M/S HMA DATA SYSTEMS PVT LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(4), BANGALORE

Ground No.3 was not pressed by the assessee for adjudication and the same is dismissed as not pressed.

There are two issues that remain to be decided in this appeal. The first issue is as to, whether the CIT(Appeals) was justified in confirming the order of AO in making disallowance of expenses to the extent of Rs.1,22,50,626. The break-up of the sum disallowed is as follows:-

For the AY 2010-11, the assessee filed a return of income declaring total income at NIL. The AO has noticed that in the past assessment years, the percentage of business income to the total income declared by the assessee was as follows:-

With this background, the AO examined the Profit & Loss account for the year ended 31.3.2010 and found that the expenditure incurred with reference to the stream of revenue earned by the assessee. The AO found that the income declared was rental income i.e., chargeable to tax under the head ‘income from house property’ and income in the form of fees for professional of Rs.6 lakhs which was declared as income derived from

As against the aforesaid stream of income, the assessee has claimed expenditure of Rs.1,34,00,000. The AO therefore examined the various expenses debited in the P&L account and also the nexus of those expenses with the income earned by the assessee. The AO firstly noticed that the sum of Rs.6 lakhs which was shown as fees for professional services rendered was based on an invoice raised at the fag end of March, 2009 and the invoice was Inv. No.1. Invoice was raised on a company by name, ‘Vencap Holdings P. Ltd.’ [VHPL]. The AO called for a report of commission from ACIT, Company Circle 3(4), Chennai on the nature of services rendered by the assessee to VHPL for which Invoice of Rs.6 lakhs was raised by assessee. The Inspector deputed to make enquiry found that the assessee and VHPL were located in the same floor and the same address and that VHPL had no staff for the past 7 years and did not pay any rents to the assessee. It also emerged that the directors of VHPL and assessee were one and the same. VHPL had offered loss of Rs.19,313 for AY 2012-13 and Rs.74,80,750 for AY 2010-11. The nature of services received could not be explained by VHPL Vice President, Mr. G. Kishor

The AO then found that out of expenditure of Rs.1.3 crores claimed by the assessee in the P&L account, the AO found that the rent of Rs.2,27,142 was claimed by the assessee. The assessee had office in Bangalore and Chennai and both were owned by assessee. The godown in Pondicherry was taken on rent of Rs.1,300 per month. The AO’s conclusion was that except the sum of Rs.15,600 being rent for godown at Pondicherry, the remaining rental expenditure debited in the P&L account had to be treated as unexplained expenditure u/s. 69C of the Act. The AO, however, has not made a separate addition u/s. 69C as he had disallowed the entire expenditure claimed in the P&L account.

The AO then examined the claim of depreciation of assessee which was at a sum of RS.54,71,780. The conclusion of the AO was that one of the items of the asset on which depreciation was claimed was a BMW car, which was used by Director of company for personal purpose and depreciation cannot be allowed. A perusal of depreciation chart reproduced in para 6.4.2 of the AO’s order shows that apart from vehicle, the assessee owned several other assets and the depreciation component on the vehicle was only Rs.32,52,495.

The AO thereafter examined the employee cost of Rs.27,34,237 and came to the conclusion that only 3 employees were working for past 3 years and therefore the employee cost was not genuine.

Thereafter the AO gave the following conclusion for disallowing expenditure debited in the P&L account of Rs.1.34 crores:-

The CIT(Appeals), however, was not convinced and was of the view that the AO was justified in disallowing expenses. He also found that VHPL was operating from the same premises of assessee and had no employees for carrying out its day to day functions and expenditure claimed by assessee included expenditure of VHPL also. On the legal proposition advanced by the assessee that expenses have to be allowed, when the

On the issue that similar expenses were allowed by the Tribunal in AY 2009-10, the CIT(Appeals) took the view that the fact that prevailed in AY 2009-10 were different and therefore the decision for that year was not relevant, since in AY 2009-10 there was no enquiry conducted by the AO as was done in the present AY 2010-11.

For all the above reasons, the CIT(Appeals) confirmed the order of AO.

Before us, the ld. counsel for the assessee reiterated the submissions that were made before the CIT(Appeals) and further placed reliance on the following decisions:-

The ld. DR relied on the order of CIT(Appeals) and brought to our notice that the order of Tribunal for AY 2009-10 was not relevant because in that assessment year, the AO did not make any enquiries whereas in the present AY 2010-11, the AO had made detailed enquiries. The ld. DR reiterated the findings of AO in the order of assessment.

We have given a careful consideration to the rival submissions. We find that the action of the AO in treating the sum of Rs.6 lakhs which was shown as income in the form of professional fees received as unexplained credit u/s. 68 of the Act cannot be sustained. There is no dispute with regard to the identity and capacity of VHPL. The genuineness of the transaction cannot be disputed merely on the basis that no services were rendered. The basic presumption u/s. 68 is that the sum treated as unexplained has to be assessee’s money. TDS has been deducted on the sum payable by VHPL. The AO himself has found that VHPL does not have employees and assessee catered to the needs of VHPL. In these circumstances, the addition of Rs.6 lakhs u/s. 68 was not justified.

As far as disallowance of expenses is concerned, what we notice is that out of rental expenditure of Rs.2,27,142 claimed by assessee, the AO has treated a sum of Rs.2,11,542 as unexplained expenditure u/s. 69C of the Act. The assessee has explained that apart from the rent for godown of the previous year, which was allowed by the AO at Rs.15,600, the balance amount of Rs.2,11,542 was rent paid to accommodation provided to the assessee’s director. This fact is evidenced in the Notes to the Accounts at

As far as depreciation claimed by the assessee is concerned, the first thing which we notice is that the assessee is in business of security product distribution. A perusal of depreciation schedule given in the order of assessment shows that apart from BMW Car, there are other assets on which depreciation has been claimed by the assessee. Depreciation is an item of expenditure which has to be statutorily allowed u/s. 32 of the Act, irrespective of its user in view of the concept of block of assets. The only reason given by the AO for disallowance of depreciation is use of BMW car by the director of assessee. As rightly contended, there is use of car by director of company for the purpose of business of assessee and this is not disputed. There is nothing to show that property was used only for personal purposes. The car in question was a business asset and depreciation had to be allowed on the same. The AO could have disallowed depreciation on the ground of personal user in respect of a particular item of depreciable asset. He could not have disallowed the entire claim of depreciation. Disallowance of depreciation on the ground that there was no business activity, cannot also be sustained, for the reasons which will be given later.

Similarly, the employee cost was salary paid to 3 employees and had to be allowed as a deduction. There is no dispute that salary was paid to employees of the assessee. Thus, we do not find any valid justification for the comments and conclusions of AO in the order of assessment which was endorsed by the CIT(Appeals).

As far as the question whether lack of business activity can result in disallowance of expenses incurred by the assessee, firstly we notice that business of assessee has not been closed and there has been a temporary

We also find that the Tribunal in the appeal of the revenue for AY 2009-10, on the aforesaid reasoning had upheld the order of CIT(Appeals) deleting the addition made by AO by way of disallowance of expenses. We are therefore of the view that the expenses claimed by the assessee should be allowed as a deduction and it has also to be held that income of Rs.6

The next issue that arises for consideration is disallowance of expenses u/s. 14A of the Act. The first aspect we notice on this issue is that the AO had disallowed a sum of Rs.7,85,024 u/s. 14A. It is not in dispute that the assessee received dividend income of Rs.22,13,427 which was claimed exempt u/s. 10(35) of the Act. The break-up of disallowance u/s. 14A made by the AO was as follows:-

Before the CIT(Appeals), the assessee pointed out that in the computation of total income, the assessee had already disallowed a sum of Rs.9,71,314 as expenditure incurred for earning exempt income u/s. 14A. The assessee has pointed out that the AO has made a much less computation of deduction of expenses to be disallowed u/s. 14A. The assessee therefore submitted that the disallowance being a double

We have heard the rival submissions. We have perused the computation of total income of the assessee which is at page 3 of the assessee’s PB, which is a loss of (1,18,41,024). It is thus clear that the disallowance u/s. 14A as made by the assessee in computation of income has already been subsumed in total income declared by the assessee. Since the total income of assessee has been computed by the AO in the order of Assessment with the starting point as loss declared by the assessee in the return of income, which also includes disallowance u/s. 14A, there was no occasion to further make a disallowance u/s. 14A. Moreover, the disallowance made by the assessee is greater than the

In the result, the appeal by the assessee is partly allowed.

Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.