2018 (7) TMI 359 - AT - Income Tax

Addition on account of sundry creditors and Expenses Payable - assessee has adopted cash system of accounting for receipts and sub commission and other expenses were accounted on mercantile basis - Held that - The earlier years expenses are allowed during the year under consideration and if the earlier years receipts are excluded from the income of the year under consideration, the whole exercise would be revenue neutral. There is no dispute that the receipts shown by the assessee are matching with Form No. 26AS filed by the deductor of TDS. In our considered opinion, income statement of the assessee does not give any distorted figure. In any case, the expenditure incurred by the assessee for earning income has to be allowed. In any case, legitimate expenses incurred by the assessee in earning income has to be allowed and once the income has been accepted as such, and taxed accordingly, the matching expenditure has to be allowed. TDS u/s 194C - payment to hotel - non deduction of tds - addition u/s 40(a)(ia) - Held that - The facilities/amenities made available by a hotel to its customers do not constitute work within the meaning of section 194C of the Act, therefore, we do not find any reason to interfere with the finding of the CIT(A). Our view is fortified by the judgment of the Hon ble High Court of Bombay in the case of The East India Hotels Ltd & Anr. Vs. CBDT 2009 (3) TMI 8 - BOMBAY HIGH COURT Addition on account of capital gains - Held that - As in case the capital gains in the hands of the assessee is enhanced, then the consequential capital gains in the hands of the co-owner has to be reduced and since both of them are taxed at the highest rate of tax, the exercise would be tax neutral. The CIT(A), correctly directed the AO to delete the addition Addition on account of personal expenses - Held that - Since the AO has made adhoc disallowance and since the first appellate authority, in his wisdom, has directed the AO to restrict the disallowance to 50% of the total disallowance, we do not find any reason to interfere with the findings of the CIT(A) - Revenue appeal dismissed.

Summary

Issues Involved:
1. Addition of sundry creditors and Expenses Payable under cash system of accounting.
2. Deletion of addition under section 40(a)(ia) for non-deduction of TDS.
3. Addition on account of capital gains.
4. Restriction of addition on personal expenses.

Issue 1: Addition of Sundry Creditors and Expenses Payable
The case involved a dispute regarding the accounting system followed by the assessee for commission receipts and expenses. The AO disallowed expenses amounting to ?51,22,350, alleging a violation of section 145 of the Income Tax Act due to a hybrid accounting system. The CIT(A) analyzed the Tax Audit Report and upheld the assessee's method of accounting. The CIT(A) emphasized that the auditor's comments indicated no discrepancy in commission income realization and expenses accounting. Relying on legal precedents, the CIT(A) directed the AO to delete the disallowance, stating that section 145 is a machinery provision and cannot override the charging provision.

Issue 2: Deletion of Addition under Section 40(a)(ia)
The AO disallowed a payment of ?10,99,132 under section 40(a)(ia) for non-deduction of TDS. However, the CIT(A) found that the payment made to a hotel did not fall under section 194C of the Act. Citing a Bombay High Court judgment, the CIT(A) deleted the disallowance, stating that hotel services do not constitute "work" under section 194C.

Issue 3: Addition on Account of Capital Gains
The AO added ?12,84,820 as capital gains due to a discrepancy in the cost of acquisition of a property. The CIT(A) noted that any increase in capital gains for one party should result in a corresponding decrease for the co-owner to maintain tax neutrality. Relying on this principle, the CIT(A) directed the AO to delete the addition, emphasizing that the tax implication remained neutral.

Issue 4: Restriction of Addition on Personal Expenses
The AO disallowed ?2,93,511 for depreciation claimed on cars, suspecting personal usage. The CIT(A) restricted the disallowance to 50% of the total amount, amounting to ?1,46,755. The Tribunal upheld this decision, considering it a reasonable restriction on personal/non-business expenditure.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues, emphasizing tax neutrality and adherence to accounting principles and legal provisions.