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Before: Shri H.S. Sidhu & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: These are cross appeals filed by the Revenue and assessee against the order dated 21.02.2013 of the ld. CIT (Appeals)-23, New Delhi for the assessment year 2009-10. The grounds raised in respective appeals are as under :
Ground raised in assessee’s appeal :
ITA Nos. 2791 & 2491/Del./2013 2
“On facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred in law in upholding the addition of Rs. 61,24,633/- u/s 40(a)(ia) of the Act made on account of non deduction of TDS from interest paid to NBFCs.”
Grounds raised in Revenue’s appeal: “1. On the facts and circumstances of the case, the Ld CIT (A) has erred in deleting addition of Rs. 7,74,723/- made by the AO for non business expenses in the absence of bills and vouchers.
2. On the facts and circumstances of the case, the Ld CIT(A) has erred in deleting disallowance of Rs. 72.08.010/- made by the AO under head Petrol, Diesel and CNG expenses in absence of documentary evidence in respect of these expenses.
3. On the facts and circumstances of the case, the Ld CIT(A) has erred in deleting disallowance of Rs. 25.422415/- being prepaid insurance expense.
4. The appellant craves leave to add alter or amend any of the grounds of appeal before or during the course of the hearing of the appeal.”
2. We first take up the appeal of the assessee. The brief facts and background of the case qua the issue involved are that the assessee is engaged in the business of car rental services mainly for corporate clients and multinational companies. The Ld. Assessing Officer noted that the assessee has debited expenses in the P&L account amounting to Rs. 1,23,52,682/- on account of interest paid. Out of the said expenses amounts aggregating to Rs. 61,24,633/- was paid to various NBFC companies from whom the assessee had taken loan for the purchase of cars. However on such interest payment the assessee had not deducted TDS and accordingly, held that the expenses is to be disallowed in terms of provision of section 40(a)(ia).
ITA Nos. 2791 & 2491/Del./2013 3
Before the ld. CIT (Appeals), the assessee took a plea that the assessee did not deduct TDS on the interest paid on a bona fide belief that such payment of interest is akin to payment of interest to scheduled banks on which no TDS is required to be deducted. It was further contended that all these companies must have computed their due tax including the interest paid and therefore, in terms of second proviso to section 40(a)(ia) inserted by the Finance Act 2012 with effect from 1.4.2013, no disallowance can be made if the payee has included the said amount in his/its return of income. The said amendment should be treated as retrospective as it is curative and remedial in nature. However, the Learned CIT (Appeals) confirmed the said disallowance, firstly on the ground that the NBFC cannot be compared or treated at par with banking companies to which Banking Regulation Act 1949 applies; and secondly, amendment brought in the statute cannot be given retrospective effect.
Before us the ld. AR of the assessee had filed petition for admission of additional evidence under Rule 29 stating that out of the following seven companies, - i. Apeejay finance Ltd. Rs. 46,789/- ii. Cholamandalam DBS Finance Ltd. Rs. 9,21,059/- iii. GE Capital Tfs Ltd. Rs. 15,30,745/- iv. L & T Finance Ltd. Rs. 7,16,331/- v. Reliance Capital Ltd. Rs. 21,55,824/- vi. Sundram Finance Ltd. Rs. 5,36,190/- vii. Tata Capital Ltd. Rs. 8,25.270/- Total: Rs. 61,24,633/- The assessee has been able to procure certificates from 3 parties in Form No. 26A as required under proviso to section 201(1) and in other cases also, the assessee is under process to procure the requisite certificates. All these
ITA Nos. 2791 & 2491/Del./2013 4 companies are regularly assessed to tax and have shown the interest payment as their income and have also filed their return of income. Once that is so, then in view of the second proviso to section 40(a)(ia) and also first proviso to section 201(1), the assessee cannot be treated as assessee in default and no disallowance u/s 40(1)(ia) can be made. So far as the applicability of the said provisos with retrospective effect, he submitted that now this issue stands covered in favour of the assessee by the judgment of the Hon'ble High Court of Delhi in the case of CIT vs. Ansal Land Mark Township (P) Ltd. reported in 377 ITR 365, wherein it has held that the provisos inserted by the Finance Act 2012 in section 40(1)(ia) and 201(1) are declaratory and curative in nature and therefore have to be given retrospective effect from 1.4.2005. Along with the said petition the assessee has also filed certificates from Chartered Accountant of the respective companies.
On the other hand the Ld. DR submitted that these are purely additional evidences and that to be only in respect of 3 companies, that is, the assessee has given certificates from 3 companies which too have not been verified by the Assessing Officer. Therefore, these evidences require verification at the end of the Assessing Officer.
We have heard the rival submissions, perused the relevant material on record and also the relevant findings given in the impugned order. Admittedly, the assessee under the statute was liable to deduct TDS on the interest paid to NBFCs. However, before us the ld. Counsel has taken a plea that these NBFC companies have given certificate in Form 26A certifying that they have shown interest income in their return of income filed u/s 139(1). Therefore, in view of the second proviso to section 40(a)(ia) read with first proviso of section ITA Nos. 2791 & 2491/Del./2013 5 201(1) brought by the Finance Act 2012 with effect from 1.04.2013 and 1.7.2012 respectively, no disallowance should be made. However, out of the 7 NBFC companies, the assessee could produce certificate from 3 companies and for the balance it has been stated that the assessee is in the process of procuring the same at the earliest and short opportunity should be given to the assessee to produce the same. Under these facts and circumstances and in view of the amended provisions brought by the Finance Act 2012, we are of the opinion that in the interest of justice this matter needs to be re-examined by the AO in light of the second proviso of section 40(a)(ia) read with proviso of section 201(1) which envisages that, the assessee cannot deemed to be the ‘assessee in default’, firstly, if such resident payee has furnished return of income u/s 139; secondly, has taken into account such sum for computing the income in such return of income; thirdly, has paid tax due on the income declared by him in such return of income; and lastly, the person furnishes a certificate to this effect from an accountant any such form as may be prescribed, i.e., Form No. 26A, then in such situation neither the assessee can be treated as the assessee in default nor there can be any disallowance u/s 40(1)(ia). Now it is a settled proposition of law under the jurisdiction of Hon'ble Delhi High Court that amendment brought by Finance Act 2012 in section 40(1)(ia) and 201(1) is declaratory and curative and therefore, such an amendment shall have retrospective effect from 1.4.2005. Accordingly, we are setting aside the entire matter to the file of the Assessing Officer who shall examine the matter in view of the amended provisos and the onus would be upon the assessee to produce the certificates in respect of interest paid to other NBFCs also and Assessing Officer shall examine all the certificates and decide the issue in accordance with the law. Thus, the assessee’s appeal is treated as allowed for statistical purposes.
ITA Nos. 2791 & 2491/Del./2013 6
Now we will take the revenue’s appeal. The brief facts qua the issue raised in the ground no. 1 and 2 are that, the assessee is engaged in the business of providing car rental services. He has declared income of Rs. 93,86,260/- for the A.Y. 2009-10. According to the Assessing Officer, the assessee could not produce any copies of bills and vouchers and also books of accounts in support of expenses claimed. In response to the show cause notice the assessee submitted that he has been maintaining ledger accounts and bank book in computerized system, however the bills and vouchers which were lying in the office premises got destroyed in the fire which broke on 4.1.2010. The relevant reply of the assessee before the Assessing Officer in this regard reads as under:-
“1. As submitted earlier vide our letter dated 25.11.2011 regarding the books of accounts along with bills/vouchers, we produce the Cash Book, Ledger and Bank Book as were maintained regularly by the assessee in computerized system as in the past for your kind verification. A few files containing bills of vendors were also produced. Regarding the balance bill/vouchers, it was submitted that unfortunately on 04.04.2010 at 00.30 hrs a fire was broke out at the office premises of the assessee located at Prakash House no.l, Opp. State Bank of Patiala, Mahipal Pur Road, New Delhi. It was immediately informed to the local police and local public call the fire bridge also. With the help of fire engines the fire bridge brought the fire under control. But meantime all our records, bills, vouchers and books of account which were lying in the office premises destroyed in the fire. A certified copy of the FIR lodged with the local police was also enclosed for your kind perusal. It was also submitted that the assessee’s books of accounts for the financial year ending 31.3.2009 were subject to ax audit by M/s Gupta Khurana and Sahewala, a firm of Chartered Accountants and the books of accounts along with bills/vouchers were verified by the tax auditor. The computerized backup of the books of ITA Nos. 2791 & 2491/Del./2013 7 accounts was available in a pen drive. With the help of this back up the books of accounts were retrieved.” However, the ld. Assessing Officer held that in absence of any bills and vouchers, it is difficult to allow the entire expenses. Accordingly he disallowed 25% of the following expenses:-
(i) Business promotion expenses Rs. 1,90,670 (ii) Staff welfare expenses Rs. 1,15,690 (iii) Printing and Stationery expenses. Rs. 2,50,374 (iv) Driver Training Expenses. Rs. 61,820 (v) Staff Uniform Rs. 87,790 (vi) Printing and Stationery. Rs. 2,50,374 (vii) Diwali Expenses Rs. 95,011 (viii) Soft ware expenses. Rs. 32,450 (ix) Misc. Expenses: Rs. 20,408 (x) Telephone expenses Rs. 16,60,880 (xi) Parking and Pollution expenses Rs. 2,36,987 (xii) Tour and travel Rs. 96,438 Total: Rs.30,98,892 Which works out to Rs. 7,74,723/- and the same was added to the income of the assessee.
As regards the expenses debited under the head petrol, diesel and CNG expenses which was claimed to the extent of Rs. 2,52,70,746/-, and claimed depreciation of Car at Rs. 3,16,86,533/- and repair and maintenance of vehicle at Rs. 1,51,22,819/- also, as per the AO, the assessee could not produced the copies of bills/ vouchers etc. in support of these expenses incurred. Therefore, in the absence of any documentary evidences in respect of these expenses, AO held that it would be reasonable that expenses that @10% should be disallowed out of the above expenses of Rs. 7,20,80,098/- (i.e. Rs.
ITA Nos. 2791 & 2491/Del./2013 8 2,52,70,746/- + Rs. 3,16,86,533/- + Rs. 1,51,22,819/-) which works out to Rs. 72,08,010/-.
The Learned CIT (Appeals) has deleted the aforesaid additions observing as under:- “(5) In connection with the disallowance of various expenses, it is contended that the books of accounts, retrieved from the back up available with the auditor, had been produced before the Assessing Officer, hence the finding that books of account were not produced is incorrect. It is stated that the Assessing Officer was mistaken in making adhoc disallowances without rejecting the books of account u/s 145(3), and moreover the assessment has been completed, not u/s 144, but u/s 143(3), It is contended that the appellant was hot allowed a reasonable opportunity of being heard before making of the disallowances. The appellant has furnished copies of all submissions made during the assessment proceedings including copy of FIR filed before the SHO, Vasant Kunj Police Station, on 06.04.2010 regarding fire on 04.04.2010 in which computers, printers, photocopier machine, air conditioners, office furniture, EPABX system, office files, documents, records and bills were stated to have been completely destroyed, It is considered therefore that the appellant had sufficient reason for being unable to produce the original books of account and bills/vouchers before the Assessing Officer during the scrutiny proceedings which were commenced by issue of notice u/s 143(2) dated 18.08.2010, Moreover the assessment order shows that the computerized books of account from the back up were produced before him. The fact that the books of account were available at the time of audit, which was completed on 28.09.2009, cannot be a cause for suspicion, as made out by the Assessing Officer. The Assessing Officer has not pointed out any defect in the books of account, apart from the lack of bills and vouchers in support of the expenses. The appellant has relied on the case of Addl. CIT Vs. Jay Engineering Works Ltd. (1978) 113 ITR 0389 (Del.) wherein it was held, in similar circumstances of books destroyed by fire, that the secondary evidences in the form of audited balance sheet and profit and loss account, and auditor's report, could be said to be ITA Nos. 2791 & 2491/Del./2013 9
"material" which reliance could be placed by the Income Tax authorities. Accordingly, it was held in that case that the adhoc disallowances made were contrary to the settled legal principles. I have called for and examined the details of expenditure claimed under various heads and find that there is no disproportionate change in the expenses claimed as compared to the earlier year. A net profit of 5% has been disclosed which is comparable with the net profit of 4.95% declared in the A.Y. 2008-09. It is also seen that the appellant filed the details of expenditure before the Assessing Officer on 16.12.2011 and no further queries were put to him. Hence I am in agreement with the appellant that the Assessing Officer has made disallowance of expenses on an adhoc and unsubstantiated basis. Considering these facts, I find no reason to sustain the adhoc disallowance of 25% of various administrative expenses and 10% of expenses related to running of the cars. Accordingly, the additions made of Rs. 7,74,723/- and 72,06,010/'- are deleted.”
The ld. DR submitted that in absence of any bills and vouchers being produced before the AO or maintaining appropriate books of accounts, the disallowance made by the Assessing Officer is not only reasonable but also justified on the facts and circumstances of the case. The Learned CIT(Appeals) merely relying upon the comparable expenses of the earlier years has deleted the said disallowance without appreciating that the expenses claimed for the business purpose needs to be justified through proper evidences and the onus lies heavily upon the assessee. Thus, the disallowance made by the Assessing Officer should be upheld.
On the other hand the ld. AR of the assessee submitted that so far as the observation of the Assessing Officer that the books of accounts have not been produced is not correct as they were duly produced. It was only the bills and vouchers could not be produced due to fire at the office premises. In any case all these expenses have incurred mostly through accounts payee cheques and ITA Nos. 2791 & 2491/Del./2013 10 in some matters the assessee has also confirmation from the 3rd parties. Therefore, in light of these evidences the disallowance cannot be made on ad hoc basis. Moreover, he submitted that the assessee’s case in the earlier years have been completed u/s 143(3) wherein on similar nature of expenditure no disallowance/s have been made and also rate of the net profit has also been accepted, when the trading results and net profits by and large remained the same. In support he also filed comparative chart of expenses debited to the profit and loss account for the F.Ys. 2008-09 and 2007-08 along with the copy of assessment order passed u/s 143(3) for the A.Y. 2008-09.
We have heard the rival submissions and perused the relevant material placed on record including the impugned order. For claiming any business expenditure the onus lies upon the assessee to prove that the expenses incurred is purely for business purpose and or for commercial expediency. Even though the assessee may have produced the books of accounts before the Assessing Officer, however the entries in the books of accounts needs to be substantiated in the form of bills and vouchers and or others evidences. The Learned CIT(Appeals) merely by comparing the net profit of the earlier years has deleted the said disallowance which according to us may not be the correct approach while dealing with the issue of disallowances of expenses debited and claimed as revenue expenditure. Expenses debited and claimed qua that year needs to be proven. If bills and vouchers are not available for some reasons, then other corroborative evidences like, the payments made through accounts payee cheques or through banking channels or the third party/ vendor duly confirming the transactions with evidences available with him etc. Here in this case, Ld. AR has contended that such kind of details along with the regular books of accounts have been produced, but none of the ITA Nos. 2791 & 2491/Del./2013 11 authorities have examined the same from this perspective. Accordingly, we are the opinion that the issue of disallowances of expenses should go back to the file of Assessing Officer to be examined afresh and the Assessing Officer may examine all the evidences brought on record and assessee would be at liberty to produce any such evidence to substantiate his claim. The AO after giving due opportunity to the assessee shall decide the issue afresh and in accordance with the law. Thus, ground no. 1 and 2 are treated as allowed for statistical purposes.
In ground no. 3 the revenue has challenged disallowance of Rs. 25,42,015/- being pre-paid expenses. In this regard, it has been informed by the ld. Counsel for the assessee that this issue stands squarely covered in favour of the assessee by the decision of the Hon'ble Tribunal of Delhi Bench in assessee’s own case for the assessment year 2008-09. The assessee has debited sum of Rs. 45,26,938/- in his profit and loss account which included pre paid insurance charges of Rs. 25,42,015/-. The Assessing Officer held that such pre-paid expenses on account of vehicle insurance cannot be allowed. The Learned CIT (Appeals) following the appellate order for the A.Y. 2008-09 has allowed the appeal.
We find this issue has been dealt in detail and decided by the Hon'ble Tribunal in the following manner:- “5. We have heard the Id. DR and gone through the facts of the case. Admittedly, insurance premium is paid year after year for a period of 12 months only. The benefit of premium paid in the preceding year would have been available for a portion of period in the year under consideration. As found out by the Id. CIT (A), the assessee is following consistently the same method. It is nobody’s claim that premium for a period exceeding 12 months had been claimed in the year consideration and has been paid on ITA Nos. 2791 & 2491/Del./2013 12
the basis of demand notice raised by the insurance company. In this situation, we do not find any flaw in the approach of the Id. CIT (A). Under the mercantile system of accounting, the assessee is entitled to claim deduction on the basis of incurring the liability irrespective of the date of payment. Even such liability can be claimed on the basis of provisions where such liability is not qualified. On the other hand, under the cash system of accounting, the assessee is entitled to claim deduction on the basis of payment irrespective of the date of incurring of liability. Under the mercantile system of accounting, in terms of provisions of sec. 145(1) of the Act, deduction can be claimed only if it is established that liability has been incurred in the year under consideration. The liability for payment of premium is incurred at the time of commencement of policy, which undisputedly falls in the year under consideration. The assessee has actually paid the insurance premium for a period of 12 months in the year under consideration, even though benefit of such payment may be available beyond the accounting year. Premium for insurance in respect of buildings is admissible u/s 30(c) of the Act while for plant and machinery u/s 31 (ii) of the Act. The other kinds of insurance premium are admissible u/s 36 & 37 of the Act. A similar claim of the assessee is stated to have been accepted by the AO himself in the assessment years 2003-04 to 2005-06 and 2007-08. In these circumstances, we are of the opinion that since the amount has actually been paid and was liability for the year under consideration at the commencement of policy, whichever alternative definition of the word "paid" be applicable to the case of the assessee, it has to be held that this amount was "paid" by the assessee in the year of account in question on a correct interpretation of the word "paid" as used in section 43(2) of the Act. The assessee was entitled to claim this amount as a legitimate deduction in the year of account in question and consequently in the assessment for the relevant assessment year. Here, we may refer to a decision of the Hon’ble Madras High Court in the case of CIT Vs. Southern Roadways Ltd.,282 ITR 379(Mad) in respect of similar claim in respect of telex rent, telephone rent, postal franking machine rent, rates and taxes. Hon’ble High Court, relying upon their earlier decision held that: “The above issues are squarely covered by a Division Bench decision of this court in the case of CIT v. Southern Roadways Ltd. reported in [2004] 265
ITA Nos. 2791 & 2491/Del./2013 13
ITR 404, wherein it has been held as follows (page 407): “The assessee paid a sum of Rs. 26,729 out of which a sum of Rs. 22,034 has been paid towards postage, telegram, telephone, etc., and a sum of Rs. 4,695 has been paid as rates and taxes. The assessee-company in its accounts treated them as prepaid and showed it as an asset in its balance-sheet. However, the payments were made in pursuance of demands raised by the postal, telephone and telegraph departments, etc., the same was claimed as a deduction in computing the income from business. The Assessing Officer negated the claim for deduction of such expenses. In the appeal, the Commissioner of Income-tax accepted the contention of the appellant. On second appeal, the Tribunal held that in principle, the assessee is entitled to the revenue deduction either on the basis of the 'matching principle' or with reference to section 43B of the Act, that the said sum of Rs. 26,729 is not governed by either, thereby it set aside the decision of the Commissioner of Income-tax, and to that extent, restored the order of the Assessing Officer. The case of the assessee is that they are following the mercantile system of accounting, the amount has been actually incurred for which liability to pay has arisen in that accounting year. There is no dispute in this case that the amount has been actually paid. In the statement of case also, it is stated that the assessee-company in its accounts treated the above said amount as prepaid and showed it as an asset in its balance-sheet. However, the payments were made in pursuance of demands raised by the postal, telephone and telegraph departments, etc., and claimed as deduction in computing the income from business. The expenditure actually incurred and revenue in nature relating to the business is allowable. Any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed. Hence, we are of the view that the actual expenditure incurred has to be allowed notwithstanding the method of accounting the assessee followed.” 5.1 In view of the foregoing and in the light of aforesaid decision, the assessee is entitled to claim this amount as a legitimate deduction in the year of account in question and consequently, in the assessment for the relevant assessment year. Therefore, we have no hesitation in upholding the ITA Nos. 2791 & 2491/Del./2013 14 findings of the ld. CIT (A). Thus, ground no. 1 in the appeal is dismissed.”
Thus, respectfully, following the decision of co-ordinate Bench (supra) in assessee’s own case for earlier year which admittedly is applicable on the facts of this year also, we uphold the deletion of the said disallowance by the Ld. CIT (Appeals) and accordingly the said ground no. 3 raised by the revenue is dismissed.
In the result, the appeal of the assessee is allowed for statistical purposes and Revenue’s appeal is partly allowed for statistical purposes.
Order pronounced in the open court on 28.11.2017.