MATRIX SEA FOODS INDIA LIMITED,HYDERABAD vs. ACIT (OSD) WARD-16(4), HYDERABAD

At the outset, the Ld. AR submitted that only two issues are involved in the present appeal i.e. (a) addition of Rs.22,52,673/- made by the Ld. AO on account of “Gold Scheme Expenses and (b) Addition of Rs.34,52,901/- made by the Ld. AO on account of “Foreign and Domestic Tour Expenses”. As regards the disallowance of Rs.22,52,673/- on account of the Gold Scheme, the Ld. AR submitted that the assessee had launched a promotional scheme to enhance sales of its newly introduced product “Vira Safe” and to increase the market share of its existing products. Under the said scheme, dealers who achieved the specified sales targets were rewarded with gold coins purchased by the assessee. It was contended that this was a regular trade practice in the line of business of the assessee, wherein incentives such as gold coins or other gifts are given to dealers to promote sales and encourage brand loyalty. The Ld. AR further submitted that the assessee had furnished complete details of the dealers and the purchases of gold coins made from authorized jewellers before the Ld. AO. The Ld. AO, however, disallowed the expenditure merely on the ground that the assessee failed to furnish acknowledgments from the ultimate customers who received the gold coins through the dealers. The Ld. AR invited our attention to the list of persons to whom the gold coins has been given which is placed at page no.108 of the paper book, the working of points obtained and gold coupons owned by the dealers on the basis of their performance (page no.109 to 114 of the paper book) and submitted that all the details with regard to Page 5 of 11 the gold coin scheme were produced before the Ld. AO. The Ld. AR argued that the assessee had no direct dealings with the end customers, as the incentive scheme operated only between the assessee and its dealers. The Ld. AR also drew our attention to the fact that the Ld. AO had not doubted the genuineness of the purchases of gold coins nor disputed that the sales targets were achieved. Further, with regard to the observation of the Ld. AO towards sum of Rs.6,01,275/-, which was paid by one of the assessee ’s employees (a relative of the director) to the jeweller on behalf of the assessee, the Ld. AR submitted that the said amount was subsequently reimbursed to the employee through banking channels. Therefore, there was no violation of section 40A(3) of the Act, as the payment was effectively made by account payee cheque from the account of the assessee. Accordingly, the Ld. AR prayed before the Bench that the addition of Rs.22,52,673/- made by the Ld. AO on account of gold scheme expenses should be deleted.

Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the findings of the Ld. AO and submitted that the assessee failed to produce adequate documentary evidence to substantiate that the gold coins were actually distributed under the claimed scheme. In the absence of acknowledgements from the beneficiaries or confirmations from the customers, the Ld. AO rightly disallowed the expenditure as unverifiable. In the alternate submission, the Ld. DR also contended that in respect of the purchase of gold through an employee, the transaction attracted disallowance under section Page 6 of 11 40A(3) of the Act since the initial payment was made in cash exceeding the prescribed limit.

We have carefully considered the rival submissions and perused the material placed on record. We observed that the primary basis for disallowance by the Ld. AO was the absence of acknowledgements from the end customers who allegedly received the gold coins from the dealers. In this regard, we have gone through the list of persons to whom the gold coins has been given, which is placed at page no.108 of the paper book, the working of points obtained and gold coupons owned by the dealers on the basis of their performance (page no.109 to 114 of the paper book). On perusal of the documents, we find that the assessee has maintained detailed records of the gold coins purchased, the dealers to whom they were distributed, and the working of points obtained and gold coupons owned by the dealers on the basis of their performance. The Ld. AO has not disputed the genuineness of the purchase of gold coins nor has he questioned the achievement of sales targets by the dealers. It is also a matter of commercial prudence that in industries with strong competition, incentive schemes such as gold coins or gift vouchers are standard promotional tools. The assessee’s action of providing such incentives to its dealers cannot, therefore, be said to be without business purpose. 6.1 However, insofar as the transaction of Rs.6,01,275/- is concerned, we find that the payment was initially made in cash by Page 7 of 11 an employee who happens to be related to one of the directors, though the amount was subsequently reimbursed by the assessee through banking channels. In the absence of direct payment from the assessee’s account to the jeweller at the time of purchase, the said transaction attracts the rigor of section 40A(3) of the Act. Therefore, the disallowance to the extent of Rs.6,01,275/- is upheld. Accordingly, we direct the Ld. AO to allow the claim of Gold Scheme Expenses to the extent of Rs.16,51,398/- (Rs.22,52,673/- – Rs.6,01,275/-) and sustain the balance disallowance of Rs.6,01,275/-.

As regards the disallowance of Rs.34,52,901/- out of total Tour and Travel expenditure of Rs.44,85,187/-, the Ld. AR submitted that the assessee had incurred these expenses through recognized travel agencies, and the genuineness of the expenditure incurred has not been doubted by the Ld. AO. It was explained that the assessee, being engaged in a competitive business environment, had introduced incentive schemes for its dealers based on achievement of sales targets. Under the said schemes, dealers achieving higher sales were rewarded with both domestic and foreign tours as a measure of business promotion. The Ld. AR submitted that this is a regular business practice prevalent in the industry to motivate dealers and improve sales volume. It was further submitted that, as per trade custom, it is usually left to the discretion of the dealer to either utilize the travel coupon personally or to nominate any other person—such as an employee, relative, or valued customer—for the said trip.

Per contra, the Ld. DR relied on the findings of the Ld. AO and submitted that the assessee failed to establish that the entire expenditure was incurred for business purposes. It was contended that the Ld. AO, after verifying the list of persons who actually availed the trips, found that certain beneficiaries were Page 9 of 11 unrelated to the assessee’s business, and therefore, the proportionate disallowance made by the Ld. AO was justified.

We have carefully considered the rival submissions and perused the material placed on record. The core issue before us is whether the partial disallowance of Rs.34,52,901/- out of total tour and travel expenditure of Rs.44,85,187/- is sustainable. On perusal of the assessment records and the paper book, we note that the Ld. AO has not doubted the genuineness of the expenditure incurred through recognized travel agencies. Further, there is no dispute that the scheme was introduced as a business incentive for dealers based on sales performance. The Ld. AO has also not disputed the sales targets achieved and the incentive policy formed by the assessee as regular business promotion activity. The disallowance was made only on the ground that some of the persons who availed the trips did not have a direct business connection with the assessee or its dealers. In our considered view, this reasoning cannot be sustained. Once the entitlement for a foreign or domestic tour arises upon achievement of sales targets by the dealers, the manner in which such entitlement is utilized is of no consequence for determining the allowability of the expenditure. The business purpose of the expenditure is established at the point where the incentive is granted to the dealer as a reward for higher sales, and the subsequent utilization by the nominee or transferee of the dealer does not change the character of the expenditure. It is a well-accepted commercial practice that dealers are given flexibility to transfer their incentive

In the result, the appeal of the assessee is partly allowed.