2013 (3) TMI 461 - AT - Income Tax

Disallowance of Prior period expenses - Demand for the above period was raised during the previous year on account of completion of assessment - Section 43B - Disallowance out of misc. expenses, conveyance and travelling and tea and refreshment expenses. Held that - We find the assessee has paid the arrears to ESIC relating to different assessment years during the impugned assessment year after the same was quantified by the ESIC authorities in the assessment. Further in view of provisions of section 43B, payment to ESIC is allowable only on actual payment basis, is an allowable expenditure. We set aside the order of the ld. CIT(A) and direct the A.O. to delete the disallowance. Regarding the dissallowances of expenses - Held that - in absence of complete supporting vouchers the entire expenses cannot be allowed as deduction as wholly and exclusively for the purposes of business. Therefore some disallowance is justified. This ground by the assessee is partly allowed.

Summary

Issues:
1. Challenge to the addition of prior period expenses.
2. Disallowance of miscellaneous expenses, conveyance, and travelling expenses.
3. Disallowance of specific expenses like telephone expenses, pooja and Diwali expenses, business promotion expenses, repairs and spare part expenses, and freight charges refund.

Analysis:

Issue 1: Challenge to the addition of prior period expenses
The appellant challenged the addition of Rs. 1,68,849 as prior period expenses by the Assessing Officer (A.O.). The expenses were related to ESIC payments for previous years. The appellant argued that since the liabilities were quantified and paid during the impugned assessment year, they should be allowed as a deduction. The CIT(A) disagreed, citing the mercantile system of accounting and a Supreme Court decision. However, the ITAT found that the payments to ESIC were quantified and paid during the year, making them allowable under section 43B. The ITAT directed the A.O. to delete the disallowance.

Issue 2: Disallowance of miscellaneous expenses, conveyance, and travelling expenses
The appellant contested the disallowance of Rs. 1,80,000 out of total expenses of Rs. 18,59,215. The A.O. disallowed the amount on an adhoc basis due to lack of complete supporting vouchers. The ITAT acknowledged the nature of the expenses and accepted that full supporting vouchers might not always be possible. However, it deemed the disallowance of Rs. 1,80,000 excessive and reduced it to Rs. 25,000, stating that partial disallowance was justified.

Issue 3: Disallowance of specific expenses
The A.O. disallowed specific expenses such as telephone expenses, pooja and Diwali expenses, business promotion expenses, repairs and spare part expenses, and freight charges refund due to lack of details or supporting documentation. The CIT(A) upheld the disallowances. The ITAT noted that while complete verification was not possible for all expenses, the disallowances appeared excessive. It directed the A.O. to restrict the disallowances to lower amounts for each category of expenses, considering the circumstances of the case.

In conclusion, the ITAT partly allowed the appeal filed by the assessee, directing the A.O. to make specific adjustments to the disallowed expenses based on the explanations provided and the nature of the expenses incurred.