2022 (5) TMI 1140 - AT - Income Tax

Addition u/s 69C - Addition under the head 'Site Expenses' - HELD THAT - AO erred in disallowing the expenses by invoking u/s. 69C of the Act because, in this case, not only the expenses were recorded in the books of accounts but the assessee was also able to prove the source of expenditure claimed. The assessee has demonstrated that the source of expenses was the revenues earned during the year, which is evident from paper book. Hence, the reliance placed by the AO on the decisions of Bhagwati Developers P Ltd. 2003 (2) TMI 58 - CALCUTTA HIGH COURT L.M. Thapar 1984 (2) TMI 67 - CALCUTTA HIGH COURT is found to be misplaced in as much as in both these judgments the expenses found to have been incurred by the assessee were not recorded in the books of accounts and therefore its source remained unexplained. This is clearly not the factual position in the present case. Thus the disallowance of site expenses is hereby deleted. Ground No. 1 of the appeal stands allowed. Disallowance of office expenses - HELD THAT - According to law, what has to be seen is whether the expenditure is genuine and the same has been incurred wholly for the purpose of the business. It is noted that the disallowance was made purely on surmises and conjectures. The said expenses were incurred for the purpose of procuring items such as hand soaps, bleaching powders, tea, snacks, coffee, stationary, coffee and tea for vending machines etc. which is necessary for units work sites also spreading to 3000 places. These items were purchased in the normal course of business and are found to be necessary for the smooth functioning of the business. Further, as already discussed while adjudicating Ground No. 1, Section 69C cannot be invoked n the facts of the present case. It is not a case that the expenses were not recorded in the books of accounts or that their source of payments were in doubt. The case laws cited by the AO/Ld. CIT(A,) as discussed while adjudicating Ground no. 1, is not applicable in the assessee's case. For the reasons as aforesaid, we do not countenance the action of the lower authorities in disallowing office expenses and accordingly direct the AO to delete the impugned addition. Ground No. 2 stands allowed. Disallowance of Transportation Expenditure - assessee is not able to substantiate the genuineness of these expenses and therefore disallowed the sum holding it to be unexplained expenditure u/s. 69C - HELD THAT - As in this case due to the mistake of the accountant, as found earlier, Rs. 28,80,000/- has been shown as expenses along with transportation expenses booked by the assessee. It has been brought to our notice that the transport expenses is to the tune of Rs. 2,40,457/- and the balance sum of Rs. 28,80,000/- was on account of salary expenditure, which we have already taken note of while adjudicating the site expenses wherein we noted that site expenses included the salary disbursement of Rs. 28,80,000/- was part of the said expenses. When this fact has been accepted by us, so the disallowance of Rs. 28,80,000/- by the AO and the action of the Ld. CIT(A) confirming 90% of the said disallowance, is in itself erroneous and is accordingly directed to be deleted. Ground No. 3 is accordingly allowed. Disallowance of sum debited under the head 'Misc. Expenses written off' - HELD THAT - Merely because expenses incurred were incurred in cash and were supported by self-made vouchers, the same cannot be disbelieved for making disallowance in the hands of the assessee. It is noted that the CIT(A) has not recorded any specific finding to allege that the expenses incurred by the assessee were either in-genuine or not incurred for the purposes of business. The only anomaly pointed out by CIT(A) has been found to be duly explained in the preceding paragraph. The disallowance impugned before us is therefore directed to be deleted. Ground No. 4 stands allowed. Disallowance of subscription and donation - AO opined that since donation and subscription paid to local puja committee and local clubs are not eligible for deduction u/s. 80G such donation is not wholly and exclusively for the purpose of business and hence the sum was disallowed - HELD THAT - It is noted that the subscription has been paid to different committees and associations towards Jagadhatri Puja/Kali Puja/Moharram in the local vicinity where the assessee operates its business. According to Ld. AR these subscriptions are paid to the local clubs/committees etc. for smooth functioning of the business - As submitted that these expenses have not been incurred for the personal benefit of the directors/employees but are exclusively incurred for the purpose of business and is therefore an allowable expense u/s. 37 of the Act. Upon perusing the details of the donation and subscription, we find merit in the claim of the assessee. Disallowance of Balance written off - HELD THAT - Since the balances were written off in the normal course of business, the assessee claimed that it is allowable u/s. 37 - However the Ld. CIT(A) did not appreciate the same and sustained the order of the AO. In this context, it is noted that since these excess statutory payments were no longer realizable, the assessee has written off these amounts standing in the books. According to assessee, since these balances were written off in the normal course of business, the same is allowable u/s. 37 - However, it is not clearly discernible as to whether the assessee had actually written off this claim in the books of the assessee so, the same is restored back to AO for verification. Excess VAT payment and other two items the AO may verify whether these amounts had been actually written off in the books and netted off in the respective asset heads. He may also verify whether these write off are in the course of business and if found so, it may be allowed as deduction while computing the business income. Disallowance on account of interest paid on delayed payment of tax - whether the interest paid on non-deduction of TDS/late payment of TDS can be claimed as expenditure for determining the taxable income? - HELD THAT - Thus interest paid on delayed payment of TDS qualifies as deductible expenditure u/s. 37. TDS liability - In the present case, the assessee had paid interest under Section 201(1A) on delayed payment of TDS. The said TDS represented the taxes paid for an on behalf of the payees to the credit of the Government. Section 199 of the Act in clear terms provides that, any deduction of tax and payment thereof to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. In other words, TDS is treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made. It is therefore evident that 'TDS' qua the assessee, is not income-tax on its profits or gains of any business or profession assessable u/s. 28 of the Act. Instead it is the tax on the profits and gains of the business of the recipient. In view of the above, as the tax deducted at source (TDS) is not in the nature of the income tax which is required to be paid on profits gains chargeable to tax u/s. 28 of the Act and thus not disallowable u/s. 40(a)(ii) of the Act, the consequent the interest paid u/s. 201(1A) of the Act upon late payment of TDS also cannot be disallowed u/s. 40(a)(ii) of the Act. For the reasons as aforesaid, the disallowance of interest paid on belated payment of TDS is hereby deleted. This ground stands allowed. Disallowance in respect of Claim of Gratuity and Leave Encashment Payment - HELD THAT - The assessee had claimed expenditure to the tune of Rs. 71,18,021/- in relation to gratuity and leave encashment which had been disallowed in the assessment order dated 17.02.2014 for AY 2011-12, found placed - This piece of contemporaneous evidence was available both before AO CIT(A). It was this very sum, which was written back in the P L A/c of the relevant year, as these expenses were no longer payable. Since the expense was never allowed as deduction in the year of debit/accrual i.e. AY 2011-12, the corresponding write back also cannot be taxed, having regard to the extant provisions of Section 41(1) of the Act. In view of the foregoing and the fact that the AO in the remand report has also accepted the assessee's contention by observing the explanation of the assessee is considered and appears to be acceptable the action of Ld. CIT(A) sending the issue back to the AO for further verification is held to be unwarranted. Therefore, in the light of aforesaid facts and circumstances, the directions given by Ld. CIT(A) is set aside and we direct deletion of the impugned disallowance.

Summary

Issues Involved:
1. Disallowance of site expenses.
2. Disallowance of office expenses.
3. Disallowance of transportation expenses.
4. Disallowance of miscellaneous expenses written off.
5. Disallowance of subscription and donation.
6. Disallowance of balances written off.
7. Disallowance of interest on delayed payment of tax.
8. Disallowance of gratuity and leave encashment payment.

Detailed Analysis:

1. Disallowance of Site Expenses
The assessee claimed site expenses of Rs. 66,15,994/-, which the AO disallowed, adding the amount under Section 69C of the Income-tax Act, 1961, due to most payments being made in cash. The CIT(A) allowed only 10% of the expenses. The Tribunal noted that the assessee provided support services to telecom operators at over 3300 sites, requiring significant manpower and resulting in cash payments due to remote locations. The Tribunal found that the assessee had submitted sufficient evidence, including vouchers and appointment letters, to substantiate the expenses. The Tribunal held that the AO and CIT(A) erred in disallowing the expenses based on suspicion and reliance on a special audit report from a previous year. The Tribunal deleted the disallowance, emphasizing that the books of accounts were not rejected, and the ad-hoc disallowance was arbitrary.

2. Disallowance of Office Expenses
The AO disallowed 50% of the office expenses amounting to Rs. 7,18,878/- due to a significant increase compared to the previous year. The assessee explained that Rs. 8,00,000/- was wrongly categorized as office expenses instead of site expenses. The Tribunal found that the actual office expenses were Rs. 6,37,756/-, comparable to the previous year. The Tribunal held that the disallowance was based on surmises and conjectures and directed the AO to delete the disallowance.

3. Disallowance of Transportation Expenses
The AO disallowed Rs. 28,80,000/- from transportation expenses, considering it unexplained under Section 69C. The assessee explained that this amount was actually salary expenses wrongly categorized. The Tribunal accepted this explanation, noting that the actual transportation expenses were Rs. 2,40,457/-. The Tribunal deleted the disallowance, emphasizing that the mistake was due to an accountant's error.

4. Disallowance of Miscellaneous Expenses Written Off
The AO disallowed Rs. 2,99,999/- under miscellaneous expenses written off due to lack of documentary evidence. The Tribunal found that the expenses were for legitimate business purposes and supported by vouchers. The Tribunal noted that the CIT(A) had misunderstood the evidence, leading to an erroneous disallowance. The Tribunal deleted the disallowance.

5. Disallowance of Subscription and Donation
The AO disallowed Rs. 1,71,861/- for subscription and donation to local puja committees and clubs, considering it not for business purposes. The Tribunal found that these payments were necessary for smooth business operations, especially in local areas. The Tribunal allowed the expenses, relying on the precedent set by the Hon'ble jurisdictional High Court in CIT vs. Bata India Ltd.

6. Disallowance of Balances Written Off
The AO disallowed Rs. 2,14,904/- for balances written off, including excess TDS and VAT payments. The Tribunal noted that these amounts were no longer realizable and written off in the normal course of business. The Tribunal directed the AO to verify the actual write-off in the books and allow the deduction if found genuine.

7. Disallowance of Interest on Delayed Payment of Tax
The AO disallowed Rs. 16,45,657/- paid as interest on delayed payment of TDS, considering it penal in nature. The Tribunal held that such interest is compensatory and deductible under Section 37 of the Act. The Tribunal relied on judicial precedents, including the Hon'ble Supreme Court's decision in Lachmandas Mathura vs. CIT, to conclude that the interest paid on TDS is not penal and should be allowed as a business expense.

8. Disallowance of Gratuity and Leave Encashment Payment
The AO disallowed Rs. 71,18,021/- for gratuity and leave encashment, which was written back in the current year. The Tribunal noted that this amount was disallowed in AY 2011-12 and written back as it was no longer required. The Tribunal found that taxing this amount again would result in double taxation. The Tribunal directed the deletion of the disallowance, noting that the AO had accepted the assessee's explanation in the remand report.

Conclusion
The Tribunal allowed the appeal of the assessee on most grounds, directing the deletion of disallowances related to site expenses, office expenses, transportation expenses, miscellaneous expenses written off, subscription and donation, balances written off, and interest on delayed payment of tax. The Tribunal also directed the AO to verify the write-off of gratuity and leave encashment and allow the deduction if found genuine.