2016 (5) TMI 44 - AT - Income Tax

Appeal Outcome: Travel Expenses Partially Allowed, Advisory Fees Fully Allowed, Penalty Issue Remanded for Fresh Adjudication

The Tribunal partly allowed the appeal regarding the disallowance of traveling expenses, fully allowed the appeal concerning the disallowance of advisory ... Ad-hoc disallowance of expenses - nexus of expenditure to business purpose - disallowance under section 40A(2) for excessive payments to related persons - penalty under section 271(1)(c) - application of section 271AAA to search cases - remand for fresh adjudicationAd-hoc disallowance of expenses - nexus of expenditure to business purpose - disallowance under section 40A(2) for excessive payments to related persons - Whether the disallowance of travelling expenses and the addition under section 40A(2) in respect of advisory fees to directors were sustainable. - HELD THAT: - The assessee had 25% of travelling expenses disallowed by the AO (confirmed by the CIT(A)) on an estimated ad-hoc basis for lack of sufficient particulars to establish business nexus. The Tribunal held that a uniform ad-hoc disallowance of 25% was excessive and unreasonable on the material on record and, applying a proportional approach, restricted the disallowance to 10% of total travelling expenses, thereby deleting the balance addition. Separately, the AO had treated 50% of advisory fees paid to directors as disallowable under section 40A(2) on the ground of excessiveness. The Tribunal found that neither the AO nor the CIT(A) brought cogent evidence to show that payments to directors were excessive or unreasonable having regard to fair market value, legitimate business needs or benefit derived; no comparables or material disproving receipt of services were produced. Accordingly the disallowance under section 40A(2) could not be sustained and the addition was deleted. [Paras 6]Travel disallowance reduced from 25% to 10%; addition of Rs.11,14,272 under section 40A(2) deleted; appeal partly allowed on these grounds.Penalty under section 271(1)(c) - application of section 271AAA to search cases - remand for fresh adjudication - Validity of the penalty levied under section 271(1)(c) for alleged concealment of income in Assessment Year 2007-08 vis-a -vis the applicability of section 271AAA. - HELD THAT: - A search was carried out on 17.04.2007 and the assessee subsequently offered additional income of Rs.22 lakhs in the return. The AO imposed penalty under section 271(1)(c) treating the disclosure as consequent to the search. The Tribunal did not decide the merits on the penalty question but observed that the assessee raised additional grounds concerning the statutory construction and applicability of section 271AAA (not earlier considered by the first appellate authority). In view of those unadjudicated statutory issues and procedural posture, the Tribunal restored the matter to the file of the CIT(A) for fresh adjudication of the points relating to section 271AAA and related contentions after hearing the assessee, without expressing any opinion on the merits. [Paras 14]Penalty issue remanded to the CIT(A) for fresh consideration of the applicability of section 271AAA and related grounds; no adjudication on merits by the Tribunal.Final Conclusion: For Assessment Year 2009-10 the appeal is partly allowed - travelling disallowance reduced and the section 40A(2) addition deleted. For Assessment Year 2007-08 the penalty-related issues (including the applicability of section 271AAA) are restored to the CIT(A) for fresh adjudication; appeals disposed for statistical purposes. Issues Involved:1. Disallowance of 25% of traveling expenses.2. Disallowance of advisory fees paid to directors under Section 40A(2).3. Penalty under Section 271(1)(c) for alleged concealment of income.Issue-wise Detailed Analysis:1. Disallowance of 25% of Traveling Expenses:The assessee challenged the confirmation of an ad-hoc disallowance of 25% of traveling expenses amounting to Rs. 16,17,742/- by the CIT(A). The CIT(A) upheld the disallowance on the grounds that the assessee did not provide sufficient evidence to prove the nexus of the expenses to genuine business requirements, suggesting that the expenses could be attributed to personal travel. The Tribunal found the disallowance of 25% to be excessive and unreasonable. It restricted the disallowance to 10% of the total traveling expenses, amounting to Rs. 6,47,097/-, and deleted the remaining Rs. 9,70,645/-. This issue was thus partly allowed in favor of the assessee.2. Disallowance of Advisory Fees Paid to Directors under Section 40A(2):The assessee contested the disallowance of Rs. 11,14,272/- paid to directors as advisory fees. The CIT(A) upheld the disallowance, stating that the business exigencies and needs for such payments were not proven. The Tribunal noted that the AO and CIT(A) failed to provide cogent evidence that the payments were excessive or unreasonable. The Tribunal highlighted that the provisions of Section 40A(2) require the AO to prove that the payments were excessive in comparison to the fair market value or the legitimate needs of the business. Since no such evidence was provided, the Tribunal concluded that the disallowance could not be sustained and ordered the deletion of Rs. 11,14,272/-. This issue was decided in favor of the assessee.3. Penalty under Section 271(1)(c) for Alleged Concealment of Income:For the assessment year 2007-08, the assessee challenged the penalty of Rs. 7,40,520/- levied under Section 271(1)(c) for alleged concealment of income amounting to Rs. 22 lakhs. The CIT(A) confirmed the penalty, stating that the additional income was disclosed only after the search action and was not recorded in the books of account. The Tribunal noted that the assessee raised additional grounds regarding the applicability of Section 271AAA and the statutory explanations under Section 271(1)(c). The Tribunal decided to restore the issue to the file of the CIT(A) for fresh adjudication, considering the new grounds raised by the assessee. The CIT(A) was directed to examine the issues and decide in accordance with the law after providing an opportunity for a hearing to the assessee. This issue was thus allowed for statistical purposes.Conclusion:The Tribunal partly allowed the appeal regarding the disallowance of traveling expenses, fully allowed the appeal concerning the disallowance of advisory fees to directors, and restored the penalty issue to the CIT(A) for fresh adjudication. The overall result was that the assessee's appeals were partly allowed.