2014 (1) TMI 546 - AT - Income Tax

Disallowance of proportionate amount of franchisee fee Held that - The nature of the expenditure should be determined objectively - The agreement entered by the assessee with M/s Ma Foi Management Consultants Ltd shows that the assessee has only acquired the license to act as the franchisee of the above said company - It is not a case of acquiring a trade name, which would fall in the category of Capital expenditure - The same is allowable as expenditure u/s 37(1) Decided in favour of assessee. Disallowance of expenses relating to exempted income u/s14A Held that - Following CIT Vs. Dhanalakshmy Bank Ltd 2010 (10) TMI 806 - Kerala High Court The proportionate disallowance under section 14A should be limited to only interest liability and not overheads or administrative expenditure, which should be considered for disallowance under Rule 8D - The issue restored for fresh examination. Disallowance of medical expenses Held that - The assessee has claimed that the medical expenses were incurred on its employees - The assessing officer did not examine the said claim of the assessee - The AO had disallowed this expenditure for want of adequate details/explanations - The issue restored for fresh examination.

Summary

Issues:
1. Disallowance of proportionate amount of franchisee fee debited during the year.
2. Disallowance of expenses relating to exempted income u/s14A of the Act.
3. Disallowance of medical expenses incurred for staff.

Issue 1: Disallowance of proportionate amount of franchisee fee debited during the year:
The assessee, engaged in share dealing and as a franchisee, claimed a franchisee fee under "Preliminary expenses." The AO disallowed it citing insufficient details. However, the fee was allowed in the previous year. The Tribunal found the fee as a necessary expense for the franchise agreement, not capital expenditure, thus allowable under section 37(1) of the Act. The order of Ld CIT(A) was set aside, directing the AO to delete the disallowance.

Issue 2: Disallowance of expenses relatable to exempted income u/s 14A of the Act:
The Tribunal referred to a decision by the Kerala High Court and directed a fresh examination of the disallowance of expenses related to exempted income under section 14A of the Act. The order of Ld CIT(A) was set aside, instructing the AO to reexamine the issue in light of the court's decision.

Issue 3: Disallowance of medical expenses:
The AO disallowed medical expenses due to inadequate details, which the Ld CIT(A) confirmed, questioning if the expenses were considered as perquisites for employees. The Tribunal disagreed, stating medical expenses for employees are staff welfare expenses and allowable under section 37(1) of the Act. The matter was sent back to the AO for fresh examination, directing the assessee to provide relevant vouchers to support the claim of medical expenses for employees.

In conclusion, the Tribunal allowed the appeal for statistical purposes, setting aside the disallowances of the franchisee fee and medical expenses, and directing a reexamination of expenses related to exempted income.