B.BRIEF FACTS OF THE CASE AND QUESTION OF LAW
The Assessee, an individual, is proprietor of M/s.Opal Stone Industries and is engaged in the export of granite and marbles. He filed return of income on 27.10.2006 declaring income of Rs.26.94 lacs.The AO completed the assessment, on 31.12.2008, u/s. 143 (3) of the Act, determining the income of the assessee at Rs.41.15 lacs.
Question of Law:
1. Whether the Ld. CIT (A) erred in deleting the addition of Rs. 4, 38,609/- made by the A.O towards foreign tour travel expenses as assessee failed to prove relation of foreign travel with business.
2. Whether the Ld. CIT (A) erred in deleting the addition of Rs. 4,70,758/– made by the A.O out of conveyance, travelling & telephone expenses despite assessee failing to prove genuineness of the claim and its relation to business.
CONTENTION OF THE REVENUE
The Revenue supported the orders of the authorities and contended as mentioned below:
1. Deleting the addition of Rs.4.38 lacs made by the AO toward foreign tour expenses.
a. During the assessment proceedings, the AO found that the assessee had shown turnover of Rs.12.92 crores and had debited Rs.21.93 lacs towards foreign travel expenses. He called for an explanation of the assessee in that regard. Vide his letter, dated 10.12.2008, the assessee submitted that as an exporter of granite and marbles frequent trips have to be made by employees of the assessee to gauge the market trends and develop new client, that the expenses claimed were around 1.7% of the total turnover, that no personal element was involved in the foreign travel expenses.
b. But the AO held that the export income was generated from these countries, namely Kuwait, Nigeria and UAE, that the foreign travel had been undertaken to destinations such as Germany, Egypt, HongKong, South Africa where the assessee had not generated any export income. In the absence of correspondence between overseas clients and trips taken by Zulfikar Momin,who is the brother of the assessee, it was contended that foreign travel expenses was not incurred wholly and exclusively for the business of the assessee. Thus disallowance of Rs.4, 38,609/- (20% of the expenses) was made. The AO had partly disallowed the foreign travel expenses incurred by the assessee, as he was of the opinion that there was no justification for incurring expenditure, which the brother of the assessee had travelled abroad.
c. It was also contended that the FAA has given a categorical finding of fact that the export had increased from Rs.6 Crores to Rs.12 Crores during the year under appeal. The AO had totally ignored the fact. The FAA had found that there was a direct link between the foreign travel expenses and the exports. The countries visited by the employees of the assessee including his brother are those from where he received export orders. It is not necessary that every visit should result in export order in the same year. Considering these facts, the revenue was of the opinion that the order of the FAA does not suffer from any legal infirmity.
2. Deletion of disallowance of Rs.4.07 lacs.
During the assessment proceedings the AO found that the assessed had incurred expenses of Rs.47, 87,625/- towards various expenses like conveyance, telephone, sales promotion and incentive etc. It was contended that some of the expenditure had been incurred in cash that the assessee was not able to give a satisfactory explanation in that regard, that possibility of personal use could not be ruled out. He disallowed 10% of the expenditure amounting to Rs.4, 70,758/- on adhoc basis.
CONTENTION OF THE ASSESSEE
a. The contention of the assessee was that the expenses were incurred for business purposes only and were quite reasonable considering the volume of the business, that the sale for the year under appeal had increased to Rs.12.92 crores from Rs.6.01 crores during the immediately preceding year.
b. The assessee contended that a businessman was the best judge of his affairs and knew the best way to run his business, that the AO could not step into his shoes and guide him about the expenditure and that the reasonableness, commercial expediency and justifiability of expenditure had to be judged from the point of view of a businessman.
c. The assessee stated that his brother was an employee and had no other source of income or occupation other than the employment with the assessee’s business, that all the details of foreign travel expenses were furnished during the assessment proceedings .It was also contended that during the assessment year the assessee had received the export proceeds of Rs.12.92 crores, that the details of party-wise receipts indicated that he had exported marble/granite to countries like UAE, Kuwait, Nigeria,USA and Argentina, that the foreign travel had been undertaken by the employees of the assessee to finalize the latest trend in the market, to explore new customers and find out their requirements etc.
d. To explore the new business opportunities, foreign travel was required and there was business expediency of making such trips, that brother of the assessee was one of the full time senior employee of the assessee’s proprietary business, that expenditure incurred for its employee has to be allowed, that he had travelled to various countries for supply of marble and granite, that the purpose of travel to these destinations was to extend the business.
e.The assessee also contended that he was maintaining regular books of account that were duly supported by vouchers and were subjected to statutory audit, that expenses were fully vouched and were incurred wholly and exclusively for the purpose of business, that expenses were not in the nature of capital or personal, that the AO had not pointed out any irregularity in the books of account and vouchers produced before him for verification, that the disallowance was made purely on adhoc basis, that the AO had not drawn any evidence on record to show that expenses were personal in nature. The AO presumed that the assessee might have incurred certain expenditure for non business purposes, that disallowance made on presumption could not be sustained.
HELD BY ITAT, MUMBAI
After considering the rival contentions, ITAT Mumbai held that the ad hoc disallowance made by the AO was not based on any scientific or logical basis. It is a fact that the books of the assessee are audited and no discrepancy was pointed out by the AO about the accounts maintained by him. Cash vouchers were supported by the documentary evidences. The AO had disallowed various expenses as he was of the opinion that personal element could not be ruled out. In our opinion, it is a very general and vague statement and it cannot form the basis for making addition. The AO should have brought on record some positive evidence to prove that part of the expenditure was not incurred wholly and exclusively for the business of the assessee. In the absence of such evidences, the FAA had rightly allowed the appeal filed by the assessee.As far as the reasonableness, commercial expediency of the expenditure incurred by an assessee is concerned we are of the opinion that the AO is not the right person to decide the issue-an assessee has to take the final decision in that regard.
In the matter of S A Builders (288ITR1) the Hon’ble Apex Court has held as under:
“Once it is established that there was a nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
Similarly, the Hon’ble Delhi High Court has, in the case of Dalmia Cement (254 ITR 377), held as follow:
“Under section 37(1) of the Income-tax Act, 1961, the jurisdiction of the Revenue is confined to deciding the reality of the business expenditure, viz., whether the amount claimed as a deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of the business. It must not, however, suffer from the vice of collusiveness or colourable device. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.”
The ITAT, Mumbai cited the above points and upheld the contentions of the assessee as disallowance made by the AO cannot be held to be justified on any basis.