2024 (12) TMI 1422 - AT - Income Tax

Addition on account of Travel Expenses u/s 37 - allowable business expenditure or not? - expenses on foreign travel to countries such as the USA, Dubai, and France - assessee contended that these expenses were incurred to explore business opportunities and establish relations abroad. HELD THAT - Under Section 37(1) of the Act, only those expenses that are incurred wholly and exclusively for business purposes are allowable. The onus is on the assessee to substantiate the business nexus of such expenses. In the present case, no documentary evidence, such as agreements, business communications, or other substantiating material, was produced to establish that the foreign travel was undertaken solely for business purposes. The absence of such evidence weakens the claim of the assessee that the expenses were incurred wholly and exclusively for business purposes. Based on the AR s submissions and admission, and in the interest of fairness, we deem it reasonable to disallow 30% of the foreign travel expenses to account for the personal element, while allowing the balance 70% as business expenses. Accordingly, we partly allow this ground of appeal. Addition u/s 68 - unexplained cash credit - AO observed that amount was recorded in the head Dev Aurum Booking Account in the books of the assessee and represented cash received during the financial year under consideration - assessee failed to discharge its burden of proving the nature and source of the cash credited in the books of accounts and the explanation provided was inadequate and lacked documentary support - HELD THAT - The onus is squarely on the assessee to prove the identity, creditworthiness, and genuineness of the transaction, which remains unfulfilled in this case. Tax auditor s comment that the transaction was subject to reconciliation indicates a lack of clarity and proper documentation regarding the nature and source of the cash credit. This strengthens the view that the assessee failed to maintain proper records and reconcile the transaction adequately. Thus, on failure of the assessee to discharge its onus under Section 68, we find no infirmity in the findings of the AO and the CIT(A). Accordingly, the addition u/s 68 is confirmed, and this ground of appeal is dismissed. Addition made by AO u/s 36(1)(va) on account of delay in depositing PF/ESIC contributions - AO observed that the assessee had delayed depositing employees' contributions toward PF/ESI beyond the statutory due dates specified under the respective Acts - HELD THAT - AR conceded that the issue is already decided by the Hon ble Jurisdictional High Court against the assessee. Additionally, this issue has been conclusively settled in the case of Checkmate Services (P.) Ltd. 2022 (10) TMI 617 - SUPREME COURT We find no merit in the assessee's contention. The disallowance made by the AO and confirmed by the CIT(A) is upheld. Accordingly, this ground of appeal is dismissed. Addition u/s 36(1)(iii) on account of interest - sufficient own interest-free funds - HELD THAT - We hold that the disallowance made by the AO and upheld by the CIT(A) is not sustainable. Assessee has demonstrated the availability of sufficient interest-free funds and the lack of a direct nexus between borrowed funds and the advances. Accordingly, we delete the addition made u/s 36(1)(iii). Appeal of the assessee is partly allowed.

Issues Involved:

1. Disallowance of Travel Expenses under Section 37.
2. Addition under Section 68 regarding unexplained cash credit.
3. Disallowance under Section 36(1)(va) concerning delayed PF/ESI contributions.
4. Disallowance of Interest Expenses under Section 36(1)(iii) related to advances to related parties.

Detailed Analysis:

1. Disallowance of Travel Expenses under Section 37:

The primary issue was whether the foreign travel expenses claimed by the assessee were incurred "wholly and exclusively" for business purposes. The Assessing Officer (AO) disallowed Rs. 35,60,621/- of foreign travel expenses due to the absence of evidence substantiating the business purpose of the trips. The CIT(A) upheld this disallowance, noting the lack of supporting documents such as agreements or contracts. The assessee argued that the travel was for exploring business opportunities and that the expenses were negligible relative to turnover. However, the presence of personal elements, such as directors accompanied by spouses, was admitted. The tribunal recognized a personal element in the expenses and deemed it reasonable to disallow 30% of the expenses, allowing the remaining 70% as business expenses.

2. Addition under Section 68 regarding unexplained cash credit:

The AO added Rs. 9,06,000/- under Section 68, citing the assessee's failure to prove the identity, creditworthiness, and genuineness of the transaction with Mr. Utpal Gajjar, from whom an advance was reportedly received. The assessee claimed this amount was a booking advance later repaid upon cancellation. However, no documentary evidence was provided to substantiate the transaction or repayment. The CIT(A) confirmed the addition, emphasizing the lack of reconciliation and proper documentation. The tribunal found no infirmity in the AO's and CIT(A)'s findings, noting the absence of evidence to discharge the assessee's burden under Section 68, and upheld the addition.

3. Disallowance under Section 36(1)(va) concerning delayed PF/ESI contributions:

The AO disallowed Rs. 1,03,440/- for delayed PF/ESI contributions, citing the Gujarat High Court's decision that contributions not deposited within statutory due dates are not deductible, even if paid before the return filing date. The CIT(A) confirmed this disallowance. During the hearing, the assessee conceded the issue was settled against them by the Supreme Court. The tribunal upheld the disallowance, aligning with the jurisdictional High Court and Supreme Court decisions.

4. Disallowance of Interest Expenses under Section 36(1)(iii) related to advances to related parties:

The AO disallowed Rs. 27,83,725/- of interest expenses, arguing that borrowed funds were diverted to related parties without business purpose or commercial expediency. The CIT(A) upheld this, noting a clear nexus between borrowed funds and interest-free advances. The assessee argued that sufficient interest-free funds were available to cover the advances, relying on Supreme Court precedent in Reliance Industries Ltd. The tribunal found the AO's disallowance arbitrary, lacking specific quantification of interest-free advances or linkage to borrowed funds. Given the availability of interest-free funds and absence of a direct nexus, the tribunal deleted the disallowance, allowing this ground of appeal.

Conclusion:

The appeal was partly allowed, with adjustments made to the disallowance of travel expenses and deletion of the interest disallowance under Section 36(1)(iii), while other additions and disallowances were upheld.

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