2018 (9) TMI 1464 - AT - Income Tax

Disallowance of repair and maintenance expenses - revenue v/s capital expenditure - A.O considered them to be a capital in nature and merely allowed depreciation on the impugned amount - Held that - Major expenditure for repair are towards repair of DG sets at ₹ 40,97,741/-. This repair expenditure was incurred by the assessee towards repair of wartsila DG sets and details are available at page-7 of the paper book. On perusal of this ledger account of repair we observe that there are regular minor expenditure for repair from May 2004 till close of the year but at fag end of the year i.e. 31.03.2005 a sum of ₹ 40,97,741/- has been incurred. The assessee has been unable to prove that this particular expenditure will not give benefit to the company for a long period. Thus the amount of ₹ 40,97,741/- cannot be categorized as a revenue expenditure under the head repair and maintenance and the same needs to be capitalized and certainly the assessee will be eligible to claim the depreciation as provided under the provisions of law on this capital expenditure. Addition of machine hire charges - A.O only allowed this expenditure to the extent of 25% and this disallowance was maintained to 30% by Ld.CIT(A) - Held that - necessary investigation ought to have been conducted by the Ld.Assessing Officer and he was refrained from doing so by non co-operation by the assessee by not filing necessary details. We also cannot support the findings of Ld.CIT(A) which are without going into the basic facts of the issue. We therefore are of the considered view that this issue of genuineness of the expenditure of hire charges for machine needs to be set aside to the file of Ld. CIT(A). If necessary he can call for a detailed remand report from the Ld.AO after carrying out necessary investigation of the alleged finance and leasing companies on the basis of details and information to be provided by the assessee as and when required without taking any unnecessary adjournment. Addition of commission expenses - Assessee is aggrieved with the disallowance of 15% of commission expenses whereas the revenue is aggrieved with the part relief given by the Ld.CIT(A) against the disallowance of 25% made by Ld.A.O to 15% - Held that - In comparison to preceding financial year the turnover has increased by only 18% whereas the commission expenses has increased by 47%. In these circumstances when expenses has increased abnormally in comparison to past year and necessary details to prove the genuineness of the expenses are not to the mark as they are required to be, we find no inconsistency in the findings of Ld.CIT(A) sustaining disallowance at 15% of the total commission expenses incurred by the assessee during the year. In the result the grounds raised by the assessee and revenue is dismissed. Disallowance of traveling expenses - Held that - Referring to all the details of traveling expenses, we find that the complete details of each expenditure along with purposes of tour by respective employees has been mentioned. Directors as well as staff officials of the company also travelled extensively across/ outside the country. There have been frequent travels to European countries also. However, assessee failed to bring on record the connection of the foreign travels for the business purposes in the firm in the form of details of the parties which have been visited, communications with those parties with regard to export/import and whether any orders were procured. In these given facts and circumstances of the case and fair play, we are of the view that disallowance of 20% of the total expenditure will cover the deficiency in the records of the assessee. We accordingly hold so and sustain the disallowance. Disallowance of vehicle expenses - Held that - In the submissions made by the Ld. Counsel bifurcation of expenditure has been given out of which ₹ 16,93,629/- specifically relates to car running and maintenance of the cars owned by the company. Rest of other expenses relates to the vehicle expenses for the staff and auditors. In these circumstances wherein complete details have been provided by the assessee towards the car running and maintenance expenses, we are of the considered view that disallowance of 10% at ₹ 16,93,629/- is justified to cover the personal expenses of Directors/Promoters. Sustain the disallowance to ₹ 1,69,336/- as against ₹ 4,48,270/- confirmed by the Ld.CIT(A). Ground of the assessee is partly allowed. Disallowance of miscellaneous expenses - Held that - Miscellaneous expenses are towards electricity charges, garden expenses, internal audit, office maintenance, printing and stationery, legal expenses etc. Books of accounts are audited. The finding has been given by Ld. Assessing Officer about ad-hoc disallowance made by him. However, CIT(A) restricted the disallowance to 10% of ₹ 67,02,718/- for the lack of relevant bills and vouchers should have been produced by the assessee before the lower authority. The nature of expenditure incurred under the head miscellaneous expenses even though related to business purposes but due to lack of proper details minor disallowance of 5% would meet the end of justice.

Summary

Issues Involved:
1. Repair and maintenance expenses.
2. Machine hire charges.
3. Commission expenses.
4. Travelling and conveyance expenses.
5. Vehicle expenses.
6. Miscellaneous expenses.

Issue-wise Detailed Analysis:

1. Repair and Maintenance Expenses:
The assessee claimed ?85,57,917/- under the head "Repairs & Maintenance." The Assessing Officer (A.O.) considered these expenses to be capital in nature and allowed only depreciation, resulting in an addition of ?64,18,438/-. The Commissioner of Income Tax (Appeals) [CIT(A)] sustained the disallowance at ?30,00,000/-, considering the expenditure on the repair of DG sets as partially capital in nature. The Tribunal found that the expenditure of ?40,97,741/- on DG sets should be capitalized, allowing depreciation on this amount. The Tribunal dismissed the assessee's ground and partly allowed the revenue's ground, directing the A.O. to allow depreciation and calculate the disallowance accordingly.

2. Machine Hire Charges:
The assessee claimed machine hire charges of ?1,76,20,000/-. The A.O. allowed only 25% of these charges, disallowing ?1,32,15,000/- due to lack of evidence. The CIT(A) reduced the disallowance to 30%. The Tribunal noted that the genuineness of the expenditure was not adequately proved and set aside the issue to the CIT(A) for further investigation and a detailed remand report from the A.O. The Tribunal allowed the ground for statistical purposes.

3. Commission Expenses:
The assessee claimed commission expenses of ?2,58,52,585/-. The A.O. disallowed 25% of the commission expenses due to lack of agreements and proof of services rendered, amounting to ?64,63,146/-. The CIT(A) reduced the disallowance to 15%. The Tribunal upheld the CIT(A)'s decision, noting the absence of formal agreements and adequate proof of services rendered, and dismissed the grounds raised by both the assessee and revenue.

4. Travelling and Conveyance Expenses:
The assessee incurred ?1,05,65,979/- in travelling and conveyance expenses. The A.O. disallowed 50% of these expenses, amounting to ?52,82,990/-, due to the personal element and lack of business nexus. The CIT(A) reduced the disallowance to 35%, giving relief of ?15,82,990/-. The Tribunal found that the complete details of the expenses were not provided, and sustained a disallowance of 20%, amounting to ?21,13,196/-. The Tribunal partly allowed the assessee's ground and dismissed the revenue's ground.

5. Vehicle Expenses:
The assessee incurred ?44,82,710/- in vehicle expenses. The A.O. disallowed 10% of these expenses, amounting to ?4,48,270/-, due to lack of log books. The CIT(A) confirmed this disallowance. The Tribunal, noting the detailed breakdown of expenses provided by the assessee, sustained a disallowance of 10% on car running and maintenance expenses, amounting to ?1,69,336/-. The Tribunal partly allowed the assessee's ground.

6. Miscellaneous Expenses:
The A.O. made an ad-hoc disallowance of ?10,00,000/- out of miscellaneous expenses of ?67,02,718/-. The CIT(A) restricted the disallowance to 10% of the total expenditure. The Tribunal, considering the lack of proper details, restricted the disallowance to 5%, amounting to ?3,35,136/-. The Tribunal partly allowed the revenue's ground.

Conclusion:
The Tribunal dismissed Ground No.1 of the assessee and partly allowed the revenue's appeal, allowed Ground No.2 of both parties for statistical purposes, dismissed Ground No.3 of both parties, partly allowed Ground No.4 of the assessee and dismissed the revenue's ground, and partly allowed Ground No.5 of both parties. The cross appeals were partly allowed for statistical purposes. The order was pronounced in the open Court on 19.9.2018.