Tribunal rules in favor of corporate entity on hospitality expenses disallowance under Income Tax Act

The Tribunal allowed the Miscellaneous Application, ruling in favor of the corporate entity. It held that expenses incurred by the company, as an artificial person, do not contain a personal element, and disallowance under section 37 of the Income Tax Act should be made in the hands of individuals benefiting from such expenses. Therefore, the Tribunal concluded that there was no basis for disallowing 10% of hospitality expenses in the hands of the corporate entity. The order was pronounced in open court on 23/08/2017.

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Issues:
Adjudication of hospitality expenses disallowance in the hands of a corporate entity.

Analysis:
The Miscellaneous Application pertains to an appeal for the Assessment Year 2010-11. The issue raised was the disallowance of an amount related to hospitality expenses in the appellant's business. The appellant argued that the expenses were incurred in the course of carrying on business and provided evidence to support this claim. The Tribunal's order dated 22/07/2016 did not adjudicate on this specific ground, leading to the current application.

The learned AR contended that the disallowance made by the Assessing Officer was baseless and should be deleted entirely. The Tribunal acknowledged that ground no. 3 had not been adjudicated upon despite being argued at length during the hearing. The Tribunal recognized this as a mistake apparent from the record and proceeded to hear both parties on the issue of disallowance in the hands of the corporate entity.

The Tribunal referred to various judicial decisions that established the principle that expenses incurred by a company, as an artificial person, do not contain any personal element. Therefore, no disallowance can be made in the hands of the company under section 37 of the Income Tax Act. Any addition should be made in the hands of individuals receiving such benefits, such as employees or directors. The Tribunal relied on a series of judgments to support this position.

Based on the legal precedents and the nature of expenses incurred by a corporate entity, the Tribunal concluded that there was no merit in disallowing 10% of the hospitality expenses on an adhoc basis in the hands of the corporate entity. Consequently, the Miscellaneous Application filed by the assessee was allowed, and the order was pronounced in open court on 23/08/2017.

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