2014 (2) TMI 53 - AT - Income Tax

Disallowance out of preceding year expenses Held that - The assessee company is having many divisions all across the country and there can be instances and cases, where bills for expenses are received at much later dated or beyond the financial year and expenses could not be booked when they are incurred Relying upon the decision in Nagri Mills Co. Ltd. 1957 (9) TMI 30 - Bombay High Court - The expenses were incurred wholly and exclusively for the purpose of business - The bonafide and genuineness of expenses is not doubted - Assessee claims that expenses to the tune of Rs.75,51,613/- were to be disallowed u/s 43B of the Act for the reason that these were not paid during the relevant period and these expenses can be allowed only on actual payments Such expenses shall be allowed in the year of actual payment Partly allowed in favour of Revenue. Repair expenses Held that - The Assessing Officer has asked only general details and no specific bills were called for - The Assessing Officer must have applied his mind with the details submitted by the assessee and must have pinpointed the discrepancies and omissions - Ad hoc disallowance cannot be resorted to in the absence of any specific discrepancy noted in the details submitted by the assessee Relying upon the decision in National Industrial Corporation 2002 (8) TMI 93 - DELHI High Court - The order of CIT(A) is upheld. Commission paid to managing director Held that - The Assessing Officer has made an ad hoc disallowance without appreciating the facts of the case that the turnover and profit of the company has been increased during the year - The payment has been made in accordance with Schedule-XIII of the Companies Act, 1956 and this payment has also been approved by the Board of Directors and shareholders of the company The order of CIT(A) is upheld. Commission expenses Held that - The assessee has furnished complete details of expenses along with evidences - The Assessing Officer without making specific inquiry about the expenses made adhoc disallowance out of commission expenses - The Assessing Officer was free to examine further the commission agents to whom the payments were made by the assessee - The assessee has submitted explanation for making the payments which the Assessing Officer has not found false - The assessee is having large number branches and the commission agents procure orders, facilitate in collection of payment from the customers and, therefore, the payments were made for the work carried out by the agents for the smooth running of the business of the assessee Decided against Revenue. Depreciation on machinery and wind electric generators Held that - The firm from whom the machines were purchased were non-existent but the facts show that the wind electric generators were installed at the premises of TNEB which has been confirmed by the TNEB which is a Government Undertaking - Merely not finding M/s. Airo Energy Ltd. that too without summoning the same at the premises cannot be made a basis to draw the conclusion that firm was non-existent - The evidence in the form of certificate from TNEB assumes a credence and deserves to be considered for allowing the depreciation on the assets - The confirmation filed from TNEC did not constitute additional evidence and the same was filed before the Assessing Officer The CIT(A) was correct in deleting disallowance Decided against Revenue. Disallowance of depreciation on machinery Held that - The Assessing Officer made a presumption that wind electric generators purchased from M/s. Ashish Engineering Works was not genuine He made the disallowance to cover up the possible leakage towards the bogus purchase on which assessee was entitled 100% depreciation other than the wind electric generators division - The AO has failed to establish that no assets have been purchased or installed and in that circumstances, he can resort to disallow the depreciation - No efforts have been made to establish that the details submitted by the assessee were not correct Decided against Revenue. Lease rent paid Held that - The assets were in existence as per the spot verification report dated 08.03.2001 of the chartered engineer appointed by the Income-tax Department - The lease rent paid is in respect of the assets purchased in the earlier years also deserve to be allowed in this year also - All the assets which have been acquired/ purchased by lessors from the five parties The order of CIT(A) upheld The lease rent was genuine and should be allowed. Lease rent on machinery, lease management fee and lease rent of building Held that - The lease rent has been paid by banking channels - The assets had been found by the Chartered Engineer on the spot verification and the same was reported by him in his report dated 08.03.2001 - The suppliers of the machinery/equipments were well know like Tata Iron & Steel Co. etc. including Government organization BHEL - The lease rent paid on the assets in the subsequent years has never been disallowed by the revenue authorities nor the genuineness has been doubted - The lessors have confirmed having given the machinery on lease, the machinery was existed on the spot and being used - Decided against Revenue. Interest paid on utilization of funds for non-business purpose Held that - The CIT(A) has proved the genuineness of the lease rent paid, then the interest paid cannot be said to for non-business purpose Decided against Revenue. Transactions with certain parties genuine or bogus Held that - Most of the payments made to these parties have been received back during the year, under consideration - The transactions relating to four parties shows there is a peak debit in the books of the assessee rather than the peak credit - There can be no addition on account of peak debit because it represents amount advanced through books of account to a particular party - The credit in the accounts represents the advance during the year under consideration - Once the advance made to a party and the same amount was received back then there cannot be any addition for escapement of income - The Assessing Officer has failed to discharge the onus with regard to establishing the fact regarding the benami of these sources of the assessee - The Assessing Officer could have enquired regarding the person who has introduced the accounts from the account opening form and the necessary enquiries could have been made from the banks but nothing of such type has been done by the Assessing Officer - Merely stating that the cheques have been issued to the parties and received back during the year under consideration cannot be a basis for making such huge addition of Rs.20 crores Decided against Revenue. Staff welfare and sales promotion expenses Held that - The assessee has failed to furnish complete details of the expenses incurred - The Assessing Officer has restricted the disallowance to 10% on account of staff welfare and sales promotion expenses - Keeping in view of the nature of expenses, CIT (A) was justified in sustaining the addition being 10% of these expenses being treated as not allowable in view of the provisions of section 37(2) of the Act Decided against assessee. Foreign traveling expenses Held that - Assessing Officer had disallowed this amount out of foreign traveling expenses as details submitted were not sufficient to explain the expenditure to justify - Such disallowances are being made in past years Decided against assessee. Amount paid in cash in excess of Rs.10,000 Held that - The expenditure incurred in cash is covered by Rule 6DD(h) Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance on account of preceding years' expenses.
2. Deletion of disallowance out of repair expenses.
3. Deletion of disallowance out of MD's commission.
4. Deletion of disallowance out of professional expenses.
5. Deletion of disallowance out of miscellaneous expenses.
6. Deletion of disallowance out of commission expenses.
7. Deletion of disallowance of depreciation on machinery and wind generators.
8. Deletion of disallowance of depreciation on machinery from M/s Ashish Engineering Works.
9. Deletion of disallowance of expenses on lease rent/lease management fees.
10. Deletion of disallowance of lease rent, lease management fee, and lease rent of building.
11. Deletion of disallowance of interest on borrowed funds for non-business purposes.
12. Deletion of lump-sum addition.
13. Confirmation of adhoc disallowance out of staff welfare and sales promotion expenses.
14. Confirmation of disallowance on account of foreign traveling expenses.
15. Confirmation of disallowance for cash payments exceeding Rs.10,000.
16. Confirmation of disallowance regarding payment of provident fund and EPF.

Detailed Analysis:

1. Deletion of Disallowance on Account of Preceding Years' Expenses:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs.1,22,73,504/- on the grounds that the expenses were genuine, business-related, and crystallized during the year under consideration. The Tribunal noted that the assessee had disclosed these expenses in the audit report and provided sufficient details. The CIT(A) had rightly considered the assessee's explanation and the matching concept in mercantile accounting. The Tribunal also considered the past consistency in allowing such expenses in previous years.

2. Deletion of Disallowance Out of Repair Expenses:
The Tribunal upheld the CIT(A)'s deletion of Rs.50 lacs out of repair expenses, noting that the Assessing Officer (AO) did not pinpoint any specific defects or discrepancies in the details provided by the assessee. The Tribunal emphasized that ad hoc disallowances without specific findings are not justified. The assessee had provided detailed break-ups of expenses, and the AO failed to identify any non-business or capital nature expenses.

3. Deletion of Disallowance Out of MD's Commission:
The Tribunal upheld the CIT(A)'s deletion of Rs.1 lac out of the MD's commission, noting that the payment was made in accordance with Schedule-XIII of the Companies Act, 1956, and approved by the Board of Directors and shareholders. The Tribunal found the AO's ad hoc disallowance unjustified, especially given the increase in the company's turnover and profit.

4. Deletion of Disallowance Out of Professional Expenses:
The Tribunal upheld the CIT(A)'s deletion of Rs.1 lac out of professional expenses, noting that the assessee had provided detailed break-ups of the expenses, and the AO did not ask for further specific information or doubt the genuineness of the expenses. The Tribunal found no basis for the ad hoc disallowance.

5. Deletion of Disallowance Out of Miscellaneous Expenses:
The Tribunal upheld the CIT(A)'s deletion of Rs.5 lacs out of miscellaneous expenses, noting that the AO failed to pinpoint any specific defects or ask for further details. The Tribunal found that the assessee had provided sufficient details, and the increase in miscellaneous expenses was justified by the substantial increase in turnover and profits.

6. Deletion of Disallowance Out of Commission Expenses:
The Tribunal upheld the CIT(A)'s deletion of Rs.50 lacs out of commission expenses, noting that the assessee had provided party-wise details, agreements, and PANs of the commission agents. The AO did not demonstrate how the expenses were excessive or unreasonable. The Tribunal found the ad hoc disallowance unjustified, especially given the past consistency in allowing such expenses.

7. Deletion of Disallowance of Depreciation on Machinery and Wind Generators:
The Tribunal upheld the CIT(A)'s deletion of Rs.4.23 crores and Rs.42.5 lacs claimed on machinery and wind generators, noting that the Tamil Nadu Electricity Board (TNEB) had confirmed the installation and functioning of the wind generators. The Tribunal found that the AO did not issue summons to the supplier or verify the TNEB certificate, and the existence and use of the machinery were established.

8. Deletion of Disallowance of Depreciation on Machinery from M/s Ashish Engineering Works:
The Tribunal upheld the CIT(A)'s deletion of Rs.1 crore on machinery from M/s Ashish Engineering Works, noting that the assessee had provided complete details of the purchases, and the AO did not establish that no assets were purchased or installed. The Tribunal found the ad hoc disallowance without basis or substance.

9. Deletion of Disallowance of Expenses on Lease Rent/Lease Management Fees:
The Tribunal upheld the CIT(A)'s deletion of Rs.7,05,28,805/- out of lease rent/lease management fees, noting that the existence of the assets was established through spot verification. The Tribunal found that the lease transactions were genuine, and the disallowance was unjustified.

10. Deletion of Disallowance of Lease Rent, Lease Management Fee, and Lease Rent of Building:
The Tribunal upheld the CIT(A)'s deletion of Rs.8,55,60,070/-, Rs.18,05,500/-, and Rs.8,64,400/- on lease rent, lease management fee, and lease rent of the building, respectively. The Tribunal found that the assets were in existence and being used, and the lease transactions were genuine. The disallowance was made without adequate details and was unjustified.

11. Deletion of Disallowance of Interest on Borrowed Funds for Non-Business Purposes:
The Tribunal upheld the CIT(A)'s deletion of Rs.2 crores on account of interest, noting that the lease transactions were genuine, and the assets were in existence and being used. The Tribunal found no justification for the ad hoc disallowance of interest.

12. Deletion of Lump-Sum Addition:
The Tribunal upheld the CIT(A)'s deletion of the lump-sum addition of Rs.20 crores, noting that the transactions with the five parties were genuine, and the assets were in existence and being used. The Tribunal found that the AO failed to establish the benami nature of the accounts or any escapement of income. The addition was made without basis or evidence.

13. Confirmation of Adhoc Disallowance Out of Staff Welfare and Sales Promotion Expenses:
The Tribunal upheld the CIT(A)'s confirmation of the disallowance of Rs.7,04,957/- out of staff welfare and sales promotion expenses, noting that the assessee had not provided full details, and some expenses were suo moto disallowed by the assessee. The Tribunal found the disallowance justified in view of the nature of the expenses.

14. Confirmation of Disallowance on Account of Foreign Traveling Expenses:
The Tribunal upheld the CIT(A)'s confirmation of the disallowance of Rs.1,50,000/- on account of foreign traveling expenses, noting that the details submitted were not sufficient to justify the expenditure. The Tribunal found the disallowance consistent with past years.

15. Confirmation of Disallowance for Cash Payments Exceeding Rs.10,000:
The Tribunal set aside the disallowance of Rs.57,115/- for cash payments exceeding Rs.10,000, noting that the expenditure was covered by the exemptions in Rule 6DD(h) of the Income-tax Rules, 1962. The Tribunal allowed this ground of the assessee's cross objection.

16. Confirmation of Disallowance Regarding Payment of Provident Fund and EPF:
The Tribunal dismissed the grounds relating to the disallowance of Rs.28,672/- and Rs.25,103/- regarding payment of provident fund and EPF, as these grounds were not pressed at the time of hearing.

Conclusion:
The Tribunal partly allowed the appeal of the revenue and the cross objection of the assessee, upholding the CIT(A)'s decisions on most grounds while setting aside a few disallowances and dismissing some grounds.