2003 (8) TMI 181 - AT - Income Tax

2016 (6) TMI 181 - AT

Issues Involved:
1. Sustenance of disallowance of expenses pertaining to earlier years.
2. Disallowance of freight charges.
3. Disallowance of travelling expenses.
4. Disallowance of salary and wages.
5. Disallowance of raw material and stores expenses.
6. Disallowance of miscellaneous credit notes of customers.
7. Disallowance of stores and supplies.
8. Disallowance of bank interest and charges.
9. Disallowance of health club expenses.
10. Disallowance of foreign travel expenses.
11. Disallowance of club membership fees.
12. Disallowance of guest house expenses.
13. Disallowance of advertisement and publicity expenses.
14. Disallowance of depreciation on generator.
15. Disallowance of interest on borrowed capital.
16. Disallowance of debenture issue expenses.
17. Deletion of cash credit addition.

Issue-wise Detailed Analysis:

1. Sustenance of Disallowance of Expenses Pertaining to Earlier Years:
- Grounds 1(a) to 1(k): The assessee challenged the disallowance of Rs. 17,15,531 under various heads for expenses pertaining to earlier years. The AO disallowed these expenses citing the mercantile system of accounting and lack of evidence for liability ascertainment in the current year. The ITAT upheld the disallowance for some expenses (e.g., Rs. 1,664 for employee payables, Rs. 1,08,228 for freight charges, Rs. 60,302 for freight charges, Rs. 34,623 for salary and wages, Rs. 4,19,395 for raw material and stores, Rs. 5,24,839 for credit notes to customers, Rs. 2,95,130 for stores and supplies, Rs. 1,48,795 for bank interest and charges) and allowed others (e.g., Rs. 1,11,875 for bad debts, Rs. 6,745 for petty staff amounts, Rs. 3,935 for travelling expenses).

2. Disallowance of Freight Charges:
- Ground 1(d) and 1(e): The assessee's claims for freight charges paid to Aneja Transport & Forwarding Agency (Rs. 1,08,228) and East India Transport Agency (Rs. 56,000) were disallowed due to lack of documentary evidence and ascertainment of liability in the current year.

3. Disallowance of Travelling Expenses:
- Ground 1(f): The disallowance of Rs. 3,935 on account of travelling expenses was allowed as these were petty amounts incurred by employees in the field and adjusted against advances given in earlier years.

4. Disallowance of Salary and Wages:
- Ground 1(g): The disallowance of Rs. 34,623 on account of salary and wages was restored to the AO for re-examination of facts vis-a-vis terms of employment and relevant documents.

5. Disallowance of Raw Material and Stores Expenses:
- Ground 1(h): The disallowance of Rs. 4,19,395 for raw material and stores was upheld due to lack of evidence that these expenses were incurred in the current year.

6. Disallowance of Miscellaneous Credit Notes of Customers:
- Ground 1(i): The disallowance of Rs. 5,24,839 was upheld as the assessee failed to provide evidence that these expenses crystallized during the current year.

7. Disallowance of Stores and Supplies:
- Ground 1(j): The disallowance of Rs. 2,95,130 for stores and supplies was upheld due to lack of evidence of actual consumption in the current year.

8. Disallowance of Bank Interest and Charges:
- Ground 1(k): The disallowance of Rs. 1,48,795 was upheld as these expenses pertained to earlier years and were not crystallized in the current year.

9. Disallowance of Health Club Expenses:
- Ground 2: The disallowance of Rs. 16,200 for health club membership fees for the executive director was upheld as personal expenses.

10. Disallowance of Foreign Travel Expenses:
- Ground 3: The disallowance of Rs. 50,000 on foreign travel expenses was upheld due to lack of details and potential personal nature of expenses.

11. Disallowance of Club Membership Fees:
- Ground 4: The disallowance of Rs. 16,959 for club membership fees was allowed as necessary business expenditure.

12. Disallowance of Guest House Expenses:
- Ground 5: The disallowance of Rs. 1,45,572 for guest house expenses was upheld, and the deletion of Rs. 24,064 for holiday home expenses was reversed, citing provisions of s. 37(4) and s. 37(5).

13. Disallowance of Advertisement and Publicity Expenses:
- Ground 6: The disallowance of Rs. 50,000 on advertisement and publicity expenses was upheld due to lack of details and potential entertainment nature.

14. Disallowance of Depreciation on Generator:
- Ground 7: The disallowance of Rs. 6,54,723 on depreciation for a generator was restored to the AO for re-examination of actual use in the existing business.

15. Disallowance of Interest on Borrowed Capital:
- Ground 8 and Revenue's Ground 4: The disallowance of Rs. 81,11,121 on interest for borrowed capital used in the sugar division was upheld, and the relief of Rs. 67,07,466 allowed by CIT(A) was reversed, treating the interest as capital expenditure.

16. Disallowance of Debenture Issue Expenses:
- Ground 9: The disallowance of Rs. 1,11,12,423 for debenture issue expenses was upheld as capital expenditure. The alternate plea for deduction under s. 35D was restored to the AO for examination.

17. Deletion of Cash Credit Addition:
- Revenue's Ground 3: The deletion of Rs. 1 lakh cash credit addition was restored to the AO for re-examination of creditworthiness and correctness of facts.

Conclusion:
- The ITAT upheld several disallowances citing lack of evidence and the mercantile system of accounting, while allowing some claims where sufficient justification was provided. The matters requiring further verification were restored to the AO for re-examination.

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