MOTOR MACHINERUY TOOLS,PATNA vs. ACIT, CIRCLE-5, PATNA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA-PATNA ‘e-COURT’, KOLKATA [Virtual Court Hearing] [Before Shri P.M. Jagtap, Vice-President (KZ)] I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 MotorMachinery Tools…………………………………………………………………………………Appellant [PAN: AAHFM 5345 D] Vs. ACIT,Circle-5, Patna………………………………………………………………………………….Respondent Appearances by: Sh. Ajay Kumar Rastogi, Adv., appeared on behalf of the Assessee. Sh. Ajay Kumar, JCIT, Sr.D/R, appeared on behalf of the Revenue. Date of concluding the hearing : September 8th, 2021 Date of pronouncing the order : September 9th, 2021

ORDER Per Shri P.M. Jagtap, Vice-President: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals), Hazaribagh [hereinafter the ld. ‘CIT(A)’] dated 31.01.2020 passed under section 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’). 2. It is noted that there is a delay of 49 days on the part of the assessee in filing this appeal before the Tribunal. In this regard, the assessee has moved an application seeking condonation of the said delay on the ground that the appeal could not be filed in time because of the lockdown declared at the relevant time to prevent the spread of COVID-19 virus and keeping in view the reason given by the assessee, I am satisfied that there was sufficient cause for the delay of 49 days on the part of the assessee in filing of this appeal before the Tribunal. Even the ld. D/R has not raised any objection in this regard. The said delay of 49 days is accordingly condoned and the appeal of the assessee is being disposed off on merit. 3. The issue raised in ground no. 1 relates to the addition of Rs.4,08,200/- made by the Assessing Officer (hereinafter the ‘AO’) and confirmed by the ld. CIT(A) u/s 28(iv) of the Act being the amount of cost of demo van disbursed by M/s. Usha International Ltd.

2 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools 3.1. The assessee in the present case is a partnership firm which is engaged in the business of distribution of agro machineries i.e. pumping set, generator set, agricultural engines, power tiller, lubricants, spare parts etc. It works as dealer/redistributor of companies like M/s. Cotton Grieves and M/s. Usha International Ltd. The return of income for the year under consideration was filed by it on 29.09.2011 declaring total income at Rs.11,88,753/-. The said return was selected for scrutiny through CASS. It was noticed by the AO that the assessee on 31.03.2011 had received “Special Redistributors’ Incentive” of Rs.4,08,200/- from M/s. Usha International Ltd. in the form of credit notes. As noted by the AO, this incentive was given for the purchase of a van which was supposed to be used for the promotion of the products of M/s. Usha International Ltd. According to the AO, this benefit in the form of incentive had arisen to the assessee in the course of business and the same was liable to tax under the head “profits and gains of business or profession” as per Section 28(iv) of the Act. The assessee, however, had treated this amount of incentive as liability in his balance-sheet. The AO, therefore, required the assessee to offer its explanation as to why the said amount should not be brought to tax as business income as per the provision of Section 28(iv) of the Act. In reply, it was submitted by the assessee that the amount in question was given as subsidy for the purchase of van and the same was actually utilised for purchase of van in the immediately succeeding year. It was submitted that the van was purchased for a total amount of Rs.5,47,253/- and Rs.1,39,053/- over and above the amount of subsidy was borne by the assessee. It was also brought to the notice of the AO that the assessee in the immediately succeeding year had treated the value of the van being asset only to the extent of Rs.1,39,053/- and claimed depreciation at the rate of 15%. It was contended on behalf of the assessee that the amount of incentive in question, thus, was utilised for the purchase of van and the same was reduced from the cost of acquisition of van as per Explanation 10 to Section 43(1) of the Act. It was also contended on behalf of the assessee before the AO that Explanation 10 to Section 43(1) of the Act was applicable in this case and not Section 28(iv) of the Act. 3.2. The submissions made on behalf of the assessee were not found acceptable by the Assessing Officer for the following reasons given in the assessment order: “On being condition attached to this special incentive- This is actually incentive for achieving certain targets which has been given by the way of subsidy. Credit note of Rs. 4,08.200/- have been given under the nomenclature of the ‘Special Redistributors’ Incentive” by the parent company in its books. So, being in the nature of incentive, it is actually trading receipt in the

3 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools hands of the assessee and should be treated as business income as per section 28(iv) of the Indian Income Tax Act, 1961. Section 28(iv) reads as follows: "the value of any benefit or perquisite, whether convertible into money or not. arising from business or the exercise of a profession (shall he chargeable to income lax under the head of profits and gains of business or profession)' This incentive has been given by the parent company, in the course of it business with the assessee. So, simply it is a trading receipt. There would have been no occasion for the assessee to receive this amount had it not been a dealer for the Usha International. The very object of this incentive is also to promote the sales of the product. To achieve higher targets of sales, these types of incentives are offered by the companies. Not all the dealers of Usha International' were provided with this incentive. Assessee is among the very few dealers who received it due to his larger sales. So, this incentive is directly linked with the turnover of the assessee. The incentive so received is not very different from what a staff of Usha International would have received by way of production bonus tor achieving higher production. Even Conditionality of spending it for the purpose of purchasing a van and painting it with the Logo of parent company doesn't make it a liability for the assessee, as this van was never meant to be returned back to the parent company. This fact was also confirmed by the Usha International itself vide its letter dated in response to the direct queries in this regard. As far as demonstration of products of Usha is concerned, it is very obvious that same products are sold by the assessee. So, in a way it is demo of assessee's own sales items. Therefore, Ins saying that this incentive doesn’t arise as any benefit to him, instead benefit was to the Usha. whose logo was painted on the Van. doesn’t hold the ground. Usha International, sales its products through its distributors and increase in the sale of distributors only may result in the increase of the sale of the parent company. This was the whole idea behind floating this scheme by the company Promotion of the Usha Products directly augments the sale of the assessee. So, it is clearly a benefit convertible into money arised to the assessee in the course of business within the scope of section 28(tv). Hence, it is treated as the profit of business of the assessee.” Keeping in view the reasons given above and the failure of the assessee to submit any proof regarding the utilisation of the incentive amount in question for purchase of van, the AO treated the incentive amount as the business income of the assessee as per Section 28(iv) of the Act and made addition to that extent. 3.3. The addition of Rs.4,08,200/- made by the AO on account of “Special Redistributors’ Incentive” by treating the same as business income as per Section 28(iv) of the Act was challenged by the assessee in the appeal filed before the Tribunal. During the course of appellate proceedings before the ld. CIT(A), the submissions made before the AO in support of the case on this issue were reiterated on behalf of the assessee. The ld. CIT(A), however, did not find merit in the same and proceeded to confirm the addition made by the AO on this issue for the following reasons given in para 5.3.3 to 5.3.6 of his order: “5.3.3. It is fact that during the year under consideration appellant had received Rs. 4,08,200/- in the form of credit notes as "Special Redistributor Incentive". It is fact that incentive has been given by the companies to their distributors if they achieve and exceed the target of yearly turnover fixed by the companies. Thus, incentives are directly linked with the turnover of the distributors of the companies. These types of incentives are extra benefit to the distributors provided by the companies to boost them so that sale of the company may be increased. 5.3.4. For the sake of clarity provision of section 28(iv) is produced here under which reads-

4 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools The following income shall be chargeable to income tax under the head “profits and gains of business of professions- the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of the profession.” 5.3.5. From the above discussion, it is clear that appellant firm has received incentive which has been arises from the carrying out the business activity as distributor of M/s Usha International. Though, as per claim of the assessee, it has been given for purchase of Van which has to be utilized for the demonstration of product of the M/s Usha International but there is no doubt that it is benefit to the appellant as owner of the said Van. 5.3.6. In a latest decision in the case of M/s Mahindra & Mahindra Ltd, the Hon’ble Apex Court has given their view on the provision of section 28(iv) that “provision of section 28(iv) will be applicable on the income arises from business or profession and the benefit which is received has to be some other form rather than in shape of money”. Thus, it is clear that “Special Redistributor Incentive" received by the appellant firm in the form of credit notes though as to be used for purchase of Van but is income arises during business activities and taxable in terms of provisions of section 28(iv) of the I.T. Act. As per appellant submission that they have considered the "Special Redistributor Incentive" as subsidy in the year of purchase of van cannot be accepted without any evidence as appellant itself disclosed it as “Special Redistributor Incentive" in the ledger a/c of assessee maintained by M/s Usha International Ltd. Further, treatment of this transaction in the accounts of M/s Usha International Ltd also not been explained” 4. I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. D/R has strongly relied on the impugned order of the ld. CIT(A) in support of the Revenue’s case on this issue. The ld. Counsel for the assessee, on the other hand, has invited my attention to the copy of letter of M/s. Usha International Ltd. dated 12.07.2011 placed at page no. 8 of the paper book to point out that the amount of incentive in question was given to the assessee in the form of credit note for purchase of van which was to be painted with Usha logo and was to be used by the assessee for display and demonstration purposes. He has contended that the said incentive was, thus, received by the assessee for the specific purpose of purchase of van on the last date of the year under consideration and the same shown as liability in the balance sheet as on 31.03.2011 was actually utilised for the purchase of van in the immediately succeeding year. The ld. Counsel for the assessee had invited my attention to the balance sheet of the assessee as at 31.03.2012 placed at page no. 10 of the paper book to point out that pickup van was purchased by the assessee for an amount of Rs.5,47,253/- and after reducing the incentive of Rs. 4.08 lakhs received from M/s. Usha International Ltd. from the cost of acquisition, the balance amount was reflected in the balance sheet on which depreciation was claimed by the assessee. He has contended that this accounting treatment was duly given by the assessee as per Explanation 10 to Section 43(1) of the Act which reads as under: “Explanation 10.—Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or

5 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee: Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.” 4.1. As rightly contended by the ld. Counsel for the assessee, the amount of incentive in question thus was received from M/s. Usha International Ltd. for the specific purpose of purchase of van which was to be utilised for the display and demonstration of the logo of M/s. Usha International Ltd. and since the said amount was actually utilised for purchase of van in the immediately succeeding year, I find merit in the contention of the ld. Counsel for the assessee that it was a case where a portion of cost of asset claimed by the assessee had been met directly by M/s. Usha International Ltd. in the form of subsidy or grant and it was rightly excluded by the assessee from the actual cost of the asset in order to determine the cost of acquisition for the purpose of Section 43(1) of the Act as specifically provided in Explanation 10 thereto. In my opinion, the amount of incentive received by the assessee from M/s. Usha International Ltd. specifically for the purchase of van was not in the nature of any benefit or perquisite which had arisen from business so as to treat the value of the same as business income of the assessee in terms of Section 28(iv) of the Act. I, therefore, find merit in the contention of the ld. Counsel for the assessee that the case of the assessee is covered by Explanation 10 to Section 43(1) of the Act and not by Section 28(iv) of the Act. I, therefore, delete the addition made by the AO u/s 28(iv) of the Act and confirmed by the ld. CIT(A) and allow ground no. 1 of the assessee’s appeal. 5. The issue in ground no. 2 relates to the disallowance of Rs.1,92,383/- made by the AO and confirmed by the ld. CIT(A) out of freight inward expenses. 6. In the profit & loss account filed along with the return of income, a sum of Rs.24,05,951/- was credited by the assessee on account of freight inward. As found by the Assessing Officer, the freight inward expenses claimed by the assessee in proportion to the purchases was more than the freight outward expenses claimed by the assessee in proportion to the sales made. He also noted that the freight inward expenses to the extent of Rs. 12,82,588/- were incurred by the assessee in cash and the same were supported only by self-made vouchers. He, therefore, treated the freight inward

6 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools expenses claimed by the assessee to that extent as unverifiable and made disallowance of Rs.1,92,383/- being 15% of Rs.12,82,558/-. On appeal, the ld. CIT(A) confirmed the said disallowance. 6. I have heard the arguments of both the parties on this issue and also perused the relevant material on record. Although the ld. Counsel for the assessee has submitted that there is no specific instance pointed out by the AO to show the unverifiable element involved in the freight inward expenses claimed by the assessee, it is observed that the freight inward expenses claimed by the assessee to the extent of Rs.12,82,558/- were incurred in cash and the same were supported by only self-made vouchers. The claim of the assessee for the freight inward expenses to that extent, in my opinion, therefore was not fully verifiable as rightly held by the authorities. However, I find some merit in the alternative contention raised by the ld. Counsel for the assessee that the disallowance of 15% made by the AO and confirmed by the ld. CIT(A) is excessive and unreasonable keeping in view the nature of the business of the assessee and it would be fair and reasonable to restrict the same to 7.5%. I accordingly modify the order of the ld. CIT(A) on this issue and direct the AO to restrict the disallowance of 15% to 7.5%. Ground No. 2 of the assessee’s appeal is treated as partly allowed. 7. The third ground raised by the assessee in this appeal relating to the issue of addition of Rs.15,014/- on account of difference in closing balance in the account of M/s. Usha International Ltd. is not pressed by the ld. Counsel for the assessee at the time of hearing before the Tribunal. The same is accordingly dismissed. 8. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on September 9th, 2021.

gggjjjSd/-/- [P.M. Jagtap] Vice-President Kolkata, the 9th day of September, 2021. S.C./Sr. P.S.

7 I.T.A. No. 39/Pat/2020 Assessment Year: 2011-12 Motor Machinery Tools Copies of the order forwarded to: 1. Motor Machinery Tools, Raja Market, Station Road, Patna-800 001. 2. ACIT, Circle-5, Patna. 3. CIT(A)-Hazaribagh. 4. CIT- 5. CIT(DR), Patna Bench, Patna. 6. Guard File. True Copy By order

Senior Private Secretary/DDO, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata