KURODA ELECTRIC INDIA PRIVATE LIMITED,HARYANA vs. ACIT, CIRCLE 2(1), GURGAON

5. That the appellant craves leave to add, alter and / or amend the grounds of appeal at the time of hearing and resubmit any documents as may be required as additional evidence under Rule 29 of Income Tax Rules, 1962.

6. That on the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A) erred in upholding the ACITs Order arbitrarily disallowing 30% of expenses incurred by the 3 Kuiroda Electric India Vs. ACIT Appellant on car hire, domestic and foreign travel without any evidence merely on the basis of certain incorrect assumptions, suspicion, surmise and conjecture.

7. That on the facts and in the circumstances of the case, the learned CIT(A) erred in ignoring the submissions made by the Appellant to prove genuineness of the expenses incurred.

8. That on the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in ignoring the fact that the subject year is the year of incorporation of the Appellant company, and it is only natural that substantial travelling expenses are to be incurred in the initial years to set up the business and establish connections with suppliers, agents and customers.”

The assessee filed an application for condonation of the delay contending that the time limit for filing the Appeal before the Tribunal was up to 28/01/2023 and the assessee made payment of Court Fee on 20/01/2023 and filed Appeal in online on 24/01/2023 in Form No.

“ The appellant has e-filed its return of income for the A.Y. 2016-17 declaring loss of alongwith questionnaire. In response, the AR of the appellant attended and filed their submission. From the P&L A/C, the AO observed that appellant has booked car charges of Rs. 15,10,854/-, foreign travelling of Rs. 8,43,895/- and domestic travelling of Rs. 23,31,777) To examine the nature of these expenses, the AO called for the ledger copies of the expenses with name, employee number, date of travelling, name & business purpose of travelling and names and addresses of the persons with whom meeting was held, copies of correspondence

In response to this, the appellant submitted that during this period, the sale has increased. However, requisite information regarding travelling was not provided. The appellant submitted that eight new companies were added in the next F.Y. relevant to A.Y. 2017-18. However, details of communication, meetings and other information as required by the AO with these companies were not provided to establish that appellant's claim of addition of these clients and consequent increase in sale in next year have resulted from these travels. The Counsel of the appellant submitted that these companies are located in Gurugram, Delhi and Manesar. Hence, the AO observed that since these companies are located in nearby areas, foreign and other domestic travels were not required.

The AO has further observed that as per Appointment agreements with the directors, who are Japanese citizens, are entitled for journey only once a year. Further, the AO also observed that even if it is admitted that parent companies of these Indian companies may be located in Japan or any other foreign country, they are not supposed to take decision on behalf of the Indian subsidiaries whose registered office,

Thus, the AO concluded that in the absence of information which could establish that the travels were actually made for business purpose, the appellant has failed to discharge its onus. Relying on the decision of the Hon'ble ITAT in the case of Kanu Kitchen Kulture (P) Ltd Vs. DCIT [2014] 49 taxmann.com 64 (Delhi-Trib), Hon'ble Supreme Court in the case of CIT Vs. Imperial Chemical Industries (India) P. Ltd. [1969] 74 ITR 17, the Hon'ble ITAT held that burden of proving that a particular expense has been laid out or incurred wholly and exclusively for the purpose of business is entirely on the assessee. The discharge of the burden has to be effective and meaningful and not to cover up merely book entries and paper work.

Accordingly claim of the appellant with regard to car charges of Rs.15,10,854/- foreign travelling of Rs. 8,43,895/- and domestic travelling of Rs. 23,31,777/- (totaling to Rs 46,86,526/-) was not accepted by the AO and 30% of these expenses which was Rs.29,73,339/- were disallowed and added to the total income of the appellant.” assessee preferred an Appeal before the CIT(A). The Ld. CIT(A) vide order dated 29/11/2022, confirmed the additions made by the CIT(A), but corrected the computation error made by the A.O., and restricted the disallowance of 30% to total expenses claimed of Rs. 46,86,526/-. Aggrieved by the order of the Ld. CIT(A), assessee preferred the present Appeal on the grounds mentioned above.

The assessee through his Representative provided certain details, and clarifications but the Ld. A.O. not satisfied with the explanation given by the Assessee's Representative. However, the A.O. has not disallowed the entire expenditure claimed by the assessee, but made ad-hoc disallowance of 30% of the expenses claimed by the assessee, taking into consideration that it would not be proper to completely disallow the expenses. first year of incorporation/business establishment of the assessee. It is the case of the assessee that the expenses on car charges, foreign traveling and domestic traveling are bound to be more in the initial year of set up, as it involves much extra travelling in setting up a new business unit and does not correlate to transaction and business of the Company. The said fact has been not considered by the Lower Authorities. It is not the case of the Revenue that the assessee has not incurred any expenditure, on the contrary, the A.O. himself observed that ‘it would not be proper to completely disallow the expenses’ and made ad-hoc disallowance. The assessee on 29/11/2018 provided detailed submission on the questionnaire raised along with all the invoices, vouchers and other documentary evidence supporting the expenses incurred by the assessee. Further, on 04/12/2018 once again provided detailed submission with respect to all travel made by the employees along with the agenda of the meetings and other relevant details corroborating the business purposes of the travelling and car hire charges.

Safe Deposit Co. Ltd. (1982) 133 ITR 756 (SC) held that the true test of an expenditure laid out wholly and exclusively for the purposes of business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going.

The expenditure incurred must be for commercial expediency.

In the circumstances, the Ld. A.O. has been totally wrong in considering the fact that the discharge of the burden has to be effective and meaningful and not to cover up merely by book entries and paper work.

“ Under Section 37(1) of the Income tax Act, 1961, the jurisdiction of the Revenue is confined to deciding the reality of the business expenditure, viz., whether the amount claimed as a deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of the business. It must not, however, suffer from the vice of collusiveness or colorable device. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of the business man or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”

Order pronounced in the open court on 07th March, 2024.