Commercial expediency has to be judged from the point of view of Assessee who knows best how his business has to be run for deciding on allowability of deduction towards Expenses

ne of the most common reason for disallowance by the Assessing Officer during the course of assessment proceeding is commercial expedience. It may be noted that Commercial expediency is a matter of subjective interpretation and it has to be judged from the point of view of Assessee who knows best how his business.

Here is a judgment by Delhi ITAT in Niho Construction Limited Vs DCIT which may be helpful for the Assessee:

The complete copy of the order is as under:

ITAT Delhi

Niho Construction Limited Vs DCIT

ITA No.3063/Del./2011

Order Dated 31/05/2012

This appeal filed by the assessee emanates from the order of the CIT (Appeals)-XVI, New Delhi dated 25.01.2011 for the Assessment Year 2007­-08.

2. The assessee company is incorporated on 06.02.2001 and it is engaged in the business of development of residential and commercial complexes. The return of income was filed on 12.11.2007 which was further revised on 31.03.2009.

3. The grounds of appeal read as under :-

“1. That on the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) has erred in law while confirming the following disallowances of expenses incurred wholly and exclusively for the business of the assessee company:

1. Out of Salary amounting Rs.1800000/-

2. Out of Depreciation on Mobile Phones amounting Rs.520393/-

II. That on the facts and circumstances of the case the learned Commissioner of Income Tax(Appeals) has erred in law while making the unjustified addition to the returned income on account of Provident Fund being Employees Contribution amounting Rs.663966/- disregarding the Hon’ble Delhi High Court’s ruling in the case of CIT vs P.M. Electronics Ltd. It is pertinent to submit that no expense has been claimed on this account while arriving at the returned income.

III. The Appellant craves for grant of permission to add, alter or withdraw any ground of appeal at any time before the hearing of the appeal.”

4. In the ground no.1, one of the issues involved is disallowance sustained by the CIT (A) out of salary amounting to Rs.18,00,000/-

5. While making the assessment for the Assessment Year 2005-06, the Assessing Officer noticed that assessee company has paid huge salary to the ladies who are relatives of Directors / CEO. The details of these persons are as under :-

NAME	RELATIONSHIP	NATURE OF EXPESNES	AMOUNT PAID
Mrs. Ashoo Kapil	Wife of Director	Salary	480,000
Mrs. Poonam Khandelwal	Wife of Director	Salary	360,000
Mrs. Girija Mangtani	Wife of Director	Salary	360,000
Ms. Rakshal Mangtani	Daughter          of Director	Salary	120,000

Since the assessee failed to justify the reasonableness of payment made to these ladies related to the Directors/ CEO, the additions were made which has been sustained up to the level of Appellate Tribunal. A copy of the order of ITAT in ITA No.1373/Del/2009 relevant to Assessment Year 2005-06 is made available and wherein the ITAT has confirmed the addition by holding as under :-

“7. We have considered rival submissions. Except the oral statement that the services were rendered by this four relatives of the Directors, no other material is placed before us which reveal that any services were rendered by these persons to the assessee. Mrs. Ashu Kapil is paid the salary as paid similar to the director. No further material is available before us which corroborates the contention of the assessee made before AO. Similarly no material is placed in respect of services rendered by any other relatives of the directors to whom payments by way of salary is made. The expenses claimed u/s 37 are allowable provided the expenses are wholly and exclusively for the purpose of business. Hon’ble Delhi High Court in the case of Siddho Mal & Sons v. ITO 122 ITR 839 held as under :-

“The word “wholly” in s. 10(2)(xv) refers to the quantum of expenditure but the word “exclusively” refers to the motive, objective and purpose of the expenditure.

An expenditure is to be allowed if it satisfied the test of commercial expediency and commercial expediency has to be judged from the point of view of assessee who knows best how his business has to be run but such a point of view has to be a prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness or colourable discretion. Thus, on the one hand it is not for the ITO to judge whether the assessee could have avoided to reduce a particular expenditure but on the other, an unreasonably high or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and, if combined with other circumstances, it leads to the conclusion that the motive behind the expenditure is to unduly benefit some one, the ITO is well within his rights to come to a finding that the expenditure is not exclusively for the purposes of business.

Relationship by itself, without more, cannot lead to the inference of excluding the possibility of a payment being wholly and exclusively for the purpose of business. Dealing with relatives in contract with or in preference to strangers is neither prohibited by law nor can be tabooed. Indeed, it is natural to do so but this does not give a licence to cover up dishonest transactions or impermissible transfers. The courts and authorities are not to wear blinkers to overlook or condone the passing off of public revenue to one’s own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions.”

7.1. It is also settled law that it is for the assessee to prove that the expenses are wholly and exclusively for the purpose of business. In the present case we find that except the oral submissions that the services were rendered by relatives of directors no other material is produced before us which suggest so. We, therefore, confirm the disallowance made.”

6. Since there is no change in the facts on this issue, respectfully following the order of the ITAT, cited supra, we sustain the order of the CIT (A) and dismiss this ground of assessee’s appeal.

7. The other issue involved in the ground no.1 is confirming the disallowance made on depreciation on mobile phones amount to Rs.5,20,393/-. The assessee claimed depreciation on the mobile phones amounting to Rs.6,12,227/- at the rate of 100%. The Assessing Officer restricted the depreciation @ 15% treating the same as part of plant and machinery or office equipment. The CIT (A) confirmed the addition by holding as under :-

“Regarding the disallowance of 100% depreciation of mobile phones purchased by the appellant, it has been discussed by the A.O. that items which are entitled to 100% depreciation are specifically mentioned in the Income Tax Act/Rules and since mobile phones do not find mention there, they can be allowed depreciation only at the rates applicable to plant and machinery. Even otherwise, mobile phones do not depreciate so fast and are longer lasting than the items on which 100% depreciation is allowable. Accordingly, I uphold the action of the A.O. in allowing depreciation on mobile phones @ 15% instead of 100% as claimed by the appellant. This ground of appeal is dismissed.”

8. We have heard both the sides on the issue and in the pleadings, the ld. AR has failed to show any provision in the Rules related to the depreciation wherein 100% depreciation is justified on the mobile phones. It was also stated during the pleadings that none of the mobiles was costing less than Rs.5,000/-. Considering the totality of the facts and circumstances, we find that the CIT (A) was justified in confirming the action of the Assessing Officer for restricting the rate of depreciation @ 15%. Therefore, this ground of assessee’s appeal also stands dismissed.

9. In the ground no.2, the issue involved is sustaining the disallowance on account of provident fund being employees’ contribution amounting to Rs.6,63,966/- paid before the due date of filing the return of income.

After hearing both the sides, we hold that this issue is covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in the case of CIT vs. AIMIL Limited reported in 229 CTR 448 and Hon’ble Supreme Court in the case of CIT vs. Vinay Cements Limited reported in 213 CTR 286 (SC). The Hon’ble jurisdictional High Court in the case of CIT vs. AIMIL Limited, cited supra, has held as under :-

“As soon as employees’ contribution towards PF or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that If the assessee does not deposit this contribution with PF/ESI authorities, it will be taxed as Income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of s. 36(1)(va). Sec. 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from Income insofar as employees’ contribution is concerned. Deletion of the second proviso has been treated as retrospective in nature and would not apply at all. The case is to be governed with the application of the first proviso. If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Acts permit the employer to make the deposit with some delays, subject to the aforesaid sequences. Insofar as the IT Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed. CIT vs.Vinay Cement Ltd., (2007) 213 CTR (SC) 268, CIT vs. Dharmendra Sharma (2007) 213 CTR (Del) 609 : (2008) 297 ITR 320 (Del) and CIT vs. P.M. Electronics Ltd. (2008) 220 CTR (Del) 635 : (2008) 15 DTR (Del) 258 followed.”

Since the amount has been paid prior to the date of filing the return, keeping in view the aforesaid decision of Hon’ble jurisdictional High Court, we allow this ground of assessee’s appeal.

11. Ground No.3 is general in nature and does not require any adjudication.

12. In the result, the appeal of the assessee is partly allowed.

Order pronounced in open court on this 31^st day of May, 2012.