Om Logistics Ltd.,, New Delhi vs Department Of Income Tax

These cross appeals, preferred by the department as well as the assessee, are directed against the order dated 8-12-2012, passed by the 2

CIT(Appeals)-II, New Delhi in appeal no. 308/11-12, relating to A.Y. 2009-10.

2. Brief facts are that the assessee company in the relevant assessment year was engaged in the business of transportation. It had filed its return of income declaring of income of Rs. 13,42,38,250/-. The AO determined the total income at Rs. 13,74,88,250/-, after making following additions/ disallowances:

1. Disallowance out of salary, allowances & Bonus 10,00,000/-

2. Disallowance out of rent expenses 15,00,000/-

3. Disallowance out of computer expenses 7,50,000

3. Ld. CIT(A) partly allowed the assessee's appeal. Being aggrieved, both the assessee and the department are in appeal before us.

4. First we take up the departmental appeal. Following grounds are raised:

"1. That the Commissioner of Income tax (Appeals) erred in law and on facts of the case in deleting the addition of Rs. 15,00,000/- made by the Assessing Officer on account of disallowance out of rent expenses.

2. That the Commissioner of Income tax (Appeals) erred in law and on facts of the case in deleting the addition of Rs. 7,50,000/- made by the Assessing Officer on account of disallowance of computer expenses being capital in nature.

4. Brief facts apropos ground no. 1 are that AO in course of assessment proceedings observed that expenditure on account of rent had gone up to Rs. 818.12 lacs as compared to Rs. 619.08 lacs under the same head in the immediately 3

preceding year, thereby showing an increase of 32.15%. However, there was no corresponding increase in revenue from operations. The assessee in its explanation submitted that increase in expenditure under rent account was because of expansion process and some specific business activity of warehousing and company had to take some extra steps from the market on rental basis. The effect of the same could be seen in the coming period. However, AO did not accept the assessee's contention and made ad hoc disallowance of Rs. 15,00,000/-.

5. Ld. CIT(A) deleted the disallowance, inter alia, taking note of the submission of assessee that it provided logistic service that included end to end delivery on 'hub and spoke model', where material had to be stored in the warehouse and supplied to the customer at the time of need. It was further explained that rent was paid in respect of various premises used for different business purposes that included branch/ booking office, hub or even resting places for workers. Further, it was pointed out that number of branch/ booking office had increased from 309 at the beginning of the year to 334 at the end of the year. Ld. CIT(A) after considering the assessee's submission deleted the disallowance, observing that no specific reason had been given by the AO to make the disallowance.

6. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) because apparently the AO has made the disallowance solely on the ground that there was increase in expenditure over earlier year, which was not in proportion to the revenue increase without pointing out any specific discrepancy in the claim made by assessee. The AO has not controverted the assessee's plea that the expenditure was incurred for business purposes. Therefore, the disallowance on ad hoc basis was wholly unwarranted.

4 7. Brief facts apropos ground no. 2 are ht AO noticed that the expenditure on account of computer expenses had gone up to Rs. 108.25 lacs as against expenditure of Rs. 99.49 lacs in the immediately preceding year. The assessee company in its reply submitted that increase in expenditure under computer expenses account mainly represented computer maintenance charges, server lease rent as well as internet expenses for almost 200 branches situated all over India. It was further submitted that all the payments incurred under that account head were properly accounted for and were fully supported with documentary evidence which could be verified by AO. The AO, however, did not accept the assessee's contention and observed that from the examination of the books of a/c on random basis it could be seen that certain computer expenses incurred were on capital nature. Keeping in view the capital nature of expenses the AO disallowed Rs. 7,50,000/-.

8. Ld. CIT(A) deleted the disallowance, inter alia, observing that AO did not specify any expense which could be considered as capital in nature.

9. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) because admittedly the AO has not pointed out even a single item of expenditure which in his opinion was capital in nature claimed as revenue by the assessee. Mere bald allegation made by AO cannot be sustained in the absence of any specific details. The ad hoc disallowance of Rs. 7,50,000/- without any basis was wholly unwarranted.

10. In the result, department's appeal is dismissed.

Assessee's appeal:

10. Sole effective ground is as under:

5 "On the facts and circumstances of the case, the learned CIT(a) has erred both on facts and in law in confirming the action of the AO in making an arbitrary disallowance of an amount of Rs. 10,00,000/- out of salary, allowances and bonus expenses.

11. Brief facts, apropos this issue, are that in course of assessment proceedings, the AO noticed that the expenditure on account of salary allowance and bonus had gone up to Rs. 2280.12 lacs as against expenditure of Rs. 1793.17 lacs under the same head in the immediately preceding year, showing an increase of 27.16%. Whereas there was no much increase in revenue from operations. The assessee in its explanation submitted that increase in expenditure was mainly because of increase in staff strength. It was pointed out that keeping in view of coming new business opportunities during the year and company's future expansion plan and to achieve expected increased level of turnover, due to all these factors the assessee company had recruited more experienced personnel in the transport business so that company may not face any shortage of required experienced staff strength for execution of increased business.

12. The AO, however, made an ad hoc disallowance of Rs. 10,00,000/- observing that from the examination of the books of a/c on random basis, it was seen that payments on account of salary had been made in cash. He observed that keeping in view marked increase under salary, allowance account, the assessee's justification was not acceptable.

13. Ld. CIT(A) confirmed the disallowance for the following reasons:

(a) Increase in salary etc. was commensurate with the turnover increase in respect of FY 2009-10 and FY 2010-11 but not so in FY 2008-09.

6 (b) The assessee's explanation was too general and vague.

14. Ld. counsel for the assessee submitted that the ad hoc disallowance as confirmed by ld. CIT(A) was wholly unjustified because AO did not point out even a single item of expenditure which was not allowable. He referred to page 42 of the PB wherein the assessee's explanation in regard to AO's query with reference to section 40A(3) is contained, which was replied by assessee as under:

"During the year under consideration there is no transaction in violation of Section 40A(3). Further there are some transactions amounting to Rs. 19,24,280/- which are in violation of Sec. 40(a)(ia) as per detail attached. The same has already been added back in the computation of the year as taxable income."

15. Ld. counsel submitted that assessee had more than 200 branches and the explanation given by it was not found to be false and, therefore, ad hoc disallowance was not called for. The assessee's books were duly audited and tax audit report was also submitted.

16. We have considered rival submissions and perused the record of the case. The disallowance u/s 37 can be made only if a finding is recorded by AO that the amount had not been incurred for business purpose and the claim is not genuine. Merely because the expenditure had been incurred in cash, cannot be a ground, without being corroborated by evidence, for making disallowance. The AO did not make any disallowance u/s 40A(3), after considering the assessee's reply as noted above. It is well settled law that mere increase in expenditure in one year, the effect of which could be reflected on revenue in subsequent years, cannot be a basis for making disallowance in the year of expenditure. It is well settled law that the 7

management decisions to incur expenditure cannot be questioned by revenue. The reason assigned by AO for making disallowance was marked increase under the head 'salary'. This reason cannot be countenanced. We, accordingly, allow the assessee's appeal.

17. In the result, department's appeal is dismissed and assessee's appeal is allowed.

Order pronounced in open court on 13-02-2015.

Sd/- Sd/- (ABY. T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 13-02-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR