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Income Tax Appellate Tribunal, DELHI BENCHES “C”: DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
Shri Ved Jain, Sr. Advocate Ms. Umang Luthra, Advocate For Assessee : & Shri Himanshu Aggarwal,C.A For Revenue : Ms. Rakhi Vimal, Sr. D.R. Date of Hearing : 09.10.2019 Date of Pronouncement : 14.10.2019 ORDER PER BHAVNESH SAINI, J.M.
Both the appeals by Assessee are directed against the different Orders of the Ld. CIT(A)-16, New Delhi, Dated 05.01.2017, for the A.Ys. 2011-2012 and 2012-2013.
2 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
We have heard the Learned Representatives of both the parties and perused the material on record. Since the common issues are involved in both the appeals, therefore, both the parties mainly argued in A.Y. 2011-2012 in ITA.No.1128/Del./2017 and submitted that Order in this case may be followed in appeal for the A.Y. 2012-2013 in ITA.No.1129/Del./2017. We, therefore, decide the appeal for A.Y. 2011-2012 as under.
ITA.No.1128/Del./2017 – A.Y. 2011-2012 :
On Ground No.1, assessee challenged the disallowance of Rs.13,12,995/- under section 14A of the I.T. Act. The assessee filed return of income declaring total income of Rs.27,86,65,480/-. The A.O. noted that assessee company belongs to Escort Group of Companies. The main source of income of the company is also on account of 'Royalty received by the company from Escort Group of companies from the logo which escort group is using. For this logo Escort Group has paid a sum of Rs.28,15,54,300/- to the company and that constitute the primary source of income of the ‘assessee company. The other source of 3 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
income of company is on account of deposits of surplus funds in the bank. The third source of the company is from letting out of machinery which the company has given to the Escort Group and the last source of income is on account of investments in various equity shares. The income from investment in equity comes to Rs.98,81,855/- which is claimed as exempt. The A.O. noted that against the three source of income, company has claimed administrative and selling expenses Rs.26,25,989/- The assessee has received exempt dividend income of Rs.69,08,245/- whereas it has added back only Rs.10,000/- as disallowance under section 14A of the I.T. Act. The assessee was required to explain as to why disallowance under section 14A of the I.T. Act should not be made. The assessee submitted before A.O. that A.O. has desired that disallowance in respect of administrative expenses should be considered on the following expenses and be made in proportion to the exempt income earned to the total income i.e., Office Rent, Legal and Professional Charges, Office Maintenance, Printing & Stationery and General Expenses. On the basis of this, assessee has 4 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. worked-out a fresh calculation, according to which, the total disallowance amount worked-out at Rs.62,701/-, against which, assessee has already considered Rs.10,000/- in the return. Assessee, therefore, explained that still if A.O. feels that disallowance considered by the assessee in the return is fair and reasonable and is based on correct interpretation and linkage of various expenses to the taxable/exempt income fresh calculation is filed. The A.O, however, did not accept the contention of assessee following Section 14A of the I.T. Act, 1961 read with Rule 8D of the I.T. Rules, 1962 reconsidered the issue. The A.O. also referred to decisions of ITAT in the case of assessee for the A.Y. 2009-2010 Dated 19.07.2013 in which matter have been restored to the file of A.O. with a direction that the administrative expenses incurred are equally attributable to all the source of income of assessee and this aspect has to be considered afresh. The A.O, therefore, considered the administrative expenses are equally attributable to all the source of income of assessee and accordingly, disallowed Rs.13,12,995/-. Ld. CIT(A) dismissed the appeal of assessee.
5 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that receipt of dividend income does not involve any expenditure since the dividend is directly credited through ECS mode in the bank account. The assessee has not borrowed any funds for investment in shares and mutual funds during assessment year under appeal. Further there are no fresh investments made during assessment year under appeal and unsecured loans have been repaid. The A.O. required the assessee to calculate disallowance in respect of total administrative expenses to be made in proportion to exempt income earned to the total income earned and worked-out the disallowance amounting to Rs.62,701/- [PB-32]. The authorities below without any reasons have disregarded the fresh calculation made by assessee. The A.O. shall have to record the satisfaction to that effect which is not done in the present case and, therefore, no disallowance could be made by the A.O. Learned Counsel for the Assessee relied upon decision of Hon’ble Supreme Court in the case of Maxopp Investments
6 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
Ltd., Dated 12.02.2018 in which it was held that “Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, Suo motu disallowance under section 14A was not correct. It will be in those cases where assessee in his return has himself apportioned, but, the A.O. was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to that effect.” Learned Counsel for the Assessee, therefore, submitted that addition is wholly unjustified.
On the other hand, Ld. D.R. relied upon the Orders of the authorities below.
After considering the rival submissions, we are of the view that addition is wholly unjustified. The assessee has various sources of income and mostly from the Group Company. The assessee has received exempt dividend income of Rs.69,08,245/- and added back Rs.10,000/- on account of proportionate disallowance under section 14A of the I.T. Act. The A.O. however, desired the assessee to work- out afresh disallowance under section 14A to be made in proportion to the exempt income earned to the total income.
7 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
The assessee made a fresh working and offered for disallowance a sum of Rs.62,701/- against Rs.10,000/- already added back in the return of income. The A.O. did not point-out any infirmity in the fresh calculation of the assessee. The A.O. has not recorded any satisfaction in the assessment order as to how the calculation made by assessee was incorrect. The A.O. relied upon Order of the Tribunal for the A.Y. 2009-2010 in which the matter was remanded to the file of A.O. and no fresh finding have been given against the assessee. The Hon’ble Delhi High Court in the case of I.P. Support Services India Pvt. Ltd., 378 ITR 240 held that “no disallowance be made in the absence of satisfaction as to why voluntary disclosure made by the assessee was unreasonable and unsatisfactory.” Similar view have been taken by the Hon’ble Delhi High Court in the case of Taikisha Engineering India Ltd., 370 ITR 338. The Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd., 380 ITR 652 held that “onus upon A.O. to record satisfaction that interest bearing funds used for investment to earn tax free income”. The assessee in the 8 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. present case has claimed that receipt of dividend income does not involve any expenditure since the dividend is directly credited through ECS in the Bank Account. The assessee has not borrowed any funds for investment in shares and mutual funds during assessment year under appeal and no fresh investments have been made, rather assessee repaid unsecured loans in assessment year under appeal. Therefore, it was incumbent on the part of the A.O. to record satisfaction that revised disallowance made by the assessee as per the direction of the A.O. at Rs.62,701/- was unreasonable and improper. Further, no compliance have been made by the A.O. Therefore, there was no justification for the authorities below to disallow the amount in question. We, therefore, set aside the Orders of the authorities below and delete the addition made by the A.O. However, we restrict the addition to Rs.52,701/- as is offered by the assessee before A.O. In the result, Ground No.1 of appeal of Assessee is partly allowed.
9 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
On Ground No.2, assessee challenged the disallowance out of Office expenses of Rs.4,82,925/- and office maintenance expenses of Rs.5,73,216/-.
During the course of assessment proceedings it was seen that assessee company is paying office Rent amounting Rs.8,40,000/- to M/s. Ritu Nanda Insurance (P) Ltd. being a related party of the assessee company. The assessee company was required to show cause as to why rent expenses and office maintenance expenses be not disallowed under section 40A2(b) of the I.T. Act, 1961. The Assessee company explained that it is using office infrastructure facilities belonging to M/s. Ritu Nanda Insurance Services Pvt. Ltd. For this purpose, the assessee pays Rs.70,000/- per month for use of such facilities. In addition, the proportionate electricity charges are also paid. The assessee company has also made payments to M/s. Technovative Engineers Pvt. Ltd. for providing manpower in the nature of helper, assistants and drivers. The said company has been entrusted with task of housekeeping, day to day maintenance, job of equipments, handling of mails
10 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. and mails delivery, managing electrical and communication equipments etc. This party was being paid for such services @ Rs.41,865/- per month up-to June 2010. With effect from 01.07.2010, their service charges have been increased to Rs.47,760/ - per month The A.O. further found that assessee company has not entered into any agreement with the related party i.e. M/s. Ritu Nanda Insurance Pvt. Ltd. The assessee company has simply produced a letter without specifying the area and value of rent expenditure charged. Further it is stated that M/s. Ritu Nanda Insurance Pvt. Ltd. is paying 4,76,100/- Per month for this office space. An Inspector was deputed to verify the facts and to file an enquiry report. The Inspector reported that the assessee company is sharing this premises with other 14 companies, the details of which are mentioned in the assessment order. The A.O, therefore, noted that the assessee-company sharing of this office space with 15 related companies which is used commonly and assessee has only very small space for use. The employees hired by the assessee were found to be there. However, they failed to provide the details. The 11 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
A.O, therefore, noted that in order to reduce the taxable income, assessee has claimed these expenses, therefore, Section 40A(2)(b) is clearly applicable in this case. The A.O. divided the entire expenses by 16 companies occupying the same and allowed part claim of assessee and made disallowance of Rs.4,82,925/- out of office rent and further disallowed Rs.5,73,216/- out of maintenance expenses. The Ld. CIT(A) dismissed this ground of appeal of assessee.
Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that assessee has entered into an agreement with M/s. Ritu Nanda Insurance Pvt. Ltd., copy of which is filed at Page-78 of the paper book wherein both the parties agreed to extend Lease Agreement Dated 30.04.2009, the lease rent was decided to be Rs.70,000/-. Payments have been accepted. Similar agreement was entered into between M/s. Technovative Engineers Pvt. Ltd., Dated 01.07.2010 wherein both the parties agreed to render the services in the nature of office maintenance for a fixed consideration. The statement of the employees provided on hire were recorded
12 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. by the Department. Learned Counsel for the Assessee submitted that rent paid by assessee and office maintenance expenses are reasonable having regard to the fair market value of the property and A.O. has not verified how the rent and office expenses are unreasonable, therefore, whole addition is unjustified.
On the other hand, Ld. D.R. relied upon the Orders of the authorities below.
We have considered the rival submissions. In this case, the A.O. found that assessee has been paying rent and office maintenance expenses. The assessee was found to have paid rent to M/s. Ritu Nanda Insurance Pvt. Ltd., who is a related party to the assessee. It was also found that M/s. Ritu Nanda Insurance Pvt. Ltd., was also paying monthly rent of Rs.4,76,100/- from May, 2010 for this Office space. The office space is utilised by 16 companies including related party and the assessee. It is, thus, clear that assessee company sharing office space with M/s. Ritu Nanda Insurance Pvt. Ltd., along with other group related parties. It is not a denying fact that assessee was using
13 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. office space for the purpose of business and at the time of visit of the Inspector also assessee was found to have using the office space on rent and that assessee was also paying maintenance charges. The A.O. disallowed the amounts in question by applying the provisions of Section 40A(2)(b) of the I.T. Act. The assessee has explained before the authorities below the circumstances in which the payments have been made. There is nothing unreasonable in this regard. In any case, even for applying the provisions of Section 40A(2)(b) of the I.T. Act, it is for the A.O. to make out a case that expenditure incurred is excessive or unreasonable having regard to the fair market value of such services. No efforts in this regard have been made by the A.O. Therefore, there were no justification for the A.O. to divide the entire amount between 16 parties to make the disallowance. The method applied by the A.O. is not acceptable in view of the language prescribed under section 40A(2)(b) of the I.T. Act, in which A.O. has made disallowance. The Hon’ble Supreme Court in the case of Upper India Publishing House Pvt. Ltd., 117 ITR 569 (SC)
14 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad. held that “before applying the provisions of Section 40A(2)(b) of the I.T. Act, the A.O. should have prove that the expenditure is excessive or unreasonable.” It may also be noted here that A.O. disallowed both the expenses considering that expenses have not been incurred wholly and exclusively for the purpose of business. The assessee has filed return of income declaring net income of Rs.27.86 crores. Therefore, there were no reason for the assessee company to have inflated the expenses which are connected wholly and exclusively for the purpose of business. Considering the totality of the facts and circumstances of the case in the light of provisions of Law referred to above and the decisions, we are of the view that the authorities below were not justified in making the disallowance. We, accordingly, set aside the Orders of the authorities below and delete both the additions. In the result, Ground No.2 of the appeal of assessee is allowed.
Ground No.3 is alterantive ground which does not call for any further finding.
15 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
In the result, appeal of assessee ITA.No.1128/Del./2017 partly allowed.
ITA.No.1129/Del./2017 – A.Y. 2012-2013 :
On Ground No.1, assessee challenged disallowance of Rs.25,64,434/- under section 14A instead of Rs.5768/-. On Ground No.2, assessee challenged the addition on account of disallowance of Rs.4,82,925/- towards office rent and office maintenance expenses of Rs.7,32,000/-.
Both the grounds are made and have been considered in A.Y. 2011-2012 in ITA.No.1128/Del./2017. Following the reasons for decision for the same, we set aside the Orders of the authorities below and delete both the additions. However, on Ground No.1, the addition under section 14A is restricted to Rs.5,768/-.Ground No.1 is partly allowed and Ground No.2 allowed. Ground No.3 is an alternative ground which does not call for any further finding.
16 ITA.No.1128 & 1129/Del./2017 M/s. Harparshad and Company Pvt. Ltd., Faridabad.
In the result, ITA.No.1129/Del./2017 partly allowed.
To sum-up, both the appeals of the Assessee are partly allowed.
Order pronounced in the open Court.