2016 (6) TMI 801 - AT - Income Tax

Disallowance of remuneration to Directors - AO disallowed 50% of the payment of salary to the Directors as being not wholly and exclusively for business purposes - Held that - As submitted by the assessee that in the subsequent year the assessee company has started getting revenue receipts and the personnel cost has also gone up to 15.23 lakhs as against 12.01 lakhs during the year. The directors have been paid salary of 9, 00, 000/- each in A.Yrs. 2008-09 and 2009-10 and no disallowance has been made by the AO we find force in the above submission of the Ld. Counsel for the assessee. Although no revenue receipts are generated during the year however the company is in existence and has started generating revenue in the next year a fact stated by the Ld. Counsel for the assessee and not controverted by the Ld. Departmental Representative. In the immediately preceding assessment year the company has paid remuneration of 9, 00, 000/- and no disallowance has been made. In our opinion once a Director is in employment his salary should not be reduced in a particular year because there is no generation of revenue. The logic given by the revenue authorities in the instant case in our opinion is not justified. We therefore set aside the order of the CIT(A) and direct the AO to delete the disallowance out of remuneration to Directors. Disallowance of rent for residence of the Director - Held that - It is an admitted fact that no such rent was paid in the preceding year when the business was going on. When there is no business activity during the year there was no justification for giving rent of 2, 43, 000/- for residence of the Director. Further the rent has been paid to the wife of the Director who is a specified person u/s.40A(2)(b). Similarly the usage charge of 57, 000/- i.e. rent for the furniture also is uncalled for under the facts and circumstances of the case. We therefore uphold the order of the CIT(A) in disallowing the rent expenses of 3 lakhs. Disallowance of travelling postage and telephone expenses - Held that - We find the assessee has travelled to Bangkok Malaysia and Kaulalumpur which are mainly tourist spots. Nothing has been produced before us that the assessee has gone to these places in relation to his business activity and which has resulted into some business. No such proof was also filed that he had discussed with some people/business houses there on account of mining activity. Merely stating that assessee travelled to these places for venturing into new business of mining is not convincing. Therefore an amount of 1, 48, 116/- being 50% of travelling expenses out of 2, 96, 213/- is justified. However since the assessee is a Private Limited Company the disallowance of 50% of Telephone expenses i.e. 79, 310/- out of 1, 58, 620/- and 50% depreciation on motor cars amounting to 1, 17, 453/- out of 2, 34, 906/- is not justified. The addition if any can be made in the hands of the Directors as perquisite. Disallowance of Electricity expenses - Held that - As we find the same has rightly been disallowed by the AO and upheld by the CIT(A) since the same relates to the bills of Radhika Bungalow where the parents of the assessee are residing and bills of the residence of one of the Directors Shri Sandip Mantri. Appeal decided partly in favour of assessee

Summary

Issues:
1. Disallowance of various expenses claimed by the assessee for Assessment Year 2007-08.

Analysis:
1. The assessee, a construction company, declared a total loss after setting off long term capital gains. The Assessing Officer (AO) questioned the allowability of claimed expenses due to lack of business activity during the year.
2. The company argued it was a going concern with infrastructure and assets, despite no revenue that year. Major expenses included personnel costs, site development charges, rent, and other expenses, all claimed as business-related.
3. The AO disallowed portions of personnel costs, rent, and usage charges, citing lack of commercial expediency. Sales promotion expenses were partially disallowed due to lack of work in progress.
4. Traveling and telephone expenses were partly disallowed for trips to tourist spots without clear business purpose. Depreciation on cars and electricity charges were also partially disallowed.
5. The CIT(A) upheld some disallowances, leading to the assessee's appeal. The assessee contested disallowances of remuneration to directors, rent expenses, and other costs.
6. The Tribunal found the disallowance of director's remuneration unjustified, considering the company's subsequent revenue generation. Rent expenses for the director's residence were upheld, along with partial disallowance of traveling expenses.
7. The disallowance of electricity charges related to personal residences was partly allowed, and the appeal was partly allowed by the Tribunal.

This detailed analysis covers the disallowance of various expenses claimed by the assessee for the Assessment Year 2007-08, addressing each issue comprehensively based on the original judgment text.