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

Mitsui & Co India Pvt Ltd Vs Addl. CIT

ITAT BENCH ‘E’ DELHI

ITA No. 1362/Del./2011

Assessment Year: 2005- 2006

Decided on: 3 June 2011

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 dis allowance of an amount of Rs. 26,74,542/- on account of car expenses.

(ii) That the above dis allowance 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 dis allowance of Rs.4,17,336/- on account of entertainment expenses on account of personal use of employees and directors.

(ii) That the above dis allowance 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 dis allowance 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 dis allowance of Rs.2,68,305/- made by AO on account of business promotion expenses.

(ii) That the said dis allowance 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 dis allowance 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 dis allowance from car expenses for personal use. Learned AR submitted that this issue is covered in favor 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 favor 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 dis allowance 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 non business 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 dis allowances 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 dis allowances are not justified in view of case laws relied upon. We accordingly direct to delete the aforementioned dis allowance.

6. In the ground nos.3(i) to 3(iii), the issue is regarding the ad hoc dis-allowance of Rs.4,17,336/- out of entertainment expenses. In the ground no.4, the issue is regarding the confirmation of dis allowance of Rs.50,000/- which was provision for entertainment expenses. In ground no.5(i) & 5(ii), the issue is regarding the sustenance of dis allowance 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 dis allowance 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 dis allowance 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 dis allowance under the two heads is kept at 10% of the amount claimed. The relief on this account is worked out as under:-

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 dis allowance 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 dis allowances 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 non business 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 dis allowances 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 dis allowances 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 dis allowances 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.