2015 (3) TMI 643 - AT - Income Tax

Disallowance of Bad Debts - failure of the Appellant to prove revenue recognition of such debts in earlier years - Held that - We note that assessee has claimed before the ld. CIT(A) that details of bad debt were furnished by the assessee regarding offer for taxation in the respective year and all such debts carried over for long periods arising out of hotel operations. However, we find that the detailed as referred in the above submissions have not been produced by the assessee before us. The ld. CIT(A) has given finding that the assessee has not proved that the amount of bad debts was taken into income of the assessee in the earlier years. We find that there is contradiction between the submissions of the assessee and the finding of the ld.CIT(A) as to whether the details were furnished that the income relating to bad debts were offered for taxation in the earlier years. In this view of the matter, in our considered opinion the issue needs to be remitted to the file of the AO to make factual examination of the assessee s claim after giving the assessee adequate opportunity of being heard. - Decided in favour of assessee for statistical purposes. Deduction u/s. 43B of municipal taxes - CIT(A) allowed the claim - Held that - CIT(A) has allowed the impugned payment on the basis of provisions of section 43B of the I.T Act 1961. The said section mandates that the statutory dues should be allowed if they are paid during the year or subsequently prior to the due date of filing of return irrespective to the year to which they pertain. In this case, the ld. CIT(A) has given a finding that liability of municipal tax though pertaining to earlier year crystallized during the year as necessary bill was raised during the year. This was paid before the due date of filing of return. Hence, the amount involved is allowable as per provisions of section 43B of the Act. It is not the case of the revenue that the concerned payment has not been made before the due date of filing of return. The revenue has taken the ground that the said amount should not be allowed if it was paid in subsequent financial year. We find that this ground is not sustainable as section 43B itself mandates that the amount involved can be allowed if the same is paid after the close of the financial year, but before the due date of filing of return. Hence, we do not find any infirmity in the order of the ld.CIT(A) - Decided against revenue. Disallowance of expenses on apartment and board - CIT(A) granted part relief to the assessee - Held that - CIT(A) has noted that AO in his remand report has stated that though the details of the expenses have been furnished but no names, addresses or bills of suppliers etc were furnished. Therefore, expenditure remained unverifiable. The ld.CIT(A) has dislodged this finding of the AO by holding that AO s objection is not good because the accounts of the assessee are subjected to audit and the auditors have not mentioned any short coming on that account, in assessee s books, in their Audit report. We find that AO s remand report indicates that the bills submitted in this regard were not proper inasmuch as names, addresses or bills of suppliers etc were not mentioned in the vouchers. This finding of the AO cannot be dislodged only by plea that the accounts of the assessee were audited and the auditors have not pointed out any short coming. Income tax laws do not provide that the auditors report should be treated as sacrosanct and the AO need not make proper examination. Hence, assessee s claim of expenditure in absence of proper supporting by way of cogent vouchers cannot be allowed. In such circumstances, we set aside the order of the ld.CIT(A) on this issue and restore that of the AO. - Decided in favour of revenue. Disallowance of management fees - CIT(A) deleted addition - Held that - assessee had entered into agreement with Sarovar Park Plaza Hotels & Resorts P.Ltd for operation of hotel of the assessee and also to render supervisory services. The amount paid was based upon percentage of gross revenue and gross operating profit. The ld. CIT(A) has given a finding that after availing services of the above referred reputed hotel chain the business position of the assessee in subsequent years improved. In such situation, it cannot be said that the amount paid as management fee, was not allowable. The ld.CIT(A) has rightly held that management fee is directly attributable to income from operations and is fully allowable as business expenditure. There is no basis for AO s observation that the assessee cannot pay the management fees, if it has also paid director s remuneration, director s salary, and any other administration expenses. There is no basis for such observation of the AO. By no stretch of imagination, it can be inferred that since the assessee has paid management fees, hence, services of the directors and salary to the staff are not required. In this respect, we also refer to the case of CIT Vs. Walchand & Co. Pvt. Ltd reported in (1967 (3) TMI 2 - SUPREME Court). In this case, it was held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively made out for business reasonableness has to be judged from the point of view of businessman. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of Bad Debts
2. Deduction under Section 43B for Municipal Taxes
3. Disallowance of Various Expenses
4. Disallowance of Management Fees

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts:
The assessee claimed a deduction for bad debts amounting to Rs. 10,37,344/-. The Assessing Officer (AO) disallowed this claim on the grounds that the assessee failed to furnish details supporting the claim. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that the assessee did not demonstrate that the amount written off as bad debts was previously offered for taxation. The Tribunal found contradictions between the assessee's submissions and the CIT(A)'s findings. It noted that the assessee claimed to have provided details showing the debts were offered for taxation in earlier years. Consequently, the Tribunal remitted the issue back to the AO for factual examination, giving the assessee another opportunity to substantiate the claim.

2. Deduction under Section 43B for Municipal Taxes:
The AO disallowed Rs. 54,17,874/- related to municipal taxes, arguing that these expenses pertained to earlier years and the assessee failed to prove that the liabilities crystallized during the current financial year. The CIT(A) allowed the deduction, noting that the demand for municipal taxes was raised in August 2002 and paid before the due date of filing the return, thus falling under Section 43B. The Tribunal upheld the CIT(A)'s decision, emphasizing that Section 43B allows such deductions if the payment is made before the due date of filing the return, regardless of the year to which the expenses pertain.

3. Disallowance of Various Expenses:
The AO disallowed Rs. 40,87,354/- out of Rs. 55,80,075/- claimed for various expenses, as the assessee failed to provide supporting details. The CIT(A) granted partial relief, stating that the expenses were related to hotel operations and the accounts were audited without any noted shortcomings. However, the Tribunal found the AO's objection valid, as the assessee did not furnish proper vouchers with names, addresses, or bills of suppliers. It held that the audit report alone could not override the need for proper verification and restored the AO's disallowance.

4. Disallowance of Management Fees:
The AO disallowed Rs. 23,17,827/- paid as management fees to Sarovar Park Plaza Hotels & Resorts Pvt. Ltd., citing the absence of the operating agreement and questioning the necessity of such fees alongside directors' remuneration and employees' costs. The CIT(A) overturned this disallowance, noting that the agreement was furnished and the fees were justified by the improved business performance. The Tribunal upheld the CIT(A)'s decision, affirming that the management fees were directly attributable to business operations and allowable as business expenditure. It emphasized that the AO's reasoning lacked basis and referenced the Supreme Court's ruling in CIT Vs. Walchand & Co. Pvt. Ltd., which supports the commercial expediency of such expenditures.

Final Outcome:
- The assessee's appeal regarding bad debts was allowed for statistical purposes.
- The revenue's appeal was partly allowed, reinstating the AO's disallowance on various expenses but upholding the CIT(A)'s decisions on municipal taxes and management fees.

Order Pronounced:
The order was pronounced in the open court on 05-03-2015.