2023 (10) TMI 648 - AT - Income Tax

Nature of expenditure - Contingent liability or not - invocation of performance guarantee by the Department of Telecommunication - internet expenses - Additions u/s 69C r.w.s. 115BBE - CIT(A) confirmed the disallowance on the ground that the said liability was a contingent liability not brought in the books of the Appellant at the time of creation of such contingent liability - HELD THAT - It is pertinent to note that the bank guarantee was originally for the business purpose with the Department of Telecom which is a mandatory for certain projects. Thus, the observations made by the AO that it is not in respect of business appears to be incurred as the performance guarantee was prior to the period on which the assessee was not fully operationalise his business. Therefore, the benefit of Section 37(1) is allowable to the assessee in light of the decision of Neo Constructo Construction Ltd. 2013 (7) TMI 851 - GUJARAT HIGH COURT Ground No. 1 is allowed. Labour expenses paid to one staff doing administrative / accounting as well as miscellaneous office work - HELD THAT - D.R. relied upon the assessment order and the order of the CIT(A). It is pertinent to note that there was no closure declared by the assessee of its entire business but certain business activities were going on from 2008 till 2016 and therefore, one staff expenses related to salary component was genuine by the assessee as revenue expenditure. Hence, the Ground No. 2 is allowed. Addition at the rate prescribed in the Section 115BBE - HELD THAT - From the perusal of the additions it is pertinent to note that the expenditure claimed by the assessee in respect of performance guarantee as well as labour expenses were both explained by the assessee during the assessment proceedings and therefore, applying Section 115BBE in assessee s case is not justifiable. Hence, Ground No. 3 is allowed.

Summary

Issues Involved:
The judgment involves issues related to disallowance of internet expenses, disallowance of salary expenditure, and taxation under Section 115BBE of the Income Tax Act for the assessment year 2017-18.

Disallowance of Internet Expenses:
The appeal challenged the disallowance of Rs. 10,00,000/- as internet expenses debited in the books due to invocation of performance guarantee by the Department of Telecommunication. The contention was that the liability was contingent and not brought into the books initially. The appellant argued that the disallowance was unwarranted as the guarantee was for business purposes, citing a relevant court decision. The Tribunal allowed this ground, considering the guarantee's business nature and timing.

Disallowance of Salary Expenditure:
Another issue was the disallowance of Rs. 2,00,000/- expenditure towards salary paid during the year, based on the belief that the business was closed in 2008. The appellant asserted that the business was not closed, and the expenses were essential for maintaining corporate status and business operations. The Tribunal found that certain business activities were ongoing, and the salary expenses were genuine revenue expenditure, thus allowing this ground.

Taxation under Section 115BBE:
The third issue revolved around the application of Section 115BBE for taxing the disallowances. The appellant argued that this section was not applicable to their case, which was supported by explanations provided during assessment proceedings. The Tribunal agreed that the expenses were adequately explained, rendering the application of Section 115BBE unjustifiable. Consequently, this ground was allowed.

Additional Grounds:
Additional grounds presented were dismissed as they were alternate to the allowed grounds. Since the primary grounds were allowed, the additional ones became academic and were not adjudicated upon.

This judgment, delivered by the Appellate Tribunal ITAT Ahmedabad, on 07/07/2023, favored the appellant by allowing the appeal against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2017-18.