2010 (7) TMI 1042 - AT - Income Tax

2014 (3) TMI 617 - AT

Issues Involved:
1. Disallowance of service charges paid to Cummins Diesel Sales & Services India Ltd. (CDSS).
2. Disallowance of travelling and conveyance expenses.
3. Disallowance of staff welfare, miscellaneous expenses, and advertisement and publicity expenses.
4. Disallowance of service charges paid to Cummins Auto Services Ltd. (CASL).
5. Disallowance of repair and maintenance expenditure.
6. Ad hoc disallowance of vehicle and telephone expenses.
7. Disallowance of foreign travelling expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Service Charges Paid to CDSS:
The revenue challenged the CIT(A)'s deletion of disallowance of Rs. 5,04,245/- for AY 2003-04 and Rs. 14,05,175/- for AY 2004-05. The AO disallowed these amounts due to discrepancies in the discount figures used for calculating service charges. The CIT(A) accepted the assessee's explanation that different methods were used for quantifying service charges and royalty, which was consistently followed. The Tribunal upheld the CIT(A)'s order, agreeing that the AO did not verify the reasons for the difference in discount amounts and that the service charges were paid as per the agreement.

2. Disallowance of Travelling and Conveyance Expenses:
The AO disallowed Rs. 17,80,312/- for AY 2003-04, reasoning that the increase in expenses should correlate with the 40% increase in turnover. The CIT(A) deleted the disallowance, stating that the AO's approach lacked legal basis and no discrepancies were found in the details provided by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the AO's disallowance was ad hoc and not supported by any defects in the books of account.

3. Disallowance of Staff Welfare, Miscellaneous Expenses, and Advertisement and Publicity Expenses:
For AY 2004-05, the AO disallowed Rs. 4,50,000/- (Rs. 1,50,000/- for staff welfare, Rs. 1,00,000/- for miscellaneous expenses, and Rs. 2,00,000/- for advertisement and publicity expenses) due to lack of complete details. The CIT(A) deleted the disallowance, citing judicial precedents against ad hoc disallowances without detailed reasoning. The Tribunal agreed, stating that the AO failed to point out specific items not incurred for business purposes.

4. Disallowance of Service Charges Paid to CASL:
The AO disallowed Rs. 52,00,000/- paid to CASL, treating the agreement as a sham. The CIT(A) confirmed the disallowance, stating that the assessee failed to prove the services rendered. The Tribunal, however, found that the assessee provided sufficient evidence, including agreements, dealer network details, and sample invoices, to support the payment. The Tribunal allowed the deduction, noting that the AO did not provide evidence to disprove the genuineness of the agreement.

5. Disallowance of Repair and Maintenance Expenditure:
The AO treated Rs. 8,03,490/- as capital expenditure but allowed depreciation of Rs. 88,129/-. The CIT(A) confirmed the disallowance. The Tribunal found that expenses for wooden pallets and maintenance of existing assets were revenue in nature. It directed the AO to allow the full amount as revenue expenditure and withdraw the allowed depreciation.

6. Ad Hoc Disallowance of Vehicle and Telephone Expenses:
The AO disallowed Rs. 2,27,610/- for vehicle expenses and Rs. 2,00,000/- for telephone expenses on an ad hoc basis. The CIT(A) reduced both disallowances to Rs. 1,00,000/- each. The Tribunal deleted the disallowances, stating they were based on surmises without any material evidence.

7. Disallowance of Foreign Travelling Expenses:
The AO disallowed Rs. 7,16,300/- (25% of Rs. 28,65,214/-) for lack of evidence on the business purpose of foreign travels. The CIT(A) confirmed the disallowance. The Tribunal found that the assessee provided detailed justifications and ledger accounts for the expenses. It deleted the disallowance, directing the AO to allow the full amount.

Conclusion:
The appeals filed by the assessee for AY 2003-04 and 2004-05 were allowed, and the revenue's appeals were dismissed. The Tribunal upheld the CIT(A)'s decisions on various disallowances and found the AO's actions to be largely ad hoc and unsupported by evidence.

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