2010 (5) TMI 753 - AT - Income Tax

Disallowance of reimbursement of medical expenses Held that - The assessee being a company, the expenditure could not be held as personal expenses of the company as directors were appointed for the business purposes of the company relying upon Sayaji Iron & Engg. Co. Vs. CIT 2001 (7) TMI 70 - GUJARAT High Court - no material was brought on record to show that such payment was not in accordance with the terms of employment of Directors and was not authorised by the Board specially keeping in view that similar reimbursement was allowed in the immediately preceding year - no disallowance in the hands of the assessee company can be made on the ground that any amount of perquisite which was taxable in the hands of Director employee was not shown by such employee Director in his return of income - the action of the department should be against the said employee Director and not in the hands of assessee company- thus there is no reason to interfere with the order of the CIT(A) Decided against revenue. Proportionate disallowance of interest Interest free advances Held that - Revenue could not point out how the advances given to different persons were not business advances of the assessee. In absence of any material brought on record, tribunal confirmed CIT order that the above advances were for the business purpose of the assessee and no disallowance of interest in respect of such interest free business advances can legally be made - interest free funds available with the assessee company was much more than interest free advance given to Karnataka Jewels Ltd. and no material on record to show that there was a nexus between interest bearing funds and interest free advance to the said Karnataka jewels Ltd.- the order of CIT(A) upheld - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of reimbursement of medical expenses of the Directors.
2. Proportionate disallowance of interest on account of interest-free advances given to M/s. Karnataka Jewels Ltd.

Issue-wise Detailed Analysis:

1. Disallowance of reimbursement of medical expenses of the Directors:

The Revenue appealed against the deletion of disallowance of Rs. 1,58,822/- for medical expenses reimbursed to the Directors. The Assessing Officer disallowed the expense, considering it personal and not as per the terms of employment. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the expense, noting that similar expenses were allowed in the previous year without disallowance and that the expenses were incurred for business purposes.

The Tribunal upheld CIT(A)'s decision, stating that the company, being a separate legal entity, does not derive personal benefits from such expenses. The Tribunal also noted that the expenses were authorized by a board resolution and similar expenses were allowed in the previous year. The Tribunal emphasized that any perquisite not shown by the Director in their return should be addressed in the Director's hands, not the company's. Thus, the Tribunal confirmed the deletion of the disallowance.

2. Proportionate disallowance of interest on account of interest-free advances given to M/s. Karnataka Jewels Ltd.:

The Revenue challenged the deletion of disallowance of Rs. 10,25,400/- for interest paid on borrowed funds, arguing that the assessee gave interest-free advances totaling Rs. 1,87,38,243/- to several parties, including Karnataka Jewels Ltd. The CIT(A) found no nexus between the borrowed funds and the advances, noting that the advances were for business purposes, such as deposits with Karnataka Electricity Board, advance for machinery, and rent advance.

For the advance to Karnataka Jewels Ltd., CIT(A) observed that the opening balance was Rs. 64,66,410/- from previous years, and the fresh advance of Rs. 43,10,900/- was made at the end of the year. CIT(A) noted that interest-free funds available were substantial and no material evidence showed a nexus between the interest-bearing funds and the interest-free advance. The Tribunal agreed with CIT(A), noting that the Departmental Representative failed to provide evidence contradicting CIT(A)'s findings. The Tribunal confirmed that the advances were for business purposes and upheld the deletion of the interest disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on both issues. The reimbursement of medical expenses was deemed allowable as business expenses, and the interest disallowance was deleted due to the lack of evidence showing a nexus between borrowed funds and interest-free advances. The judgment emphasized the need for concrete evidence to support disallowances and upheld the principle of commercial expediency.