ITAT deletes Addition u/s 37(1) of written off Amount Treated as Business Expenditure [Read Order]

The New Delhi bench of the Income Tax Appellate Tribunal (ITAT) recently deleted the addition under Section 37(1) of Income Tax Act 1961 on account of written off amount treated as business expenditure.

The assessee, Amway India Enterprises Pvt. Ltd, was selling goods directly to customers through independent distributors known as Amway Business Owners (ABOs). The ABOs were required to pay Service Tax, but it was unclear who was liable for the tax.

The assessee decided to lend money to the ABOs to help them pay the tax until the issue was resolved. The amount was initially shown as loans in the balance sheet. Later, when it was clarified that the ABOs were liable for the tax, they asked the appellant to waive off the loan, as they had already paid the tax.The appellant agreed and wrote off the amounts paid to the ABOs as a Service Tax liability until December, 2011.

The assessing officer disallowed this amount, considering it as not wholly and exclusively incurred for business purposes and as capital expenditure. However, based on the presented facts, it is argued that the payment was revenue expenditure closely related to the business activities. The appellant justifiably claimed during the relevant year that the payment was made for business expediency.

The counsel for the revenue argued that the Assessing Officer was correct in disallowing the payment of service tax by the assessee to its distributors, as treating it as bad debts and claiming it as revenue expenditure is not allowed by law.

The counsel for the revenue lastly submitted that the Assessing Officer was justified in disallowing the amount and adding it back to the assessee's total income as it was not solely incurred for the purpose of the business.

Therefore, the Assessing Officer was right in making addition in the case of the assessee. The counsel prayed that the CIT (A) has granted the relief to the assessee without any basis.

Counsel for the assessee argued that assessee is a company that is working through its distributors and the chain of distributors is the sole source of the assessee to reach its customers.

The counsel submitted that there was service tax liability created on the distributors due to application of new GST Rules and distributors were facing great hardship in making payment of service tax out of the commission income earned by them.

The counsel added that keeping in view the hardship of the distributors the assessee company decided to support their distributors by way of payment of services tax and the amount paid to them was shown as debit balance in their respective account with an expectation that within same time this amount would be settled.

The counsel submitted that specifically it was observed by the assessee company that the distributors/ ABOs are not able to return the amount debited to their respective accounts, therefore, the same was treated as bad debts and claims granted in the profit and loss account of the assessee.

The bench consisting of two members, the Judicial Member C. M. Garg and the Accountant Member B. R. R. Kumar observed that the payment was initially recorded as a loan in the company's books, and it was not claimed as an expenditure for service tax in the year of payment due to the uncertainty and dispute surrounding the liability.

The question arose as to whether the liability should be borne by the company (service receiver) or the distributors (service providers). In such a situation, when the company had reimbursed its distributors who had already paid the service tax, it can be seen as an adhoc reimbursement of expenditure or liability.

Considering the hardship faced by the distributors and the service tax liability, the company decided to write off the loan amount recorded in the distributors/ ABOs accounts.

The two-member tribunal observed that, In light of these facts and the commercial expediency, the CIT(A) correctly concluded that the payment made by the appellant was directly related to the business activity and incurred wholly and exclusively for the purpose of the company's business. It was allowable as a business expenditure, the tribunal further observed. The tribunal thus upheld the decision of CIT (A).

In result, the appeal filed by revenue was dismissed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates