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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 14/10/2013 of the Ld. Commissioner of Income-tax (Appeals)-XXVIII, New Delhi for assessment year 2010-11, raising following grounds:
1. That the Ld. CIT(A) has erred both in facts and in law while sustaining the disallowance of Rs. 1,15,650/-being out of pocket expenses recoverable from the client, which was written off during the year since the same could not be recovered.
2. That the Ld. CIT(A) has erred both in facts and in law while sustaining the disallowance of Rs. 1,53,196/- being l/6th out of vehicle expenses for personal use on estimate basis and failed to appreciate that the expenses incurred were wholly and exclusively for business purposes.
3. That the Ld. CIT(A) has erred both in facts and in law while sustaining the disallowance of Rs. 1,40,728/- being l/6th out of communication expenses for personal use on estimate basis and failed to appreciate that the expenses incurred were wholly and exclusively for business purposes.
4. That the Ld. CIT(A) has erred both in facts and in law while disallowing Rs. 3,13,433/- being l/6th out of traveling coupons for personal use on estimate basis and failed to appreciate that the expenses incurred were wholly and exclusively for business purposes.
5. That the order passed by the Ld. CIT(A) is bad in law and against the facts of the case. 6. That the appellant craves leave to add , delete or amend any of the grounds of appeal
on or before the disposal of the present appeal.
2. The facts in brief are that the assessee, a partnership firm, filed its return of income on 30/09/2010 declaring income of Rs. 2,61,35,294/-. The scrutiny assessment was completed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’), making certain additions and disallowances, at total income of Rs. 2,68,91,980/-. On appeal, the Ld. Commissioner of Income-tax (Appeals) allowed part relief on the grounds raised by the assessee. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. In respect of ground No. 1, the ld. Authorised Representative of the assessee submitted that the expenses of Rs. 1,15,650/- were incurred on behalf of a client for incorporation of a company in financial year 2005-06 and the said expenses have been written off during the year and allowable as per the provisions of section 36(1)(vii) of the Act. The Ld. Authorized Representative submitted that alternatively, the assessee may be allowed said expenses as business loss as the expenses were incurred in the course of the business. Whereas, ld. Senior Departmental Representative relying on the orders of the authorities below submitted that the assessee has failed to support with the evidences whether such debt was incurred by the assessee and shown as part of the income in the relevant assessment year 2005-06 and in absence of which, it has not satisfied the conditions laid down in section 36(1)(vii) of the Act. 3.1 We have heard the rival submissions and perused the material on record. We find that before the Ld. Commissioner of Income-tax( Appeals), the assessee failed to explain that the debt in question was part of income in relevant assessment year. The Ld. Commissioner of Income-tax (Appeals), has decided the issue as under: “4.2 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee had claimed that an expense of Rs.1,15,650/- had been incurred on incorporation of company on behalf of a client. The Assessing Officer disallowed the expense on the basis that there was nothing on record to show that these debtors were financially not in a position to pay the debts. The appellant has claimed that the expense was connected with the business activities and hence an allowable expense. As per the provisions of section 36(1 )(vii), in computing the income referred to in section 28 deduction is to be allowed of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. The Hon’ble Kerala High Court in the case of the M/s Travancore Tea Estate Co. Ltd. v. CIT (1992) 197 ITR 528 has held that the burden of proof that there is a debt owing to the assessee that the debt arose in the course of the business of the assessee and finally that had become bad in the year of account is all on the assessee. Thus the Hon’ble Court has held that there are three conditions essential for an amount to be written as bad debt. (a) there should be a debt owing to the assessee, (b) the debt should arise in the course of the business of the assessee, and (c) it should become bad in the year of account. In the case of the appellant, the appellant has admitted that the income was not included in the profit and loss account at any point during preceding previous years. As the payment on account of incorporation of company never swelled the taxable profits of the assessee company for any previous year prior to A.Y. 2010-11 the same cannot be held as bad debt. Further, as incorporation of company was not a trading debt of the appellant the write off did not qualify as a debt as it was not incidental to the business carried on by the appellant. The business/profession of the appellant is providing legal advice and not making payments on behalf of the clients. The addition made by the Assessing Officer is therefore confirmed.”
3.2 Though we agree that the expenses written off cannot be allowed as bad debt written off under section 36(1)(vii) of the Act, however, the claim of the assessee as business loss, if justified, is allowable in view of the judgment of Hon’ble Bombay High Court in the case of Harshad J Choksi V. CIT 349 ITR 250 (Bom) , wherein it is held as under:
“11. On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.
In fact this court in the matter of Commissioner of Income Tax v. R.B. Rungta& Co. (Supra) upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under Section 10 of the Indian Income Tax Act, 1922 which is similar/identical to Section 28 of the Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by this court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under Section 10(1) of the Indian Income Tax Act, 1922.” 3.3 In the instant case, the out of pocket expenses have been incurred by the assessee like ROC fees, professional fees etc which were reimbursable from the client. The assessee firm was engaged in rendering legal services including corporate services for incorporation of companies and out of pocket expenses incurred were incidental to the carrying on the business of the assessee. The assessee written off the expenses as the likelihood of the recovery of the expenses became remote as the partner who introduced the client, retired from the firm. According to the assessee, it was not commercially viable to claim expenses through litigation. Thus, in our opinion, the loss on account of non- recovery of out of pocket expenses incurred during the carrying on of its business activities is allowable as business loss under section 37(1) of the Act. Accordingly, we allow the ground No. 1 of the appeal. In grounds No. 2 to 4, the assessee has challenged the 1/6th disallowance 4. on account of Vehicle, Communications and travelling expenses respectively. 4.1 Before us, the Ld AR submitted that the expenses were incurred for the purpose of business and in assessment year 2013-14, the Assessing Officer has himself restricted the disallowance under these heads to 1/10th of the expenses incurred. 4.2 The ld. Senior Departmental Representative, on the other hand, relied on the order of the authorities below.
4.3 We have heard the rival submissions and perused the material on record. Out of the expenses of Rs. 9,19,173/- related to vehicle running and maintenance, interest on car loan, depreciation etc, the Assessing Officer disallowed 1/6th of the expenses amounting to Rs. 1,53,196/-, in absence of any log book of the vehicle running and maintenance produced by the assessee. Similarly, the Assessing Officer disallowed 1/6th of the expenses of Rs. 8,44,368/- related to communication expenses and depreciation on mobile phones for personal use in absence of any details of telephone calls, which amounted to Rs. 1,40,728/-. Further, under the head ‘travelling expenses’, the Assessing Officer noticed that expenses of Rs. 18,80,598/- were incurred on purchase of travelling coupons and in absence of any detail of the travels and personal use involved, he made disallowance of 1/6th of the expenses on coupons, which amounted to Rs. 3,13,433/-. The Ld. Commissioner of Income- tax (Appeals) upheld the disallowances on the ground that personal element in vehicle and telephone expenses cannot be ruled out and in case of disallowance under travelling expenses, the assessee failed to specify the purpose of the travels undertaken. In the facts of the case, we find that the assessee did not produce log-book of the vehicles as well as details of the telephone calls and, therefore, the assessee has failed to establish that entire expenses incurred on vehicle use and communication expenses were wholly and exclusively incurred for the purpose of business. We also agree with the findings of the ld. Commissioner of Income-tax (Appeals) that personal use in such expenses cannot be ruled out. In respect of disallowance under travelling expenses, the assessee has not been able to produce evidences that all the travels were for the purpose of business. However, we find that the Assessing Officer himself has restricted the disallowances to 1/10th of the expenses incurred in assessment year 2013-14. In view of above facts and circumstances, we are of the opinion that 1/10th of disallowances in respect of the expenses on vehicles, communication and travelling is reasonable and justified. Accordingly, we hold so. The grounds No. 2 to 4 of appeal are allowed partly.
The grounds No. 5 and 6 of the appeal are general in nature and therefore not required to be adjudicated upon by us.
In the result, the appeal of the assessee is allowed partly.