Disallowance on account of the foreign tour expenses on the ground that expenses were not supported by the vouchers and not incidental to the business of Assessee company


Disallowance on account of the foreign tour expenses on the ground that expenses were not supported by the vouchers and not incidental to the business of Assessee company

Supreme Rayons (P) Ltd. vs Deputy Commissioner Of Income Tax on 24 March, 2006

Equivalent citations: (2006) 104 TTJ Jodh 896

Bench: R Syal, H O Maratha


Hari Om Maratha, J.M.

  1. These cross-appeals arise out of the first appellate order dt. 18th Dec, 2001, passed by the learned CIT(A), Ajmer, in relation to asst. yr. 1998-99.
  2. The assessee-company is engaged in the manufacturing/sales of synthetic cloth.
  3. The ground No. (1) of the assessee’s appeal and ground No. (3) of the Department’s appeal relate to the same issue, i.e., addition on account of foreign tour expenses. The relevant facts are that the AO made disallowance out of foreign tour expenses on the ground that these were either not fully supported by vouchers or were not incidental to the business of the assessee-company.
  4. The assessee-company showed sales of Rs. 11.13 crores in the previous year. In the earlier year, the receipts of the assessee were only from jobwork to the extent of Rs. 1.03 crores. An expenditure of Rs. 14.92 lakhs was incurred on foreign tour, by its agents and dealers, undertaken to South-East Asian countries, as a part of incentive schemes for sales/purchases.
  5. The assessee’s case is that to achieve a target of Rs. 11.13 crores, these agents and dealers were instrumental. As per the incentive scheme, the achiever [of a particular goal] was entitled to a rebate or a foreign tour, as per his option. About 25 agents opted for foreign tour and they were also accompanied by two directors of the company, besides two sales managers and one marketing manager. A commission was also paid for the purchase of foreign currency from M/s Thomas Cook and SBI. Conveyance charges were also incurred for which bills were filed before the AO. These bills for the conveyance were self-made vouchers by the directors and other officials of the company.
  6. The subject-matter of this ground before us is the disallowance of expenses incurred on the foreign tour of Shri N.S. Sancheti and Shri S.K. Sancheti, who besides being directors are also whole-time employees of the assessee-company. The AO observed that two directors and three other officials accompanied the group of 26 persons, which according to him were not required, in his opinion only one official looking after the sales, could well accompany this group and not others. Therefore, he, proportionately, disallowed Rs. 1,88,020 for the tour of four persons out of 5, and held it to be not incidental to the business and made the addition of Rs. 1,88,020. The learned CIT(A) reduced this addition to Rs. 1,23,800. Both the parties are aggrieved.
  7. We have heard the rival submissions and perused the evidence on record.
  8. After hearing both the sides, we agree with the learned Authorised Representative that the assessee-company had drawn a scheme to augment the sale of its products. We are entirely in the agreement with the company, that it did spent and achieved the goals, and as a result sent some parties, as mentioned above, on foreign tour. We are also ready to accept that five persons, being employees of the assessee-company, including two of its directors, did accompany this group. But it is to be seen as to whether the expenditure incurred on the five persons [employees] of the company was for and only for the business purposes or an element of non-business purpose was also involved therein. In any case, the contention of the learned Authorised Representative that the assessee-company is the best judge of its affairs and is free to carry out its business in a way, which yields best results is well founded. But the aspect of non-business user is always open to scrutiny. In this case, two directors of the company and three other officials accompanied the tour group. It was doubted that all the five were not required to accompany, and it was thought that they were on pleasure trip, instead. It is always possible to make such inferences. But these facts are to be considered in correct perspective, by keeping in mind the point of view of the assessee. Neither the AO nor the learned CIT(A), has given some plausible reasons for the same. Both of them acted on the generality of the aspect, instead of touching the same on merits, to come to the conclusion, as to why and how claim of the assessee is not allowable. Therefore, we have to restore this issue to the file of the learned AO to decide the same afresh, after hearing the assessee. Therefore, this issue in both the appeals is allowed for statistical purposes.
  9. The second issue of the assessee’s appeal relates to a sustained addition of Rs. 52,674.
  10. A commission of Rs. 52,674 has been claimed to have been paid to M/s Rajender Textile Agency. The confirmation filed with regard to the above payment was not accepted, as it was not supported by details of the working out of the quantum of the commission amount. On that basis this payment of commission was disallowed and confirmed.
  11. We have heard the rival submissions and perused the evidence on record.
  12. The learned Authorised Representative has contended before us that the letter of confirmation filed by M/s Rajender Textile Agency, dt. 5th March, 2001, is self explanatory. A copy of this letter is placed at page No. 20 of the assessee’s paper book. The recipient has categorically stated that it has received a commission of Rs. 52,674 in relation to asst. yr. 1998-99 from Supreme Rayons (P) Ltd., Bhilwara. Copies of accounts of these years were also enclosed to support the confirmation of commission receipt. After going through the copies of account of Rajender Textile Agency in the accounts of the assessee’s, for these years, placed at page Nos. 21, 22 and 23 of the assessee’s paper book, we are convinced that the claim of the assessee is perfectly in order. The payment of commission stands duly proved on record. Thus, we delete the addition of Rs. 52,674 from the hands of the assessee and allow this ground of appeal.
  13. Now we take up ground No. (1) of the Departmental appeal. This ground relates to deletion of Rs. 67,773 made on account of discrepancy in the commission paid to Nankana Textile of Rs. 43,507; and B.D. Batra & Co. of Rs. 24,266.
  14. In these two cases the discrepancy occurred due to the reason that in case of M/s Nanakana Textile incentive of Rs. 4.10 lakhs was paid in the incentive account, but an amount of Rs. 46,290 was debited in the interest account, as interest was to be charged for late payments made.
  15. After considering rival submissions, in the light of the available record, we are satisfied that after making allowance of debited interest and bank commission, rate difference, there would have been no discrepancy of Rs. 43,507 in the confirmation given by the party. Thus, the difference was due to the nature of accounting made as discussed above and on reconciliation there would be no reason for the discrepancy.
  16. Likewise in the case of B.D. Batra & Co., the difference of Rs. 24,266 was noticed in the confirmation of the party. That difference was explained to be due to the accounting of sales, commission paid/payable as per the mercantile system of the assessee. In the same way, we are satisfied that in case the reconciliation is made, there would be discrepancy, which seemed to be due to nature of accounting. Therefore, both these deletions are hereby confirmed by us. This leads to the dismissal of ground No. (1) of the Revenue’s appeal.
  17. In ground No. (2) the deletion of Rs. 4,29,523 added by the AO by disallowing the sales incentive paid to M/s Rajender Kumar, Kanpur, and Sharda Suiting, Bhilwara, is the subjection of appeal.
  18. It seems that the learned CIT(A) has set aside the addition in respect to the above two parties, whose confirmations were not received by the AO. The learned CIT(A) has directed the AO to send intimations/details to the concerned AOs of these two concerns for getting the receipts verified and for taking necessary action, if warranted. In a way this order amounts to restoration of these additions for further verification and necessary action. The deletion for the time being is only setting aside of these additions. Therefore, there is no infirmity in the above findings of the learned CIT(A). Thus, ground No. (2) is also dismissed. As a result, the appeal of the Revenue stands dismissed, as ground No. (3) has already been decided along with the appeal of the assessee, and other grounds are formal in nature.
  19. In the result, the appeal of the assessee is partly allowed for statistical purposes. The appeal of the Revenue is partly allowed for statistical purposes.