2017 (7) TMI 772 - AT - Income Tax

Disallowance of amount paid to its clients to compensate for their loss which occurred due to negligence of employees of assessee - Held that - The finding of the authorities below that the copy of statement do not prove that payment was made on account of this loss of these persons is not correct as every evidence is available to demonstrate that assessee had made payments for losses suffered by its clients on account of negligence of its employees. The amount paid to these persons is necessarily an expenditure which is allowable u/s 37 of the Act as section 37 of the Act clearly states that any expenditure not in the nature of capital expenditure or personal expense laid out or expenditure wholly and exclusively incurred for the purposes of business or profession shall be allowed in computing the income chargeable under the head profits and gains or business or profession. Moreover, circular no. 35 issued by Board clearly states the losses arising due to negligence of employees has to be allowed as expense if the loss took place in the normal course of the business and the amount involved was necessarily kept for the purpose of business. In the present case, the losses were necessarily incurred in the normal course of business of assessee and therefore, the expenditure was allowable. - Decided in favour of assessee.

Summary

Issues Involved:
Disallowance of expenses claimed by the assessee for compensating clients' losses due to negligence of employees.

Analysis:
The appeal was filed against the order of the Ld. CIT (A) regarding the disallowance of an amount claimed by the assessee to have paid to clients as compensation for losses incurred due to the negligence of its employees. The Assessing Officer observed the claimed amount in the profit and loss account and requested justification. The assessee stated that payments were made to clients due to losses caused by employees' negligence. However, the Assessing Officer found the evidence insufficient and made the addition. The Ld. CIT (A) also dismissed the appeal, stating the failure of the assessee to prove the business loss incurred. The assessee contended that the losses were due to volatile fluctuations in the market and were compensated through cheques. The Ld. AR argued that the expenses were incurred for business purposes and referred to relevant circulars supporting the claim. The Ld. DR argued that the assessee failed to prove the losses were payable by them. The Tribunal noted the assessee's business activities, clients' losses, and compensation payments made through cheques, supported by bank statements and receipts. It was established that the losses were due to employees' negligence, justifying the expenses as allowable under section 37 of the Act and in line with circular no. 35 issued by the Board. Consequently, the Tribunal deleted the additions sustained by the Ld. CIT (A) and allowed the appeal.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing the necessary and justifiable nature of the expenses incurred in compensating clients' losses due to the negligence of the employees.