By TIOL News Service

JAIPUR, FEB 13, 2015: THE issue before the Bench is - Whether when the AO had not pointed out any specific defects in the claim of expenditure by the assessee except holding that they were claimed on self made vouchers, such expenditure can be disallowed even though the same has been incurred for the purpose of business. And the verdict favours the assessee.

Facts of the case

The assessee derived income from authorized dealer for sale of vehicles, spare parts and accessories of M/s Maruti Udyog Ltd. for repairs. The assessment proceedings was completed U/s 143(3) of the Act making the total taxable income of the assessee at Rs. 1,16,22,904/- after making certain additions. The AO observed that the assessee had incurred Rs. 14,47,551/- under the head showroom expenses. On verification of details, it was found that most of expenses were incurred in cash on the basis of self made vouchers, therefore, a lump sum addition of Rs. 1,44,755/- being 10% of total claim was disallowed by the AO. 

Under the head repair and maintenance, the assessee had claimed expenses of Rs. 20,21,020/- in P&L account. On verification of details filed, it was found by the AO that a bill dated 06/8/2007 of Rs. 32,412/- issued by Frig Care Centre and payment of Rs. 54,140/- to JVVN Ltd. were included therein. Month wise salary payment had also been included. The assessee was also failed to produce all the bills and vouchers related to repair and maintenance expenses. Therefore, he presumed that the entire expenses were not related to the business activities of the assessee company. Thus, a lump sum disallowance of Rs. 2,02,102/- being 10% was disallowed and added to the total income of the assessee. 

Further the AO verified the incentive and remuneration paid to the customers, which had been debited in total at Rs. 23,85,961/- in P&L account. On verification of detail, the AO found that an amount of Rs. 11,07,092/- had been claimed as paid to the customers, Rs. 7,52,466/- had been debited as service tax expenses and Rs. 5,26,403/- had been paid to the employee. He further found that out of total incentive received from M/s Sundaram Finance Ltd., 7,89,279/- was paid to customers and Rs. 1,10,763/- had been paid against the service tax. However, in other cases, no such evidence was found. The finance company had decided its terms with the Assessee Company and customers mutually. The AO treated the assessee as a facilitator in this case, intends to give any further benefit over and above the benefit being given by the finance company, they should get reflected in the documents prepared by the financial company as well as was found in case of Sunderam Finance because the dealer was sharing liability of customer in repayment of loan take. No such evidence was found in other cases except self prepared documents by the assessee company. Nevertheless, the benefit of service tax paid was given in other cases as well. Thus, total addition of Rs. 8,44,216/- was made to the total income for want of proper verification of the evidences maintained in this regard. 

CIT(A) allowed the appeal of the assessee partly after considering the assessee’s reply i.e. the AO made ad hoc/lump sum addition out of expenses claimed by the appellant. He had not been pointed out any specific item of expenses which had not been incurred wholly and exclusively for business purposes. The cash payment permitted under the law for expenses cannot be basis of addition. The CIT(A) had found that these disallowances excessive, therefore, he restricted the addition to 5% of total expenses. For repair and maintenance, CIT(A) observed that most of the expenses were supported by bills and vouchers, some disallowance was considered justified. After considering the fact that part of the expenses are fully vouched and supported by the third party voucher, the disallowance was restricted to Rs. 1,25,000/- and deleted the remaining addition of Rs. 77,102/-. Under the head incentive and remuneration paid to the customers, it has been observed by the CIT(A) that the assessee had received incentive from Sunderam Finance at Rs. 7,89,279/-. Remaining incentive was received from various banks i.e. Rs. 3,17,813/-, which has also been passed on to the customers. The assessee received incentive from Maruti Insurance amounting to Rs. 89,76,823/-. The assessee paid to the employee out of this incentive at Rs. 4,47,726/- and only Rs. 21,058/- was passed on to the customers. Accordingly he held that incentive paid to the employees was reasonable and no disallowance is called for. 

On appeal by the Revenue and the cross objection by the assessee, the Tribunal held that,

++ the Revenue had not reverted the finding given by the CIT(A) with respect to showroom expenses, therefore, the addition made by the CIT(A) was confirmed. He was reasonable to accept the assessee’s submission, therefore, revenue’s appeal is dismissed on this ground. The disallowance confirmed under the head repair and maintenance expenses, the assessee’s arguments has been found convincing. He also furnished copy of evidence, which shows that the assessee had purchased the cable from Frig Care Centre vide bills No. 1133 dated 06/8/2007 and 1117 dated 04/8/2007, Rs. 80,840/- paid to JVVN Ltd. However, expenditure incurred by the assessee under this head at Rs. 20,21,020/-. The AO disallowed 10% out of total expenses at Rs. 2,02,102/-, which was restricted by the AO at Rs. 1,25,000/-. The A.R. has not controverted the findings given by the CIT(A) as well as the AO that the assessee was unable to produce the complete bills and vouchers related to repair and maintenance. Therefore, he was reasonable to restrict the disallowances at 5%. Accordingly, the revenue’s appeal as well as C.O. of the assessee are dismissed on this ground. The CIT(A) allowed the full expenses under the head incentive and remuneration paid to the customers after verifying each item, which has not been controverted by the DR, therefore, the revenue’s appeal on this ground was dismissed;

++ as regards the assessee’s C.O. against confirming the ad hoc disallowance under the head Staff Welfare Expenses is concerned, out of the expenses claimed by the assessee at Rs. 1,90,382/-, the AO disallowed Rs. 19,038/- being 10% of total expenses claimed on the ground that the expenses were not wholly and exclusively incurred for business purposes and on self made vouchers, which has been confirmed by the CIT(A) by observing that the disallowances were having personal nature and claimed on self made vouchers. The AR reiterated the same arguments that no specific defects had been pointed out by the AO and the CIT(A) except claimed on self made vouchers. He further submitted that Rs. 64,980/- was incurred towards marriage and birthday gifts to the family members of the staff is a normal business/courtesy. The expenditure incurred in course of running the business for maintenance of cordial relation with the staff. After considering the assessment order as well as finding given by the CIT(A), no specific defects had been pointed out by the lower authorities except holding that they were claimed on self made vouchers. The assessee had incurred these expenses on staff welfare, which are required to maintain the cordial relation with the staff, so that the company’s target can be achieved. These expenses were incurred wholly and exclusively for the business purposes, therefore the addition confirmed by the CIT(A) on this ground was deleted.

(See 2015-TIOL-165-ITAT-JAIPUR)