By TIOL News Service

PUNE, JUNE 17, 2016: THE issue is - Whether when there is no business activity during the year, is it justified if the Company pays rent for residence of the Director particularly when it is paid to the wife of the Director who is a specified person u/s.40A(2)(b). NO is the answer.

Facts of the case

The assessee is a Company primarily engaged in construction business and property development & allied services. In its return the a loss amount was declared after setting off the current year business loss against LTCG of the current year. AO noticed that the only income disclosed by the assessee is from sale of land. No other income is shown nor there is any opening or closing stock. Assessee had claimed various other expenses. AO observed that the personnel cost includes salary to Directors, receptionist, accountant, architecht etc. but the business is being in dormant position there is no commercial expediency for the same. An disallowed 50% of the such expenditure. In respect of rent & usage charges, AO noted that substantial amount was incurred towards rent for residential premises of director and since such rent was not paid in the preceeding year and since it was paid to the wife of director who is specified person u/s 40A(2)(b), AO disallowed a part of such expenses. With regard to promotion and other expenses it was observed that in the absence of any work in progress or finished goods for sale, such expenditure is unreasonable and disallowed a portion thereof. Out of travelling expenses 50% was disallowed as AO rejected assessee's claim that foreign travel was undertaken for venturing into new business of mining. 50% of depriciation on cars for probable personal use was disallowed. Electricity charges for the bunglow of assessee's parents and one of the director's was disallowed. Job work expenditure pertaining to bunglows was also partly disallowed. Upon appeal, CIT(A) granted partial relief. Aggrieved assessee preferred an appeal.

After hearing the parties, the Tribunal held that,

++ the directors have been paid salary in the previous AYs and no disallowance has been made by the AO. Although no revenue receipts are generated during the year, however, the company is in existence and has started generating revenue in the next year. Once a Director is in employment his salary should not be reduced in a particular year because there is no generation of revenue. We therefore set aside the order of the CIT(A) and direct the AO to delete the disallowance of remuneration to Directors.

++ so far as the payment of rent is concerned, no such rent was paid in the preceding year when the business was going on. When there is no business activity during the year, there was no justification for giving rent for residence of the Director. Further, the rent has been paid to the wife of the Director who is a specified person u/s.40A(2)(b). Similarly, the usage charge i.e. rent for the furniture also is uncalled for under the facts and circumstances of the case. We, therefore, uphold the order of the CIT(A) in disallowing the rent expenses.

++ so far as the disallowance of travelling, postage and telephone expenses is concerned, we find the assessee has travelled to Bangkok, Malaysia and Kaulalumpur which are mainly tourist spots. Nothing has been produced before us that the assessee has gone to these places in relation to his business activity and which has resulted into some business. No such proof was also filed that he had discussed with some people/business houses there on account of mining activity. Merely stating that assessee travelled to these places for venturing into new business of mining is not convincing. Therefore, disallowance of an amount being 50% of travelling expenses is justified. However, since the assessee is a Private Limited Company, the disallowance of 50% of Telephone expenses and 50% depreciation on motor cars is not justified. The addition, if any, can be made in the hands of the Directors as perquisite.

++ so far as the disallowance of Electricity expenses is concerned, we find the same has rightly been disallowed by the AO and upheld by the CIT(A) since the same relates to the bills of Bungalow where the parents of the assessee are residing and bills of the residence of one of the Directors.

(See 2016-TIOL-1085-ITAT-PUNE)