2014 (3) TMI 722 - AT - Income Tax

Disallowance of entire expenditure Entire expenses treated as income Genuineness of the expenses - Held that - There are some employees who are regularly paid over a period of 12 months and some of them for some period - Most of them are having bank accounts with continuous numbers - This indicate that these persons must have employed in group concerns and at the instance of the management, they may be called in to work in different places and their salaries were paid by different firms at the convenience of the management - There are many inconsistencies in the disbursement of salaries as the same person is not figuring in next month s list consistently - Due to influx of time it is not possible to examine each and every amount as the assessee has done business only in one year and has closed down its operations by the end of March, 1997 - 30% of the expenditure claimed is allowed, other than the expenditure on dealers meet and interest, could justify in the facts of the case and accordingly thus, the AO is directed to disallow 30% of the various expenditure claimed, other than interest and expenditure on dealers meet which are separately dealt with. Claim of Interest Held that - Interest was paid to the partners along with an amount to Dhanalakshmi Bank - The amount paid to bank can be allowed in full - The amount paid to partners would get taxed separately in their hands, so there is no need to disallow as it was only appropriation. Dealers meet expenses Held that - The whole arrangement was a make believe arrangement as observed by the A.O. and confirmed by the CIT(A) - the claim of dealers meet in its entirety, disallowance of 30% of various expenditure claimed (other than interest) would meet the ends of justice on the given set of facts - The order should not be taken as a basis for considering the allowance of expenditure in the hands of the company, which we were informed is pending for adjudication Decided partly in favour of Assessee.

Summary

Issues involved:

1. Disallowance of the entire expenditure claimed by the assessee.
2. Treatment of the entire receipts as income.
3. Examination of the genuineness of the business activities carried out by the assessee.
4. Allowance of specific expenditures, including dealer meet expenses and interest payments.

Detailed Analysis:

1. Disallowance of the entire expenditure claimed by the assessee:

The assessee firm filed its return of income for A.Y. 1997-98, admitting an income of Rs.82,330/-. The A.O. disallowed the entire expenditure claimed by the assessee, holding that it was neither proved nor genuine. The CIT(A) and ITAT upheld this disallowance, with the ITAT noting inconsistencies in the agreement and the lack of evidence to support the claimed expenditures. The A.O. observed that the firm's agreement with Unique Plastics Ltd. was entered before the firm's formation and was amended twice before it started operations. The A.O. also noted that the commission was reduced without a basis, suggesting the diversion of funds. The ITAT concluded that 30% of the various expenditures (other than interest and dealer meet expenses) could be justified and directed the A.O. to disallow 30% of the claimed expenditures.

2. Treatment of the entire receipts as income:

The A.O. treated the entire receipts of Rs.40,20,000/- from Unique Plastics Ltd. as income, disallowing the entire expenditure claimed by the assessee. The ITAT accepted the receipt of Rs.40,20,000/- as commission, noting that there was no dispute regarding this amount. The ITAT focused on examining the various claims of expenditure rather than the genuineness of the business activity, which was relevant for the allowance of expenditure in the company's hands.

3. Examination of the genuineness of the business activities carried out by the assessee:

The A.O. and CIT(A) questioned the genuineness of the business activities carried out by the assessee, noting inconsistencies in the agreement and the lack of evidence to support the claimed expenditures. The ITAT observed that the firm's agreement with Unique Plastics Ltd. was entered before the firm's formation and was amended twice before it started operations. The ITAT also noted that the business was done only for one year at the unilateral directions of the company, indicating that the claim of business activity required thorough examination. However, the ITAT accepted the receipt of Rs.40,20,000/- as commission and focused on examining the various claims of expenditure.

4. Allowance of specific expenditures, including dealer meet expenses and interest payments:

The ITAT addressed the allowance of specific expenditures, including dealer meet expenses and interest payments. The ITAT disallowed the entire amount of Rs.4,17,069/- claimed as dealer meet expenses, noting inconsistencies in the bills and the fact that the expenditure was borne by the assessee at the instance of the company. The ITAT allowed the interest paid to Dhanalakshmi Bank in full but noted that the amount paid to partners would get taxed separately in their hands. The ITAT directed the A.O. to disallow 30% of the various expenditures claimed (other than interest and dealer meet expenses) to meet the ends of justice.

Conclusion:

The ITAT partly allowed the appeal of the assessee, directing the A.O. to disallow 30% of the various expenditures claimed (other than interest and dealer meet expenses) and disallowing the entire amount of Rs.4,17,069/- claimed as dealer meet expenses. The ITAT accepted the receipt of Rs.40,20,000/- as commission but noted that the claim of business activity required thorough examination. The ITAT's order should not be taken as a basis for considering the allowance of expenditure in the hands of the company, which is pending adjudication.