2020 (7) TMI 434 - AT - Income Tax

Personal expenditure - Expenditure accounted under the head subscription and membership fees - assessee is engaged in the business of assembling, trading and marketing of diesel generator sets of Kirloskar - HELD THAT - Due to the inherent nature of the business of the assessee, each contract for supply and erection of the diesel generator is obtained after considerable amount of negotiations and discussions with clients which includes builders, hotels, hospitals, business complexes, individuals etc., across the State of Kerala. Since the value of the product range is comparatively high, to convince the customers, a series of presentations, negotiations and discussions at various levels of the client would occur before the finalization of a particular order. Most of such presentations, meetings and discussions are held at various hotels, clubs. Such expenses incurred at hotels, clubs, for meeting, discussions, travelling etc. are accounted under the said head of subscriptions and membership fees, and also, travelling and other expenditures incurred for attending conferences / meetings with the dealer Kirloskar is also accounted under the said head of expenses. The expenditure incurred is fully supported and are incurred through by banking channels. It is to be further noted that there are no qualifications, observations made by the Auditors in their report regarding these expenses are not incurred. AO has made an arbitrary adhoc disallowance of 30% without giving any reasons for the findings. A.O. has also not found out any defect / deficiency. Disallowance made is on the higher side taking into the given facts and circumstances of the case. As personal element in such expenses cannot be totally ruled out, and to meet the ends of justice 10% of the disallowance of the said expenditure would be sufficient on facts and circumstances of the case Adhoc disallowance under various expenses debited to the profit and loss account - HELD THAT - The expenditures are very much in the nature of unavoidable expenditure in a small scale manufacturing unit. The quantum of such expenditure is also very small when compared to the volume of operations of the assessee. The assessee is running a small scale manufacturing unit and this expenditure incurred are in the ordinary course of business and are mostly paid to unorganized sectors and hence in most of the cases only self made vouchers are available for incurring such expenses. None of these expenditures are of personal nature. AO has not brought on record any material to show that these impugned expenses are not incurred by the assessee and are not an allowable deduction. It is now well settled law that no adhoc disallowance could be made unless the A.O. brings any specific detail on record which may call for any disallowance. Thus hold that the disallowance of 10% in the facts and circumstances of the case is uncalled for and delete the same.

Summary

Issues:
1. Disallowance of expenses under subscription and membership fees.
2. Adhoc disallowance of expenses under various heads.

Issue 1 - Disallowance of expenses under subscription and membership fees:
The appellant, engaged in the business of diesel generator sets, challenged the disallowance of 30% of expenses under subscription and membership fees. The Assessing Officer and CIT(A) upheld the disallowance due to lack of evidence and perceived personal element in the expenses. The appellant argued that the disallowance was arbitrary, submitting detailed expenses and emphasizing the necessity of such expenses for client relationships. The Tribunal found the disallowance excessive, reducing it to 10% due to lack of specific reasons for the higher disallowance. The Tribunal noted the nature of the business requiring client interactions at hotels and clubs, supporting the expenses incurred. The disallowance was adjusted, providing relief to the appellant.

Issue 2 - Adhoc disallowance of expenses under various heads:
The appellant contested the adhoc disallowance of 10% on expenses under different heads, supported mainly by internal vouchers. The Assessing Officer and CIT(A) upheld the disallowance, considering the lack of proper bills. The appellant argued that the nature of these expenses in the industry commonly involves self-made vouchers. The Tribunal reviewed the expenses, noting their nature and necessity in a small-scale manufacturing unit. It emphasized that no specific evidence was presented to disallow the expenses, citing relevant judicial precedents. Consequently, the Tribunal deemed the disallowance unwarranted and deleted it, allowing the appeal.

In conclusion, the Tribunal partially allowed the appeal, providing relief to the appellant on both issues related to the disallowance of expenses.