2024 (6) TMI 319 - AT - Income Tax

Disallowance of Business Promotion Expenses - expense towards a get- together organized between the foreign suppliers and local customers - on perusal of the bills the AO noticed that an amount was incurred for food provided for 250 people - AO held mere production of bills does not prove that the expense was incurred wholly and exclusively for the purpose of business - CIT(A) upheld the disallowance stating that the assessee has not been able to prove that there was business connection of the get-together party and that the assessee has not discharge the onus that the expenditure is incurred with a view bring profit or monetary advantage - HELD THAT - From the perusal of statement of accounts we notice that the assessee has declared substantial revenue from operations and has incurred expenses various expenses for the purpose of business which have been accepted by the AO. AO has not rejected the books of accounts of the assessee. Given the volume of business of the assessee, in our considered view without recording any adverse finding the AO is not correct in making the disallowance of the entire food expenses stating that the same is not incurred for the purpose of business. According to the ld AR the fact that the assessee has made payment to the caterer after deducting tax at source, also goes to substantiate the claim that the expenses incurred are legitimate. When the assessee has submitted the documentary evidence of having incurred the expenditure on which tax is deducted at source and when the related expenses of hotel expenditure is allowed, the AO is not right in disallowing the food expenses for the reason that the same is for large number of people. Therefore, we hold that the AO is not correct in disallowing the food expenses claimed by the assessee as part of business promotion expenses. Accordingly, we delete the disallowance made by the AO. Cessation of Liability u/s 41(1) - amount reflected in the statement of accounts as amount outstanding in the name of M/s Parul Shah and Co. towards professional fees payable - reason for the AO to make the addition is that the liability is outstanding for more than three years and that the assessee has not brought anything on record to show that there is any intention to make payments towards the liability - HELD THAT - We noticed in assessee's case that the assessee as part of the financial statements reflecting the outstanding liability it would mean that it is an acknowledge liability and that the assessee is intending to settle the liability in the future date. The ratio of the above jurisdictional high Court decision states that addition under section 41(1) cannot made merely for the reason that the period of limitation has expired. Applying the said ratio to assessee's case, we are of the considered view that the AO is not correct in making the addition under section 41(1) of an acknowledged liability of the assessee. Accordingly, we direct the AO to delete the addition. Appeal of the assessee is allowed.

Summary

Issues involved: Appeal against order of CIT(A) for AY 2013-14 - Disallowance of Business Promotion Expenses - Addition under section 41(1) of the Income Tax Act, 1961.

Disallowance of Business Promotion Expenses:
The assessee, a private limited company trading in hygiene and cleaning chemicals, claimed Rs. 15,66,719/- as Business Promotion Expenses. The AO disallowed Rs. 8,67,047/- incurred for food for 250 people during a get-together event, stating lack of justification. The CIT(A) upheld the disallowance, questioning the business connection and profit motive. The Tribunal noted the business nature, customer base including major companies, and the purpose of the event to expand product range. The AO allowed accommodation expenses for foreign suppliers but disallowed food expenses. The Tribunal found the food expense legitimate, supported by evidence, TDS deduction, and audited accounts. The AO's disallowance was deemed incorrect, and the disallowance was deleted.

Cessation of Liability under section 41(1) of the Act:
The AO added Rs. 15,000/- under section 41(1) for an outstanding liability of over three years, stating lack of intention to settle. The CIT(A) upheld the addition. The Tribunal considered the liability as an admitted liability based on financial statements, citing a High Court decision that a liability does not cease to be a debt due to limitation. The Tribunal found the AO's addition incorrect, as the liability was acknowledged and intended to be settled in the future, directing deletion of the addition.

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the disallowance of Business Promotion Expenses and the addition under section 41(1) of the Act.