Case: Asstt. Commissioner of Income Tax Vs Knorr Bremse (P) Ltd.. ITAT (Income Tax Appellate Tribunal)

JudgesC.L. Sethi, J.M. and Shamim Yahya, A.M.
IssueDirect Taxation
Judgement DateFebruary 19, 2010
CourtITAT (Income Tax Appellate Tribunal)

Order:

Shamim Yahya, A.M., (Delhi 'D' Bench)

  1. These appeals by the revenue are directed against the orders of the ld. CIT(A) for the concerned assessment years.

  2. Since the issues involved are common and connected these appeals are being consolidated and disposed off for the sake of convenience by this common order.

  3. The first common issue raised is that the ld. CIT(A) erred in directing the deletion of disallowance made on account of alleged bad debts write off during the year.

  4. On this issue the AO observed that assessee has not furnished any correspondence or evidence to the effect that the debts have become bad during the concerned assessment years. Therefore, he disallowed the bad debt claim.

  5. Upon assessee's appeal ld. CIT(A) noted that in view of the amendment of Section 36(1)(vii) w.e.f. 1.4.1989, the assessee is not required to provide demonstrative evidence that the debt written off has in fact become bad and that if the assessee is writing off the debts as irrecoverable in his account in the previous year, it is sufficient compliance to the deduction under Section 36(1)(vii) of the Act. Accordingly, ld. CIT(A) deleted the disallowance in this regard.

  6. We have heard both the counsels and perused the records. We find that the issue involved is covered in favour of the assessee by the order of the Hon'ble Jurisdictional High court in the case of CIT v. Autometers Ltd. 292 ITR 345, wherein it was held that the requirement of assessee to prove that the debt has become bad debt is dispensed with by 1989 amendment in Section 36(1)(vii) and thereafter all the assessee has to do is to write off a bad debt as irrecoverable in its accounts. Respectfully following the aforesaid precedent, we uphold the order of the ld. CIT(A) and decide the issue in favour of the assessee.

  7. The next issue raised is that ld. CIT(A) erred in deleting the disallowance of Rs. 548236/- made on account entertainment expenses for A.Y. 2001-02 and Rs. 646625/- for A.Y. 2002-03.

    7.1 The assessee had incurred an expenditure of Rs. 10,96,472/-towards entertainment expenditure during the financial year 2000-01. The AO disallowed Rs. 5,48,236/- being 50% of the total expenditure, holding the same to have been incurred for non-business purposes. It was observed by the AO that most of the expenses had been evidenced by self prepared vouchers and were in the form of reimbursement to the directors and senior executives and the payments had been made in cash. The genuineness of the expenditure being incurred for the business purpose was doubtful. The AO observed as under:

    The assessee's contentions are not acceptable for the reasons mentioned below:

    i) In respect of claim towards entertainment expenditure, by assessee's own admission, supporting vouchers are available only in a "few" cases. The fact is that in more than 400 entries in the general ledger, in almost all the cases barring a few, there are no supporting vouchers.

    ii) By assessee's own admission, the expenditure was incurred at the residences of the Managing Director and the Finance Controller. Most of the amounts are self vouchers of the above persons who have merely stated that they have entertained some guests in their residences and are to be reimbursed. There are neither supporting vouchers nor a list of guests entertained on the various occasions. There is no way to verify as to whether first of all, the expenditure was actually incurred and secondly, whether the expenditure was exclusively in connection with the assessee's business.

    Thus, the assessee has failed to discharge the onus of establishing the genuineness of the expenditure allegedly laid out towards entertainment charges as well as the details regarding the persons claimed to have been entertained. In this context, reference may be made to the judgment of the Hon'ble Supreme court in the case of CIT v. Calcutta Agency Ltd. (1951 19 ITR 191 (SC), where it was held that if the assessee failed to establish the facts necessary to support this claim for deduction under Section 37(1), the claim for deduction of expenditure is not admissible.

    In view of the aforesaid and also having regard to the fact that entertainment expenditure would to certain extent be required in case of a business entity and in light of the facts and circumstances stated above, I would deem it reasonable to disallow 50% of expenditure claimed under this head. The disallowance works out to Rs. 5,42,236/-(50% of Rs. 10,96,472/-).

    7.2 Before the Ld. CIT'A assessee inter-alia claimed that as regards the expenditure incurred for entertaining the guests and clients in hotels and restaurants, the bills for the same were duly produced before the AO. In some cases the guests and clients were entertained by the directors and executives at their residence, which were evidenced by self prepared vouchers. It is submitted that such expenditure cannot be evidenced otherwise than by self created vouchers by the directors etc.

    7.3 The CIT(A) deleted the disallowance on the ground that the assessee had claimed the expenditure in a bonafide manner and since the AO had not disputed the factum of the expenditure as such, hence there was no basis for the AO to make a partial disallowance on the basis of estimation and surmises.

    7.4 Against this order the revenue is in appeal before us.

    7.5 We have heard both the counsels and perused the records. We find that on this issue the AO has made out a case that there are a large number of entries in general ledger and almost in all cases barring a few, ITA Nos. 1166 & 1167/DEL/07 A.Yrs. 2001-02 & 2002-03 there are no external vouchers. In most of the cases by assessee's own admission the entertainment expenditure was incurred at the residence of the Managing Director and the Finance Controller. Most of the amount are self vouchers of the above persons who have merely stated that they have entertained some guests at the residence and these are to be reimbursed. There is neither any external supporting voucher, nor a list of guests entertained or the occasion thereof. A sample of the bill in this regard submitted in the paper book of the assessee at page No. 53 is reproduced as under:

    Entertainment Bill Date 15.02.2001

    Expenses incurred in providing Soft Drinks, Snacks and Foods
    at my residence on Company's Guests as per details given below:
     Date Particulars Amount
     
    31.1.2001 14 persons @ Rs. 165 p/p. 2310.00
     
    03.02.2001 15 persons @Rs. 200 p/p. 3000.00
     
    09.02.2001 18 persons @ Rs. 200 p/p. 3600.00
     
    12.02.2001 12 persons @ Rs. 165 p/p. 1980.00
     ========
    Total: 10890.00
     --------

    (Rupees Ten thousand eight hundred ninety only)

    (Vinod Astavans)
    Managing Director

    7.6 A perusal of the above makes it amply clear that there is no way that AO can verify the veracity of the above expenditure. There is neither any external supporting voucher, nor the particulars of person and the occasion of entertainment. Ld. counsel of the assessee has contended that AO cannot...

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