Case Law Details
ACIT Vs Grand Polycoats Company Pvt. Ltd. (ITAT Ahmedabad)
ITAT Ahmedabad held that gratuity premium paid to LIC was to be treated as business expenditure and the same is allowable under section 37(1) of the Income Tax Act.
Facts- The assessee is engaged in the business of manufacturing of high performance industrial coatings and specialised paints, and the assessee was the only Indian company selected by Indian Space Research Organization (ISRO) to supply special paints to coat for space research and was awarded contract to supply special paints for “Mission Mars”.
The case of the assessee was selected for limited scrutiny and order under section 143(3) of the Act was passed, assessing income at Rs.4,92,95,770/- after making disallowance of Rs.2, 12,55,04/- on account of sales commission expenses, Rs.7,04,541/- on account of gratuity expense and 1,99,156/- on account of R&D expenses u/s. 35(2AB) of the Act. Aggrieved by the same, the assessee carried the matter in appeal before the ld.CIT(A) who deleted all the disallowance. Aggrieved by this order, the Department has come in appeal before the Tribunal.
Conclusion- Held that the ITAT in the immediately preceding year, A.Y 2013-14, confirmed the order of the CIT(A) passed on identical lines holding that Gratuity amount paid towards a fund which was not approved by the Income Tax Authority. This issue has been settled by the High Court of Gujarat in the case of Valsad District Central Co Op. Bank Ltd. Vs. ACIT in favour of the assessee. Hon’ble High Court concluded that as contribution made towards the fund was to be treated as business expenditure and the same was allowable u/s. 37(1) of the Act, even though the said fund was unapproved by the Income Tax Department.
Accordingly, that in the preceding year identical disallowance of gratuity paid to LIC by the assessee was disallowed for identical reason of the fund to which it was paid not being approved. The ITAT however upheld the order of the Ld.CIT(A) deleting the disallowance.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The above appeal has been filed by the Revenue against the order passed by the ld.CIT(A), National Faceless Appeal Centre, Delhi dated 28.09.2022under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), for the assessment year 2014- 15.
2. The grounds raised in the Revenue’s appeal read as under:
“1. ‘Whether on the facts of the case and in law, Ld. CIT(A) was justified in deleting the addition of Rs.2, 12,55,043/- made by the AO on account of restricting the commission expenses to 2% of total sales without appreciating the fact that the assessee could not provide the basis of debiting the commission expenses which were not corresponding to monthly sales.
1.1 “Whether on the facts of the case and in law, Ld. CIT(A) was justified in deleting the addition of Rs.2, 12,55,043/- made by the AO despite the fact that the assessee could not establish with documentary evidences that commission expenses were wholly and exclusively incurred for business purposes and actual services were rendered by the commission agents and also that the assessee failed tojustify its own argument with documentary evidences that commission expenses differ on case to case basis, on customer to customer basis and on product to product basis.”
2. “Whether on the facts of the case and in law, Ld. CIT(A) was justified in deleting the addition of Rs. 7,04,541/- made by the AO on account of disallowance of gratuity paid towards the fund which was not approved by income-tax Authority?”.
3. “Whether on the facts of the case and in law, Ld. CIT(A) was justified in deleting the addition of Rs. 1,99,156/- made by the AO on account of disallowance of deduction u/s.35(2AB) of the Act without appreciating the fact that deduction was claimed in respect of employees who were not fulfilling eligibility criteria as laid down by DSIR?”
4. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
3. Brief facts relating to the case are that, the assessee is engaged in the business of manufacturing of high performance industrial coatings and specialized paints, and the assessee was the only Indian company selected by Indian Space Research Organization (ISRO) to supply special paints to coat for space research and was awarded contract to supply special paints for “Mission Mars”.
4. For the impugned year, the assessee filed return of income declaring total income at Rs.2,71,37,030/-. The case was selected for limited scrutiny and order under section 143(3) of the Act was passed, assessing income at Rs.4,92,95,770/- after making disallowance of Rs.2, 12,55,04/- on account of sales commission expenses, Rs.7,04,541/- on account of gratuity expense and 1,99,156/- on account of R&D expenses under section 35(2AB) of the Act. Aggrieved bythe same, the assessee carried the matter in appeal before theld.CIT(A) who deleted all the disallowance. Aggrieved by this order, the Department has come in appeal before the Tribunal.
5. Vis-à-vis, the ground no.1 and 2 raised by the department relating to the deletion of disallowance pertaining to commission expenses and gratuity paid to LIC, the ld.counsel for the assessee, at the outset itself submitted that, identical disallowance made in thepreceding year was deleted by the ld.CIT(A) and his order was confirmed by the ITAT vide its order in ITA No.388/Ahd/2022 dated 26.5.2023. Copy of the order was placed before.
The ld.DR fairly agreed with the same.
As for ground no.3, it was argued on merits before us.
6. We shall now proceed to adjudicate the grounds raised by the Revenue beginning with groundno. 1 .
7. Ground No.1 being against the deletion by the Ld.CIT(A) of the disallowance pertaining to sales commission expenses, we note, from the facts before us, that the impugned disallowance of sales commission to the tune of Rs.2, 12,55,043/- was madeby the AO noting that there was no uniform rate of commission paid by the assessee, ranging from 1% to 9%, and as per the AO only 2% of the commission expenses were reasonable and allowable. Accordingly, excess commission as per the AO, amounting to Rs.2, 12,55,043/- was disallowed by him.
8. We have noted from order of the ld.CIT(A) that detailed submissions were made by the assessee before the ld.CIT(A) giving reasons for the variation in sales commission rate, pointing out that the assessee was operating in a fiercely competitive market scenario and to survive and to grow, it had to give commission and incentives to dealers, rate of which varied from dealer to dealer depending on various factors. The assessee also pointed out that none of the dealers to whom the commission was paid was a related party of the assessee as per section 40A(2)(b) of the Act, and that payments were made through cheque after deducting TDS. Finding merit in the contention of the assessee , noting the fact that similar disallowance of commission expenses in the past had been deleted by the Ld. CIT(A) he allowed the assesses claim to entire commission expenses, deletingthe disallowance made by the AO.
9. We have perused the order of the ITAT in the case of the assessee for the immediately preceding year i.e. Asst.Year 20 13-14 in ITA No.388/Ahd/2022 wherein this issue was dealt with in para 8 of the order, confirming the order of the ld.CIT(A) deleting the disallowance of identical commission expenses holding as under:
“8. We have given our thoughtful consideration and perused the materials available on record. Regarding the disallowance of commission expenses, the Assessing Officer observed that the payments under the head “commission” made to various persons engaged in marketing and distribution network and therefore estimated that the minimum rate of 2% on total sales claimed by the assessee. It is not in dispute that the above commission payment are made by the assessee by cheques and appropriate TDS is deducted and remitted to the Government account and the parties also assessed to Income Tax. The assessee is also maintaining its books of accounts in ERP system, Commission is calculated at the end of the relevant quarter and after due verification of sales target achieved, payment received against sales etc, and on the basis of debit note received from dealers, the commission expenses is accounted in the books of the assessee company. The assessing officer also found that similar commission expenses which was paid by the assessee in the earlier assessment years is being accepted by the department and which is not disputed by the A. O. Thus taking into account, overall facts of the case, the Ld. CIT(A) deleted the addition made by the Assessing Officer on commission expenses. The Ld. D.R. appearing for the Revenue could not place on record any contra view. In the absence of the same, we have no hesitation in confirming the deletion made by the Ld. CIT(A) on account of commission expenses. Thus the Ground Nos. 1 and 1.1 raised by the Revenue are devoid of merits and the same are hereby dismissed.”
10. The facts and circumstances leading to disallowance of commission expenses in the preceding year we find are identical being on account of variation in rate of commission. The ITAT found merit in the basis of the Ld.CIT(A) for deleting the disallowance finding all parties to whom commission was paid being unrelated, payments being made through banking channels ,TDS deducted thereon and similar disallowances made in earlier years being deleted by the CIT(A) which was not contested by the Revenue.
The ld.DR was unable to either distinguish the factsof the case of the preceding year before us nor has he pointed out any infirmity in the order of the ld.CIT(A) for the impugned year before us.
11. Inview of the above, since the issue is squarely covered by the order of the ITAT in the case of the assessee itself in the preceding year, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance of commission expenses to the tune of 2, 12,55,043/-.
12. Ground No.2 relates to the disallowance of gratuity expenses incurred by the assessee. The disallowance being made for the reason that it was not found to havefulfilled the conditions required by sections 40A(7) of the Act, regarding the gratuity being paid to an approved gratuity fund. Assessee, as per the facts of the case had paid gratuity premium amounting to Rs.7,04,541/- to LIC, but the gratuity fund itself being not found to be approved by the CIT/CIT, the AO disallowed the entire gratuity premium paid by the assessee during the year.
13. The ld.CIT(A) allowed the assessee’s claim by following the decisionof the Hon’ble Madras High Court in the case of CIT Vs. Tamil Nadu Maritime Board, 131 taxmann.com 250 holding that contributionmade towards the fund was tobe treated as business expenditure, and was allowable under section 37(1) of the Act, even though, said fund was unapproved.
The ITAT in the immediately preceding year, A.D 20 13-14, we find, confirmed the order of the ld.CIT(A) passed on identical lines holding at para 9 to 10 of its order as under:
“9. Regarding ground no. 2, Gratuity amount paid towards a fund which was not approved by the Income Tax Authority. This issue is been settled by the Hon’ble High Court of Gujarat in the case of Valsad District Central Co-Op. Bank Ltd. Vs. ACIT reported in [2018] 92 taxmann.com 280 in favour of the assessee held as follows:”
……10. In the present case, the petitioner had raised a claim and had also placed all necessary computation on record in connection with such a claim. It is of course true that the contribution to the gratuity scheme itself was not sufficient to enable an assessee to claim deduction. Additional requirement that such scheme in which the contribution is made must also have been approved by the Commissioner is undisputable. In normal case therefore, nondisclosure of such claim not being approved, if such was the fact, may amount to not disclosing true and full facts. However, this issue must be examined in peculiar facts of the present case. According to the petitioner, factually, the scheme was approved by the Commissioner way back in A the year 1976. It was only after it, the LIC would undertake the responsibility to manage the same. It was on this basis that the petitioner had been raising the claim year after year right since its inception every year. In none of the past years, any such issue was raised by the Assessing Officers in this respect. Therefore, the petitioner produced what it had been producing all along namely, the contribution made towards the fund and the agreement of the LIC to manage the fund. If the Assessing Officer had any doubt about such a claim, it was always open for him to examine it, ask the petitioner to fulfill further requirements. Merely because the petitioner did not provide an additional declaration in the return that the scheme though approved, the pentioner is unable to produce a copy of the order approved by the Commissioner after long gap of time, cannot be categorized as failure on the part of the petitioner to disclose truly and fully all material facts. Only on this ground, we are inclined to quash the notice.”
9.1. Further the Ld. CIT(A) relied upon the Madras High Court judgment in the case of CIT Vs. Tamilnadu Maritime Board reported in 131 taxmann.com 250, wherein the Hon’ble High Court has held that contribution made towards fund was to be treated as business expenditure and the same was allowable u/s. 37(1) of the Act, even though the said fund was unapproved by Income Tax Department.
10. Thus following the above judicial decisions, we have no hesitation in confirming the deletion made by the Ld. CIT(A). Thus the ground no. 2 raised by the Revenue is also devoid of merit and the same is liable to be rejected.
14. We find that in the preceding year identical disallowance of gratuity paid to LIC by the assessee was disallowed for identical reason of the fund to which it was paid not being approved. The ITAT however upheld the order of the Ld.CIT(A) deleting the disallowance.
The ld.DR was unable to point out any distinguishing facts in the present case nor was he was able to show any infirmity in the order of the ld.CIT(A).
15. In view of the same, since the issue is squarely covered in favour of the assessee by virtue of the order passed by the ITAT in the case of the assessee itself in the preceding year, we have no hesitation in upholding the order of the ld.CIT(A) deleting the disallowance of gratuity premium paid amounting to Rs.7,04,541/-. The ground no.2 raised by the Revenue is rejected.
16. The ground no.3 raised by the Revenue relates to disallowance of weighted deduction claimed by the assessee in in-house research and development expenses under section 35(2AB) of the Act.
17. Drawing our attention to the facts of the case, the ld.counsel for the assessee pointed out that the assessee had in-house research and development facility, which was approved by the authority prescribed for the said purpose under section 35(2AB) of the Act viz. Department of Scientific and Industrial Research (DSIR). The assessee, he stated therefore was entitled to and had claimed weighted deduction on research & development expenditure incurred in its in-house facility. Hepointed out that the AO denied the assessee’s claim of weighted deduction on expenditure in relation to four employees stated tobe working in its R&D facility to the tune of Rs. 1,99,156/-, finding their qualifications to be not in accordance with the guidelines of prescribed authority i.e. DSIR for being eligible for weighted deduction. From the assessment order, he drew our attention to the table at page no.8 of the order giving details of names of the employees, their designation as, Asstt. Research and Development, total salary paid to them amounting in all to Rs. 1,99,156/- and their educational qualifications as SSC in the case of all the four employees. He pointed out that the ld.AO noted that as per the DSIR guidelines only personnel with Degree/Diploma in Science and Engineering discipline, and above qualification would be regarded as R&D manpower eligible for weighted deduction; that manpower under category of retainership/consultants and manpower on contract would not be admissible for weighted tax deduction. Referring to the said guidelines, the AO found that the assessee was not eligible for weighted deduction on the four employees whose qualification being SSC, did not fulfill the criterion for eligibility as per the DSIR guidelines itself.
18. The contention of the ld.AR before us was that the fact that the assessee’s in-house R&D facility was approved by the prescribed authority in terms of section 35(2AB) of the Act,was not disputed. Also not disputed, he pointed out, is the fact that DSIR had approved the expenditure incurred in relation to these four employees. He stated, therefore, that when the prescribed authority had approved the quantum of expenditure incurred in relation to these employees, as being in relation to its in house R&D activities the AO had no locus standi to question the approval of the prescribed authority.
19. The ld.DR however relied on the order of the AO emphasizing that the finding of the AO that these four employees did not qualify as R&D manpower as per DSIR guidelines itself, lacking requisite qualification, there was no question for allowing weighted deduction in relation to expenses pertaining to these employees
20. We have heard contention of the both the parties. We are in agreement with the contentions of the ld. counsel for the assessee. The undisputed fact being the assessee’s in-house R&D facility was approved by the prescribed authority, DSIR, and the quantum of expenditure incurred in relationton four employees was certified by the DSIR, as having incurred for R&D facility, we completely agree with the Ld.Counsel for the assessee that there was no locus standi with the AO to question the certification of the DSIR.
Section 35(2AB) is an incentive provision for promoting research and development activities in the Country, and for this purpose, weighted deduction is given for all expenditure incurred on revenue and capital account on in-house R&D facility. R&D being a technical subject, the approval of such facilities is required tobe given by authorities prescribed in the section which are considered competent for the said purpose, in the present case being Department of Scientific and Industrial Research, DSIR. When the authority considered competent by the legislature for R&D approvals itself has approved the quantum of expenditure incurred by the assessee, we fail to understand how the AO can sit in judgment over the certification givenby the prescribed authority so as to deny the benefit of weighted deduction to the assessee. When the DSIR itself found no fault in the expenses incurred on the four employees, the AO surely had no locus standi to treat the same as not incurred for R&D facility. We completely agree with the Ld.CIT(A) that in the aforesaid facts and circumstances there was no case for making any disallowance u/s 35(2AB) of the Act.
In view of the above, we confirm order of the ld.CIT(A) deleting the disallowance of R&D expenses to the tune of Rs. 1,99,156/- and ground no.3 raisedby the Revenue is also rejected.
21. In the result, appeal of the Revenue is dismissed.
Order pronounced in the Court on 3rd October, 2023 at Ahmedabad.
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