2013 (7) TMI 880 - AT - Income Tax

Disallowance of loom expenses - revenue v/s capital - CIT(A) confirmed the addition - Held that - The admitted facts of the case are that the assessee booked the looms expenditure on the basis of self-made vouchers. It is also admitted facts as admitted by the Commissioner of Income-tax (Appeals) that such expenditures are necessary for the purpose of the business. Once it is found that such expenditures are necessary for the purpose of business, the entire expenses claimed by the assessee cannot be disallowed. In the light of the fact, the orders of the Revenue authorities cannot be sustained. It is also a fact that the expenditure accounted for and claimed by the assessee on account of looms is not verifiable. Therefore, the case under consideration is a reasonable estimation of such expenses. If we consider comparative trading account for the year ended March 31, 2007, year under consideration and the last year ended March 31, 2006, we noticed that the last year the assessee claimed ₹ 12,60,374 as loom expenses and gross profit shown was ₹ 1,45,00,622 and for the year ended March 31, 2007 gross profit shown is ₹ 2,12,79,434. Thus, proportionate loom expenditure should be ₹ 18,50,000 (rounded off) (1260374/14500612 x 2,12,79,434). It is stated that in last year the loom expenses have been accepted by the Department. Under the circumstances loom expenses to the extent of ₹ 18,50,000 is allowable as expenditure. We accordingly allow the same and the balance amount of ₹ 4,12,695 is confirmed. The assessee gets relief of ₹ 18,50,000 out of addition of ₹ 22,62,695.- Decided partly in favour of assesse. Disallowance of interest expenses - Held that - Details of the own funds and others are not available on record. In the absence of relevant details available on record, we are sending back this matter to the file of the Assessing Officer with direction to decide the issue in the light of the above order of the Income-tax Appellate Tribunal, Mumbai Bench, after providing reasonable opportunity of hearing to the assessee. - Decided in favour of assesse by way of remand. Disallowance of depreciation on car - Held that - the assessee has failed to furnish supporting evidence that the car was purchased in the name of partner Shri Lalit Jain and it was used for the purpose of business. The assessee has failed to furnish any evidence in this regard. Once it is found that the car was not used for the purpose of business, depreciation is not allowable. The assessee has failed to furnish any evidence to show that the car was used for the purpose of business. - Decided against assesse. Disallowance of food and beverages expenses - CIT(A) confirmed disallowance @ 20% as against 5% as seeked by assesse - Held that - The assessee has failed to furnish any evidence or explanation why only 5 per cent. was to be disallowed, whereas the Commissioner of Income-tax (Appeals) has considered the relevant provisions of fringe benefit tax and found that 20 per cent. of the disallowance was reasonable. In the absence of contrary material on the finding of the Commissioner of Income-tax (Appeals), the order of the Commissioner of Income-tax (Appeals) is confirmed on the issue. - Decided against assesse.

Summary

Issues Involved:
1. Disallowance of loom expenses.
2. Disallowance of interest on debit balance.
3. Disallowance of depreciation on car.
4. Disallowance of food and beverage expenses.

Detailed Analysis:

1. Disallowance of Loom Expenses:
The assessee, engaged in the export of handmade woollen carpets and handloom durries, claimed Rs. 22,62,695 as loom expenses. The Assessing Officer (AO) found the expenses unverifiable, as they were based on self-made cash vouchers and not supported by sufficient evidence. The AO disallowed the entire amount, citing that the looms remained the property of the assessee and the expenses were not justified. The Commissioner of Income-tax (Appeals) (CIT(A)) confirmed the addition but allowed Rs. 5,00,000 as capital expenses, directing depreciation on this amount. The Tribunal acknowledged the necessity of these expenses for business but found the claimed expenses unverifiable. It allowed Rs. 18,50,000 as loom expenses based on a reasonable estimation, providing relief of Rs. 18,50,000 out of the addition of Rs. 22,62,695.

2. Disallowance of Interest on Debit Balance:
The AO disallowed Rs. 1,08,360 as interest on an advance given to Shri Kunal Jain, son of a partner, without charging interest, while the firm paid interest on borrowed funds. The CIT(A) confirmed this disallowance. The Tribunal noted the absence of details regarding the firm's own funds and remanded the matter to the AO for reconsideration, directing the AO to apply the formula from the ITAT Mumbai Bench decision in Asst. CIT v. H. P. Shah and Co., which exempts disallowance to the extent of the firm's own capital and reserves.

3. Disallowance of Depreciation on Car:
The AO disallowed Rs. 1,50,000 claimed as depreciation on a second-hand car, as the assessee failed to provide evidence of ownership and business use. The CIT(A) confirmed the disallowance. The Tribunal upheld the CIT(A)'s decision, noting the lack of evidence that the car was used for business purposes and was registered in the name of a partner, not the firm.

4. Disallowance of Food and Beverage Expenses:
The AO disallowed 20% of Rs. 4,61,381 claimed as food and beverage expenses, amounting to Rs. 92,276, due to unverifiable self-generated vouchers and non-payment of fringe benefit tax (FBT). The CIT(A) confirmed the disallowance, considering the FBT provisions. The Tribunal found the 20% disallowance reasonable and upheld the CIT(A)'s decision, rejecting the assessee's contention for a 5% disallowance due to lack of evidence or explanation.

Conclusion:
The appeal was partly allowed, providing relief on loom expenses and remanding the interest disallowance issue for reconsideration, while upholding the disallowances on depreciation and food and beverage expenses.