2017 (11) TMI 1217 - AT - Income Tax

Disallowance of legal and professional charges - Held that - So far as amount paid as legal and professional fee to M/s. Luthura & Luthra undisputedly the assessee has filed its submission dated 17.01.2014 along with bills and the assessee has duly explained before the ld. CIT (A) that these legal expenses were incurred to settle a police complaint filed against the Director, Shri Sandeep Murthy by some of its investors against the Director and the company in their official capacity. It is also brought on record by the assessee company that the allegations in the complaints were of criminal breach of trust by one Shri Rabi Singh against Shri Sandeep Murthy and Shri Ram Sriram. When the assessee company has found FIR against Directors of the company, there cannot be any dispute that the Directors were arrayed as accused in their official capacity and these expenses are certainly business expenditure and ld. CIT (A) has rightly and validly allowed the same by deleting the addition. So far as an addition under the head legal and professional expenses paid to M/s. Insight Alpha for private phone consultations is concerned, ld. CIT (A) while deleting the same relied upon one consultancy agreement entered into between the assessee company and M/s. Insight Alpha effective from 12.11.2010, recital of the agreement (supra) as reproduced by ld. CIT (A) in para 8.4 of the impugned order is comprehensive enough to prove that the amount has been charged as hourly consulting charges necessary for the business of assessee company as an investment consultancy company. Moreover, assessee company has produced invoice before AO which has been duly examined by the ld. CIT (A) in the light of the agreement (supra). Moreover, when genuineness of these expenses have not been disputed by the AO, we find no illegality or perversity in deletion of addition of ₹ 5,46,000/- by ld. CIT (A). So ground no.1 is determined against the Revenue. Disallowance of entertainment expenses - Held that - The assessee company produced two invoices, namely, invoice dated 21.12.2010 whereupon guest name is not legible and another invoice dated 24.11.2010 whereupon Function at Dome has been written before the AO. First of all, ld. CIT (A) has not given the date of Annual Day allegedly celebrated by the assessee company nor he has got clarified from the assessee company as to why the two invoices one dated 21.12.2010 and another dated 24.11.2010 have been raised when it is also not explained by the assessee company before the AO as well as ld. CIT (A) if the Annual Day function took placed on 21.12.2010 and 24.11.2010 or two Annual Day functions were organized. At least invoices relied upon by the assessee company were required to be in the name of the assessee company with legible name of the, so both the bills relied upon by the assessee company cannot be connected with the assessee company or its business. - Decided in favour of revenue Disallowance out of travelling expenses - no supporting document or any submission by the assessee company has been filed to substantiate the purpose of these visits - Held that - Assessee company explained that Shri Ajit who has availed of the air travel services is the representative of Murugun Capital and Shri Ram is the representative of Sherpalo Mauritius LLC from whom the assessee company is charging cost plus 17% and 15% respectively for entire travelling expenses. So when the travelling expenses have been incurred by the assessee company on behalf of the associated company with 17% and 15% markup over and above the total expenditure, for which vouchers as well as email communications have been produced, the ld. CIT(A) has rightly and validly deleted the addition - Decided against the Revenue

Summary

Issues Involved:
1. Disallowance of legal and professional charges
2. Disallowance of entertainment expenses
3. Disallowance of traveling expenses

Issue 1: Disallowance of Legal and Professional Charges

The Assessing Officer disallowed legal and professional charges claimed by the assessee company, leading to an addition to its income. The Deputy Commissioner of Income-tax challenged the deletion of the addition by the Commissioner of Income-tax (Appeals). The Tribunal analyzed the nature of the expenses, specifically &8377; 2,37,150 paid for settling a police complaint against the Director. The Tribunal found that these expenses were related to business activities and were justified. Additionally, the claim of &8377; 5,46,000 paid for consultancy services was supported by a consultancy agreement and deemed necessary for the company's business as an investment consultancy firm. As the genuineness of these expenses was not disputed, the Tribunal upheld the deletion of this addition.

Issue 2: Disallowance of Entertainment Expenses

The Assessing Officer disallowed entertainment charges claimed by the assessee company, citing a lack of connection to business activities and illegible invoices. The Commissioner of Income-tax (Appeals) overturned this decision based on the company's production of an invitation card and email communications related to an annual day celebration. However, the Tribunal noted discrepancies in the dates of the invoices provided and the lack of clarity regarding the events they pertained to. As the invoices did not clearly link to the company or its business, the Tribunal ruled in favor of the Revenue and reinstated the disallowance of these entertainment expenses.

Issue 3: Disallowance of Traveling Expenses

The Assessing Officer disallowed a portion of the traveling expenses claimed by the assessee company due to a lack of supporting documentation regarding the purpose of the visits. The Commissioner of Income-tax (Appeals) disagreed and deleted the disallowed amount, considering the company's operations under a cost-plus mark-up arrangement. The Tribunal reviewed the explanation provided by the company, detailing the expenses incurred on behalf of associated companies with mark-ups. As vouchers and email communications supported the business nature of these expenses, the Tribunal upheld the deletion of the disallowed traveling expenses.

In conclusion, the Tribunal partially allowed the Revenue's appeal, reinstating the disallowance of entertainment expenses while upholding the deletion of legal and professional charges and traveling expenses.