2016 (4) TMI 633 - AT - Income Tax

Disallowance on account of entertainment expenses and traveling expenses - CTI(A) restricted the disallowance - Held that - In the present case, it is noticed that the assessee had been associated with two firms i.e. M/s AZB & Partners and M/s Ajay Bahl & Co. to render consultancy services and advice on the matters relating to his field of expertise. The AO asked the aforesaid firms u/s 133(6) of the Act about the involvement of the assessee and in response the above said two firms did not deny the facts that the services were rendered by the assessee. In the present case, the incurring of expenses was not doubted. However, the AO was of the view that those expenses could have been recovered from the clients and accordingly made the disallowance of the entire expenses incurred under the head entertainment and travelling . In the present case, it appears that the AO did not appreciate this fact that the assessee had incurred approximate 3% of the personal fee for entertainment expenses and incurred about 17% of the professional fee on account of travelling expenses which cannot be considered to be unreasonable. At the same time, the assessee had not produced the vouchers for all the expenses incurred, moreover, in such type of cases, involvement of personal element cannot be ruled out. In our opinion, the ld. CIT(A) was justified in restricting the disallowance to the extent of 20% instead of whole amount disallowed by the AO. We do not see any infirmity in the impugned order of the ld. CIT(A) and accordingly do not see any merit in this appeal of the department. - Decided against revenue

Summary

Issues:
1. Disallowance of entertainment expenses by AO and relief allowed by CIT(A).
2. Disallowance of travelling expenses by AO and relief allowed by CIT(A).

Analysis:
1. The department appealed against the CIT(A)'s order restricting the addition made by the AO on account of entertainment expenses. The AO disallowed the entertainment expenses as the assessee failed to prove their genuineness and provide necessary documentary evidence. The CIT(A) observed that the expenses were incurred for professional purposes and allowed a partial relief, considering the commercial expediency and the proportion of expenses to total fees earned. The disallowance was restricted to 20% of the expenses incurred, sustaining a disallowance of Rs. 1,60,378.

2. The department also challenged the CIT(A)'s decision regarding the disallowance of travelling expenses. Similar to the entertainment expenses issue, the CIT(A) considered the commercial expediency and the proportion of expenses to total fees earned. The disallowance was restricted to 20% of the travelling expenses, sustaining a disallowance of Rs. 8,44,432. The Tribunal noted that the involvement of personal elements in such expenses could not be ruled out and found the CIT(A)'s decision justified. The Tribunal concluded that the disallowance was reasonable and upheld the CIT(A)'s order, dismissing the department's appeal.