The amount paid is a permissible expense if it was made solely for business purposes

Fact and issue of the case

This is an appeal filed by the revenue against the order of the ld CIT(A)-11, New Delhi dated 27.04.2016 for AY 2012-13

The effective ground No. 1 and 2 of the revenue reads as under

The Ld CIT(A) erred in law and on facts in deleting the addition of Rs. 38,12,22,446/- on the account of amounts written off and treating the expenditure as revenue expenditure

The Ld. CIT(A) erred in deleting the abovementioned addition despite the fact that the assessee could not prove business expediency of the expenditure under reference

The ld CIT DR supported the assessment order and submitted that a plain reading of section 37(1) of the Act shows that to be an allowable expenditure under this provision, the amount of expenditure incurred by the assessee must be (a) paid out of wholly and exclusively for the purpose of business or profession of assessee, (b) must not be capital expenditure, or personal expenses or an allowance of the character described in section 32 to 36 of the Act

The ld DR submitted that in the present case distributors of the assessee were receiving commission income for their services and were liable to pay service tax on such services as per relevant rules. The ld DR submitted that, in addition to commission, the assessee provided financial assistance to ABOs in the form of loan for discharging service tax liability and the amount debited to the account of ABO and subsequently the assessee written off these loans and the assessee claimed the same as revenue expenditure being bad debts. The ld DR submitted that the net effect of the said accounting of claim of assessee was effectively that the assessee assumed liability of services tax which was not payable to him but was payable to the ABOs/ distributors. The ld DR submitted as per judgment of the Hon’ble Supreme Court in the case State of Madras Vs. G.J. Coelho (1964) 53 ITR 186, wherein, it was held that the expenditure made under a transaction which is so closely related to the business that it could be viewed as on integral part of the conduct of business, may be recorded as revenue expenditure laid out wholly and exclusively for the purpose of business. The ld DR submitted that the AO was right in disallowing the payment of service tax by the assessee to its distributors showing the same as debts and subsequently treating the same as bad debts is a clear example of claiming revenue expenditure in the garb of bad debts which is not permissible in the The ld DR lastly submitted that the AO has rightly disallowed the impugned amount and added back to the total income of the assessee being not wholly and exclusively incurred for the purpose of business of the assessee. Therefore, the AO was right in making addition in the case of the assessee. The ld DR prayed that the ld CIT(A) has granted the relief to the assessee without any basis therefore, the impugned first appellate order may kindly be set aside by restoring that of the AO

Replying to the above, ld counsel of the assessee submitted that the assessee is a company is working through its distributors and the chain of distributors is sole source of the assessee to reach its customers. The ld counsel submitted that there was service tax liability created on the distributors due to application of new GST Rules and distributors were facing great hardship in making payment of service tax out of the commission income earned by them. The ld counsel submitted that keeping in view the hardship of the distributors the assessee company decided to support their distributors by way of payment of services tax and the amount paid to them was shown as debit balance in their respective account with an expectation that within same time this amount would be settled. The ld counsel submitted that specifically it was observed by the assessee company that the distributors/ ABOs are not able to return the amount debited to their respective accounts, therefore, the same was treated as bad debts and claim granted in the profit and loss account of the assessee. Ld counsel submitted that in the present case the appellant has made the payment of service tax to the ABOs for smooth running of business by facilitating its distributors to pay the service tax liability and since the legality of said liability was not clear, the payment was shown as loan in the books of account if assessee and not claimed as an expenditure on account of service tax in the year of payment. The ld counsel submitted that the Hon’ble Supreme Court in the case of State of Madras Vs. GJ Coelho (supra) as noted by the AO in para 3 and 4 of the assessment order, it was held that the expenditure made under the transaction which is so closely related to the business of the assessee that it can be viewed as integral part of conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the business

The ld counsel submitted that there is no denial of the fact that the payment was made to the distributors for reimbursement of service tax liability borne by them and it has been exclusively demonstrated by the assessee that the payment was made only to those ABOs who had actually paid the service tax. Ld counsel submitted that in view of the foregoing factual position and compulsion of the assessee the appellant has made payment to its distributors to sustain their survival and existence the amount paid by the appellant, which was subsequently written off as bad debits is closely related to the business activity of the assessee and thus it was incurred wholly and exclusively for the purpose of the business of the assessee and the same was not capital or personal expenditure, therefore, the ld CIT(A) was right in allowing the claim of the assessee considering the entire facts and circumstances and commercial expediency of business of the assessee. The ld counsel lastly submitted that the findings arrived by the ld CIT(A) are quite correct and sustainable therefore, impugned first appellate order may kindly be upheld dismissing the ground of revenue

Observation of the court

In view of the above, first of all, we note that there is no quarrel or dispute regarding quantum of expenditure/ bad debts claimed by the assessee. We further noted neither the AO nor the ld CIT DR before us disputed the fact that the assessee made payment of service tax to its distributors who had actually paid the amount of service tax to the exchequer and thus, it was a kind of reimbursement of service tax liability of the assessee to its distributors. It is a fact of common knowledge that the liability of service tax was arose due to application of new taxation of law such as GST and the issue as to whether such liability was to be borne by the distributors of the assessee company or the assessee was not settled up to that point of time. We are in agreement with the contention of the ld counsel of the assessee, as noted that the ld CIT(A) observed that the payment was shown as loan in the books of account and not claimed as an expenditure on account of service tax in the year of payment since the legality of said liability was not clear and disputed. As to whether the liability has to be borne by the assessee i.e. service receiver or the distributor i.e. service providers. In such a situation when the assessee company has paid amount to its distributors who had actually paid the service tax amount to the exchequer is a kind of adhoc reimbursement of expenditure or liability of service tax. In view of the above factual position without keeping in view the hardship of the distributors and the liability of the services tax the company decided to write off the amount of loan debited to the respective account of the distributors/ ABOs then the ld CIT(A) was right in concluding that the payment was made by the appellant are directly related to the business activity of the assessee and it was incurred wholly and exclusively for the purpose of business of the assessee due to commercial expediency and the same was allowable as business expenditure. We are unable to find any valid reason to interfere with the finding arrived by the ld CIT(A) and thus we uphold the same. Accordingly, effective ground No. 1 and 2 of revenue being devoid of any merit and are dismissed

In the result, the appeal of the revenue is dismissed

Order pronounced in the open court on 08/05/2023