2014 (8) TMI 723 - AT - Income Tax

Addition u/s 35D Expenses on repair of work place - Whether the provisions of section 35D, at all, could be applicable on the assessee, where the assessee incurs expenses to repair the place of his work Held that - The assessee is a wholesaler and retailer of musical goods, which he imports - assessee incurred expenses to repair the property/showroom taken on rent - Neither the assessee has incurred any expenditure in the extension of his undertaking nor has he set up a new unit - as per the submissions of the assessee extracted in the order, that the renovation work undertaken by the assessee at ₹ 11,93,820/- had been capitalized suo moto - the expenses are for the purposes of repairs on rented premises cannot be said to be preliminary expenses, eligible for amortization Decided in favour of Assessee. Personal expenditure - 1/3 Adhoc expenses disallowed New shop opened at NOIDA - Held that - The assessee had opened a shop at Noida, while the assessee resides at Mumbai - involvement of personal nature of expense cannot be there - the expenses are routine business expenses, which has not been denied by either of the revenue authorities the expenses deserve to be allowed as there was no hint of personal usage in any of the expenses, noted by the revenue authorities - because of opening a new show room at Noida, the business has increased considerably - Along with the increase in business, the routine business expenses have also increased, as compared to the preceding year - the AO did not at all look into the comparative figures as produced before him - when the business has increased by 60.15%, it is obvious that corresponding expenses shall also increase - no disallowance is called for - the order of the CIT(A) is set aside and the AO is directed to delete the disallowance - Decided in favour of Assessee. Import Promotion Expenses Claim of depreciation Held that - There is no term as import promotion expenses - the assessee has used the wrong term for the expenses which he has incurred - It is seen from the details as filed that the expenses had been incurred by the assessee for travelling abroad for the purpose of business, like buying tickets, foreign currency, stay etc. it has not been examined by the revenue authorities the assessee claimed depreciation against which, the AO allowed at ₹ 1,37,616/- and balance, the AO disallowed - as the CIT(A) observed that disallowance was made after the AO examined the bills of the fixed assets were produced before him - thus, the matter is remitted back to the CIT(A) for examination Decided in favour of Assessee.

Issues Involved:
1. Disallowance of Rs. 5,08,595/- under Section 35D of the Income Tax Act, 1961.
2. Ad-hoc disallowance of Rs. 1,39,765/-.
3. Ad-hoc disallowance of Rs. 1,98,879/-.
4. Disallowance of Rs. 3,69,992/- on account of Import Promotion Expenses.
5. Disallowance of Rs. 49,701/- on account of Depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 5,08,595/- under Section 35D:
The assessee, a proprietor engaged in the business of importing and selling musical instruments, incurred Rs. 6,35,714/- for repairs on a tenanted premises. The AO treated these expenses as deferred revenue expenses under Section 35D, allowing only 20% to be charged in the year. The CIT(A) upheld this view, citing the enduring nature of the repairs. However, the ITAT found that Section 35D pertains to amortization of preliminary expenses for the extension of an undertaking or setting up a new unit, which was not the case here. The expenses were for repairs on rented premises, not preliminary expenses. Therefore, the ITAT directed the AO to allow the full expense of Rs. 6,35,744/-.

2. Ad-hoc Disallowance of Rs. 1,39,765/-:
The AO disallowed 1/3rd of the expenses amounting to Rs. 1,86,352/- claimed under various heads such as conveyance, job work, security service charges, etc., incurred at Noida. The CIT(A) reduced this disallowance to 1/4th, sustaining Rs. 1,39,765/-. The ITAT noted that these were routine business expenses with no indication of personal usage. Consequently, the ITAT set aside the revenue authorities' orders and directed the AO to allow the full expense as claimed.

3. Ad-hoc Disallowance of Rs. 1,98,879/-:
The AO observed a significant increase in certain expenses compared to the previous year and disallowed 1/3rd of these expenses. The CIT(A) reduced the disallowance to 1/4th, sustaining Rs. 1,98,979/-. The ITAT found that the increase in expenses was justified due to the opening of a new showroom at Noida, which led to increased business and corresponding expenses. Therefore, the ITAT set aside the CIT(A)'s order and directed the AO to delete the disallowance of Rs. 1,98,979/-.

4. Disallowance of Rs. 3,69,992/- on Account of Import Promotion Expenses:
The assessee claimed expenses for traveling abroad related to business activities, termed as "import promotion expenses." The CIT(A) upheld the disallowance, noting the lack of justification and comparison with the previous year. The ITAT found that the term "import promotion expenses" was a misnomer and directed the AO to examine the details of the expenses, such as tickets, foreign currency, and stay, and allow them if justified. The issue was restored to the AO for re-examination.

5. Disallowance of Rs. 49,701/- on Account of Depreciation:
The AO allowed depreciation of Rs. 1,37,616/- against the claimed Rs. 1,87,315/-, disallowing the balance. The CIT(A) sustained this disallowance, observing that the AO had examined the bills. The ITAT found that the revenue authorities did not comprehensively examine the documents and restored the issue to the AO for fresh examination, directing him to afford reasonable opportunity to the assessee.

Conclusion:
The ITAT allowed the appeal filed by the assessee, setting aside the orders of the revenue authorities on all grounds and directing re-examination or allowance of the expenses and depreciation as claimed. The order was pronounced in the open court on 20th August, 2014.

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