CREATIVE LABELS P.LTD,MUMBAI vs. DCIT 4(1)(2), MUMBAI

Assessee by : Shri Pankaj R. Toprani (AR) Revenue by : Shri Saurabh Kumar Rai (DR) Date of hearing : 22.02.2017 Date of Pronouncement : 15.03.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JM: 1. This appeal by assessee u/s 253 of the Income-tax Act (‘the Act’) is directed against the order of Ld. Commissioner of Income Tax (Appeals) [for short ‘the CIT(A)] –9, Mumbai dated 19.08.2016 for Assessment Year (AY) 2013-14. The assessee has raised the following grounds of appeal:

1. The learned CIT(Appeals) has erred in law and on the facts of the case in disallowing charges Rs. 14,76,363/-.

2. The learned CIT(Appeals) has erred in law and on the facts of the case in ignoring the decision of the Supreme Court in the case of CIT vs. Dhanrajgiriji reported in 91 ITR 544 wherein the Hon’ble Supreme Court had laid down the law of the land that every businessman knows his interest best and it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure.

3. The learned CIT(Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer making an addition of Rs. 13,92,822/- on account of rejection of materials. The learned CIT (Appeals) fails to appreciate that the assessing officer had not rejected the books of account u/s. 145(3) of the Income Tax Act and hence the wastage declared by the assessee had to be accepted.

2 Creative Labels Pvt. Ltd.

relates to disallowance of Transportation Charges. The ld. AR of the assessee argued that the assessee is engaged in the business of self- adhesive labels. The assessee debited Rs. 14,76,363/- on account of Transportation Charges. During the year under consideration, the assessee incurred Transportation Charges of Rs. 36,16,807/- and had recovered Rs. 21,40,444/- from its customer as per terms and condition of sales. The assessee has agreement with Unilever Group of Companies, as per agreement the Transportation Charges incurred by assessee were reimbursed by them. The assessee has shown reimbursement of Transportation Charges of Rs. 21,40,444/- that was 60% of the Transportation Charges. As per agreement, the assessee has delivered the material at their site and had to incur the Transportation Charges. The AO disallowed the Transportation Charges without any reasonable basis holding that assessee has not produced evidence to show that assessee wanted to recover the expenses. It was further argued that Revenue cannot be allowed to decide that as to what kind of expenditure, businessmen has to incur, and under which circumstances. The commercial expediency is the sole discretion of businessmen to safeguard his interest. In support of his contention, the ld. AR of the assessee relied upon the decision of CIT vs. Panipat Woollen & General Mills Co. Ltd. (1976) (103 ITR 66), CIT vs. Dhanrajgiriji (1973) (91 ITR 544) and the decision of S.A. Builders Ltd. vs. CIT (2007) (288 ITR 1). On the other hand, the ld. DR for the Revenue supported the order of authorities below.

4. We have considered the rival contention of the parties and perused the material available on record. The AO while framing assessment order observed that assessee was incurred expenses outward and letter receiving the reimbursement of such 3 Creative Labels Pvt. Ltd. expenses from the buying parties. The assessee was asked to explain that as to why the Transport Outward Expenses claimed in the Profit & Loss Account be not disallowed as these expenses are relating to the other parties and the buyer’s cost not related to the sale of assessee. The assessee filed its reply and contended that the assessee has incurred Transportation Charges of Rs. 36,16,807/- and received Rs. 21,40,444/- and net amount of Rs. 14,16,363/- has been debited to the Profit & Loss Account. The assessee further contended that major sales of assessee are with Unilever Group of Companies, which reimbursed the assessee towards the Transportation Charges as the selling prices consist of the Transportation Charges. The contention of assessee was not accepted by AO holding that assessee failed to produce the evidence that assessee wanted to recover the expenses and that assessee has voluntary chosen not to affect the recovery of these expenses. The AO further concluded that there is no restriction to bear the expenses on account of other parties and even non-business expenses. The ld. CIT(A) while considering the Ground of Appeal confirmed the disallowance holding that the expenditure was not wholly and exclusively for the purpose of business. The Hon’ble Apex Court in S.A. Builders (supra) while dealing with the “Commercial Expediency” relating to section 37 held that decision relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 the expression used is “for the purpose of business”. It was further held that consistently it has been held in decision relating to section 37 that expression “for the purpose of business” includes expenditure voluntarily incurred for Commercial Expediency, and it is immaterial, if a 3rd party also benefits thereby. The expression “Commercial Expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may have been incurred under any legal obligation, but yet it is allowable as business expenditure, if it was incurred under Commercial Expediency. In our opinion the transport expenses were incurred by the assessee under business expediency. Thus, in view of the above discussion the disallowance of Transportation Charges of Rs. 14,76,363/- claimed as expenses on account of Transport Outward Claim were allowable expenses, which we delete.

5. Ground No.2 of appeal is argumentative and reference of Hon’ble Supreme Court decision which does not require any adjudication.

4 Creative Labels Pvt. Ltd.