2013 (6) TMI 570 - AT - Income Tax

Telephone expenses disallowed - Held that - As only in the impugned assessment year, the AO has made a disallowance, which has not been followed up even in the subsequent years, though, the assessments were framed u/s 143(3). Thus the rule of consistency cannot be ignored as laid down by a host of decisions in various fora. Therefore set aside the order of the CIT(A) sustaining the disallowance at Rs. 58,557/- on this issue and direct the AO to delete the disallowance made at Rs. 78,076/-. In favour of assessee. Disallowance of partners conveyance - CIT(A) restricted it to 10% - Held that - The conveyance allowance are fixed by the company to its partners. This fact, as well as the fact that the disallowance has been made only in the impugned year has not been denied by the DR. Thus following the rule of consistency no further disallowance is called for. In favour of assessee. Disallowance of business development expenses - Held that - As no disallowance made even in the subsequent years. Since the AR has pleaded for a reasonable and suitable reduction ad-hoc disallowance of Rs. 15,000/- would meet the ends of justice. Partly in favour of assessee. Disallowance of foreign travel expenses - Held that - From the breakup reproduced along with the bills with regard to foreign travel, which do have a positive presumption of carrying professional/business connection, because, durations are small, which can only be presumed to be professional/business oriented. But expenses shown under others and Visa fee , cannot be allowed, because, visa once given can be used by the person for any number of times, including for personal requirements and there are no details of others (Rs. 20,728/-). Therefore, set aside the order of the CIT(A) and direct the AO to restrict the disallowance to Rs. 20,728/- and allow the balance aggregating to Rs. 3,92,115/-. Partly in favour of assessee. Disallowance u/s 40(a)(i) for non deduction of TDS - assessee paid membership fee to Baker Tilly International (BTI), located in England - Held that - No part of the payment made as subscription to BTI has resulted in income in its hands. Clause 3.5 of the agreement specifies that the company shall not constitute any partnership, joint venture or agency relationship with its members. This clears the deck to come to the conclusion that the subscription paid to BTI does not involve any income element and therefore, the provisions of TAS shall not be applicable. Thus set aside the orders of both the revenue authorities and direct the AO to delete the disallowance made to BTI. In favour of assessee. Disallowance of payment made to the legal heirs of the deceased partner - Held that - The issue, in so far as the assessee is concerned, can be said to in favour and covered by an order of the coordinate Bench in its own case in assessment year 1981-82. Also AO has himself conceded that in the case of Mulla & Mulla 1990 (9) TMI 32 - BOMBAY High Court has held that an overriding charge to have been created over the assessee, where, by the obligation, income is diverted before it reaches the assessee, it is deductible . Since the payment has been made by the firm to the legal heir of its deceased partner, as per the clauses of the partnership deed dated 1.4.2000 having unequivocal covenants. Thus the amount so paid to the legal heir of the deceased partner is an allowable expense. In favour of assessee. Non deduction of TDS on payments made to professionals - Held that - As payments had been made to non professional who are contracted for 3-4 months to do and learn the basic concepts of profession of accountancy. The persons are students who are perusing their accountancy degree/diploma or even as interns. It is economical for the employees to engage such persons, who would come, do the basic work of a paid employee, prepare some details/reports and go in 3-4 months time. Thus assessee has made payments to such students or small time accountants, who take up office job work at certain period of times & shall not attract deduction of tax at source and hence would not be hit by section 40(a)(ia). In favour of assessee.

Issues Involved:
1. Disallowance of telephone expenses.
2. Disallowance of partners' conveyance expenses.
3. Disallowance of business development expenses.
4. Disallowance of foreign travel expenses.
5. Disallowance under Section 40(a)(i) for non-deduction of TDS.
6. Disallowance of payment to legal heirs of deceased partners.
7. Disallowance of subcontracting fees under Section 40(a)(ia).
8. Addition of unreconciled entries of AIR.

Detailed Analysis:

1. Disallowance of Telephone Expenses:
The assessee contested the excessive disallowance of telephone expenses. The AO disallowed 20% of the mobile and residence phone expenses, totaling Rs. 78,076/-. The CIT(A) reduced this to 15%, i.e., Rs. 58,557/-. The ITAT noted that in other assessment years, no such disallowance was made by the AO, emphasizing the principle of consistency. Therefore, the ITAT directed the AO to delete the disallowance of Rs. 78,076/-. Ground no. 1 was allowed.

2. Disallowance of Partners' Conveyance Expenses:
The AO disallowed 20% of the partners' conveyance expenses, amounting to Rs. 1,12,200/-, which the CIT(A) reduced to 10%, i.e., Rs. 56,100/-. The ITAT observed that the conveyance allowance was fixed and no disallowance was made in subsequent years. Following the rule of consistency, the ITAT directed the AO to delete the disallowance. Ground no. 2 was allowed.

3. Disallowance of Business Development Expenses:
The AO disallowed Rs. 30,000/- out of Rs. 3,30,271/- claimed as business development expenses. The ITAT noted no disallowance in subsequent years and reduced the disallowance to Rs. 15,000/- to meet the ends of justice. Ground no. 3 was partly allowed.

4. Disallowance of Foreign Travel Expenses:
The AO disallowed 25% of the foreign travel expenses, amounting to Rs. 1,09,037/-, due to lack of substantiation. The CIT(A) sustained the disallowance. The ITAT reviewed the details and found that expenses related to conferences and short-duration trips were likely professional. However, it disallowed Rs. 20,728/- for visa fees and unspecified "other" expenses, directing the AO to allow the balance. Ground no. 4 was partly allowed.

5. Disallowance under Section 40(a)(i) for Non-Deduction of TDS:
The AO disallowed Rs. 2,17,594/- paid as membership fees to Baker Tilly International (BTI) for non-deduction of TDS. The CIT(A) upheld the disallowance, citing a similar case. The ITAT found that the payment to BTI did not result in income for BTI and was not subject to TDS as per the relevant clauses of the agreement and CBDT Circular No. 786. The ITAT directed the AO to delete the disallowance. Ground no. 5 was allowed.

6. Disallowance of Payment to Legal Heirs of Deceased Partners:
The AO disallowed Rs. 20,26,244/- paid to the legal heirs of a deceased partner, deeming it not allowable under Section 37(1). The CIT(A) sustained the disallowance, referencing the Supreme Court's decision in Sitaldas Tirathdas. The ITAT noted that similar payments were allowed in earlier years and that the partnership deed created an overriding charge. Therefore, the ITAT directed the AO to allow the payment. Grounds no. 6(a) & (b) were allowed.

7. Disallowance of Subcontracting Fees under Section 40(a)(ia):
The AO disallowed Rs. 5,33,992/- for non-deduction of TDS on subcontracting fees. The CIT(A) upheld the disallowance, stating that the payments were made to professionals. The ITAT found that the payments were made to non-professionals or students for basic accounting work, which did not attract TDS. The ITAT directed the AO to allow the payment. Ground no. 3 was allowed.

8. Addition of Unreconciled Entries of AIR:
The AO added Rs. 24,050/- for unreconciled entries of AIR. The AR did not press this issue due to the small amount. The ITAT dismissed this ground. Ground no. 4 was dismissed.

Conclusion:
- Appeal for AY 2005-06 was partly allowed.
- Appeal for AY 2006-07 was allowed.
- Appeal for AY 2007-08 was partly allowed.

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