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2018 (3) TMI 1970 - AT - Income TaxDisallowance of Guarantee Commission u/s. 37(1) - Guarantee Commission u/s 37 paid to Promoters Share Holder Directors at the rate of 1% of the each guarantee for the purpose of business - HELD THAT - For the assessment year 1989-90 the assessee had reduced the payment of handling charges to 9.5 per cent and had been allowed after due scrutiny. For the assessment year 1990-91 claim of the assessee at the rate of 9.5 per cent had been allowed though it not been dealt with by the Assessing Officer specifically in the order. For the assessment year 1993-94 the rate of 9.5 per cent had been held reasonable and had been allowed. When the matter reached before the Hon ble Bombay High Court 2008 (8) TMI 208 - BOMBAY HIGH COURT the Court observed that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-Tax (Appeals) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during assessment years 1991-92 and 1992-93 and accordingly dismissed the appeal filed by the Revenue. Since the facts involved in this appeal are similar to the facts in the case of Indo Saudi Services (Travels) P. Ltd. 2008 (8) TMI 208 - BOMBAY HIGH COURT respectfully following the same we set aside the order of the ld. CIT(A) and delete the disallowance. Considering the fact that similar set of fact the addition was deleted by Guarantee Commission of Tribunal. We do not find any justification in sustaining the disallowance when the order of Tribunal was brought in the notice of Ld. CIT(A). Even there are no variations of fact related with the issue under consideration in this year. Thus respectfully following the principle of consistency the Ground No. I of the appeal is allowed. Disallowance of Travelling Expenses - AO disallowed 50% of the expenditure on his observation that no evidence has been furnished by the assessee - CIT(A) after considering the comparative rate furnished by assessee for Guest house charges and prevalent rate of Five Star hotel concluded that the rate of Guest house are not less than the Five Star hotels - HELD THAT - Hon ble Gujarat High Court in Sayaji Iron Engineering Co. 2001 (7) TMI 70 - GUJARAT HIGH COURT while considering the grounds related with Business Expenditure for use of vehicle of assessee-company by its Director held that when vehicle were used by Directors in a limited company Even if they proportionately used by the Director because the limited company by its nature cannot have personal use the limited company is an any intimate person and there cannot be anything person about such entity. Once the expenditure in question was in term as provided in section 309 and 198 of Companies Act therefore not be any non-business purpose so far as the assessee companies are concerned. It was wrong in disallowing 1/6 of the total Car expenditure and depreciation claimed by assessee-company on account of personal use of the Car which has been used by the Directors - it is settled law that the Revenue authority cannot step into the shoes of businessmen to dictate them how to make the expenditure for running their business. The lower authorities have not brought anything on record that visit of the Directors namely Suchitra Hegde and Ritvik Hegde was not for the purpose of business. In absence of any finding or any material on record that the visit and stay of Directors was for stay of personal use this ad-hock disallowance in not justifiable. Thus we do not find any justification in adhoc disallowance on account of Travelling Expenses. In the result Ground No.II of the appeal is allowed. Disallowance of Prior Period Expenditure - HELD THAT - Hon ble Delhi High Court in case of CIT Vs. Exxon Mobile Lubricants (P) Ltd. ( 2010 (9) TMI 36 - DELHI HIGH COURT while considering the ground related with Prior Period Expenditure held that when the liability of the assessee under agreement had arisen and accrued in August 2002 when agreement was executed therefore the liability of the assessee to pay for the period January 2002 to March 2002 arose and crystallized in August 2002. If the assessee had shown the Prior Period Expenses and the AO had not excluded while working out the current year taxable income than there was no reason on the part of AO to disallow only one part of the Prior Period Adjustment i.e. Prior Period Expenditure. It was held that the addition by Assessing Officer was not sustainable. We have noted that the facts of the present case in principle are similar. In view of the above legal position the liability to make the ex-gratia payment was crystallized during the year under consideration. In our view the assessee was entitled for deduction of the said Prior Period Expenses. In the result this ground of appeal is allowed.
Issues Involved:
1. Disallowance of Guarantee Commission under Section 37(1) 2. Adhoc Disallowance of Travelling Expenditure under Section 37(1) 3. Disallowance of Prior Period Expenditure 4. Disallowance under Section 14A 5. Exempt Income not considered Detailed Analysis: 1. Disallowance of Guarantee Commission under Section 37(1): The assessee-company paid a guarantee commission to two Directors for extending personal guarantees to the Bank of India for obtaining a loan/credit facility. The Assessing Officer (AO) disallowed this commission, arguing that the directors performed no extraordinary work and that the guarantee was a routine business necessity. The CIT(A) upheld this disallowance, disregarding a previous ITAT order for AY 2010-11 that allowed a similar commission. The ITAT noted that the personal guarantee was a pre-condition by the lender and that the directors were not paid any remuneration. The ITAT found the disallowance unjustified, especially since a similar disallowance was deleted in the previous year. Therefore, following the principle of consistency, the ITAT allowed the commission as a business expense. 2. Adhoc Disallowance of Travelling Expenditure under Section 37(1): The AO disallowed 50% of the travelling expenses on an adhoc basis due to a lack of evidence. The CIT(A) upheld this disallowance, citing that the guest house rates were not less than five-star hotels. The ITAT found that the directors' visits were for business purposes and that the expenses were justified. The ITAT referred to the Gujarat High Court's decision in Sayaji Iron & Engineering Co. v CIT, which held that personal use by directors in a limited company does not warrant disallowance. Thus, the ITAT found the adhoc disallowance unjustified and allowed the travelling expenses. 3. Disallowance of Prior Period Expenditure: The assessee claimed an expenditure for bonus declared at a higher rate than the statutory requirement, which was crystallized in the current year. The AO disallowed this, arguing that the assessee followed the mercantile system of accounting. The CIT(A) upheld this disallowance. The ITAT noted that the liability for the bonus was crystallized in the current year and referred to the Delhi High Court's decision in CIT Vs. Exxon Mobile Lubricants (P) Ltd. and the Supreme Court's decision in Nonsuch Tea State Ltd. Vs. CIT, which supported the assessee's claim. Therefore, the ITAT allowed the prior period expenditure. 4. Disallowance under Section 14A: The AO disallowed Rs. 2,33,533/- under Section 14A read with Rule 8D, arguing that the assessee did not consider the investment in SBI Mutual Funds. The assessee claimed that the investments were made from surplus funds and not borrowed funds. The CIT(A) did not address the issue of exempt income. The ITAT noted that the AO did not consider the assessee's claim regarding the dividend income from SBI Mutual Funds and directed the AO to re-compute the disallowance under Section 14A, considering the jurisdictional High Court's decision in CIT Vs. HDFC Bank. 5. Exempt Income not considered: The assessee claimed that the dividend income from SBI Mutual Funds was not considered as exempt income by the AO. The CIT(A) failed to decide on this issue. The ITAT directed the AO to consider the claim of exempt income and re-compute the disallowance under Section 14A accordingly. Conclusion: The ITAT allowed the appeal filed by the assessee, directing the AO to re-compute the disallowance under Section 14A and consider the exempt income claim. The disallowances for guarantee commission, travelling expenses, and prior period expenditure were deleted, following the principle of consistency and relevant judicial precedents.
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