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Income Tax - expenditure billed in name of sister company - rent on garden - capitalised advertisement expenditure - eligible for deduction - No personal expenditure in hands of company: ITAT

By TIOL News Service

MUMBAI, OCT 16, 2008 : THIS batch of four cross appeals - two by the Assessee and the other two by the Revenue - relate to the assessment years 2001-02 and 2002-2003.

The first ground of the assessee's appeal is against the disallowance of travelling expenses of Rs.5,78,385; The assessee claimed deduction for travelling expenses at Rs. 10,84,243. On perusal of the details, it was observed that certain expenses were not billed in the name of the assessee. Such amount was determined by the Assessing Officer at Rs.5,78,385. On being show caused, the assessee stated that certain expenses were shared by it in the group of companies as a matter of pure businesses expediency. The Assessing Officer did not concur with the submission advanced on behalf of the assessee and made addition of Rs.5,78,385. CIT(A) sustained the addition.

The Tribunal observed, “There is no dispute about the fact that it a particular expenditure has been incurred by the assessee in the carrying on of its business, then the disallowance cannot be made only on the technical ground that the bill was raised in the name of its sister concern for certain business considerations. However, it is necessary that the expenditure should have a direct nexus with the carrying on of the assessee's business. Now, the mere fact that the travelling expenses have been booked in the names of these employees cannot per se lead to the conclusion that the expenses were incurred for the assessee's business more so in the light of the fact that the bills were in the name of another sister concern. The material question is to see as to whether the travelling was undertaken in furtherance of the assessee's business or the other companies for whom also they worked and the assessee was reimbursed towards their salary.

As the necessary detail showing the object of travel and work done is not before the Tribunal, the matter is remanded; If it is found that the travelling was undertaken for the assessee's business, then, notwithstanding the fact that the bill was obtained in the name of the group entity, the deduction would be allowed. If, on the other hand, the expenditure is not incurred for the purpose of assessee's business, then the expenses cannot be allowed.

Ground No.2 is against the disallowance of 10% of the dividend income u/s.14A. The assessee had shown dividend income of Rs.83,14,981. On being called upon to explain as to why the expenses relatable to the earning of exempt income should not be disallowed, the assessee stated that the investments were made out of surplus fund available with the assessee and as such there was no expenditure, which could be attributed to the dividend income. The A.O. found that the assessee had a large investment portfolio of Rs. 10.54 crores as per Schedule 3 of the Balance Sheet. For managing such an investment portfolio and taking care of returns thereon, certain managerial and administrative time was required to be spent. Considering these facts, he disallowed 10% of the dividend income as expenditure in relation to such exempt income. Accordingly, a sum of Rs.8,31,498 was added to the assessee's total income. No relief was allowed in the first appeal.

Section 14A was inserted by the Finance Act, 2001, with retrospective effect from 1.4.1962 to provide that for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. It is pertinent to note that sub-sections (2) and (3) to this section were inserted by the Finance Act, 2006 with effect from 1.4.2007. These sub-sections provide that the A.O. shall determine the amount of expenditure incurred in relation to such exempt income as per the method prescribed if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the exempt income. It is further provided that where an assessee claims that no expenditure has been incurred by him in relation to the exempt income, the Assessing Officer shall proceed to determine the amount of such expenditure relatable to the exempt income.

In the case of Wimco Seedlings Limited [2007-TIOL-127-ITAT-DEL], it has been held that such disallowance is not permissible and sub-sections (2) and (3), which came into effect by the Finance Act, 2006, giving the authority to the AO for computing proportionate expenses from common expenses on the prescribed basis, are applicable only with effect from assessment year 2007-2008. Following this decision, this ground of appeal is allowed.

Rent on garden: Both Revenue and assessee are aggrieved: Ground No.3 of the assessee's appeal and ground No. 2 of the Revenue's appeal deal with a common issue. The assessee-company paid rent of Rs. 17,72,708 to its sister concern ING Bank for using premises at Altamount Road for three months. As per the note submitted by the assessee, the premises pertain to landlord M/s.Krishna & Co. which had let it out to ING Bank, who in turn sub-letted a portion of it to the assessee. The office area of the building let out of ING Bank consisted of 6000 sq.ft. and Garden area of 8200 sq. ft. It was claimed that the assessee occupied 2/3rd of the property and as per the assessee's submission, the rent paid worked out to Rs.87.81 per sq.ft. per month [Rs. 591236 / 6733 (Office space of 4000 Sq feet and garden space of 2733 sq. feet)]. The assessee further submitted that this rate was lower than the market rate of Rs. 100 per sq.ft. of the area in which the said office was situated. The Assessing Officer noted that the assessee was an investment company and hence it had nothing to do with the garden space. It was, therefore, held that there was no ultimate purpose of the assessee-company for using the garden and paying any rent for that portion, was uncalled for. The proportionate garden rent was disallowed, which worked out to Rs.7,19,954 (Rs.87.81 x 3 months x 2733 garden space ). The Assessing Officer further noted that the rate per sq.ft. without the garden space was Rs.147.81 ( Rs.591236 / 4000 sq.ft.). Excess payment of rent u/s.40A(2)(b) was computed at Rs.47.81 per sq.ft., which resulted into the disallowance of Rs.1,91,200. Thus, the total disallowance was made at Rs.9,11,154 (719954 + 191200).

In the first appeal, the CIT(A) held that the rate of Rs.147.81 per sq.ft. applied by the Assessing Officer was not correct as the actual rent paid by the assessee was at Rs.87.81 per sq.ft., which was below the bench mark adopted by the A.O. of Rs.100 per sq.ft. He, therefore, deleted the addition of Rs.1,91,200. However, the remaining addition of Rs.7,19,954, as relatable to the garden space, was upheld.

Both the sides are in appeal against their respective stands.

The Tribunal observed, “The assessing Officer has disallowed the rent of garden space simply on the ground that the nature of assessee's business did not necessitate any garden space. What amount of expenditure is to be incurred by the assessee in carrying on its business purely falls in his domain and the Assessing Officer cannot interfere so long as the expenditure is for business and has been genuinely incurred. For the reason that the AO has not denied that the assessee was in fact using the garden space which it had paid rent in inclusive manner”.

Accordingly, this addition is ordered to be deleted.

Advertisement expenditure: The assessee claimed a sum of Rs.1,27,83,883 as advertisement expenditure in the computation of income. However in the books of account only 1/5th was claimed as deduction and the remaining 4/5th was capitalized to be set off in further four years. On being show caused as to why the deduction for the remaining 4/5th expenditure be not disallowed, the assessee stated that, it was advertisement expenditure and its spread over five years in the books was for management convenience. The Assessing Officer noted that the concept of the deferred revenue expenditure has been recognized by the judiciary in the Income-tax Act and hence only 1/5th of the expenditure claimed as deduction in the books of account can be allowed. The remaining amount of Rs.1.02 crore was added to the assessee's income. In the first appeal, the CIT(A) deleted this addition.

The Tribunal observed, “On the perusal of the views placed before us, we find that the real question for determining the deductibility or otherwise of any expenditure is its nature and not the treatment given in the books of account. If a particular expenditure is deductible by virtue of its nature being revenue, the assessee cannot be denied the deduction merely on the ground that it had capitalized it in the books of account. In the same manner, if a particular amount has been claimed as deductible, which is otherwise capital in nature, that cannot be allowed because of the treatment given in the books of account. So, the crucial factor is the nature of expenditure and not the way in which it has been reflected in the books of account.”

The Tribunal held that the entire expenditure is deductible.

No personal expenditure in the hands of the company.

The Assessing Officer observed that the assessee had claimed telephone expenses, petrol charges, drivers reimbursement, sweeper charges and electricity charges to the extent of Rs.4.34 lakhs over and above the perquisite already paid to the M.D. Such expenses were held to be personal in nature and not allowable. Similarly, payment in respect of Shri H.Y.Rastogi for car lease and petrol charges of Rs.3,02,653 was disallowed. The total disallowance of Rs. 7,36,744 was deleted in first appeal.

Tribunal’s decision:  “It is noted that the assessee is a private limited company and in such a situation, there cannot be any question of a personal use of the facilities by the Directors of the company. We uphold the impugned order on this issue.”

(See 2008-TIOL-487-ITAT-MUM in 'Income Tax' + 2008-TIOL-487-ITAT-MUM in 'Legal Corner')

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