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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri B.R.Baskaran & Shri Ravish Sood
O R D E R
Per Ravish Sood, JM
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-2, Mumbai, dated 04.07.2016, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 30.01.2015 for A.Y 2012-13. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not examining the need for abnormal i n c r e as e i n s al a r y f r o m R s . 2 0, 5 2, 2 1 1 / - ( A . Y 2 0 1 1 - 1 2 ) t o Rs.45,84,985/- (A.Y 2012-13) especially when assessee did not have any turnover.
2. On the facts and in the circumstances of the case and in law, the id. CIT(A) erred in taking cognizance of the fact that salary was increased abnormally only to decrease the tax liability on account of income of Rs.2.5 crores disclosed during survey. The appellant craves leave to add to, amend or withdraw the aforesaid ground of appeal.”
P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd.
Briefly stated, the assessee is a group concern of M/s Ushdev International Ltd. (for short „UIL‟). Survey proceedings under Sec. 133A were conducted on 20.09.2011 in the case of M/s UIL and its group companies. The UIL group is engaged in the business of trading in imported pig iron, steel scrap and non-ferrous metals. During the course of the survey proceedings, it was admitted by the managing director of M/s UIL that the group entities were in receipt of “cash commissions” which were not reflected in the books of accounts. In the backdrop of the aforesaid admission, a disclosure of an amount of Rs.25,00,00,000/- was made towards the undisclosed income of the UIL Group Concerns. Further, an additional income of Rs.5,00,00,000/- was also offered on account of any discrepancy arising on account of purchases, sales or expenses debited in the books of accounts of the UIL group concerns.
The assessee company had filed its return of income for A.Y. 2012-13 on 21.09.2012, declaring total income at Rs.1,54,85,419/-. In the backdrop of the disclosure of undisclosed income the assessee had in its return of income for the year under consideration i.e A.Y. 2012-13 offered an amount of Rs.1,50,00,000/- (out of Rs.25,00,00,000/- disclosed by the UIL group) as its undisclosed income from cash commissions, and a further amount of Rs.1,00,00,000/- to cover up any other discrepancy. Subsequently, the return of income filed by the assessee was selected for scrutiny assessment under Sec.143(2).
The A.O while framing the assessment observed that the assessee had disclosed an additional income of Rs.2.5 crores, which formed part of the disclosure made by the UIL group during the course of the survey proceedings. However, it was noticed by the A.O that the assessee had claimed to have incurred a business loss of Rs.95,14,581/-, which was set off against the aforesaid disclosure of additional income of Rs.2.5 crores and the balance amount was offered for tax. Further, it was observed by the A.O that on the basis of the aforesaid facts the assessee had claimed a refund of Rs.35,82,925/-. On a perusal of the „balance sheet‟ of the assessee for the P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. year under consideration, it was observed by the A.O that the assessee had not earned any income from trading activity. Rather, it was noticed by him that the only credit in the profit and loss account was „other income‟ of Rs.23,68,993/-. On further deliberations, it was gathered by the A.O that the aforesaid „other income‟ comprised of an interest income of Rs.12,67,869/-, whereas the balance figure of Rs.11,01,124/- was on account of the writing off the sundry balances. It was observed by the A.O that against the aforesaid “other income” the assessee had debited total expense of Rs.1,18,81,210/-, and resultantly claimed a business loss of Rs.95,14,581/-. Further, it was noticed by the A.O that the assessee had not made any purchases or sales during the year. On a perusal of the expenses, it stood revealed that the same primarily comprised of “employee emoluments” of Rs.45,84,958/- and “interest on CC A/c” of Rs.71,85,492/-. The A.O was of the view that now when the assessee had not done any business during the year, thus it was beyond comprehension as to how it could have incurred such huge expenses. In order to seek clarity on the issue under consideration, the A.O called upon the assessee to explain as to why the interest expenditure may not be disallowed. Further, the assessee was directed to furnish employee vise details of salary along with the provident fund payments and the nature of services rendered by the respective employees. The reply filed by the assessee to impress upon the A.O that the balance expenses were incurred in the course of its business, however did not find favour with him. The A.O was of the view that as the assessee had not carried out any business during the year, thus the interest payment of Rs.71,85,492/- claimed by it as an expense was not to be allowed in its hands. In so far, the salary expense of Rs.45,84,958/- was concerned, the same was disallowed by the A.O by characterising the same as a bogus claim raised by the assessee on the basis of an afterthought. On the basis of his aforesaid observations the A.O assessed the income at Rs.2,72,53,869/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. was persuaded to accept its claim that no disallowance of salary of Rs.45,84,958/- was liable to be made. The CIT(A) finding favour with the contentions advanced by the assessee as regards the allowability of the salary expenses of Rs.45,84,958/-, observed as under:
6.7 I am of the considered opinion that the temporary cessation of the business activities does not disentitle an assessee to claim the expenditure which are necessary for keeping the company alive and for the prospects of getting new business in future. 6.8 Also, the payments to staff as stated by the appellant for servicing outstanding debts also appears to be true. The assessing Officer himself has pointed out in the order that the outstanding debtors and creditors have gone down considerably till A.Y 2013-14. Without keeping employees, I find it difficult to believe that the appellant could have recovered such outstanding debtors or cleared payments to outstanding creditors.
Further, the CIT(A) was also in agreement with the claim of the assessee that no disallowance of the interest expenditure of Rs.71,85,492/- was called for in its hands. The CIT(A) finding favour with the claim of the assessee as regards the allowability of the interest expenditure as was debited by it in the profit and loss account, observed as under:
“5.7 I have carefully perused the submission made by the Appellant. The Appellant has rightly pointed out that the interest expenditure debited to the P&L A/c cannot be regarded as a prior period expenditure in the absence of any omission or mistake in preparation of the books of accounts. Temporary suspension of business will not eligible to claim interest expenditure is not a justifiable one, accordingly appeal is allowed. 5.8 The second contention raised by the Appellant is that the interest expenditure incurred pertains to the borrowings which were utilized for the purpose of carrying out business transactions. It is worthwhile here to mention that carrying of business is a systematic set of activities. In the current year, the Appellant is said to have conducted follow-up of the recovery and payment in relation to the outstanding balances of debtors and creditors. Such outstanding balances have resulted out of trading activities carried out in preceding year i.e. relevant to AY 2011-12. For the purpose of clearing outstanding balances of the creditors, the cash credit facility is used. 5.9 The Assessing Officer has failed to point out as to how the borrowings have been diverted for non-business purpose. The main argument of the Assessing Officer seems to be that there is no matching income in this year. 5.10 The argument of the Assessing Officer regarding no income offered to tax during the year does not seem to be entirely correct. On perusal of the computation of income filed in the paper-book, it appears that the business income of Rs.1,54,85,419/- is offered to tax. The same is after offering of Rs.2.5 crores as per the statement recorded of Shri Prateek Gupta. The cash commission as offered by the Appellant forms part of the business income in the computation of income. The Assessing Officer has accepted this computation of income. Accordingly, the argument of the Assessing Officer that no income was earned during the year does not hold good.
P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. 5.11 Thus, based on the submission made before me and on perusal of the case- laws relied by the Appellant, I am of the considered opinion that the borrowings is not proved to be used for non-business purpose and the basic condition as stipulated u/s 36(1)(iii) that the borrowings should have been used for business purpose appears to be satisfied. 5.12 In the rebuttal, the Appellant has also made a third contention that there is only a temporary suspension of the business activities. The AR have submitted the financial statements for the year ended March'14 wherein the Appellant has made a T/O of Rs. 5.37 crores. In his submission made during the course of assessment proceedings, he had relied upon several Court decisions wherein it was held that if during the period of lull or inactivity, an assessee has kept its apparatus alive, it would be regarded as continuing the business activities and the expense/loss suffered by it would be allowed as a business loss. A temporary discontinuance of business may give rise to an inference that a business is passing through a lean period of transition and it could be revived if proper circumstances arise. 5.13 In the case of Variavan Chettiyar Vs. CIT 72 ITR 114 (Mad.), Madras High Court was held that:- “The company may not obtain or be able to execute a single business contract for months and yet it may be deemed to carry on its business, if during the period of lull and inactivity it is kept alive and if it retains its registered office and holds meetings. It is not necessary that a business to be in existence should have work all the time. There may be long intervals or inactivity and a concern may still be a going concern, though it may for some time be quiet and dormant. The mere fact that a businessman has not been able to obtain a contract and the business has for some time been in that sense dormant would not mean that it has ceased to exist, if the assessee continues to maintain an establishment and incur expenses in the expectation that the work would come and the business would be successful. How long he shall remain in the hope and in what manner he must carry on his work to gain success is primarily his own concern. The mere fact that for some time he is not able to secure a contract or do the work which he set out to do should not disqualify him from pleading that the expenditure that he had incurred was expended for the purpose of his business.” 5.14 I am inclined to agree with this contention of the Appellant as well. The Appellant has clearly proven that there was only a temporary suspension of business which the Appellant was able to revive it in financial year ended Mar'14 i.e. relevant to A.Y 14-15. Therefore, the expenses debited to P&L A/c which is essentially incurred for keeping the business conditions alive should be allowed as deduction from total income. 5.15 Therefore, the disallowance of interest of Rs.71,85,492/- made by the Assessing Officer is hereby deleted and Ground no 1 raised by the Appellant is allowed.” On the basis of the aforesaid deliberations the CIT(A) deleted the addition /disallowance of the salary to employees and the interest expenditure, and allowed the appeal.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short „D.R‟) took us through the order of the A.O in context of the issue P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. under consideration. It was the contention of the ld. D.R that the assessee had deliberately debited bogus expenses in order to facilitate claim of the refund of the taxes deposited by it. The ld. D.R drew our attention to the expenses debited by the assessee in its profit and loss account for the year under consideration (Page 2) of assesses „Paper book‟ (for short „APB‟).
Per contra, the ld. Authorized Representative (for short „A.R‟) relied on the order passed by the CIT(A). It was submitted by the ld. A.R that the assessee company was incorporated on 04.08.2010, and was thus in existence only for a period of 8 months during the immediately preceding year i.e A.Y 2011-12. The ld. A.R averred that the payments made to neither of the employees fell within the sweep of Sec.40A(2)(b) of the Act. The ld. A.R took us through a „Chart‟ wherein the comparative details of the employee cost for the year under consideration as against that for the immediately preceding year viz. A.Y. 2011-12 stood reflected. In order to justify the increase in the employee cost, the Ld. A.R explained the same on employee vise basis. The ld. A.R explaining the comparative increase in the emoluments being paid to Shri Dhaval Shah, vice president of the company, submitted that he was the key person responsible for preparing the strategy for reviving the business of the assessee company. It was submitted by the ld. A.R that the business of the assessee had picked up in the succeeding years only because of the diligent efforts put in by Shri Dhaval Shah. In order to fortify his aforesaid claim the ld. A.R drew our attention to the financial results of the assessee for the succeeding years, which revealed that the said years had witnessed substantial sales. Interestingly, it was submitted by the ld. A.R that though the A.O had drawn adverse inferences as regards the allowability of the aforesaid expenses on the ground that the business of the assessee was not in existence during the year under consideration, however the remaining expenses were duly allowed by him. Further, it was submitted by the ld. A.R that though the claim of the salary expenses by the assessee was in order, however even otherwise as the assessee had made a disclosure of Rs.1,00,00,000/- to cover up any other discrepancy in its books of account, thus on the said count also no separate P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. addition of the salary expenses and interest expenditure was called for in its hands. In support of the contention that in a case where the business of the assessee is temporarily stalled, then the expenses incurred for maintaining the basic infrastructure i.e payment of salaries and wages to employees and incurring other essential and fixed expenses would be allowable, reliance was placed by the ld. A.R on the following judicial pronouncements: (i) DCIT Vs. Medley Pharmaceuticals ltd. (ITA No. 1795/Mum/2004; dated 14.03.2007) (ii) Chunnilal & Co. (TM) (P) Ltd Vs. ITO, Ward-8 (1)(2), Mumbai (2005) 4 SOT 309 (Mum.) (iii) ACIT, Circle 4(1), New Delhi Vs. JNG Builders (ITA No.3873/Del/2011 ; dated 02.08.2013). In the backdrop of the aforesaid facts of the case and support taken from the aforesaid judicial pronouncements, the ld. A.R submitted that no adverse inferences as regards the allowability of the salary expenses incurred by the assessee in the normal course of its business were liable to be drawn. Alternatively, it was submitted that even otherwise as the assessee had already made a disclosure of an additional income of Rs.1,00,00,000/- in context of the discrepancies, if any, thus for the said reason also no separate disallowance was liable to be made.
We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find substantial force in the contention of the ld. A.R that as there was a lull in the business, therefore, for the said reason no purchases or sales were carried out by the assessee during the year under consideration. Admittedly, a similar position continued in the immediately succeeding year, which too was witnessed by an absence of any purchase/sale transactions. However, the contention of the ld. A.R that efforts were being put to revive the business can safely be gathered from the fact that in the succeeding years the business of the assessee was back on the track and had witnessed substantial purchase and sale transactions.
We have deliberated on the contentions advanced by the authorized representatives of both the parties and have given a thoughtful P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. consideration to the issues before us. We are persuaded to subscribe to the claim of the ld. A.R, that where due to certain compelling reasons emerging from a temporary lull the assessee was unable to transact any business during the year, the expenses incurred to maintain the entity and such other expenses for revival of the business cannot be disallowed. Alternatively, we are of the considered view that now when the assessee had made a separate disclosure of an additional income of Rs.1,00,00,000/- to cover any discrepancy, thus for the said reason, even if the aforesaid claim of expense of the assessee was to be dislodged by characterising the same as bogus, no separate disallowance to the extent of the aforementioned disclosure of Rs.1,00,00,000/-was liable to be made in its hands. We have perused the order of the CIT(A) and find that he had by way of a well reasoned order deleted the disallowance of the expenses made by the A.O.
We shall now advert to the contention of the revenue that the CIT(A) had erred in not examining the abnormal increase in salary from an amount of Rs.20,75,211/- in A.Y. 2011-12 to an amount of Rs.45,84,958/- during the year under consideration viz. A.Y 2012-13. We are of the considered view that the A.O while drawing averse inferences on the basis of the aforesaid comparative analysis had failed to comprehend that as the assessee company was incorporated on 04.08.2010, thus the latter was in existence during the preceding year only for a period of 8 months. We have also deliberated on the contentions advanced by the assessee as regards the reason leading to an increase of the salary of Sh. Dhaval Shah, vice president of the assessee company, and find substantial force in the same. It is the contention of the ld. A.R that as the assessee company was in doldrums because of temporary lull in its business, therefore, extra burden was shifted on Sh. Dhaval Shah for reviving the business. The ld. A.R had submitted before us, that it was because of the said additional burden and responsibility cast upon Sh. Dhaval Shah that his salary was in all fairness increased by the assessee company during the year. We have given a thoughtful consideration to the aforesaid contentions of the ld. A.R and are persuaded to subscribe to the same. Further, as regards the salary of two P a g e | Dy. Commissioner of Income Tax-1(1)(2) Vs. M/s G.G. Trading Pvt. Ltd. operation assistants viz. (i) Ms. Archana Devale; and (ii) Shri Dattatray, it was submitted by the ld. A.R that the said persons were new employees who were substituted in place of two old employees viz. (i) Ms. Hetal Parmar; and (ii) Ms. Neeta Desai. Similarly, another employee i.e. Mr. Manisha Menezes had joined during the year as an accounts assistant, in place of an old employee i.e. Ms. Sonali. The ld. A.R further submitted, that another employee i.e. Mr. Grishma, AGM finance had joined during the year in place of Mr. Komal Ahuja, DGM finance who had left the job. The ld. A.R had further explained that as due to survey action the administrative work of the tax manager had substantially increased, therefore, during the year under consideration his salary under the changed circumstances was increased. Further, another employee i.e. Ms. Kavita Advankar, Tax Assistant was employed to assist the tax manager. Lastly, the ld. A.R submitted that during the year due to business expediency two relationship managers were employed by the assessee company i.e. (i) Ms. Archana Munde; and (ii) Mr. Prajakata More.
We have deliberated at length on the aforesaid explanation advanced by the ld. A.R, and find that he had explained the purpose and the reason for employing new employees, as well as giving a raise to the salary of the existing employees. We are not oblivious of the fact that the revenue cannot step into the shoes of an assessee and seek justification for incurring of the expenses in a specific manner, as the same remains within the realm of the assessee to decide as to how the business is to be run. However, in the case before us we find that the assessee had furnished complete details along with the justification for payment of the emoluments to its employees. In the backdrop of the aforesaid facts, we are unable to persuade ourselves to subscribe to the adverse inferences drawn by the A.O as regards the increase in the salary expenses by the assessee company during the year under consideration. We thus, decline to accept the contention advanced by the revenue that the CIT(A) has erred in not examining the abnormal increase in the salary expense of the assessee company during the year