2022 (2) TMI 109 - AT - Income Tax

Disallowance of telephone expenses - According to the ld. AR, these expenses have been incurred by the partners of the assessee for the purpose of business and since the timings of European Countries and USA also Australia there is time differences in working hours of the establishments and for this purpose, the partners have to call at these odd hours to the foreign customers - HELD THAT - It is an admitted fact that as per Clause 3 of the partnership deed of the firm which has already been placed on record, all the partners are working partners of the firm for carrying out the business activities of the firm and thus, these expenses were incurred wholly and exclusively for the purpose of business of the assessee firm and are entitled to deduction u/s 37(1) of the Act. We also verified the fact that the department had not made any disallowance in preceding year i.e. A.Y. 2012-13 wherein the assessment was completed U/s 143(1) of the Act. The department has also not made any disallowance for the subsequent year i.e. A.Y. 2015-16 wherein the assessment was passed U/s 143(3) of the Act. Copies of all the orders of the proceeding years as well as subsequent year have already been placed on record and after going through these orders as well as facts of the present case, we found that no disallowance was called for on telephone expenses and the assessee is entitled to said deduction U/s 37(1) of the Act, accordingly, we direct to delete the same. Disallowance on account of entertainment expenses - HELD THAT - No disallowances had been made by the A.O. in the preceding years as well as in the subsequent year. With regard to club subscription/expenses, we observed that the club subscriptions and expenses were incurred for the business purposes as much as it facilitated interaction with business associations etc. The club expenses were incurred with a view to promote to soliciting the customers in export of garments business - A.O. noted that the expenses with regard to entertainment are related to purchase of foods items and some of the bills are in the names of the partners for Delhi Gold club - assessee's business is export of garments out of India and many of the foreign buyers came India in connection with export business activities and the assessee firm have to look after the foreign buyers and soliciting them, but at the same time, we cannot lost sight of the fact that some of the expenses claimed by the assessee are on account of purchase of cigarettes, wines etc., in our view, these expenses incurred by the assessee on purchase of cigarettes, wines etc. cannot be allowed as business expenses. Therefore, Additions are on higher side and in the interest of justice, we restrict this addition to the tune of ₹ 6.00 lacs and rest of the addition is directed to be deleted. We order accordingly. Addition u/s 40(a)(ia) - payment for the membership expenses relating to the Maharani of India Retail Division - HELD THAT - Since the deduction of tax is not deductible under Chapter XVII-B of the Income Tax Act on the aforesaid payments made by the assessee firm. The ld. AR has submitted that the A.O. has not stated any of the sections under which the assessee firm is required to deduct tax at source on these payments. The membership and subscription charges are not covered under any specific sections provided under Chapter XVII-B of the Act. It is also very important to mention here that in the preceding years i.e. A.Y. 2012-13 and 2013-14 as well as subsequent year i.e. A.Y. 2015-16, the A.O. had not made any disallowance u/s 40(a)(ia) of the Act - Since the tax was not deductible at source under Chapter XVII-B of the Act on these payments we direct to delete the addition made and sustained U/s 40(a)(ia) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of telephone expenses
2. Disallowance of entertainment expenses
3. Addition under section 40(a)(ia)

Issue 1: Disallowance of Telephone Expenses

The assessee challenged the disallowance of telephone expenses of ?1,23,464 by the ld. CIT(A). The ITAT observed that the expenses were incurred by the partners for business purposes due to time differences with foreign customers. The partnership deed confirmed the partners' role in business activities, justifying the expenses under section 37(1) of the Income Tax Act. Notably, no disallowance was made in the preceding or subsequent years. Thus, the ITAT directed to delete the disallowance.

Issue 2: Disallowance of Entertainment Expenses

The appeal contested the disallowance of ?11,01,445 for entertainment expenses. The ITAT noted the business nature of these expenses related to foreign buyers' visits for overseeing production and quality verification. While some expenses were disallowed for items like cigarettes and wines, the ITAT restricted the disallowance to ?6.00 lakhs, considering the nature of the business and past assessments where no disallowances were made.

Issue 3: Addition under Section 40(a)(ia)

The challenge was against the addition of ?1,80,653 under section 40(a)(ia) of the Act. The ITAT examined the nature of payments, including membership fees and subscriptions, and found no specific requirement for tax deduction at source under Chapter XVII-B. Noting the consistency of no disallowances in previous and subsequent years, the ITAT directed to delete the addition under section 40(a)(ia) based on the totality of facts and legal obligations.

In conclusion, the ITAT partially allowed the appeal, directing the deletion of disallowances on telephone expenses and under section 40(a)(ia), while restricting the disallowance for entertainment expenses. The judgment emphasized the business nature of expenses, legal obligations, and consistency in past assessments as key factors in determining the outcome of the appeal.