2019 (2) TMI 272 - AT - Income Tax

Disallowance in respect of Cars and Telephones used by the staff members of the assessee firm under section 38 (2) - allowable busniss expenses - adhoc disallowance of 1/6th of the expenses pertaining to car and telephone expenses rejecting the explanation of the assessee - Held that - Assessee before the CIT(A) has specifically addressed that out of the 10 cars maintained, only two were used personally by the partners. Similarly, out of 145 telephone numbers maintained, only two telephone numbers were being used by the partners. As per the submissions extracted from the assessment order, it is seen that the assessee has submitted that details have been maintained qua each of the vehicles/mobile numbers. The issue may also be of a recurring nature. we are of the view that instead of arriving at an arbitrary estimate, it is appropriate to set aside the issue back to the file of the CIT(A) with the direction to take the past history of the assessee into consideration and confine the disallowance to be made only on the grounds of personal usage to the specific cars/mobile/phones stated to be used by the partners, in case the claim is found to be correct on record. - Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Correctness of order by CIT(A)
2. Disallowance of car and telephone expenses under section 38(2) of the Income Tax Act, 1961
3. Right to add, alter, amend, or withdraw grounds of appeal

Issue 1: Correctness of order by CIT(A)

The appeal was filed by the assessee challenging the order of the ld. CIT(Appeals)-I Ludhiana for the 2014-15 assessment years. The assessee contended that the order passed by the Commissioner of Income Tax (Appeals) was erroneous both in law and on the facts of the case. However, during the hearing, the assessee was not present, leading to the appeal being treated as ex-parte. The Tribunal proceeded with the appeal after hearing the ld. Sr.DR.

Issue 2: Disallowance of car and telephone expenses under section 38(2) of the Income Tax Act, 1961

The AO made an adhoc disallowance of 1/6th of the expenses related to car and telephone expenses, as the assessee failed to provide records to bifurcate between business and personal use. The assessee's explanation was deemed untenable as no log book or telephone register was maintained. Section 38(2) of the Income Tax Act, 1961 was cited to justify the disallowance. The CIT(A) appreciated the facts and reduced the disallowance to 1/8th of the expenses, considering the specific usage of cars and telephones by partners. The Tribunal, upon review, directed the issue back to the CIT(A) to consider the past history of the assessee and confine the disallowance only to assets used personally by partners, if supported by records.

Issue 3: Right to add, alter, amend, or withdraw grounds of appeal

The assessee reserved the right to add, alter, amend, or withdraw any grounds of appeal. This right was not directly addressed in the subsequent proceedings or the final decision of the Tribunal.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, directing a reevaluation of the disallowance of car and telephone expenses under section 38(2) of the Income Tax Act, 1961. The decision emphasized the importance of considering specific usage patterns and maintaining accurate records to support claims of business-related expenses.