2024 (3) TMI 534 - AT - Income Tax

30% ad-hoc disallowance of travelling expenses being car charges, foreign travelling expenses and domestic travelling expenses - assessee submitted that the expenses claimed by the assessee are bound to be more in the initial year of set up, as it involves extra travelling setting up of new business unit which does not correlate to transaction and business of the company - HELD THAT - It is not in dispute that the assessment was pertaining to first year of incorporation/business establishment of the assessee. It is the case of the assessee that the expenses on car charges, foreign traveling and domestic traveling are bound to be more in the initial year of set up, as it involves much extra travelling in setting up a new business unit and does not correlate to transaction and business of the Company. The said fact has been not considered by the Lower Authorities. It is not the case of the Revenue that the assessee has not incurred any expenditure, on the contrary, the A.O. himself observed that it would not be proper to completely disallow the expenses and made ad-hoc disallowance. The assessee on 29/11/2018 provided detailed submission on the questionnaire raised along with all the invoices, vouchers and other documentary evidence supporting the expenses incurred by the assessee. Further, on 04/12/2018 once again provided detailed submission with respect to all travel made by the employees along with the agenda of the meetings and other relevant details corroborating the business purposes of the travelling and car hire charges. Hon ble Supreme Court in the case of CIT Vs. Delhi Safe Deposit Co. Ltd. 1982 (1) TMI 2 - SUPREME COURT held that the true test of an expenditure laid out wholly and exclusively for the purposes of business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going. The expenditure incurred must be for commercial expediency. In the circumstances, the Ld. A.O. has been totally wrong in considering the fact that the discharge of the burden has to be effective and meaningful and not to cover up merely by book entries and paper work. The present case, at no point of time, the Lower Authorities have disputed the genuineness of the vouchers, payments, approvals, travel dates etc. but without their being any contrary evidence and without any material in hand erroneously made ad-hoc disallowance of Rs. 30% of the expenses claimed by the assessee. In our opinion, the Lower Authorities have committed error in making ad-hoc 30% disallowance - Appeal of assessee allowed.

Summary

Issues involved:
The judgment involves the appeal filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals) for the Assessment Year 2016-17. The main issue pertains to the 30% ad-hoc disallowance of traveling expenses, specifically car charges, foreign traveling expenses, and domestic traveling expenses, totaling to Rs. 46,86,526.

Delay Condonation:
The assessee filed an application for condonation of the delay of 279 days in filing the present Appeal, citing reasons such as non-receipt of physical copy by the Tribunal despite online filing. The Tribunal, satisfied with the reasons, condoned the delay.

Facts and AO's Observations:
The AO observed that the appellant booked car charges, foreign traveling, and domestic traveling expenses but found the provided information insufficient to establish the business purpose of the travels. The AO concluded that the appellant failed to discharge its burden of proving the expenses were laid out for business purposes.

CIT(A) Order and Appeal:
The CIT(A) confirmed the additions made by the AO but corrected a computation error and restricted the disallowance to 30% of the total expenses claimed. The assessee, aggrieved by this order, filed the present appeal challenging the additions.

Contentions and Submissions:
The assessee argued that as a newly incorporated company, higher expenses in the initial years were justified for business setup. The Lower Authorities were criticized for making ad-hoc disallowance without proper basis. The Departmental Representative contended that the expenses were not proven to be exclusively for business purposes.

Judgment and Rulings:
The Tribunal noted the nature of the appellant's business and the circumstances of being a newly incorporated company. It was emphasized that the burden of proof lies on the assessee to show expenses were incurred for commercial expediency. Citing relevant case laws, the Tribunal found the ad-hoc disallowance unjustified and ruled in favor of the assessee, deleting the disallowance made by the Lower Authorities.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, emphasizing the necessity for expenses in the initial years of business setup and the lack of justification for the ad-hoc disallowance. The disallowance was deleted, and the judgment was pronounced on 7th March 2024.