2013 (11) TMI 13 - AT - Income Tax

Tribunal grants relief on multiple expense disallowances, directs AO to verify for appropriate deductions

The Tribunal partially allowed both appeals, providing relief on various disallowances related to vehicle expenses, travel expenses, professional fees, ... Clubbing of income of two partnership firms with the income of assessee - revocable transfer - Held that:- the concept of the partnership firm as governed by the Partnership Act as well as the scheme of taxation of the partnership firms which are recognized as separate entities for income tax purpose and having regard to the taxation purpose, we are of the view that the provisions of section 60 to 63 of the Act cannot be applied to club the income of two partnership firms namely M/s Sea Princess Investment and M/s Sea Princess Realty with the income of the assessee and the ld. CIT(A), in our opinion, was not justified in upholding the action of the A.O. in clubbing the income of the said two partnership firms in the hands of the assessee by invoking the said provisions. - Additions deleted - decided in favor of revenue. Disallowance made of various expenses on the ground that vehicle- wise and party-wise details could not be furnished by the assessee and also for want of the relevant details and supporting evidence – Held that:- Disallowance of vehicle expenses of 10% made by the A.O. without pointing out even a single instance of un- verifiable element involved in the said expenses was not sustainable – Decided in favor of Assessee. Nature of expenditure, Revenue or Capital - Professional fees paid by the assessee to the interior decorators etc., AO treating the same as capital expenditure to the extent of Rs. 26,21,380/- - Held that:- the temporary operational plan implemented by the assessee during the construction period really worked effectively resulting into profit of Rs. 7.60 and Rs. 12.03 in financial year 2005-06 and 2006-07 respectively as against the profit of Rs. 5.41 crores earned by the assessee company in A.Y. 2004-05. As regards the other small items of payment made by the assessee on account of professional fees, we are of the view that going by the nature of the corresponding services availed by the assessee as explained by the ld. counsel for the assessee, the said payments were made to upkeep and maintain the existing systems available in the hotel building and the same being in the nature of expenditure regularly incurred for the purpose of assessee's business of running a Five Star Hotel, the same cannot be treated as capital expenditure especially when it did not result in bringing into existence any new capital asset or any enduring advantage in the capital filed to the assessee – Decided in favor of Assessee. Deduction u/s 36(1)(v) of the Income Tax act – Held that:- Revenue authorities have misconstrued the provisions of section 36(1)(v) of the Act which requires that the contribution is paid by the employer to the gratuity fund and the payment made to the employees out of that fund is not relevant in this context. Since the payment was duly made by the assessee to the gratuity fund during the year under consideration as mentioned by the A.O - Conditions stipulated in section 36(1)(v) of the Act were fulfilled and the assessee was entitled to the deduction on account of gratuity so paid to the fund during the year under consideration – Decided in favor of Assessee. Nature of expenditure, revenue or capital – Repair and maintenance expenditure – Held that:- A perusal of the details furnished by the ld. counsel for the assessee shows that going by the nature and purpose of the impugned expenditure, the same is revenue expenditure as it does not result in bringing into existence any new asset or advantage of enduring nature in the capital field - However, keeping in view that there is no finding recorded either by the A.O. or the ld. CIT(A) specifically on this aspect, it is just and proper to restore this issue to the file of the A.O. to decide the same afresh after verifying the nature and purpose of the impugned expenditure – Decided in favor of Assessee for statistical purpose. Issues Involved:1. Disallowance of vehicle expenses.2. Disallowance of conveyance, domestic, and foreign travel expenses.3. Disallowance of professional fees as capital expenditure.4. Disallowance of payment of gratuity.5. Disallowance of leave encashment.6. Disallowance of repairs and maintenance expenses as capital expenditure.7. Disallowance under Section 14A.8. Interest charged under Sections 234B and 234C.9. Clubbing of income under Sections 60 to 63.10. Disallowance under Section 40(a)(ia).Detailed Analysis:1. Disallowance of Vehicle Expenses:The assessee, engaged in running a Five Star Hotel, claimed vehicle expenses of Rs. 31,57,630/-. The A.O. disallowed 10% of these expenses due to lack of vehicle-wise and party-wise details. The CIT(A) upheld this disallowance. The Tribunal found that the nature of the assessee's business justified these expenses and the disallowance was made without pointing out specific unverifiable elements. Thus, the disallowance was deleted.2. Disallowance of Conveyance, Domestic, and Foreign Travel Expenses:The A.O. disallowed 10% of conveyance and domestic travel expenses, and 50% of foreign travel expenses due to lack of supporting vouchers. The CIT(A) confirmed this. The Tribunal noted that the foreign travel was for business purposes and no specific unverifiable elements were pointed out. Therefore, the disallowance was deleted.3. Disallowance of Professional Fees as Capital Expenditure:The A.O. treated Rs. 26,21,380/- paid for interior designing and other consultancy services as capital expenditure. The CIT(A) partially upheld this, treating Rs. 45,000/- as revenue expenditure. The Tribunal found that the expenditure on temporary operational plans and regular maintenance did not result in any enduring benefit or new asset creation. Thus, the disallowance was deleted.4. Disallowance of Payment of Gratuity:The A.O. allowed only the actual payment made to employees out of the gratuity fund, disallowing Rs. 4,79,450/-. The CIT(A) confirmed this. The Tribunal held that the payment to the approved gratuity fund met the conditions of Section 36(1)(v) and was allowable, thus deleting the disallowance.5. Disallowance of Leave Encashment:The A.O. disallowed Rs. 1,98,247/- due to lack of evidence of actual payment. The CIT(A) directed the A.O. to allow the assessee to produce evidence. The Tribunal upheld this direction, allowing the assessee to provide proof of payment.6. Disallowance of Repairs and Maintenance Expenses as Capital Expenditure:The A.O. treated Rs. 2,37,12,234/- of repairs and maintenance expenses as capital in nature. The CIT(A) upheld this. The Tribunal found that the expenses were incurred to maintain the existing assets and were necessary for the business, thus allowable as revenue expenditure. Specific items like replacement of parts were considered revenue, while others like purchase of new equipment were capitalized.7. Disallowance under Section 14A:The assessee did not press this ground, and it was dismissed as not pressed.8. Interest Charged under Sections 234B and 234C:These issues were deemed consequential, and the A.O. was directed to allow relief accordingly.9. Clubbing of Income under Sections 60 to 63:The A.O. clubbed income from two partnership firms with the assessee's income, invoking Sections 60 to 63. The CIT(A) upheld this. The Tribunal found that the capital contributions did not constitute a transfer under these sections and the income was already taxed in the firms' hands. Thus, the additions were deleted.10. Disallowance under Section 40(a)(ia):The assessee did not press this ground, and it was dismissed as not pressed.Conclusion:The Tribunal partly allowed both appeals, providing relief on several disallowances and directing the A.O. to verify and allow appropriate deductions based on the Tribunal's observations.