2011 (1) TMI 1369 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance u/s 40A(3) for payment by pay order.
2. Disallowance of salary expenses.
3. Ad hoc disallowance of various expenses.
4. Disallowance of Diwali incentives.
5. Disallowance of chit fund loss.
6. Disallowance of business promotion expenses.

Summary:

Issue 1: Disallowance u/s 40A(3) for payment by pay order
The assessee challenged the disallowance of Rs. 27,674 u/s 40A(3) for payment made by pay order. The Tribunal accepted the assessee's contention that a pay order is a banker's cheque and thus account payee, making the provisions of Section 40A(3) inapplicable. Consequently, the disallowance was deleted.

Issue 2: Disallowance of salary expenses
The AO disallowed Rs. 2,23,700 out of salary payments for 12 persons due to unverifiable payments and discrepancies in the number of employees. The CIT(A) partially upheld the disallowance, reducing it to Rs. 1,86,200. The Tribunal found that the assessee provided sufficient evidence, including salary registers and details of casual laborers, and noted that salary was never disallowed in the past. Thus, the Tribunal deleted the entire disallowance of Rs. 1,86,200.

Issue 3: Ad hoc disallowance of various expenses
The AO disallowed 20% of travelling, conveyance, telephone, car running, and car depreciation expenses due to lack of supporting documents. The CIT(A) reduced the disallowance to 10%. The Tribunal further reduced the disallowance to 5%, noting that the assessee had produced relevant documents and the AO had not identified any specific non-business expenditure.

Issue 4: Disallowance of Diwali incentives
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed the ground as not pressed.

Issue 5: Disallowance of chit fund loss
The AO disallowed Rs. 20,040 claimed as chit fund loss, which was confirmed by the CIT(A). The Tribunal, referencing the ITAT Delhi Bench decision in Dy.CIT vs. P.U.R. Polyurethene Products (P.) Ltd., allowed the chit fund loss, recognizing it as a business expense used for raising funds.

Issue 6: Disallowance of business promotion expenses
The AO disallowed Rs. 1,26,000 incurred for sponsoring a Golf Tournament, which was confirmed by the CIT(A). The Tribunal allowed the expenditure, agreeing with the assessee that it was incurred for business promotion and provided significant publicity, thus qualifying as an allowable business expense.

Conclusion:
The appeal was allowed partly, with the Tribunal providing relief on several disallowances while dismissing the ground related to Diwali incentives as not pressed. The order was pronounced in the open Court on 21.1.11.