ARYA OFFSHORE SERVICES P.LTD,MUMBAI vs. JT CIT (OSD) CEN CIR 39, MUMBAI

1. The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the learned Assessing Officer in disallowing out of gift expenses to the extent of a sum of Rs.4,00,000/- without any basis on the on ground that these expenses are not wholly and exclusively for the business purposes.

Brief facts qua the first issue is that assessee is engaged in the business of rendering comprehensive services to organization connected with offshore activities. The AO noted that assessee has debited a sum of Rs.36,59,899/- as “gift” expenses which was claimed as business expenditure. The assessee’s case before the AO was that ‘gifts’ were distributed to the customers and associates on occasions “Diwali” and were incurred out of commercial expediency. The AO held that, similar submissions were made in the earlier year also and part of the disallowance was made in those years on the ground that assessee has not brought complete verifiable documents on the record. Following the earlier year precedence, he disallowed a sum of Rs.7,50,500/- out of gift expenses on estimate basis.

The relevant facts with regard to second issue is that in the revised computation, the assessee has claimed deduction of Rs.43,26,035/- on account of ‘prior period expenses’. In response to the show cause notice by the AO, the assessee submitted that 4 आया� ऑफशोर स�व�सेस �ाइवेट �ल�मटेड Arya Offshore Services Private Limited 31st March, 2010 it had incurred an amount of Rs.43,26,035/- which included the volume of discount given to its Principal, M/s ENI India Ltd. Since the decision to give volume discount materialized only after filing of the return of income, therefore, the same was claimed by way of revised computation. It was contended that this was incurred in connection with the business of the company only. The relevant part of the assessee’s submission before the AO is reproduced hereunder:-

However, the AO did not accept the assessee’s contention and observed that credit note issued by the assessee to the Principal showed an aggregate liability of Rs.74,78,660/- which was shown payable by the assessee on account of volume discount for the period from December, 2007 to July 2009. The letter was issued only on 23.11.2010, which means that, liability under consideration had not crystallized during the financial year relevant to assessment year 2009-10. Accordingly, he disallowed said clam of Rs.46,29,035/-.

Before the Ld. CIT(A) besides reiterating the same submission, the assessee stated that as per the contractual commitment with M/s ENI India Ltd, the Principal was entitled to volume discount on the services offered by the assessee. Due to some misunderstanding with the Principal with regard to giving of volume discount in certain services, applicant raised invoices to M/s ENI India Ltd., without considering or offering the volume discount. Later on, when the matter was clarified, a credit note was issued by the assessee in respect of Volume discount. Due to this, the income offered did not give the correct picture of the income, therefore the assessee had to file a revised return and claimed an amount of Rs.43,26,035/- in this year. Merely because credit note was issued on 23.11.2010, it does not mean that it represented the expenditure for a later year. The Ld. CIT(A) asked for the remand report and the Ld. AO in his remand report stated that assessee was recognizing the revenue as and when the services were performed, therefore, assessee correctly recognized the revenue from the services when it was performed in the assessment year 2009-10 and no adjustment was required in this year. The liability only got crystallized on 23.11.2010 and it is only in the AY 2011-12, it can be claimed as prior period expenditure. The Statutory Auditor has also certified that, this volume discount of Rs.42,73,977/- has already been booked as prior period expenditure for year ending on 31st March, 2010, therefore, such a claim of the assessee and deducting of the amount from the receipt of the year ending from 31st March, 2009 is not correct. The Ld. CIT(A) too accepted the AO’s contention and noted that assessee had not given any volume discount to M/s ENI India Ltd during the year under appeal. In the books also, no such expenditure can be said to have accrued during the year relevant to assessment year 2009-10, it was only when the issue was resolved in September, 2010 that the assessee reviewed its contract obligation and agreed that volume discount of Rs.42,73,977/- was required

Before the Ld. Counsel after explaining the entire facts, submitted that in the remand report AO has accepted that this liability if at all pertain to assessment year 2011-12, which is evident from his observations made in page 3 of the remand report, (copy of this appearing from pages 63 to 66 of the paper book). Accordingly, he submitted if same is not allowed in this year then same should be allowed in AY 2011-12 as CIT(A) has not considered this matter and has not given any direction to the AO in this regard.

After considering the submissions made by the parties and the finding given in the impugned order as well as material placed on record, we find that it is an undisputed fact that assessee was contractually obliged to give volume discount to its Principal, M/s ENI India Ltd., for the services offered by the assessee. It is also not undisputed that assessee is recognizing the revenue from services rendered based on time of service rendered and the bill amount is raised to the Principal as per the terms of contract. Thus, the related revenue was recognized as and when the services were performed. As brought out on record by AO on the remand proceedings, the liability got crystallized only on 23.11.2010, when both the parties have settled this issue, that is, they have agreed for the volume discount and accordingly, credit note was issued by the assessee accepting / recognizing the volume discount. The Ld. AO in his remand report had given his comment before the CIT(A)

During the course of the hearing the assessee has submitted a e-amil confirmation from M/s ENI India Ltd., a copy of which is enclosed herewith which clearly says the above income has been admitted by M/s ENI India Ltd. only in AY 2011-12 and hence it is allowable in the hands of the assessee only in AY 2011-12”.

As regards ground No.3, the issue raised in ground 1 & 2 has been reiterated, therefore, no separate adjudication is required. Accordingly, grounds raised in the assessee’s appeal is treated are partly allowed for statistical purposes.

In the result, appeal of the assessee stands partly allowed for statistical purposes.