2011 (3) TMI 1039 - AT - Income Tax

Revision u/s 263 - AO had allowed certain expenses without examining the genuineness of expenses in view of the fact that a complaint made by a close family friend of the Director was received by the AO on 19/11/2008 indicating misappropriation and siphoning of the funds of the company - Held that - AO had treated 90 per cent of repairs and maintenance expenditure of capital in nature. The AO issued questionnaire specifically asking the assessee to furnish the addresses of the parties to whom the payment exceeding Rs.50,000/- which being submitted AO had noted that the assessee had not furnished complete details of contractors decided it against the assessee but on appeal CIT (Appeals) deleted the addition relying on the expenditure incurred by the assessee in earlier years. Thus it is apparent that the CIT (A) has also gone into genuineness of the expenses & identified the expenditure of Rs.29,49,360/- capital in nature and the balance expenditure of Rs.55,11,54,867/- was held to be Revenue in nature. Thus the order of the AO has merged in the order of the CIT (A). As regards disallowance of foreign travel/tour expenses CIT (A) has gone through the details. The assessing officer had considered the foreign travel expenses liable to FBT and the assessee had paid the tax thereon. If the expenditure was in nature of personal expenses of the Directors, there was no reason to charge FBT on such expenditure. CIT (A) has gone through the VISA and Pass-ports of the Directors on test-check basis and has found that the expenditure was incurred for the purpose of business. Therefore, the order of the AO has merged in the order of the CIT (A). As regards issue that the Directors have siphoned off money of Rs.50 crores in assessment year 2002-03 to 2008-09 by illegal withdrawals of money by way of addition to the fixed assets, the assessment cannot be held to be erroneous merely on hear-say or failure to make inquiries into the allegations contained in complaint that too for the purposes of making the roving enquiries. The expenditure incurred by the assessee on fixed assets has been found to be genuine by the AO, which has been also upheld by the ld. CIT (Appeals). Therefore, the AO had considered the issue in relation to the renovation and maintenance expenses and foreign travelling expenses. Merely because a complaint has been filed, the assessment cannot be treated as erroneous and prejudicial to interests of revenue on the grounds that the assessing officer had passed such order without making proper enquiries. Thus as CIT(A) had adjudicated upon on all the issues therefore, the assessment order has merged in the order of CIT(A). Hence, CIT was debarred to assume jurisdiction u/s 263 of the Act - appeal filed by the assessee is allowed.

Issues Involved
1. Genuineness of repair and maintenance expenses.
2. Legitimacy of foreign travel and conveyance expenses.
3. Alleged siphoning of funds through additions to fixed assets.

Detailed Analysis

1. Genuineness of Repair and Maintenance Expenses
The assessment order under section 143(3) of the Income-tax Act, 1961, was made on 19/12/2008, assessing the taxable income of Rs.18,68,62,700/- as against declared income of NIL. The Commissioner of Income-Tax (CIT) noted that the Assessing Officer (AO) allowed certain expenses without verifying their genuineness despite a complaint received on 19/11/2008. The complaint alleged that Rs.50 crores under the head repair and maintenance of the building were siphoned off. The AO had concluded that the genuineness of these expenses could not be verified but treated 90% of such expenses as capital in nature. The CIT argued that the entire amount of Rs.6,67,88,797/- should have been disallowed as bogus/non-genuine expenses.

The assessee contended that the CIT (A) had already decided the issue, noting that the expenditure was in tune with earlier years and that the vendors were genuine. However, the CIT observed that the CIT (A) did not explicitly confirm the genuineness of the expenses, thus declaring the AO's order erroneous and prejudicial to the interest of the Revenue.

2. Legitimacy of Foreign Travel and Conveyance Expenses
The complaint also alleged that Rs.5 crores were siphoned off under travel and conveyance expenses for personal use by the Directors. The AO noted that the documents for foreign visits were manipulated and the assessee failed to produce the Directors' passports. The AO concluded that these were personal expenses unrelated to the business.

The assessee argued that the CIT (A) had allowed these expenses based on ITAT's decision for AY 1997-98. The CIT observed that the CIT (A) did not examine the genuineness of the expenses and that the AO should have disallowed the expenses for being non-genuine, making the AO's order incomplete and thus erroneous and prejudicial to the Revenue.

3. Alleged Siphoning of Funds through Additions to Fixed Assets
The complaint further alleged that Rs.40 crores were siphoned off by showing bogus purchases of fixed assets. The AO failed to investigate these allegations. The assessee argued that the AO had examined the details of additions to fixed assets and found them genuine. The CIT noted that the AO did not thoroughly investigate the genuineness of these purchases, making the assessment order erroneous and prejudicial to the interest of the Revenue.

Final Judgment
The Tribunal observed that the CIT (A) had already examined the genuineness and nature of the expenses and found them to be in line with earlier years. The CIT (A) had also considered the foreign travel expenses legitimate for business purposes. The Tribunal noted that the CIT (A) had dealt with all the issues, and thus the order of the AO had merged with the order of the CIT (A). Therefore, the CIT was debarred from assuming jurisdiction under section 263 of the Act. The Tribunal set aside the order of the CIT and restored the order of the AO, allowing the appeal filed by the assessee.

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