2008 (10) TMI 662 - AT - Income Tax

Disallowance of foreign travelling expenses and hotel expenses - expenses related to business activity or not? - HELD THAT - The expenses on airfare is wholly and exclusively for the purpose of business. Therefore, such expenses could not have been disallowed even in part. As regards hotel expenses, when the assessee or its employees travelled abroad and stayed in the hotel, the expenses are wholly and exclusively for the purpose of business. From the details the AO has not found out as to which part is not towards travel abroad or for otherwise than for the purpose of business. Accordingly the sustenance of disallowance is not in accordance with law. We, therefore, delete the entire disallowance. Disallowance of the expenses on proportionate basis - AO invoking provision of section 14A - When the assessee specifically denied having incurred any expenditure and having also proved that the expenditure was incurred in the business of real estate agent, it was for the AO to prove that such expenditure was not incurred in the course of carrying on business but were incurred for earning exempt income. The AO having failed to do such exercise cannot presume and allocate the expenditure in the ratio of exempt income to total income. The finding has to be specific. The nexus has to be proved. In absence of such finding or nexus, provisions of section 14A cannot be invoked so as to disallow the expenses on proportionate basis. We, therefore, delete the disallowance Unexplained investment u/s 69B - construction of house property - difference in the cost of construction and cost of investment in the property - CIT deleted the addition made by AO - Assessee filed complete details in respect of investment made. Total investment by three co-owners - HELD THAT - Considering the facts it cannot be said that there was any unexplained investment by the assessee in construction of house property, After all the report of DVO is only an opinion and not a conclusive proof that any unexplained investment has been made. Moreover, defects were also pointed out in the said report. Considering these facts, we find that the addition was rightly deleted by the ld CIT(A). Expenses claimed in excess of income from commission and after reducing the amount of house tax paid is disallowed - AO disallowed the expenses on the ground that the receipt is minuscule whereas the expenses are manifold. However, when the claim is made in respect of business expenses u/s 37(1) what is to be examined is whether the expenses are incurred wholly and exclusively for the purpose of business or not. Since there is no dispute about this fact, there cannot be ad hoc or artificial disallowance without giving a finding that particular expense was not incurred for the purpose of business. We, therefore, delete the disallowance. In the result, the appeal of the assessee is allowed and that of the revenue is dismissed.

Issues Involved:
1. Disallowance of foreign traveling expenses.
2. Disallowance of telephone and car expenses.
3. Disallowance under Section 14A.
4. Unexplained investment under Section 69B.
5. Treatment of income from sale of properties as capital gains vs. business income.
6. Assessment of annual letting value of properties.

Detailed Analysis:

1. Disallowance of Foreign Traveling Expenses:
The primary issue was whether the foreign travel expenses incurred by the assessee were for business purposes or personal in nature. The Assessing Officer (AO) disallowed the entire amount of Rs. 26,09,688, considering it as personal expenditure. The CIT(A) reviewed the evidence, including client meetings and business dealings abroad, and partially allowed the claim by disallowing only 20% of air tickets and 25% of hotel expenses, totaling Rs. 6,22,960. The Tribunal found that the AO did not provide specific discrepancies in the assessee's claims and concluded that the entire expenditure was for business purposes, thus deleting the disallowance.

2. Disallowance of Telephone and Car Expenses:
The AO disallowed Rs. 50,163 for telephone expenses and certain amounts for car repairs, maintenance, and depreciation, citing personal use. The CIT(A) reduced the disallowance for telephone expenses to Rs. 10,000, acknowledging no telephones were installed at the residential premises. The Tribunal upheld the CIT(A)'s decision, recognizing the personal element in the use of these assets.

3. Disallowance under Section 14A:
The AO disallowed Rs. 1,01,863 under Section 14A, attributing it to the earning of exempt income. The CIT(A) reduced this to Rs. 30,476, considering only 10% of interest expenses as related to exempt income. The Tribunal deleted the entire disallowance, stating that the AO failed to demonstrate a direct nexus between the expenses incurred and the earning of exempt income.

4. Unexplained Investment under Section 69B:
The AO added Rs. 4,63,700 as unexplained investment in the construction of a house property based on a valuation report by the DVO, which estimated a higher construction cost than declared. The CIT(A) deleted the addition, noting discrepancies in the DVO's report and the fact that the assessee maintained complete records of construction expenses. The Tribunal upheld the CIT(A)'s decision, emphasizing that the DVO's report alone, without concrete evidence of actual unexplained expenditure, could not justify the addition.

5. Treatment of Income from Sale of Properties:
The AO treated the income from the sale of properties as business income, arguing that the assessee was engaged in real estate. The CIT(A) found that the assessee was primarily a real estate agent and not a trader in properties, as the properties were held for several years and not frequently traded. The Tribunal upheld the CIT(A)'s decision to treat the income as capital gains, noting the long-term holding and the nature of the assessee's business.

6. Assessment of Annual Letting Value of Properties:
The AO assessed the annual letting value of certain properties, including a flat in Ambadeep Building, which was vacant and not let out during the year. The CIT(A) deleted the addition related to the Ambadeep property, citing Section 23(1)(c) of the Act, which allows for a nil annual value if the property was let out in earlier years and remained vacant. The Tribunal upheld this decision, referencing a similar ruling for the previous assessment year.

Separate Judgments:
The Tribunal delivered separate judgments for different appellants but followed consistent reasoning across similar issues, ensuring uniformity in the application of legal principles.

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