2023 (10) TMI 648 - AT - Income Tax

Appeal Granted: ITAT overturns disallowance of expenses, deems Section 115BBE inapplicable.

The Appellate Tribunal ITAT Ahmedabad allowed the appellant's appeal against the Commissioner of Income Tax (Appeals) for the assessment year 2017-18. The ... Treatment of expenditure incurred on invocation of performance guarantee as business expenditure - allowability of business expenditure under Section 37(1) - disallowance as unexplained credit under Section 69C - applicability of the special tax rate under Section 115BBE - allowability of salary as revenue expenditure for maintenance of corporate/administrative statusTreatment of expenditure incurred on invocation of performance guarantee as business expenditure - allowability of business expenditure under Section 37(1) - disallowance as unexplained credit under Section 69C - Whether the amount debited on invocation of a performance bank guarantee, claimed as internet expenses, is allowable as business expenditure or liable to be disallowed as unexplained under Section 69C. - HELD THAT: - The Tribunal found that the bank guarantee had been issued for business performance in respect of Department of Telecommunications projects and that the invocation related to that business guarantee. The assessee explained the nature of the transaction during assessment proceedings and relied on judicial precedent on compensatory/business nature of performance guarantees (Neo Constructo Construction Ltd.). The Tribunal held that the expenditure was incurred for the purpose of business and therefore was allowable under the legal principle embodied in Section 37(1). Consequently, treating the amount as an unexplained liability attracting Section 69C was not justified on the facts of the case. [Paras 7]Addition of Rs. 10,00,000 disallowed under Section 69C is deleted and the expenditure is held allowable as business expenditure under Section 37(1).Allowability of salary as revenue expenditure for maintenance of corporate/administrative status - allowability of business expenditure under Section 37(1) - Whether the salary expense of Rs. 2,00,000 paid during the year is allowable as revenue expenditure despite contention that the business was closed. - HELD THAT: - The Tribunal noted there was no formal closure of the company and some administrative and accounting activities continued. The salary related to administrative/accounting work performed for maintaining corporate and business functions. On the available material and the explanation given during assessment proceedings, the Tribunal concluded that the salary payment was a genuine revenue expenditure relatable to the assessee's business and therefore allowable. [Paras 9]The disallowance of Rs. 2,00,000 as unexplained expenditure is deleted and the salary is allowed as revenue expenditure.Applicability of the special tax rate under Section 115BBE - disallowance as unexplained credit under Section 69C - Whether the additions so made could be taxed at the special rate prescribed by Section 115BBE. - HELD THAT: - The Tribunal observed that the amounts disallowed in the assessment (performance guarantee invocation and salary) had been satisfactorily explained by the assessee during assessment proceedings. Because the additions were explained and held to be allowable as business/revenue expenditures, the basis for applying the special tax rate under Section 115BBE did not survive. Therefore application of Section 115BBE to tax these additions was not justified. [Paras 12]Charge under Section 115BBE is not sustainable and is deleted.Final Conclusion: The appeal is allowed: the disallowances of the performance-guarantee-related expenditure and the salary expense are deleted as allowable business/revenue expenditures, and the application of the special tax rate under Section 115BBE is held not to be justified. Issues Involved:The judgment involves issues related to disallowance of internet expenses, disallowance of salary expenditure, and taxation under Section 115BBE of the Income Tax Act for the assessment year 2017-18.Disallowance of Internet Expenses:The appeal challenged the disallowance of Rs. 10,00,000/- as internet expenses debited in the books due to invocation of performance guarantee by the Department of Telecommunication. The contention was that the liability was contingent and not brought into the books initially. The appellant argued that the disallowance was unwarranted as the guarantee was for business purposes, citing a relevant court decision. The Tribunal allowed this ground, considering the guarantee's business nature and timing.Disallowance of Salary Expenditure:Another issue was the disallowance of Rs. 2,00,000/- expenditure towards salary paid during the year, based on the belief that the business was closed in 2008. The appellant asserted that the business was not closed, and the expenses were essential for maintaining corporate status and business operations. The Tribunal found that certain business activities were ongoing, and the salary expenses were genuine revenue expenditure, thus allowing this ground.Taxation under Section 115BBE:The third issue revolved around the application of Section 115BBE for taxing the disallowances. The appellant argued that this section was not applicable to their case, which was supported by explanations provided during assessment proceedings. The Tribunal agreed that the expenses were adequately explained, rendering the application of Section 115BBE unjustifiable. Consequently, this ground was allowed.Additional Grounds:Additional grounds presented were dismissed as they were alternate to the allowed grounds. Since the primary grounds were allowed, the additional ones became academic and were not adjudicated upon.This judgment, delivered by the Appellate Tribunal ITAT Ahmedabad, on 07/07/2023, favored the appellant by allowing the appeal against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2017-18.