDING GIFTS, ALLOWING THE BALANCE, VACATING THE CONTRARY FINDING BY THE AO, R ESULTING IN THE PRESENT APPEAL BY THE REVENUE. 6. LIKE SUBMISSIONS, I.E., AS IN THE CASE OF TH E GROUNDS # 2 & 3, CONSISTENT WITH THE STAND OF THE OPPOSING PARTIES BEFORE THE FIRST APPE LLATE AUTHORITY, STOOD RAISED BEFORE US BY EITHER SIDE. ITA.NO.248 /COCH./2009 4 7. WE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS LISTED THE EXPENDITURE AT ANNEXURE B TO ITS PAPER-BOOK. THE L D. AR WAS QUERIED IN THE MATTER, AND HE EXPLAINED EACH OF THE EXPENDITURE AS TOWARD A BU SINESS PURPOSE, I.E., ON ACCOUNT OF A DEFINED EVENT, EVEN AS MENTIONED IN THE ANNEXURE. T HERE IS NO BASIS FOR THE FINDING BY THE AO, AND THE BUSINESS EXPEDIENCY OF EACH OF THE AMOUNTS STANDS CLARIFIED, BEING GIFTS TO THE DEALERS AT THE MEETS OR CONFERENCES HELD OR FOR MEETING SALE TARGETS, AS IN THE CASE OF MELA SINGH & SONS ( ` 30,000/ - ) . WE, THEREFORE, ARE IN AGREEMENT WITH THE LD. CIT(A) ON THIS GROUND AND CONFIRM THE DELETION AS DIRECTED BY HIM. 8. GROUND NOS. 6 & 7 ARE IN RESPECT OF ADDITION AT ` 22,94,997/- IN RESPECT OF CREDITS RELATING TO A PRIOR PERIOD. IT WAS EXPLAINED BY TH E ASSESSEE IN APPEAL THAT BOTH THE ITEMS COMPRISING THE IMPUGNED AMOUNT, I.E., `ADVERTISEMEN T AND PUBLICITY ( ` 1590739/-) AND `GROUP GRATUITY ( ` 7,04,258/-) REPRESENT THE WRITE BACK OF THE PROVISI ON MADE DURING THE EARLIER YEARS IN RESPECT OF THE SAID EXPENSES ON BE ING DEEMED AS IN EXCESS. FURTHER, THE SAME WERE NOT CLAIMED AS EXPENDITURE DURING THE REL EVANT YEARS AND, AS SUCH, THERE IS NO QUESTION OF THEIR BEING ADDED BACK NOW ON BEING WRI TTEN BACK IN THE ACCOUNTS. THE ASSESSEE SECURED RELIEF IN FIRST APPEAL ON THAT BAS IS. AGGRIEVED, THE REVENUE IS IN APPEAL. 9. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI AL ON RECORD. THE PROVISION FOR ADVERTISEMENT AND PUBLICITY EXPENDITURE WAS MADE DU RING THE PREVIOUS YEAR 1999-2000 AT ` 17,96,270/- AGAINST WHICH ONLY A CLAIM OF ` 2055 3 1/ - STOOD RECEIVED FROM THE DEALERS IN 2000-01 AND CLAIMED ON THE BASIS OF PAYMENT IN T HE ASSESSMENT FOR AY 2001-02. AS NO FURTHER CLAIMS WERE EXPECTED, THE SAME STANDS WR ITTEN BACK IN ACCOUNTS. THE PROVISION FOR GRATUITY WAS MADE IN THE YEAR 2001-02 AT A MUCH HIGHER FIGURE, WHILE THE DEMAND RAISED BY THE LIC SUBSEQUENTLY WAS MUCH LESS, SO TH AT THE EXCESS PROVISION STANDS WRITTEN BACK. THE LD. CIT(A) HAS GIVEN A CLEAR FIN DING THAT THESE AMOUNTS WERE NOT CLAIMED IN THE RELEVANT YEARS, AND WHICH HAS NOT BE EN REBUTTED BY THE REVENUE. IN FACT, EVEN THE AO DOES NOT SAY SO; HIS ONLY OBJECTION, AS IT APPEARS, BEING THAT THE AMOUNT, THOUGH CREDITED AS INCOME IN ACCOUNTS, STANDS CLAIM ED AS A DEDUCTION PER THE RETURN OF INCOME. WE CAN HARDLY AGREE. THE REVERSAL OF EXCESS PROVISION ONLY REPRESENTS THE ITA.NO.248 /COCH./2009 5 OUTSTANDING ADJUSTMENT/S IN ACCOUNTS, EVEN AS THE D EDUCTIONS HAVE TO BE CLAIMED ON THE BASIS OF THE PROVISIONS OF THE ACT, PROVING THE REL EVANT EXPENDITURE. EXPENDITURE ON GRATUITY, FURTHER, IS ALLOWABLE ONLY SUBJECT TO ACT UAL PAYMENT TO THE RETIRING EMPLOYEE, OR ON PAYMENT TO AN APPROVED FUND MANAGER, FUNDING THE GRATUITY LIABILITY, AS PER ACTUARIAL VALUATION. IN THE PRESENT CASE, THE EXPENDITURE ADM ITTEDLY IS BY WAY OF PROVISION, WHICH IS ORDINARILY NOT ADMISSIBLE UNDER THE ACT, I.E., EXCE PT WHERE SHOWN TO BE A REASONABLE ESTIMATE OF AN ACTUAL BUSINESS EXPENDITURE, THE QUA NTIFICATION OF WHICH IS UNASCERTAINED, AND, MORE IMPORTANTLY, HAS BEEN CLAIMED OR ALLOWED IN THE ASSESSMENT FOR THE YEARS OF CREATION OF THE RESPECTIVE PROVISION. AS SUCH, NO CASE FOR ADDITION, ON THE WRITE BACK OF SUCH EXPENDITURE/PROVISION IS MADE OUT, AND STANDS RIGHTLY DELETED BY THE LD. CIT(A). WE DECIDE ACCORDINGLY. 10. IN THE RESULT, THE REVENUES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 13TH JANUARY, 2011 GJ COPY TO: 1. M/S. KERALA AUTOMOBILES LTD., ARALUMOODU, TRIVAN DRUM. 2. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1 ), TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITA.NO.248 /COCH./2009 6