2016 (5) TMI 353 - AT - Income Tax

Tribunal rules in favor of assessee, allows deductions for business expenses, and rejects Revenue's appeal.

ITO, Ward-4 (2). Kolkata Versus M/s Marcopolo Products Private Limited and Vice-Versa

ITO, Ward-4 (2). Kolkata Versus M/s Marcopolo Products Private Limited and Vice-Versa - TMI Issues Involved:1. Deletion of addition of insurance premium of Rs. 45,00,000/-2. Deletion of addition of a part of Director's salary amounting to Rs. 10,00,000/-3. Deletion of addition of Rs. 27,168/- as club expense4. Disallowance of Rs. 1,82,917/- towards prior period expenses5. Addition of Rs. 43,571/- towards Sundry Creditors as deemed income under Section 41(1) of IT Act, 1961Issue-wise Detailed Analysis:1. Deletion of Addition of Insurance Premium of Rs. 45,00,000/-:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 45,00,000/- paid as insurance premium for directors under a keyman insurance policy. The AO added this amount to the total income of the assessee, questioning the benefit derived from the directors' services. The CIT(A), however, allowed the deduction, relying on case law and CBDT circular No. 762, which clarified that such premiums are allowable business deductions. The Tribunal upheld the CIT(A)'s decision, citing the Hon'ble Bombay High Court's judgment in COMMISSIONER OF INCOME TAX vs. B.N. EXPORTS, which affirmed that premiums paid for keyman insurance policies are business expenditures. The Tribunal concluded that the payment was made to protect the company from potential losses due to the directors' untimely death, thus dismissing the Revenue's ground.2. Deletion of Addition of a Part of Director's Salary Amounting to Rs. 10,00,000/-:The AO disallowed Rs. 10,00,000/- of the director's remuneration, deeming it excessive and unreasonable. The CIT(A) found the director's qualifications and contributions justified the remuneration, noting his role in generating significant business. The Tribunal concurred, referencing Section 40A(2)(a), which allows disallowance of excessive payments to related persons. However, given the director's substantial business contributions, the Tribunal agreed with the CIT(A) that the remuneration was not excessive or unreasonable, thus dismissing the Revenue's ground.3. Deletion of Addition of Rs. 27,168/- as Club Expense:The AO disallowed club membership expenses, questioning their business relevance. The CIT(A) allowed the deduction, citing case law that such expenses facilitate business operations. The Tribunal upheld this view, referencing Section 37 and decisions like COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD and DEPUTY COMMISSIONER OF INCOME TAX vs. BANK OF AMERICA SECURITIES (INDIA) (P) LTD, which affirmed that club membership fees incurred for business purposes are allowable deductions. The Tribunal concluded that the expenses were for business facilitation, not capital expenditure, thus dismissing the Revenue's ground.4. Disallowance of Rs. 1,82,917/- Towards Prior Period Expenses:This issue was not pursued by the assessee during the proceedings, and the ground was dismissed as not pressed.5. Addition of Rs. 43,571/- Towards Sundry Creditors as Deemed Income Under Section 41(1) of IT Act, 1961:The AO added Rs. 43,571/- to the income, considering it a ceased liability. The CIT(A) upheld this, citing the assessee's failure to prove the liability's existence. The Tribunal, however, referenced a prior decision (ITA1345/KOL/2011) which clarified that Section 41(1) applies only if there is remission or cessation of liability within the relevant assessment year. In this case, the liability was carried forward without remission or cessation during the relevant year. Therefore, the Tribunal concluded that the addition was not justified under Section 41(1), thus allowing the assessee's ground.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The key points of contention were resolved in favor of the assessee, emphasizing the importance of substantiating business-related expenses and adhering to statutory provisions for disallowances and additions.