2014 (9) TMI 622 - AT - Income Tax

Tribunal decision: Revenue appeal dismissed, assessee appeal partly allowed. Section 41(1) issue remanded.

Deputy Commissioner of Income Tax Versus M/s. Unibild Engineering And Construction Company Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The major issue under Section 41(1) was remanded for re-examination, ... Addition u/s 41(1) – Sundry creditors – Held that:- The matter needs re-examination at the end of the AO - the amount had become time barred and moreover, the assessee had transferred the amount to profit & loss account - no amount is transferred to the profit & loss account - there is no finding by the AO that the amount has become barred by limitation – relying upon Commissioner of Income-Tax Versus TV Sundaram Iyengar And Sons Limited [1996 (9) TMI 1 - SUPREME Court] - obtaining by the assessee of a benefit by virtue of remission or cessation is the sine qua non for the application of this Section - the AO needs to examine the case of each and every creditor and has to ascertain whether the assessee has obtained any benefit by virtue of remission or cessation of any credit liability in respect of any creditor - Section 41(1) would be applicable only where there is a remission or cessation of any liability – thus, the matter is remitted back to the AO for reexamination – decided in favour of assessee. Expenses incurred on pooja expenses on which FBT was paid – Held that:- During the accounting year relevant to the assessment year under consideration, the assessee incurred expenditure under the head 'Pooja Expenses' - keeping in view the prevailing Indian customs and traditions some expenditure on pooja is necessary for smooth business operations and making employees happy to boost their productivity' - the turnover of the assessee is more than ₹ 92 crores and the Pooja expenses are only ₹ 2,81,113 - The business of the assessee is labour intensive because it is in the business of civil construction - the expenditure incurred by the assessee is quite reasonable and the disallowance of 50% of the expenditure on the presumption that the same was incurred for non-business purposes is not justified – Decided partly in favour of assessee. Building material expenses and consumable expenses disallowed – Held that:- The AO considered all the bills and vouchers and then he found only few mistakes - the AO has mentioned, the assessee has submitted the bills of all the parties for building material purchased and consumables along with copy of some ledger accounts and bank statements - when during remand proceedings, all bills and vouchers have been produced and have been examined by the AO and total discrepancy was found only in respect of two bills, there was no justification for adhoc disallowance at 1% - the AO himself has written to the CIT(A) that the quantum of disallowance should not be less than the mistake detected in the remand proceedings – the amount is restricted at ₹ 5,17,540 – Decided partly in favour of assessee. Vehicle Running & Maintenance expenses disallowed – Held that:- The company and the directors are separate legal entities and even if there is some personal use of vehicles by the directors, it cannot be said as personal use of vehicles by the assessee which is a company – relying upon Deputy Commissioner Of Income-Tax Versus Haryana Oxygen Ltd. [1999 (12) TMI 107 - ITAT DELHI-D] - the Government has brought in FBT and assessee has already paid tax under the FBT which will take care of personal use of vehicles, if any, by the directors/employees – thus, the order of the CIT(A) is upheld – Decided against revenue. Issues Involved:1. Addition under Section 41(1) of the Income Tax Act, 1961 for sundry creditors.2. Disallowance of pooja expenses.3. Disallowance out of building material and consumable expenses.4. Disallowance of vehicle running and maintenance expenses.Detailed Analysis:1. Addition under Section 41(1) of the Income Tax Act, 1961 for sundry creditors:The assessee challenged the addition of Rs. 3,40,619/-, Rs. 19,38,780/-, and Rs. 6,79,87,117/- under Section 41(1) made by the Assessing Officer (AO) and confirmed by the CIT(A). The AO presumed the liabilities ceased to exist due to no transactions for four years and unserved notices under Section 133(6). The assessee argued that the AO did not properly appreciate the facts and law, highlighting payments made in subsequent years and discrepancies due to address changes. The Tribunal found the AO's reliance on T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) misplaced, as no liability was transferred to the profit & loss account, and the amounts were not time-barred. Citing Sugauli Sugar Works (236 ITR 518), the Tribunal emphasized that obtaining a benefit by remission or cessation is essential for Section 41(1) to apply. The Tribunal set aside the orders and remanded the matter for re-examination by the AO, ensuring adequate opportunity for the assessee to present evidence.2. Disallowance of pooja expenses:The assessee contested the disallowance of Rs. 1,40,557/- out of Rs. 2,81,113/- incurred for pooja expenses, which the AO considered 50% non-business expenditure. The Tribunal noted the AO's acknowledgment of the necessity of such expenses for business operations and employee morale. Given the assessee's turnover of over Rs. 92 crores and the reasonable nature of the pooja expenses, the Tribunal found the 50% disallowance unjustified and deleted it.3. Disallowance out of building material and consumable expenses:The AO disallowed 3% of building material and consumable expenses, totaling Rs. 1,03,24,302/-, due to unproduced bills and vouchers. During appellate proceedings, the assessee produced all relevant documents, leading the CIT(A) to reduce the disallowance to 1% (Rs. 34,41,434/-). The Tribunal, upon reviewing the remand report, found discrepancies only in two bills amounting to Rs. 5,17,514/-. Considering the thorough examination during remand proceedings, the Tribunal deemed the 1% disallowance excessive and sustained the disallowance at Rs. 5,17,514/-, partly allowing the assessee's appeal and rejecting the Revenue's appeal on this ground.4. Disallowance of vehicle running and maintenance expenses:The AO disallowed Rs. 4,18,360/- for personal use of vehicles. The Tribunal noted that a company and its directors are separate legal entities, and any personal use by directors should be treated as perquisites in their hands, not as personal use by the company. Supporting this view with multiple ITAT decisions, the Tribunal upheld the CIT(A)'s deletion of the disallowance, noting the payment of Fringe Benefit Tax (FBT) by the assessee, which covers personal use by directors/employees.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, remanding the major issue under Section 41(1) for re-examination, deleting the disallowance of pooja expenses, and reducing the disallowance of building material and consumable expenses. The decision was pronounced in open court on 27.6.2014.