The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition based on adhoc disallowance out of staff welfare expenses holding that the AO should not resort to adhoc disallowance.
The assessee company, Mitsui & Co. India Pvt.Ltd was engaged in the business of general trading of materials & equipment required for industrial projects. Assessee’s case was selected for scrutiny assessment. During the course of assessment proceedings, the Assessing Authority noticed that the assessee company carried out certain international transactions which were referred to the Transfer Pricing Officer (TPO) for the purpose of transfer pricing adjustment. The TPO had passed an order wherein no adverse inference was drawn by the TPO in respect of international transactions.
While framing the assessment, noticed that in respect of exempt income, the assessee did not make suo moto disallowance under Section 14A of the Income Tax Act as it had made in the last year. The AO by invoking the provision of Rule 8D(ii) of the Income tax Rules, 1962 made disallowance. Further, the AO made disallowance on adhoc basis out of staff welfare expenses. The AO also made an addition in respect of remuneration paid to Mitsui & Co. India Pvt. Ltd.
Sanjay Kumar, appeared on behalf of the assessee submitted that the lower authorities had made and confirmed the addition purely on adhoc basis. Such approach of the lower authorities was contrary to the settled legal position. Further it is contended that the bills and invoices of staff welfare expenses were duly submitted to lower authorities. But the AO had not pointed out any defect or discrepancy in respect of the expenditure claimed for staff welfare.
He further relied upon the decision in the case of the British as India (P.) Ltd. vs DCIT, 2011 which held that the expenditure incurred for lunch and dinners was allowable expenditure.
Ved Jain appeared on behalf of the revenue.
The two-member Bench of Kul Bharat, (Judicial Member) and M.Balaganesh, (Accountant Member) noted that the CIT(A) had partly confirmed the action of AO, treating the expenditure for non-business purpose and it was clear that he did not advert to other expenses. He merely affirmed the action of AO without pointing out as to how the remaining expenses are not for business purposes.
The Bench allowed the appeal filed by the assessee deleting the addition and held that, “It is well settled that the AO should not resort to adhoc disallowance. If the expenditure is not incurred for business purposes, there has to be a specific finding in this regard unless expenditure for personal use and business purpose are mixed and cannot be segregated.”
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