2022 (12) TMI 875 - AT - Income Tax

Disallowance of rent paid to M/s. DRS Industries Ltd - question of assessee making payment to land owner towards rent - HELD THAT - The undisputed facts are that the agreement between the assessee and M/s. DRS Industries Ltd did not materialize and consequently, the dealership of Skoda cars sales services has not been transferred to the assessee. Rent agreement in respect of premises where the business was carried out by M/s. DRS Industries Ltd., was also in the name of M/s. DRS Industries Ltd., and the land lord. Therefore, the question of assessee making rent payment directly to land owner does not arise. It is not case of the assessee that it has paid rent to M/s. DRS Industries Ltd., in pursuance of an agreement and in turn M/s. DRS Industries Ltd., has paid rent to land lord. In absence of any agreement between the appellant and land lord, the AO has rightly disallowed rent expenses debited into the profit and loss account. CIT(A), after considering relevant facts has rightly sustained additions made by the AO and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject grounds taken by the assessee. Disallowance of advertisement expenses paid - AO has disallowed advertisement expenses incurred by the assessee, on the ground that there is no valid agreement between the assessee and M/s. DRS Industries Ltd., for incurring advertisement expenses - HELD THAT - We find that there is no valid agreement between the appellant and M/s. DRS Industries Ltd., and further the so called agreement is not acted upon, and as claimed by the assessee for various reasons, the dealership of Skoda cars sales services has not been transferred in the name of the assessee. Therefore, the assessee is running a dealership business and incurring of advertisement expenses does not arise. CIT(A) after considering relevant facts has rightly sustained net advertisement expenditure debited into the profit and loss account and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the grounds taken by the assessee.

Summary

Issues:
1. Disallowance of rent paid to M/s. DRS Industries Ltd.
2. Disallowance of advertisement expenses paid to M/s. DRS Industries Ltd.

Issue 1: Disallowance of Rent Paid to M/s. DRS Industries Ltd.:
The appellant contested the disallowance of rent paid to M/s. DRS Industries Ltd., stating that the rent was paid in accordance with an agreement dated 30.06.2010. The appellant argued that despite the agreement not materializing due to unforeseen circumstances, they had incurred various expenses, including rent payment to the landowner. However, the AO disallowed the rent payment, emphasizing that the agreement was not in the appellant's name. The ITAT Chennai upheld the disallowance, noting that the dealership of Skoda cars was not transferred to the appellant as per the agreement, and the rent agreement was between M/s. DRS Industries Ltd. and the landowner. As there was no agreement for the appellant to pay rent directly to the landowner, the disallowance was justified.

Issue 2: Disallowance of Advertisement Expenses Paid to M/s. DRS Industries Ltd.:
Regarding the disallowance of advertisement expenses paid to M/s. DRS Industries Ltd., the appellant claimed to have incurred these expenses while preparing to take over the dealership business. The AO disallowed the expenses citing the absence of a valid agreement between the appellant and M/s. DRS Industries Ltd. The ITAT Chennai affirmed the disallowance, stating that since there was no valid agreement for the takeover of the dealership and the agreement was not acted upon, the appellant's claim for advertisement expenses was unfounded. The ITAT upheld the CIT(A)'s decision to sustain the net advertisement expenditure debited to the profit and loss account, amounting to Rs. 13,62,695.

In conclusion, the ITAT Chennai dismissed the appeal filed by the assessee, upholding the disallowances of rent paid to M/s. DRS Industries Ltd. and advertisement expenses incurred, based on the absence of valid agreements and materialization of the intended business transactions. The judgment was pronounced on 07th December 2022 in Chennai.