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Facts
The appellant, an individual in real estate broking, filed a return declaring a loss for AY 2018-2019. The Assessing Officer completed assessment under Section 143(3), making additions and disallowances, which the CIT(A) subsequently upheld. The disallowances primarily concerned business promotion expenses paid via credit card and vehicle-related expenses, both disallowed by 50% by the AO citing a personal element.
Held
The Tribunal dismissed ground 1 as not pressed. For business promotion expenses, it deleted the additional disallowance of INR 11,36,819/-, accepting the 15% self-disallowance made by the assessee based on the tax auditor's observation. For vehicle-related expenses, the Tribunal restricted the disallowance to 15% (INR 15,00,110/-), deleting the remaining INR 35,00,255/- of the 50% disallowance, aligning with the approach for business promotion expenses. Grounds 4 to 6 were dismissed as general in nature.
Key Issues
Whether the ad-hoc disallowance of 50% of business promotion and vehicle-related expenses by the Assessing Officer was justified, especially when the assessee had already self-disallowed 15%.
Sections Cited
250, 143(3), 40A(3), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “H(SMC
order : 28.01.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Assessee is directed against the order, dated 29/10/2024, passed by the Commissioner of Income Tax (Appeals)-53, Mumbai [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘ the Act’] whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 03/05/2021, passed under Section 143(3) of the Act for the Assessment Year 2018-2019.
2. The Assessee has raised following grounds of appeal :
“1. The Learned Commissioner of Income Tax(A), Mumbai has Assessment Year 2018-2019 erred in law and in facts by passing the impugned order in violation of Principles of Natural Justice.
The Learned Commissioner of Income Tax(A), Mumbai has erred in law and in facts in upholding the order passed by the Assessing Officer which is illegal and bad in Law.
3. The learned Commissioner of Income Tax (A) has erred in dismissing the appeal and upholding the ad hoc disallowance of 50% of the business expenses amounting to Rs.63,02,311/- as made by the Assessing Officer. These include: (a) Business promotion expenses of Rs.1,65,127/- (b) Other business-related expenses paid through credit card amounting to Rs.11,36,819/- and (c) Vehicle related expenses, including depreciation of Rs.50,00,365/- 4. The learned Commissioner of Income Tax (A) has erred by ignoring assessee’s request for adjournment and passing order on the basis of partial submissions made by the assessee.
The Learned Commissioner of Income Tax (A) has erred in dismissing the appeal without considering full facts and circumstances of the case.
6. The appellant prays that the addition of Rs.63,02,311/- be deleted.”
The Appellant in the present case is an individual engaged in real estate broking business. The Appellant filed return of income for the Assessment Year 2018-2019 on 17/09/2019 declaring loss of INR.21,63,999/-. The case of the Appellant was selected for regular scrutiny. The Assessing Officer completed the assessment vide Assessment Order, dated 03/05/2021, under Section 143(3) of the Act at assessed income of INR.41,38,310/- after making the following addition/disallowance:
(a) Addition of INR.1,65,127/- under Section 40A(3) on account of payment of business promotion of more than INR 20,000 expenses in cash 2 Assessment Year 2018-2019
(b) Disallowance of INR.11,36,819/- under Section 39(1) of the Act in respect of business promotion expenses incurred through American Express Credit Card holding the same to be personal in nature in addition to suo-moto disallowance of INR.8,55,204/- made by the Appellant [by estimating the personal expenses included in promotion business promotion expenses at the rate of 50% of INR.39,84,046/]
(c) Disallowance of INR.50,00,365/-, under Section 37(1) of the Act being 50% of the expenses incurred on vehicles owned by the Appellant which included car insurance expenses; depreciation; interest on car loan; repair & maintenance expenses; and petrol expenses.
The appeal preferred by the Appellant before the CIT(A) against the Assessment Order, dated 03/05/2020, did not yield any favourable results as the CIT(A) dismissed the appeal and sustained the above addition/disallowance made by the Assessing Officer.
5. Being aggrieved, the Appellant has preferred the present appeal before the Tribunal challenging the above order passed by the CIT(A) on the grounds reproduced in paragraph 2 above.
We have heard both the sides and perused the material on record. Ground No.1:
Ground No.1 raised by the Appellant is directed against the addition of INR.1,65,127/- made by the assessing made under Section 40A(3) of the Act. During the course of hearing the Learned Authorised Representative for the Appellant, under instructions, submitted that the Appellant does not wish to pursue this ground on account of smallness of the amount involved. Accordingly Ground 3 Assessment Year 2018-2019 No. 1 raised by the Appellant is dismissed as not pressed.
Ground No.2
Ground No.2 raised by the Appellant pertains to disallowance of Business Promotion Expenses of INR.11,36,819/- under Section 37(1) of the Act.
8.1. We have heard both the sides on this issue and have perused the material on record.
8.2. We note that during the assessment proceedings the Appellant was directed to furnish the business purpose of various expenses paid through American Express Credit Card. Vide submission, dated 23/04/2021, filed before the Assessing Officer it was submitted on behalf of the Appellant that the expenses incurred through American Express Credit Card were in the nature of business development and promotion expenses and did not have any element of personal expenditure. The aforesaid expenses were incurred in ordinary course of business which required the Appellant to travel across the countries. It was specifically submitted by the Appellant that it was not possible for the Appellant to furnish identify specific business purpose. Since the Appellant had failed to provide any supporting documents, the Assessing Officer disallowed 50% of Business Promotion Expenses incurred through the American Express Credit Card to arrive at the figure of INR.19,92,023/-. However the Assessing Officer noted that the Appellant had already disallowed INR.8,55,204/- in the computation of total income and therefore, the Assessing Officer restricted the addition to the differential amount of INR.11,36,819/-.
8.3. The Appellant carried the issue in appeal before the CIT(A). Before the CIT(A), it was submitted on behalf of the Appellant that the nature of business of the Appellant required incurring of business 4 Assessment Year 2018-2019 promotion expenses. However, the Appellant was not in a position to link the expenditure incurred with the direct result in benefit derived from such expenditure. The Appellant was required to regularly travel to foreign countries to promotes his business as the high net worth individuals/Indians living outside India were interested in making investment in properties in India. However, the CIT(A) was not convinced with the aforesaid submissions made by the Appellant and therefore, the CIT(A) sustain the disallowance made by the Assessing Officer.
8.4. During the proceedings before the Tribunal the Learned Authorised Representative for the Appellant has submitted that disallowance made by the Assessing Officer was excessive. The Appellant had explained that the nature of business of the Appellant was such that the Appellant was not in a position to maintain document showing direct link between the expenditure income expenditure incurred and the benefit drawn. The Learned Authorised Representative for the Appellant also invited our attention to the computation of income wherein 15% of the Business Promotion Expenses had already been disallowed by the Appellant in the computation of income. It was further submitted that there was no basis to conclude that 50% of a Business Promotion Expenses incurred by the Appellant were personal in nature and therefore, it was submitted that the disallowance of INR.11,36,819/- made by the Assessing Officer should be deleted. It was further submitted that the Assessing Officer had also disallowed Business Expenses of INR.1,65,127/- under Section 40(A)(3) of the Act and this fact was not taken into consideration either by the CIT(A) or the Assessing Officer.
8.5. Per contra the Learned Departmental Representative pointed out that no documentation whatsoever was furnished by the Appellant either during the assessment proceedings or during the appellate proceedings before the CIT(A) or the Tribunal. Since the Appellant 5 Assessment Year 2018-2019 had failed to furnish any documentation, the disallowance made by the Assessing Officer by computing the element of personal expenses included in the Business Promotion Expenses at the rate of 50% of the aforesaid expenses could not be found fault with. It was submitted that the Assessee had not even furnished the basis of arriving at the figure of suo-moto disallowance of INR.8,55,204/-.
8.6. Having given thoughtful consideration to the rival submissions. We find that the Assessing Officer had failed to point out any specific expenditure of personal nature incurred by the Appellant. However, it is also admitted fact that the Appellant had failed to place on record primary documents to support that the expenses incurred were wholly and exclusively for the purpose of business. To the contrary the Appellant has admitted to have incurred Business Promotion Expenses having element of personal nature and had, therefore, made suo-moto disallowance of 15% of Business Promotion Expenses. We find that the basis of the aforesaid disallowance was the observation/estimation made by the tax auditor. In Schedule – 2 to the Tax Audit Report, the Tax Auditor had reported that the component of personal expenditure under some account heads cannot be ruled out and therefore, 15% of such expenses have been deemed to be personal expenses and disallowance of the same has been voluntarily made in the return of income.
8.7. We find merit in the contention advanced on behalf of the Assessee that the estimation of personal element in Business Promotion Expenses at the rate of 50% has no basis. Neither has the Assessing Officer identified expenses of personal nature nor has the Assessing Officer placed on record any basis or material to arrive at the rate of 50%. Therefore, in the facts and circumstances of the present case, we find that the rate of 15% estimated by the tax auditor for the purpose of computing the expenses of personal nature forming part 6 Assessment Year 2018-2019 of Business Promotion Expenses cannot be disturbed. Accordingly, we accept the contention of the Assessee and delete the additional disallowance of INR.11,36,819/- made by the Assessing Officer in respect of Business Promotion Expenses under Section 37(1) of the Act. Thus, Ground No. 2 raised by the Assessee is allowed.
Ground No.3
Ground No.3 raised by the Appellant relates to disallowance of 50% of expenses related to vehicle amounting to INR.50,00,365/-.
9.1. We note that, as was the case with the Business Promotion Expenses, the Appellant had failed to bring on record documents showing utilisation of the motor vehicles wholly and exclusively for the purpose of business to meet the requirements of Section 37(1) of the Act. The submission of the Appellant before the authorities below was that the vehicles were used only for the purpose of business. However, we find that the Appellant has itself disallowed 15% of Business Promotion Expenses as being personal nature. The case of the Appellant is that the vehicles were also used for business promotion. Therefore, we reject the submission of the Appellant that entire amount of expenses related to vehicles should be allowed as deduction under Section 37(1) of the Act. On the other hand, we find that the Assessing Officer had disallowed 50% of the aforesaid expenses. However, the basis or material to arrive at the aforesaid rate of disallowance is not on record. Thus, keeping in view the overall facts and circumstances of the present case, we restrict the rate of disallowance of expenses related to motor vehicle to 15% of such expenses by placing reliance upon the observations made by tax auditor in relation to the personal element embedded in expenses (referred to in paragraph 8.5 above). Accordingly, the Assessing Officer is directed to restrict the disallowance to INR.15,00,110/-. As a result, the addition on account of vehicle 7 Assessment Year 2018-2019 expenses to the extent of INR.35,00,255/-. stands deleted. Thus, Ground No. 3 raised by the Appellant is partly allowed.
Ground No. 4 to 6
During the course of hearing the Learned Authorised Representative for the Appellant submitted that Ground No. 4 to 6 are general in nature. Since the aforesaid grounds do not require separate adjudication, the same are dismissed as being general in nature.
In result, the appeal preferred by the Assessee is partly allowed.