The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) deleted the disallowance of Rs.38,18,487,holding that the assessing officer incorrectly applied Section 37 of the Income Tax Act,1961,to disallow sales promotion expenses.The Bench held that provisions for annual discount scheme and credit notes were allowable.
Rushil Décor Ltd,the assessee,is engaged in the business of manufacturing laminates and allied products,and filed its income tax return for AY 2016-17.
The assessee had incurred sales promotion expenses amounting to Rs. 48,28,256 during the assessment year 2016-17.
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The income tax return of Rushil Décor Ltd. for AY 2016-17 was selected for scrutiny assessment by the tax authorities.The Assessing Officer scrutinized two issues: the disallowance of sales promotion expenses and the disallowance of provisions made for the annual discount scheme and credit notes.
The Assessing Officer (AO) disallowed the entire amount of Rs. 48,28,256 claimed by Rushil Décor Ltd. under the head “sales promotion expenses”.
The Commissioner of Income Tax (Appeals) partially allowed the assessee’s appeal, deleting Rs. 10,08,769 from the total disallowed amount. Rushil Décor Ltd. had made provisions for certain expenses, including Rs. 19,21,000 for an annual discount scheme and Rs. 3,01,300 for credit notes.The CIT(A) upheld the AO’s decision to disallow the provisions of Rs. 22,21,300 related to the annual discount scheme and credit notes.
Aggrieved by the decision, the assessee appealed before the Income Tax Appellate Tribunal.
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The appellant represented by i Tushar Hemani and Parimalsinh B. Parmar argued that the action of lowe authorities were violating the basic principles of natural justice and therefore deserves to be quashed.
The counsel for the assessee argued that the Assessing Officer (AO) ignored important vouchers provided by the assessee to support the sales promotion expenses. These vouchers were given on a “sampling basis” to prove the expenses were legitimate. However, the AO overlooked these vouchers, leading to the disallowance of the full amount. The counsel also pointed out that the CIT(A) did not ask for the remaining vouchers before confirming the disallowance.
The counsel emphasized that the disputed expenses of Rs. 15,97,897 were only a small part (0.05%) of the company’s total revenue of Rs. 320.51 crore, and thus, such a minor amount should not have led to the disallowance of the entire sum. Moreover, the expenses met the conditions under Section 37 of the Income Tax Act, which allows business expenses. Since the CIT(A) had already allowed part of the expenses (Rs. 10,08,769), the counsel argued that the full disallowance should be reversed.
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The counsel further explained that all payments for the expenses were made by cheque, and there was no allegation of cash payments. The disallowance was disproportionate to the size of the company’s revenue, and therefore, no further disallowance was necessary. If any disallowance was to be made, it should be a minimal amount.
The counsel for the assessee explained that the addition of Rs. 22,21,300 related to provisions for two items: the “Annual Discount Scheme” (Rs. 19,21,000) and “Credit Note to be booked” (Rs. 3,01,300). To support this, the counsel referred to page 144 of the paper book, showing evidence of these provisions.
The counsel argued that, under Section 145 of the Income Tax Act, businesses must calculate their income using either the cash or mercantile accounting method. The assessee, being a company, is required to use the accrual accounting method, as mandated by the Companies Act. Under accrual accounting, liabilities incurred during the year must be recorded, even if they are not paid in the same year. The provisions made by the assessee for the annual discount scheme and credit notes were based on this accounting practice and reflected routine business expenses that the company expected to incur in the next year.
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Although the actual payments for these expenses would be made in the following year, the provision was necessary to ensure the financial accounts gave a true and fair picture. The provision was merely an estimate for anticipated future expenses, which, according to the counsel, should be considered legitimate business expenses under Section 37 of the Income Tax Act.
The counsel pointed out that the total provision of Rs. 22,21,300 was only 0.07% of the company’s total revenue of Rs. 320.51 crore, which made the amount immaterial in the context of the company’s overall financial situation. Additionally, the company had not claimed the actual expenses yet, but instead debited them to the provision account, making it a tax-neutral exercise.
In conclusion, the counsel argued that the provisions for the annual discount scheme and credit notes were reasonable, necessary, and in line with accounting standards. Given that these provisions were based on past business experience, and their impact on the company’s total revenue was minimal, the assessee requested that the entire addition of Rs. 22,21,300 be deleted.
Rignesh Das,on behalf of,Assistant Commissioner of Income Tax,relied on the order earlier passed by CIT(A).
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After hearing the rival contentions, the two member Bench comprising Sidhartha Nautiyal ( Judicial Member ) and Annappurna Gupta ( Accountant Member ) after considering the arguments presented by both sides and reviewing the relevant records, we believe that, based on the facts provided by the assessee, the disallowances are very small compared to the company’s total turnover. Regarding the first disallowance, there is no evidence suggesting that any expenses were paid in cash. Additionally, the CIT(A) did not ask the assessee to provide the remaining invoices before confirming the disallowance. Given these facts, they concluded that no disallowance is necessary for this assessment year. Therefore, the assessee’s appeal is allowed.
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