TMI Blog2017 (10) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of visits by its employees. The issue requires re-verification by the AO in the light of our above discussion. Hence, we set aside the issue to the file of the AO and direct him to re-consider the issue afresh and decide the same in accordance with law. Allocation of headquarter expenses to units claiming exemption u/s 10A / 10B - AO has allocated head office expenses proportionately for units claiming exemption u/s 10A / 10B, on the basis of the turnover of the units - Held that:- No merit in the arguments of the assessee for the reason that on perusal of the details of expenditure incurred by the assessee it is difficult to accept explanation of the assessee that head office expenditure has no relevance to the units claiming exemption u/s 10A / 10B. The assessee is having four units based at various locations which were controlled through its headquarter. The expenditure incurred by head office like travel and conveyance, communication expenses, legal and professional charges and rates and taxes definitely is having relevance to its total business. Therefore AO was right in allocating head office expenses to the units eligible for claiming exemption u/s 10A / 10B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the head office of ₹ 8,73,919 to the units claiming deduction under sections 10A and 10B of the Act; ii. Allowances / disallowances under sections 40(a), 43B etc of the Act. 3.2 The Appellant prays that if Ground No 2 is dismissed, the Learned AO be directed to allocate head office expenses after giving effect of allowances / disallowances for adjustments required under the Act. 2. The assessee also filed a petition for admission of additional ground on 20-03-2017. The relevant additional grounds of appeal filed by the assessee are reproduced below:- IV Ground No.4 Without prejudice to Ground No. 2, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in considering the gross amount of head office expenditure of ₹ 1,80,87,118 instead of the net head office expenditure (i.e. after reducing head office income) of ₹ 82,67,588 while upholding the proportionate allocation of head office expenditure to divisions claiming deduction under section 10A and l0B of the Act. 3. The Ld.AR for the assessee submitted that in respect of allocation of head office expenses to units claiming deduction u/s 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign travel expenses for its top executives, who had undertaken foreign travel in connection with its export business to discuss business strategies, for this, necessary evidence had been filed before the AO. The AO has not disputed the correctness of claim made by the AO; however, disallowed on the sole ground that the assessee has failed to file necessary proof of meeting between the employees of the assessee and its foreign clients. Insofar as disallowance of deduction claimed u/s 10A / 10B on allocation of head office expenses, it was submitted that head office expenses incurred are nowhere in relation to units claiming exemption u/s 10A / 10B of the Act. The units, have incurred expenditure on stand-alone basis without any support from the head office. Therefore, the AO was incorrect in allocating head office expenses to the units claiming exemption u/s 10A / 10B of the Income-tax Act, 1961. 6. The CIT(A), after considering the relevant submissions of the assessee observed that the assessee could not file any evidence during the course of appellate proceedings to show that the travels were undertaken for business purposes. Therefore, the AO was right in disallowing 50% of fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores in immediately preceding year. Therefore, there is a relevance of expenditure incurred in respect of foreign travel expenses to its business receipts. Therefore, there is no reason for disallowance of foreign travel expense. The AO, after considering the explanation of the assessee has disallowed 50% of the total foreign travel expenses for the reason that the assessee has failed to submit any evidence of business meeting attended by its employees with its customers abroad. The AO further observed that though the assessee furnished relevant documents in support of foreign travel expenses, the question here is not authenticity of foreign travel expenses incurred by the assessee, but the nexus between expenditure incurred and business purpose. Since the assessee has failed to prove nexus between expenditure incurred and business purpose, disallowed 50% of total foreign travel expenses and added to the total income of the assessee. 8. The Ld.AR for the assessee submitted that the AO was erred in disallowing foreign travel expenses solely on the ground that the assessee has not furnished any proof to establish business meeting with its customers inspite of furnishing of eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the AO was incorrect in disallowing adhoc 50% foreign travel expenses. 11. Having heard both the sides, we find force in the arguments of the assessee for the reason that merely because no evidence has been filed to establish foreign travel undertaken by its executives to attend meetings with its clients, foreign travel expenses incurred by the assessee cannot be disallowed on adhoc basis despite furnishing of evidences. The AO has not pointed out any incorrect claim made by the assessee. The AO has accepted the fact that the assessee has filed all documents to justify its expenses. The AO is only on the point that no evidence has been filed to prove foreign travel and business connection with its clients. We are of the view that the AO was incorrect in observing that the assessee has not filed any details to justify its foreign travel expenses, despite the assessee has filed its vouchers which clearly indicates the purpose of visits by its employees. However, it is incumbent upon the assessee to file some evidence in the form of correspondence between the assessee and its foreign clients for the meetings between its employees and its clients to justify foreign trave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee it is difficult to accept explanation of the assessee that head office expenditure has no relevance to the units claiming exemption u/s 10A / 10B. The assessee is having four units based at various locations which were controlled through its headquarter. The expenditure incurred by head office like travel and conveyance, communication expenses, legal and professional charges and rates and taxes definitely is having relevance to its total business. Therefore, we are of the view that the AO was right in allocating head office expenses to the units eligible for claiming exemption u/s 10A / 10B of the Act. We further observe that there is merit in the argument of the assessee that only net expenses of head office should be allocated to the units claiming exemption u/s 10A / 10B, because the assessee is generating other income like interest on fixed deposit and rent which may have some bearing on the functioning of its units claiming exemption u/s 10A / 10B. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the submissions of the assessee. Hence, we set aside the issue to the file of AO and direct him to consider the issue afresh after ..... X X X X Extracts X X X X X X X X Extracts X X X X
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