Car expenses incurred for the personal use of directors of the company in accordance with the terms and conditions of service were allowable as business expenditure, as held by DelTrib in Mitsui & Co India Pvt Ltd v Addl CIT — In favour of: The assessee (partly); ITA No 1362/Del/2011: (AY 2005–2006).
Ad hoc disallowances of the entertainment expenses and business promotion expenses were justified for want of verification and for non-business purposes.
Mitsui & Co India Pvt Ltd v Addl. CIT
ITAT BENCH 'E' DELHI
ITA No. 1362/Del./2011
Assessment Year: 2005-2006
I P Bansal, JM And B C Meena, AM
Decided on: 3 June 2011
Counsel appeared:
Shri Ved Jain & Mrs Rano Jain, CAs for the appellant
Shri A K Monga, Senior DR for the respondent
Order
Per: B C Meena, AM:
The assessee has filed this appeal against the order of CIT (Appeals)- IX, New Delhi dated
29.10.2010 for the assessment year 2005-06. The grounds of appeal taken by the assessee read as
under:-
“1. On the facts and circumstances of the case, the order passed by the learned CIT (A)
is bad both in the eye of law and on facts.
2(i) On the facts and circumstances of the case, learned CIT(A) has erred both on facts
and in law in confirming the disallowance of an amount of RS.26,74,542/- on account of
car expenses.
(ii) That the above disallowance has been confirmed despite the same being, incurred
wholly and exclusively for the purposes of business and rejecting the contention of the
assessee that there cannot be an element of personal nature in case of a company, being
a separate legal entity.
3(i) On the facts and circumstances of the case, learned CIT(A) has erred both on facts
and in law in confirming the adhoc disallowance of Rs.4,17,336/- on account of
entertainment expenses on account of personal use of employees and directors.
(ii) That the above disallowance has been confirmed ignoring the explanation and
evidences brought on record to show that the expenses have been incurred wholly and
exclusively for the purposes of business.
(iii) On the facts and circumstances of the case ld. CIT(A) has erred both on facts and in
law in giving a find contrary to the facts of case.
4. On the facts and circumstances of the case, learned CIT(A) has erred both on facts and
in law in confirming the disallowance of Rs.50,000/- on account of entertainment
expenses.
5(i) On the facts and circumstances of the case, learned CIT(A) has erred both on facts
and in law in confirming the disallowance of Rs.2,68,305/- made by AO on account of
business promotion expenses.
(ii) That the said disallowance has been confirmed ignoring the explanation and
evidences brought on record by the assessee to show that the expenses have been
incurred wholly and exclusively for the purposes of business.
6. The Appellant craves leave to add, amend or alter any of the grounds of appeal.”
2. The assessee is a private limited company. Assessee company engaged in the business of
trading, exports & imports, supply of material and equipments to infrastructure and industrial
projects. The CIT(A) had sustained disallowance for the element of personal use out of car
expenses. Addition of Rs.4,17,336/- and Rs.50,000/- has been sustained for entertainment
expenses and the addition of Rs.2,68,305/- has been sustained out of business promotion
expenses.
3. Ground Nos.1 and 6 are general in nature, hence no adjudication is required. Issues raised in
grounds no.2(i) & 2(ii) are related to disallowance from car expenses for personal use. Learned
AR submitted that this issue is covered in favour of the assessee by the following decision of the
Hon'ble Gujarat High Court:-
(i) Sayaji Iron & Engg. Co. v. CIT (2002) 253 ITR 749 (Guj.)
(ii) CIT v. Dinesh Mills Ltd. (2005) 199 CTR 509 (Guj.); and
(iii) Dinesh Mills Ltd. (2002) 254 ITR 673 (Guj.)
Ld. AR pleaded to set aside the order of the authorities below and allow assessee’s ground.
4. Learned DR relied on the orders of the authorities below and pleaded to dismiss assessee’s
grounds.
5. After hearing both the sides and considering the material on record and the case laws relied
upon, we hold that issue is covered in favour of assessee. The Hon'ble Gujarat High Court in the
case of Sayaji Iron & Engg. Co., cited supra, held as under:-
“ The assessee, a private company, had incurred Rs.96,653/- towards maintenance of its vehicles,
which it had claimed as business expenditure. One-sixth of the expenditure was disallowed on the
ground that all the vehicles were not exclusively used for the business as its directors were also
using them for their personal purposes. The Appellate Tribunal confirmed the disallowance of
one-sixth thereof. The Tribunal had distinguished earlier orders in the case of the assessee on the
ground that even if there was no personal user of the company it would yet be “user for nonbusiness
purpose”. On a reference:
Held, reversing the decision of the Tribunal, (i) that, the directors of the assessee were entitled to
use the vehicles for their personal use in accordance with the terms and conditions on which they
were appointed and the perquisites given to the directors formed part of their “remuneration”
under the Explanation to section 198 of the Companies Act, 1956, for the purpose of determining
their remuneration under section 309 of that Act. Once such remuneration was fixed as provided
in section 309 it was not possible to state that the assessee incurred the expenditure for the
personal use of the directors. Even if there was any personal use by the directors that was as per
the terms and conditions of service and, in so far as the assessee was concerned, it was business
expenditure and no part of the expenditure could be disallowed.”
Revenue had not cited any contrary decision. Respectfully following the aforementioned
decisions, we hold that the disallowances made by the Assessing Officer are not warranted
insofar as the same has been made merely on the basis of personal use. Since the assessee is a
corporate assessee such disallowances are not justified in view of case laws relied upon. We
accordingly direct to delete the aforementioned disallowance.
6. In the ground nos.3(i) to 3(iii), the issue is regarding the ad hoc disallowance of Rs.4,17,336/-
out of entertainment expenses. In the ground no.4, the issue is regarding the confirmation of
disallowance of Rs.50,000/- which was provision for entertainment expenses. In ground no.5(i) &
5(ii), the issue is regarding the sustenance of disallowance of Rs.2,68,305/- on account of
business promotion expenses.
7. The CIT (A) has decided these issues in his order as under:-
“5.5 I have considered the findings recorded by the AO as per the assessment order and the
submissions made by the Ld. AR.
5.6 The provision of Rs.50,000/- made by the appellant under the head "Entertainment Expenses"
has rightly been disallowed by the AO and hence the same is confirmed.
5.7 During the course of the appellate proceedings, the nature of entertainment and business
promotion expenditure came up for details discussion with the Ld. AR. The details of the said two
expenses submitted by the appellant were closely examined. The Ld. AO as per the assessment
order has pointed out various discrepancies in the expenses claimed. He has also quoted certain
instances where the expenses prima facie appeared to have been incurred for non-business
purposes. On many occasions expenses have been incurred in cash (amounting to more than
Rs.16 lakhs) for which supporting evidences in the form of 3rd party bills are not available. Many
entries in the account do not have narration about the client or the business purpose for which
the amount was spent. The Ld. AO also observed that the entertainment expenses were unusually
high totaling to Rs.42.23 lakhs which on an average work out to Rs.20,000/- approximately for
each working day.
5.8 As regards the business promotion expenses, the Ld. AO asked the assessee to establish the
nexus with the business. It was further observed that many entries for the expenditure were of
small amount and the expenses were incurred in cash for which no verification was possible.
Therefore, invoking provisions of section 37(1), the AO made a part disallowance of the expenses
claimed @ 20% holding the same to have been incurred for non-business purposes.
5.9 Subsequent to the discussion as mentioned above, the Ld. AR stated that he had no objection
if the disallowance out of the entertainment and business promotion expenses is restricted to 10%
of the total claim as against 20% disallowed by the Ld. AO. In the light of the fact and
circumstances of the case, I am of the considered opinion that the ends of justice would meet if
the disallowance under the two heads is kept at 10% of the amount claimed. The relief on this
account is worked out as under:-
Head Amount disallowed by the AO @
20%
Relief allowed @
10%
1. Entertainment
Expenses
Rs.8,34,672/- Rs.4,17,336/-
2. Business Promotion
Exp.
Rs.5,36,611/- Rs.2,68,305/-
Total Rs.6,85,641/-
The CIT (A) has confirmed the addition of provisions of Rs.50,000/- made under the head of
entertainment expenses being the same as provision. After hearing both sides, we hold that since
it was only a provision and not actually spent, we sustain the same.
7.1 As regards disallowance out business promotion expenses, the CIT(A) allowed part relief.
The Assessing Officer disallowed 20% while the CIT (A) restricted it to 10%. In his order, CIT
(A) has also stated that the AR of the assessee has no objection to the business promotion
expenses being restricted to the 10% of the total claim, which CIT(A) has done. From the grounds
of appeal, we find that the assessee has contested the ad hoc disallowances of entertainment
expenses on account of personal use of employees and directors. The CIT(A) has sustained part
of the addition by holding that the Assessing Officer has pointed out various discrepancies in the
expenses claimed and some of the expenses prima facie appeared to have been incurred for nonbusiness
purposes. The CIT(A) has also recorded that on many occasions, the expenses have been
incurred in cash for which supporting evidences in respect of third party bills were not available.
Many of the entries in the account were not having narration for what business purposes the same
were spent. Similarly, in the case of business promotion expenses, the CIT (A) has confirmed the
Assessing Officer’s observation that the assessee has failed to establish the nexus with the
business and many expenses of small amount were incurred in cash for which no verification was
possible. It makes clear that part disallowances were sustained not for personal use but for other
reasons as stated above.
8. Learned AR relied on the decision of the Hon'ble Gujarat High Court in the case of Sayaji Iron
& Engg. Co. and CIT v. Dinesh Mills Ltd., cited supra. However, we find that the part of
disallowances out of the entertainment expenses has been sustained for want of verification and
for no nexus with business. Similarly, sustenance out of the business promotion expenses has also
done for want of verification as the expenses were incurred in cash. The addition of Rs.50,000/-
has been sustained on account of provision made under the head ‘entertainment expenses’ as the
same was not actually incurred during the year. Learned AR’s pleading that no res judicata or
estoppel are applicable on the issue of consent for addition, however, the facts of the case shows
that these disallowances are for want of verification and expenses incurred for non-business
purposes. Therefore, considering all these facts, we uphold the additions to the extent consented
which is 10% of the total expenses claimed under these heads. The order of CIT(A) on these
issues is sustained and these grounds are accordingly dismissed.
10. In the result, the appeal of the assessee is partly allowed.
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