Disallowance under Section 14A, provision for doubtful debts, foreign tax credit, and sales promotion expenses allowed in favour of assessee.

“Similarly, for AYs 2010-11 to AY 2015-16, the Tribunal deleted the disallowance made under section 14A r.w.rule 8D of the Act on the grounds of no proper satisfaction being recorded by the Id. AO. Accordingly, following the earlier year’s precedents, we hold that no disallowance is called for over and above what has been suomoto disallowed by the assessee because assessee has given detailed justification for suomoto disallowance and Id. AO without recording its satisfaction or incurred any expenditure which can be said to be attributable to earning of exempt income as mechanically applied, accordingly, the disallowance made by the Id. AO is deleted.”

“This principle of Hon’ble Bombay High Court has been followed by the Hon’ble Karnataka High Court and Hon’ble Gujarat High Court wherein post amendment to Section 115JB also even for the book profit provision for doubtful debts has been allowed as deduction. Therefore, in view of the principles laid down by the Hon’ble Jurisdictional High Court and other High Courts as noted above, we hold that the provision for doubtful debts is deductible not only under normal provisions of law but also u/s.115JB. Accordingly, ground No. IX and X are allowed.”

“8. AY 2018-19 ITAT remanded the issue to AO to verify the details of expenses in relation to such foreign income and examine the normal and additional claim of foreign tax credit and allow accordingly.”

“Ground no. XI: disallowance of trip scheme expenses; Ground no. XII: disallowance of colour idea stores expenses; Ground no. XIV: disallowance of discount and incentives which are target based to increase sales (i.e. by way of credit notes) given to dealers (by way of enhancement by Id. CIT(A);

In so far as Ground No. XI & XII are concerned, at the outset, the assessee submits that the issue is favourably covered in the assessee’s own case in AY 2009-10 wherein the Tribunal held that relationship between the assessee and its Dealers is Principal to Principal and not Principal to Agent, accordingly, section 194H of the Act does not apply and consequently no disallowance u/s. section 40(a)(ia) of the Act be made. This has been consistently followed by Tribunal in AY 2010-11 to AY 2015-16.

We have heard both the parties and also perused the relevant materials referred to before us and the findings given in the impugned orders. We will first take up the issue of disallowance of trip scheme expenses and disallowance of colour idea store expenses as raised in ground No.11 & 12 respectively. As mentioned above assessee has various dealers all across the country who are normally hardware stores dealing in many other products other than paints and assessee company sell such paints to various dealers who will further sell to painters and other customers. There is no agreement as such between the assessee and its dealers for sale of goods. The assessee provided the basic details and after verification and due diligence had approved the dealers and then the customer code is created in the books of accounts of the assessee. Dealers also share their success stories and interact with top management to give the feedback. These conventions are often done on the trips sponsored for the dealers who had achieved the target as per the scheme floated by the assessee company. Thus, expenses incurred for organizing such trips is allowable as ‘revenue expenditure’. It has also been brought on record that where assessee was paying to the travel or tour operator, appropriate TDS has been deducted.

These trade discounts / cash discounts are given as reduction in purchase price in the invoice and GST as applicable is levied on the net price. Such discount nowhere can be treated as commission and accordingly, discounts given by the assessee company to the dealers is allowable as ‘revenue expenditure’. The whole case of the Id. AO and Id. CIT (A) is that there is an agency relationship between the assessee company and the dealers.

Thus, the expenditure incurred under this head, we hold that it is purely Revenue expenditure as it is in the nature of sales promotion. All other aspects which has been raised by the Id. DR and the Id. CIT(A) has been clarified and reported by the assessee before us which has been incorporated in detailed in the foregoing paragraphs to which we fully endorse for the reasons that there is no concept of agency qua the dealing between the assessee and the dealers. It is purely on principal-to-principal basis and all the expenses incurred for sales promotion, business promotion, trip expenses, colour Idea store expenses are purely for the purpose of business and allowable as revenue expenditure. Accordingly, ground No. XI and XII are allowed.”

“Ground no. XI: disallowance of trip scheme expenses; Ground no. XII: disallowance of colour idea stores expenses; Ground no. XIV: disallowance of discount and incentives which are target based to increase sales (i.e. by way of credit notes) given to dealers (by way of enhancement by ld. CIT(A);

In so far as Ground No. XI & XII are concerned, at the outset, the assessee submits that the issue is favourably covered in the assessee’s own case in AY 2009-10 wherein the Tribunal held that relationship between the assessee and its Dealers is Principal to Principal and not Principal to Agent, accordingly, section 194H of the Act does not apply and consequently no disallowance u/s. section 40(a)(ia) of the Act be made. This has been consistently followed by Tribunal in AY 2010-11 to AY 2015-16.

We have heard both the parties and also perused the relevant materials referred to before us and the findings given in the impugned orders. We will first take up the issue of disallowance of trip scheme expenses and disallowance of colour idea store expenses as raised in ground No.11 & 12 respectively. As mentioned above assessee has various dealers all across the country who are normally hardware stores dealing in many other products other than paints and assessee company sell such paints to various dealers who will further sell to painters and other customers. There is no agreement as such between the assessee and its dealers for sale of goods. The assessee provided the basic details and after verification and due diligence had approved the dealers and then the customer code is created in the books of accounts of the assessee. Dealers also share their success stories and interact with top management to give the feedback. These conventions are often done on the trips sponsored for the dealers who had achieved the target as per the scheme floated by the assessee company. Thus, expenses incurred for organizing such trips is allowable as ‘revenue expenditure’. It has also been brought on record that where assessee was paying to the travel or tour operator, appropriate TDS has been deducted.

These trade discounts/cash discounts are given as reduction in purchase price in the invoice and GST as applicable is levied on the net price. Such discount nowhere can be treated as commission and accordingly, discounts given by the assessee company to the dealers is allowable as ‘revenue expenditure’. The whole case of the Id. AO and Id. CIT (A) is that there is an agency relationship between the assessee company and the dealers.

Thus, the expenditure incurred under this head, we hold that it is purely Revenue expenditure as it is in the nature of sales promotion. All other aspects which have been raised by the Id. DR and the Id. CIT(A) has been clarified and reported by the assessee before us which has been incorporated in detailed in the foregoing paragraphs to which we fully endorse for the reasons that there is no concept of agency qua the dealing between the assessee and the dealers. It is purely on principal-to-principal basis and all the expenses incurred for sales promotion, business promotion, trip expenses, colour Idea store expenses are purely for the purpose of business and allowable as revenue expenditure. Accordingly, ground No. XI and XII are allowed.”

“100. The brief facts are that during the year under consideration, the assessee incurred a CSR expenditure of Rs.46.51 crores and the same has been offered to tax as per section 37 of the Act. Out of which, Rs.9.44 crores are eligible (i.e. 50% of amount) for deduction/claim u/s. 80G of the Act and the assessee has claimed such deduction in its ROI.

101. The AO denied such deduction on the premise that such being part of mandatory CSR expenditure as per section 135 of the Companies Act, it loses the essence of being a ‘donation’ which is typically understood as ‘voluntary’ act, element of charity is missing. Further, considering the legislative intent of insertion of CSR and its implication u/s. 37, deduction u/s 80G could not be allowed. However, the CIT(A) allowed the claim of the assessee and dismissed the AO’s observation by observing as under:-

– The assessee has chosen voluntarily the organisation to which donation is given. Neither the donee organisation had a right to receive nor the assessee was under any obligation to donate to donee only, it could have given to any of the entities covered within the scope of section 135 of the Companies Act;

– On the part of element of charity, the CIT(A) held that the activities of list of organisations covered under Schedule VII of the Companies Act, 2013 are related to social benefit and eligible to issue certificates u/s. 80G. Therefore, the element of charity cannot be missing and the assessee is eligible to claim deduction u/s. 80G of the Act.

102. Before us, Id. Counsel submitted that this issue stands covered in favour of the assessee and reliance was placed on the following judgment:-Hon’ble Jurisdictional Tribunal in the case of Societe Generale Securities India (P.) Ltd. v. Principal Commissioner of Income-tax [2024] 204 ITD 796 wherein it is held that – Explanation 2 to section 37(1) which denies deduction for CSR expenses by way of business expenditure is applicable only to extent of computing ‘business income’ under Chapter IV-D and; there would be no bar for assessee to claim benefit under section 80G, falling in Chapter VIA. Relevant extract of the decision is reproduced as under:

“……By this, the assessee seeks compliance with Explanation 2 of section 37 of the Act and, therefore, the revenue shall not have any grievance. Whether or not the assessee suomoto disallowed the amount spend towards the CSR while computing the business income is a verifiable fact.

6. After computing the business income, while computing the total income of the assessee, the assessee is invoking the benefit under Chapter VIA by claiming deduction of the sums under section 80G of the Act. According to the revenue, when once such sum went to satisfy the requirement of section 135 of the Companies Act, the benefit gets exhausted and such an amount is no more available for the purpose of claiming deduction under section 80G of the Act. There is no express provision to support the contention of Revenue. On the other hand, section 80G (2) (iiihk) and (iiihl) of the Act expressly provide that such sums donated for Swachh Bharat Kosh and Clean Ganga Fund shall be the amounts other than the sums spent by the assessee in pursuance of CSR. Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2) (iiihk) and (iiihl) of the Act. As stated above, clue can be had from the restrictions by way of section 80G (2) (iiihk) and (iiihl) of the Act. Explanation 2 to section 37(1) of the Act which denies deduction for CSR expenses by way of business expenditure is applicable only to extent of computing ‘business income’ under Chapter IV-D of the Act and; it could not be extended or imported to CSR contributions which was otherwise eligible for deduction under Chapter VI-A of the Act.

7. Where the deduction under section 80G of the Act is also disallowed, since CSR qualifying donations are not ‘voluntary contributions’, it will be a double jeopardy in the case of assessee. Assessee cannot be denied the benefit of claim under Chapter VIA of the Act, which is considered for computing ‘Total Taxable Income’. If assessee is denied this benefit, merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature at all. Legislature on this matter simply dealing with the computation of total income under chapter IVD pertaining to “Income under the head Business and Profession” and not at all dealt with the eligibility of assessee to claim deduction u/s. 80G of the Act, falling in chapter VIA of the Act. It is further observed that genuineness of the transactions and identity of the donees are also not under challenge. All the payments were made through proper banking channel and appropriate donation receipts were also produced before the lower authorities and before us also.

8. As discussed, and observed (supra), there is no bar for the assessee to claim benefit u/s. 80G of the Act, falling in Chapter VIA of the Act, we found observations of the Ld. PCIT as untenable in law, in the result grounds raised by the assessee are allowed and order of Ld. PCIT passed u/s. 263 of the Act is set-aside.”

102. He further submitted that this issue is also covered in favour of the following decisions of the Tribunal:

103. It is an undisputed fact that in so far as CSR expenses of Rs. 46.51 Crores, the assessee has already offered to tax in accordance with Section 37 and therefore, there is no issue of claiming of deduction on account of CSR expenses. However, out of the said amount, assessee has made donation to the institutions which are covered u/s.80G and has claimed 50% of the amount of Rs.9.44 Crores which were claimed at deduction in its return of income. This issue has been held by the Tribunal in series of cases wherein it has been held that the claim of deduction u/s.80G is independent of CSR and the same has to be allowed in accordance with Chapter VIA was itself independent of prohibition provided in Section 37(1) which only pertains to CSR expenses, accordingly, the ground raised by the Revenue is dismissed.”