2012 (5) TMI 440 - AT - Income Tax

Disallowance of 90% of expenses related to other group concerns and their directors or their relatives - held that - while accepting the principle that for eligibility of an allowance under section 10(2)(xv), there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. Merely because the assessee s income, after incurring such expenses, was found to be little or negligible, it cannot be said that the said expenditure became an impermissible deduction. Once it is found that the expenditure was bona fide incurred and that the same related to the business activity, then it would become deductible as the same is permitted by the provisions of law. In the light of view taken in these decisions, we are of the opinion that disallowance of a portion of establishment expenses by the ld. CIT(A) was not justified. - The mere fact that no tangible business came out of the foreign visit is not a ground for disallowing the foreign travel expenditure, because it is possible that in the first meeting only business discussions would take place and nothing tangible may come out. - Unless the business is abandoned or closed and even if business is at a dormant stage waiting for proper market conditions to develop, the expenditure incurred in the course of such a business is to be allowed as deduction. Delay in filing an appeal - Appeal against order of Rectification u/s 154 - held that - the asseessee seems to be quite negligent by not taking the necessary steps for filing the appeal within the time prescribed by the statute. The conduct of the assessee reveals that the assessee takes the condonation of delay provision as granted. The assessee did not care to submit any request for condonation of delay, even when it was brought specifically to their notice. In granting the indulgence and condoning the delay, it must be proved beyond the shadow of doubt that the assessee was diligent and was not guilty of negligence whatsoever. - Delay not condoned - decided against the assessee.

Issues Involved:
1. Disallowance of salary and establishment expenses.
2. Imposition of penalty under Section 271(1)(c) of the Income-tax Act.
3. Disallowance of expenses under Section 154 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Salary and Establishment Expenses:
The assessee appealed against the disallowance of Rs. 9,09,391/- by the CIT(A), which included Rs. 1,00,000/- disallowed by the AO. The CIT(A) enhanced the disallowance, concluding that 90% of the company's activities were for managing loans and advances to group concerns and their directors or relatives, not for earning income. The CIT(A) noted that the main source of income was interest and hire charges, and 90% of the funds were advanced as interest-free loans, indicating that the company's activities were not aimed at earning income. The CIT(A) thus disallowed 90% of the expenses, including establishment expenses, foreign travel, depreciation on cars, postage, and telephone expenses, arguing they were not incidental to earning income.

The Tribunal, however, found that the genuineness of the expenses was not doubted by the AO or the CIT(A). It held that the expenses incurred for maintaining the establishment and retaining the status of the company, as well as holding on to assets, were allowable. The Tribunal emphasized that the reasonableness of the expenditure should be judged from the point of view of the businessman and not the Revenue. Consequently, the Tribunal allowed the appeal of the assessee on this ground.

2. Imposition of Penalty under Section 271(1)(c) of the Income-tax Act:
The AO levied a penalty of Rs. 39,500/- on the disallowance of Rs. 1,00,000/- upheld by the CIT(A) out of establishment expenses, citing that the assessee furnished inaccurate particulars of income. The CIT(A) also issued a notice for penalty on the enhanced disallowance of Rs. 8,09,391/-. The assessee did not file any reply before the CIT(A), who upheld the penalty of Rs. 3,20,114/-.

The Tribunal, however, noted that since the disallowance in the quantum appeal was deleted, the penalty did not survive. It referred to the Supreme Court's decision in K.C. Builders vs. ACIT, which held that penalty cannot stand if the assessment itself is set aside. The Tribunal thus set aside the penalty orders, allowing the appeal of the assessee on this ground.

3. Disallowance of Expenses under Section 154 of the Income-tax Act:
The appeal against the order dated 12.2.2007 u/s 154 was delayed by 778 days. The assessee did not file any application for condonation of delay until the hearing. The assessee claimed the delay was due to a belief that there was no need to contest the order passed u/s 154, and later, on the advice of a new counsel, filed the appeal.

The Tribunal found the assessee's explanation for the delay to be perfunctory and general, lacking evidence of diligence or bona fide reasons. It emphasized that the law of limitation requires sufficient cause for delay, which was not demonstrated by the assessee. The Tribunal, therefore, declined to condone the delay and dismissed the appeal in limine.

Conclusion:
The appeals in ITA no.2410/Del./2004 and ITA no.2105/Del./2007 were allowed, while the appeal in ITA no.1781/Del./2009 was dismissed in limine due to the delay in filing. The Tribunal emphasized the importance of demonstrating sufficient cause for delays and the necessity of expenses being wholly and exclusively for business purposes.

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