2020 (5) TMI 280 - AT - Income Tax

Disallowance of business promotion expenses - assessee is incurred these expenses for promotion of its business - assessee incurred major expenses which consist of corporate membership of Mumbai Cricket Association, on social functions and donation - HELD THAT - Hon ble jurisdictional High Court in Otis Elevator 1991 (4) TMI 53 - BOMBAY HIGH COURT held that when the assessee incurred expenses for promotion of club fees with a view to enable the assessee to improve its relation and prospects, the payment must be allowed as business expenditure. The other expenses, genuineness of which were not disputed by the lower authorities which mainly consist of either donation to various charitable organizations, distribution of Notebook to poor student and expenses incurred during the festival season for erecting hoarding are also allowable expenses. Considering the nature and expenses, AO is directed to allow all the expenses and delete the disallowance accordingly. In the result, Ground No.A of the appeal is allowed. Disallowance of interest u/s 40A(2)(a) - HELD THAT - Neither the AO has brought on record that the interest paid by the assessee is on higher side as compared to the market rate for getting the unsecured loan for such business as undertaken by assessee. Nor the AO has recorded that assessee made the payment to its sister concern for evasion of tax. We have noted that on similar rate of interest, the addition was deleted in assessee s group case in Puspanjali Realtors 2018 (1) TMI 1588 - ITAT MUMBAI and on appeal before the ITAT, the order of ld. CIT(A) was confirmed. In view of the above discussion, and respectfully following the order of the coordinate bench in Puspanjali Realtors Pvt. Ltd. In the ground of appeal raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of business promotion expenses.
2. Disallowance of excessive interest under section 40A(2)(a).

Issue-wise Detailed Analysis:

1. Disallowance of Business Promotion Expenses:

The assessee, a private limited company engaged in the business of builders and developers, appealed against the disallowance of ?9,59,300/- claimed as business promotion expenses for the Assessment Year 2011-12. The Assessing Officer (AO) had disallowed these expenses, which included payments to the Mumbai Cricket Association for corporate membership, donations to various organizations, and expenses on social functions, on the grounds that they were not incurred wholly and exclusively for business purposes.

The assessee argued that these expenses were for business advertisement and growth, citing the Hon’ble Bombay High Court's decision in Otis Elevator Co. (India) Ltd. vs CIT, which allowed club fees as business expenditure if incurred to improve business relations and prospects. The Tribunal noted that the expenses were genuine and incurred for business promotion, such as putting up hoardings for advertising upcoming projects and distributing notebooks to poor students. The Tribunal directed the AO to allow all the expenses and delete the disallowance, thereby allowing Ground No.A of the appeal.

2. Disallowance of Excessive Interest under Section 40A(2)(a):

The assessee also appealed against the disallowance of ?4,68,73,515/- out of interest expenses under section 40A(2)(a) for the Assessment Year 2011-12. The AO had disallowed part of the interest paid to sister concerns, deeming it excessive. The assessee contended that the loans were borrowed for business purposes, and the interest rates were justified as per the group policy. The assessee cited a similar case, Puspanjali Realtors Pvt. Ltd., where the Tribunal had affirmed the deletion of such disallowance.

The Tribunal noted that the AO did not provide evidence that the interest rates were higher than market rates or that the payments were made to evade tax. The Tribunal also observed that in the case of the assessee’s sister concern, the interest income was accepted in the assessment order. Following the principle of consistency and the precedent set in Puspanjali Realtors Pvt. Ltd., the Tribunal allowed the ground of appeal, directing the deletion of the disallowance.

Separate Judgments:

For the Assessment Year 2012-13, the Tribunal noted that the issues were identical to those in the Assessment Year 2011-12. The Tribunal followed the same reasoning and allowed the assessee’s appeal while dismissing the revenue’s appeal due to the tax effect being below the prescribed monetary limit of ?50 lakhs as per CBDT Circular No. 17/2019.

Conclusion:

The Tribunal allowed the assessee’s appeals for both Assessment Years 2011-12 and 2012-13, directing the deletion of disallowances related to business promotion expenses and excessive interest. The revenue’s appeal for Assessment Year 2012-13 was dismissed due to the tax effect being below the monetary limit.