2012 (12) TMI 624 - AT - Income Tax

Disallowance of traveling and conveyance expenditure Held that - Even though the assessee has explained before the CIT(A) that the expenses are meant for the purpose of business and are properly vouched and properly spent, accounted and paid by the company, the reasons elaborating the deficiencies in the vouchers and bills produced by the assessee, pointed out by the AO in the impugned assessment orders cannot be totally ignored - the disallowance worked out applying a straight rate 25% is excessive and unreasonable, thus a token disallowance of Rs.1.5 lakhs as against disallowance of Rs.12,28,516 made by the AO for AY 2004-05 and Rs.50,000 as against Rs.3,85,150 for AY 2005-06, would meet the ends of justice. Revenue s grounds partly allowed. Professional services rendered outside India - Non deduction of TDS - Held that - It is not the case of the Revenue that the payments were made form any office situated in India & also not on record that the foreign agents have any permanent establishment in India in that situation, the payments made by the branch office or the assessee situated outside India to agents outside the country may not fall within the provisions of sec.195(1) - against revenue. Subsidy receipt - revenue v/s capital - Held that - Going through the STPI Scheme the issue whether the subsidy received by the assessee in the form of duty waiver on the import of capital goods, casting export obligations on the assessee, has to be re-examined in the light of the STPI Scheme as a whole, a copy of which is now filed before us. AO needs to conduct purpose test of the said subsidy on the one hand, in the light of the cited judgments, and the details of actual capital asset, in respect of which the assessee enjoyed the waiver of the duty on the other, before arriving at proper and legally sustainable decision in the matter. AO should also examine the applicability of the provisions of S.43(1) with its relevant Explanations before reaching any conclusions on the issue by passing a speaking order - thus restore the matter to the file AO for fresh consideration - in favour of assessee by way of remand.

Summary

Issues Involved:
1. Disallowance out of traveling and conveyance expenditure.
2. Disallowance of expenses on the ground of payments made towards professional services rendered outside India without tax deduction.
3. Nature of subsidy received by the assessee and its tax treatment.

Issue-Wise Detailed Analysis:

1. Disallowance out of Traveling and Conveyance Expenditure:

The first common grievance of the Revenue relates to the disallowance of traveling and conveyance expenditure. The assessing officer, upon verification, observed that the majority of the bills were in the names of individuals and not properly billed to the company, leading to a disallowance of 25% of the claimed expenditure. The CIT(A) deleted these additions, finding the expenditure properly vouched and verifiable. Upon appeal, the Tribunal noted that while the assessee explained the expenses as business-related and properly accounted for, the deficiencies noted by the assessing officer could not be ignored. However, the Tribunal found the 25% disallowance excessive and reduced it to Rs.1.5 lakhs for the assessment year 2004-05 and Rs.50,000 for the assessment year 2005-06, partially allowing the Revenue's grounds.

2. Disallowance of Expenses for Professional Services Rendered Outside India:

The second issue concerns the disallowance of expenses for professional services rendered outside India without tax deduction. The assessing officer disallowed these expenses, arguing that the payments were made towards professional services rendered outside India without tax deduction at source, invoking provisions of section 5(2)(a) and section 195 of the I.T. Act. The CIT(A) deleted these additions, following the Tribunal's decision in the assessee's own case for the assessment year 2003-04, where it was found that payments made by the branch office outside India to agents outside the country did not fall within the provisions of section 195(1). The Tribunal upheld this reasoning, noting that as long as the receipts/expenditure of the Branch Offices abroad are clubbed in the accounts of the assessee's Head Office, the payments made to the Branch Offices merely constitute payment by one hand to the other of the same person. Consequently, the Tribunal dismissed the Revenue's grounds on this issue.

3. Nature of Subsidy Received by the Assessee:

The third issue involves the nature of the subsidy received by the assessee, which was treated as revenue in nature by the assessing officer. The assessee claimed the subsidy, in the form of customs and excise duty exemption, as capital in nature. The assessing officer, invoking provisions of section 28(iii) and 28(iii)(c) of the I.T. Act, treated the subsidy as taxable revenue, arguing that the waiver of customs and excise duty was another form of cash assistance. The CIT(A) confirmed this view, referencing various judicial decisions. On appeal, the Tribunal found that the issue required re-examination in light of the STPI Scheme and relevant judicial precedents. The Tribunal directed the assessing officer to conduct a purpose test of the subsidy and examine the applicability of section 43(1) of the Act before reaching a conclusion, setting aside the CIT(A)'s order and restoring the matter to the assessing officer for fresh consideration.

Conclusion:

The Tribunal dismissed both appeals of the Revenue and allowed the assessee's appeal for statistical purposes, directing a re-examination of the subsidy issue by the assessing officer.