M/s. Mitsui & Co. India Pvt. Ltd., New Delhi V. Addl CIT, New Delhi

ITA 1362/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3914 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 18-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 16-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MONGA SENIOR
• Assessee Lawyers: MRS RANO JAIN CAS
• Keywords: Business expenditure; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) SHRI I.P. BANSAL, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.1362/DEL./2011 (ASSESSMENT YEAR : 2005-06) M/S. MITSUI & CO. INDIA PVT. LTD., VS. ADDL.CIT, R ANGE 6, PLOT NO.D-1, 4 TH FLOOR, NEW DELHI. SALCON RAS VILAS, DISTRICT CENTRE, SAKET, NEW DELHI. (PAN : AADCM4488J) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN & MRS. RANO JAIN, CAS REVENUE BY : SHRI A.K. MONGA, SENIOR DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER : THE ASSESSEE HAS FILED THIS APPEAL AGAINST THE ORDE R OF CIT (APPEALS)- IX, NEW DELHI DATED 29.10.2010 FOR THE ASSESSMENT Y EAR 2005-06. THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE READ AS UND ER :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED CIT (A) IS BAD BOTH IN THE EY E OF LAW AND ON FACTS. 2(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L EARNED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMIN G THE DISALLOWANCE OF AN AMOUNT OF RS.26,74,542/- ON ACCO UNT OF CAR EXPENSES. ITA NO.1362/DEL./2011 2 (II) THAT THE ABOVE DISALLOWANCE HAS BEEN CONFIRME D DESPITE THE SAME BEING, INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND REJECTING THE CONTENTION O F THE ASSESSEE THAT THERE CANNOT BE AN ELEMENT OF PERSONA L NATURE IN CASE OF A COMPANY, BEING A SEPARATE LEGAL ENTITY. 3(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L EARNED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMIN G THE ADHOC DISALLOWANCE OF RS.4,17,336/- ON ACCOUNT OF ENTERTA INMENT EXPENSES ON ACCOUNT OF PERSONAL USE OF EMPLOYEES AN D DIRECTORS. (II) THAT THE ABOVE DISALLOWANCE HAS BEEN CONFIRME D IGNORING THE EXPLANATION AND EVIDENCES BROUGHT ON R ECORD TO SHOW THAT THE EXPENSES HAVE BEEN INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE I D. CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN GIVING A FIND CONTRARY TO THE FACTS OF CASE. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LEAR NED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMIN G THE DISALLOWANCE OF RS.50,000/- ON ACCOUNT OF ENTERTAIN MENT EXPENSES. 5(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L EARNED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMIN G THE DISALLOWANCE OF RS.2,68,305/- MADE BY AO ON ACCOUNT OF BUSINESS PROMOTION EXPENSES. (II) THAT THE SAID DISALLOWANCE HAS BEEN CONFIRMED IGNORING THE EXPLANATION AND EVIDENCES BROUGHT ON RECORD BY THE ASSESSEE TO SHOW THAT THE EXPENSES HAVE BEEN INCURR ED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. 6. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTE R ANY OF THE GROUNDS OF APPEAL. ITA NO.1362/DEL./2011 3 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY. ASS ESSEE COMPANY ENGAGED IN THE BUSINESS OF TRADING, EXPORTS & IMPOR TS, SUPPLY OF MATERIAL AND EQUIPMENTS TO INFRASTRUCTURE AND INDUSTRIAL PROJECT S. THE CIT (A) HAD SUSTAINED DISALLOWANCE FOR THE ELEMENT OF PERSONAL USE OUT OF CAR EXPENSES. ADDITION OF RS.4,17,336/- AND RS.50,000/- HAS BEEN SUSTAINED FOR ENTERTAINMENT EXPENSES AND THE ADDITION OF RS.2,68, 305/- HAS BEEN SUSTAINED OUT OF BUSINESS PROMOTION EXPENSES. 3. GROUND NOS.1 AND 6 ARE GENERAL IN NATURE, HENCE NO ADJUDICATION IS REQUIRED. ISSUES RAISED IN GROUNDS NO.2(I) & 2(II) ARE RELATED TO DISALLOWANCE FROM CAR EXPENSES FOR PERSONAL USE. LEARNED AR SUB MITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWING DECISION OF THE HON'BLE GUJARAT HIGH COURT :- (I) SAYAJI IRON & ENGG. CO. VS. CIT (2002) 253 ITR 749 (GUJ.); (II) CIT VS. DINESH MILLS LTD. (2005) 199 CTR 509 (GUJ.); AND (III) DINESH MILLS LTD. (2002) 254 ITR 673 (GUJ.) LD. AR PLEADED TO SET ASIDE THE ORDER OF THE AUTHOR ITIES BELOW AND ALLOW ASSESSEES GROUND. 4. LEARNED DR RELIED ON THE ORDERS OF THE AUTHORITI ES BELOW AND PLEADED TO DISMISS ASSESSEES GROUNDS. 5. AFTER HEARING BOTH THE SIDES AND CONSIDERING THE MATERIAL ON RECORD AND THE CASE LAWS RELIED UPON, WE HOLD THAT ISSUE IS CO VERED IN FAVOUR OF ASSESSEE. ITA NO.1362/DEL./2011 4 THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAYAJ I IRON & ENGG. CO., CITED SUPRA, HELD AS UNDER:- THE ASSESSEE, A PRIVATE COMPANY, HAD INCURRED RS. 96,653/- TOWARDS MAINTENANCE OF ITS VEHICLES, WHICH IT HAD C LAIMED AS BUSINESS EXPENDITURE. ONE-SIXTH OF THE EXPENDITURE WAS DISALLOWED ON THE GROUND THAT ALL THE VEHICLES WERE NOT EXCLUSIVELY USED FOR THE BUSINESS AS ITS DIRECTORS WERE ALSO USING THEM FOR THEIR PERSONAL PURPOSES. THE APPELLATE TR IBUNAL CONFIRMED THE DISALLOWANCE OF ONE-SIXTH THEREOF. T HE TRIBUNAL HAD DISTINGUISHED EARLIER ORDERS IN THE CASE OF THE ASSESSEE ON THE GROUND THAT EVEN IF THERE WAS NO PERSONAL USER OF T HE COMPANY IT WOULD YET BE USER FOR NON-BUSINESS PURPOSE. ON A REFERENCE : HELD, REVERSING THE DECISION OF THE TRIBUNAL, (I) THAT, THE DIRECTORS OF THE ASSESSEE WERE ENTITLED TO USE THE VEHICLES FOR THEIR PERSONAL USE IN ACCORDANCE WITH THE TERMS AND CONDITIONS ON WHICH THEY WERE APPOINTED AND THE PERQUISITES GI VEN TO THE DIRECTORS FORMED PART OF THEIR REMUNERATION UNDER THE EXPLANATION TO SECTION 198 OF THE COMPANIES ACT, 19 56, FOR THE PURPOSE OF DETERMINING THEIR REMUNERATION UNDER SEC TION 309 OF THAT ACT. ONCE SUCH REMUNERATION WAS FIXED AS PROV IDED IN SECTION 309 IT WAS NOT POSSIBLE TO STATE THAT THE A SSESSEE INCURRED THE EXPENDITURE FOR THE PERSONAL USE OF THE DIRECTO RS. EVEN IF THERE WAS ANY PERSONAL USE BY THE DIRECTORS THAT WA S AS PER THE TERMS AND CONDITIONS OF SERVICE AND, IN SO FAR AS T HE ASSESSEE WAS CONCERNED, IT WAS BUSINESS EXPENDITURE AND NO PART OF THE EXPENDITURE COULD BE DISALLOWED. REVENUE HAD NOT CITED ANY CONTRARY DECISION. RESPE CTFULLY FOLLOWING THE AFOREMENTIONED DECISIONS, WE HOLD THAT THE DISALLOW ANCES MADE BY THE ASSESSING OFFICER ARE NOT WARRANTED INSOFAR AS THE SAME HAS BEEN MADE MERELY ON THE BASIS OF PERSONAL USE. SINCE THE ASS ESSEE IS A CORPORATE ASSESSEE SUCH DISALLOWANCES ARE NOT JUSTIFIED IN VIEW OF CAS E LAWS RELIED UPON. WE ACCORDINGLY DIRECT TO DELETE THE AFOREMENTIONED DIS ALLOWANCE. ITA NO.1362/DEL./2011 5 6. IN THE GROUND NOS.3(I) TO 3(III), THE ISSUE IS R EGARDING THE AD HOC DISALLOWANCE OF RS.4,17,336/- OUT OF ENTERTAINMENT EXPENSES. IN THE GROUND NO.4, THE ISSUE IS REGARDING THE CONFIRMATION OF DI SALLOWANCE OF RS.50,000/- WHICH WAS PROVISION FOR ENTERTAINMENT EXPENSES. I N GROUND NO.5(I) & 5(II), THE ISSUE IS REGARDING THE SUSTENANCE OF DISALLOWAN CE OF RS.2,68,305/- ON ACCOUNT OF BUSINESS PROMOTION EXPENSES. 7. THE CIT (A) HAS DECIDED THESE ISSUES IN HIS ORDE R AS UNDER :- 5.5 I HAVE CONSIDERED THE FINDINGS RECORDED BY TH E AO AS PER THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY TH E LD. AR. 5.6 THE PROVISION OF RS.50,000/- MADE BY THE APPEL LANT UNDER THE HEAD 'ENTERTAINMENT EXPENSES' HAS RIGHTLY BEEN DISALLOWED BY THE AO AND HENCE THE SAME IS CONFIRMED. 5.7 DURING THE COURSE OF THE APPELLATE PROCEEDINGS, THE NATURE OF ENTERTAINMENT AND BUSINESS PROMOTION EXPENDITURE CAME UP FOR DETAILS DISCUSSION WITH THE LD. AR. THE DETAILS OF THE SAID TWO EXPENSES SUBMITTED BY THE APPELLANT WERE CLOSEL Y EXAMINED. THE LD. AO AS PER THE ASSESSMENT ORDER HAS POINTED OUT VARIOUS DISCREPANCIES IN THE EXPENSES CLAIMED. HE HAS ALSO QUOTED CERTAIN INSTANCES WHERE THE EXPENSES PRIMA FACIE AP PEARED TO HAVE BEEN INCURRED FOR NON-BUSINESS PURPOSES. ON MA NY OCCASIONS EXPENSES HAVE BEEN INCURRED IN CASH (AMOU NTING TO MORE THAN RS.16 LAKHS) FOR WHICH SUPPORTING EVIDENC ES IN THE FORM OF 3RD PARTY BILLS ARE NOT AVAILABLE. MANY ENT RIES IN THE ACCOUNT DO NOT HAVE NARRATION ABOUT THE CLIENT OR T HE BUSINESS PURPOSE FOR WHICH THE AMOUNT WAS SPENT. THE LD. AO ALSO OBSERVED THAT THE ENTERTAINMENT EXPENSES WERE UNUSU ALLY HIGH TOTALING TO RS.42.23 LAKHS WHICH ON AN AVERAGE WORK OUT TO RS.20,000/- APPROXIMATELY FOR EACH WORKING DAY. 5.8 AS REGARDS THE BUSINESS PROMOTION EXPENSES, THE LD. AO ASKED THE ASSESSEE TO ESTABLISH THE NEXUS WITH THE BUSINESS. IT WAS FURTHER OBSERVED THAT MANY ENTRIES FOR THE EXPE NDITURE WERE OF SMALL AMOUNT AND THE EXPENSES WERE INCURRED IN C ASH FOR ITA NO.1362/DEL./2011 6 WHICH NO VERIFICATION WAS POSSIBLE. THEREFORE, INVO KING PROVISIONS OF SECTION 37(1), THE AO MADE A PART DIS ALLOWANCE OF THE EXPENSES CLAIMED @ 20% HOLDING THE SAME TO HAVE BEEN INCURRED FOR NON-BUSINESS PURPOSES. 5.9 SUBSEQUENT TO THE DISCUSSION AS MENTIONED ABOVE , THE LD. AR STATED THAT HE HAD NO OBJECTION IF THE DISALLOWA NCE OUT OF THE ENTERTAINMENT AND BUSINESS PROMOTION EXPENSES IS RE STRICTED TO 10% OF THE TOTAL CLAIM AS AGAINST 20% DISALLOWED BY THE LD. AO. IN THE LIGHT OF THE FACT AND CIRCUMSTANCES OF THE C ASE, I AM OF THE CONSIDERED OPINION THAT THE ENDS OF JUSTICE WOULD M EET IF THE DISALLOWANCE UNDER THE TWO HEADS IS KEPT AT 10% OF THE AMOUNT CLAIMED. THE RELIEF ON THIS ACCOUNT IS WORKED OUT A S UNDER:- HEAD AMOUNT DISALLOWED RELIEF ALLOWED @ 10 % BY THE AO @ 20% 1. ENTERTAINMENT EXPENSES RS.8,34,672/- RS .4,17,336/- 2. BUSINESS PROMOTION EXP. RS.5,36,611/- R S.2,68,305/- TOTAL RS.6,85,641/- THE CIT (A) HAS CONFIRMED THE ADDITION OF PROVISION S OF RS.50,000/- MADE UNDER THE HEAD OF ENTERTAINMENT EXPENSES BEING THE SAME AS PROVISION. AFTER HEARING BOTH SIDES, WE HOLD THAT SINCE IT WAS ONLY A PROVISION AND NOT ACTUALLY SPENT, WE SUSTAIN THE SAME. 7.1 AS REGARDS DISALLOWANCE OUT BUSINESS PROMOTION EXPENSES, THE CIT (A) ALLOWED PART RELIEF. THE ASSESSING OFFICER DISALLO WED 20% WHILE THE CIT (A) RESTRICTED IT TO 10%. IN HIS ORDER, CIT (A) HAS AL SO STATED THAT THE AR OF THE ASSESSEE HAS NO OBJECTION TO THE BUSINESS PROMOTION EXPENSES BEING RESTRICTED TO THE 10% OF THE TOTAL CLAIM, WHICH CIT (A) HAS DO NE. FROM THE GROUNDS OF APPEAL, WE FIND THAT THE ASSESSEE HAS CONTESTED THE AD HOC DISALLOWANCES OF ITA NO.1362/DEL./2011 7 ENTERTAINMENT EXPENSES ON ACCOUNT OF PERSONAL USE O F EMPLOYEES AND DIRECTORS. THE CIT (A) HAS SUSTAINED PART OF THE A DDITION BY HOLDING THAT THE ASSESSING OFFICER HAS POINTED OUT VARIOUS DISCREPAN CIES IN THE EXPENSES CLAIMED AND SOME OF THE EXPENSES PRIMA FACIE APPEAR ED TO HAVE BEEN INCURRED FOR NON-BUSINESS PURPOSES. THE CIT (A) HAS ALSO RE CORDED THAT ON MANY OCCASIONS, THE EXPENSES HAVE BEEN INCURRED IN CASH FOR WHICH SUPPORTING EVIDENCES IN RESPECT OF THIRD PARTY BILLS WERE NOT AVAILABLE. MANY OF THE ENTRIES IN THE ACCOUNT WERE NOT HAVING NARRATION FO R WHAT BUSINESS PURPOSES THE SAME WERE SPENT. SIMILARLY, IN THE CASE OF BUS INESS PROMOTION EXPENSES, THE CIT (A) HAS CONFIRMED THE ASSESSING OFFICERS O BSERVATION THAT THE ASSESSEE HAS FAILED TO ESTABLISH THE NEXUS WITH THE BUSINESS AND MANY EXPENSES OF SMALL AMOUNT WERE INCURRED IN CASH FOR WHICH NO VERIFICATION WAS POSSIBLE. IT MAKES CLEAR THAT PART DISALLOWANCES W ERE SUSTAINED NOT FOR PERSONAL USE BUT FOR OTHER REASONS AS STATED ABOVE. 8. LEARNED AR RELIED ON THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON & ENGG. CO. AND CIT VS. DIN ESH MILLS LTD., CITED SUPRA. HOWEVER, WE FIND THAT THE PART OF DISALLOWA NCES OUT OF THE ENTERTAINMENT EXPENSES HAS BEEN SUSTAINED FOR WANT OF VERIFICATION AND FOR NO NEXUS WITH BUSINESS. SIMILARLY, SUSTENANCE OUT OF THE BUSINESS PROMOTION EXPENSES HAS ALSO DONE FOR WANT OF VERIFICATION AS THE EXPENSES WERE INCURRED IN CASH. THE ADDITION OF RS.50,000/- HAS BEEN SUST AINED ON ACCOUNT OF ITA NO.1362/DEL./2011 8 PROVISION MADE UNDER THE HEAD ENTERTAINMENT EXPENS ES AS THE SAME WAS NOT ACTUALLY INCURRED DURING THE YEAR. LEARNED ARS P LEADING THAT NO RES JUDICATA OR STOPPEL ARE APPLICABLE ON THE ISSUE OF CONSENT F OR ADDITION, HOWEVER, THE FACTS OF THE CASE SHOWS THAT THESE DISALLOWANCES AR E FOR WANT OF VERIFICATION AND EXPENSES INCURRED FOR NON-BUSINESS PURPOSES. T HEREFORE, CONSIDERING ALL THESE FACTS, WE UPHOLD THE ADDITIONS TO THE EXTENT CONSENTED WHICH IS 10% OF THE TOTAL EXPENSES CLAIMED UNDER THESE HEADS. THE ORDER OF CIT (A) ON THESE ISSUES IS SUSTAINED AND THESE GROUNDS ARE ACCORDING LY DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 3 RD DAY OF JUNE, 2011. SD/- SD/- (I.P. BANSAL) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 3 RD DAY OF JUNE, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-IX, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.