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ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by revenue under section 253 of Income-tax Act (‘Act’) is directed against the order of ld. Commissioner of Income-tax (Appeals)- 20, Mumbai [hereinafter referred as ld. CIT(A)] dated 24.01.2018, which in turn arise from the assessment order completed under section 143(3) of the Act on 18.03.2014 for Assessment Year 2011-12. The revenue has raised following grounds of appeal: 1. “Whether on the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,75,00,000/- on account of expenses which were not fully and exclusively expended for the purpose of business u/s 37(1) of the IT Act.” Mum 2008-M/s Ceres Capital & Financial Services P. Ltd.
2. “The appellant prays that for these and other reasons it is submitted that the order of the Ld. CIT(A) on the above grounds be set aside and that of the A.O. be restored.” 2. Brief facts of the case are that the assessee-company is engaged in the business of financial services, filed its return of income for Assessment Year 2011-12 on 08.06.2011 declaring total income of Rs. 38,74,391/-.
The return of income was selected for scrutiny and assessment was completed under section 143(3) on 18.03.2014. During the assessment proceeding, the Assessing Officer noted that in the Profit & Loss Account, the assessee claimed expenditure of Rs. 1.75 Crore on account of outsourcing/contract services. The Assessing Officer issued show- cause notice to the assessee to substantiate the expenses and to furnish the necessary details with supporting evidence. In response to the show- cause notice, the assessee filed agreement dated 15.07.2010 with M/s Ceres Direct Distribution Pvt. Ltd. (CDDPL) to whom the payments were made under this head. The Assessing Officer issued summon under section 131 to the Directors of CDDPL for furnishing the details regarding the agreement with the assessee, the services rendered and the nature of services along with the copy of bills and reconciliation of payment with bank statement. In response to the summons under section 131, the Director of CDDPL furnished the copy of agreement, bank statement and copy of bills raised. After perusing the details furnished Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. by assessee and CDDPL, the Assessing Officer in para-4.1 of its order summarized that fees were charged in the following manner:
(a) In due discharge by CERES of its obligations under this agreement, CCFS shall pay CERES per employee/work station engaged by CERES in supplying sub-contracting services to CCFS, fee as may mutually agreed upon between the parties from time to time and laid down in Annexure-I of this agreement. (b) CERES shall present one consolidated bill for sub-contracting services charges for the fixed amount charged for carrying out the said services. The bill will be submitted by the 7th of the following month in which the services is provided. (c) CCFS will make the payment of the Bill within 7 working days from the receipt of correct invoice and supporting documents. (d) CCFS shall deduct the applicable taxes from the payment made to CERES. The fee for services as laid down in Annexure-I is exclusive of service tax and education cess which at present is payable @ 10.30% of the base fee, any variation on account of change in taxes will charged by CERES at the rates applicable as per the relevant Act.’ 3. After recording the arrangement of raising the bills and manner of payments thereof, the Assessing Officer took the view that assessee as well as recipient company failed to furnish the details on the basis of which the bills were raised and that in absence of any supporting evidence, the bills are nothing but adhoc bill. M/s CDDPL is associate concern of assessee having common Director and shareholding of substantial interest. The claim of expenditure of Rs. 1.75 Crore on account of outsourcing/contract services is nothing but a colorful device to divert the income of assessee-company by making a entry in the books on 30.03.2011 which is adjusted against the recipient company 3 Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. against the expenses. The expenses were not incurred wholly and exclusively for the purpose of business as per the provision of section 37(1). On appeal before the ld. CIT(A), the entire disallowance/addition was deleted. During the first appellate proceedings, the assessee contended that no opportunity was granted to make submission by the Assessing Officer. The assessee filed detailed submission vide submission dated 26.10.2015 along with the necessary evidence and stated that Assessing Officer in spite of furnishing all explanation and submission held that assessee failed to substantiate the expenses without supporting evidence that expenses were not actually incurred for the purpose of business. The assessee also filed application under Rule 46A of Income-tax Rules for furnishing additional evidence. The ld CIT(A) vide his order dated 26.10.2015 remanded the submissions and the evidences of the assessee to assessing officer for his remand report. The Assessing Officer filed his remand report dated 04.08.2016 objected about the admission of new evidences. The ld. CIT(A) during the appellate proceeding further asked the assessee to furnish the copy of ledger of CDDPL in assessee’s book, copy of ledger of assessee in the books of CDDPL, copy of bill raised and copy of return of income of CDDPL. The assessee furnished the relevant document before the ld. CIT(A) on 24.01.2018. After considering the books of assessee as well as CDDPL, the ld. CIT(A) deleted the entire addition holding that both 4 ITA No. 2609 Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. the concern i.e. assessee as well as CDDPL are taxed at marginal tax rate. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before us.
We have heard the submission of ld. Department Representative (DR) for the revenue and ld. Authorized Representative (AR) of the assessee and perused the material available on record. The ld. DR for the revenue supported the order of Assessing Officer and would submit that the Assessing Officer in para-4.4 and 4.5 of the assessment order has clearly established that the payment of Rs. 1.75 Crore on account of outsourcing charges was nothing but a colorable device to divert the income of assessee. The outsourcing of the advisory services is not a part of business activities of the assessee. The ld. CIT(A) deleted the entire addition without examining the genuineness of transaction. There was no justification for allowing deduction of huge expenses.
On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR submits that assessee as well as Recipient Company is taxed as marginal tax rate. The ld. CIT(A) examined the nature and activities of the services rendered by assessee-company. The nature of services provided to assessee-company was explained vide page no. 114 of Paper Book. The assessee provided all necessary evidence to substantiate the genuineness of expenses to the assessing officer as well as to ld CIT(A). The ld. CIT(A) after examining all the details and on 5 Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. proper satisfaction deleted the disallowances. The ld AR for the assessee prayed for dismissal of the appeal.
We have considered the rival submission of representative of the parties and have perused the material available on record. During the assessment, the Assessing Officer disallowed the entire expenses on account of outsourcing/contract services holding that the assessee failed to furnish the working and details on the basis of which the bills were raised. The assessing officer also concluded that outsourcing on advisory is not a part of business activity of the assessee. The payments were made without deduction of tax at source and that the expenses were not made wholly and exclusively for the purpose of business. We have noted that the Assessing Officer has not discussed the evidence furnished by assessee except observing that the assessee failed to furnish the working and details on the basis of which the bills were raised.
Before the ld. CIT(A), the assessee filed detailed submission along with all the documentary evidences vide submission dated 26.10.2015. The submission of assessee was remanded to the Assessing Officer for his remand report. The Assessing Officer furnished his remand report vide remand report dated 14.08.2016.
We have noted that the assessee has filed the copy of submission dated 26.10.2015 with all necessary evidences. The assessee also filed application under Rule 46A of Income-tax Rules for furnishing 6 Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. additional evidence. In the submission dated 26.10.2015, the assessee contended that despite furnishing all explanation and submission, the Assessing Officer noted that assessee failed to substantiate the expenses without supporting evidence. The assessee also contended that CDDPL had infrastructure to execute the work, therefore, the work was assigned to them. The additional evidence and the submission of assessee were remanded to the Assessing Officer. The Assessing Officer furnished his remand report dated 04.08.2016 (copy of which is filed vide page no. 166 to 168 of Paper Book). The assessee filed his response to the remand report vide reply/submission dated 13.02.2017 (copy of which is at page no. 169 to 234 of Paper Book). The ld. CIT(A) further directed the assessee to furnish the copy of ledger of CDDPL in assessee’s book, copy of ledger of assessee in the books of CDDPL, copy of bills raised and return of CDDPL. The assessee also furnished the details of the services provided under the agreement. The ld. CIT(A) after considering the material placed before him concluded that the amount received by CDDPL is duly entered in their books as evident from assessee’s ledger.
Both the concern i.e. assessee and CDDPL are taxed at marginal tax rate. Therefore, the observation of Assessing Officer that transaction between the assessee was part of design to evade tax without any substance. The ld. CIT(A) also concluded that it is not a case of Assessing Officer that CDDPL is a paper concern and had provided 7 Mum 2008-M/s Ceres Capital & Financial Services P. Ltd. accommodation entries to the assessee. We have noted that the ld. CIT(A) gave a categorical finding after proper appreciation of fact. No contrary facts or law is brought to our notice to take other view, therefore, we affirm the order of ld. CIT(A).
In the result, appeal of the revenue is dismissed.
Order pronounced in the open court on 30/04/2019.
Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 30.04.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “C” Bench, ITAT, Mumbai 6. Guard File