2012 (6) TMI 534 - AT - Income Tax

Tribunal Reduces Disallowances, Emphasizes Procedural Compliance

The Tribunal partly allowed the appeals of both the Revenue and the assessee. The Tribunal reduced various disallowances made by the Assessing Officer, ... Refund of tuition fees - assessee is refunding the tuition fee to those students who are not keen to pursue the coaching in the institute - AO made enquiries u/s 133(6) from these students on test check basis. He alleged that in some of the cases the notices sent u/s 133(6) were received back with the remark of the postal authorities that the persons are not available or incomplete addresses and in 7 cases he alleged that either the students or their parents to whom tuition fees has been refunded in cash, denied to have received any such refund from the assessee – Held that:- in case of students coming from outstation, guardians do not always accompany their wards especially at the time of leaving the institute. When such students are refunded fee, they might, for obvious reasons, not disclose the same to their guardians/parents. This will obviously result in mismatch of information. AO however, proceeded in a hasty manner by making a casual enquiry and based on a faulty and insufficient sample drew his conclusion, away from the human probabilities, practical difficulties, business policy need, past history, the other similar trade practices etc. Hence, the ld. CIT (A) rightly deleted the disallowanceOnus of proof - Instead of claiming expenditure, the assessee was in receipt of tuition fees (net of refund). To allege a receipt as income of the assessee, onus always lay upon the Revenue. Therefore, it was for the AO to prove the correct amount of receipt to compute incomeAdvertisement expenses - expenses incurred on advertisement and banners – AO disallowed Payment to cricket club, Payment to ABVP, Payment on account of donation etc. – Held that:- payments were advertising the name of the Institutes at all places which will be frequented by target group (young students). Obviously, the best place/time would be the Sport Events or the events where students in general would participate. The AO has not alleged any personal element in these payments nor has the payment been doubted. Obviously, all the payments are either by cheque or are acknowledged by the concerned person. Since alt the above payments were made for the purposes of the business and were for advertising Institute. Since the expenses have been incurred on advertisement and banners are also a mode of advertisement, hence the ld. CIT(A) was justified in deleting the disallowance. Decided in favor of assesseeAddition on account of printing and stationary – part of such expense have been incurred in cash, that too without any bills, etc., and the vouchers have also been prepared by the assessee himself – Held that:- appellant submitted that this work was got done through casual and part-time workers, whose “signatures were obtained on periodical basis. The letter containing these submissions was made available to the assessing officer, who did not make any adverse comment. No addition is justified. Decided in favor of assesseeAddition out of building and maintenance account - certain expenses, which have been incurred in cash and which are not supported by the bills – Held that:- from time to time petty works become necessary and these have to be carried out through small-time, illiterate masons and contractors, who do not carry bill books and seek payments in cash. Disallowance cannot be made on the ground that payments were made in cash. No evidence is collected to suggest that payments were not genuine. The AO could have examined the person who made the payment and verified the vouchers. CIT(A) was justified in deleting the disallowance. Decided in favor of assesseeDisallowance out of telephone and vehicle expenses – Personal use – Held that:- disallowances for personal use, at 1/5, should apply only to 3 mobiles used by him and 2 land lines installed at his residence and also only to the two cars used exclusively by the appellant. telephones installed at business premises cannot be considered for personal use. The ld. CIT(A) has rightly reduced the disallowance. Revenue appeal partly allowedCopy checking expenses – assessee paid amount to M/s SRK Associates on account of copy checking – Whether proprietor of SRK Associates was wife of the appellant is good reason for invoking section 40A (2)(b) of the IT Act – Held that:- in the case of Edward Keventer (P) Ltd. (1978 (8) TMI 1 (SC)) AO must not apply provisions of Section 40A(2)(b) [in the old Act as Section 10(4A) capriciously as a matter of routine and Section is to be applied judiciously. The legitimate business needs must be judged from the viewpoint of a prudent business man. The benefit derived or occurring must also be considered from the angle of a prudent businessman. When the AO has accepted the genuineness of payment then there must be some material to suggest that fair market value of services rendered by a concern covered u/s 40A(2)(b) is less as compared to actual payment. Hence, in absence of evidence collected by the AO, CIT(A) was justified in deleting the addition. Decided in favor of asseesseeAddition out of computer expenses - AO noted that payments were prima-facie of capital nature as new items/assets were purchased by the assessee – Held that:- motherboard is a component of the computer and expenditure on its replacement cannot be treated as a “capital cost”. On the other hand, the UPS, though necessary for a computer, is a separate component and decision of the assessing officer to treat its cost, as capital cost is in order. CIT(A) was justified in deleting the expenses. Appeal partly allowed. Staff welfare expenses - random verification during the course of assessment proceedings, it was found that most of these expenses have been incurred in cash and also that part of the expenses are claim on the basis of self made vouchers – Held that:- assessee has not given the details of services rendered. The paper book also do not contain copy of such vouchers. The AO has mentioned that some expenses are not supported by authentic bills. We therefore, feel that AO was justified in disallowing part of the expenditure. The disallowance is excessive and hence is restricted to ₹ 35,000. Decided in favor of revenueInterest free payment - assessee has paid interest to bank against loan and overdraft for ₹ 10,99,099/- and such interest payment was reduced from the bank interest for FDR - On perusal of Schedule- VIII of the Balance sheet, it was found that the assessee has made interest free advances – Held that:- Since interst free advances are less than the capital and the AO has not brought on record any nexus of interest bearing loans being used the AO could not have disallowed the interest. There is no onus on the assessee to establish that interest free advances are out of interest bering advances if non-interest bearing funds are more. AO was not justified in making any disallowance. Hence, disallowance is deleted. appeal of the Revenue and cross objection of the assessee are partly allowed Issues Involved:1. Reduction of addition on account of cash refund of tuition fees.2. Disallowance of advertisement expenses.3. Disallowance of printing and stationery expenses.4. Disallowance of building and maintenance expenses.5. Disallowance of telephone and vehicle expenses.6. Disallowance of copy checking expenses.7. Disallowance of computer expenses.8. Disallowance of staff welfare expenses.9. Disallowance of interest on interest-free advances.10. Charging of interest.Issue-wise Detailed Analysis:1. Reduction of Addition on Account of Cash Refund of Tuition Fees:The Revenue challenged the reduction of addition from Rs. 21,51,100 to Rs. 86,500 regarding cash refunds of tuition fees, while the assessee contested the confirmation of the Rs. 86,500 addition. The Assessing Officer (AO) found discrepancies in the refund process, including incomplete addresses and denials of receipt by some students. The CIT(A) noted procedural lapses, such as lack of cross-examination of students and the provisional nature of the findings. The CIT(A) reduced the addition to Rs. 86,500, which was further reduced to Rs. 60,200 by the Tribunal, considering the genuineness of receipts and lack of adverse material.2. Disallowance of Advertisement Expenses:The AO disallowed Rs. 63,000 of advertisement expenses, questioning their business connection. The CIT(A) overturned this, recognizing the expenses as legitimate advertisement costs, including payments for banners and sponsorships at events. The Tribunal upheld the CIT(A)'s decision, finding the expenses justified and incurred for business purposes.3. Disallowance of Printing and Stationery Expenses:The AO disallowed Rs. 50,000 out of Rs. 72,61,764 claimed for printing and stationery, citing unsupported cash expenses. The CIT(A) reversed this, noting the absence of identified bogus vouchers and the nature of expenses involving casual workers. The Tribunal agreed, finding no basis for the disallowance.4. Disallowance of Building and Maintenance Expenses:The AO disallowed Rs. 50,000 out of Rs. 10,82,443 claimed for building maintenance due to unsupported cash payments. The CIT(A) found the expenses reasonable given the nature of work and the necessity of cash payments to small contractors. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of evidence against the genuineness of payments.5. Disallowance of Telephone and Vehicle Expenses:The AO disallowed 1/5 of telephone and vehicle expenses, estimating personal use. The CIT(A) limited the disallowance to expenses on the proprietor's personal phones and cars. The Tribunal found this approach fair, reducing the disallowance to Rs. 58,711 for telephone expenses and Rs. 81,753 for vehicle expenses, and dismissed the cross-objection by the assessee.6. Disallowance of Copy Checking Expenses:The AO disallowed Rs. 1,00,000 out of Rs. 9,35,000 paid to SRK Associates, a proprietary concern of the assessee's wife, under Section 40A(2)(b). The CIT(A) found the disallowance unjustified, noting the AO's failure to prove excessiveness or unreasonableness of payments. The Tribunal upheld the CIT(A)'s decision, emphasizing the need for evidence of fair market value and legitimate business needs.7. Disallowance of Computer Expenses:The AO disallowed Rs. 15,862 for purchases of a motherboard and UPS, treating them as capital expenses. The CIT(A) differentiated between the two, treating the motherboard as a repair expense and the UPS as a capital expense. The Tribunal agreed, upholding the CIT(A)'s partial acceptance of the appeal.8. Disallowance of Staff Welfare Expenses:The AO disallowed 1/10 of staff welfare expenses (Rs. 71,233) due to unsupported cash payments. The CIT(A) found the disallowance baseless, noting the AO's failure to identify self-made vouchers as bogus. The Tribunal partially agreed, reducing the disallowance to Rs. 35,000, considering the lack of independent bills.9. Disallowance of Interest on Interest-Free Advances:The AO disallowed Rs. 8,03,702 of interest, applying an 11% rate on interest-free advances of Rs. 98,23,950. The CIT(A) reduced the rate to 6%, aligning with the interest rate on the assessee's FDRs. The Tribunal found the disallowance unjustified, noting the sufficiency of the assessee's capital and lack of evidence of borrowed funds being used for interest-free advances.10. Charging of Interest:The Tribunal noted that interest is mandatory and the assessee would get consequential relief based on the outcome of other issues.Conclusion:The Tribunal partly allowed the appeals of both the Revenue and the assessee, providing detailed justifications for each issue and emphasizing the need for evidence and proper procedural adherence in disallowances.