KHANNA HOTELS, LTD.,MUMBAI vs. D.C.I.T. C.C. 35, MUMBAI

This appeal, filed by the assessee company, being 19-10-2011 passed by the learned Commissioner of Income Tax (Appeals)- 41, Mumbai (Hereinafter called “the CIT(A)”), for the assessment year 2008-09.

The Grounds of appeal raised by the assessee company in the memo of appeal filed with the Tribunal read as under:-

Aggrieved by the above disallowances made by the A.O. in the assessment order dated 30-12-2010 passed u/s 143(3) of the Act, the assessee company carried the matter in appeal before the CIT(A).

Before the CIT(A), the assessee company submitted that the assessee is a company and assessee company cannot incur any personal expenses and at best these expenses can be treated as perquisites in the hands of employees including Directors but that does not mean that the expenses can be disallowed in the hands of the assesssee company . The assessee company relied upon the decision of Hon’ble High Court of Gujarat in the case of Sayaji Iron and Engg. Co. v. CIT 253 ITR 749. The assessee company submitted that it has also paid all these expenses and these are genuine expenses incurred for the purpose of business of the assessee company which can be verified from the books of accounts. However, the CIT(A) rejected the contention of the assessee company on the ground that some vouchers of the ITA 8680/M/11 4 assessee company are not verifiable and were not supported by regular bills and the assessee company has not given proper explanation before the AO and the CIT(A) even in appellate proccedings, hence, the CIT(A) held that disallowance of 10% made by the A.O. is very reasonable and accordingly the same was upheld by the CIT(A) .

Aggrieved by the orders dated 19-10-2011 passed by the CIT(A), the assessee company is in appeal before us.

The ld. Counsel for the assessee company submitted that these expenses are fully verifiable and are genuine allowable business expenditure and no specific defect in the vouchers/bills is pointed out by the authorities below and ad-hoc disallowance is made which is not permissible and more so the company has duly paid the Fringe Benefit Tax to the Revenue on these expenses , hence, these expenses as disallowed by the AO and sustained by the CIT(A) cannot be disallowed in the hands of the assessee company because the assessee is a company and there cannot be any personal expenses being incurred by the assesee company who is an artificial juridical person and at the best these expenses can be treated as perquisite in the hands of the employees including Directors and hence no disallowance can be made in the hands of the assessee company as these are genuine business expenditure duly incurred by the assessee company which can be verified from the books of accounts maintained by the assessee company and no specific defect is pointed by the Revenue in the books of accounts maintained by the assessee company nor these books of accounts are rejected by the Revenue. The books of accounts were duly produced before the authorities below along with the supporting vouchers/bills .

The ld. D.R., on the other hand, strongly supported the orders of the authorities below.

We have heard the rival contention and perused the material placed on record. We have observed that assessee company has incurred these expenses on ‘entertainment’ and ‘selling and business promotion’ which are not in dispute between both the parties. The only contention of the A.O. is that these ‘entertainment’ and ‘selling and business promotion’ expenses are not supported by proper bills/vouchers etc. and hence the same are not fully verifiable. However, no specific defects were pointed out by the A.O. in the vouchers/bills maintained by the AO nor in the books of accounts maintained by the assessee company nor the books of accounts are rejected by the AO rather an ad-hoc disallowance of 10% of expenses incurred by the assessee company on entertainment and selling and business promotion expenses has been made by the AO and sustained by the CIT(A). The assessee company submitted and stated before us that FBT have already been paid by the assessee company on these expenses. In our considered view, the AO was not justified in disallowing the expenses on ad-hoc basis without specifically pointing the defects in the vouchers and/or books of accounts maintained by the assessee company and the reasons for disallowance of the expenses so disallowed. The manner in which ad-hoc disallowance @10% of total expenses on entertainment and selling and business promotion expenses incurred by the assessee company has been made by the AO without pointing defects in the vouchers/bills and /or books of accounts maintained by the assessee company , the said disallowance of expenses incurred by the company on ‘entertainment’ and ‘selling and business promotion’ is not sustainable under the Act and more so the assessee company is an artificial juridical person being a company and fringe benefit tax is also stated to be duly paid on these expenses , the onus cast on revenue is more onerous to bring these expenses to disallowance under the Act which in our considered view has not been discharged by the Revenue in this case. In our considered view , these disallowance of expenses on ‘entertainment’ and ‘selling and business ITA 8680/M/11 6 promotion’ incurred by the assessee company made by AO and sustained by the CIT(A) are not sustainable under the Act and we set aside the orders of CIT(A) dated 19.10.2011 with respect to the additions made on account of disallowance of ‘entertainment expenses’ of Rs.61,467/- and ‘selling and business promotions expenses’ of Rs.3,07,295/- and delete the disallowance so made by the A.O vide orders dated 30-12-2010 .

In the result, the appeal filed by the assessee company is allowed.