2017 (8) TMI 1615 - AT - Income Tax

ITAT rules in favor of assessee on donation and repair expenses, allowing deductions for business expenditure

The ITAT allowed the appeal of the assessee, ruling in favor of the assessee on both issues. The addition of donation and subscription account was allowed ... Business expenditure - donation and subscription - incidental to business - ad hoc disallowance - vouching and verification of expenses - books audited under section 44AB of the ActDonation and subscription - business expenditure - incidental to business - Whether the amount claimed as donation and subscription is allowable as business expenditure - HELD THAT: - The Tribunal found that the assessee had filed ledger entries and supporting bills/vouchers in respect of the donation and subscription payments. The payments were made to local religious and social organisations to maintain good relations with the local community and ensure smooth running of the business. Applying the principle that contributions to local puja and festival committees or organisations to avoid confrontation and for smooth running of business are allowable as business expenditure, the Tribunal held that the sum claimed is incidental to the assessee's business and is therefore allowable. The Tribunal relied on precedent of the Calcutta High Court to uphold this view and allowed the ground of appeal. [Paras 3]The donation and subscription of Rs. 10,747/- is allowable as business expenditure and the addition is deleted.Ad hoc disallowance - vouching and verification of expenses - books audited under section 44AB of the Act - Whether the ad hoc disallowance of 20% of repairs claimed is sustainable in view of the vouchers and audited books produced by the assessee - HELD THAT: - The AO made a 20% ad hoc disallowance of repairs expense on the ground that payments were in cash and supported only by internal vouchers, creating possibility of inflation. The Tribunal examined the paper book and found that ledgers and bills/vouchers for repairs to building, electrical works, machinery and racks had been placed on record and test-checked as genuine; addresses of service providers were available on the bills. The assessee's books were audited under section 44AB and under the Companies Act. The Tribunal held that where vouchers and verifiable bills are on record, an ad hoc percentage disallowance based on surmise and conjecture is arbitrary; if specific items are unverifiable they alone may be disallowed, but no generic estimated disallowance was warranted. The ad hoc disallowance confirmed by the CIT(A) was therefore unsustainable and deleted. [Paras 5]The ad hoc disallowance of Rs. 1,91,258/- (20% of repairs) is arbitrary and deleted.Final Conclusion: The appeal is allowed: the addition on account of donation and subscription is deleted as allowable business expenditure, and the ad hoc disallowance of repairs expenses is deleted for lack of justification; accordingly the Assessing Officer's additions are set aside. Issues involved: Appeal against addition of donation and subscription account, addition of repair expenses, and ad hoc disallowance of 20% of repair expenses.Analysis:1. Addition of donation and subscription account:The assessee appealed against the addition of Rs. 10,747 made by the AO as donation and subscription account. The AO disallowed the expenses claimed under this head as they lacked supporting receipts or 80G certificates. However, the assessee contended that these expenses were necessary for maintaining good relations with local residents and were a business necessity. The ITAT noted that the assessee had provided evidence in the form of ledger copies and receipts to support the expenses. Referring to a precedent set by the Calcutta High Court, the ITAT ruled that contributions to local organizations for business purposes are allowable as business expenditure. Therefore, the ITAT allowed this ground of appeal for the assessee.2. Addition of repair expenses:The next issue pertained to the addition of Rs. 1,91,258 claimed by the assessee under the head of repairs. The AO had added this amount to the total income of the assessee, suspecting possible inflation of expenses as they were supported only by internal vouchers and paid in cash. The CIT(A) upheld this addition. However, the ITAT found that the assessee had submitted detailed evidence of repair expenses, including ledger copies and bills, for building, electric, machinery, and rack repairs. The ITAT verified the evidence and found it to be correct. The ITAT observed that the AO's disallowance was based on conjecture and surmises, as all evidence had been provided and could have been easily verified. The ITAT emphasized that without rejecting the books of account, an ad hoc disallowance is not sustainable in the eyes of the law. Therefore, the ITAT deleted the estimated disallowance made by the AO and confirmed by the CIT(A).In conclusion, the ITAT allowed the appeal of the assessee, ruling in favor of the assessee on both the issues of addition of donation and subscription account and repair expenses.