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Facts
The assessee, TTK Healthcare Ltd., appealed an order confirming the disallowance of 20% of performance-linked incentive expenditure and treating e-commerce portal development cost as capital expenditure. The Assessing Officer (AO) had disallowed the incentive expenditure due to lack of documentary evidence and classified the e-commerce portal cost as capital. The CIT(A) upheld these decisions, allowing only depreciation on the portal.
Held
The Tribunal restored the issue of performance-linked incentives to the AO for fresh consideration, directing the assessee to furnish necessary documents. Regarding the e-commerce portal expenditure, the Tribunal upheld the CIT(A)'s order, treating it as capital expenditure as it provided enduring business benefit, dismissing this ground of appeal.
Key Issues
Whether performance-linked incentives are revenue expenditure and whether e-commerce portal development cost is capital or revenue expenditure.
Sections Cited
143(3), 143(3A), 143(3B), 37(1), 192
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2018-19 arises out of the order of Learned Commissioner of Income Tax, National Faceless Appeal Centre (NFAC), Delhi [hereinafter “CIT(A)”] dated 27.05.2024 in the matter of assessment framed by the Assessing Officer [AO] u/s. 143(3) r.w.s 143(3A) & 143(3B) of the Income-tax Act, 1961 (hereinafter “the Act”) on 16.03.2021.
The ground of appeal raised by the assessee are as under:
“1. Order of the NFAC / Commissioner of Income tax (Appeals) is contrary to law, facts and in the circumstances of the case.
2. The NFAC/CIT(A) erred in confirming the disallowance of 20% of the performance linked incentive expenditure amounting to Rs.2,02,49,170/-. 2.1 The NFAC/CIT(A) ought to have appreciated that the appellant has incurred the expenditure on performance linked incentives given to around 1500 field managers, executives and representatives as sales promotion expenses during the course of business hence no adhoc disallowance is called for in this regard. 2.2 The NFAC/CIT(A) ought to have appreciated that the incentives are being regularly given on the basis of performance and tax deducted at source wherever applicable. Hence incentive payment ought to have allowed in the course of business. 2.3 The NFAC/CIT(A) erred in holding that because bonus (as per statutory requirement) etc are given, incentive need not be paid. Incentive is paid as per policy of the Company to incentivize the employees on the basis of achievements of turnover and are normal payments in the course of business and trade practice.
2.4 The NFAC/CIT(A) ought to have appreciated that welfare expenses are incurred in providing food, medical insurance, festival expenses etc which are incurred in the normal course of business. Canteen expenses are provided as required under Factories Act and all expenses are in the line with normal trade practice.
3. The NFAC/CIT(A) erred in confirming the expenditure incurred on design and development of E-Commerce portal as capital in nature and allowing only 60% depreciation by restricting the disallowance to Rs.41,83,793/-. 3.1 The NFAC/CIT(A) ought to have appreciated that the expenditure on E-commerce portal does not give any enduring benefit to the appellant and hence to be allowed as revenue expenditure.”
The brief facts of the case are that the assessee is engaged in the manufacture of pharmaceuticals formulations, bulk drugs, and ready to eat products, printing and publishing, hospital care products, artificial heart valves and trading in consumer products. The assessee has filed its return of income on 30.03.2019 admitting total income of Rs. 29,66,42,700/-. The A.O in the order passed u/s. 143(3) of the Act has made the disallowance of 20% of the performance linked incentive of Rs.10,12,45,858/- u/s. 37(1) of the Act on the ground that documentary evidences of the claim were not produced. The A.O has also made disallowance of expenditure on design and development of e-commerce portal on the ground that the expenditure incurred is capital expenditure. However, the A.O has allowed depreciation @ 60% under the category of computers and computer software.
Aggrieved, the assessee is in appeal before us.
Ground No.1 is general in nature hence, no adjudication is required for the same.
Ground No.2 is against disallowance of 20% of the performance linked incentive expenditure amounting to Rs. 2,02,49,170/- .
5.1 The Ld. Authorized Representative (A.R) of the assessee has argued that performance linked incentives scheme is standard practice in the pharma industry to motivate the sale employees for doing better performance and achieving the targets which is mutually benefits to the company and the employees. The Ld. AR has submitted that TDS as per Section 192 of the Act has also been deducted including the above amount and employees too have paid tax as part of salary.
5.2 The Ld. Departmental Representative (DR), on the other hand, has relied on the orders of lower authorities.
5.3. We have heard the rival submissions, and perused the materials available on record. The A.O has disallowed 20% of total incentive paid to employees, doubting the sale promotion expenses and on ground that assessee has not submitted any documentary evidence in support of the expenditure. The Ld CIT(A) has also noted that assessee has not submitted any explanation/submission or evidence during appellate proceeding to justify the expenditure claimed. The Ld. AR before us has reiterated that performance linked incentives have been paid to motivate the sale employees for doing better performance and achieving the targets which is mutually benefits to the company and the employees. The Ld. AR has argued that all the payments are genuine and recorded in books of account and TDS u/s 192 of the Act has also been deducted on all such payments.
5.4 We find that the only reason for disallowances of incentive paid to employees by both the authorities was that assessee has not submitted necessary documents, we therefore deem it fit to restore the matter back to the file of A.O. The assessee is directed to submit all the necessary documents in support of the expenditure before A.O. who will provide proper opportunity of being heard to assessee. The ground is accordingly allowed.
Ground No.3 is against confirming the addition made by A.O of Rs.41,83,793/- regarding the expenditure incurred on design and development of E-commerce portal.
6.1 The assessee has claimed expenditure of Rs.1,04,59,483/- on design and development of E-commerce portal and claimed it as revenue expenditure. The A.O held it as capital expenditure as the expenditure incurred is one time investment generating recurring benefit. However the A.O has allowed depreciation @60%. The Ld. CIT(A) has upheld the same.
6.2 The Ld. AR has submitted that the disallowance does not impact the assessee materially, as the Written Down Value (WDV) of the asset gets reduced to nominal value after four years due to the depreciation allowed at 60%. Hence, the issue remains revenue- neutral over time.
6.3. We have heard the rival submissions, and perused the materials available on record. It is observed that the expenditure incurred by the assessee was for the development of E-commerce portal, which provides an enduring benefit to the business. Therefore, the AO was justified in treating it as a capital expenditure and allowing depreciation at 60%. Further, the contention of the assessee that the disallowance is revenue-neutral due to the complete depreciation of the asset over four years does not change the legal position regarding the nature of the expenditure. In view of above, we do not find any infirmity in the order of Ld. CIT(A) and accordingly dismiss this ground of appeal.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on 14th February, 2025.