2017 (9) TMI 237 - AT - Income Tax

Disallowance of 25% legal and professional expenses on adhoc basis - Held that - Merely because there is a substantial increase in the amount of expenses the disallowance cannot be made. The lower authorities could not say that any of the services obtained by the assessee is not for the purpose of business of the company. The assessee has given the names of the consulting companies which are definitely of necessary services looking to the size and nature of business carried out by the assessee. As the assessee has entered into the business of marketing of washing machines and refrigerators the market research analysis service as well as industrial reports are necessary for the purpose of business. The assessee has provided details of major expenses of legal fees for Trillegal as well as KPMG both the services are for the purpose of the business of the assessee. In view of this disallowance made by the ld AO cannot be sustained when the details of legal expenses are available with the AO where each and every party to whom the fees is paid is mentioned. Ld AO could not point out any services which are not for the purposes of business. Nature of expenses were shown to be not for the purposes of the business. Merely adhoc disallowance without pointing out any specific defect in details showing that it is not related to the business such disallowance cannot be sustained Disallowance of written off by the assessee as sum becomes irrecoverable - Held that - According to us the assessee is exploring the new business opportunity in the power sector and for that it hires a consultancy to carry out certain studies as the assessee is engaged in the business of support services. The assessee has obtained this project during the year and hence legal fees paid was written off. According to us the assessee is eligible for this deduction of expenses as it has incurred it for the purpose of the business and for consultancy expenses to be allowed i.e. deduction of income tax nowhere provided that corresponding credit to the profit and loss account should have been given. In view of this we allow ground of the appeal of the assessee and direct the ld AO to delete the disallowance. Disallowance on account of travelling expenses and conveyance expenses - Held that - None of the expenditure of travelling are related to the share holder owners of the appellant company. These expenses are incurred by assessee for the relocation of employee designated as director along with their family it is incurred for the purpose of the business and is not the perquisite in the hands of the assessee therefore naturally they are not entering into the Form No. 16 issued to those employees. It was further stated that merely because FBT is not paid does not make the expenditure disallowable. We do not find any infirmity in the submission of the assessee and we also see considerable force in the arguments - Decided in favour of assessee. Disallowance on account of Warranty expenditure - Held that - According to us the assessee should have been granted the deduction of actual warranty provision of Rs. 18503389/- instead of Rs. 7842523/-. The Hon ble Supreme Court in the case of Rotork Controls India Pvt. Ltd Vs. CIT 2009 (5) TMI 16 - SUPREME COURT OF INDIA has held that warranty services are normal business expenditure and not contingent liability. In view of this we do not subscribe to the views of lower authorities in not allowing the claim of the assessee. Hence we direct the ld AO to withdraw the deduction already granted to the assessee of Rs. 7842523/- and to allow deduction of Rs. 18503389/-. The above adjustment made may also result into lower assessment of the income of the assessee then returned income. As this has happened due to a fresh claim by the assessee during the appellate proceeding assessee is not barred from claiming the same.

Summary

Issues Involved:
1. Disallowance of Legal and Professional Expenses
2. Disallowance of Advances Written Off
3. Disallowance of Travelling and Conveyance Expenses
4. Disallowance of Exhibition Expenditure under Section 40(a)(ia)
5. Disallowance of Provision for Warranty
6. Penalty Proceedings under Section 271(1)(C)
7. Interest under Section 234B

Detailed Analysis:

1. Disallowance of Legal and Professional Expenses:
The assessee challenged the disallowance of 25% of legal and professional expenses amounting to Rs. 31,38,066 on an ad-hoc basis. The assessee incurred Rs. 1,25,52,264 in legal and professional fees, significantly higher than the previous year. The lower authorities disallowed the expenses due to the lack of complete details. However, the Tribunal found that the assessee provided sufficient details, including the nature of services and the names of consulting companies. The Tribunal noted that the services were necessary for the business, especially given the new business activities. Therefore, the disallowance was not justified, and the Tribunal allowed the appeal on this ground.

2. Disallowance of Advances Written Off:
The assessee contested the disallowance of Rs. 2,75,000 written off as irrecoverable advances. The amount was paid to Frost and Sullivan for a strategic analysis report, which was not completed. The Tribunal found that the expenditure was for exploring new business opportunities and was incurred for business purposes. The Tribunal directed the AO to delete the disallowance, allowing the appeal on this ground.

3. Disallowance of Travelling and Conveyance Expenses:
The assessee challenged the disallowance of Rs. 8,77,940 out of total travelling and conveyance expenses of Rs. 2,20,30,193. The disallowance was based on the substantial increase in expenses compared to the previous year and the inclusion of expenses for family members. The Tribunal found that the expenses were incurred for business purposes, including relocation and annual holidays for directors as per company policy. The Tribunal allowed the appeal, directing the AO to delete the disallowance.

4. Disallowance of Exhibition Expenditure under Section 40(a)(ia):
The assessee contested the disallowance of Rs. 6,06,616 towards exhibition expenses due to non-deduction of tax at source. The Tribunal noted that the assessee did not press this ground before the CIT(A) and did not provide any justification for revisiting it. Therefore, the Tribunal upheld the disallowance, dismissing the appeal on this ground.

5. Disallowance of Provision for Warranty:
The assessee challenged the non-deduction of the provision for warranty. The Tribunal found that the assessee made a provision of Rs. 1,85,03,389 but claimed only Rs. 78,42,523 as used. The Tribunal referred to the Supreme Court's decision in Rotork Controls India Pvt. Ltd Vs. CIT, which held that warranty provisions are normal business expenses. The Tribunal directed the AO to allow the deduction of the actual provision amount, allowing the appeal on this ground.

6. Penalty Proceedings under Section 271(1)(C):
The assessee contested the initiation of penalty proceedings. The Tribunal found this ground to be premature and dismissed it.

7. Interest under Section 234B:
The assessee contested the charging of interest under Section 234B, which the Tribunal found to be consequential in nature and dismissed this ground.

Conclusion:
The appeal for Assessment Year 2007-08 was partly allowed, with the Tribunal directing the deletion of disallowances related to legal and professional expenses, advances written off, and travelling and conveyance expenses. The appeal for Assessment Year 2008-09 was also partly allowed, with the Tribunal directing the allowance of the provision for warranty and upholding the disallowance of exhibition expenditure. Penalty proceedings and interest under Section 234B were dismissed as premature and consequential, respectively.