2014 (7) TMI 426 - AT - Income Tax

Foreign Travel Expenses - Expenditure incurred for non-business purpose Held that - On hearing both the parties and on perusal of the relevant material, it would be reasonable to remand the issue to the file of the AO to examine the same and to take a fresh decision in the light of the information furnished thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Expenses on guest house and residential flats Held that - Assessee mentioned that the confirmation given by Shri Sharma is supported by the guest house register - issue can also be remanded to the file of the AO to examine the expenditure incurred on guest houses and residential flats owned by the employees - the expenditure incurred on employees may be fully allowed as it is incurred for the business purposes - it is not clear from the record that why the assessee has to incur on the residential flats allotted to the employees of the company - the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Valuation of closing stock Held that - On hearing both the parties and on perusal of the material on record, the issue needs to revisit the file of the AO and the closing stock valuations have to be redone in the light of the provisions of section 145A of the Act thus, the issue is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Disallowance of 50% of license fees Held that - As decided in assessee s own case for the earlier assessment year, it has been held that nature of the expense is that under an agreement the assesee became a licensee member of RPG Enterprises Ltd and was entitled to use its trade mark RPG and also have full access to various organizational facilities developed by RPG Enterprises - there was no rationale explanation for the benefit which the assessee received by making payment - In the past 50% of disallowance had been made and the AO made disallowance of 50% of the expenses thus, the order of the CIT(A) is upheld Decided against Revenue. Disallowance u/s 14A of the Act Dividend income Held that - CIT (A) was rightly of the view that Rule 8D is applicable only from AY 2008-2009 Relying upon M/s. Cheminvest Ltd vs. ITO 2009 (8) TMI 126 - ITAT DELHI-B - even if no exempt income is earned, a proportion of the expenditure incurred is attributable to managing the said investments and therefore section 14A of the Act would definitely be applicable - while adjudicating the issue, the CIT (A) has rightly considered the decisions of the ITAT as well as the judgments of the higher judiciary and the direction given by the CIT (A) to calculate the disallowance u/s 14A of the Act at 5% of the dividend income is fair and reasonable Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of foreign travel expenses.
2. Disallowance of expenditure on guest houses and residential flats.
3. Overvaluation of closing stock.
4. Disallowance of 50% of license fees.
5. Disallowance under Section 14A of the Income Tax Act.
6. Disallowance of club membership expenses.

Detailed Analysis:

1. Disallowance of Foreign Travel Expenses:
The assessee contested the disallowance of Rs. 9,69,613/- incurred on foreign travel, which was treated by the AO as non-business expenditure due to insufficient details provided. The CIT (A) upheld this disallowance. The Tribunal noted that similar issues had been decided in favor of the assessee in previous years and remanded the matter back to the AO for re-examination with the new evidence provided by the assessee. This ground was allowed for statistical purposes.

2. Disallowance of Expenditure on Guest Houses and Residential Flats:
The assessee challenged the disallowance of Rs. 1,17,49,450/- for expenses on guest houses and residential flats provided to employees, which the AO disallowed due to lack of detailed evidence. The Tribunal noted the affidavit and guest house register provided by the assessee and remanded the issue back to the AO for fresh examination, directing a speaking order after granting the assessee a reasonable opportunity to be heard. This ground was allowed for statistical purposes.

3. Overvaluation of Closing Stock:
The assessee disputed the partial confirmation of overvaluation of closing stock amounting to Rs. 31,35,062/-. The Tribunal agreed with the assessee's contention that the valuation should be revisited in light of Section 145A of the Income Tax Act and remanded the issue back to the AO for re-evaluation. This ground was allowed for statistical purposes.

4. Disallowance of 50% of License Fees:
The Revenue's appeal contested the deletion of disallowance of 50% of license fees paid to RPG Enterprises Ltd. The Tribunal referred to its previous decision in the assessee's favor and the confirmation by the Jurisdictional High Court, upholding the CIT (A)'s order. This ground was dismissed.

5. Disallowance under Section 14A:
The Revenue challenged the CIT (A)'s direction to the AO to recompute the disallowance under Section 14A at 5% of the dividend income. The Tribunal upheld the CIT (A)'s decision, noting it was consistent with judicial precedents and reasonable. This ground was dismissed.

6. Disallowance of Club Membership Expenses:
The Revenue appealed against the deletion of the disallowance of Rs. 6,16,455/- for club membership expenses. The Tribunal upheld the CIT (A)'s decision, which was consistent with previous years and supported by the Mumbai High Court decision in Otis Elevator vs. CIT. This ground was dismissed.

Conclusion:
The Tribunal remanded the issues of foreign travel expenses, guest house and residential flat expenses, and closing stock valuation to the AO for fresh examination. The appeals regarding the license fees, Section 14A disallowance, and club membership expenses were dismissed, upholding the CIT (A)'s decisions. The assessee's appeal was allowed for statistical purposes, while the Revenue's appeal was dismissed.