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TMI Blog2018 (9) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... the depreciation as provided under the provisions of law on this capital expenditure. Addition of machine hire charges - A.O only allowed this expenditure to the extent of 25% and this disallowance was maintained to 30% by Ld.CIT(A) - Held that:- necessary investigation ought to have been conducted by the Ld.Assessing Officer and he was refrained from doing so by non co-operation by the assessee by not filing necessary details. We also cannot support the findings of Ld.CIT(A) which are without going into the basic facts of the issue. We therefore are of the considered view that this issue of genuineness of the expenditure of hire charges for machine needs to be set aside to the file of Ld. CIT(A). If necessary he can call for a detailed remand report from the Ld.AO after carrying out necessary investigation of the alleged finance and leasing companies on the basis of details and information to be provided by the assessee as and when required without taking any unnecessary adjournment. Addition of commission expenses - Assessee is aggrieved with the disallowance of 15% of commission expenses whereas the revenue is aggrieved with the part relief given by the Ld.CIT(A) against the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, internal audit, office maintenance, printing and stationery, legal expenses etc. Books of accounts are audited. The finding has been given by Ld. Assessing Officer about ad-hoc disallowance made by him. However, CIT(A) restricted the disallowance to 10% of 67,02,718/- for the lack of relevant bills and vouchers should have been produced by the assessee before the lower authority. The nature of expenditure incurred under the head “miscellaneous expenses” even though related to business purposes but due to lack of proper details minor disallowance of 5% would meet the end of justice. X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The machine hire charges were paid to inter corporate bodies & on such payment, tax was deducted at source @ 15%. Machines were taken on monthly hire basis and utilization of such machinery was not doubted upon, even if the machines could not be utilized continuously or wholly, hire charges could not be avoided. Disallowance of hire charges on ad-hoc basis to the extent of 30% is unjustified & bad- in law deserves to be set aside: Ground No.3: Commission of sales of ₹ 64,63,146/- That the learned Commissioner of Income tax (A) erred in law in confirming the disallowance of amount equal to 15% of commission paid on sales at ₹ 38,77,888/- out of total commission paid at ₹ 2,58,52,585/- without appreciating the fact that commission on domestic sales was normally given @ 1.25% to 1.5% whereas on export such commission was paid at higher rates on which tax was deducted at ₹ 24,69,452/- and at ₹ 42,72,213/- respectively. Disallowance of such expenditure ignoring the submission of complete details is wholly unjustified, improper, bad in law and deserves to be set aside. Ground No.4: Travelling & Conveyance Expenses ₹ 52,82,990/- That the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case the Ld. CIT(A) was justified in restricting the disallowance of miscellaneous expenses at 10% as against 10,00,000/- disallowed by the AO. 5. The first issue relates to repair and maintenance expenses: Brief facts relating to this common issue is that the assessee claimed expenditure of ₹ 85,57,917/- under the head Repairs & Maintenance. The Ld.A.O considered them to be a capital in nature and merely allowed depreciation on the impugned amount thereby making addition of ₹ 64,18,438/-. Ld. CIT(A) while dealing with the issue observed that most of the expenditure are of revenue in nature except the one incurred towards repair of DG sets and therefore sustained the disallowance at ₹ 30,00,000/-. 6. Now the issue is before the Tribunal. 7. The Ld. Counsel for the assessee submitted that the company incurred expenses towards repairs and maintenance of plant and machinery, computers, DG Set, furniture & fixtures, office equipments, factory building, road etc. which were revenue in nature and are incurred in normal course of business towards normal wear and tear of capital assets. Incurring of expenditure was not doubted upon but entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her hand, the appellant company suffered huge losses year after year hence there could not be any motive to debit capital expenditure in profit and loss account. Such repairs also included road construction work after a gap of ten years through contractor including material and labour. The repairs of the road inside the factory after a period of ten years cannot be treated as capital expenditure in any manner. Similarly, machinery repairs expenses do not indicate any major repair which can be said to be capital in nature. However, considering the amount of expenditure incurred towards repairs to DG set at ₹ 4O,97,741/- may be partially capital in nature hence in the interest of justice a sum of ₹ 30 lacs may be treated as capital expenditure. The AO allowed depreciation @ 25% i.e. ₹ 21,39,479/- while treating en tire expenses as capital in nature which itself is incorrect because depreciation on road constructed side the factory is eligible @ 10% only. Accordingly, the disallowance is restricted to ₹ 30 lacs only and appellant will get relief of ₹ 55,57,917/-. The AO is directed to recalculate the depreciation accordingly this ground of appeal is par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income. When the matter came up before the Ld.CIT(A) he give part relief to the assessee sustaining the disallowance @30%. Now the assessee is in appeal before the Tribunal. 14. The Ld. Counsel for the assessee submitted that the appellant company did not own machineries to manufacture twisted yarn and being a sick unit registered under BIFR, term loan facility could not be availed from any financial institution/bank to acquire new assets. Therefore, to cater demand of twisted yarn, there was no alternative except to take the machines on hire. Therefore, various textile machineries were taken on hire for which machine hire charges of Rs.l,76,20,000/- were paid to five leasing and finance companies. (Paper book-I page no. 13 to 16). Such hire charges were paid in subsequent years also but no disallowances were made. The AO disallowed 75% of such charges on two grounds:- (a) that "since the installed capacity of machineries have not been utilized fully then it is very difficult to accept the need of machineries on hire" and (b)Proof of transportation of machinery was not furnished. The CIT(A) vide para 4 of the order observed that "Such disallowance has also been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings, the appellant had failed to produce the proof of incurring such expenditure. Further, it has been observed by the AO that since the plant & machinery was not fully utilized, there was no need of hiring the machinery. The AO proceeded to make a disallowance of ₹ 1.32 crores out of total expenditure of ₹ 1.76 crores which works out to 75% of total expenditure. The appellant has filed the detailed written submissions which have been reproduced above. It is evident that the AO has disallowed 75% of machine hire charges paid by the appellant on the ground that "the claim of the company is not tenable since the installed capacity of the machineries have not been utilized fully then it is very difficult to accept the need of machineries on hire". Such disallowance has also been made on the ground that proof of transportation of the machinery was not furnished. The AO has neither doubted the agreements executed for hiring of machines, nor existence of machines or their use. The AO has also not pointed out any specific defect or non business purpose of use of machinery. But the facts remain that the appellant had failed to file proof of having incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olkata and the remaining two companies Kothsons Finance & Consultancy P.Ltd and Aarkey tieup Pvt.Ltd at 5, Clive Row, 1st floor, Room No.24, Kolkata . It has been claimed that the period of hire charges are for two years but these are not supported by written agreement. No proof of transportation of the machines to the assessee's factory premises has been shown. Merely by making the payments by account payee cheque and deduction of tax at source on the impugned payment cannot prove the genuineness of the machine hire charges for the company which is running in huge loss. 19. In our considered view necessary investigation ought to have been conducted by the Ld.Assessing Officer and he was refrained from doing so by non co-operation by the assessee by not filing necessary details. We also cannot support the findings of Ld.CIT(A) which are without going into the basic facts of the issue. We therefore are of the considered view that this issue of genuineness of the expenditure of hire charges for machine needs to be set aside to the file of Ld. CIT(A). If necessary he can call for a detailed remand report from the Ld.AO after carrying out necessary investigation of the alleged finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubted upon and none of the agents was relative of any of the directors of the company. The AO observed that payment of commission was for extra commercial consideration and this was done to facilitate making certain payments to the friends. Therefore, in the absence of written agreements with the agents he disallowed 25% of the payments on ad-hoc basis. The CIT(A)observed that execution of agreement was not necessary when payments were made to regular agents year after year and AO did not point out specific defect in incurring such expenditure. However, in absence of supporting evidences and justification for making such huge commission he reduced the disallowance @ 15% as against 25%. 25. On the other hand the Ld. Departmental Representative vehemently argued and supported the findings of Ld. CIT(A). 26. We have heard the rival contentions and records placed before us. The issue raised before us through this common ground by both parties relates to commission expenses. The assessee is aggrieved with the disallowance of 15% of commission expenses whereas the revenue is aggrieved with the part relief given by the Ld.CIT(A) against the disallowance of 25% made by Ld.A.O to 15% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered by the commission agents were filed by the appellant. During the course of appeal proceedings also, despite opportunities the appellant has failed to produce complete details and supporting evidences and justification for making such huge commission particularly when the company was running loss. Therefore, the AO has been found justified in making such disallowances. However, disallowance of commission @25% has been found unreasonably high particularly when the AO had not pointed out any specific defect in incurring such expenditure. Therefore, in the interest of natural justice it shall be reasonable to disallow the commission @15% as against 25% which shall be sufficient to cover the discrepancy noticed by the AO. This ground of appeal is partly allowed". 27. We find that it is an undisputed fact relating to the alleged expenses of commission that no formal agreements have been prepared between the assessee and the agents which can prove the basis for payment of such expenses. It is also not disputed that the details of services rendered by each commission agent was also not filed. In some cases the commission paid are around 12 to 15% whereas in most of the cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the executives as well as the directors of the company to have official meetings quite often.(Details at page no. 21 to 41 of Paper book-I). Foreign tours by directors or executives were for the purpose of export of finished products which is evident from the fact that the export turnover was increased during the year from ₹ 65,05 crores to ₹ 84.10 crores. (Details at page no. 42 to 47 of Paper book-I). The. AO observed that there was no justification for employees and directors of the company to travel all around the Country since the business of the company is manufacturing and exporting the goods. According to AO, travelling is not wholly for business purposes and there was no positive advantage to the company, he therefore, disallowed such expenditure to the extent of 50%. The CIT (A) considered the disallowances as excessive and restrict the same to 35% of the total expenditure. 33. The Ld. Departmental Representative vehemently argued and supported the findings of Ld. Assessing Officer. 34. We have heard the rival contentions and records placed before us. The issue raised in this ground by both the parties relates to disallowance of travelling and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement being part of such expenditure cannot be ruled out. Ld.CIT(A) give part relief even when the appellant failed to submit the required details with supporting evidences and justification for incurring impugned expenditure. From perusal of the paper book Page-21 to 47 providing all the details of travelling expenses, we find that the complete details of each expenditure along with purposes of tour by respective employees has been mentioned. Directors as well as staff officials of the company also travelled extensively across/ outside the country. There have been frequent travels to European countries also. However, assessee failed to bring on record the connection of the foreign travels for the business purposes in the firm in the form of details of the parties which have been visited, communications with those parties with regard to export/import and whether any orders were procured. In these given facts and circumstances of the case and fair play, we are of the view that disallowance of 20% of the total expenditure will cover the deficiency in the records of the assessee. We accordingly hold so and sustain the disallowance to ₹ 21,13,196/-. Assessee's Ground No.4 is part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel bifurcation of expenditure has been given out of which ₹ 16,93,629/- specifically relates to car running and maintenance of the cars owned by the company. Rest of other expenses relates to the vehicle expenses for the staff and auditors. In these circumstances wherein complete details have been provided by the assessee towards the car running and maintenance expenses, we are of the considered view that disallowance of 10% at ₹ 16,93,629/- is justified to cover the personal expenses of Directors/Promoters. We accordingly do so and sustain the disallowance to ₹ 1,69,336/- as against ₹ 4,48,270/- confirmed by the Ld.CIT(A). Ground No.5 of the assessee is partly allowed. 42. Now we are left with Ground No.5 of revenue's appeal wherein the revenue has challenged the findings of Ld.CIT(A) sustaining the disallowance of miscellaneous expenses to 10% of the total expenditure of ₹ 67,02,718/- as against ad-hoc disallowance of ₹ 10,00,000/- made by the Ld. Assessing Officer. 43. Ld. Departmental Representative vehemently argued and supported the orders of Ld. Assessing Officer. 44. Ld. Counsel for the assessee argued that the impugned expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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