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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of the CIT(A)-8, Mumbai dated 26-03-2015 and it pertains to AY 2009-10. The assessee has raised the following grounds of appeal:_
Ground No. 1 “I
1.1 On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeals) ('CIT (A)'), erred in upholding the disallowance made by the Learned Deputy Commissioner of Income-tax (O.S.D.), Range 3(1), Mumbai (' Learned AO') of foreign travel expenses of Rs. 34,10,933, being 50% of the total 68,21,865.
1.2 The Appellant prays that the Learned AO be directed to delete the disallowance.
Ground No. 2 II
2.1 On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) erred in upholding the proportionate allocation of the head office ('HO') expenses made by the Learned AO of Rs. 78,42,574, being 43.36 % of total HO expenses of Rs. 1,80,87,118 to the ioA/ioB units.
2.2 The Appellant prays that the Learned AO be directed to delete the above allocation of the HO expenses to the ioA/ioB units. Ground No. 3 III 3.1 Without prejudice to Ground No. 2 above, the Hon'ble CIT (A), erred in upholding the allocation made by the Learned AO of the HO expenses without giving effect to the following adjustments under the Income-tax Act, 1961 ('the Act'): Allocating tax depreciation of the head office of Rs. 15,52,067 as i. against book depreciation of the head office of Rs. 8,73,919 to the units claiming deduction under sections 10A and 10B of the Act; ii. Allowances / disallowances under sections 40(a), 43B etc of the Act. 3.2 The Appellant prays that if Ground No 2 is dismissed, the Learned AO be directed to allocate head office expenses after giving effect of allowances / disallowances for adjustments required under the Act.”
The assessee also filed a petition for admission of additional ground on 20-03-2017. The relevant additional grounds of appeal filed by the assessee are reproduced below:-
“IV Ground No.4
Without prejudice to Ground No. 2, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in considering the gross amount of head office expenditure of Rs. 1,80,87,118 instead of the net head office expenditure (i.e. after reducing head office income) of Rs. 82,67,588 while upholding the proportionate allocation of head office expenditure to divisions claiming deduction under section 10A and l0B of the Act.”
The Ld.AR for the assessee submitted that in respect of allocation of head office expenses to units claiming deduction u/s 10A & 10B, while allocating head office expenses, the AO has taken gross expenditure ignoring income earned by the head office, therefore, without prejudice to the stand tht head office expenses cannot be allocated to units eligible for exemption u/s 10A & 10B, if at all allocation is necessary, then, it should be on net expenditure incurred by the head office, but not on gross expenditure. The Ld.AR further submitted that all the relevant materials and information required for disposal of this ground have already been filed before the authorities below and are on record, therefore, the additional grounds of appeal may be admitted for adjudication. The Ld.DR strongly opposed admission of additional ground filed by the assessee.
We have heard both the parties and perused the materials available on record. The additional ground raised by the assessee making an alternative plea of allocation of head office expenses on net basis is supported by relevant material already on record before the lower authorities and no new facts or materials brought on record to support the claim. Therefore, we deem it appropriate to admit the additional grounds of appeal raised by the assessee and hence, the additional ground of appeal raised by the assessee is admitted for adjudication.
5. The brief facts of the case are tht the assessee company engaged in the business of development and export of software and trading in ultrasonic welding and cleaning equipment, drainage clearing, equipment, compressors and accessories filed its return of income for the AY 2009-10 on 30-09-2009 declaring total income of Rs.48,74,04,059/-. The case was selected for scrutiny and notice u/s 143(2) and 142(1) were issued. In response, the authorized representative of the assessee appeared from time to time and filed necessary details, as called for. The assessment was completed u/s 143(3) on 14-03-2013 determining total income at Rs.50,36,30,985 inter alia making additions / disallowances towards 50% of foreign travel expenses and disallowance of deduction claimed u/s 10A / 10B of the Act. Aggrieved by the assessment order, the assessee has filed appeal before CIT(A). The assessee has filed elaborate written submissions before the CIT(A) to challenge the additions made by the AO in respect of 50% disallowance of foreign travel expenses on the ground that the assessee has incurred foreign travel expenses for its top executives, who had undertaken foreign travel in connection with its export business to discuss business strategies, for this, necessary evidence had been filed before the AO. The AO has not disputed the correctness of claim made by the AO; however, disallowed on the sole ground that the assessee has failed to file necessary proof of meeting between the employees of the assessee and its foreign clients. Insofar as disallowance of deduction claimed u/s 10A / 10B on allocation of head office expenses, it was submitted that head office expenses incurred are nowhere in relation to units claiming exemption u/s 10A / 10B of the Act. The units, have incurred expenditure on stand-alone basis without any support from the head office. Therefore, the AO was incorrect in allocating head office expenses to the units claiming exemption u/s 10A / 10B of the Income-tax Act, 1961.
6. The CIT(A), after considering the relevant submissions of the assessee observed that the assessee could not file any evidence during the course of appellate proceedings to show that the travels were undertaken for business purposes. Therefore, the AO was right in disallowing 50% of foreign travel expenses. Accordingly, he confirmed the additions made by the AO. However, the CIT(A) further observed that there is a merit in the contention of the Ld.AR that the AO ought to have increased the corresponding deduction u/s 10A of the EDEC Pune Division by disallowing the foreign travel expenses of the eligible 10A unit of Rs.16,55,505/-. Insofar as allocation of headquarter expenses, the CIT(A) observed that the basic finding of the AO is that the headquarter expenditure incurred by the assessee company has been allocated against the taxable units and not against exempt units. The AO has rightly apportioned the headquarter expenses amongst the units claiming exemption u/s 10A / 10B as the assessee has failed to establish that the head office expenditure is no way relevant to the units claiming exemption u/s 10A / 10B of the Act. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
7. The first issue that came up for our consideration is disallowance of foreign travel expenses. During the year under consideration, the assessee has claimed deduction of Rs.22,05,18,836 on account of travel and conveyance expenses. On verification of the details filed by the assessee, the AO observed that the assessee has spent an amount of Rs.68,29,865 in respect of expenses of Vice President, Shri MM Lohia and other executives of the company. In this connection, the assessee was requested to furnish the details of foreign travel expenses like travel period, place of visit and justification that visit was for the purposes of business. In response to the query, the assessee vide letter dated 14-12-2012 submitted a detailed chart showing foreign visits undertaken by its vice president and other officials, purpose of visit, places visited, amounts spent and stated that its personnel have visited countries like Canada, UAE, Singapore and other countries for the purpose of business meetings with its clients. The assessee also furnished sample copies of vouchers along with passports and visas to justify its foreign visits by its employees. The assessee further submitted that it is in the business of export of goods and merchandise and its export turnover is more than 88% of its total turnover. He further submitted that during the financial year its export turnover has been increased to Rs.211.79 crores as against Rs.135.38 crores in immediately preceding year.
Therefore, there is a relevance of expenditure incurred in respect of foreign travel expenses to its business receipts. Therefore, there is no reason for disallowance of foreign travel expense. The AO, after considering the explanation of the assessee has disallowed 50% of the total foreign travel expenses for the reason that the assessee has failed to submit any evidence of business meeting attended by its employees with its customers abroad. The AO further observed that though the assessee furnished relevant documents in support of foreign travel expenses, the question here is not authenticity of foreign travel expenses incurred by the assessee, but the nexus between expenditure incurred and business purpose. Since the assessee has failed to prove nexus between expenditure incurred and business purpose, disallowed 50% of total foreign travel expenses and added to the total income of the assessee.
The Ld.AR for the assessee submitted that the AO was erred in disallowing foreign travel expenses solely on the ground that the assessee has not furnished any proof to establish business meeting with its customers inspite of furnishing of evidence to justify foreign travel expenses. The Ld.AR further referring to the paper book submitted that its foreign travel vouchers clearly indicates the purpose of visit, country visited and other relevant details, which have been approved by director in charge of business. The assessee has furnished relevant passport / visas copies of the officials to travel in connection with business purpose, therefore, the AO was incorrect in disallowing expenses on adhoc basis merely on the ground that no evidence has been filed to justify expenditure incurred and business meetings with its clients.
The Ld.DR strongly supporting the order of the CIT(A) submitted that the question here is not the correctness of expenditure claimed by the assessee, but the relevance of foreign travel expenses and its business connection. The AO has brought out clear facts to the effect that the assessee has not filed any evidence to justify its expenditure incurred for meeting with its foreign clients, therefore, the AO was right in disallowing foreign travel expenses and his order should be upheld.
We have heard both the parties and perused material available on record and gone through the order of authorities below. The AO has disallowed foreign travel expenses on the ground that the assessee has not furnished any evidence in support of foreign travel of its employees and business connection with its clients. The AO has not doubted the genuineness of expenses incurred by the assessee. The AO has accepted the fact that the assessee has furnished all evidences except evidence in respect of meetings with its foreign clients. The assessee claims that merely because no evidence has been filed to establish the business meeting with its clients, foreign travel expenses cannot be disallowed despite furnishing of evidences to prove the expenditure. The assessee further submitted that foreign travel expenditure incurred by the assessee is in relation to travelling undertaken by its vice president and top executives, who had frequently visited many countries, where the assessee is having business relationship to have necessary meetings with its clients for which all evidences have been furnished before the AO. The assessee has filed various documents including passports / visas of the employees, who travelled and also sample copies of vouchers which clearly indicate the purpose of visit. Therefore, the AO was incorrect in disallowing adhoc 50% foreign travel expenses.
Having heard both the sides, we find force in the arguments of the assessee for the reason that merely because no evidence has been filed to establish foreign travel undertaken by its executives to attend meetings with its clients, foreign travel expenses incurred by the assessee cannot be disallowed on adhoc basis despite furnishing of evidences. The AO has not pointed out any incorrect claim made by the assessee. The AO has accepted the fact that the assessee has filed all documents to justify its expenses. The AO is only on the point that no evidence has been filed to prove foreign travel and business connection with its clients. We are of the view that the AO was incorrect in observing that the assessee has not filed any details to justify its foreign travel expenses, despite the assessee has filed its vouchers which clearly indicates the purpose of visits by its employees. However, it is incumbent upon the assessee to file some evidence in the form of correspondence between the assessee and its foreign clients for the meetings between its employees and its clients to justify foreign travel expenses. Therefore, we are of the view that the issue requires re-verification by the AO in the light of our above discussion. Hence, we set aside the issue to the file of the AO and direct him to re-consider the issue afresh and decide the same in accordance with law. Needless to say, the assessee is directed to furnish necessary evidence to establish nexus between foreign travel by its employees and business connection of the assessee.
The next issue that came up for our consideration is allocation of headquarter expenses to units claiming exemption u/s 10A / 10B of the Act.
The AO has allocated headquarter expenses to the units claiming exemption u/s 10A / 10B and reworked deduction claimed by the assessee. According to the AO, the assessee has parked its headquarter expenses to the units earning taxable income but not against units claiming exempt income u/s 10A / 10B of the Act. It is the contention of the assessee that the expenses incurred by the headquarter are no way connected to the business of the units claiming exemption u/s 10A / 10B. The units are functioning on stand alone basis, therefore, the question of allocation of head office expenses to the units claiming exemption u/s 10A / 10B does not arise. The assessee further contended that alternatively, if at all, any allocation is required to be made towards head office expense, to the units claiming exemption u/s 10A / 10B, only net expenses incurred by the headquarter should be allocated but not the total expenditure incurred by the assessee.
We have heard both the parties and considered the materials available on record. The AO has allocated head office expenses proportionately for units claiming exemption u/s 10A / 10B, on the basis of the turnover of the units. According to the AO, the assessee has parked its head office expenses for the units generating taxable income without any valid reasons for not allocating expense to the units claiming exemption u/s 10A / 10B. The assessee claims that head office expenditure in no way connected to the units claiming exemption u/s 10A / 10B and the units are functioning independently.
Therefore, the AO was incorrect in allocating head office expenses to the units claiming exemption u/s 10A / 10B. We do not find any merits in the arguments of the assessee for the reason that on perusal of the details of expenditure incurred by the assessee it is difficult to accept explanation of the assessee that head office expenditure has no relevance to the units claiming exemption u/s 10A / 10B. The assessee is having four units based at various locations which were controlled through its headquarter. The expenditure incurred by head office like travel and conveyance, communication expenses, legal and professional charges and rates and taxes definitely is having relevance to its total business. Therefore, we are of the view that the AO was right in allocating head office expenses to the units eligible for claiming exemption u/s 10A / 10B of the Act. We further observe that there is merit in the argument of the assessee that only net expenses of head office should be allocated to the units claiming exemption u/s 10A / 10B, because the assessee is generating other income like interest on fixed deposit and rent which may have some bearing on the functioning of its units claiming exemption u/s 10A / 10B. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the submissions of the assessee. Hence, we set aside the issue to the file of AO and direct him to consider the issue afresh after affording opportunity of hearing to the assessee.
In the result, appeal filed by the assessee is treated as partly allowed, for statistical purpose. Order pronounced in the open court on 25th September, 2017.