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Income Tax Appellate Tribunal, “I” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The appeal of the assessee is directed against the order dated 30-09- 2016 passed by Ld CIT(A)-9, Mumbai and it relates to the assessment year 2012-13. The assessee is challenging the order passed by Ld CIT(A) on the following issues:- (a) Disallowance out of Communication expenses (b) Disallowance out of Business Development expenses (c) Addition relating to Sundry balances written off.
The assessee is engaged in the business of manufacture and sale of cloth. The assessee filed its return of income declaring a total income of Rs.41.94 lakhs. During the course of assessment proceedings, the AO made various additions. The Ld CIT(A) gave partial relief to the assessee. Aggrieved with the additions sustained by Ld CIT(A), the assessee has filed this appeal before us.
The first issue relates to the disallowance out of Communication expenses. The assessee claimed a sum of Rs.41.72 lakhs under the head Communication
2 Garodia Syntex Pvt. Ltd. expenses. The assessee had booked Postage expenses of Rs.4.73 lakhs, telephone expenses of Rs.3.39 lakhs and Conveyance & travelling expenses of Rs.33.59 lakhs under this head. The AO took the view that the entire expenses might not have been incurred towards business purposes and involvement of personal element could not be ruled out. Accordingly he disallowed 10% of the expenses amounting to Rs.4.17 lakhs. The Ld CIT(A) also confirmed the same.
The Ld A.R submitted that the entire expenses are supported by proper vouchers. He further submitted that the expenses claimed under this head constitute about 1.03% of the total turnover, while in the immediately preceding year, it was 1.34%. Accordingly he submitted that the assessee has incurred lesser expenses during the year under consideration. He further submitted that the assessee is a corporate entity and hence the question of “Personal element” does not arise in its hands as held in the case of Sayaji Iron and Engg. Co. Vs. CIT (253 ITR 749). Accordingly he contended that the Ld CIT(A) was not justified in confirming the addition of 10% made on estimated basis towards personal element.
On the contrary, the Ld D.R submitted that the assessee has failed to show that the entire expenses were incurred towards business purpose only.
We heard the parties on this issue and perused the record. We notice that the assessing officer has disallowed 10% of the Communication expenses on the reasoning that involvement of personal element cannot be ruled out. We have noticed that the assessee has booked postage expenses, telephone expenses and travelling expenses under this head. The Hon’ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. Ltd (supra) has expressed the view that a Corporate entity cannot said to have any personal expense, since the expenses are incurred on the employees and directors of the Corporate entity. The Ld A.R, during the course of hearing, also submitted that the AO did not make any such disallowance in other years. We also notice that 3 Garodia Syntex Pvt. Ltd.
majority of expenses incurred under this head consisted of conveyance & travelling expenses. Hence we agree with the contentions of the assessee, there is no necessity to disallow any expenses under this head towards personal element. In the absence of any material to show contrary, all the expenses should be considered to have been incurred towards business purpose only. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition made under this head.
The next issue relates to adhoc disallowance of Rs.2.00 lakhs made out of Business Promotion expenses. The assessee claimed a sum of Rs.58.40 lakhs. The AO noticed that the assessee has incurred hospitality expenses under this head and it was contended that they have been incurred to maintain good relationship with the clients. The AO took the view that the assessee could not prove that each and every expense has been incurred exclusively for the purpose of business and also could not substantiate the necessity of the expenses and the beneficiary. Accordingly he made adhoc disallowance of Rs.2.00 lakhs. The Ld CIT(A) also confirmed the same.
The Ld A.R submitted that the assessee has incurred entire expenses towards business purpose only and they are in the nature of business promotion, sales promotion, poster and advertisement expenses. He submitted that the expenses claimed by the assessee under this head constitute only 1.76% of the total turnover. He further submitted that the AO did not have any material to show that the expenses were not incurred towards business purpose only.
On the contrary, the Ld D.R supported the order passed by Ld CIT(A) on this issue.
We heard the parties on this issue and perused the record. We notice that the assessee has booked business promotion and advertisement expenses under this head. We notice that the assessing officer has, in principle, has accepted that these expenses have been incurred for the purpose of business.
4 Garodia Syntex Pvt. Ltd.
However the AO has made adhoc expenses only for the reason that the assessee has failed to show that these expenses have been incurred exclusively for the purpose of business and further the assessee has also failed to prove the necessity for incurring the expenses. We also notice that the Ld CIT(A) has endorsed the view of the AO. However we notice that the tax authorities have given vague reasons for making the adhoc disallowance of Rs.2.00 lakhs under this head. We notice that the assessing officer has not raised any specific question with regard to any of the expenditure, i.e., it is not shown by the revenue that the assessing officer has made this adhoc addition after examining the various expenses booked under this head. We have noticed that the assessee has incurred expenses for business promotion, sales promotion and advertisement expenses under this head. We also notice that the AO has not pointed out any specific instance of non-business purpose. Without pointing out any specific case of non-business purpose, in our view, the AO was not justified in making adhoc disallowance under this head, as generally the business promotion and advertisement expenses are incurred towards business purpose only. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.
The last issue relates to the disallowance of claim of sundry balances written off. The AO noticed that the miscellaneous expenses claimed by the assessee included a sum of Rs.64,823/- relating to Sundry balances written off. Since the assessee did not offer any explanation in this regard, the AO disallowed the claim of Rs.64,823/-. The Ld CIT(A) also confirmed the same.
The Ld A.R submitted that the assessee had given advances to its employees in the earlier years. It could not recover a portion of said advances, since the concerned employees have left the organization. Accordingly he submitted that the amount so written off is related to the business carried on by the assessee and should be allowed.
5 Garodia Syntex Pvt. Ltd.
On the contrary, the Ld D.R submitted that the assessee is making mere oral submissions without substantiating it.
We find merit in the contentions of Ld D.R on this issue. It is the duty of the assessee to show that the sundry balances written off was related to the advances given to its ex-employees. Hence, in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to substantiate its explanations. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of the AO with the direction to examine the same afresh by considering the information and explanations that may be furnished by the assessee. After considering them, the AO may take appropriate decision in accordance with the law.
In the result, the appeal of the assessee is treated as allowed for statistical purposes. Order has been pronounced in the Court on 7.5.2018.