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Income Tax Appellate Tribunal, “H”, BENCH
Before: SHRI M.BALAGANESH, AM & SHRI AMARJIT SINGH, JM
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2003-04 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-12, Mumbai in appeal No.CIT(A)-12/IT 6/DCIT 6(3)(1)/2009-10 dated 29/02/2016 (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 27/02/2006 by the ld. Dy. Commissioner of Income-Tax 5(2), (hereinafter referred to as ld. AO).
The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of payment made towards
M/s. Firstsource Solutions Ltd., club membership in the sum of Rs 6,61,000/- in the facts and circumstances of the case.
2.1. We have heard the rival submissions. It is not in dispute that the assessee had incurred a sum of Rs 6,61,000/- towards corporate membership of the Managing Director (MD) of the assessee company as a one time payment. Admittedly the membership is in the name of the assessee company wherein the MD is permitted to use the facilities of the club. We find that the details of the same were duly furnished before the ld AO which are enclosed in page 195 of the Paper Book and again before the ld CITA which are enclosed in Pages 15 to 17, 26 to 28, 204 to 205, 208 and 211 of the Paper Book filed before us.We find that this issue is decided in favour of the assessee by the co-ordinate bench of Kolkata Tribunal in the case of Ankit Metal & Power Ltd vs Addl CIT in & 1479/Kol/2014 dated 6.9.2017wherein it was held as under:-
“5.2. With regard to revenue's appeal, we find from the paper book of the assessee that no fresh evidences were filed by the assessee before the ld CITA and hence there is no violation of Rule 46A of the IT Rules. We find that on merits, the issue is covered by the decision of Hon'ble Delhi High Court in the case of CIT vs Samtel Colour Limited reported in (2010) 326 ITR 425 (Del) and Hon'ble Supreme Court in the case of CIT vs United Glass Manufacturing Company Ltd in Civil Appeal No. 30146/2008 dated 13.9.2012 (SC) , wherein it was held that the subscription and admission fee paid towards corporate membership to club was an expenditure incurred wholly and exclusively for the purposes of the business of the assessee and not towards capital account as it only facilitated the smooth and efficient running of a business enterprise and did not add to the profit-earning apparatus of a business enterprise. Accordingly, the Ground No. 3 raised by the revenue is dismissed.”
M/s. Firstsource Solutions Ltd., 2.2. We find that the issue is also covered by the decision of Hon’ble Jurisdictional High Court in the case of Otis Elevator Co. (India) Ltd vs CIT reported in (1992) 195 ITR 682 (Bom). Respectfully following the said decisions, we hold that the expenses incurred for corporate membership of club in the sum of Rs 6,61,000/- is incurred wholly and exclusively for the purpose of business of the assessee company and is squarely allowable as deduction. Accordingly, the Ground No.1 raised by the assessee is allowed.
The next issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of interest paid on borrowings in the sum of Rs 37,85,915/- in the facts and circumstances of the case.
3.1. We have heard the rival submissions. We find that the assessee is engaged in the business of IT Enabled Transactio Processing Services and had filed its return of income for the Asst Year 2003-04 on 28.11.2003 declaring total loss of Rs 11,86,90,280/-. The ld AO observed that the assessee had debited a sum of Rs 60,03,000/- on account of interest expenses. The ld AO observed that assessee had unsecured loan of Rs 70,00,00,000/- in its Balance Sheet on which interest was paid. The assessee had made investments in the following subsidiary and mutual funds :- Customer Assets India Pvt Ltd - Rs 95,95,23,000/- Prudential ICICI Liquid Plan - Rs 15,14,55,000/- Prudential ICICI Flexible Income Plan - Rs 7,92,82,000/- Birla Sun Life Units - Rs 7,10,81,000/- 3.2. The ld AO felt that these investments had nothing to do with the business of the assessee activity of the assessee. He observed that on M/s. Firstsource Solutions Ltd., one hand , assessee had borrowings and had suffered interest thereon. On the other hand, it had made investments in aforesaid subsidiary and mutual funds which are for non-business purposes. Accordingly, the ld AO resorted to make proportionate disallowance of interest on borrowings. The ld AO also recorded in his assessment order that the own funds available in the form of share capital and reserves and surplus with the assessee was Rs 130 crores , whereas the investments made were for Rs 12,13,41,000/-. The ld AO observed that interest of Rs 60,03,000/- was paid on total borrowings of Rs 70 crores. Accordingly, he calculated the proportionate interest to be disallowed as under:-
Borrowed fund used for investment in Subsidiary company Borrowed fund * Investment in subsidiary / ( Share capital and Reserves &Surplus + Borrowed fund)
70,00,00,000 * 126,13,41,000 / ( 130,00,00,000 + 70,00,00,000) = 44,14,69,350/- The ld AO while making the aforesaid disallowance included even the investments made in mutual funds along with subsidiary.
Proportionate interest for the fund used for investment in subsidiary Borrowed fund used in investment in subsidiary * Finance Cost / Borrowed Fund 44,14,69,350 * 60,03,000 / 70,00,00,000 = 37,85,915/-
M/s. Firstsource Solutions Ltd., 3.3. The ld CITA upheld the action of the ld AO. We find at the outset, the ld AO proposed to make disallowance of interest on borrowed funds only in respect of investment made in subsidiary of the assessee company and not with the mutual funds. Hence the consideration of total investments figure by the ld AO at Rs 126,13,41,000/- is erroneous. The ld AO ought to have considered only a sum of Rs 95,95,23,000/- in the aforesaid workings, which if taken , the disallowance would be as under:- 70,00,00,000 * 95,95,23,000 / 200,00,00,000 * 60,03,000 / 70,00,00,000 = 28,80,008/- 3.4. We find that the details in support of the contentions of the assessee were duly furnished before the ld CITA which are enclosed in pages 17 to 19, 28 to 29, 62 to 64, 205 to 206 and 209 to 210 of the Paper Book before us. We find that this issue is already adjudicated by this tribunal in assessee’s own case for the Asst Year 2004-05 in dated 31.1.2018 wherein it was observed as under:-
“4. We heard the parties on this issue and perused the record. The facts relating to the issue are discussed in brief. The assessee claimed interest expenditure of Rs.100.10 lakhs. The AO noticed that the assessee has made following fresh investments:- Customer Assets India P Ltd Rs.99,95,23,000/- Series F of convertible preferred stock of First Ring Inc. US Rs.61,72,19,000/-
The AO took the view that the assessee has diverted interest bearing loans for making above said investments, which did not yield any income. Accordingly, he computed disallowance of proportionate amount of interest relatable to the above said investments, which worked out to Rs.61,71,318/- and disallowed the same. The Ld CIT(A) deleted this disallowance and hence the revenue is aggrieved.
M/s. Firstsource Solutions Ltd.,
5. We notice that the assessee has demonstrated before ld CIT(A) that the own funds available with it is more than the value of investments made in subsidiaries. The assessee held own funds of Rs.13000 lakhs and Rs.23580 lakhs as on 31.3.2003 and 31.3.2004 respectively. The amount of investment made in subsidiaries stood at Rs.9595.23 lakhs and 15767.42 lakhs respectively as on 31.3.2003 and 31.3.2004. Hence, as per the decision rendered by Hon'ble jurisdictional High Court in the case of Reliance Utilities & power (313 ITR 340), the presumption shall be that the assessee has used only its own funds for making investments. Further, the assessee has also contended that the subsidiary companies are also engaged in the similar line of business as that of the assessee. Accordingly it was contended, by placing reliance on the decision rendered by Hon'ble Supreme Court in the case of S.A.Builders Ltd Vs. CIT (288 ITR 1), that there is commercial expediency in making investments and hence no disallowance was called for. We notice that the Ld CIT(A) has deleted the disallowance on account of above said reasoning.
6. Before us, the Ld D.R submitted that the Ld CIT(A) has granted relief without discussing much on the issue. On the contrary, the Ld A.R submitted that the assessee has raised valid contentions before Ld CIT(A) and accordingly he has granted relief to the assessee. 7. Having heard rival submissions, we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference, since the own funds available with the assessee is more than the value of investments made in subsidiaries and further, there is commercial expediency in making investments, since the subsidiary companies are also said to be engaged in the similar line of business activity. Accordingly we uphold the order passed by Ld CIT(A) on this issue.”
3.5. Respectfully following the same, we direct the ld AO to delete the disallowance of interest in the sum of Rs 37,85,915/- in the facts and circumstances of the case. Accordingly, the Ground No. 2 raised by the assessee is allowed.
The next issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of provision for car hire charges in the sum of Rs 11,33,160/- and provision for expenses in the sum of Rs 42,52,507/- in the facts and circumstances of the case.
M/s. Firstsource Solutions Ltd., 4.1. We have heard the rival submissions. We find that the ld AO had observed that assessee company had debited a sum of Rs 98,72,364/- on account of car hiring and other charges for which the details were submitted by the assessee in the form of statement vide letter dated 31.1.2006 before the ld AO. The ld AO observed that details were not submitted by the assessee in respect of the following provision for car hire charges incurred on 31.3.2003 as under:- 31.3.2003 Car Hire - Rs 20,160/- 31.3.2003 Car Hire - Rs 6,75,000/- 31.3.2003 Car Hire - Rs 1,23,000/- 31.3.2003 Car Hire - Rs 3,15,000/- ----------------------- Rs 11,33,160/- ---------------------- Repairs & Maintenance Expenses Rs 1,34,818/- Rent, Rates & Taxes Rs 18,000/- Connectivity Charges Rs 18,63,550/- Electricity, Water & Power Consumption Rs 4,48,298/- Training Expenses Rs 8,55,980/- Recruitment Expenses Rs 9,36,861/- ------------------------ Rs 42,52,507/- ------------------------- 4.2. The ld AO accordingly disallowed the same in the assessment which was upheld by the ld CITA. We find that the assessee had claimed that the aforesaid expenses were incurred prior to 31.3.2003 for which payments were made in subsequent assessment year and hence provision was made in the books on accrual basis and claimed as deduction. We find that the details of the same were duly furnished before the ld AO
M/s. Firstsource Solutions Ltd., which are enclosed in pages 195 to 203 of the Paper Book and again before the ld CITA which are enclosed in Pages 22 to 23, 30 and 60 of the paper book filed before us. We find that this issue is also covered in assessee’s own by the order of this tribunal for Asst Year 2004-05 in dated 31.1.2018 wherein it was held as under:-
“19. Ground No.3 urged by the assessee relates to disallowance of Provision of various expenses. The assessee created provision for following outstanding expenses and claimed the same as deduction:- (a) Upkeep charges & Maintenance - Rs. 4,00,948/- (b) Travelling and Conveyance - Rs. 6,47,000/- (c) Computer expenses - Rs. 5,45,000/- (d) Legal and Professional expenses - Rs.32,00,000/- (e) Electricity, water and power consump. - Rs. 6,60,000/- (f) Recruitment and training exp. - Rs.42,59,910/- (g) Car hire charges - Rs. 4,70,000/- The AO took the view that mere provision made by the assessee for expenses is not allowable unless it is shown that the liability has accrued during the year under consideration. In the absence of further details forthcoming from the assessee, the AO disallowed the above said claim. The Ld CIT(A) also confirmed the same.
The Ld A.R submitted that these expenses have accrued during the year under consideration and hence the provision was created by making reliable estimates. In the subsequent years, these expenses have been paid and the un-paid amount has been taken to income account. He submitted that these provisions were made on account of accounting compulsions under matching principle and hence the same is allowable as deduction. In this regard, the assessee relied on following case law:- (a) Bharat Earth Movers (245 ITR 428)(SC) (b) CIT Vs. United Motors (India) Ltd (181 ITR 347)(Bom) (c) Rotork Controls India (P) Ltd Vs. CIT (180 Taxman 422)(SC) (d) CIT Vs. Nokia Siemens Networks India (14 taxmann.com 84)(Kar) 21. The Ld D.R, on the contrary, submitted that the assessee has not shown that the liability in respect of above said expenses has accrued during the year under consideration.
M/s. Firstsource Solutions Ltd.,
We heard the parties on this issue and perused the record. There should not be any dispute that the accounting principles mandates that all known provisions have to be provided for, even if the exact amount of liability is not known. A reliable estimate is required to be made for making such provisions. It is the case of the assessee that these provisions relate to expenses of routine nature and such kind of provisions are made year after year. The actual payments made against these provisions are usually debited to the concerned Provision account and the balance, if any, shall be transferred to the Profit and Loss account.
Even though the AO has observed that the assessee did not furnish relevant details, yet it is the contention of the assessee that all the relevant details were furnished to him, vide letter dated 22-12-2006. Since the provision is made on the basis of estimates, the amount of actual payment may differ in the normal course. But the said difference should not bar deduction of the provision so made, so long as it is a liability that has already accrued as at the year end. We notice that the AO did not examine the details furnished by the assessee in order to demonstrate that the concerned liability did not accrue as at the year end. Hence, we have no other option, but to accept the explanations of the assessee, as the same is in accordance with the accounting principles and requirements. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the expenses relating to provisions, listed above.”
4.3. Respectfully following the same, we direct the ld AO to delete the disallowance of car hire charges in the sum of Rs 11,33,160/- and other expenses in the sum of Rs 42,52,507/- as above in the facts and circumstances of the case. Accordingly, the Ground Nos. 3 & 4 raised by the assessee are allowed.
The next issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of seminar and meeting expenses in the sum of Rs 2,11,373/- in the facts and circumstances of the case.
5.1. We have heard the rival submissions. We find that the ld AO had observed that assessee company had debited a sum of Rs 10,56,851/- on M/s. Firstsource Solutions Ltd., account of Meeting and Seminar expenses for which the details were submitted by the assessee in the form of statement vide letter dated 18.1.2006 before the ld AO. The ld AO observed that certain expenses were incurred mainly in respect of Hotel Charges for which supporting details were not available. Hence it could not be verified whether it was incurred wholly and exclusively for the purpose of business. Accordingly, the ld AO made an adhoc disallowance at 20% of the expenditure in the sum of Rs 2,11,372/- which was upheld by the ld CITA. We find that the details of the same were duly furnished before the ld AO which are enclosed in pages 179 to 182 of the Paper Book and again before the ld CITA which are enclosed in Pages 24 to 25 of the Paper Book filed before us. We find that this issue is also covered in assessee’s own by the order of this tribunal for Asst Year 2004-05 in dated 31.1.2018 wherein it was held as under:-
“24. The fourth ground relates to adhoc disallowance made out of Meeting and Seminar expenses. The assessee claimed a sum of Rs.30.11 lakhs under this head. On verification of details, the AO noticed that majority of expenses have been incurred towards "Hotel Charges". The AO disallowed 20% of the claim by observing that it cannot be verified that expenses were incurred wholly and exclusively for the purpose of business. The Ld CIT(A) also confirmed the same, but he accepted the alternative plea of the assessee that the disallowance shall be eligible for deduction u/s 10A of the Act.
We heard the parties on this issue. The nature of expenses being "Meeting and Seminar Expenses", the major part of expenses shall be incurred towards hotel charges only. We notice that the assessee has furnished all the details before the AO. We further notice that the AO has made adhoc disallowance only on presumption that there may be personal element. It can be noticed that the AO has made the impugned disallowance on surmises and conjectures without showing how personal element is involved in meetings and seminars. Hence we do not find any justification in making adhoc disallowance of 20% from this expenditure. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance.”
M/s. Firstsource Solutions Ltd., 5.2. Respectfully following the same, we direct the ld AO to delete the disallowance of meeting and seminar expenses in the sum of Rs 2,11,372/- in the facts and circumstances of the case. Accordingly, the Ground No. 5 raised by the assessee is allowed.
The last issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of staff welfare expenses in the sum of Rs 12,23,782/- at 20% of total expenses on an adhoc basis in the facts and circumstances of the case.
6.1. We have heard the rival submissions. We find that the ld AO had observed that assessee company had debited a sum of Rs 61,18,911/- on account of Staff Welfare expenses for which the details were submitted by the assessee in the form of statement vide letter dated 18.1.2006 before the ld AO. The ld AO observed that certain expenses were incurred mainly in respect of Hotel Charges for which supporting details were not available. Hence it could not be verified whether it was incurred wholly and exclusively for the purpose of business. Accordingly, the ld AO made an adhoc disallowance at 20% of the expenditure in the sum of Rs 12,23,782/- which was upheld by the ld CITA. We find that the details of the same were duly furnished before the ld AO which are enclosed in pages 179, 183 to 194 of the Paper Book and again before the ld CITA which are enclosed in Page 25 of the Paper Book filed before us. We find that this issue is also covered in assessee’s own by the order of this tribunal for Asst Year 2004-05 in dated 31.1.2018 wherein it was held as under:-
M/s. Firstsource Solutions Ltd.,
26. The fifth ground urged by the assessee relates to the adhoc disallowance of 20% made out of Staff welfare expenses. The assessee claimed a sum of Rs.183.99 lakhs towards staff welfare expenses. The assessee furnished relevant details to the AO. However, the AO noticed that these expenses were incurred in respect of Canteen, food, staff medical benefit. Further a sum of Rs.19.95 lakhs has been described as Others". Accordingly, the AO took the view that it cannot be verified that these expenses have been incurred wholly and exclusively for the purpose of business. Hence he disallowed 20% thereof. The Ld CIT(A) confirmed the disallowance, but he accepted the alternative prayer of the assessee that the amount so disallowed shall be eligible for deduction u/s 10A of the Act.
We heard the parties on this issue. We notice that the assessee has given details of expenses except for a sum of Rs.19.95 lakhs. Hence, we are of the view that the disallowance, if any, should be restricted to that portion for which no detail was given. Accordingly we are of the view that no disallowance is called for from out of expenses for which details were given. We are also of the view that the disallowance @ 20% is also on the higher side. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict disallowance to 10% of Rs.19.95 lakhs, for which details were not given. However, this disallowance shall be eligible for deduction u/s 10A of the Act as held by Ld CIT(A), since the said decision has not been challenged by the revenue.”
6.2. The decision rendered above in Asst Year 2004-05 would apply with equal force for this assessment year also which is in appeal before us, save that the ld AO is directed to quantify the amount for which details were given by the assessee, for which no disallowance is to be made in the light of aforesaid tribunal order. Wherever, no details were furnished, the ld AO is directed to make 10% disallowance thereon and consequently give deduction u/s 10A of the Act if the assessee is eligible otherwise. Accordingly, the Ground No. 6 raised by the assessee is allowed for statistical purposes.
M/s. Firstsource Solutions Ltd.,
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on this 05/07/2019