2015 (11) TMI 1843 - AT - Income Tax

Disallowance u/s.40-A(3) being 20% of the expenditure incurred in cash - HELD THAT - Undoubtedly, the assessee company was incurring expenditure on behalf of its clients. The assessee company has shown the handling charges, transport charges, BPT charges, and gunny bag purchases. In fact, all these charges are belonging to the clients and the same cannot be said to be expenditure of the assessee company. The assessee company also explained in this regard that the company was utilizing the said amount for the payment of labour for job work, for stenciling done manually and high piling and speed money charges to the labour for speed delivery of the cargo. No doubt, to clarify the said expenditure the AO issued notice to the concerned companies but failed to receive the answer from the other companies but it cannot be the ground to disallow the expenditure incurred on behalf of the clients and add the same to the income of the assessee company. Moreover, no expenditure was claimed by the assessee company nor these amounts belong to the assessee company. Thereupon, the said situation, in our view section 40A(3) of the IT Act is not attracted in the hands of the assessee. Hence, the Ld. CIT(A) has rightly deleted the being 20% of the expenses. Addition of speed money is to be payable by the company to the labourers and others to achieve the result or to do the work at spot. This expenditure has also been incurred by the assessee company on behalf of its client. This amount has not been belonging to the assessee company and in this regard the company also reflected the said amount in its Profit and Loss account. As discussed above, section 40A(3) deals with the computing of income under the head of profit and gains of business and provision under section 40A(3) is one of the sub sections of section 40A and while computing the taxable income under the head of profit and gains of business then the provisions of section 40A(3) can be invoked. When there is no claim with regard to any expenditure, therefore there should not be any disallowance in view of the provision under section 40A(3) When the expenditure is not related to the assessee company, however executed on behalf of its client, then the question of application of the provisions of section 37(1) of the Income Tax Act, 1961 does not arise Addition on account of payment made to the Dena Bank as one time settlement against the liability - HELD THAT - The assessee has constructed the warehouse project and installed plant and machinery. The warehouse project was completed in the year of 1990 1991 and amount debited in the balance sheet for the year of 1990-91 - Against the said project, the assessee took the loan from Dena Bank and failed to repay the same, hence, the bank has filed the recovery suit against the assessee. There was a settlement for the amount payable to the bank against the assessee s term loan liability. The assessee paid a sum of ₹ 23,74,000/- in assessment year of 2006-07 and ₹ 24,26,000/- in assessment year of 2007-08 making total payment to ₹ 48 lakhs to Dena Bank. The amount was debited to the separate account and shown separately on the asset side as against the Dena Bank s settlement of term loan. The intimation was given by the assessee by virtue of letter dated 24.10.09.Therefore, in the said situation the ld. CIT(A) has rightly deleted the amount from the income of the assessee. - Decided against revenue.

Summary

Issues:
1. Disallowance of expenditure under section 40A(3) of the IT Act, 1961.
2. Addition of Speed Money under section 37(1) of the IT Act, 1961.
3. Deletion of addition on account of payment to Dena Bank as One Time Settlement.

Issue-I:
The question was whether the Ld. CIT(A) erred in deleting the disallowance of expenditure under section 40A(3) of the IT Act, 1961. The assessee, engaged in various services for clients, incurred expenses on behalf of clients. The AO disallowed these expenses, but the ITAT found that as the expenses did not belong to the assessee and were incurred on behalf of clients, section 40A(3) did not apply. The ITAT upheld the Ld. CIT(A)'s decision to delete the disallowance.

Issue-II:
The issue involved the addition of Speed Money under section 37(1) of the IT Act, 1961. The Revenue contended that the amount was not allowable as per the Explanation to Section 37(1). However, the ITAT found that the Speed Money was paid by the company on behalf of clients, and as there was no claim for the expenditure, section 40A(3) did not apply. The ITAT supported the Ld. CIT(A)'s decision to delete the addition.

Issue-III:
The third issue concerned the deletion of the addition on account of payment made to Dena Bank as a One Time Settlement. The Revenue argued that the amount should be added to the income based on a previous judgment. However, the ITAT noted that the settlement was against the liability for a project, and the Ld. CIT(A) rightly deleted the amount from the income. The ITAT upheld the decision, stating that the judgment cited by the Revenue was not applicable to the current case.

In conclusion, the ITAT dismissed the Revenue's appeal, affirming the Ld. CIT(A)'s decisions on all three issues. The ITAT found that the Ld. CIT(A) had correctly interpreted the provisions of the IT Act and ruled in favor of the assessee based on the specific circumstances of the case.