2023 (4) TMI 366 - AT - Income Tax

Appeal allowed, Tribunal emphasizes commercial expediency, Revenue burden of proof. Decision on 20th Feb 2023.

The appeal was allowed, and all additions and disallowances were deleted by the Tribunal. The Tribunal emphasized the importance of commercial expediency ... Unexplained paid up share capital u/s. 68 - assessee failed to submit copy of bank account and income tax return of the share subscriber company - HELD THAT:- Assessee has sufficiently explained the identity and creditworthiness of the share subscriber it being a sister concern and the genuineness of the transaction for which nothing contrary has been brought on record by the Revenue. We do not find any merit in the finding of CIT(A). We accordingly, allow ground no. 1 taken by the assessee and direct to delete the addition so made - Accordingly, ground no. 1 is allowed. Addition on account of directors’ remuneration being treated as excessive u/s. 40A(2) - As argued authorities below have not brought out any contrary material except their own observations which are based on surmises and conjecture, to demonstrate that the remuneration paid to the directors is excessive - HELD THAT:- We note that directors’ remuneration paid by the assessee against the turnover and net profit of the assessee in past five years demonstrate the legitimacy of the expenses incurred by the assessee and the benefits derived by it from the same. Payment made to directors is not bogus for which nothing has been brought on record by the Ld. AO. Thus, we are in agreement with the submission of that once it is established that remuneration has been paid to directors then Revenue cannot put itself in the arm chair of a businessman to assume the role of ascertainment, how it is a reasonable remuneration having regard to the facts and circumstances of the case. Matter of commercial expediency should be left to the businessman concern or the board of directors - We direct to delete the disallowance made - Accordingly, ground no. 2 is allowed. Addition u/s 40A(3) - as submitted that assessee made reimbursement of expenses incurred by the two advocates on behalf of the assessee - HELD THAT:- As from the perusal of the order of Ld. CIT(A), we take note of the facts which have been tabulated, giving all the explanations and details for the payment made to the two advocate professionals towards reimbursement of expenses incurred by them on behalf of the assessee. We do find force in the submission made by the Ld. Counsel explaining the case of the assessee as stated above and accordingly, direct for the deletion of disallowance made in this respect. Accordingly, ground no. 3 is allowed. Addition being prior period expenditure not allowable in the year under consideration - HELD THAT:- As we note that details of these expenditure are tabulated which relate to service charges, site maintenance, construction expenses and generator running and maintenance expenses for which claim of these expenses were submitted before the assessee by respective service providers after the close of accounting year and, therefore, the assessee claimed the expenses in the year under consideration. All these expenses are legitimate business expenses allowable u/s. 37(1) - Ld. Counsel also placed reliance on the decision of coordinate bench of ITAT, Mumbai in the case of Kellogs (India) Pvt. Ltd. [2012 (12) TMI 664 - ITAT MUMBAI] - we are inclined to direct for deletion of the addition made by the authorities below. Accordingly, ground no. 4 is allowed. Addition u/s. 36(1)(iii) - interest free advances - Counsel submitted that this disallowance has been made without establishing that borrowed fund were utilised in making interest free advances - HELD THAT:- Assessee has its own interest free funds which are substantially more as compared to the interest free advances given by it, which does not have any adverse impact on the claim of interest expenditure made by it in the P&L Account. Considering the over all facts and circumstances of the case and the explanation furnished by the Ld. Counsel, we direct to delete the addition made in this respect. Accordingly, ground no. 5 is allowed. Addition on account of sponsorship expenses by treating the same as donation - assessee has claimed business promotion expenses which have been incurred by the assessee by way of contribution to various association and bodies and temples for festive occasions - HELD THAT:- The expenses incurred by the assessee are not held to be bogus or have been doubted by the authorities below. Accordingly , we are inclined to allow the claim of the expenses by the assessee and thus direct for deletion of addition made in this respect. Accordingly, ground no. 6 is allowed. Issues Involved:1. Addition under section 68 on account of unexplained share capital.2. Disallowance of directors' remuneration under section 40A(2).3. Disallowance under section 40A(3).4. Disallowance of prior period expenses.5. Disallowance of bank interest under section 36(1)(iii).6. Disallowance of sponsorship expenses treated as donation.Issue-wise Detailed Analysis:1. Addition under Section 68 on Account of Unexplained Share Capital:The assessee was subjected to an addition of Rs. 7,74,500/- under section 68 of the Income-tax Act, 1961, due to unexplained share capital. The assessee had allotted shares to a sister concern, Alliance Nirman Ltd., and provided various documents such as PAN, address, confirmation, Form No. 2 filed with ROC, and audited financial statements. However, due to disputes among directors, the bank statement could not be procured. The Tribunal found that the assessee had discharged its initial onus under section 68 by furnishing necessary details and documents to prove the identity, creditworthiness, and genuineness of the transaction. Citing judgments from the Hon'ble High Court of Calcutta and Bombay High Court, the Tribunal concluded that the addition was not sustainable as the assessee had provided sufficient explanation, and the Revenue failed to bring any contrary evidence. Thus, the addition was deleted.2. Disallowance of Directors' Remuneration under Section 40A(2):The assessee faced a disallowance of Rs. 7,20,000/- on account of directors' remuneration deemed excessive. The Tribunal noted that the authorities did not provide any contrary material to demonstrate that the remuneration was excessive. The book results of five years were examined, showing no substantial decrease in turnover or net profit. The Tribunal emphasized that commercial expediency should be left to the businessman or the board of directors, and the Revenue cannot assume the role of the businessman. The Tribunal found the remuneration legitimate and directed the deletion of the disallowance.3. Disallowance under Section 40A(3):An addition of Rs. 1,02,000/- was made under section 40A(3) for cash payments made to two advocates as reimbursement of expenses. The Tribunal noted that the payments were made through bank deposits and were genuine business expenses recorded in the books of accounts. The identity of the advocates was not in doubt, and the expenses were not held to be bogus. The Tribunal found the explanation satisfactory and directed the deletion of the disallowance.4. Disallowance of Prior Period Expenses:The assessee claimed prior period expenses amounting to Rs. 5,48,704/-, which were disallowed on the basis that the assessee follows a mercantile system of accounting. The Tribunal noted that the liability for these expenses crystallized in the year under consideration when the bills were received, and the genuineness of the expenses was not in doubt. The Tribunal cited a coordinate bench decision and directed the deletion of the disallowance, considering the expenses legitimate business expenses allowable under section 37(1).5. Disallowance of Bank Interest under Section 36(1)(iii):An addition of Rs. 29,54,329/- was made under section 36(1)(iii) for interest on borrowed funds allegedly used for interest-free advances. The Tribunal observed that the assessee had sufficient interest-free funds to cover the advances, and the advances were made from own resources. The Tribunal noted that similar additions were deleted in the subsequent assessment year. The Tribunal directed the deletion of the disallowance, finding no adverse impact on the interest expenditure claim.6. Disallowance of Sponsorship Expenses Treated as Donation:The assessee incurred Rs. 1,36,000/- on sponsorship expenses, which were treated as donations by the Revenue. The Tribunal noted that these payments were made out of commercial expediency to foster a conducive business environment and were not held to be bogus. The Tribunal allowed the claim of the expenses and directed the deletion of the addition.Conclusion:The appeal of the assessee was allowed, and all the additions and disallowances made by the lower authorities were deleted. The Tribunal emphasized the importance of commercial expediency and the need for the Revenue to provide concrete evidence when making additions or disallowances. The order was pronounced in the open court on 20th February 2023.