2008 (7) TMI 1024 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of travelling expenses.
2. Disallowance of 10% of the dividend income u/s 14A.
3. Disallowance of rent attributable to garden space and excess rent u/s 40A(2)(b).
4. Disallowance of advertisement expenditure.
5. Addition on account of personal expenses.
6. Disallowance of allocated regional overheads and R&D survey expenses.

Summary:

1. Disallowance of Travelling Expenses:
For the assessment year 2001-2002, the assessee's appeal against the disallowance of travelling expenses amounting to Rs. 5,78,385 was remitted back to the Assessing Officer (AO) for a fresh decision. The AO was directed to examine whether the travelling was undertaken for the assessee's business, notwithstanding the bills being in the name of a group entity. For the assessment year 2002-2003, a similar disallowance of Rs. 16,64,275 was also remitted back to the AO for verification and fresh adjudication.

2. Disallowance of 10% of the Dividend Income u/s 14A:
For both assessment years 2001-2002 and 2002-2003, the disallowance of 10% of the dividend income u/s 14A was contested. The Tribunal allowed the assessee's appeal, following the precedent set in the Third Member case of Wimco Seedlings Limited vs. DCIT, which held that such disallowance was not permissible.

3. Disallowance of Rent Attributable to Garden Space and Excess Rent u/s 40A(2)(b):
For the assessment year 2001-2002, the Tribunal deleted the disallowance of Rs. 7,19,954 towards garden space rent, holding that the expenditure was for business purposes. The disallowance of excess rent u/s 40A(2)(b) amounting to Rs. 1,91,200 was also deleted as the actual rent paid was below the benchmark rate considered reasonable by the AO. For the assessment year 2002-2003, similar disallowances were contested, and the Tribunal followed the same reasoning, allowing the assessee's appeal and dismissing the Revenue's appeal.

4. Disallowance of Advertisement Expenditure:
For the assessment year 2001-2002, the AO disallowed Rs. 1,02,27,106 out of the total advertisement expenditure claimed by the assessee. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, holding that the entire expenditure was deductible as revenue expenditure, irrespective of its treatment in the books of account.

5. Addition on Account of Personal Expenses:
For the assessment year 2001-2002, the AO disallowed Rs. 7,36,744 as personal expenses. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, noting that in the case of a private limited company, there cannot be any question of personal use of the facilities by the Directors. For the assessment year 2002-2003, a similar disallowance of Rs. 1 lakh out of telephone expenses was also deleted.

6. Disallowance of Allocated Regional Overheads and R&D Survey Expenses:
For the assessment year 2002-2003, the AO disallowed Rs. 15,66,000 towards allocated regional overheads and R&D survey expenses. The Tribunal upheld the CIT(A)'s decision to sustain the addition, noting that the assessee had failed to prove any nexus between the business carried on by it and the expenditure claimed. The assessee was advised to take remedial action in the subsequent year if the same amount was offered for taxation there.

Conclusion:
The appeals of the assessee were partly allowed, and those of the Revenue were dismissed for both assessment years 2001-2002 and 2002-2003. The Tribunal provided detailed directions for fresh adjudication on certain issues and upheld the CIT(A)'s decisions on others.