2017 (10) TMI 233 - AT - Income Tax

Disallowance of foreign travel expenses - AO has disallowed foreign travel expenses on the ground that the assessee has not furnished any evidence in support of foreign travel of its employees and business connection with its clients - Held that - We find force in the arguments of the assessee for the reason that merely because no evidence has been filed to establish foreign travel undertaken by its executives to attend meetings with its clients, foreign travel expenses incurred by the assessee cannot be disallowed on adhoc basis despite furnishing of evidences. The AO has not pointed out any incorrect claim made by the assessee. The AO has accepted the fact that the assessee has filed all documents to justify its expenses. The AO is only on the point that no evidence has been filed to prove foreign travel and business connection with its clients. We are of the view that the AO was incorrect in observing that the assessee has not filed any details to justify its foreign travel expenses, despite the assessee has filed its vouchers which clearly indicates the purpose of visits by its employees. The issue requires re-verification by the AO in the light of our above discussion. Hence, we set aside the issue to the file of the AO and direct him to re-consider the issue afresh and decide the same in accordance with law. Allocation of headquarter expenses to units claiming exemption u/s 10A / 10B - AO has allocated head office expenses proportionately for units claiming exemption u/s 10A / 10B, on the basis of the turnover of the units - Held that - No merit in the arguments of the assessee for the reason that on perusal of the details of expenditure incurred by the assessee it is difficult to accept explanation of the assessee that head office expenditure has no relevance to the units claiming exemption u/s 10A / 10B. The assessee is having four units based at various locations which were controlled through its headquarter. The expenditure incurred by head office like travel and conveyance, communication expenses, legal and professional charges and rates and taxes definitely is having relevance to its total business. Therefore AO was right in allocating head office expenses to the units eligible for claiming exemption u/s 10A / 10B of the Act. We further observe that there is merit in the argument of the assessee that only net expenses of head office should be allocated to the units claiming exemption u/s 10A / 10B, because the assessee is generating other income like interest on fixed deposit and rent which may have some bearing on the functioning of its units claiming exemption u/s 10A / 10B. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the submissions of the assessee. Appeal filed by the assessee is treated as partly allowed, for statistical purpose.

Summary

Issues Involved:
1. Disallowance of Foreign Travel Expenses.
2. Allocation of Head Office (HO) Expenses to Units Claiming Exemption under Sections 10A and 10B.
3. Adjustments in Allocation of HO Expenses under the Income-tax Act, 1961.
4. Consideration of Net HO Expenditure instead of Gross HO Expenditure for Allocation.

Issue-wise Detailed Analysis:

1. Disallowance of Foreign Travel Expenses:
The assessee challenged the disallowance of ?34,10,933, which is 50% of the total foreign travel expenses of ?68,21,865. The assessee argued that the expenses were incurred for business purposes, specifically for meetings with foreign clients, and provided evidence such as travel vouchers, passports, and visas. The AO disallowed the expenses due to the lack of proof of business meetings with clients. The Tribunal found that while the assessee provided substantial evidence, the AO's disallowance was based on the absence of proof of business meetings. The Tribunal directed the AO to re-examine the issue, allowing the assessee to provide further evidence to establish the business purpose of the travel.

2. Allocation of Head Office (HO) Expenses to Units Claiming Exemption under Sections 10A and 10B:
The AO allocated ?78,42,574, being 43.36% of total HO expenses, to the units claiming exemption under Sections 10A and 10B. The assessee contended that these expenses were not related to the exempt units, which operated independently. The CIT(A) upheld the AO's allocation, stating that the HO expenses were relevant to the overall business, including the exempt units. The Tribunal agreed with the AO, noting that expenses like travel, communication, and legal fees were relevant to the entire business. However, it acknowledged the assessee's argument that only net HO expenses should be allocated and directed the AO to re-examine this aspect.

3. Adjustments in Allocation of HO Expenses under the Income-tax Act, 1961:
The assessee argued that if the allocation of HO expenses was upheld, adjustments should be made for tax depreciation and allowances/disallowances under Sections 40(a) and 43B. The Tribunal did not provide a specific ruling on this issue but implied that the AO should consider these adjustments during the re-examination of the HO expenses allocation.

4. Consideration of Net HO Expenditure instead of Gross HO Expenditure for Allocation:
The assessee filed an additional ground, arguing that the AO should consider net HO expenditure (after reducing HO income) instead of gross expenditure for allocation to the exempt units. The Tribunal admitted this additional ground, recognizing that relevant material was already on record. It directed the AO to re-examine the allocation of HO expenses, considering the net expenditure argument.

Conclusion:
The Tribunal partially allowed the assessee's appeal for statistical purposes. It directed the AO to re-examine the disallowance of foreign travel expenses and the allocation of HO expenses, considering the net expenditure argument and the need for further evidence of business purposes. The AO was instructed to provide the assessee with an opportunity to present additional evidence and arguments during the re-examination process.