2009 (12) TMI 660 - AT - Income Tax

Tribunal allows deduction of salary expenses for business purpose; interest and club expenses disallowed.

The Tribunal allowed the deduction of salary expenses disallowed by the Assessing Officer, finding them to be incurred for the business purpose as per the ... Interest on borrowed capital, Business expenditure, Income from other sources, Issues Involved:1. Disallowance of salary expenses.2. Disallowance of interest expenses.3. Disallowance of club expenses.Summary:1. Disallowance of Salary Expenses:The first common ground raised in these appeals concerns the disallowance of salary expenses of Rs. 10,85,509 for the assessment year 1996-97 and Rs. 16,54,042 for the assessment year 1997-98. The facts from the assessment year 1996-97 were considered. The Assessing Officer (AO) disallowed the salary expenses, stating that the assessee had no receipts taxable under the head 'Business and profession' and that the expenses were not directly attributable to business receipts within the meaning of section 28 of the Act. The AO also invoked section 14A, stating that no deduction shall be allowed for expenditure incurred in relation to income that does not form part of the total income. The CIT(A) confirmed the AO's order, holding that the expenditure was not wholly and exclusively for the purpose of the assessee's business. The Tribunal, however, found that the revenue authorities did not properly appreciate the facts of the case. The Tribunal held that the salary expenses were incurred for the purpose of the assessee's business as per the MoU and Board Resolution, and thus, the assessee is entitled to the deduction of these expenses.2. Disallowance of Interest Expenses:The second ground concerns the disallowance of interest expenses of Rs. 1,20,385. The assessee claimed the interest expenses on the basis that it had undertaken the placement of preferential shares of REPL Engg. Ltd. and had to refund share application money along with interest when the shares were not allotted. The AO disallowed the claim, stating that no liability of interest had accrued or arisen in the hands of the assessee-company. The CIT(A) confirmed the AO's order, stating that the expenditure claimed was not the assessee's business expenditure. The Tribunal upheld the CIT(A)'s order, finding that the funds were not utilized for the purpose of the assessee's business and that the assessee failed to establish that the interest paid was for the purpose of business.3. Disallowance of Club Expenses:The third ground concerns the disallowance of club expenses of Rs. 50,000. The AO noticed that the assessee-company had paid an amount for the life membership of the President of the company and rejected the claim, stating it was a personal expenditure. The CIT(A) upheld the AO's decision, stating that the assessee failed to provide evidence that the expenditure was wholly and exclusively for the purpose of business. The Tribunal also upheld the CIT(A)'s finding, as the assessee failed to provide material evidence to support the claim that the club membership was for business purposes.Conclusion:The appeal for the assessment year 1996-97 is partly allowed, and the appeal for the assessment year 1997-98 is allowed.