2014 (9) TMI 162 - AT - Income Tax

Expenses treated as Non-business expenses Expenses incurred through credit card and in ordinary course of business Held that - Assessee has failed to produce any evidence to establish that the expenditure incurred under various heads of expenditure was relatable to the business of the assessee and in the absence of any evidence being filed by the assessee to prove its stand the order of the CIT(A) is upheld Decided against Assessee. Applicability of provisions of TDS - Disallowance u/s 40(a)(ia) Held that - The first aspect of the issue of non-deduction of tax at source was the payments to doctors, faculty, in respect of advertisement, contractor and professional as referred to by the AO - assessee during course of hearing had furnished on record tabulated period-wise chart in respect of the payments to doctors and faculty, payments on account of advertisement, contactor and professionals along with evidence of deposit of tax at source - The complete payments on which tax was deducted by the assessee from time to time was deposited before the due date of filing of the return of income relying upon CIT Vs. Rajinder Kumar 2013 (7) TMI 454 - DELHI HIGH COURT - in view of the amended provisions of the Act, the expenditure on which the tax was due to be deducted and the same was deducted and deposited before the due date of filing of return, is to be allowed as an expenditure in the hands of the assessee - The second set of the disallowance was the items on which tax was not deducted at source - the payments were made to the franchises and not the employee directly and in the absence of any satisfactory explanation with regard to the nature of such payments booked under the head incentive and because of failure to deduct the tax at source, the amount is not allowable in the hands of the assessee Decided partly in favour of assessee. Amount paid to ROC for increasing Authorised capital disallowed Held that - The expenditure having been incurred in the capital field is the capital expenditure in the hands of the assessee and is not allowable as revenue expenditure in the hands of the assessee following the decision in Brook Bond India Ltd. Vs. CIT 1997 (2) TMI 11 - SUPREME Court - Expenditure incurred by a company in connection with issue of shares is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit making Decided against assessee. Payments made to the imprest account disallowed u/s 40A(3) Held that - Payments made to the imprest account do not attract the provisions of section 40A(3) of the Act - if any expenditure is booked in cash over and above ₹ 20,000/-, then the provisions of section 40A(3) of the Act are to be applied and disallowance are to be worked out thereunder - the assessee claimed that the imprest account was available with the directors from time to time and only remuneration at the end of the year was adjusted and hence no cash payment for the said expenditure of remuneration to the Directors - the stand of the assessee needs to be verified thus, the matter is to be remitted back to the AO for verification Decided in favour of Assessee. Employees contribution towards PF account u/s 36(l)(va) Payment made before due date of filling of return Held that - Following the decision in CIT Vs. Nuchem Ltd. 2010 (2) TMI 959 - PUNJAB AND HARYANA HIGH COURT - and in case the employees contribution toward PF account is paid before filing of the return, then no disallowance is warranted - The AO is directed to verify the claim of the assessee and recompute the disallowance, if any - Decided in favour of Assessee. Estimated addition of commission paid to doctors Held that - The statement of the employee of the assessee was recorded in the presence of the learned counsel for the assessee and was also signed by him - the disallowance on account of commission paid to the doctors for referring the patients to the hospital are to be added as income in the hands of the assessee in view of the provisions of section 69C of the Act the amount of addition is restricted Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Addition on account of non-business expenditure through credit cards.
2. Disallowance under section 40(a)(ia) for non-deduction of TDS.
3. Disallowance for payment to Registrar of Companies for increasing authorized capital.
4. Disallowance under section 40A(3) for cash payments.
5. Disallowance of depreciation and interest on machinery.
6. Disallowance of employee's contribution to Provident Fund.
7. Estimated addition on account of commission paid to doctors.

Detailed Analysis:

1. Addition on Account of Non-Business Expenditure through Credit Cards:
The Assessing Officer (AO) noted large payments made through credit cards without sufficient documentation to prove they were business-related. The assessee admitted some expenses might be personal and suggested adding 10-20% of Rs. 3,73,800 to income. The AO disallowed Rs. 9,81,548 due to lack of evidence. The CIT (Appeals) upheld this disallowance. The Tribunal agreed, stating the assessee failed to produce evidence to substantiate the business nature of these expenditures. Thus, the addition of Rs. 9,81,548 was upheld.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed Rs. 1,42,10,804 for failure to deduct TDS on various payments. The CIT (Appeals) allowed partial relief for TDS deducted and paid before the due date of filing the return, reducing the disallowance to Rs. 1,22,35,474. The Tribunal referenced the Delhi High Court's rulings in CIT Vs. Naresh Kumar and CIT Vs. Rajinder Kumar, stating that TDS payments made before the due date of filing the return should be allowed. The AO was directed to verify and allow such claims, reducing the disallowance accordingly.

3. Disallowance for Payment to Registrar of Companies for Increasing Authorized Capital:
The AO disallowed Rs. 25,500 paid to the Registrar of Companies for increasing authorized capital, treating it as capital expenditure. The CIT (Appeals) upheld this disallowance, referencing the Supreme Court ruling in Brook Bond India Ltd. Vs. CIT. The Tribunal agreed, confirming the disallowance of Rs. 25,500 as it was capital expenditure.

4. Disallowance under Section 40A(3) for Cash Payments:
The AO disallowed Rs. 62,852 for cash payments exceeding Rs. 20,000. The CIT (Appeals) upheld this, rejecting the assessee's claim that these were adjustments to the imprest account. The Tribunal remanded the issue back to the AO to verify whether the payments were indeed adjustments to the imprest account and not direct cash payments. If verified, no disallowance would be warranted; otherwise, the disallowance would stand.

5. Disallowance of Depreciation and Interest on Machinery:
The assessee did not press these grounds, and the Tribunal dismissed them as not pressed.

6. Disallowance of Employee's Contribution to Provident Fund:
The Tribunal noted that if the employee's contribution to the Provident Fund is paid before the due date of filing the return, no disallowance is warranted, referencing the Punjab & Haryana High Court's ruling in CIT Vs. Nuchem Ltd. The AO was directed to verify and allow such claims.

7. Estimated Addition on Account of Commission Paid to Doctors:
The AO added Rs. 21,75,771 based on the statement of an employee admitting to unrecorded commission payments to doctors. The CIT (Appeals) upheld this addition. The Tribunal, considering the lack of direct evidence but acknowledging the employee's statement, reduced the addition to Rs. 5,00,000. For the subsequent year (2006-07), a similar issue was raised, and the Tribunal reduced the addition to Rs. 6,00,000.

Conclusion:
Both appeals were partly allowed, with specific directions for verification and adjustments by the AO on several issues, particularly regarding TDS payments and cash disbursements. The Tribunal upheld the disallowance of non-business expenditures and capital expenditures while providing partial relief on other grounds based on compliance with legal provisions and court precedents.