THE ITO, WARD-2(1)(2),, AHMEDABAD vs. KRONE FINSTOCK PVT. LTD.,, AHMEDABAD

आदेश / O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the appellate order of the Commissioner of Income Tax(Appeals)-2, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)- 2/444/ITO, Wd.2(1)(2)/2014-15 dated 11/08/2015 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 23/01/2015 relevant to Assessment Year (AY) 2012-13.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 2 - 2. The grounds of appeal raised by the assessee are as under:

“1. The learned CIT(A) erred in law and on facts in deleting the disallowance of Rs.54,00,000/- made by the AO on account of infrastructure and referral fee treating the same as non business expenses, without properly appreciating the facts on the case and the material brought on the record. 2. On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the assessing officer. 3. It is therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the assessing officer may be restored to the above extent.”

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 3 - i) The Net profit ratio of assessee reduced from the preceding year from 25.1% to 3.63% of the turnover though there was no change in the business activity of the assessee. ii) The said fees of Rs. 60 lacs were paid to the above companies for the utilization of common infrastructure of above companies as well as for reference of clients. However, on verification, it was found that all the clients, i.e. 44, were of Ahmadabad except two clients whereas assessee has its infrastructure in Ahmadabad. iii) On perusal of the agreement for the use of common infrastructure and referral fees, it was noticed that the agreement was made among three parties for the use of common infrastructure owned/possessed by all three parties, but assessee company has not received any income against the infrastructure facility owned/possessed by it from the above two parties.

In view of above, the explanation was sought by the AO from the assessee on the observation as discussed above. The assessee in compliance to it submitted that:

a) It is using common infrastructure facility for its business located at Monarch house opp. Jaggers park, Nr, Ishwar Bhawan Navrangapura Ahmedabad though it is registered office is located at C.G. Road Ahmedabad.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 4 - b) The common infrastructure facility availed by the assessee include the electricity, internet, administrative and salary expenses Etc. It is enjoying about 1800 sq. Ft. area in such premises. c) The reference of the client has no relevance/ connection with the expenditure as the same was incurred for availing the facility as discussed above. d) The expenditures above were to be incurred compulsorily irrespective of the business. Moreover, the payments made to the parties above have suffered tax at the maximum marginal rate in their individual hands. Hence there is no loss to the Revenue. However Assessing Officer disregarded the contentions of the assessee by observing as under:

i. There is no reference to the client made by the above-said parties though the agreement requires so. ii. The business of the assessee is mainly based in Ahmadabad only except two clients. The business of the assessee has been carried in Ahmadabad only for the last several years. Therefore there was no reason to utilize the infrastructure facility of these two companies which are also situated outside the Ahmadabad.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 5 - iii. The MOU among all the three parties was effective from 01/04/2012 which evidences that the same is not applicable for the year under consideration, i.e. F.Y. 2010-2011. iv. As per the MOU, the assessee was to utilize the infrastructure facility of these companies available at various locations in Ahmadabad & outside Ahmadabad. But the assessee has not used all the infrastructure facility except the one as discussed above. v. The assessee has already debited salary & administrative and miscellaneous expenses in its profit & loss a/c for Rs. 7,62,171.00 and 76,168.00 during the year against Rs. 6,98,750.00 and Rs. 33,511.00 as claimed in the preceding year. Thus there was not any business expediency for such huge expenditure. vi. One of the company has filed its return of income declaring the loss. Thus the argument of the assessee that both the companies have suffered tax at the Maximum Marginal rate is incorrect. vii. Both the parties are related parties in pursuance to the provisions of section 40A(2)(b) of the Act to the assessee, and therefore the unreasonable & excessive amount has been paid by the assessee.

In view of above, the AO disallowed the expenses of Rs. 60 lacs and added to the total income of the assessee.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 6 - 5. Aggrieved, assessee preferred an appeal to Ld. CIT(A). The assessee before the learned CIT(A) submitted that the premise from where it was carrying on its business was registered office and Branch Office of MRBPL and MPFL respectively. Thus, the said premises was managed by both the companies. Therefore, the payment was made by the assessee to each of them. The AO misunderstood that MPFL has no office facilities in Ahmadabad and the assessee has made the payment to MPFL for using the infrastructure facilities outside the Ahmadabad.

The assessee along with both the companies as discussed above was using the same premises, i.e. Monarch House Navrangpura, Ahmedabad for its business activities. Therefore, it was quite natural that the assessee had to bear part of the expenses. As such the assessee has made the payment for using the common infrastructure facility such as electricity, internet, admin and salary expenses. The assessee was enjoying the 1800 sq.ft. area of the said premises. It is also pertinent to note that the assessee has shared the expenses to the extent of 6% of all the expenses relating to such premises. The assessee was using various types of infrastructure facilities including a lift, telecommunication and internet, electricity and parking facilities etc. Thus, the common infrastructure facility was not limited to salary and wages and miscellaneous expenses. Therefore, the reasonableness of the expenses of Rs.60,00,000/- born by the assessee cannot be doubted. It is also important to note that MRBPL has paid the taxes on maximum margin rate whereas MPFL has paid the tax under MAT. Therefore, it

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 7 - cannot be concluded that the assessee has incurred the cost of using the common infrastructure facility to avoid the payment of tax.

The ld. CIT-A after considering the submission of the assessee restricted the disallowance to the extent of 10% of the total expenses, i.e. 60 lacs and deleted the remaining amount, i.e. Rs. 54 lacs by observing as under:

“3.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance of Rs.60 lacs claimed as expenditure made for utilisation of the common infrastructure and referral expenses paid to the related persons as specified u/s. 40A(2)(b) of the I. T. Act, 1961. The aforesaid claim of expenditure pertaining to Monarch Project and Finmarkets Ltd. (MPFL in short) was at Rs.36 lacs and Monarch Research and Brokerage Pvt. Ltd. (MRBPL in short) was at Rs. 24 lacs. The claim of aforesaid expenditure has been disallowed for the reasons discussed in Para No. 3.2 of the assessment order. Briefly, the expenditure was held to be not for the business expediency as per the AO. It was observed by the AO that the common infrastructure and referral fee expenses have not been made for any client reference to the appellant company. Further these payments have been made to the related parties covered under the provisions of section 40A(2)(b) of the I. T. Act, 1961. It was also observed that assessee company have its client base in Ahmedabad since long and there was no reason to utilise the infrastructure facility of Monarch Research and Brokerage Pvt. Ltd. and Monarch Project and Finmarkets Ltd., Guregaon, situated outside Ahmedabad. As per the MOU agreement which was executed between the appellant company, M/s. Monarch Research and Brokerage Pvt. Ltd. and M/s. Monarch Project and Finmarkets Ltd., the same was executed on TOO rupee stamp paper and was not notarized or registered. Further, the various terms and conditions of the MOU have not been fulfilled.

3.4. On the other side, the appellant company has contended that the payments to both the parties were made for getting the common infrastructure facilities by the appellant company. It was pointed out

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 8 - that the appellant and the two other recipient two companies were carrying on the business at the same premises i.e. Monarch House, Navrangpura, Ahmedabad, and were utilizing the common infrastructure provided to them. So it was but natural that the part of the said expenses were to be borne by each of them. The appellant was using the common infrastructure facilities in the form of office space area of 1800 Sq. Ft., Electricity, Internet, Lift, Admin & Salary expenses of employees, Telecommunication and Parking facilities etc. It was further argued that the total expenditures on these common infrastructure facilities were to the tune of Rs.13,24,04,774/-, out of which the appellant company has borne approximately 5% of the total infrastructure cost which was very reasonable.

3.5. From the submission, it is also found that the two recipient companies were having their local offices, wherefrom they were doing the business activities of share broking like Sherkhan or Angel Broking. Even in the MOU dated 01/04/2011, the registered office of the M/s. Monarch Research and Brokerage Pvt. Ltd. has been shown of the common office.

Likewise, the another recipient company i.e. Monarch Project and Finmarkets Ltd. was also having its branch office at this common premises, though its registered office was at Mumbai, Thus, it is not the case that the appellant company has made any payments for utilisation of the services outside the Ahmedabad.

3.6. On going through the details and submission, it is also seen that M/s. Monarch Research and Brokerage Pvt. Ltd. was regularly assessed to fax at the maximum marginal rate and Monarch Project and Finrnarkets Ltd. had paid the tax under MAT. Since the payments to M/s. Monarch Project and Finmarkets Ltd. has been reflected in the P & L Account, thus it was the part of the book profits, therefore, the taxes have also been paid on the book profits by M/s. Monarch Project and Finmarkets Ltd.. Thus, if was tax neutral exercise and there was no reason for making the disallowance of the entire excessive claim of the expenditure by the appellant. It has been noticed that an MOD dated 01/04/2011 between the appellant and other two recipient companies have been executed on the stamp paper and relevant portion of the sharing of the infrastructure facilities among them is reproduced as under:-

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 9 -

“All companies here agrees with mutual consent to share infrastructure and common expenses borne carrying business in a group hereby includes usage of office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, electricity, water supply, pantry and securities, salary of employee, Branch General Expenses (including Rent, furniture cost, other administrative cost, back office cost), other administrative cost. Here the term rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together] any' a. land; or b. building; or office; or c. land appurtenant to a building; or d. equipment; or e. furniture; or f. fittings,

Whether or not any or all the above are owned by the payee.”

3.7. Merely that the same have been executed on the stamp paper without notarizing and registration would not make any difference legally for the reason that all the three parties are related and they have shown the transactions in their books of accounts. Moreover, from the details of total expenditure, the allocation of expenditure on the appellant was only 5% which came to approximately Rs. 60 lacs which was commensurating to the income ratio of 6% of the total revenue of all the three companies. The details of the post sharing expenses are noted as under:-

Particular Monarch Monarch Krone Total Project & Research Finstock Finmarkets Ltd. & Brokerage Private Ltd. Pvt. Ltd. 202,764,509.00 70,518,461.00 19,015,429.00 292,298,399.00 Total Income (As per BSFY 2011-12)

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 10 -

Percentage 6% Income Ratio

Payment made 3,600,000.00 2,400,000.00 --- 6,000,000.00 as per contract

Particular

Salary 57,712,474.00 6,626,904.00 0 64,339,378.00

Administrative 44,895,943.00 5,172,867.00 0 50,068,810.00 Expenses Electricity 4,983,914.00 26,035.00 0 5,009,949.00 Expenses Communication 3,335,155.00 90,152.00 0 3,425,307.00 Expenses Internet & 6,269,327.00 1,020,345.00 0 7,289,672.00 other connectivity Travelling 1,838,576.00 433,082.00 0 2,271,658.00 & Conveyance exp. Total Expenses 119,035,389.00 13,369,385.00 0 132,404,774.00

3.8. The AO has not even controverted the appellant's contention that the appellant company has not utilised or enjoyed the infrastructure facilities provided in the form of office space of 1800 Sq. Ft., Telecommunication expenses, Electricity expenses, Internet and Salary of common employees etc. When these common facilities have been utilized by the appellant company with the other two group companies, then it was obligatory on the part of the appellant to share the total expenditures approximately as per the revenue yielding ratio. AO's finding that these expenditures were made without any business expediency is not based upon any information / evidences. AO has not denied that the said common premises with facilities have not been utilised by the appellant company for its business activities. Moreover, it has been found that the appellant company has made the TDS on the total payment of Rs. 60 lacs under the provisions of section 194J of I. T.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 11 - Act totaling to Rs.6,27,000/- and the same have been deposited on 27/06/2012 in the government account. Thus, the genuineness of the claim of the expenditure is also remained explained not only from the terms and conditions of the MOU but from the deduction of TDS upon the payments. Since the claim of expenditures have been reimbursed to the related parties, therefore, the possibility of making the excess payment cannot be ruled out, and considering the appellant's contention vide letter dated 05/01/2015 in the assessment proceedings as has been reproduced on Page 7 of the assessment order which reads as under:- “In view of the above, proposed disallowance of Rs.60 lacs may please be dropped or in the alternative reduced substantially.” the disallowance of the aforesaid expenditure @ 10% which amounted to Rs. 6 lacs is confirmed and the relief is granted for the balance amount. 3.9. The related grounds of appeal are accordingly partly allowed.” Being aggrieved by order of Ld. CIT(A), the assessee is in the second appeal before us.

The learned DR before us submitted that the Assessee made the payment to both the companies in pursuance to the memorandum of understanding, which is effective from 1st April 2012. Thus, the assessee cannot claim any expenses under the year under consideration. It is also undisputed fact that the assessee and other two companies are associated concern as the directors in all the companies are common but the disallowance was not made by the AO merely after invoking the provisions of section 40a(2)(b) of the Act. Rather, it was also disallowed under the provision of section 37(1) of the Act. Indeed the AO has made the reference and remarks to the provisions of Section 40A(2)(b) in his

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 12 - assessment order, but that was not the sole basis for making the disallowance. One of the companies has paid the taxes under the provisions of VAT which cannot be equated with the rate of tax under normal computation of income. Therefore, the argument of the assessee that the payment to both the companies has neutral tax effect is wrong. The argument of the assessee that the expenses claimed by it represent only 6% of total expenses incurred on such premises towards common infrastructure facility does not hold good. It is because it cannot be the criteria to decide the reasonableness of the expenses. There was no change in the facts and circumstances in the business activity of the assessee, but the profit has come down drastically from 25.5% to 3.1% of the turnover.

On the other hand, the learned AR before us filed a paper book running from pages 1 to 47 and submitted that there was no loss to the revenue on account of such payment made by the assessee in view of the fact that both the companies have paid the taxes. The learned AR also submitted that the assessee incurred the expenses for its business activities. The provision of law does not require that the expense should give positive results to the assessee for business expenses incurred by it. The expenses have been incurred exclusively and wholly for the business. Therefore, the same should be allowed as deduction u/s 37(1) of the Act.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 13 -

From the preceding discussion, we note certain facts as detailed under:

Note: 13-Administrative, selling and Distribution

Figures for Figures for Particulars the period the period ended 31st ended 31st March 2012 March 2011

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 14 - Administration expenses Audit fees a Statutory Auditor 10 000 10 000 b Tax Auditor 5000 5000

Postage, Printing & Stationery 971 36 225 Software Development Charges 0 55 150 Common Infrastructure and Referral fees 60 00 000 0 Legal & Professional charges 9000 0

60 4 971 1 06 375

Note:5 – Other Current Liabilities

Particulars Figures as at Figures as at 31st March, 31st March 2012 2011 Sundry Creditors Audit fees 54,00,000 24,150 Payable 30,000 30,000

54,30,000 54,150 Payable towards entities in 54,00,000 0 directors of the company are

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 15 - holding directorship and shareholding The amount of salary & wages and administration expenses incurred in the preceding year was also incurred in the relevant year. Therefore there is no business expediency of such expenses especially when business was carried on by the assessee with its staff at its place in the current year as well as in the preceding year. Thus payment made to both the parties in the relevant year appears unreasonable.

“2. Payment Terms. a) Against all such company expenses, Party on second part raise Rs.200000 & Party on First Part raise Rs.300000 per month shared on annual basic to Party on Third Part.” 5. Thus it appears that the agreement was made afterthought to divert the profit of the assessee company to another company as it had a

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 16 - high rate of net profit of 25.1% in last year and due to this transaction alone the net profit of company falls to 3.63% in the year under consideration. 6. The TDS was deducted and deposited for the whole the year instead of monthly deduction & deposit of the same. It was done at the end of the year to prove the genuineness of the transaction. TDS amount was outstanding until the finalization of financial statements as evident under :

Note: 6 – Short-term Provisions

Figures as at 31st Particulars Figures as at 31st March 2011 March 2012 a. Salary Payables 0 51,600 b. Others - Provisions for Income Tax 21,56,500 19,60,000 - TDS Collection 8,84,496 2,33,312 & remittance - Others 550 2,620

30,41,546 22,47,532

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 17 - any payment made by a person which is taxable in the hand of the recipient will not be disallowed to the payer. It is also important to note that one of the companies is paying tax under MAT for which tax credit can be claimed in future years.

It is noted that common infrastructure facility available at Monarch house opp. Jaggers park, Nr, Ishwar Bhawan navrangapura Ahmadabad which is owned by the MRBPL and If assessee had used infrastructure facility only at Ahmadabad then there was no reason to pay Rs.3,00,000 per month to Monarch project and finmarket Limited, Mumbai.

Further perusal of agreement reveals that infrastructure facility of both the parties is located at the various location at its head office, corporate office, and branches which will be used by assessee company. However the agreement only specifies the address of registered office of all the companies. As such the agreement neither reveals any details regarding branches and corporate office addresses nor assessee in its any submissions file the details before both the lower authorities.

As per assessee’s submission that it has used infrastructure facility at MONARCH RESEARCH AND BROKERAGE PRIVATE LIMITED’s registered office at monarch house opp. Joggers park near commerce six road, Navrangpura, Ahmedabad- 380009 whereas it entitled to use all the infrastructure facilities of both the

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 18 - companies. However, there is no evidence that the assessee has used any other infrastructure facility located at such other places. It is also evident that the assessee till the preceding assessment year was able to do same nature of business activity from its place of business. It is also undisputed fact that the assessee did not get any referral client.

There is no detail available on the record about the number of branches owned by both the companies and which the assessee was entitled to use. The assessee claimed to have used the office premises to the extent of 1800 sq feet along with other facilities of the said companies. But there are no individual details of the facility used by it has been furnished, e.g. how the area was determined, how the sitting arrangement of the assessee staff was made, how many telephone line was allotted to the assessee, what was the basis of the sharing of the expenses.

Furthermore, we note that since assessee company is an NBFC registered with RBI, and it is carrying its business activity from a place other than its registered office. There was no detail filed by the assessee whether this fact was communicated to RBI intimating that it is carrying on its financial activities from a place other than its registered office. But no such detail was available on record.

ITA No.2917/Ahd/2015 The ITO vs. Krone Finstock Pvt. Ltd. Asst.Year –2012-13 - 19 - In view of above, we are of the view that the AO should re-examine the entire issue and therefore to verify the genuineness of the transaction, we remit the issue to the file of AO for fresh adjudication by the law and in the light of above-stated discussion. Thus the ground of appeal raised by the Revenue is allowed for statistical purposes.

This Order pronounced in Open Court on 03/07/2018

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आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-2, Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad