2014 (3) TMI 325 - AT - Income Tax

Deletion made u/s 41(1)(a) of the Act Cessation of liability Held that - There is no infirmity in the order of CIT(A) as assessee has not written off the said amount in its books of account - M/s Perfect Engineering Works has confirmed having to receive the amount from the thus, the liability has not ceased to exist thus, the provisions of section 41(1)(a) of the Act does not apply - Since no evidence was filed, the plea of the revenue cannot be accepted Decided against Revenue. Reduction in commission paid to family members Held that - The assessee could not file any evidence of rendering services by the family members of the assessee against which the assessee has made said payment - AO is justified to state that the payment of commission by the assessee to his wife, two daughters-in-law, grandson, granddaughters and son of the assessee Sunil Kakkad (HUF) is for business purposes the contention of the revenue is accepted that without stating any reason CIT(A) has stated that disallowance be restricted to 20% being excessive payment of commission by the assessee - There is no details as to the rate on which the assessee had made payment of commission to his family members - the payment of commission to his family members has been made merely to reduce the taxable income and the said payment is not for the purpose of business of the assessee thus, the order of the CIT(A) set aside Decided in favour of Revenue. Deletion of disallowance out of daily wages and contract charges Held that - The AO is justified to make an adhoc disallowance of 5% out of the claim of assessee as entire expenditure was not subject to verification, that the said payment were made in cash against self made vouchers the order of the CIT(A) set aside Decided in favour of Revenue. Deletion of disallowance out of telephone expenses on account of personal use Held that - The AO as well as CIT(A) have made adhoc disallowance on account of personal use of telephone thus, there is no reason to interfere with the order of the CIT(A) restricting the disallowance on account of personal use of Telephone by assessee as made by AO Decided against Revenue.

Summary

Issues:
1. Disputed addition under section 41(1)(a) of the Income Tax Act, 1961 for cessation of liability.
2. Dispute regarding commission paid to family members.
3. Disallowance of daily wages and contract charges.
4. Disallowance of telephone expenses for personal use.

Issue 1: Disputed addition under section 41(1)(a) of the Income Tax Act, 1961 for cessation of liability:
The Department appealed against the deletion of an addition of Rs.2,03,750 made under section 41(1)(a) by the AO. The CIT(A) deleted the addition based on the assessee not writing off the amount in its books of account. The Tribunal upheld the CIT(A)'s decision, noting that the liability had not ceased to exist as confirmed by Perfect Engineering Works. The Tribunal rejected the Department's appeal, emphasizing the absence of evidence for the payment being made in the subsequent year.

Issue 2: Dispute regarding commission paid to family members:
The Department disputed the reduction of commission paid to family members by the CIT(A). The AO disallowed Rs.6,35,000 stating lack of evidence for work done by family members. The CIT(A) restricted the disallowance to 20% under section 40A(2)(b) of the Act. The Tribunal reversed the CIT(A)'s decision, agreeing with the AO that the payment was not for business purposes and lacked evidence of services rendered. The total disallowance of Rs.6,35,000 was confirmed.

Issue 3: Disallowance of daily wages and contract charges:
The AO disallowed Rs.3,08,102 out of claimed daily wages and contract charges of Rs.61,62,042 due to lack of evidence for genuine business expenditures. The CIT(A) deleted the disallowance, stating the payments were for monthly salary and expenses. The Tribunal reversed the CIT(A)'s decision, upholding the adhoc disallowance of 5% by the AO due to lack of verification for cash payments against self-made vouchers.

Issue 4: Disallowance of telephone expenses for personal use:
The AO disallowed 10% of claimed telephone expenses for personal use, amounting to Rs.61,115. The CIT(A) reduced the disallowance to Rs.30,557. The Tribunal upheld the CIT(A)'s decision, stating that both the AO and CIT(A) made adhoc disallowances for personal use without interference. The Department's appeal on this issue was rejected.

In conclusion, the Tribunal partially allowed the Department's appeal, upholding the disallowances related to commission paid to family members, daily wages, and contract charges. The disallowance of telephone expenses for personal use was upheld as well.