JM FINANCIAL LIMITED (FORMERLY KNOWN AS J M SHARE & STOCK BROKERS LTD.),MUMBAI vs. DCIT -4(3), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

ITA No.2871/Mum/2016 This appeal in for A.Y.2002-03 arises out of the of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal Nos.CIT(A)-9/Cir.4/159/2014-15, dated 20/01/2016 (ld. CIT(A) in short) in the matter of imposition of penalty u/s.271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as Act)

ITA No.2872/Mum/2016 This appeal in for A.Y.2010-11 arises out of the of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal Nos.CIT(A)-9/Cir.4/155/2013-14, dated 28/01/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 22/03/2013 by the ld. The Asst. Commissioner of Income Tax – 4(3), Mumbai (hereinafter referred to as ld. AO).

2873/Mum/2016 M/s. J.M.Financial Ltd.

ITA No.2873/Mum/2016 This appeal in for A.Y.2011-12 arises out of the of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal Nos.CIT(A)-9/Cir.4/424/2013-14, dated 28/01/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 22/03/2013 by the ld. The Asst. Commissioner of Income Tax – 4(3), Mumbai (hereinafter referred to as ld. AO). As the issues involved are identical in all these appeals, they are taken up together and disposed off by this common order for the sake of convenience.

Asst Year 1998-99 – Assessee Appeal

2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the levy of penalty u/s 271(1)( c) of the Act in the facts and circumstances of the case. The assessee had also raised an additional ground of appeal before us challenging the validity of levy of penalty u/s 271(1)(c ) of the Act on the ground that the ld AO had not mentioned the specific charge of offence in the penalty notice by striking off the irrelevant portion .

2.1. The brief facts of this issue are that the assessee is a share and stock broker and had filed its return of income for the Asst Year 1998-99 on 27.11.1998 declaring loss of Rs 3,39,24,610/- comprising of capital loss of Rs 32,44,671/- and business loss of Rs 3,06,79,939/-. The original assessment was completed u/s 143(3) of the Act on 28.3.2001 determining assessed loss at Rs 91,99,620/-. One of the additions made was on account of disallowance of payment of brokerage of Rs

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74,05,267/- made by the assessee to its sub-brokers. The assessee filed an appeal before the ld CITA who vide order dated 28.10.2005 restricted the disallowance to Rs 10,51,975/-. The revenue filed an appeal before this tribunal. This tribunal vide its order dated 16.11.2009 remanded the issue to the file of the ld AO to examine and verify the details filed by the assessee as no proper opportunity was afforded to the assessee in the original assessment proceedings.

2.2. The ld AO observed that in the original assessment proceedings, the assessee was asked to furnish the names and address of the sub-brokers to whom the brokerage in excess of Rs 50,000/- was paid. The assessee could not submit the details in respect of 44 such parties and hence the payment of Rs 74,05,267/- shown to be paid to those parties were disallowed by the ld AO, which was reduced to Rs 10,51,975/- by the ld CITA in the original first appellate proceedings. In effect, the ld CITA had granted relief to the tune of Rs 63,53,292/- towards disallowance made on account of brokerage. The ld AO in the second round of proceedings directed the assessee to give the names, addresses and confirmations from those persons to whom the brokerage of Rs 63,53,292/- was paid. The assessee furnished the names and addresses of 34 such persons. Notices u/s 133(6) of the Act were issued asking them to confirm whether they had received any brokerage from the assessee. Most of these notices were either received back unserved or the persons receiving it did not reply to the ld AO. The ld AO observed that one entity i.e The Merchant Navy Officers Welfare Fund had denied receiving any brokerage. The ld AO observed that the assessee had submitted the photocopies of latest confirmations of following persons:- a) R.V.R.Services - Rs 6,08,891/- b) Ellora Consultant Pvt Ltd - Rs 52,833/- c) Hiralal Pipalia - Rs 63,928/-

2873/Mum/2016 M/s. J.M.Financial Ltd. d) Ajay Agarwal - Rs 53,400/- e) Arun Bhuta - Rs 1,11,500/- f) Mid-East Portfolio Management Services - Rs 95,000/- 2.3. In response to notices u/s 133(6) of the Act, two persons namely M.B.Vasundhara Devi and Premier Spinning and Weaving Mills Pvt Ltd had confirmed receiving brokerage of Rs 96,714/- and Rs 1,04,000/- respectively from the assessee. Accordingly the ld AO granted deduction towards payment of brokerage in the sum of Rs 11,86,266/- and disallowed the remaining amount of Rs 51,67,026/- for want of evidences in the second round of proceedings vide order u/s 143(3) of the Act dated 23.12.2010.

2.4. The assessee filed an application under Right to Information Act (RTI) and got details of the parties to whom notices could not be served, parties to whom notices were served and who did not attend and the parties who responded to notices. As per information received under RTI, notices u/s 133(6) of the Act could not be served on 2 parties only. All the other parties have either not responded or informed the ld AO that they cannot confirm the details as the necessary records i.e for Asst Year 1998-99 are not available at their end. Before the ld CITA, the assessee also submitted the addresses of the said parties from the Permanent Account Number (PAN) database. It was contended that all the payments of sub-brokerage were made on the basis of information provided to the assessee by the merchant bankers. The ld CITA however confirmed the disallowance of brokerage to the extent of Rs 51,67,026/-. This Tribunal in the second round of quantum proceedings confirmed the disallowance of brokerage to the extent of Rs 27,41,056/- ; allowed the sub-brokerage of Rs 2,74,069/- and set aside the issue back to the file of ld AO to the extent of Rs 21,52,226/- vide order in ITA No.

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5437/Mum/2012 dated 16.7.2014. Meanwhile, the ld AO levied penalty u/s 271(1) (c ) of the Act amounting to Rs 18,08,459/- in respect of disallowance of brokerage in the sum of Rs 51,67,026/- vide order u/s 271(1)(c ) of the Act dated 20.3.2014 on the ground that the assessee had filed inaccurate particulars of income thereon. The ld CITA vide order dated 20.1.2016 upheld the levy of penalty in the sum of Rs 18,08,459/- by ignoring even the fact that this tribunal had granted partial relief to the assessee to the extent of Rs 2,74,069/- and had set aside the issue to the file of ld AO for reverification to the extent of Rs 21,52,226/- . At the time of passing of penalty order u/s 271(1)(c ) of the Act by the ld AO, the order of this tribunal in the second round of quantum proceedings was not available before him. However, before the order was passed by the ld CITA, the tribunal order dated 16.7.2014 was very much available , but despite that the ld CITA proceeded to uphold the penalty levied by the ld AO. Aggrieved by the order of the ld CITA sustaining the levy of penalty in the sum of Rs 18,08,459/- , the assessee is in appeal before us.

2.5. We have heard the rival submissions and perused the materials available on record. At the outset, we find that the assessee had raised an additional ground of appeal before us challenging the validity of levy of penalty u/s 271(1)(c ) of the Act on the ground that the ld AO had not mentioned the specific charge of offence in the penalty notice by striking off the irrelevant portion . We find that this ground deserves to be admitted as it goes to the root of the matter and does not involve verification of any fresh facts as the penalty show cause notices issued by the ld AO both at the time of original assessment proceedings (for quantum) and second round of quantum assessment proceedings are very much on record. We would like to address this preliminary issue

2873/Mum/2016 M/s. J.M.Financial Ltd. first. We have gone through the penalty notice u/s 274 read with section 271(1)(c ) of the Act issued by the ld AO on 28.3.2001 ( i.e first quantum assessment proceedings) and also on 23.12.2010 ( i.e second quantum assessment proceedings) which are enclosed in pages 83 to 87 of the paper book filed before us. From the perusal of the said notices, we find that the ld AO had not struck off the irrelevant portion by clearly specifying the charge of offence committed by the assessee i.e whether the assessee had concealed its income or had furnished inaccurate particulars of income. We find that the ld AO in the quantum assessment order had stated that the penalty is initiated for both concealment of income and furnishing of inaccurate particulars of income. But in the show cause notice for penalty, the same is not mentioned by including the word ‘and’ at the relevant place. But ultimately we find that the penalty has been levied only for furnishing inaccurate particulars of income as is evident from the reading of the penalty order u/s 271(1)(c ) of the Act dated 20.3.2014. This issue is now settled in favour of the assessee by the following decisions, among others :- a) Decision of Hon‟ble Jurisdictional High Court in the case of CIT vs Samson Perichery reported in 392 ITR 4 (Bom). b) Decision of Hon‟ble Karnataka High Court in the case of CIT vs Manjunatha Cotton and Ginning Factory and others reported in 359 ITR 565 (Kar). c) Decision of Hon‟ble Karnataka High Court in the case of CIT vs SSA‟S Emerald Meadows in of 2015 dated 23.11.2015. Special Leave Petition preferred by the revenue before the Hon‟ble Supreme Court was dismissed in CC No. 11485/2016 dated 5.8.2016 . d) Decision of Hon‟ble Telangana & Andhra Pradesh High Court in PCIT vs Smt Baisetty Revathi reported in 398 ITR 88 (T & AP).

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2.5.1. We find that the co-ordinate bench of this Tribunal in the case of Radhakrishna Roadways Pvt Ltd vs ACIT in dated 14.3.2019 had held as under:-

“We have heard the rival submissions of both the parties and perused the material on record including the various decision cited by the learned AR. The undisputed facts are that the Assessing Officer while framing the assessment u/s 143(3) of the Act initiated the penalty u/s 271(1)(c ) of the Act without mentioning whether the same relates to concealment of income or filing inaccurate particulars of income. Similarly, when the notice u/s 271(1)(c ) was issued on 28.03.2013 the same was issued in mechanical manner without striking off irrelevant limb and therefore there was no application of mind on the part of the Assessing Officer. Even in the order imposing penalty, the Assessing Officer mentioned both limbs. In our view it is mandatory on the part of the Assessing Officer to specifically state the particular charge on which penalty is proposed to be levied and non- striking off of the irrelevant limb will go to the root of Jurisdiction of the Assessing Officer to pass penalty order. In the case of Manjunath Cotton & Ginning Factory (supra) and M/s SSA‟s Emerald Meadows, of 2015 dated 23.11.2015 , it has been held that no penalty can be imposed where one of the two limbs i.e „concealment of income‟ and „furnishing of inaccurate particulars of income‟ on which penalty was proposed to be imposed is not mentioned. In the case of M/s SSA‟s Emerald Meadows (supra), SLP filed in Hon‟ble Supreme Court by the Department has also been dismissed. In the case of Shri Samson Perinchery (supra), Hon‟ble Bombay High Court has held that penalty to be imposed on the ground / limb on which penalty has been initiated. Thus, in view of the ratio laid down by various courts and judicial forums, we are of the view that penalty order is bad in law. Accordingly, we direct the Assessing Officer to delete the penalty.

2.5.2. Further the Hon’ble Telangana & Andhra Pradesh High Court in PCIT vs Smt Baisetty Revathi reported in 398 ITR 88 also held that when penalty proceedings are sought to be initiated by the revenue u/s 271(1)(c ) of the Act, the specific ground which forms the foundation, therefore, has to be spelt out in clear terms. Otherwise, an assessee would not have proper opportunity to put forth his defence. When the proceedings are penal in nature, resulting in imposition of penalty ranging from 100% to 300% of the tax liability, the charge must be unequivocal

2873/Mum/2016 M/s. J.M.Financial Ltd. and unambiguous. When the charge is either concealment of particulars of income or furnishing of inaccurate particulars thereof, the revenue must specify as to which one of the two is sought to be pressed into service and cannot be permitted to club both by interjecting one or between the two.

2.6. Respectfully following the aforesaid judicial precedents, we have no hesitation in cancelling the levy of penalty on the technical ground of non- striking off of the irrelevant portion in the show cause notice for penalty by the revenue. Accordingly, the additional ground raised by the assessee for the Asst Year 1998-99 is allowed. In view of this decision, the other grounds raised by the assessee on merits need not be gone into and the arguments advanced by both the sides are left open and no decision is rendered herein on the same.

4.1. The brief facts of this issue are that assessee was carrying on the business of share and stock brokers on the Bombay Stock Exchange (BSE) , National Stock Exchange (NSE) and the Over the Counter

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Exchange of India (OTCEI) . The assessee decided to carry on the business of share and stock brokers with respect to BSE and NSE in Joint Venture with Morgan Stanley of US with effect fron 1.4.1999. Accordingly, the entire business carried on by the assessee on the BSE and NSE was transferred to Joint Venture Companies along with trading rights.

4.2. The assessee owned three properties and had tenancy rights with respect to one of the properties, which were not transferred to the Joint Venture Company. All the properties were given on rent from 1.4.1999. The rent from the properties was disclosed by the assessee under the head ‘Income from Business or Profession’. During the year under consideration, the assessee earned rental income, capital gains and income from other sources. The assessee had incurred various expenses like salaries, insurance premium, property taxes etc.

4.3. The ld AO taxed the rental income under the head ‘Income from House Property’ and also disallowed all expenses except audit fees. Penalty proceedings u/s 271(1)( c) of the Act were initiated for both the limbs i.e concealment of income and furnishing of inaccurate particulars of income by the ld AO. In the notice issued u/s 274 read with section 271(1)(c ) of the Act, the ld AO did not strike off the irrelevant portion specifying the charge of offence by the assessee.

4.3.1. The ld AO had considered the assessee as the owner with respect to all the properties. The assessee pointed out to the ld CITA that they were owners only with respect to P.M.Road, Mumbai, Ahmedabad and Pune properties and Borivali property was taken on rent by the assessee. The ld CITA however mistook that the assessee had taken all the 2873/Mum/2016 M/s. J.M.Financial Ltd. properties on rent and accordingly held that the rental income was to be assessed under the head ‘Income from Other Sources’. Further the ld CITA was of the view that the assessee did not carry on any business. Accordingly, he confirmed the disallowance of expenses made by the ld AO.

4.4. On appeal to tribunal, the tribunal restored the matter back to the file of ld CITA since he had proceeded on erroneous assumption of facts. Since the taxability of rental income was set aside, the tribunal also set aside the issue regarding allowability of expenses.

4.5. The ld CITA in set aside proceedings confirmed the order of the ld AO with respect to P.M. Road, Ahmedabad and Pune properties holding that the same was taxable under the head ‘Income from House Property’. As regards Borivali Property, the ld CITA in set aside proceedings held that the same taxable under the head ‘Income from Other Sources’. As regards allowability of expenses, the ld CITA in set aside proceedings held that the assessee is entitled to deduction of 90% of general administrative expenses of Rs 9,92,495/-.

4.6. The ld AO issued letter dated 23.1.2014 as to why the penalty u/s 271(1)(c ) of the Act shold not be levied. Ignoring the replies filed by the assessee, the ld AO levied penalty u/s 271(1)( c) of the Act for furnishing inaccurate particulars of income. The ld CITA upheld the levy of penalty. Aggrieved, the assessee is in appeal before us.

4.7. We have heard the rival submissions and perused the materials available on record. At the outset, we find that the assessee had raised an additional ground of appeal before us challenging the validity of levy of 2873/Mum/2016 M/s. J.M.Financial Ltd. penalty u/s 271(1)(c ) of the Act on the ground that the ld AO had not mentioned the specific charge of offence in the penalty notice by striking off the irrelevant portion . We find that this ground deserves to be admitted as it goes to the root of the matter and does not involve verification of any fresh facts as the penalty show cause notice issued by the ld AO dated 28.2.2005 is very much on record. We would like to address this preliminary issue first. We have gone through the penalty notice u/s 274 read with section 271(1)(c ) of the Act issued by the ld AO on 28.2.2005 ( ie. first round of proceedings) and another notice u/s 274 read with section 271(1)(c) of the Act was issued by the ld AO on 23.1.2014 and 3.3.2014 (i.e in the second quantum assessment proceedings) which are enclosed in pages 67 to 69 of the paper book filed before us. From the perusal of the said notices, we find that the ld AO had not struck off the irrelevant portion by clearly specifying the charge of offence committed by the assessee i.e whether the assessee had concealed its income or had furnished inaccurate particulars of income. We find that the ld AO in the quantum assessment order had stated that the penalty is initiated for both concealment of income and furnishing of inaccurate particulars of income. But in the show cause notice for penalty, the same is not mentioned by including the word ‘and’ at the relevant place. But ultimately we find that the penalty has been levied only for furnishing inaccurate particulars of income as is evident from the reading of the penalty order u/s 271(1)(c ) of the Act dated 24.3.2014.

4.7.1. We find that the decision rendered hereinabove for the Asst Year 1998-99 on this technical issue of not striking off the irrelevant portion in the penalty notice would hold good for this asst year also except with variance in figures. Hence we have no hesitation in cancelling the levy of penalty on the technical ground of non-striking off of the irrelevant

2873/Mum/2016 M/s. J.M.Financial Ltd. portion in the show cause notice for penalty by the revenue. Accordingly, the additional ground raised by the assessee for the Asst Year 2002-03 is allowed. In view of this decision, the other grounds raised by the assessee on merits need not be gone into and the arguments advanced by both the sides are left open and no decision is rendered herein on the same.

6.1. The brief facts of this issue are that the assessee had paid lease rentals to M/s Orix Auto Infrastructure Services Private Limited for cars taken on lease from them. The assessee had capitalized the value of vehicles in its books of accounts in accordance with the requirements of Accounting Standard (AS) 19 issued by the Institute of Chartered Accountants of India (ICAI). Accordingly, the finance charges and the tax on the leased vehicles amounting to Rs 7,85,005/- and Depreciation on leased vehicles were disallowed by the assessee voluntarily in the return of income. The assessee claimed the entire payment of lease rentals as deduction in its income tax return as they were incurred in the normal course of business of the assessee. The assesse also made an alternative plea without prejudice to its original claim of deduction towards lease rentals, submitted that if the ld AO was inclined to disallow the lease rentals, then the assessee is to be allowed depreciation and finance

2873/Mum/2016 M/s. J.M.Financial Ltd. charges with respect to the leased vehicles. The ld AO ignoring the plea of the assessee proceeded to disallow the entire lease rentals claimed as deduction in the sum of Rs 42,48,067/- on the ground that the assessee itelf had capitalized the value of leased vehicles as fixed assets in its books. However, the ld AO did not accept the alternate claim of the assessee for granting depreciation and finance charges on leased assets. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us.

6.2. We have heard the rival submissions. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The ld AR stated that similar disallowance made by the ld AO in Asst Year 2008-09 was deleted by the ld CITA , against which no appeal was preferred by the revenue before this tribunal and that the issue had already become final. The ld AR also stated that no disallowance of lease rentals was made by the ld AO in Asst Year 2009-10 in the case of the assessee itself. We find that the issue in dispute is fully settled in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of ICDS Ltd reported in 350 TIR 527 (SC) wherein it was held that depreciation on leased assets is allowable in the hands of the lessor who is the owner. Though this decision has been rendered on the allowability of depreciation on leased assets from the angle of the lessor, the principle laid down could be made very much applicable to the facts of the instant case conversely for allowability of lease rentals in the hands of the assessee (lessee). Hence respectfully following the said decision , we hold that the assessee is entitled for deduction of Rs 42,48,067/- towards lease rentals paid on cars and we direct the ld AO accordingly. Since the Ground No. A raised by the assesee is allowed, the adjudication of Ground Nos. B and C need not be adjudicated.

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7.1. We have heard the rival submissions. We find that the additional grounds raised by the assessee deserve to be admitted as they go to the root of the matter and does not involve verification of any fresh facts and they are purely legal in nature. We find that the assessee had earned exempt dividend income of Rs 37,91,61,612/- during the year under consideration. The assessee had made suo moto disallowance of Rs 55,91,168/- u/s 14A of the Act in the return of income. We find that this disallowance was worked out by the assessee by considering the salaries of Mr Nimesh Kampani, Mr Manish Sheth and Mr Rajesh Shah ( i.e one month salary cost) and list of various administrative expenses attributable to investment activity at 8.33% thereon. The details of the said workings were provided by the assessee before the ld AO. The ld AO completely ignored the workings of the assessee and did not record any objective satisfaction with cogent reasons in terms of Rule 8D(1) of the Rules as to how the computation made by the assessee is incorrect having regard to the accounts of the assessee. Instead we find that the ld AO had mechanically applied the computation mechanism provided in Rule 8D(2)

2873/Mum/2016 M/s. J.M.Financial Ltd. of the Rules and computed the disallowance under third limb thereon towards administrative expenses in the sum of Rs 7,15,49,747/-. We find that the ld AO while computing this disallowance had considered all the investments of the assessee instead of considering only those investments which had yielded exempt income.

7.1.1. We find that the issue in dispute is decided in favour of the assessee in the case of JM Financial Consultants P Ltd (now known as JM Financial Institutional Securities P Ltd) vs DCIT in for Asst Year 2009-10 dated 7.10.2015 wherein it was held that the ld AO had not rejected the computation made by the assessee and hence the ld AO could not invoke the computation mechanism provided in Rule 8D(2) of the Rules mechanically. It was also held that the ld AO had not recorded any satisfaction in terms of Section 14A(2) of the Act read with Rule 8D(1) of the Rules by examining the accounts of the assessee and correctness of the claim of the assessee. We find that this decision of the tribunal was upheld by the Hon’ble Jurisdictional High Court in Income Tax Appeal No. 1482 of 2016 dated 29.1.2019 wherein the question raised by the revenue before the Hon’ble High Court and the decision rendered thereon are as under:-

“1. Revenue is in the appeal against the judgment of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 7.10.2015 raising following question for our consideration:- Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in restricting the disallowance made by the Assessing Officer of Rs, 1,79,85,122/- to Rs. 7,64,949/- as offered by the assessee, without appreciating that when the assessee itself admitted that the disallowance had to be made with - regard to expenditure for earning of income which was exempt, the disallowance is not to be worked out on adhoc basis by estimating the same, but as per method prescribed in the Rule 8D(2)?"

2873/Mum/2016 M/s. J.M.Financial Ltd. incurred by the assessee to earn exempt income. The Tribunal, by the impugned judgment while allowing the assessee's appeal came to the conclusion that the Assessing Officer had not recorded satisfaction with respect to the correctness of the claim of the assessee in respect of such expenditure. This is a requirement flowing from sub-section (2) of Section 14A of the Act Only when sub-section (2) of Section 14A is made applicable, the question of having resorted to Rule 8D(2) of the Income Tax Rules would arise. In the result, we do not find any error in the view of the Tribunal. The Tax Appeal is dismissed.”

7.2. Respectfully following the same, we direct the ld AO to delete the disallowance made u/s 14A of the Act in the sum of Rs 7,15,49,747/- both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. Hence the additional ground raised by the assessee on non-recording of satisfaction is allowed in this regard. Since the issue is adjudicated in favour of the assessee on the technical ground , the adjudication of other grounds become academic in nature.

2873/Mum/2016 M/s. J.M.Financial Ltd. with equal force for Asst Year 2011-12 also except with variance in figures.

11.1. The brief facts of this issue are that the ld AO on perusal of the profit and loss account of the assessee observed that the assessee had debited an amount of Rs 2,05,99,612/- towards advertisement expenses, for which the details were called for in the course of assessment proceedings. The details were submitted by the assessee vide submission dated 20.11.2013. From the said details, the ld AO observed that the assessee had debited Rs 84,00,000/- under the head ‘Living Media India Ltd – Advertisement in Business Today’ . The assessee was show casued as to why the said expenses be not disallowed and added to the total income. The assessee in response to the show cause notice submitted as under:- 1) At the previous hearing your goodself had called for an explanation as to why the expenditure incurred on advertisement amounting to Rs.84,00,000/- should not be disallowed treading the same as a capital expenditure. 2) During the financial year 2010-11, the company engaged Creative land Asia Private Ltd. ( hereinafter referred to as Agency), on a monthly retainership of Rs. 7,00,000/- per month with the objective of obtaining advertising and marketing ideas in connection with designing ail our communication requirements. 3) The work performed by the Agency inter-alia included the following:- • Creating and releasing artworks for various signages etc. • Intelligence Series campaign with Business India & Business Today magazines. • Concept note and designing the internet Newsletters. Designing Diwali and new year e-cards. • HR and other internal event communication mailers.

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• Various product info leaflets and other marketing collaterals like bulletin etc. • Branding for conference and events. • Designing screen savers/desktop wallpapers etc. • Designing Broachers. 4) The nature of expenditure didn't bring any capital assets to the company. 5) The allowability of the above expenses ahs to b e analysed under the provisions of section 37 of the Income-tax Act, 1961 (the Act). In the following paras we have analysed relevant provisions and allowability of advertisement expenses: For this purpose relevant extracts from the provisions of section 37 has been reproduced herein below for your ready reference: "(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profit and gains ob business or profession...." According to $.37(1), if any expenditure satisfies the following conditions, then the same shall be allowed as a deduction u/s.37 under the head "Profits and Gains of Business or Profession": (a) The expenditure should not be of the nature described u/s.s.30 to 36. (b) It should not be in the nature of capital expenditure. (c) It should not be the personal expenditure of the assessee. (d) It should have been incurred in the previous year. (e) It should be in respect of the business carried on by the assessee. (f) ft should have been expended wholly and exclusively for the purposes of the business. (g) It should not have been incurred for any purpose which is an offence or is prohibited by any law. The Company submits that the expenditure incurred during the relevant previous year satisfies all the conditions mentioned herein above. In this regard, your goodself would appreciate the above contention. Thus, it should be allowed u/s.37(l) of the Act. 6) We further wishes to state that said expenses does not result in acquiring a capital asset, the above expenditure is allowable as revenue expenditure. In this regard, we rely on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR I wherein the Hon'ble Supreme Court held that if an expenditure results in an enduring benefit without a capital asset being generated, the expenses are allowable as revenue expenses. In this regard, the Hon'ble Supreme Court held as under:

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"The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem: no touchstone has been devised. Every case has to be decided on this own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] to TC155,192 (HL), where the learned Law Lord stated: ….When an expenditure is made, not only once and for all, but with a view of bringing to existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for trading such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidatd Copper Mines Ltd. [1965] 58ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital filed that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstance of a given case. But even if this were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit-marking apparatus of the assessee. The income-earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is 2873/Mum/2016 M/s. J.M.Financial Ltd. clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue." 7) We further wish to rely on the following decisions: • M/s. Fine Jewellers (India) Ltd. Vs. ACIT (ITA N0.3124/MUM/2011) • ITO Vs. Spice Communication Ltd. 35 SOT 78 (Del) 8) Without prejudice, if your honour considers the expenses as capital in nature, depreciation at the rotes applicable to intangibles may be directed to be allowed.”

11.2. The assessee in support of the aforesaid submissions also filed the copy of monthly invoice raised by Creativeland Asia Pvt Ltd towards retainer fees for brand communication development for Rs 7,00,000/- per month together with applicable service tax thereon. The said invoice categorically mentioned that the said retainer fee did not include third party expenses such as cost of production of the commercial, talent fees and related costs, costumes, film and tape processing, photography, modelmaking and other such outsourced services. The PAN and Service tax registration number of Creativeland Asia Pvt Ltd was also duly mentioned in the said invoice.

11.3. The ld AO however disregarded the contentions of the assessee and proceeded to disallow the advertisement expenses in the sum of Rs 84,00,000/- by observing as under:- “ The submission of the assessee is considered but is not tenable. The assessee has made its contention that the expenses were met for the work performed by the agency for designing diwali and new year e-cards, designing broachers, designing screensavers, desktop, wallpapers etc. These expenses does not have any direct nexus for the same to be considered as business expenses. Further expenses met for branding for conference and events, HR and other internal event communication mailers etc are expenses which are met to earn a long term enduring benefit and the same cannot be 2873/Mum/2016 M/s. J.M.Financial Ltd. treated as expenses to be considered for regular running of business. Thus, the assessee could not establish that these expenses have a direct relation and nexus to the expended for business purposes.”

11.4. The assessee made the following submissions before the ld CITA :-

“E) Disallowance of advertisement expenses - Rs. 84,00,000/- 36) During the year under consideration, the appellant had incurred advertisement expenses of Rs. 84,00,000/-. The said expenses were incurred for creating and releasing artworks for various signages, etc., intelligence series campaign with Business India and Business Today magazines, concept note and designing internet newsletters, designing Diwali and new year e- greeting cards, HR and other internal event communications mailers, various product leaflets and other marketing collaterals like bulleting, etc., branding for conferences and events, designing screen savers/desktop wallpapers, etc. and designing brouchers. 37) During the course of assessment proceedings, the AO had asked the appellant to clarify as to why the advertisement expenses should not be treated as capital in nature. The appellant had filed a letter giving a detailed explanation as to why the advertisement expenses should not be considered to be capital in nature. 38) The AO has disallowed the expenses on the alleged ground that the expenses do not have any direct nexus and hence cannot be considered as business expenses and the expenses would have an enduring benefit to the appellant. 39) At the outset, the appellant submits that the AO had never during the course of assessment proceedings asked the appellant to justify the claim of advertisement expenses as business expenditure. He has only asked the appellant to explain as to why the said expenses should not be treated as capital expenditure. 40) Your honour would appreciate that the appellant incurs certain common expenses on behalf of all the group companies. One of the expenses is on account of advertisement. The appellant recovers the cost of common expenses from the group companies. Accordingly, advertisement expenses as such were revenue neutral as the appellant had already collected the said expenses from group companies and offered it as income and had claimed the common expenses as a deduction. As the advertisement expenses have already been collected from group companies, it cannot be said that the expenses were not for the purpose of the business of the appellant especially when the AO has assessed the collection from group companies as the income of the appellant. Further, if the advertisement expenses are 2873/Mum/2016 M/s. J.M.Financial Ltd. considered to be capital expenditure, the corresponding income by way of collection from group companies may also be considered to be capital in nature and not income.

11.5. The ld CITA however upheld the action of the ld AO by observing as under:-

2873/Mum/2016 M/s. J.M.Financial Ltd.

“4.3. I have considered the submission of the AR. The arguments put by the AO have also been considered. During the year under consideration, the appellant had incurred advertisement expenses of Rs.84,00,000/- . The said expenses were incurred for creating and releasing artworks for various signages, etc., intelligence series campaign with Business India and Business Today magazines, concept note and designing internet newsletters, designing Diwali and new year e- greeting cards, HR and other internal event communications mailers, various product leaflets and other marketing collaterals like bulleting, etc., branding for conferences and events, designing screen savers /desktop wallpapers, etc. and designing brouchers. During the appellate proceedings, the appellant as given twofold submissions, firstly, it has contended that these were expenses for the business of the company. Alternatively, the Ld.AR has also contended that "if your honour is not inclined to reduce the disallowance of advertisement expenses, the AO may be directed to disallow only the net advertisement expenses" but at the same time, no break-up figure justifying the expenses and correlating the expenses with business was provided. In fact, one of the plea of the appellant is that the expenses has been made for the entire group companies related to J.M.Financial Group. Thus, the submissions of the appellant itself are contradictory. The assessee has made its contention that the expenses were met for the work performed by the agency for designing diwali and new year e-cards, designing broachers, designing scree savers /desktop, wallpapers etc. These expenses do not have any direct nexus for the same to be considered as business expenses. Further expenses met for branding for conference and events, HR and other internal event communication mailers etc are expenses which are met to earn a long term enduring benefit and the same cannot be treated as expenses to be considered for regular running of business. Thus/ the assessee could not establish that these expenses have a direct relation and nexus to the expended for business purposes. In view of this, the addition / disallowance made by the AO is upheld. In the result/ ground No. G (Sr.No.19 to 24) is dismissed.”

11.6. Aggrieved, the assessee is in appeal before us.

11.7. We have heard the rival submissions. We find that the assessee had made a detailed submission by presenting all the facts before the ld CITA, which had been ignored by the ld CITA. We find that the assessee had duly stated that it had incurred certain advertisement expenses on behalf

2873/Mum/2016 M/s. J.M.Financial Ltd. of all the group companies , which had been duly recovered by the assessee from its group companies. We find lot of force in the argument advanced by the ld AR that in case if the revenue is inclined to disallow the common advertisement expenses of Rs 84 lacs then the revenue ought to have reduced the corresponding income in the form of recoveries from group companies also to that extent. The revenue cannot be allowed to disallow the expenditure on one hand as incurred for non- business purposes and incurred on capital account and correspondingly tax the income on other hand which is nothing but the recoveries of the said expenditure. This would result only in double jeopardy to the assessee and also result in contradictory stand taken by the revenue. It is not in dispute that the assessee had indeed recovered group support fees of Rs 27,60,00,000/- which also includes recovery made on account of advertisement expenses and this sum is duly offered to tax by the assessee. We find that the assessee had effectively claimed only a sum of Rs 21,46,63,119/- ( 23,20,51,011 – 1,73,87,892 disallowed voluntarily by assessee) as deduction in the return of income. This goes to prove that the assessee had effectively made a surplus / profit of Rs 6,13,66,881/- out of rendering the group support services, which goes to prove that the assessee had recovered the entire group support fees including advertisement expenses with a mark up. Hence there cannot be any separate disallowance of group support fees including advertisement expenses.

11.7.1. In view of the aforesaid observations, we direct the ld AO to delete the disallowance of Rs 84,00,000/- towards advertisement expenses. Accordingly, the Ground No. F raised by the assessee is allowed.

2873/Mum/2016 M/s. J.M.Financial Ltd.

Order pronounced in the open court on this 04/10/2019