Mere non-production of vouchers by employee expenses cannot be disallowed

Fact and Issue of the case

The assessee filed an appeal to the ITAT related to the following issue:

Assessing officer erred on facts and in law in completing assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 (‘the Act’), vide order dated 30.10.2019, at an income of Rs. 3146,87,81,016/- under the normal provisions and at book profit of Rs. 3557,57,46,134 under section 115JB of the Act.
Transfer Pricing Officer (‘TPO’) erred on facts and in law in partly disallowing claim of deduction under section 80IC to the extent of Rs.1,87,74,679 by reducing profits of the eligible undertaking by making transfer pricing adjustment on inter-unit transfer price of goods procured by the eligible unit from non-eligible unit during the relevant previous year.
Assessing officer erred on facts and in law in enhancing the value of closing inventory and thereby income of appellant by Rs. 39,50,000 in respect of proportionate amount of depreciation on model fee incurred during the year and debited to the profit and loss account, alleging the same to be directly related to manufacture of finished goods and, therefore, attributable to the closing stock of such goods.
That the assessing officer erred on facts and in law in making disallowance of Rs.7,38,27,378 (comprising of Rs. 2,28,58,951 in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426 in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that the same were not supported with evidences/ bills of expenditure incurred abroad.

Observation of Court

The Tribunal have heard both the parties and have perused the material available on record. Though this claim was not made before the lower authorities, Tribunal find that the additional ground raised by the assessee raises a pure question of law, facts for the same are on record. Thus, Tribunal accordingly admitted the additional ground of appeal raised by the assessee following the decision of the Honourable Supreme Court in the case of National Thermal Power Co Ltd vs CIT: 229 ITR 383(SC) We also find that the issue on merits is squarely covered in favour of the assessee by the order dated 24.10.2016 passed by Tribunal in the preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein the Tribunal held that lease premium charges were not allowable revenue deduction. However, the Tribunal allowed the alternate plea raised by the assessee company and held the premium paid for acquisition of leasehold rights to be an intangible asset, independent from the land itself, eligible for depreciation under Section 32(1)(ii) of the Act.

With regards to disallowance of reimbursement of foreign travelling expenses to directors/employees amounting to 7.38 crores, the learned Authorised Representative submitted that the disallowance was made on the ground of non-submission of evidence/proof of actual expenses incurred by employees. It was submitted that in the course of discharge of official duties, the employees of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event the actual expenditure incurred by the employee is in excess of such per diem allowance. It was submitted that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported /backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. It was submitted that in the assessment order, the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs. 2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426/- in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that declaration furnished by the employees was not a sufficient evidence to establish the incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees.

The learned Authorised Representative submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of the Tribunal in the assessee’s own case for the AYs 2007-08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AY 2009-10, 2012-13 and 2013-14.

Tribunal have heard both the parties and have perused the material available on record. The Tribunal, in assessee’s own case, has held in A.Ys. 2010-11 and 2011-12 where tribunal have heard the rival contentions note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 where the assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.”

Thus, this Tribunal in A.Ys 2010-11 and 2011-12 and earlier years has held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. Tribunal also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12. As, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years.

The tribunal also held that the assessee is eligible for depreciation at 25% on lease hold rights acquired in Haridwar and Neemrana. As regards the land at Haridwar, the AO is directed to allow the claim of depreciation as per opening WDV carry forward from the earlier years. In so far as the depreciation of land at Neemrana is concerned the same shall be allowed after verification of the relevant payments claimed to have been made by the assessee. In the final result, the appeal of the assessee is partly allowed.