2019 (4) TMI 1798 - AT - Income Tax

Disallowance of web advertisement expenses - Allowable business expenditure - HELD THAT - AO has merely taken as a support material of the statement of Shri SK Gupta dated 13/12/2006 during the course of search proceedings on Sri SK Gupta. Therefore, it is totally incorrect for CIT Appeal to have mentioned that the AO has made the addition on the basis of statement of Shri SK Gupta and A O has not granted an opportunity of cross-examination to the assessee. Even otherwise, the addition has not been made solely on the basis of the statement of Sri SK Gupta, but for the reason of failure of assessee to produce even the basic details about the claim of the expenditure as well as the ownership and use of the software. Further the learned CIT A, was swayed by the fact that the assessee has made payment by account payee cheques. It is a matter of common knowledge that whenever there is an allegation of accommodation entries the transactions are always through account payee cheques. Bogus software purchase and claim of depreciation - Issue squarely covered against the assessee by the decision of the honourable Delhi High Court in case of Chintel 2017 (7) TMI 746 - DELHI HIGH COURT wherein the assessee could not prove the purchase of the software as genuine transaction as it was also developed by an entry operator controlled company, the honourable Delhi High Court confirmed the disallowance of depreciation on the same Disallowance u/s 40A (2) (b) - excessive and unreasonable a high salary paid to the managing Director as well as the joint managing director - CIT A deleted the disallowance because the managing Dir was also paid salary in earlier year also and she is a qualified professional - HELD THAT - We have carefully considered the rival contention and find that M/s Monila Goel and Mrs Mamta Goel both are technically qualified as B Tech graduate and BA LLB. Further there is no finding given by the learned assessing officer that expenditure is excessive or is unreasonable having regard to the business need of the assessee as well as the fair market value of the services and the benefit derived or accruing there from to the assessee. In absence of clear-cut findings with respect to the expenditure on these counts, the disallowance u/s 40 A (2) (b) cannot be made. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of web advertisement expenses
2. Disallowance of depreciation on software
3. Disallowance of excessive salary under Section 40A(2)(b)
4. Addition under Section 69C for unexplained expenditure on salary
5. Disallowance of commission payments
6. Disallowance of earned leave encashment

Detailed Analysis:

1. Disallowance of Web Advertisement Expenses:

The Assessing Officer (AO) disallowed the web advertisement expenses claimed by the assessee, amounting to ?43,50,000 for AY 2005-06 and ?37,70,000 for AY 2004-05. The AO conducted inquiries and found that the service providers were non-existent at the provided addresses, and notices under Section 133(6) went unanswered. The AO further discovered that the domain names and websites where advertisements were allegedly placed did not exist. The AO concluded that the transactions were bogus and part of an accommodation entry scheme.

The CIT(A) deleted the disallowance, accepting the assessee's evidence such as invoices, letters, and confirmations. The CIT(A) also relied on a previous decision in a similar case involving the same group of companies. However, the ITAT found that the CIT(A) failed to address the detailed findings of the AO, including the non-existence of the service providers and the technological impossibility of the services claimed.

2. Disallowance of Depreciation on Software:

The AO disallowed the depreciation on software amounting to ?4,50,000 for AY 2005-06 and ?9,00,000 for AY 2004-05. The AO found that the software purchase was from a company controlled by an accommodation entry provider, and the assessee could not produce any substantial evidence of the software's development, use, or existence. The AO noted discrepancies such as the non-existence of the technology claimed to be used in the software at the time of the alleged purchase.

The CIT(A) deleted the disallowance, accepting the assessee's evidence, including invoices, confirmations, and user manuals. However, the ITAT found that the CIT(A) overlooked the AO's detailed findings and the lack of substantial evidence from the assessee regarding the software's development and use.

3. Disallowance of Excessive Salary under Section 40A(2)(b):

The AO disallowed a portion of the salary paid to the Managing Director (MD) and Joint MD, considering it excessive and unreasonable. The AO did not provide a clear finding on the fair market value of the services or the legitimate needs of the business.

The CIT(A) deleted the disallowance, noting that the directors were qualified professionals and had been paid similar salaries in previous years. The ITAT upheld the CIT(A)'s decision, emphasizing the lack of clear findings by the AO regarding the excessiveness or unreasonableness of the salary.

4. Addition under Section 69C for Unexplained Expenditure on Salary:

The AO made an addition of ?4,17,809 under Section 69C, treating the salary paid to an employee as unexplained expenditure. The CIT(A) deleted the addition, and the ITAT upheld the CIT(A)'s decision, finding no merit in the AO's addition.

5. Disallowance of Commission Payments:

The AO disallowed commission payments of ?90,238, considering them unexplained. The CIT(A) deleted the disallowance, and the ITAT upheld the CIT(A)'s decision, finding no merit in the AO's disallowance.

6. Disallowance of Earned Leave Encashment:

The AO disallowed earned leave encashment of ?53,525. The CIT(A) deleted the disallowance, and the ITAT upheld the CIT(A)'s decision, finding no merit in the AO's disallowance.

Conclusion:

The ITAT partly allowed the appeals of the AO for both years, restoring the disallowances related to web advertisement expenses and depreciation on software, while upholding the CIT(A)'s deletion of disallowances related to salary, commission payments, and earned leave encashment. The ITAT emphasized the lack of substantial evidence from the assessee and the detailed findings of the AO in the disallowances related to web advertisement and software depreciation.