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Facts
The assessee challenged the CIT(A)'s order confirming disallowance of maintenance expenses and partial disallowance of motor car expenses. The assessee did not appear, and the appeal was decided ex-parte. The assessee had claimed maintenance charges paid to employees but did not produce bills or vouchers, only ledger accounts. The CIT(A) confirmed the disallowance. For motorcar expenses, the assessee argued that as a private limited company, personal use is not applicable, but the AO disallowed 20% and CIT(A) restricted it to 10%.
Held
The Tribunal held that for maintenance expenses, since the assessee followed the mercantile system, actual payment not being proved was not a reason for disallowance, and the AO was directed to delete the disallowance. For motorcar expenses, due to the lack of log books, it was presumed that some expenses might not be for business purposes, and therefore, the CIT(A)'s confirmation of 10% disallowance was upheld.
Key Issues
Whether disallowance of maintenance expenses is justified when vouchers were not produced but ledger accounts were provided and mercantile system of accounting is followed? Whether disallowance of motorcar expenses is justified due to lack of log books indicating potential personal use?
Sections Cited
Section 37(1) of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI PAVAN KUMAR GADALE
PER B.R. BASKARAN, ACCOUNTANT MEMBER :
The assessee has filed this appeal challenging the order dated 03.09.2019 passed by the learned Commissioner of Income Tax (Appeals)-9, Mumbai (‘CIT(A)’ for short) and it relates to Asst. Year 2014-15.
None appeared on behalf of the assessee and the notice issued by the Registry has been returned back by the Postal Department with the noting “no such person in the address”. Hence, we proceed to dispose off the appeal ex parte, without presence of the assessee.
DSM Infocomm Pvt. Ltd. 3. We noticed from the grounds of appeal that the assessee is aggrieved by the decision of CIT(A) in confirming the disallowance of maintenance expenses of Rs.12,74,133/- and partial confirmation of disallowance of motor car expenses by the Assessing Officer.
We heard the learned DR and perused the record. The assessee is engaged in the business of providing networking services, installing and trading in IT products.
The first issue relates to disallowance of maintenance expenses. The Assessing Officer noticed that the assessee has claimed a sum of Rs.12,74,133/- under the head “Maintenance charges” paid to 6 persons. The assessee furnished the ledger account copies of the said parties, but did not produce any bills or vouchers. Hence, the Assessing Officer disallowed the above said amount treating the same as not proved by the assessee. The CIT(A) also confirmed the same observing that the assessee has not furnished confirmation from the payees and also did not furnish the details of bank transactions to prove the genuineness of the transactions.
We noticed that the assessee has paid maintenance charges to 7 persons. According to the assessee, these persons are employees of the assessee and hence the ledger account copies were furnished to the tax authorities. The assessee has also stated before the CIT(A) that the relevant vouchers were furnished alongwith ledger account copies before the Assessing Officer, but the Assessing Officer did not verify the same. Thus, according to the assessee, it has furnished the vouchers before the Assessing Officer alongwith ledger account copies. Even though the CIT(A) has taken DSM Infocomm Pvt. Ltd. note of this fact, yet he has confirmed the disallowance by observing that the payment made to 6 individuals has not been proved. Under Section 37(1) of the Income Tax Act, 1961 (‘Act’ for short), an expenditure is allowed as deduction if it is fully and exclusively laid out or expended for the purpose of business. Even if the payment is postponed, yet the relevant expenditure is allowable as deduction under the mercantile system of accounting when the liability to pay arises. In the instant case, the Assessing Officer has stated that the assessee is following mercantile system of accounting and hence the actual payment may not be relevant to decide the allowability of the expenditure. We noticed that the CIT(A) has confirmed the addition only for the reason that the assessee has not proved the actual payment, which is not required under the Act. Accordingly, we set aside the order passed by the CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of maintenance expenses.
The next issue relates to disallowance of motorcar expenses. The Assessing Officer disallowed 20% of motorcar expenses observing that the usage of the motorcar for personal purposes is not allowable under the Act. The CIT(A) restricted the same to 10% and hence the assessee is aggrieved.
We heard the learned DR and perused the record. The assessee has incurred a sum of Rs.20,55,591/- towards motorcar expenses, but the Assessing Officer has taken cognizance of Rs.18,63,955/- for the purpose of computing the disallowance. The contention of the assessee before the CIT(A) was that the assessee being a private limited company and a separate legal entity, the question of personal expenditure does not arise. However, what is required to be seen is whether the expenditure incurred on motorcar is for the DSM Infocomm Pvt. Ltd. purpose of business or not. If it is expended or laid out fully and exclusively for the purpose of business, the same is allowable as deduction. Since the assessee has failed to maintain log books, it is always possible to presume that some portion of the motorcar expenses might not have been incurred for the purpose of business. Under this proposition we are of the view that the CIT(A) was justified in confirming disallowance of motorcar expenses to the extent of 10%. Accordingly, we uphold the order passed by CIT(A) on this issue.
In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 3rd September, 2024.