2020 (6) TMI 44 - AT - Income Tax

Disallowance of the Prepaid Expenses - HELD THAT - Upon perusal of financial statements and ledger extract, we find substance in the arguments of Ld. AR. The nature of the aforesaid expenditure is prepaid expenditure which is to be claimed in subsequent years. This being the case, the impugned addition could not be sustained and therefore, we delete the same. This ground stands allowed. Training Expenditure disallowance - HELD THAT - We find that the action of Ld. AO in treating the said expenditure as capital expenditure was bereft of any merits. The expenditure was merely training expenditure to train the assessee s employees qua new products. The assessee did not gained any benefit of enduring in nature. The said expenditure was rightly claimed as revenue expenditure. Ground No.2 stands allowed. Depreciation on office equipment - Purchases consisted of items such as coffee maker, T.V., microwave, washing machine which were installed at the residence of employees of the company and AO treating the same to be personal expenditure - HELD THAT - The undisputed fact that emerges is that the fixed assets were purchased by the assessee and they entered into block of assets - simply because they were put at the disposal of employees, depreciation could not be denied to the assessee. Therefore, the disallowance made in this regard stand deleted. The ground stands allowed. Disallowance of gifts - cost of mangoes sent to Austria, Germany, Switzerland as gift on the occasion of marriage of one of the employees - AR has pleaded that there could be no question of any personal expenditure in case of a company and therefore, the said expenditure would be allowable - HELD THAT - Going by the said argument, whatever expenditure was claimed by a corporate assessee, could never be disallowed despite non-fulfilment of conditions laid down by Sec. 37(1). Not convinced with the arguments, this addition stand confirmed. The ground stands dismissed. Capital Expenditure OR revenue expenditure - items under the head repair and maintenance expenditure claimed as revenue expenditure, were treated as capital expenditure and depreciation was allowed against the same - HELD THAT - Going by the nature of expenditure, we find that these were routine repair and maintenance expenditure and therefore the same, by no stretch of imagination, could be treated as capital expenditure. Hence, the adjustment made in this regard, stand reversed. This ground stands allowed. Travelling Expenses - No supporting documents / vouchers were furnished - HELD THAT - Without delving much deeper into the issue, we estimate the disallowance @10%. This ground stands partly allowed.

Summary

Issues involved:
- Disallowance of Prepaid Expenses
- Disallowance of Training Expenses
- Disallowance of Depreciation
- Disallowance of Gifts
- Disallowance of Capital Expenditure
- Ad-hoc Disallowance of Travelling Expenses

Issue 1: Disallowance of Prepaid Expenses
The assessee contested the disallowance of prepaid expenses amounting to ?5,12,792, arguing that these expenses were not debited to the Profit & Loss account. The tribunal found that the nature of the expenditure was prepaid, to be claimed in subsequent years, and not routed through the Profit & Loss Account. Consequently, the tribunal deleted the disallowance, as the expenditure was not to be claimed in the current year.

Issue 2: Disallowance of Training Expenses
The tribunal examined the disallowance of training expenses of ?15,53,309, contending that only partial benefit accrued in the current year. The tribunal noted that the expenses were related to training employees on new products, which did not confer enduring benefits. Therefore, the tribunal allowed the claim as revenue expenditure, reversing the capital expenditure treatment by the lower authorities.

Issue 3: Disallowance of Depreciation
Regarding the disallowance of depreciation on equipment installed at employees' residences, the tribunal held that since the assets were purchased by the assessee and formed part of the block of assets, depreciation could not be denied merely because they were used by employees. Thus, the tribunal deleted the disallowance of depreciation.

Issue 4: Disallowance of Gifts
The disallowance of expenses related to gifts to clients and business associates was upheld by the tribunal, as the assessee failed to prove that the expenditure was incurred wholly and exclusively for business purposes. Despite the argument that a corporate entity could not have personal expenses, the tribunal confirmed the disallowance of these expenses.

Issue 5: Disallowance of Capital Expenditure
Certain repair and maintenance expenses treated as capital expenditure were reversed by the tribunal, as they were routine in nature and did not qualify as capital expenditure. The tribunal allowed these expenses as revenue expenditure, overturning the decision of the lower authorities.

Issue 6: Ad-hoc Disallowance of Travelling Expenses
The tribunal reduced the disallowance of travelling expenses from 30% to 10%, based on previous adjudication and estimation. The tribunal noted the lack of supporting documents but decided to restrict the disallowance to 10% for this expense category.

In subsequent years, similar issues of disallowance of expenses were addressed, with the tribunal consistently applying principles established in earlier judgments. The disallowances were partly allowed, with adjustments made based on the nature of expenses and supporting evidence. Overall, the tribunal provided detailed reasoning for each issue and concluded by partially allowing all the appeals based on the specific merits of each case.