2015 (1) TMI 1378 - AT - Income Tax

Disallowance in respect of reimbursement of telephone and mobile expenses - Held that - As per rule 3(8) of the Income-tax Rules 1962 reimbursement of telephone expenses is not to be treated as perquisite in the hands of the employees with effect from the assessment year 2002-03. The hon ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT 2001 (7) TMI 70 - GUJARAT High Court held that in a case of corporate entity no disallowance can be made on account of personal use by the director/employees. Respectfully following the proposition we do not find any merit in the disallowance made in respect of reimbursement of telephone and mobile expenses. Disallowance being one-third of the entertainment expenses - Held that - We found that in normal business parlance on Diwali and other festive occasions gifts are distributed to various customers and clients however no receipt for such gifts are taken. The Assessing Officer declined the claim of deduction merely on the plea that no third party evidence had been obtained is not a valid reason for disallowance. Keeping in view the fact that the assessee had furnished full details of expenses along with supporting bills vouchers there is no reason for making such ad hoc disallowance. The Assessing Officer is directed to allow the expenses Ad hoc disallowance being one-fifth of the foreign travel expenses - Held that - The assessee during the course of assessment proceedings had furnished all the details as requested by the Assessing Officer including the name of the employee place visited purpose of the visit etc. in respect of the foreign travel. The purpose of visit of the employees was to attend business meetings fairs and exhibitions training etc. It was further clarified that the expenses incurred were only on its employees and did not include any expenses incurred on the relatives of the employees. As the travel expenses are genuine expenses incurred wholly and exclusively for the purpose of business and are revenue in nature and hence should be allowed as deductible expenses under section 37(1) of the Act. Disallowance of foreign exchange loss on forward exchange contracts entered by the assessee - Held that - The transaction entered by the assessee is on revenue account i.e. to safeguard itself from potential risks arising from foreign currency fluctuations in respect of payments for the imported raw materials. Since the payment was on revenue account AO is directed to allow the loss incurred on revenue account under section 37(1) of the Act. - Decided in favour of assessee Disallowance of commission expenses - Held that - confirmation for rendering services and receipt of payment by the persons who rendered services was not filed before the lower authorities nor even before us. Had the assessee filed such confirmation before the Tribunal we would have restored the matter back to the file of the Assessing Officer for taking cognizance of such confirmation. In the absence of such confirmation for rendering services and receipt of commission income expenses claimed on account of commission cannot be allowed. - Decided against assessee.

Issues Involved:
1. Disallowance of sales and promotional expenses.
2. Ad hoc disallowance of reimbursement of residential telephone and mobile expenses.
3. Ad hoc disallowance of entertainment expenses.
4. Ad hoc disallowance of promotional expenses.
5. Ad hoc disallowance of foreign travel expenses.
6. Disallowance of foreign exchange loss.
7. Non-reduction of reversed commission expenses from taxable income.
8. Disallowance of interest on delayed payment of purchase consideration.
9. Disallowance of commission expenses.

Detailed Analysis:

1. Disallowance of Sales and Promotional Expenses:
The assessee claimed Rs. 4,46,000 as sales promotion expenses for participating in "Photonika Fair". The Assessing Officer disallowed this amount due to lack of documentary evidence, and the Commissioner of Income-tax (Appeals) confirmed the disallowance. The Tribunal upheld the disallowance, noting that no evidence was furnished at any stage to substantiate the expenses incurred.

2. Ad Hoc Disallowance of Reimbursement of Residential Telephone and Mobile Expenses:
The Assessing Officer disallowed Rs. 7,22,445, being one-fourth of the aggregate telephone and mobile expenses reimbursed to employees, attributing it to personal use. The Commissioner of Income-tax (Appeals) confirmed this disallowance. The Tribunal, however, found merit in the assessee's argument that as a corporate entity, no personal expenses should be disallowed. Citing the Gujarat High Court's decision in Sayaji Iron and Engg. Co. v. CIT, the Tribunal directed the deletion of this disallowance.

3. Ad Hoc Disallowance of Entertainment Expenses:
The Assessing Officer disallowed Rs. 1,49,875, being one-third of the entertainment expenses, attributing it to personal use. The Commissioner of Income-tax (Appeals) confirmed this disallowance. The Tribunal directed the deletion of this disallowance, noting that the expenses were incurred for business hospitality and were commercially expedient.

4. Ad Hoc Disallowance of Promotional Expenses:
The Assessing Officer disallowed Rs. 1,64,792, being one-third of the promotional expenses, due to lack of third-party evidence. The Tribunal found that the expenses were genuine business expenses and directed the Assessing Officer to allow the expenses, noting that such disallowances based on the absence of third-party confirmation were not valid.

5. Ad Hoc Disallowance of Foreign Travel Expenses:
The Assessing Officer disallowed Rs. 6,99,284, being one-fifth of the foreign travel expenses of employees (excluding the managing director), attributing it to personal use. The Tribunal found that the expenses were genuine business expenses incurred for business purposes and directed the deletion of this disallowance.

6. Disallowance of Foreign Exchange Loss:
The Assessing Officer disallowed Rs. 4,66,018 as foreign exchange loss on forward contracts, treating it as a contingent liability. The Tribunal directed the allowance of this loss under section 37(1) of the Act, noting that the transactions were on revenue account to safeguard against foreign currency fluctuations.

7. Non-Reduction of Reversed Commission Expenses from Taxable Income:
This ground was not pressed by the assessee's counsel and was dismissed as not pressed.

8. Disallowance of Interest on Delayed Payment of Purchase Consideration:
This ground was also not pressed by the assessee's counsel and was dismissed as not pressed.

9. Disallowance of Commission Expenses:
For the assessment year 2003-04, the Assessing Officer disallowed Rs. 13,38,363 as commission expenses due to lack of confirmation from recipients. The Tribunal upheld this disallowance, noting that the assessee failed to provide necessary confirmations. For the assessment year 2004-05, the Assessing Officer disallowed Rs. 36,32,400 as commission expenses, with the Tribunal confirming the disallowance due to the assessee's failure to establish the genuineness of the expenditure.

Conclusion:
The appeals were allowed in part, with specific disallowances being upheld or deleted based on the merits of each case. The Tribunal's order was pronounced in the open court on January 23, 2015.

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