2015 (6) TMI 557 - AT - Income Tax

Disallowance of salary of employees - Held that - AO has asked the assessee company to produce these female members for verification, but no one was produced. Thus, the AO on the basis of the reasons given in the assessment order, disallowed the salary on the plea that expenditure was incurred for non-business purpose. The findings recorded by lower authorities have not been controvered by ld. AR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings recorded by lower authorities to the effect that no services were rendered by these female employees. In the statement so recorded during search it was admitted that no services were rendered to the company and they were receiving salary because they are family members of the directors of the company. - Decided against assessee. Disallowance of vehicle expenses on which FBT were paid - AO made the disallowance of vehicle running expenses @20% and depreciation also @20% being personal use of the vehicle - Held that - The issue with regard to disallowance of expenses on which FBT has been paid is covered by the series of decision of the Tribunal, wherein it was held that once fringe benefit tax is levied on such expenses as has been done in the present case, it follows that the same are treated as fringe benefits provided by the assessee as employer to its employees and the same have to be appropriately allowed as expenses incurred wholly and exclusively incurred by the assessee for the purpose of its business. See Hansraj Mathuradas, Versus The Income Tax Officer, 22(1) (2), Mumbai. 2012 (10) TMI 300 - ITAT, MUMBAI - Decided in favour of assessee. Addition made u/s.145A on account of unutilized Modvat credits - CIT(A) deleted addition - Held that - milar issue has been dealt with by the Tribunal in assessee s own case in the assessment years 2000-01, 2003-04 and 2004-05, wherein the addition made u/s.145A with regard to Modvat credit has been deleted wherein held as per the provisions of section 145A of the Income-tax Act, 1961, the Excise Duty on purchases has to be included in sales. Alternatively, the purchases and sales have to be taken at gross value and whatever credit is left in the Modvat account that would form part of. the closing stock. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of salary of employees
- Disallowance of vehicle expenses on which FBT was paid
- Deletion of addition made under section 145A of the Act on account of unutilized Modvat credits

Analysis:

1. Disallowance of Salary of Employees:
The appeals were filed by the assessee and revenue against the order of CIT(A) regarding the disallowance of salary paid to family members of the assessee who were stated to be employees. The AO disallowed the salary during the assessment under section 153A, citing reasons such as lack of specific duties assigned, absence of appointment letters, and non-attendance at the office. The CIT(A) confirmed the disallowance. The assessee contended that some part of the salary should be allowed as 50% had already been disallowed in the scrutiny assessment. However, the tribunal found that during a search operation, it was revealed that the female family members were not rendering any services to the company and were receiving salary solely because they were family members of the directors. The AO's disallowance was upheld as no positive material was presented to counter the findings that no services were actually rendered by these employees.

2. Disallowance of Vehicle Expenses on which FBT was Paid:
The AO disallowed vehicle running expenses and depreciation at 20% each, assuming personal use of the vehicle. The CIT(A) also upheld this disallowance. The assessee argued that the expenses were entirely for business purposes and properly vouched. The tribunal, referring to previous decisions, held that once fringe benefit tax (FBT) is levied on such expenses, they are treated as fringe benefits provided by the employer to employees and should be allowed as business expenses. Following the precedent set in a specific case, the tribunal directed the AO to delete the disallowance of vehicle expenses on which FBT had been paid.

3. Deletion of Addition under Section 145A for Unutilized Modvat Credits:
The revenue raised a ground in all appeals regarding the deletion of additions made under section 145A on account of unutilized Modvat credits. The CIT(A) deleted the additions, citing a previous tribunal decision in the assessee's favor for similar issues. The tribunal, following the same reasoning and precedent, confirmed the CIT(A)'s action in deleting the additions made under section 145A for unutilized Modvat credits. As a result, the appeals of the assessee were allowed in part, while the appeals of the revenue were dismissed.

In conclusion, the tribunal's judgment addressed the issues of disallowance of salary to family members, disallowance of vehicle expenses on which FBT was paid, and deletion of additions under section 145A for unutilized Modvat credits. The decision was based on detailed analysis, legal precedents, and specific circumstances of the case, resulting in partial allowance of the assessee's appeals and dismissal of the revenue's appeals.