2022 (5) TMI 1667 - AT - Income Tax

Disallowance of deduction of travelling expenses - assessee company had incurred most of the expenses in cash and the same were not supported by proper bills and vouchers proper bills and details of expenses regarding travelling by the employees have not been maintained and the involvement of personal element in the tour and travels undertaken by the directors of the assessee company could not be ruled out. HELD THAT - As assessee company had failed to produce proper bills and vouchers as well as had not maintained proper bills in respect of the traveling expenses of its employees we find the same are merely in the nature of general observations and not a single instance of any such bill/voucher or details suffering from any infirmity had been referred to by him while making the aforesaid disallowance. Accordingly we are unable to concur with the aforesaid reasoning of the A.O. for making the disallowance in question which thereafter had been sustained by the CIT(Appeals). As regards the observation of the A.O that the involvement of personal element in the tours and travels of the directors of the assessee company cannot be ruled out we are unable to persuade ourselves to subscribe to the same. As the assessee before us is a company i.e a distinct assessable entity as per the definition of person contemplated in Sec. 2(31) of the Act therefore being an inanimate person there cannot be anything personal about such entity. Thus we vacate the ad-hoc disallowance. For deduction of vehicle running and maintenance expenses we are unable to concur with the disallowance made by the A.O. on the basis that they are not supported by any material. As regards the observation of the A.O that the personal usage of the vehicles and the consequential expenses towards running and maintenance expenses of the vehicles cannot be ruled out we are of the considered view that as the assessee is a company i.e a distinct assessable entity therefore being an inanimate person there cannot be anything personal element qua incurring of running and maintenance expenses of its vehicles. In view of our aforesaid observations we vacate the ad-hoc disallowance. Ad-hoc disallowance made by the A.O. out of communication expenses we find that the same had been made for the reason that as per the A.O. the involvement of personal element in usage of telephones and mobiles by the assessee company cannot be ruled out. On the basis of our aforesaid observations that an assessee company is a distinct assessable entity i.e an inanimate person therefore no disallowance on account of personal expenditure could have been validly made we vacate the aforesaid ad-hoc disallowance made by the A.O. Ad-hoc disallowance of depreciation on vehicles we are of the considered view that now when for the reasons discussed by us hereinabove the disallowance of vehicle running and maintenance expenses had been ruled out by us therefore backed by the said reasoning no part of ad-hoc disallowance of depreciation on account of personal usage of the vehicles by the directors can be sustained.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

• Whether the ad-hoc disallowances made by the Assessing Officer (A.O.) on various expense claims of the assessee were justified.
• Whether the involvement of personal elements in the expenses claimed by a corporate entity can be presumed and disallowed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Ad-hoc Disallowances

• Relevant legal framework and precedents: The assessment was conducted under Section 143(3) of the Income Tax Act, 1961. The legal question revolved around whether the A.O. could make ad-hoc disallowances without specific evidence of discrepancies.
• Court's interpretation and reasoning: The Tribunal observed that the A.O.'s disallowances were based on general observations without specific evidence of improper documentation or personal usage.
• Key evidence and findings: The A.O. had disallowed portions of travel, communication, vehicle running, and depreciation expenses, citing lack of proper bills and potential personal use.
• Application of law to facts: The Tribunal found that the A.O.'s reasoning lacked specificity and evidence, thus failing to justify the disallowances.
• Treatment of competing arguments: The Tribunal rejected the A.O.'s general assertions, emphasizing the absence of detailed evidence to support the disallowances.
• Conclusions: The Tribunal vacated the ad-hoc disallowances, finding them unsupported by evidence.

Issue 2: Presumption of Personal Element in Corporate Expenses

• Relevant legal framework and precedents: The Tribunal referenced the definition of "person" under Section 2(31) of the Income Tax Act, which includes companies as distinct assessable entities. The case of Sayaji Iron And Engg. Co. Vs. CIT was cited to support the argument that a company, being an inanimate entity, cannot have personal expenses.
• Court's interpretation and reasoning: The Tribunal reasoned that as a company is a separate legal entity, the presumption of personal use of its resources by its directors is unfounded.
• Key evidence and findings: The A.O. presumed personal use of travel, communication, and vehicle expenses without specific evidence.
• Application of law to facts: The Tribunal applied the legal principle that a company, as an inanimate entity, cannot incur personal expenses, thereby invalidating the A.O.'s presumption.
• Treatment of competing arguments: The Tribunal dismissed the A.O.'s argument of potential personal use, citing lack of evidence and legal precedent.
• Conclusions: The Tribunal concluded that no disallowance for personal use could be justified for a corporate entity.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "As the assessee before us is a company, i.e., a distinct assessable entity as per the definition of 'person' contemplated in Sec. 2(31) of the Act, therefore, being an inanimate person there cannot be anything personal about such entity."
• Core principles established: A corporate entity, being an inanimate person, cannot have personal expenses, and ad-hoc disallowances require specific evidence of discrepancies.
• Final determinations on each issue: The Tribunal vacated the disallowances made by the A.O., setting aside the order of the CIT(Appeals) and allowing the appeal of the assessee.