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2016 (6) TMI 26 - ITAT AHMEDABAD

2016 (6) TMI 26 - ITAT AHMEDABAD - TMI - Addition u/s 40A(2) - excessive of expenditure - Held that:- So far as the expenditure on foreign travel is concerned, the payment is not made to the specified persons. Section 40A(2) specifically deals with the situation in which the payment is made to the specified persons. That is not the case here. The payment is made in respect of foreign travel of the specified persons but that does not bring the expense within the scope of disallowance under sectio .....

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company. A personal advantage to the directors, even if that be so, cannot be a reason enough for resorting to the disallowance.

Hon’ble jurisdictional High Court’s decision in the case of Sayaji (2001 (7) TMI 70 - GUJARAT High Court ) supports this proposition. The decision that the assessee’s senior directors, who are on their way out, personally meet the vendors and introduce the newer directors is essentially a business decision and it cannot be open to the Assessing Officer to .....

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en taken up at the assessment stage. Keeping in view these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the entire disallowance - Decided in favour of assessee. - I.T.A. No.2215/Ahd/2011, I.T.A. No.2297/Ahd/2011 - Dated:- 17-2-2016 - Pramod Kumar AM and Kul Bharat JM For The Assessee : Sanjay R. Shah For The Revenue : Dinesh Singh ORDER Per Pramod Kumar AM: 1. These cross appeals call into question correctness of the learned CIT(A) s order dated .....

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foreign travelling expenses. It is submitted that in the facts and circumstances of the case, the Hon ble CIT(A) is not justified in confirming the 50% disallowance of the same. Your appellant submits that as the expenditure has been incurred for the purpose of business, the same should be allowed as deduction. Your appellant submits that it be so allowed now. (ii) The learned CIT(A) has erred in confirming ad-hoc disallowance of 50% on assumption and presumption without any basis. It b so held .....

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this. During the course of scrutiny assessment proceedings the Assessing Officer noted that certain family members of Director and Ex-Directors have travelled to US and the expenses on these travelling have been claimed as deduction on account of travelling expenses. It was explained by the assessee that the foreign visits of the Directors were to negotiate business deal and in support of this contention the assessee, inter alia, produced invoice issued by Maine Plastics Inc and Malin Associates .....

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pellate proceedings, it was submitted by the assessee that the Assessing Officer failed to appreciate that the persons who visited US were directors of the Company and not only family members of the Directors. It was also submitted that the travelling was for the purpose of negotiations and discussions with the Vendors. The assessee further explained that the Directors stay at US was also to explore possibilities of alternate source of material and the benefit of travelling to U.S. by them was n .....

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disallowance by observing as follows :- 4.4 I have considered the submission made by the appellant and basis on which addition made by the Assessing Officer. The Assessing Officer has disallowed the foreign travel expenses mainly on the ground that appellant failed to establish that trip to USA by the family members of the director and ex-directors is in fact a business tour. It is undisputed fact that the appellant has business connection with the parties where the directors had visited. The p .....

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ate limited company. Relation between all the directors were given vide submission dated 8th December, 2010. It is also clarified that Shri R. M. Shah, promoter of the company is 87 years old. His daughter Mrs. Surekhaben Shah had joined the company way back in 1972, while Rajiben and Khusiben are joined with company in 1995 and 1996 respectively. Rajiben and Khusiben are Mechanical Engineers and are looking after the production of the company. The purpose behind all the four directors visit tog .....

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sary to introduce both the directors to the suppliers. 4.5 AO has not doubted the genuineness of expenditure. He could not bring on record any evidence which prove that the details submitted by the appellant are not genuine during the assessment proceedings or in remand report. Hence just on the basis of presumption expenses claimed by the appellant cannot be disallowed. The AO has disallowed the expenses u/s. 40A(2)(b) being excessive and unreasonable. It is not payment made to person covered u .....

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expenses which might have not required for business purpose. Considering all the above facts and in absence of particular information, I confirm the disallowance to the extent of 50% of total expenditure which comes to ₹ 8,05,484/- and deleted the addition for remaining amount." 5. None of the parties satisfied by the stand so taken by the ld. CIT(A). While the assessee is aggrieved of the disallowance to the extent of 50% being upheld by the ld. CIT(A), the Assessing Officer is aggri .....

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income of the assessee company at ₹ 1,88,32,600/- as against it's returned income of ₹ 1,27,49,673/- inter-alia disallowing ₹ 16,56,367/- on account of foreign traveling expenses of its four Directors who are close relatives. 3. Aggrieved by this order of the AO the assessee preferred an appeal before the Ld. C1T(A) who vide order dated 05/07/2011 partly allowed the appeal in favour of the assessee and against the revenue. The sole issue which was allowed in favour of the .....

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s per section 37(1) of the Income Tax Act. 1961. "Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head ''profits and gains of the business or profession.": (ii) Hence, it is the onus on the assessee compan .....

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books. From the records available, it is learnt that the assessee failed to submit any evidence which may prove that there was a business requirement which required all the four close relatives to travel to the US in the business interest of the company. Your Honour, the parties to whom these directors were introduced in U S as stated by the company had a long past business relations and not something which has cropped up overnight and warranted their physical presence in the U S. Neither has th .....

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vance or implication in the present case, neither on facts nor in law. As against this, the Revenue on its part wishes to rely on decisions favouring the Revenue on the said issue of Foreign Travelling Expenses wherein the High Court of Kerala in Ram Bahadur Thakur Ltd Vs. CIT (128 Taxman 599 (Kerala)/2003 (Full Bench) held that ..... The highlights of the decision are as under: (a) In order that an expenditure should qualify for deduction as contemplated by section 37(1) one of the requirements .....

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sfied as to the commercial necessity of spending that amount. In other words, there must be nexus between the expenditure and the business purpose. The capacity in which the assessee spends will also be relevant. The purpose must be for the purpose of business, i.e., the expenditure must be incurred for carrying on of the business and the assessee should have incurred it in his capacity as a person carrying on the business. The term 'wholly' refers to the quantum of the expenditure and & .....

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gn travel expenses of the wife of the Director both in a mechanical manner. The Assessing Officer simply assumed that the foreign travel of the Director of the assessee-company was for business purposes but the foreign travel of the wife accompanying the Director was of for business purposes. In fact, the Assessing Officer was bound to conduct an enquiry and to afford an opportunity to the assessee to establish its claim by adducing evidence, if any, as provided under section 143(2) and (3). The .....

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nses for the foreign tour of the Director of a company or in respect of the expenses for the foreign tour of the wife of the Director accompanying him, meticulously keeping in mind the legal principles governing the question and to arrive at a decision either way after affording a reasonable opportunity to the assessee. The appellate authorities are also bound to consider the matter in accordance with law and in the light of the broad legal principles. Of course the burden is on the assessee to .....

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the interest of revenue I request your Honour to uphold the A O's action dismissing the order of the Ld. CIT (A). 7. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 8. We have noted that the Assessing Officer proceeded to make the disallowance, under section 40A(2), on the basis that the expenditure was unreasonable and excessive and that the assessee did not derive any tangible benefit .....

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ack in 1972, while Rajiben and Khusiben are joined with company in 1995 and 1996 respectively. Rajiben and Khusiben are Mechanical Engineers and are looking after the production of the company. The purpose behind all the four directors visit together is to introduce Rajiben and Khusiben to business associates before Mrs. Surekhaben get retire in May 2006 9. On these facts, nothing really turns against the assessee so far as relationship of the directors is concerned. In any event, the reason of .....

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ervices or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction but then so far as the expenditure on foreign travel is concerned, the payment is not made to the specified persons. Section 40A(2) specifically deals with the situation in which the payment is made t .....

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