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Facts
The Advertising Corporation of India Pvt. Ltd. appealed against the CIT(A)'s order for AY 2014-15, which confirmed three additions made by the AO: Rs. 8,27,249/- for business expenses (facilitating payments from government PSUs), Rs. 44,630/- under Section 40(a)(ia) for a purchase from Luxmi Art Printers, and Rs. 87,500/- for rent expenses related to employee accommodation during work tours.
Held
The ITAT upheld the disallowance of Rs. 8,27,249/-, stating the assessee failed to justify these expenses under Section 37(1) and public policy. However, the ITAT granted relief for the Rs. 44,630/- disallowance under Section 40(a)(ia), finding it was an outright purchase with no TDS liability. Relief was also granted for the Rs. 87,500/- rent expenses, acknowledging a clear business nexus.
Key Issues
Whether expenses for facilitating payments from government PSUs are allowable business expenditure under Section 37(1); whether disallowance under Section 40(a)(ia) is applicable for outright purchases; and whether rent expenses for employee accommodation during work tours have a business nexus.
Sections Cited
250, 37(1), 40(a)(ia)
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Income Tax Appellate Tribunal, “SMC” BENCH KOLKATA
The Advertising Corporation of India Pvt. Ltd., 1&2 Old Court House Corner, Dalhousie, Kolkata - 700001 [PAN: AABCT7864K] .....................…...…………….... Appellant vs. DCIT, Circle-4(2), Kolkata, 4th Floor, Aayakar Bhavan, P-7, Chowringhee Square, Kolkata - 700069 ...............…..….................... Respondent Appearances by: Assessee represented by : Dilip Chatterjee, AR Department represented by : Gautam Patra, Addl. CIT (DR) Date of concluding the hearing : 20.02.2025 Date of pronouncing the order : 03.03.2025 O R D E R
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
The present appeal arises from the order of Ld. Commissioner of Income Tax (Appeals), Addl./JCIT(A)-1, Delhi [hereafter “the Ld. CIT(A)”], passed u/s 250 of the Income Tax Act, 1961 (hereafter ‘the Act’), vide order dated 07.06.2024.
1.1 In this case, the Ld. AO made three additions as under:
(a) Rs. 7,27,249/- by disallowing certain expenses claimed as business expenses.
(b) Disallowance u/s 40(a)(ia) of Rs. 44,630/-.
(c) Rs. 87,500/- disallowed on account of rent expenses.
Aggrieved with the action of Ld. CIT(A), the assessee is in appeal before the ITAT through the following grounds:
“1. For that and under the facts and circumstances and in law the Ld CIT(A)-1 Delhi erred in upholding the contentions as well as order of assessment passed by the DCIT-Circle -1(2) Kolkata hence such act of authority below is not sustainable in the eyes of law; 2. For that and under the facts and circumstances and in law the CIT(A) failed to ascertain the actual modus operandi of the business run by the appellant that resulted the act fully arbitrary, bad in law, based on bad faith, motive, surmise, presumptions, wrong notion, hence liable to be fully quashed: 3. For that and under the facts and circumstances and in law the CIT(A) when upholding the action and rejecting the plea taken by the appellant had to bring on records any apparent and transparent materials which could lead the contention of the authority below hence in absence of the same the action of both the authorities below is liable to be untenable in the eyes of law for the sake of natural justice and law; 4. For that and under the facts and circumstances and in law the matter of adjudication of disallowances of expenses of Rs. 8,27,249/- paid to personnel was engaged for collection of business dues from some sundry parties was disallowed of the very flimsy grounds in whole on failure on the part of the authority below to discharge proper function as per law in summoning the doubtful recipients as remarked in the orders Amounts to maintain rules of justice and acted whimsically, on bad faith and motive also notion, hence such act of disallowance is liable to be quashed for rendering justice; 5. For that and under the facts and circumstances and in law the authority below ignored the written submission for several times in support of the contention that there is violation of Sec-10(a)(in) of the act against the payments made under the head of expenses of printing of diaries ete for Rs. 4,46,000/- disregarding the plea taken by the appellant and citations thereof is out of biasness, baseless, whimsical, arbitrary, and on bad faith and motive hence the act of such disallowance is liable to be quashed for the sake of justice: 6. For that and under the facts and circumstances of the case and in law the authority below erred in disallowing the expenses under the head of " Rental Expenses" and debited accordingly from accounts of Rs. 87,500/- as this expenses was incurred partly for providing the employees for present business purpose and partly for the purpose of assessee for running business and there is no question of disallowance of a bona-fide and genuine expenses incurred for running the business is fully illegal, unlawful, bad in law and not sustainable in the eyes of law and justice accordingly the act of authority below is liable to be quashed; The Advertising Corporation of India Pvt. Ltd.
For that and under the facts and circumstances of the case and in law, the appellant reserves full right to alter, add, annul and modify the ground/grounds at the time of final hearing of this appeal.” 2.1 Before us, the Ld. AR argued and presented the facts with the help of a paper book. Regarding the addition of Rs. 8,27,249/- it was stated that amounts have been paid to various persons to pursue with the customers for release of payments. Regarding the addition made u/s 40(a)(ia) of the Act, the Ld. AR pointed out that the impugned amount pertains to a purchase order placed with one M/s Luxmi Art Printers. It was argued that this was a purchase made from the said concern and was not a contract for any kind of work. Regarding the addition of Rs. 87,500/- by way of rent expenses, it was argued that this amount was spend on making arrangements for employees when they were required to travel outside of headquarters for work related matters.
2.2 The Ld. DR, on the other hand, relied on the orders of authorities below. It was also argued that the Rs. 8,27,249 was clearly hit by the Explanation to section 37(1) of the Act.
We have considered the arguments of Ld. AR/DR and also gone through the records before us. Regarding the issue of payment amounting to Rs. 8,27,249/-. It is pertinent to extract the relevant portion from the Ld. CIT(A) orders:
“5. In the 2nd and 3rd ground of appeal, the appellant has contended that the A.O. has acted arbitrarily by disallowing the service charges Rs.8,27,249/- as there is no finding that the said claim was not incurred for the business purpose, as such his finding is completely arbitrary, unjustified and illegal. The contentions of the appellant have duly been considered. In the assessment order, the AO has discussed the matter in detail. The AO has observed that vouchers and ledger accounts of such payments were produced by the appellant during assessment proceedings. The AO observed that all vouchers are self-made cash vouchers. There is no identity of the persons to whom these charges are made. Mere mentioning a name on the voucher is not enough to establish the identity of the payee. Secondly, on most of the vouchers, it has been mentioned that the payments were made to some third persons whose identity is not known, for getting the payments released from clients, most of whom are Government Undertakings. The AO has even reproduced copy of some vouchers in the assessment order. As per the assessment order, an amount of Rs 10,000/- was paid in cash to Mr Haque for getting the The Advertising Corporation of India Pvt. Ltd. payments released from RITES Ltd (a Govt of India Undertaking). Another such payment of Rs 15.000/- was paid to Mr Ajay for getting the payment released from East west Railway. Such payments made for getting payments released, from Goyt Departments cannot qualify as expenditure laid out wholly and exclusively for the business of the appellant. Such actions are prohibited by public policy and could not be allowed as deduction, even in the name of service charges or facilitation charges. The Hon'ble Calcutta High Court, in the case of Standipack P Ltd vs CIT, 27 taxmann.com 150, held that where the assessee paid commission for providing expertise to apply for tender and follow up action for acceptance of tender and for restraining certain party from participation in the tender floated by public sector organization, such expenditure being prima facie impermissible in law was not allowable as business expenditure. 5.1 In view of the facts narrated above and in view of the findings and observations of the Hon'ble Calcutta High Court, the contentions of the appellant that the A.O. has acted arbitrarily by disallowing the service charges Rs.8,27,249/- as there is no finding that the said claim was not incurred for the business purpose, as such his finding is completely arbitrary, unjustified and illegal cannot be accepted. I find no merit in the contentions of the appellant. The amounts paid to certain persons for getting payments released from Govt Departments cannot be termed as business expenditure and are not an allowable expenditure u/s 37 of the Act. All the contentions of the appellant in this regard are rejected and ground No 2 and 3 of the appeal of the appellant are dismissed.” 3.1 On this issue it is seen that there is a clear-cut finding that the assessee has not been able to justify the expenses claimed u/s 37(1) of the Act, with respect to the mandate under the said section. It is also seen that the assessee has not been able to furnish an appropriate explanation in justification of the said expenses to escape the consequences of First Explanation to section 37 of the Act. We are considerably persuaded by the arguments of the authorities below that since the assessee deals with Government Public Sector Enterprises and hence there is all the more reason to doubt the nature of any expense which pertains to facilitating payments from such Government PSUs, from the public policy perspective. Accordingly, the finding of Ld. CIT(A) on this issue is upheld and the ground of appeal pertaining to this addition is rejected.
3.2 Regarding the addition of Rs. 4,48,966/-, it is evident that the assessee has made outright purchase from one M/s Luxmi Art Printers. Therefore, there is no reason why there could be any TDS liability.
3.3 the addition of Rs. 87,500/- is also seen to have a clear business nexus whereby, the employees have been paid for accommodation on work related tours. On this issue also, the action of Ld. CIT(A) cannot be supported and hence the assessee gets relief.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the court on 03.03.2025