Income Tax Appellate Tribunal - Bangalore
R. N. Shetty & Co. Pvt. Ltd., Hubli vs Assessee on 3 August, 2007
THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'B'
BEFORE SHRI N.L. KALRA, ACCOUNTANT MEMBER
and
SHRI GEORGE GEORGE. K, JUDICIAL MEMBER
ITA No.929 & 930(Bang)/2008
(Assessment year:2004-05)
M/s. R.N Shetty & Co.
604/B, 'Murdeshwar Bhavan' ....
Gokul Road, Hubli. Appellant
Vs.
Dy. Commissioner of Income-tax,
Circle-3(1),
Hubli. .... Respondent
Appellant by : Smt. Nitya
Respondent by : Smt. V.S Sreelekha
O R D E R
PER BENCH :
R.N.SHETTY & CO - ITA Nos: 929 (FIRM) & 930 (COMPANY) /B/08 These are two appeals - (i) for the period from 1.4.03 to 6.8.03 as a firm and (ii) for the period from 7.8.03 to 31.3.04 in the status of company - preferred by R.N. Shetty & Co. against the orders of the Ld. CIT(A), Hubli for the assessment year 2004-
05.
ITA NO:929 (FIRM):
2. The assessee being a Civil Contractor and dealer of Maruti Cars had, initially, raised 17 exhaustive and elaborate grounds in a narrative manner. Subsequently, seventeen grounds were ITA 929 & 930/B/2008 Page 2 of 41 furnished in a concise manner. On a perusal, ground Nos: 1, 2 and 17 are in general and not specific which, in our considered view, do not survive for adjudication. The remaining grounds are reformulated as under:
(1) addition of Rs.38022 in respect of maintenance charges; (2) the disallowance at 1% of daily allowance of Rs.14.75 lakhs; (3) the disallowance of Rs.5209 on staff welfare and incidental charges;
(4) the disallowance of Rs.38247/- in respect of certain expenses; (5) the disallowance of Rs.10955/-in respect of traveling expenses;
(6) the disallowance of Rs.5 lakhs being expenses on labours; (7) the disallowance of Rs.1.03 lakhs being expenses on pooja materials;
(8) the disallowance of Rs.50000/- on pooja expenses; (9) the disallowance of Rs.4.14 lakhs being traveling expenses of partners;
(10) the disallowance of Rs.1.26 lakhs being expenses on security; (11) the disallowance of Rs.1.22 lakhs being payments for under-
valuation of apartment;
(12) not justified in making a relief of Rs.1.19 lakhs subject to verification of AO;
(13) the disallowance of Rs.3.3 lakhs being pre-paid property tax expenses; & (14) addition of Rs.82340/- on free check-up camp expenses.
ITA NO:930 (Company):
3. In this appeal too, the grounds have been raised in a narrative form. For the sake of clarity and proper under-standing, they are reformulated as under:
ITA 929 & 930/B/2008 Page 3 of 41 (1) directing the AO to verify and quantify the amount of Rs.15.26 lakhs towards risk insurance policy on contractor;
(2) directing the AO to recompute the actual work- in- progress of Rs.43.30 lakhs;
(3) disallowance of Rs.1 lakh as service compensation to Shri M.P.Shetty;
(4) addition of Rs.95240/- being DA paid to mechanical staff as excess; (5) addition of Rs.37,150/-being development expenses incurred on the land belonging to the lady members of RN Shetty group;
(6) addition of Rs.159000 (sic) Rs.129300 under the head general charges, temporary huts, business expenses etc. (7) addition of Rs.55645/- being 5% of the traveling expenses by the directors;
(8) addition of Rs.92746/- towards non-business expenses (9) addition of Rs.366262/- being purchase of water heaters installed in the residence of chairman;
10) disallowance of Rs.203106 out of pooja expenses;
(11)disallowance of Rs.55655/- towards directors' traveling Expense;
(12) disallowance of Rs.719042/- towards sales promotion expenses;
(13) disallowance of security expenses of Rs.216179;
(14) disallowance of Rs.123663/- towards free check-up camp expenses;
(15)disallowance of Rs.37500/- being part of cash payments to administrative staff as a special promotional offer.
Since the issues contested in these appeals in the status of a 'registered firm' and then in the status of a 'company' pertaining to the same assessment year, they are considered together and disposed off in this common order for the sake of convenience.
ITA 929 & 930/B/2008 Page 4 of 41 ITA No:929:
4. Let us now address to the grievance of the assessee in the status of Registered Firm.
I. (a) The assessee had claimed Rs.38022/- being maintenance charges received from Naveen Hotels Limited while computing the income from the property. However, for the detailed reasons set-out for the AY 01-02 in the assessee's own case, the AO had brought to tax municipal tax of Rs.21874 and Rs.38022, aggregating to Rs.59896/-.
(b) The CIT(A) had confirmed the addition of Rs.38022/- on the ground that the charges should have been claimed in the case of Naveen Hotels Limited and not by the assessee.
(c ) The assessee's contention is that only a small portion of about 1/3rd of the building being the seventh floor at Naveen Complex was allowed to be used by Murdeshwar Ceramacis Limited and the balance was used by the assessee for own business and, thus, pleaded that the disallowance of Rs.15000 would meet the end of justice.
(d) Since the assessee had not brought any evidence to justify the disallowance only to the extent of Rs.15000/-, we are of the considered view that the CIT(A) was justified in confirming the addition of Rs.38022/-. It is ordered accordingly.
II. (a) The assessee had debited Rs.14.75 lakhs being DA paid to the mechanical staff. However, on verification of the vouchers produced, the AO found that there was no uniformity in the payment of DA and, therefore, was of the view that the ITA 929 & 930/B/2008 Page 5 of 41 payments made were excessive and unreasonable. Thus, he had disallowed 2% of such payments, amounting to Rs.29514/-.
(b) Considering the facts of the issue, the CIT(A) was of the view that neither the AO nor the assessee came up with any specific case to substantiate their respective claims. He had restricted the disallowance to 1% of the total payment to neutralize the higher DA was given to the lower category of the employees which, in his view, amounted to unreasonable.
(c ) The assessee's contention was that the daily allowance payable to its employees who rendered services outside their headquarters depend upon their stay, the rank and status, the places and the time spent at the actual place(s) etc.
(d) We have duly considered the contention of the assessee. With respects, we have also perused the finding of the Hon'ble Tribunal in ITA NO:247/B/2006 dated: 3/8/2007 in the case of ACIT v Vanitha Sugars (P) Ltd. on which the assessee had placed reliance. In that case, the Hon'ble Tribunal, after considering the issue in depth and also drew strength from the decision of Hon'ble Delhi High Court reported in 254 ITR 377, had observed thus -
"Looking to the aforesaid decision and considering the commercial expediency in the present case, it cannot be said that the assessee had not incurred expenditure as claimed by the assessee. Therefore only because the expenses are supported by self- made vouchers that alone cannot be a ground to hold that the expenditure is not genuine. Accordingly, we uphold the order of the learned CIT(A)."
ITA 929 & 930/B/2008 Page 6 of 41 With utmost respects, we would like to point out that in the case on hand, either the AO or the CIT (A) had not doubted the very bona-fide or the genuineness of the expenses incurred towards the payments of DA. On verification of the vouchers, the AO had, perhaps, found that there was no uniformity in the payment of DA, whereas in the case referred supra; the AO had disallowed Rs.10 lakhs out of Rs.21.07 lakhs claimed by the assessee which was more than 50% of the total claim. On the other hand, in the present case, the Ld.CIT (A) had only restricted the addition only to 1% of the total claim of Rs.14.75 lakhs which, in our considered view, is neither excessive nor abnormal. The lower authorities have not doubted the genuineness of the payments of DA to the employees of the assessee. The AO's apprehension was zeroed in on to the fact that "the payments were observed as made to particular class of staff at different rates and there was no uniformity." In view of the above, no interference is called for on this count. It is ordered accordingly.
III. (a) There were debits of Rs.1.09 lakhs and Rs.4.11 lakhs being staff welfare and incidental charges. On verification of vouchers, the AO found that the expenditure towards canteen was not supported by any evidence whereas the assessee had supporting evidence in the form of indents and bills for guest house ration expenses. Considering the volume of expenses claimed which were not supported by proper vouchers, he had disallowed Rs.10418/- which was restricted by the CIT(A) to paltry Rs.5209/-.
(b) No doubt, the AO had not applied the provisions of s.40A(2) of the Act. However, the AO was very considerate in admitting the fact that such expenditure is prevalent in construction work. The reasonableness of such expenditure could not be verifiable. Had he resorted to ITA 929 & 930/B/2008 Page 7 of 41 disallow the entire expenditure as claimed, then the assessee should object to his action. As a matter of fact, the AO after taking the assessee's representative into confidence, he disallowed Rs.10418/- which was subsequently reduced to Rs.5209/- .
(c) Considering the volume of expenses incurred towards staff welfare and incidental charges, the reasonableness of the stand of the AO and also restricting the disallowance to a mere 1% of total expenditure of Rs.550894/- which, in our view, is very fair and reasonable. With these observations, we hold that no interference with CIT(A)'s order is called for on this count.
IV. (a) The assessee had claimed expenses towards general charges, temporary huts to labourers, mess expenses (general mess, guest expenditure and mess subsidy) etc., aggregating to Rs.38,24,707/-. The AO was of the view that some of the self made vouchers on which the expenses were claimed did not reveal all the details. Admittedly, these expenses were in small sums but in large numbers. He had, therefore, concluded that 2% of the said expenses was considered as excessive and, accordingly, disallowed Rs.76494/- being 2% of the total expenses claimed.
(b) After considering the assessee's contentions, the CIT(A) took a stand that neither the AO nor the AR had brought out the specific instances. The addition made by the AO was based on excessive expenses clubbed with self-made vouchers have to be considered for disallowances and, thus, restricted the addition to 1% of total claim which had resulted in the disallowance to Rs.38247/-.
ITA 929 & 930/B/2008 Page 8 of 41
(c) The assessee's argument was revolved around that if the self-made vouchers which contain all the particulars were suspicious, the suspicion should be look into by the through an inquiry before coming to a conclusion that there was an excess claim.
(d) As rightly pointed out by the assessee, the AO had not brought on record any substantial evidence to suggest that there were excessive expenses claimed . He had himself conceded that these expenses were in small sums but in large numbers. Had he unearthed, after causing a discreet inquiry, that the expenses were inflated, we would have upheld his disallowance. Even the CIT (A) had not discussed the issue in detail. He had brought down the disallowance to 1% on the total expenses claimed. The assessee being a construction firm had to execute certain work in an adverse condition and its work force, no doubt, had to put to in a deplorable weather/environmental condition. To mitigate their sufferings, the assessee firm had to supplement them to a possible extent with temporary sheds, huts and to provide food packets etc., on the work spot itself. In these adverse conditions, the expenses so incurred cannot be expected to be claimed with fool proof vouchers with the names and addresses of the beneficiaries (the labourers), bills etc., While analyzing such claims, the authorities must be considerate instead of being rigid. With these observations, we are of the considered opinion that neither the AO nor the CIT (A) had substantiated their respective stand that the claim was excessive and, therefore, the disallowance of Rs.38247/- is ordered to be deleted.
V. (a) The assessee firm had claimed traveling expenses of partners at Rs.429821/-. Considering the element of personal usage and benefit, the AO had disallowed 5% of total ITA 929 & 930/B/2008 Page 9 of 41 claim on this count. The CIT(A), after considering the assessee's contention, had conceded the AO's view that the personal user element cannot be rejected totally, but, restricted such disallowance to 2.5% which came to Rs.10955/-
(b) This was objected to by the assessee on the ground that in a large sized organization of this nature where the partners were also directors of various companies and have to undertake repeated travel various places, sites of work etc., and pleaded that no part of such expenditure was disallowable.
(c) We have duly considered the spirited argument of the assessee. However, the assessee had, perhaps, unwittingly, admitted that "the partners of the assessee were also directors of various companies and have to undertake repeated travel to various places". On assessee's own admission, it is proved that the partners of the assessee had also undertaken to travel to various places not only in connections with the business of the assessee firm, but also in the capacity of directors of various companies. Thus, there was an element of personal usage or in the capacity of directors of various companies, as the case may be, while availing the travels expenses of the assessee firm. This cannot be refuted by the assessee. In view of the above, we are not inclined to interfere with the stand of the CIT (A) on this count. It is ordered accordingly.
VI. (a) The assessee had claimed expenses Rs.6027070/- on labourers for 2002-03 season which stated to be from November 2002 to 2003. Thus, the assessee had to ITA 929 & 930/B/2008 Page 10 of 41 incur a portion of expenses for the period of its business i.e., April to July 2003. in the absence of any details by way of monthly break-up, the AO had allowed the expenses on proportionate basis 5/9 and the balance was disallowed as not pertaining to assessee's business period. The working has been made as under:
Disallowance Rs.6027070 x 5/9 = Rs.3348372 Hence, Rs.3348372/- was disallowed which was not pertain to the period.
(b) After due consideration of the assessee's contention, the CIT(A) was of the view that -
"it is seen that assessing officer has made an effort to consider the disallowances based on the seasons which has proportionately worked out at 5/9 which is not the method well found and well supported by the specific instances of defects in the labour payment expenses. The assessing officer has picked up six persons and at 3 different work places like Tegur, Belgaum and Maskin therefore worked out the disallowance of Rs.3348372/-. As stated by the authorised representative, assessing officer has not made out a specific case for the disallowance and looking into the large operations of the appellant for civil work he has to employ labourers from eve n neighboring State. In such huge payments of labourers it is necessary for the assessing officer on facts to prove the defects in the either vouchers or in the actual payment of wages. In the absence of the same by adopting proportioning method based on the season is not well supported. However, there is every possibility in such huge payment that either the payments are excessive or the vouchers are defective or some of the vouchers are not explainable. Therefore, there is a scope for an element of excess claim particularly in the form of self made vouchers or vouchers which are not bearing the proper names, proper addresses and proper signatures. Thus, there is a scope for the addition. But in the absence of specific information and in the interest of natural justice, an addition of Rs.5 lakh will take care of such defects, therefore the assessing officer is directed to ITA 929 & 930/B/2008 Page 11 of 41 consider the addition of Rs.5 lakhs as against Rs.3348372/-."
(c ) The contention of the assessee was that -
"it had engaged the piece workers/gangmen towards the supply of labour force for executing the works at various projects. These gang men will bring the labourers from other States who were basically agricultural workers. These workers were generally coming in the month of November every year in batches and they will work for two - three months in a season. Thus, for every piece worker, the period from November - October was for the settlement of his bills. The assessee pays advance to every piece work (muqaddams - gang leader) on ad hoc basis and the advance paid was debited to the piece workers accounts. After the completion of the season and after finalization of rates for the seasons, measurement and quality of work, bills were passed and payments were made after adjusting their advances. As the piece workers rates will be settled only during the end of the season, the liability of the amount during any earlier part of season cannot be ascertained. This system was followed for all these years. During the year under assessment, the partnership firm was converted into a Private Limited Company. To arrive at an exact liability of the firm, the wages payable to these piece workers/gang men were calculated as on 6/8/03 and ascertained the wages payable at Rs.6027070/- and, accordingly debited to wages account. It was contended that no claim for any period beyond 6/8/03 was made. The entire expenditure relates to liability that arose during the accounting year up to 6/8/03 only. Necessary copies of ledger extracts along with Xerox copies of the vouchers were produced before the AO and without going through them, he simply adopted a rule of 3 of 5/9 to arrive at a figure of Rs.3348372/- and disallowed the which is impermissible in law.
..............................................................The Commissioner also failed to appreciate that no expenditure relating to the period beyond 6.8.03 has been claimed here and such expense has it been allowed in the assessment of the company that succeeded and hence committed an error in upholding a lump sum amount of Rs lakh on ad hoc basis which is unsustainable."
ITA 929 & 930/B/2008 Page 12 of 41 After due consideration of the contention of the assessee, we find there is a force in the argument of the assessee. The argument put-forth by the assessee has not been properly addressed to either by the AO or by the Ld. CIT (A). The AO says in the absence of any details by way of monthly break-up the expenses are allowed on proportionate basis 5/9 which has been countered by the assessee that "necessary copies of ledger extracts along with Xerox copies of the vouchers were produced before the AO". The CIT(A) had also of the firm view that, "it is seen that assessing officer has made an effort to consider the disallowances based on the seasons which has proportionately worked out at 5/9 which is not the method well found and well supported by the specific instances of defects in the labour payment expenses. The assessing officer has picked up six persons and at 3 different work places like Tegur, Belgaum and Maskin therefore worked out the disallowance of Rs.3348372/-". To clear the air, we are of the unanimous view that this issue should be remanded back on the file of the AO with a direction to verify the copies of ledger extracts and other supporting evidence purported to have been furnished by the assessee and to verify whether the claim of the assessee is confined for the period ending 6.8.03 and to take appropriate action in accordance with the provisions of the Act, after affording an opportunity to the assessee of being heard. In the meanwhile, the assessee firm, through its A.R., is advised to furnish the required details which would facilitate the AO to verify the issue, as agitated upon, in a comprehensive manner as directed supra. It is ordered accordingly.
ITA 929 & 930/B/2008 Page 13 of 41 RNS MOTORS:
VII. (a) The AO had disallowed Rs.103947/- being miscellaneous expenses not for business purposes. The details of such expenses are:
Liquor purchased on 19/5/03 Rs. 6500
Murdeshwar Pooja material purchased
on 29/5/03 Rs.87447
Expenses debited on 25/6/03 - no
details/vouchers Rs.10000
(b) Distinguishing the ruling of the Hon'ble Apex Court
reported in 118 ITR 261 on which the assessee had placed strong reliance, the CIT(A) was of the view that in the instant case it was mostly pooja expenses and the expenses which were not connected with the business expenses without any details, the addition made by the AO was justifiable.
(c) The contention of the assessee was that the expenses claimed included pooja materials amounting to Rs.87447/-. It was submitted that in this case the company which succeeded to the assessee firm, had incurred such expenses. It was contended that the expenditure as well as entertainment expenditure incurred in connection with the occasion of opening as well as from time to time by way of providing refreshments etc. to customers, officials who visit its organization and promotes public relations and goodwill so necessary to carry on the business. Thus, these expenses were allowable in full.
(d) We have duly considered the submission of the assessee which is rather in general. The issue before us is that the assessee had incurred expenses towards pooja materials.
However, no details are forth-coming. The assessee's argument ITA 929 & 930/B/2008 Page 14 of 41 that, "in this case the company, which succeeded to the assessee firm, that is no ground for making any disallowance as held by the Supreme Court in 118 ITR 261, 276" which, to our mind, has no relevance. As a matter of fact, the assessee firm was converted into a Company w.e.f. 7.8.03 whereas the period under dispute was from 1.4.2003 to 6.8.2003 and that too the expense alleged to have been incurred was on 29.5.2003, i.e., "Murdeshwar Pooja material purchases on 29.5.2003 - Rs.87447/". With respects, we have perused the ruling of the Hon'ble Apex Court in the case of Sassoon J David And Co. Pvt. Ltd. v. CIT reported in 118 ITR 261, wherein the Hon'ble Court was pleased to observe that -
"On take over of assessee-company services of directors and employees were terminated and compensation paid to them. Whether such payments are allowable as business expenditure? The assessee-company continued to function even after it was taken over. As a result of termination of its employees, the company was benefited by a reduction in its wage bill. Therefore, the payment was on ground of commercial expediency and allowable as business expenditure."
In the fore-going circumstances and also in view of fact that no details- leave alone the absence of supporting evidence such as vouchers etc., - are forth-coming even at this stage, we are, therefore, of the view that the lower authorities were justified in turning down the claim of the assessee firm.
VIII. (a) Pooja expenses of Rs.4,55,881/- was claimed by the assessee. It was explained that at the time of delivery of new vehicles, the assessee had incurred expenditures towards pooja materials. However, the AO was of the view that the expenditure of Rs.128/verhicle was on the higher side and an expense of Rs.100/vehicle would meet the end of justice and, thus, he allowed Rs.2,03,136/- for 1587 new vehicles and the balance of Rs.2,52,745/- was disallowed.
ITA 929 & 930/B/2008 Page 15 of 41
(b) The CIT(A)'s reasoning was that the AO had resorted to an estimation and on the other hand the A.R. had explained that the addition was unwarranted but not commented on self made vouchers, vouchers without signature of manager or anybody. Moreover, CIT(A) also found that some of the vouchers were without any details as pointed out by the AO. He was of the view there was scope for addition and that the AR had not come up with the any specific explanation. The CIT(A) concluded that adhoc lump sum disallowance of Rs.50,000/- is reasonable.
(c ) The contention of the assessee was that the CIT(A) had failed to point out that the that the expenditure was not for the purpose of business. The quantification of such expenditure it was submitted in the absence of any other comparable circumstances of special facts, the disallowance was unwarranted and pleaded for its deletion.
(d) We have perused the relevant records and also considered the assessee's contention. No doubt, the performing of poojas [considering as auspicious occasions by the prospective purchasers of vehicles] for new vehicles and even for 'true value' cars are prevalent in our country. Such pooja materials will be procured from nearby shops as and when required in piece meal. In such a situation, the assessee may not be in a position to produce original bill(s) for verification, the petty items purchased locally. In a situation like this, the authorities should in fact be considerate rather than in rigidity. As a matter of fact, the AO had not brought on record any documentary evidence or comparable instances to suggest that the expenses claimed were on the higher side. Perhaps to strike a balance, the CIT(A) had brought down the disallowance to Rs.50000/- as reasonable on lump sum basis looking into the nature of vouchers etc.,. Considering the sensitivity attached to such poojas which ITA 929 & 930/B/2008 Page 16 of 41 would be performed as and when new vehicles are being given delivery to its buyers, we are of the view that the assessee firm is entitled for the entire claim. It is ordered accordingly.
IX. (a) the assessee had claimed an expenditure of Rs.4.89 lakhs towards traveling of its partners. The AO was of the view that out of Rs.4.89 lakhs, Rs.4.14 lakhs was incurred for the travel of Shri Sunil Shetty and Smt.Shilpa Shetty to Maurtitus and that the tour and its benefit business of the assessee firm was not forth-coming. Thus, he disallowed the entire sum of Rs.4.14 lakhs besides, 5% of the balance expenditure of Rs.74569 was disallowed being personal usage. The aggregating disallowance
(b) Due consideration of the reasoning of the AO and also counter-contention of the assessee, the CIT(A) had come to the conclusion that the assessee failed to establish that the travel to Mauritius by one of the partners and his wife had nexus with the business of the assessee firm, the AO was justified in disallowing the entire expenses of Rs.4,14973/-. However, he deleted the addition of Rs.3728/- being 5% of balance expenditure clamed on the ground that the AO's action was without any basis.
(c ) It was contended by the assessee firm that the partners undertook foreign visits to various countries where the parent company's car models were located with a view to establish contacts so that the business could be expanded or diversified, if necessary. As per its own admission, nothing had emerged from such visits. However, it was pleaded that there was no ground for any disallowance as the expenditure incurred was for the purpose of existing business.
ITA 929 & 930/B/2008 Page 17 of 41
(d) We have duly considered the spirited argument put forth by the assessee. However, we are not in agreement with the assessee's reasoning. The assessee had not brought on record any comprehensive evidence to suggest that the foreign travel to Mauritius had nexus with the business of the assessee firm. In view of the matter, we decline to interfere with the disallowance of Rs.4,14,973/-. With regard to further disallowance of Rs,3728/-, we are in agreement with the reasoning of the CIT(A). H ence, we uphold the action of the CIT(A) on this count.
X. (a) The AO had disallowed as non-business expenses of Rs.126063/- claimed by the assessee as paid to security agency for the security personnel provided to partners' residences. As the expenditure was not directly related to the business, the CIT(A) had refused to interfere with the AO's action.
(b) On an appeal, it was contended that because of terrorists activities in Hubli, it was necessitated to incur expenses in providing securities to the residences of the partners which may be allowed.
(c) To meet the expenses towards drafting of security personnel in the residences of the partners was the look out of the partners concerned and the expenditure incurred was not directly connected to the business of the assessee firm, the lower authorities were fully justified in turning down the assessee firm's contention.
XI. (a) The assessee firm had claimed a sum of Rs.1,22,720/- paid to District Registrar on account of under-valuation of registration of SI apartment. The AO disallowed the expense as was not being revenue expenditure.
ITA 929 & 930/B/2008 Page 18 of 41
(b) The CIT(A) had confirmed the AO's action on the ground that the stamp duty was paid for under-valuation which means for retracting for the statutory provision and such payment was a penal one.
(c) We are not convinced with the plea of the assessee firm that such payment was levied as stamp duty and not as penalty. As a matter of fact, the payment was necessitated after unearthed by the registering authority that there was under- valuation of the apartment. Such payment cannot be claimed as revenue expenditure. We are declined to interfere with the stand taken by the lower authorities.
XII. (a) The AO had disallowed Rs.1,19,674/- as claimed as revenue expenditure with a cryptic reasoning that "the expenditure being loss on sale of asset."
(b) It was contended before the CIT(A) that the same had been added back in the computation of income, the disallowance made by the AO had resulted in double addition. Considering the plea of the assessee, the AO was directed to look into the plea of the assessee and to take appropriate action after verifying the facts.
(c) In view of the above, we direct the AO to verify the contention of the assessee and if found to be correct, the AO shall delete the addition, otherwise, it would amount to double addition. It is ordered accordingly.
XIII. (a) the assessee firm had claimed expenses towards property tax (April to Sept) Rs.223164/- and insurance of vehicles of Rs.3,29,043/- aggregating to Rs.552207/-. However the AO took a view that the period of business before him was only of 4 ITA 929 & 930/B/2008 Page 19 of 41 months. The expenses incurred were beyond the business period and thus he had restricted the expenses proportionately [April 03 to July 03) and disallowed Rs.333066/- out of Rs.552207/-.
(b) The CIT(A) was of the view that the AO had computed the proportionate pre-paid expenses in respect of the period belonging to the assessee firm for the purpose of disallowance. With regard to the argument of the assessee that since the assessee was getting enduring benefits, these expenses cannot be treated as prepaid expenses, the CIT(A) countered that the assessee had not explained the circumstances under which some benefit to the successor company also in respect of property tax and insurance paid for the earlier period. Accordingly, he had confirmed the AO's action.
(c ) It was contended before us that though the assessee ran the business for a part of the previous year as the liability to incur revenue expenditure arose during that period it was a justifiable claim in determining the profits of the assessee even if the benefits of the expenditure might also accrue to a person who took over the business later and it has been held so long as expenditure was incurred for the purpose of the business even if the third party the successor is benefited the same. Therefore, it was submitted there was not the ground for disallowance.
(d) we have duly considered the argument of the assessee. However, we are not inclined to agree with the contention of the assessee. The AO, had, in a judicious manner, allowed the expenses proportionately for the period from April 03 to July, 2003 as has been worked out in the impugned order. We, therefore, find no justification to interfere with the stand of the ITA 929 & 930/B/2008 Page 20 of 41 lower authorities. As said in the earlier paragraph, with due respects, we reiterate that the ruling of the Hon'ble Apex Court reported in 118 ITR 261 has no relevance to the issue on hand. It is ordered accordingly.
XIV. The assessee firm had claimed expenses of Rs.8,23,409/- under the head "Free Check-up camp". The assessee had accounted for ground rent, shamiyana, banners, pamphlets, TA/DA to staff, refreshment etc., However, the AO took a view that none of the expenses have third party vouchers. No details about the date of free camp, number of staff detailed, to whom ground rent was paid, shamiyana expenses, number of vehicles drafted for the camp. Taking these aspects in view, he had disallowed 10% of total expenditure claimed.
(b) It was contended before the CIT (A) that in the absence of the details it was guessed by the AO that the expenses were not incurred but self made vouchers were proofs for the expenses made. Considering the fact that none of the details were made available including the date on which the camp was conducted, the names of the persons attended and the so called venue, etc., the CIT (A) had justified the stand of the AO.
(c) It was contended before us that the disallowance of 10% of total expenses was purely speculative on mere suspicion as the AO seems to be of the view that even though there was no proof whatsoever he should not accept any expenditure supported by self-made vouchers regardless of the nature of the expenditure, amount claimed, the details available in the vouchers etc., No part of such expenditure is disallowable.
(d) We have duly considered the argument of the assessee. However, we find no substance in such an argument.
ITA 929 & 930/B/2008 Page 21 of 41 We are at a loss to understand what prevented the assessee firm to furnish the required information such as date of free camp, number of staff drafted, the person to whom ground rent purported to have been paid etc., The assessee cannot take a stand that whatever the claims made by it should be allowed without seeking any details for such a claim. The assessing authorities are authorised under the Act to seek certain clarifications and scrutinize the accounts/bills/vouchers to find the reasonableness of claim(s) and then only admit such a claim of the assessee(s).
Reverting back to be issue, with respects, we have perused the decision of the Hon'ble Tribunal in ITA No:268(Bang)/2003 in the case of DCIT v. M/s.Naveen Mechanised Construction Co. Ltd. wherein the Hon'ble Tribunal had dealt with an issue that the AO had called upon the assessee to correlate the actual quantity of work for which the bills were debited and the quantum of contract work carried out for which the explanation given by the assessee was not accepted the AO. The assessee was required to produce the original record of the work done by the labour contractors or by the parties for which the payments on account of services are made. However, the assessee did not produce such evidences and instead relied on the bills and the fact that the payments were made by cheques. In the case on hand, none of the details are forth-coming. Even the date of free camp purported to have been conducted has not been disclosed.
In view of the above facts, with due respects, we are of the view that the finding of the Hon'ble Tribunal referred supra, is on the different footing and not directly applicable to the facts of the issue on hand. In the case referred supra, the very fact that the payments were made by cheques distinguishes the case from the ITA 929 & 930/B/2008 Page 22 of 41 instant case. In view of the above, we are not inclined to interfere with the stand of the lower authorities on this count. It is ordered accordingly.
ITA NO:930 (Company):
Let us now analyze the grievance(s) of the assessee in the status of 'Company'.
A. (i) The assessee company had claimed expenses on contractors' all risk insurance policy at Rs.27,51,042/-for the period stated to be from 4/3/02 to 3/6/05. The assessee had incurred expenses after two years and the claim of the entire expenses was made on 9/3/2004 by debiting an amount of Rs.20,89,805/- in the P & L account.
(ii) While scrutinizing, the AO found that there was a working on reverse side of the Insurance Policy that the policy was allowable for 1158 days for Rs.2,75,042/- which the AO had considered for the exact accounting period of the assessee for the year under consideration came to 237 days and the insurance amount per day came to Rs.2,376/- and, therefore, Rs.563536/-
was allowed and the balance was disallowed, placing reliance on the decision in the case of Delhi Tourism and TDC Ltd. v. CIT [285 ITR 114 (Del)] and disputed the assessee's claim that this expenditure was not covered by s.43B of the Act.
(iii) After considering the rival submissions and also distinguishing the Delhi High Court's finding, the CIT (A) had observed thus-
"10....This being contractors all risk insurance policy it should go by each year, therefore the AO has doubted that the insurance payment is payable every year which ITA 929 & 930/B/2008 Page 23 of 41 was known to the assessee and assessee would have created provision for each year for making the payment as and when the final payment is to be made. Thus, the present AO is directed to enquire with the NHAI about the intimation given to the assessee and the basis of the insurance covered whether it is yearly or once in 4 to 5 years or it is the assessee who has debited the entire policy amount covering from 4.3.2004 to 3.6.2005 which is even beyond the accounting period of the current assessment year. The present AO should also enquire into the actual details of the each payment and its related provision created or not? After the enquiry he should come to the conclusion and allow as per the provisions of the Act provided the appellant has made the provisions for each year and claimed the expenses. In case, the appellant has really come to know the liability in the month of March, 2004 verify the actual date of such intimation because the policy amount was paid on 09.3.2004, if it is so, it is an allowable expenditure. Because electricity is paid for monthly consumption and the insurance policy is as per the directions of the NHAI, one has to see for how much period it covers. Under the circumstances, the ground is treated as partly allowed because if the liability is crystallized in the month of March, 2004 and paid on 9.3.2004, it is fully allowable or in case liability known to the appellant earlier but paid as late as on 9.3.2004,the disallowable amount has to be worked out. It is stated by the AO that the claim does not fall u/s 43B of the Act. It is seen from the wordings of the Act that any sum payable by the assessee by way of tax, duty cess or fees, by whatever name called, under any law for the time being in force.........deduction is allowable under the Act. Thus, by whatever name and under any ITA 929 & 930/B/2008 Page 24 of 41 law takes care the payment of insurance policy also. The AO is therefore directed to verify the actual facts and as per the facts explained above, the amount will be decided. Under the circumstances, technically this ground is treated as allowed in part."
(iv) It was contended that the claim of Rs.20,89,805/- debited to P & L account being the amount paid on 9.3.04 only a sum of Rs.5,63,536/- came to be allowed and the balance was disallowed by the AO. The liability itself arose during the accounting period by reason of the Government's insistence of taking out a policy for a much higher amount. The expenditure has been incurred during the period and it is on revenue account. The period over which the contract was to be executed was of no relevance, for, it was done at the insistence of NHAI. As that the entire amount for which the contract has been awarded should determine the insurance policy and, accordingly, the insurance policy had to be undertaken for carrying out the work. As the assessee company was bound by the direction of NHAI, this was incurred only during the accounting period in question.
It was further contented that the liability arose during that period and whether payment was made or not was immaterial, for, s.43B was not applicable to such liability. Therefore, it was submitted there was no need to remit the matter to the AO for reconsideration and the same should have been allowed as a deduction for, the payment was made during the year as per demand by a public authority and the claim has been made in that year.
(v) After due consideration of the relevant records and the contention put-forth by the assessee company, we are of the considered view that since the AO has been asked to look into ITA 929 & 930/B/2008 Page 25 of 41 the issue, no interference is called for at this stage. It is ordered accordingly.
B. (i) The assessee company had shown closing work in progress at Rs.421.71 lakhs. However, the AO was of the view that in respect of Alamatti work done up-to 6/8/03 was Rs.19.99 lakhs and the work executed between 7/8/03 to 31/3/04 was of Rs.53 lakhs. In respect of RNS trust work it does not include work of RNS Vidyaniketan for which the assessee company had shown receipts during the year. With regard to civil work at Murudeshwar and RNS seva Hospital up-to 6.8.03 and between 7/8/03 to 31/3/04, the total work executed was for Rs.43.32 lakhs and Rs.1.08 crores, aggregating to Rs.1.51 crores. The AO's stand was that in respect of both the works from 1/4/03 to 31/3/04 only work-in-progress was shown but no receipts were shown.
Rejecting the assessee's explanation that the work-in- progress was estimated based on work executed, the amount received against the measurement and expenses incurred, therefore the receipts were provided on estimated basis and not against the expenses incurred, the AO held that there were two methods to value work-in- progress like 'direct cost' and 'on cost' method. Accordingly, he made the addition of Rs.43.30 lakhs as undisclosed work-in- progress as on 31.3.04 for civil work at Murudeshwar and RNS Seva Hospital.
(ii) After considering the contention of the assessee company and also perusing the impugned order of the AO wherein the AO had arrived at the figure of Rs.43,30,358/- being undisclosed work in progress as on 31.3.04 by applying the "direct cost method" and "on cost method" , the CIT(A) had observed that -
ITA 929 & 930/B/2008 Page 26 of 41 "(11)..................In view of the principles of accountancy the work done up-to the year-end has to be calculated as the work-in-progress may be for the part period or the whole period of the accounting year, because each expenditure, each work and each transaction is added with the cost, the same cost will be considered as work-in-progress at the end of the year. The present AO is directed to recalculate the correct work-in-progress in the works carried out in respect of VPP, Shimoga, MCL Almatti, RNS trust, civil work at Murudeshwar and RNS Seva Hospital, after the same the AO should arrive at the correct work-in-progress. However, the addition made by the AO is not based on sound footing and without considering the method of accounting followed by the assessee to value the work- in-progress year after year; the addition is deleted in part. However, the ground is technically treated as partly allowed for the purpose of re-computation of actual work-in-progress which will be adopted in place of Rs.43,30,358/-, the same be higher or even lesser, irrespective of the same the actual work-in-progress has to be incorporated."
(iii) We have carefully considered the reasons set-out by the Ld.CIT(A) and also the contentions of the assessee company during the course of hearing. In an over all consideration of the issue, we are of the considered view that neither the AO nor the first appellate authority have dealt with the issue in a proper manner. The CIT(A) should have given a clear cut direction to the AO in a comprehensive manner instead of making an observation that "However, the addition made by the AO is not based on sound footing and without ITA 929 & 930/B/2008 Page 27 of 41 considering the method of accounting followed by the assessee to value the work-in-progress year after year; the addition is deleted in part."
However, in spite of our best efforts, we were unable to arrive at a conclusion, what the CIT (A) had meant by it? What was the quantum of addition purported to have been deleted in part? To clear the air of confusion generated by the lower authorities on the issue, we are of the unanimous view that the entire issue will have to be looked into afresh in a comprehensive manner in stead of dealt with in a piece-meal way. To facilitate the AO to consider the issue afresh, the direction of the CIT (A) in the impugned order for this limited purpose is annulled in toto. The AO is directed to verify the details already on the file and to take appropriate action in accordance with the provisions of the Act, after affording a reasonable opportunity to the assessee of being heard. On its part, the assessee company shall furnish all the details and relevant particulars of the works under-took at Alamatti, RNS Seva Hospital, Muredeshwar etc. to the AO which would enable the AO to carry out the directions given supra. It is ordered accordingly.
C. (a) Out of Rs.6 lakhs, Rs.4,10,115 being service compensation of Rs.1 lakh and ex-gratia of Rs.3,10,115/- respectively paid to Shri M.P.Shetty was disallowed by the AO in the absence of clear rule for such payments.
(b) Drawing strength from the ruling of the Hon'ble Apex Court in the case of Gordon Woodroffe Leather manufacturing Co. v. CIT (44 ITR 551), wherein the Hon'ble Court had laid down guidelines that it should be a matter of practice that there is an expectation by the employee and the payment should be on the ground of commercial expediency or to facilitate the carrying on business of the assessee, the CIT(A) observed ITA 929 & 930/B/2008 Page 28 of 41 that in the case on hand, the assessee had not explained such practice by giving an example, however, such practice is prevalent amoung the business world, there was an expectation from the employee since he had rendered the duties as a model performer. Distinguishing the case law referred to by the assessee company in the case of Eastern Investment Co. v. CIT [20 ITR 1(SC)], the CIT(A) was of the view that the gratuity, leave encashment, bonus, increment arrears and ex-gratia were allowable expenses. However, in respect of service compensation there appears to be no such commercial expediency and there was no such practice in the company and as such, he sustained the service compensation of Rs.1 lakh and allowed the ex-gratia payment of Rs.310115/-.
(c) The assessee company had contended that the expenditure voluntarily incurred so long as it is for the purpose of business which is a word of wide amplitude was allowable as per the decisions of Supreme Court. It was not for the Department to determine whether such expenditure was necessary and the business could have been carried on even without such expenditure. Hence, the disallowance of Rs.1 lakh was impermissible. Reliance was place on the finding of the Hon'ble Tribunal in ITA NO:931(Bang)/2008 dated: 28/4/2009 in the case of M/s.Naveen Mechanised Construction Co. Pvt. Ltd. v.DCIT.
(d) We have carefully considered the contention put-forth by the assessee company. We have also duly considered the reasoning of the lower authorities. We are unable to agree with the contention of the assessee company. No doubt, Mr.Shetty would have contributed his mite while he was in service. It is also a fact that there was no agreement entered into between the employer and employee for such payment of compensation. With respects, we have perused the ruling of the Hon'ble Apex Court which is distinguishable. For instance, in the ITA 929 & 930/B/2008 Page 29 of 41 case of Sassoon J David And Co. Pvt. Ltd. v. CIT reported in 118 ITR 261, the issue before the Hon'ble Supreme Court was "on take over of assessee-company services of directors and employees were terminated and compensation paid to them. The assessee company continued to function even after it was taken over. As a result of termination of its employees, the company was benefited by a reduction in its wage bill. Therefore, the payment was on ground of commercial expediency and allowable as business expenditure". In the present case, there were neither termination of its employees nor the company was benefited by a reduction in its wage bill. In such a situation, we are at a loss to understand, how the finding of the Hon'ble Supreme Court referred supra would be applicable to the issue on hand which is entirely on the different footing. With due respects, we have perused the Hon'ble Tribunal's finding referred supra. The issue before the Hon'ble Tribunal was with regard to disallowance of service compensation paid to wife of an employee who died in harness while in service. After analyzing the issue in depth, the Hon'ble Tribunal held that the service compensation given to Smt.Sushiladevi for dedicated service of her deceased husband Shri Arjunrao, who died of heart attack, during the course of his employment, is allowable expenditure. It is worth- mentioning that in the absence of any employer-employee agreement, the Hon'ble Tribunal took a humanitarian approach that "4...........We see human approach in the compensation in question, so that the deceased family could have smooth economic survival after the death of working person of family...."
However, the issue on hand is that Mr.Shetty who retired as Project Manager to whom a sum of Rs.1 lakh was paid as compensation. As rightly pointed out by the CIT (A) there was no commercial expediency involved, we are in total agreement with the CIT(A) on this count. It is ordered accordingly.
ITA 929 & 930/B/2008 Page 30 of 41 D. (a) Under the head "DA payment to mechanical Staff", the AO found that there was no uniformity in such a payment and also to a particular class of staff, the payments were made at different rates. Considering the variation, he was of the view that the payments were excessive and unreasonable and, therefore, 2% of expenditure of Rs.4761998/- was disallowed.
(b) After considering the reasoning of the AO and also the assessee company's contentions that the payment was made to the employees who had rendered services outside the headquarters depending on their stay, rank and status and that there was no rigid uniformity in such expenditure etc., the CIT(A) was of the view that there were no details and the payments suffer with various defects not fully explained, he upheld the action of the AO on this count.
(c) It was contended by the assessee company that it was not the case of the Department that this expenditure was not incurred, there was any collateral purpose other than business purpose, there was any personal expenditure nor is it the case that it is not genuine and these have been paid through cheques/vouchers supporting the same and hence no part of it was disallowable on a mere guess work, suspicion without indicating how and why it was disallowed. Hence, the disallowance confirmed by CIT (A) is unsustainable."
(d) We have considered the assessee's contentions. We are not in agreement with the argument of the assessee. The assessee had, no doubt, produced the vouchers before the assessing authority. The assessee should also agree with us that the vouchers so produced should contain the names of the employees/staff, their rank, their signatures and the amount so paid and so on so forth, without which, how could the assessee company expect the AO to accept its claims in toto without verifying the same. There should, in our considered view, some ITA 929 & 930/B/2008 Page 31 of 41 reasonableness in trading charges that the authorities below are looking at the claims of the assessee(s) with suspicion and disbelief. The authorities are also governed by certain rules/procedures which they have to administrate/implement, of course, without any bias. The assessee(s) too are also expected to furnish the required details to the possible extent which will, no doubt, facilitate the authorities concerned to come to a right conclusion.
Reverting back to the issue on hand, the authorities below have pointed out certain defects and the expenses claimed have not been fully explained supported by proper vouchers, 2% of total expenditure of Rs.47.61 lakhs was disallowed. Considering the volume of expenditure claimed, the disallowance of 2% on such expenditure by the authorities below, to our view, is reasonable and, thus, no interference is called for on this count.
E. (a) The assessee company had incurred expenditure of Rs.42.23 lakhs on development of land belonged to the lady members of R.N.Shetty group and contract receipts were shown at Rs.38.52 lakhs, thereby claiming a loss of Rs.3.71 lakhs. The AO took a stand that in the absence of any agreement in support of the contract work and the work executed for the directors and their relatives, the loss purported to have been incurred at Rs.3.71 lakhs was disallowed.
(b) After duly considering the reasoning of the AO and also the contention of the assessee company, the CIT (A) took a view that since the AO had not contraverted with the actual rates to disallow the loss and also looking into the principles of nature justice and the nature of addition, 10% of the addition would suffice the issue.
(c) The assessee's contention was revolved around the fact that when a contract was executed and paid for as per ITA 929 & 930/B/2008 Page 32 of 41 the terms of the understanding and because of supervening circumstances the expenditure in that regard exceeds the amount receivable from the contractees the expenditure cannot be disallowed once it was held that the expenditure was for the purpose of carrying out the contract.
(d) There are two vital aspects to be taken into cognizance here, viz., (i) no agreement in support of contract work was forth-coming; and (ii) the contract work purported to have been executed for the directors and their relatives. When looking at the volume of the contract work executed by the company which is governed by the board of directors, it is rather surprising that, how the assessee company had undertaken such a contract work without entering into a formal agreement, even though the work executed for the directors and their relatives. The contention of the assessee company that when a contract was executed and paid for as per the terms of the understanding and because of supervening circumstances the expenditure in that regard exceeds the amount receivable from the contractees, the expenditure claimed cannot be disallowed, is hardly convincing. When the assessee company has been insisting for the allowance of the entire expenditure so claimed, it has conveniently failed to produce the so called understanding reached with the contractees to justify its claim.
In overall consideration of the facts and circumstances of the issue, we are of the considered view that the CIT (A) was very fair in restricting the addition to Rs.37150/- which requires no interference at this stage.
F. (a) the assessee had claimed expenses to the tune of Rs.64.64 lakhs towards general charges, temporary huts to labourers and mess expenses. The AO had resorted to disallow ITA 929 & 930/B/2008 Page 33 of 41 2% of total expenses on the ground that some of the self-made vouchers did not reveal the required details.
(b) The CIT(A), after due consideration of the rival reasoning, had observed that the mess expenses of Rs.51.56 lakhs and general charges of Rs.10.80 lakhs, it is very difficult to maintain the proper vouchers fully, I feel the meager disallowance of 2% is reasonable, hence confirmed.
(c ) the assessee company's contention that the mere presence of self-made vouchers which has not been denied, does not warrant any disallowance, that too, on a purely ad-hoc basis by applying an imaginary percentage of 2% to the amount incurred.
(d) We find that an identical issue had cropped up earlier when we were dealing with the assessee's appeal in the status of 'firm'. As the present issue is similar to that of the issue which had already been dealt with and our finding recorded in Para IV.(d) supra holds good on this count. It is ordered accordingly.
G. (a) The AO had disallowed 5% of traveling expenses of Rs.11.12 lakhs incurred by the directors on the ground of an element of personal usage and benefit.
(b) We find that an identical issue had been dealt with earlier when we were dealing with the assessee's appeal in the status of 'firm'. As the present issue is similar to that of the issue which had already been adjudicated and our finding recorded in Para V.(c ) supra holds good on this count. It is ordered accordingly.
H. (a) The AO had disallowed the claim of the assessee of Rs.92476/- being non-business expenses.
ITA 929 & 930/B/2008 Page 34 of 41
(b) The assessee had claimed freight expenses from Delhi to Karwar of Rs.32040/-, lamination of Chairman's photo's of Rs.12643/-, registration charges & stamp paper for Bhavani shetty of Rs.13000/- and MD's house water proofing work of Rs.34793, aggregating to Rs.92476/-. In the absence of any explanation from the assessee whether these expenses were personal or not, the CIT(A) upheld the action of the AO.
(c ) The cryptic explanation of the assessee is that 'mere observation that the expenditure was apparently incurred for non- business purposes by itself does not merit disallowance of such expenditure unless the expenditure incurred which is prima facie for the purpose of business, is shown to have been incurred for any collateral purposes. As it has not been held so, no portion of Rs.92476/- could have been disallowed.' Reliance was placed in the case of CIT v.Mcdowell And Company Limited reported in 288 ITR 666(Kar).
(d) After due consideration of the issue, we are of the considered view that the assessee company had not come up the explanation that the expenses with regard to freight expenses and lamination of Chairman's Photo were incurred for business purposes only. Accordingly, we confirm the stand of the lower authorities on this count.
(e) In respect of water proofing expenses' claim, with respects, we have perused the finding of the Hon'ble High Court of Karnataka relied on by the assessee company. The Hon'ble Court was pleased to observe that-
The Departmental Representative after inspection has come to a conclusion that the premises "Neeladri" at Bombay were found to be used as residence by the chairman. In the light of the premises used as residence by the chairman, the ITA 929 & 930/B/2008 Page 35 of 41 Tribunal has come to a conclusion that the various expenses claimed by the assessee are allowable in terms of section 37 of the Income-tax Act. We also see a judgment of the Supreme Court in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546. The Supreme Court has noticed a similar provision in the matter of allowing expenses under section 37 of the Act. The Supreme Court notices that disallowance is permissible only in the case of the premises being a guest house in the said judgment. On the facts, the Tribunal has come to a conclusion that the premise was used by the chairman in terms of the findings in para. 8 of the order. Therefore, the judgment in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 (SC) would not be applicable if the premises are used as a residence of the chairman. We on the facts of this case do not find any legal errors in the orders of the Tribunal."
The contention of the assessee company was that this expense was incurred in the property owned by the company, but, provided to the M.D as residence, the expense claimed is revenue in nature which may be allowed.
We have heard rival submissions and perused the material on record. The assessee has argued that the property in question, on which, expenditure has been incurred is owned by the assessee company. These submissions of the assessee are not substantiated with evidences. In light of the findings of the jurisdictional high court referred (Supra), we restore this issue to ITA 929 & 930/B/2008 Page 36 of 41 the file of the AO to verify the ownership of the property in question and allow the expenditure claimed by the assessee, if the property is owned by the assessee.
I. (a) The assessee company had claimed expenses of Rs.3.66 lakhs being installation of two solar water heater in the residence of the Chairman which has been disallowed by the authorities below on the ground that these were revenue expenses incurred for the personal use of the Chairman.
(b) The contention of the assessee company was that the said appliances were fixed in the property owned by the company, but, provided to the M.D as residence, the expenses claimed are revenue in nature which may be allowed.
Having heard rival submission, we are of considered opinion our finding for preceding issue will apply for this issue also. In view of the Jurisdictional High Court in the case of CIT Vs. Mcdowell & Co. Ltd., (288 ITR 666) this issue is restored to the file of AO for fresh consideration in accordance with law.
RNS MOTORS:
J. The assessee company had claimed pooja expenses of Rs.7.11 lakhs on the ground that these expenses were incurred during the delivery of new vehicles to the customers. The AO after considering the issue, had opined that the expenditure of Rs.128/vehicle was on the higher side and thus restricted it to Rs.100/vehicle, thereby disallowed Rs.2.74 lakhs as excessive.
ITA 929 & 930/B/2008 Page 37 of 41
(b) After considering the rival submissions, the CIT(A) had brought down the disallowance to Rs.71156/- being 10% of the total claim of Rs.7.11 lakhs.
(c) We have perused the relevant records and also considered the assessee company's submissions. We find that an identical issue had been decided earlier when we were dealing with the assessee's appeal in the status of 'firm'. As the present issue is similar to that of the issue which had already been dealt with and our finding recorded in Para VIII.(d) supra holds good on this count. It is ordered accordingly.
K. (a) Out of 6.81 lakhs towards traveling expenses of the directors, Rs.5.56 lakhs was incurred for the foreign travel of directors. However, the purpose of tour and its benefit to the business of RNS Motors was not explained, the AO disallowed the entire Rs.5.56 lakhs as non-business expenses.
(b) After analyzing the assessee contention, the CIT(A) was of the view that though the foreign tour may not be fruitful but the tour was undertaken with a view to business expediency was an allowable business expenditure. As the assessee had not furnished any details before the AO, he took a stand that in view of natural justice 10% of disallowance on total claim would suffice the short-comings noticed.
(c) After considering the assessee company's contention that the tours were conducted with a view to exploring avenues to increase its business and obtaining fresh customers and to export its goods the foreign tour was by the partners etc., we are of the firm view that the assessee company, instead of bringing in comprehensive evidence to justify its claim, it had rather generalized the issue by arguing that no part of the expenditure was disallowable. Considering the pros and cons of ITA 929 & 930/B/2008 Page 38 of 41 the issue, the CIT(A) was rather very magnanimous in his resolve to bring down the disallowance from Rs.5.56 lakhs to a mere Rs.55655/- only which, in our considered view, is very fair and does not requires our interference on this issue. It is ordered accordingly.
L. The assessee company had claimed sales promotion expenses of Rs.1.43 crores being paid to its sales staff, stores staff and workshop staff. After considering the contention of the assessee company, the AO had observed that there was no base for such payments to sales staff, stores staff and workshop staff, as no fixed targets fixed slab-wise and the amount of extra work for the extra payment were available. The promotional expenses were over and above salary and other benefits. In the absence of any details to arrive at the extra work turned out by the said staff for which such payments were doled out by the assessee company, the AO disallowed 10% of total amount claimed.
(b) As the AR was not able to provide the particular method for making such extravagant bonanza by the assessee company, the CIT(A) was of the considered view that there was every possibility of excess payment which could not be quantified in the absence of details and the disallowance resorted to by the AO was rather slightly on the higher side, to strike a balance, he brought down the disallowance to a mere 5% of whopping claim of Rs.1.43 crores.
(c ) The argument of the assessee company was, put it mildly, out of context. The authorities have not doubted the bonafide of such expenditure as made out by the AR of the assessee company. Precisely, the issue is, whether such a huge expenditure to the tune of Rs.1.43 crores justifiable in the absence of details, such as the basis for such payment and that how the assessee company had arrived at the conclusion that its ITA 929 & 930/B/2008 Page 39 of 41 work-force had reached the target? In the absence of such details, the authorities have been left with no other alternative except to arrive at a reasonable conclusion which, in our considered view, is quite reasonable in the given circumstances.
In overall consideration of the facts and circumstances of the issue, we are of the unanimous view that the CIT(A) is very fair in bringing down the disallowance to 5% of the total claim of Rs.1.43 crores which, in our opinion, doesn't requires any interference. It is ordered accordingly.
M. (a) The assessee company's claim of security expenses of Rs.2.16 lakhs was turned down by the AO with a reasoning that the security provided to the partners' residences was not related to the business of the assessee company.
(b) Brushing aside the assessee's argument of terrorist perception, the CIT(A) took a view that there were no such incidents in the past and usual security to the directors' residences had a remote connection with business activity and, therefore, confirmed the addition.
(c) In conformity with our finding in the case of assessee firm, detailed at Para X (c ) supra, we decline to interfere with the reasoning of the lower authorities. It is ordered accordingly.
N. (a) The assessee company had claimed expenses towards free check up camp at Rs.12.36 lakhs. In the absence of details such as date of free check up camp conducted, number of staff drafted, to whom ground rent payment made, shamiyana expenses, etc., the AO disallowed as sum of Rs.1.23 lakhs.
ITA 929 & 930/B/2008 Page 40 of 41
(b) In total agreement with the reasoning of the AO, the CIT(A) had rather turned down the request of the assessee company to interfere with the stand of the AO.
(c) We find that an identical issue had cropped up in the case of assessee in the status of "firm" which has been dealt with in an exhaustive manner. In conformity with our finding at Para XIV (d) referred supra, we are in total agreement with the reasoning of the authorities below.
O. (a) Under the head 'Business promotion expenses', the assessee company had claimed expenditure of Rs.3.75 lakhs. The explanation was that the said amounts were paid to administrative staff as ex-gratia/special promotion in cash by the managing director. In the absence of any supporting voucher, the AO had declined to entertain the claim.
(b) Considering the assessee company's reasoning, the CIT (A) had opined that perhaps, the AO had disallowed the entire claim for want of supporting vouchers. After examining the contention of the assessee company that it was nothing but an imprest amount with the head of office for urgent business expenses, the details of the same were furnished to the office and looking into the size of the business carried on, the amount was very small, the CIT(A) was of the view that 10% disallowance will suffice because such imprest amount was being handled by the Head of office of the assessee company.
(c) It was submitted that some outstanding performances of the employees were rewarded by the Managaing Director of RNS Motros who had a personal rapport with them and to recognize and appreciate such performances of the employees, this expenditure was incurred which may be allowed as business promotion expenses.
ITA 929 & 930/B/2008 Page 41 of 41 Considering the submission of the assessee company and the reasoning of the CIT(A), we are of the considered view that stand of the CIT(A) is fully justified which does not requires any interference. It is ordered accordingly.
In the result -
(i) the appeal of the assessee in the status of 'firm' is partly allowed; &
(ii) the appeal of the assessee company in the status of 'company' is also partly allowed.
Order pronounced in the open court on 11th Sept, 2009.
Sd/- Sd/-
(N.L. Kalra) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore:
D a t e d : 11th Sept, 2009.
Vms
Copy to :
1 Appellant
2 Respondent
3 CIT
4 CIT(A), Mangalore.
5 DR, ITAT, Bangalore.
6 Guard file (1+1)
By Order
Assistant Registrar, ITAT, Bangalore.