2012 (11) TMI 1301 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenses related to 'Info & tracking of delivery schedules' and 'termination fees' paid to South Elegant Limited (SEL).
2. Disallowance/restriction of various claims under different heads such as Staff Welfare expenses, Administration expenses, Travel & conveyance, Water charges, Sample expenses, Business promotion expenses, and Repairs & maintenance.
3. Remuneration paid to the Managing Director.
4. Rent received from a sister concern.
5. Applicability of Section 201 related to failure to deduct TDS.

Summary:

I. Disallowance of Expenses Related to SEL:
- Info & Tracking of Delivery Schedules & Termination Fees:
The assessee claimed expenses of Rs. 10.68 crores for 'Info & tracking of delivery schedules' and Rs. 18.35 crores for 'termination fees' paid to SEL. The AO disallowed these expenses, questioning the genuineness of the transactions and the business necessity. The CIT(A) upheld the disallowance, noting the absence of original agreements and the non-existence of SEL. The Tribunal remanded the issues back to the AO for fresh consideration, directing verification of the additional evidence provided by the assessee.

II. Disallowance/Restriction of Various Claims:
- Staff Welfare & Administration Expenses:
For A.Y 2006-07, the AO disallowed Rs. 16.80 lakhs and Rs. 16.64 lakhs under Staff Welfare and Administration expenses, respectively, due to unverifiable claims. The CIT(A) restricted these disallowances to Rs. 10 lakhs and Rs. 9 lakhs. For A.Y 2007-08, similar disallowances were made and restricted to 15%. The Tribunal remanded these issues back to the AO for fresh consideration, emphasizing the need for verification of the provided details.

- Travel & Conveyance:
The AO disallowed Rs. 22.98 lakhs out of Rs. 76.62 lakhs claimed, citing unsupported expenses. The CIT(A) restricted this to Rs. 11.49 lakhs. The Tribunal allowed the full claim, noting the necessity of the expenses for providing transportation services to employees.

- Water Charges:
The AO disallowed 30% of the claimed Rs. 20.67 lakhs, which was restricted to 15% by the CIT(A). The Tribunal remanded the issue back to the AO for verification of the details.

- Sample & Business Promotion Expenses:
The AO disallowed Rs. 10 lakhs, attributing the expenses to the MD's credit card without business justification. The CIT(A) upheld this disallowance, and the Tribunal found no reason to interfere.

- Repairs & Maintenance:
The AO disallowed Rs. 2.20 lakhs towards customs duty on machinery, treating it as capital expenditure. The CIT(A) restricted this to Rs. 1 lakh. The Tribunal upheld the AO's decision, confirming the capital nature of the expenditure.

III. Remuneration Paid to the Managing Director:
- The AO disallowed Rs. 8.14 crores paid to the MD, questioning his limited presence in India. The CIT(A) allowed the claim, noting the MD's role in securing business and the TDS deducted on the salary. The Tribunal upheld the CIT(A)'s decision.

IV. Rent Received from Sister Concern:
- The AO added Rs. 33.02 lakhs to income, citing undercharged rent to a sister concern. The CIT(A) directed the AO to adopt the municipal value if it exceeds the rent received. The Tribunal remanded the issue back to the AO for fresh verification of the facts.

V. Applicability of Section 201:
- The AO initiated proceedings u/s 201 for non-deduction of TDS on payments to SEL. The CIT(A) held there was no violation of Section 195, noting the absence of a Permanent Establishment. The Tribunal remanded the issue back to the AO, linking it to the determination of the genuineness of the expenses under Section 37.

Conclusion:
The appeals for A.Y 2006-07 and 2007-08 are partly allowed for statistical purposes, with several issues remanded back to the AO for fresh consideration and verification.