Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
directed against three separate orders of the learned Commissioner (Appeals)–33, Mumbai. Since the appeals relate to the same assessee and involve common issues, they have been clubbed together and disposed off by way of a consolidated order for the sake of convenience. ./2004 Assessee’s Appeal – 2000–01
In ground no.1, the assessee has challenged the disallowance of professional fees paid to Preroy A.G. (PAG) amounting to ` 1,97,85,542.
Brief facts are, the assessee a company is engaged in the business of financing and investing in projects as well as equity and debt participation. For the assessment year under dispute, the assessee filed its return of income on 29th December 2000, declaring total income of ` 24,81,98,200. In course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of an amount of ` 1,97,85,542, on account of payment of professional fees to PAG called upon the assessee to justify its claim. In response, it was submitted that since the assessee is in the business of financing and investment activity in various projects, it undertakes feasibility study of new projects either in–house or through consultants before investing. It was submitted that in this connection the assessee has 4 Stock Traders Pvt. Ltd.
availed the services of PAG to assist it in high level discussion with proposed business partner, to advise in matters relating to strategic counseling and monitoring on–going joint ventures and other collaborations and in formulating business strategies to safe–guard and protect its investments in subsidiary and associate companies. Thus, it was submitted that since the professional fees paid to PAG was wholly and exclusively for business purposes, it is allowable as business expenditure. The Assessing Officer, however, was not convinced with the submissions of the assessee. He observed, PAG is a company registered in Switzerland and one Shri Sushil K. Premchand, is one of the directors in PAG. He also found that Shri Sushil K. Premchand, is also a director in the assessee company. The Assessing Officer observed, there is no evidence suggesting that any request for professional services was made to PAG. The Assessing Officer observed, there are no documents to show services were actually rendered by PAG. The Assessing Officer also noted that similar payment made to PAG in assessment year 1998–99 was disallowed. Following the same, the Assessing Officer disallowed the payment made to PAG in the impugned assessment year.
Being aggrieved with the disallowance, though, the assessee preferred appeal before the first appellate authority, however, he also sustained the disallowance made by the Assessing Officer.
5 Stock Traders Pvt. Ltd.
Shri Nitesh Joshi, learned Counsel for the assessee, at the outset fairly submitted that the issue relating to deduction claimed on account of payment made to PAG for the first time came up for consideration before the Tribunal in assessment years 1995–96, 1996–97 and 1997– 98. He submitted, while deciding the issue the Tribunal had upheld the disallowance made by the Assessing Officer. He further submitted, the aforesaid decision was followed by the Tribunal while deciding similar issue in assessee’s own case in assessment years 1998–99 and 1999– 2000. Thus, he submitted, the issue is otherwise covered by the decision of the Tribunal in preceding assessment years. Without prejudice to the aforesaid submissions, the learned Authorised Representative submitted, the payment made by the assessee is allowable as business expenditure as the assessee has received the services from PAG. He submitted, while deciding the appeal filed by PAG the Tribunal has made an observation that the amount was received on account of services rendered. Thus, the learned Counsel for the assessee submitted, if in the case of service provider, the payment is accepted as genuine, it cannot be held otherwise in case of the service recipient. In this context, he relied upon the decision of the Hon'ble Jurisdictional High Court in Tribhuvandas Bhimji Jhaveri v/s ACIT, [2001] 247 ITR 727. He submitted, even assuming that services
6 Stock Traders Pvt. Ltd. were actually not rendered by PAG but by Shri Sushil K. Premchand, still the payment is allowable as remuneration paid to the director.
The learned Departmental Representative submitted, the issue having been decided by the Tribunal in assessee’s own case in preceding assessment years, there is no scope for deviating from those decisions.
We have considered rival submissions and perused materials on record. It is very much clear from the facts on record, claim of deduction on account of payment of professional fee to PAG is a recurring dispute between the assessee and the Department right from the assessment year 1995–96. While deciding assessee’s appeals for the assessment years 1995–96, 1996–97 and 1997–98 in 2803 and 2088/Mum./2003, dated 5th April 2016, the Tribunal has upheld the disallowance after exhaustively dealing with the arguments advanced from both the sides as well as examining the facts on records including the agreement between the assessee and the PAG. The finding of the Co–ordinate Bench in this regard is reproduced hereunder for convenience:–
“8. We find that, as evident from the assessment orders of the PAG- which were placed before us in the paper-book, one hundred percent of the share in the PAG were owned by Shri Sunil K Premchand (SKP, in short) who is also a director, and majority shareholder, in the assessee before us. We have also noted that whatever evidence the assessee has lead, so far as the rendition
7 Stock Traders Pvt. Ltd. of service by the PAG is concerned, refers to the involvement of SKP and inputs by him. There is nothing before us to establish, or even indicate, consultancy or advisory work done by any person other than SKP. In pictorial terms this flow of advisory work could be explained as follows”–
Even in the situation described above, there could possibly be no objections to the situation in which the services are rendered by Preroy AG in its own right and with inherent strengths of its own. What we find, on an analysis of evidence produced before us in support of rendition of service, is that de facto services are provided by SKP wearing the PAG hat. A line of demarcation is thus drawn up between what SKP does as director of the assessee company and what SKP does as director of Preroy AG even as subject matter of his work is the interest of the assessee only. Take for example, invoice no. 1 dated 1st November 2014 for US $ 10,000. The narration on the invoice and the supporting documents in this regard are as follows: OKS India- Carl Bechem GmbH, Hagen Negotiation on behalf of STPL in March 1994, in respect of development of a proposal for the manufacture of speciality grease at OKS plant in Mysore Supporting documents a) Preroy‟s file note setting out a summary of services rendered and the recommendations made to STPL b) Sushil‟s fiile note on the meeting at OKS Munich on March 7,1994 discussing several issues such as 1993-94 sales of OKS „grease plant‟ issue, financing situation of STPL, Bechem Product pricing etc c) Corporate Brouchers of OKS and Carl Bechem
8 Stock Traders Pvt. Ltd.
Clearly, the work is done by SKP, the meeting is taken by the SKP and it pertains to the investments of the assessee is OKS. When a meeting is taken by director of the company, analysis is done by the director of the company and the recommendations are made by director of the company, it is difficult to be persuaded by the contention that these services are required to be treated as rendered by the Preroy AG because, the director was also a one hundred percent owner and a director of Preroy AG, and because, at the point of time when he was doing all this work, he had discarded the hat of director in the assessee company to wear the hat of director of Preroy AG. That is the situation with respect of the entire work in respect of which Preroy AG is paid. The evidence in support of rendition of services, whether during the assessment year 1995-96 or eve in respect of subsequent assessment years, includes fax message by SKP, travel schedules of SKP, boarding passes of SKP and fax message by Preroy AG to a business house “informing the time of Sushil‟s arrival at Amsterdam on July 1, 1994 and suggesting a meeting at the KLM lounge at Amsterdam”. The work done by Preroy AG did not have any independent existence beyond work done by SKP or, as the documentation frequently refers to him as, Sushil. As a matter of fact almost entire work, for which the Preroy AG is paid, is the work done by SKP. There is no evidence for any independent work done by Preroy AG. A lot of emphasis is placed on the work done in connection with OKS India and the fact that the assessee had substantial stakes in this entity. Learned counsel has taken pains to emphasize the fact that the assessee is in the business of investments and the work done to protect his investments in these companies is also for the purposes of his business of making investments. The occasion to deal with this aspect of the matter will, however, arises only when there is a finding that bonafide expenditure is incurred for the purposes of OKS India. When SKP takes a meeting, as a director in the assessee company, and works towards protecting his investment in OKS India, that is what he is expected to do in furtherance of his legitimate business interests. The trouble, however, arises when a claim is made that while doing this work, SKP was wearing a different hat, i..e Preroy hat, and, therefore, Preroy AG should be paid for the work so done. We are unable to accept this claim, which, in our considered view, is too far fetched. Here is a director of the company rendering services to the company in which he is a director and a rank outsider commercial entity, owned by the director, is being paid for the work done by the director. It appears that the foreign trips, during which the work is claimed to have been done, were taken up in the capacity as director of the assessee company, and, yet billing for the work done in the course of trips so undertaken at the cost of the assessee company, has been done in the name of Preroy AG.
9 Stock Traders Pvt. Ltd.
There is nothing on record to show that these foreign trips were undertaken by SKP at the cost of Preroy AG or in the course of his work as director or owner of Preroy AG. Take, for example, the meeting at KLM lounge at Amsterdam on 1st July 1994 referred to earlier in this paragraph. We find that, as evident from details of travelling expenses filed at pages 77 onwards in the paper book before us, the visit to Germany, Netherlands and UK, which lasted from 30th June to 12th July 1994, is stated to have been undertaken by SKP for attending “business meetings and representing STPL in a meeting with potential business partners”. When it comes to claiming the travelling expenses, the assessee travels as director in STPL (i.e. the assessee) to attend the business meetings, yet the assessee claims to have actually met the potential business partner in a different capacity, i.e. as a representative of Preroy AG, and seeks a deduction for fees paid to Preroy AG in respect of the same. The same is the position with respect to almost all the invoices. Take for example, invoice no. 11 for US $ 10,000 with the narration as “negotiation in respect of extending relationship between OKS- Munich and Inchem, to include OKS- India” which “make available to OKS India speciality gear oil products not available from existing technology partners”. This bill is supported by SKP‟s boarding passes at Zurich and Munich ad report on Inchem visit on 18th August 1994. In the details of travelling expenses, however, SKP has justified his Germany trip, probably with a stopover at Zurich, on the ground that he “represented STPL at business meetings with joint venture partners in Germany”. When SKP was representing the assessee in the meeting with the joint venture partners, there cannot be any question for the payment of the same presence, of the same person, to Preroy AG as well. The description of services rendered in the invoices does not, therefore, meet our approval.
We have also noted that the description of services, in the agreement dated 2nd January 1995 entered into by the assessee with the Preroy AG- a copy of which has been placed before us in the paper-book, is vague. Clause A2 defines the “services” as “any or all the services envisaged to be provided by PAG under this agreement”. Cause C1 and C2 further describes deals with the services as follows: C1. PAG shall render any or all the services under this agreement at any place outside the territory of the Republic of India, depending on the requirements of STPL. C2. PAG shall make endeavour to locate new business opportunities and partners of STPL and recommend proposals for 10 Stock Traders Pvt. Ltd.
new projects, and negotiate, coordinate with existing and new joint venture partners or technology transfers, equity participation etc, and secure their support for, and approval of, new business strategies and policies, provided however that the payment for fees for the services rendered by PAG shall be determined in accordance with the compensation clause of this agreement and shall not, in any manner, be affected either by the success or the failure of a project, strategy or business approach recommended by PAG.
As regards the compensation for these services, we find that the agreement merely states, at clause E 1, that “for the services rendered by PAG under this agreement, STPL shall pay fees to PAG at rates to be agreed by the parties on a case to case basis” and that “the fees in respect of any assignment will be agreed upon by the parties before PAG commence work on the said assignment”. There is, however, no evidence lead before us which suggests that the fees for any assignment was agreed to before any assignment commenced. There is hardly any basis for the billing work done. There seems to a charge of US $ 10,000 on every billing point. There is no evidence for any work done by a person other than SKP and the SKP has done this work, during his visits abroad, in the capacity of director in the STPL (i.e. the assessee)- as is clearly discernible from the details of foreign travelling expenses on record. The justification for the impugned payment does not, in our considered view, does not exists, as there are no independent services rendered by the assessee. Learned counsel for the assessee has laid lot of emphasis on the contention that the assessee was in the business of making investments and, therefore, even expenses incurred in connection with the business of his subsidiary, OKS India , will also be eligible for deduction as these expenses are to protect his investment. There does not seem to be any issue with the legal principles embedded in this proposition but this proposition will be relevant only when we come to a conclusion that legitimate and genuine business expenses are so incurred for the services rendered by Preroy AG. We are yet to reach this stage. As there are no independent services rendered by Preroy AG, in our opinion, it is wholly irrelevant whether the services, for which billing is done by Preroy AG, are for the purposes of business of the assessee. As regards learned counsel‟s contention that the income in question, in the hands of Preroy AG, has been brought to tax in India, and, therefore, it cannot be said that no services are rendered, we are of the view that merely because an income has been taxed in the hands of recipient of an income, does not mean that it‟s a deductible expenditure in the hands of the person making the payment. The deduction is required to be examined and 11 Stock Traders Pvt. Ltd.
adjudicated upon in accordance with the law, and, when we do so, we donot find legally sustainable merits in the claim of the assessee.”
On a careful reading of the aforesaid order of the Tribunal we have noticed that the Bench has decided the issue against the assessee after considering almost identical arguments of the assessee as was advanced before us. Notably, the aforesaid decision of the Tribunal was subsequently followed by the Tribunal while deciding assessee’s appeals on identical issue in assessment years 1998–99 and 1999–2000, vide ITA no.4493/Mum./2003, dated 11th July 2018 and ITA no.4473/Mum./2003, dated 11th July 2018, respectively. Thus, as could be seen from the aforesaid facts, while deciding identical issue in assessee’s own case in the preceding assessment years the Tribunal has upheld the disallowance made by the Assessing Officer. As regards the decision cited by the learned Counsel for the assessee, after careful reading of the said decision, we are of the view that the said decision having been rendered under different set of facts is not applicable to the present appeals. Therefore, respectfully following the decision of the Tribunal in assessee’s own case in the preceding assessment years, as referred to above, we uphold the disallowance made by the Assessing Officer. This ground is dismissed.
9. In grounds no.2, 3 and 6, the assessee has challenged the disallowance of the following expenditures:–
12 Stock Traders Pvt. Ltd.
Business Centre Fees paid to M/s. ` 1,39,58,800 Premchand Roychand & Sons; Towards expenditure of telephone ` 4,00,000 at Directors residence; Expenditure for earning dividend ` 1,03,55,000 income.
10. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of expenditure as referred to above, called upon the assessee to furnish necessary details and to also explain the reasonableness of expenditure claimed. As regards business service centre expenses of ` 1,39,58,800, the Assessing Officer called upon the assessee to explain why 90% of such expenditure should not be disallowed under section 40A(2)(b) of the Act as was done in the preceding assessment year. Objecting to the proposed disallowance, though, the assessee made submissions stating that the assessee has been provided services / facilities for which payment was made, however, the Assessing Officer was not convinced with the explanation of the assessee and proceeded to disallow 90% of the expenditure claimed which worked out to ` 1,25,62,920. As regards telephone expenses of ` 13,71,036, for the director, the Assessing Officer alleging that personal use of telephone cannot be ruled out, made ad–hoc disallowance of ` 4 lakh. Further, the Assessing Officer disallowed an amount of ` 1,03,55,000 under section 14A of the Act towards earning of exempt income. Being
13 Stock Traders Pvt. Ltd. aggrieved of such disallowances, the assessee preferred appeal before the learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and material on record, the learned Commissioner (Appeals) following his order passed for the assessment year 1999–2000 held that since the assessee has earned income from dividend, interest and capital gain, disallowance of expenditure has to be considered under section 14A of the Act. Still aggrieved with the aforesaid decision of the learned Commissioner (Appeals), the assessee is before us.
11. The learned Counsel for the assessee submitted, while considering identical issue in assessee’s own case for assessment year 1998–99 and 1999–2000 (supra), though, the Tribunal has upheld the decision of the first appellate authority that disallowance of expenditure has to be made under section 14A of the Act, however, the Tribunal directed such disallowance to be restricted to those investments which yielded dividend / exempt income during the year under consideration. Thus, he submitted, same direction has to be given in the impugned assessment year as well.
12. The learned Departmental Representative, though, agreed that the issue is covered by the decisions of the Tribunal in the preceding
14 Stock Traders Pvt. Ltd. assessment years, however, he relied upon the observations of the Assessing Officer.
We have considered rival submissions and perused materials on record. No doubt, the Assessing Officer has disallowed the expenditure claimed by the assessee as not allowable under section 37(1) and 40A(2)(a) of the Act. However, the learned Commissioner (Appeals) has modified the decision of the Assessing Officer by holding that the disallowance of expenditure can only be made under section 14A of the Act. While doing so, he has followed his decision in assessee’s own case for assessment year 1999–2000. As could be seen, while deciding identical issue in assessee’s own case for assessment years 1998–99 and 1999–2000 in the orders referred to above, the Tribunal, though, has agreed with the learned Commissioner (Appeals) that disallowance of expenditure has to be made under section 14A of the Act, however, the Tribunal has directed the Assessing Officer to restrict such disallowance only to the investment yielding dividend income during the relevant assessment year. There being no difference in facts in the impugned assessment year, we direct the Assessing Officer to restrict the disallowance under section 14A by following the directions of the Tribunal in appeals decided for assessment years 1998–99 and 1999– 2000. Grounds are disposed off accordingly.
15 Stock Traders Pvt. Ltd.
In ground no.4, the assessee has challenged disallowance of air travel expenses and misc. expenses claimed in respect of foreign travel for the wife of one of the directors.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed certain expenditure with regard to foreign travel of Smt. Neeta Premchand, w/o Shri S.K. Premchand, one of the directors of the assessee company, disallowed the expenditure claimed of ` 12,34,996, on the reasoning that such expenditure was not wholly and exclusively for assessee’s business. The learned Commissioner (Appeals) also confirmed the disallowance.
The learned Counsel for the assessee fairly submitted that while considering identical issue in the preceding assessment years, the Tribunal has upheld the disallowance.
The learned Departmental Representative agreed with the aforesaid submissions of the assessee.
Having considered rival submissions and perused material on record we find that expenditure of identical nature claimed by the assessee in assessment years 1995–96, 1996–97 and 1997–98 was disallowed by the Departmental Authorities. When the assessee challenged such disallowance before the Tribunal, the Tribunal also 16 Stock Traders Pvt. Ltd.
upheld the disallowance accepting the reasoning of the Assessing Officer. The same view was reiterated by the Tribunal while deciding assessee’s appeals for assessment year 1998–99 and 1999–2000 in the orders referred to above. In view of the aforesaid, we do not find any reason to interfere with the decision of the learned Commissioner (Appeals) on the issue. Ground raised is dismissed.
In ground no.5, the assessee has challenged disallowance of ` 1,03,66,600, on account of professional fees paid to Arthur Andersen.
Brief facts are, during the assessment proceedings, the Assessing Officer while verifying the details of professional fees paid found that an amount of ` 1,08,85,470, was paid to Arthur Andersen. After verifying the details / information called for in respect of the payment made, the Assessing Officer was of the view that only an amount of `5,18,870, was paid towards handling of income tax matters, hence, is allowable. As regards the balance amount of ` 1,03,66,600, the Assessing Officer observed that such payment was in connection with acquiring a new business viz. Permacel Division from Johnson and Johnson Ltd. Thus, holding that fees paid to Arthur Andersen is not at all linked to the existing business, he disallowed the amount of ` 1,03,66,600. The assessee challenged the disallowance before the first appellate authority.
17 Stock Traders Pvt. Ltd.
The learned Commissioner (Appeals), while deciding the issue, held that the disallowance has to be made under section 14A of the Act.
The learned Counsel for the assessee submitted that the business of the assessee is making investment in projects. Therefore, before making investment, assessee has to carry out due diligence to ensure the safety of the investment to be made. Referring to the nature of payment made as narrated by the Assessing Officer in Para–9 of the assessment order, the learned Counsel for the assessee submitted that the payment made to Arthur Andersen was towards due diligence to ensure the security of the investment to be made. Therefore, it cannot be said that the expenditure incurred was not linked to the existing business. However, ultimately, the learned Counsel for the assessee submitted, since the learned Commissioner (Appeals) has held that disallowance has to be made under section 14A of the Act, let such disallowance be restricted to the investments yielding exempt income during the relevant previous year. In this context, he relied upon the decisions of the Tribunal for the assessment year 1998–99 and 1999– 2000 (supra).
The learned Departmental Representative relied upon the observations of the Assessing Officer.
18 Stock Traders Pvt. Ltd.
We have considered rival submissions and perused materials on record. Contesting the disallowance made by the Assessing Officer, though, the learned Counsel for the assessee had argued at some length that the expenditure incurred is allowable as business expenditure, however, ultimately, he has submitted that a direction may be issued to the Assessing Officer to restrict the disallowance to be made under section 14A of the Act to the investment yielding exempt income during the relevant previous year. Undisputedly, the learned Commissioner (Appeals) while deciding the issue relating to the aforesaid disallowance has held that the disallowance has to be made under section 14A of the Act instead of section 37(1) of the Act. As noted earlier, while deciding assessee’s appeals for assessment year 1998–99 and 1999–2000 (supra), the Tribunal, though, has upheld the decision of the learned Commissioner (Appeals) to the effect that the disallowance of expenditure has to be made under section 14A of the Act, however, the Tribunal has directed to restrict such disallowance to the investments yielding exempt income during the relevant previous year. Respectfully following the aforesaid decisions of the Tribunal in assessee’s own case, though, we hold that disallowance of expenditure has to be made under section 14A of the Act, however, we direct the Assessing Officer to restrict such 19 Stock Traders Pvt. Ltd.
disallowance to the investments yielding exempt income during the relevant previous year.
Ground no.7, being general in nature is dismissed.
In the result, assessee’s appeal is partly allowed. ./2004 Revenue’s Appeal – A.Y. 2000–2001
Grounds no.1 and 2, are in respect of professional fees paid to PAG. While deciding ground no.1, in assessee’s appeal in ITA no.1820/Mum./2004, in the earlier part of the order, we have upheld the disallowance of professional fee paid to PAG. Therefore, separate adjudication of these grounds is not required. Accordingly, these grounds having become infructuous are dismissed.
In ground no.3 to 7, the Department has challenged the decision of the learned Commissioner (Appeals) in holding that the disallowance of various expenditures has to be made under section 14A of the Act. While deciding ground no.2 to 6 of assessee’s appeal in Mum./2004, we have upheld the aforesaid decision of the learned Commissioner (Appeals) with certain modification. In view of the aforesaid, the grounds raised by the Department are dismissed.
In the result, Revenue’s appeal is dismissed.
20 Stock Traders Pvt. Ltd.
./2004 Assessee’s Appeal – A.Y. 2001–02
In ground no.1, the assessee has challenged disallowance of professional fees paid to PAG amounting to ` 2,44,43,695.
This ground is identical to ground no.1 of ITA no.1820/Mum./2004. Following our decision therein, we uphold the disallowance made by the by dismissing the ground raised.
In ground no.2, 3 and 6, the assessee has challenged disallowance of various expenditures.
These grounds are identical to grounds no.2, 3 and 6, of ITA no. 1820/Mum./2004.
In view of our decision therein, we direct the Assessing Officer to restrict the disallowance under section 14A of the Act to the investment yielding exempt income during the relevant previous year. Grounds are partly allowed.
In ground no.4, the assessee has challenged disallowance of foreign travel expenses for the wife of the Director.
This ground is identical to ground no.4, of ITA no.1820/Mum./ 2004. Following our decision therein, we dismiss the ground raised by the assessee.
21 Stock Traders Pvt. Ltd.
In ground no.5, the assessee has challenged disallowance of professional fees paid to Arthur Andersen
This ground is identical to grounds no.5 of ITA no.1820/Mum./2004. Following our decision therein, we direct the Assessing Officer to restrict the disallowance under section 14A of the Act to investments yielding exempt income during the relevant previous year.
Ground no.7, being general in nature is dismissed.
In the result, assessee’s appeal is partly allowed. ./2004 Revenue’s Appeal – A.Y. 2001–02
The effective grounds raised by the Revenue are in relation to disallowance of professional fees paid to PAG.
While deciding ground no.1, of ITA no.1820/Mum./2004, we have upheld the disallowance of professional fees paid to PAG. In view of our decision therein, these grounds have become infructuous, hence, dismissed.
In the result, Revenue’s appeal is dismissed.
22 Stock Traders Pvt. Ltd.
./2007 Assessee’s Appeal – A.Y. 2003–04
In ground no.1, the assessee has challenged disallowance of professional fees paid to PAG.
In view of our decision in ground no.1, of ITA no.1820/Mum./ 2004, this ground is dismissed.
In grounds no.2 and 3, the assessee has challenged the disallowance of business centre fees paid to M/s. Premchand Roychand & Sons and telephone expenses relating to Directors’ residence.
While the disallowance of the aforesaid expenditures by the Assessing Officer is in tune with the assessment orders passed for the preceding assessment years, the learned Commissioner (Appeals) following his decision in assessment years 1998–99 to 2001–02 directed the Assessing Officer to make proportionate disallowance under section 14A of the Act.
The learned Counsel for the assessee submitted that the aforesaid decision of the learned Commissioner (Appeals) is wholly misconceived as the dividend income was taxable in the impugned assessment year. Therefore, the provisions of section 14A of the Act would not be applicable. Contesting the disallowance on merit, the learned Counsel for the assessee submitted, insofar as business
23 Stock Traders Pvt. Ltd. service centre expenses are concerned, the assessee has furnished cogent documentary evidences before the Assessing Officer to demonstrate that the payment of fee was entirely for the purpose of assessee’s business and reasonable. He submitted, the assessee has brought on record relevant facts to establish the need for hiring the business service centre. He submitted, in the given circumstances, the business service centre fulfilled the requirement of the assessee and was in the best interest of the business as other alternative options available to the assessee could have been more expensive. He submitted that before making disallowance, the Assessing Officer has not discharged his duty in establishing that the conditions of section 40A(2)(a) of the Act, are fulfilled. Thus, he submitted, the disallowance made is unjustified. As regards disallowance made out of telephone expenses, the learned Counsel for the assessee submitted, since the expenditure incurred relates to a company there cannot be any disallowance on account of personal expenditure. In this context, he relied upon the following decisions:– i) I&I Electricals Pt. Ltd. v/s ITO, [2000] 112 Taxman 195 (Jaipur); ii) DCIT v/s Gujarat Filaments Ltd., [2000] 108 Taxman 287 (Ahd.).
The learned Departmental Representative submitted, the business centre fee having been paid to arelated party, disallowance
24 Stock Traders Pvt. Ltd. made under section 40A(2)(a) of the Act is justified. As regards telephone expenses, he submitted, the case laws cited by the learned Counsel for the assessee being factually distinguishable cannot be applied. Thus, he justified the disallowance made.
We have considered rival submissions and perused materials on record. As could be seen, the Assessing Officer has disallowed 90% of the payment made by holding such payment to be unreasonable and excessive as per section 40A(2)(a) of the Act. Similarly, he has disallowed 1/3rd of the telephone expenses relating to the director’s residence alleging personal use. Whereas, the learned Commissioner (Appeals) following his earlier orders, has directed the Assessing Officer to make proportionate disallowance under section 14A of the Act. It is the contention of the learned Counsel for the assessee before us that in the impugned year dividend income was not exempt. Hence, there is no question of applicability of section 14A of the Act in respect of expenditure incurred. In our view, the aforesaid contention of the learned Counsel for the assessee needs consideration. Moreover, while disallowing 90% out of business service centre expenses, the Assessing Officer has invoked provisions of section 40A(2) of the Act by treating the expenditure as unreasonable and excessive. A perusal of the assessment order reveals that before invoking section 40A(2)(a) of the Act, the Assessing Officer has not brought any material on 25 Stock Traders Pvt. Ltd.
record to establish that the payment made by the assessee is unreasonable and excessive having regard to the market rate of such goods / services or having regard to the business needs of the assessee. Therefore, without bringing any material on record, disallowance made by treating the expenditure as unreasonable and excessive under section 40A(2) of the Act, in our view, is not justified.
The learned Counsel for the assessee through certain documentary evidences submitted in the paper book made an attempt to demonstrate that the payment made towards business service centre was not only reasonable but looking at the business needs of the assessee. In our view, the aforesaid claim of the assessee requires due consideration qua the evidences brought on record. Since, the aforesaid exercise has not been done either by the Assessing Officer or by the learned Commissioner (Appeals), we are inclined to restore the issue to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. As regards disallowance of telephone expenses, we are also inclined to restore the issue to the Assessing Officer for fresh adjudication keeping in view the relevant case laws and after due opportunity of being heard to the assessee. Grounds raised are allowed for statistical purposes.
26 Stock Traders Pvt. Ltd.
In ground no.4, the assessee has challenged foreign travel expenses incurred for the wife of the Director.
This issue is identical to ground no.4 of ITA no.1820/Mum./2004. Following our decision therein, we dismiss the ground raised by the assessee.
In the result, assessee’s appeal is partly allowed for statistical purposes.
To sum up, assessee’s appeal in ITA no.1820/Mum./2004 and ITA no.9029/Mum./2004 are partly allowed; assessee’s appeal in ITA no.229/Mum./2007 is partly allowed for statistical purposes; Revenue’s appeal n ITA no.1501/Mum./2004 and ITA no.8942/Mum./ 2004 are dismissed. Order pronounced in the open Court on 31.10.2018