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Income Tax Appellate Tribunal, KOLKATA BENCH ‘B’, KOLKATA
Before: Shri A. T. Varkey, J.M. & Dr.A.L.Saini, A.M.)
IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘B’, KOLKATA (Before Shri A. T. Varkey, J.M. & Dr.A.L.Saini, A.M.)
ITA No. 1799/Kol/2017 Asstt. Year : 2012-13 A.C.I.T, CC-3(2), Kolkata Vs M/s. Snowtex Investment Ltd. PAN: AAECS 0334C (Assessee/Department) (Respondent/Assessee)
Assessee/department by : Shri Radhey Shyam, CIT, ld.DR Respondent/assessee by : Shri S.K. Tulsiyan, Sr. Advocate, ld.AR
Date of Hearing : 30-01-2019 Date of Pronouncement: 27-02 -2019
ORDER Per Dr. A.L.Saini, A.M.:
The captioned appeal filed by the Revenue, pertaining to assessment year 2012-13, is directed against the order passed by the Commissioner of Income-tax (Appeals)-21, Kolkata in Appeal No. 47/DCIT,CC-3(2)/CIT(A)-21/2015-16, dated 02-05-2017, which in turn arises out of an assessment order passed by the Assessing Officer under section 143(3) of the Income-Tax Act, 1961 (in short, the ‘Act’), dated 27-03-2015.
At the outset, we find that the appeal of Revenue is delayed by two days and Revenue has filed condonation petitions praying for condonation of delay. On perusal of the condonation petition and in view of the concession given by the Ld. Counsel for the assessee, we condone the delay and admit the appeals for adjudication.
The grievances raised by the Revenue are as follows:-
That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law to hold that disallowance under section 14A read with rule 8D will not apply where no exempt income is received or receivable during the relevant previous year by ignoring the provision of Rule 8D that provides for computation of expenditure in respect of not only those investments income from which does not form part of total ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 1
income but also those investments income from which share not form part of total income.
That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in reducing the disallowance of Rs. 22,76,575/- to Rs. 4,831/- u/s. 14A read with Rule 8D cannot be made in a year in which no exempt income has been earned or received by the assessee without considering the CBDT's Circular no. 5/2014 dated 11.02.2014.
That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in reducing the disallowance of Rs. 22,76,575/- to Rs. 4,831/- u/s 14A read with Rule 8D by interpreting these provisions wrongly as taken up in previous two grounds.
The Ld.CIT (Appeals)-21/Kolkata erred in deleting the disallowance of Rs.4,60,032/- on account of delayed payment of employees contribution towards PF by wrongly invoking provision of section 43B which is relating to employer's contribution to PF while employee contribution to PF is governed by section 36(1)(va) read with section 2(24)(x).
The Ld. CIT(Appeals)-21/Kolkata erred in law in deleting the addition Rs.4,60,032/- invoking the provision of section 43B without taking into consideration the position of law at present that both provisions are operative and contributions have to be paid in accordance with the provisions of law as contained under section 36(1)(va) and explanation thereto read with section 2(24)(x) for Employee's contribution and under section 43B for Employer's contribution.
The Ld. CIT(Appeals)-21/Kolkata erred in law and on facts in not appreciating that the amount received towards contribution to the employee was money belonging to the employee and the assessee was not entitled to utilize the said fund and therefore, it is separately governed by the provisions of section 36(1)(va) read with section 2(24)(x).
The Ld. CIT(Appeals)-21/Kolkata erred in law in deleting the addition of Rs. 4,60,032/- without considering CBDT's circular no. 22/2015 on the issue of allowability of employees contribution to PF.
8 The Ld. CIT (Appeals)-21/Kolkata erred in law as well as on facts in deleting the disallowance of Rs. 3,59,52,944/- u/s. 36 (1) (iii) of the IT Act, 1961 made on account of interest expenses as the borrowed fund was utilized for share- application money.
9 The Ld. CIT(Appeals)-21/Kolkata erred in law as well as on facts in deleting the disallowance of Rs.30,68,635/- made on account of sale promotion expenses without considering the recent order of the A.O. ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 2
10 The Ld. CIT(Appeals)-21/Kolkata erred in law as well as on facts in deleting the disallowance of Rs. 3,86,08,000/- made on account of salary expenses, ignoring the recent order of the A.O. and relying on the assessee's submission.
11 That the petitioner craves leave to add, modify, or alter any of the above grounds of appeal, and/or adduce additional evidence if necessary at the time of hearing of appeal.
Ground nos. 1, 2 & 3 raised by the Revenue relate to disallowance made u/s. 14A, read with rule 8D of the Income Tax Rules, 1962.
The brief facts qua the issue are that the assesse company is engaged in the business of trading in shares & securities, selling and marketing of insurance products as commission agent and earned interest income against loans. During the year under consideration the assessee earned dividend income of Rs. 5,229/-, which the assessee claimed to be an exempt income u/s 10(34) of the I T Act. During the assessment proceedings, on being confronted regarding disallowance of expense relatable to earning of exempt income u/s 14A read with rule 8D, the assessee company submitted that no expense was incurred for earning exempt income and no borrowed fund was utilised for making investment in shares. However, the assessing officer rejected the explanation given by the assessee and held that assessee had failed to establish that no borrowed fund was utilised for making investment in shares. Therefore, assessing officer relying on the CBDT's Circular No. 5 of 2014, computed the disallowance u/s. 14A read with Rule 8D, which is given below:
The amount of expenditure directly relating to income = Nil which does not form part of total income 2. In a case where the assessee has incurred expenditure by = 21,40,709/- way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula: AXB/C A= amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: Rs.5,31,41,590/- B= the average value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assesse, on the first ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 3
day and the last day of the previous year i.e (Rs.45401788 + Rs.8944435)= Rs. 2,17,73,112/- 2 C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year (Rs.796451027 + Rs.552655595)= Rs.67,45,53,311/- 2 3. An amount equal to ½ % the average value of investment, = 1,35,866/- income from which does not or shall not part form of the total income, as appearing in the balance sheet of the assesse, on the first day and the last day of previous year i.e. ½ % of Rs.2,71,73,112/- 4. Total disallowance u/s. 14A 22,76,575/-
This way, the assessing officer made addition under Rule 8D(2) (ii) at Rs.21,40,709/- and under Rule 8D (2) (iii) at Rs.1,35,866/-, aggregating Rs. 22,76,575/-.
Aggrieved by the addition made by AO, the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the impugned addition made by the AO. Aggrieved, the Revenue is in appeal before us.
Learned Departmental Representative for the Revenue submitted before the Bench that assessing officer has computed the disallowance under Rule 8D (2) (ii) and under Rule 8D(2) (iii) as per the procedure laid down in these rules therefore, addition made by AO should be sustained.
On the other hand, Shri S.K. Tulsiyan, ld Counsel for the assessee submitted before the Bench that on a perusal of section 14A of the Act read with Rule 8D, it is clear that "only the expenditure incurred ‘in relation to' the exempt income can be disallowed under section 14A of the Act". In other words, the expenditure which can be disallowed is one which has relation to exempt income. In the present case, dividend was received only from HDFC CM Treasury Advantage Plan-WD. Details of investment in the said scrip is as follows:
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SI No. Name of the scrip Opening Value as Closing Value as on 01-04-2011 on 31-03-2012 1. HDFC CM Treasury Advantage Plan 18,24,636/- 1,07,639/-
The Ld Counsel also pointed out that no new investment was made during the year in the dividend yielding scrip. On the other hand, investments worth Rs.17,16,997/- were sold off during the year. Hence, no loan funds can be said to be diverted for the purpose of investment in the dividend yielding scrip and accordingly no interest expense can be disallowed in the present case. Therefore, the disallowance under Rule 8D (2) (ii) made by AO was without any base. So far the disallowance under Rule 8D (2) (iii) is concerned, only the dividend bearing securities can be considered. During the appellate proceedings, the assessee submitted the calculation of disallowance under section 14A read with rule 8D and ld CIT(A) having examined the calculation of assessee, restricted the disallowance to the tune of Rs.4,831/-. Therefore, the disallowance, if any, should be restricted to Rs.4,831/- only.
We have heard both the parties and perused the material available on record. We note that only the expenditure incurred in relation to exempt income can be disallowed u/s. 14A. In the present case, we find that the assessee received dividend income only from HDFC- CM Treasury Advantage Plan to the tune of Rs.5229/- only. We note that Coordinate Bench of ITAT, Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra).
We note that assessee company has its own funds which is more than investments made by it, therefore disallowance under Rule 8D (2) (ii) can not be made. However, disallowance under rule 8D (2) (iii) can be made only in respect to dividend bearing securities. We find that the ratio decided by the Coordinate Bench of Kolkata ITAT in the case of REI Agro ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 5
(supra) is very clear. The assessee had submitted a calculation sheet during the appellate proceedings, in which disallowance in accordance with the ratio decided in the case of REI Agro (supra) had been made at Rs.4,832/-. Accordingly, ld CIT(A) has rightly restricted the disallowance to the tune of Rs.4,832/-. That being so, we decline to interfere in the order passed by the ld. CIT(A). His order on this issue is hereby upheld and grounds nos. 1, 2 and 3 raised by the Revenue are dismissed.
Ground nos. 4,5,6 & 7 raised by the Revenue relate to disallowance of Rs.4,60,032/- on account of delayed payment of employees’ contribution to provident fund (PF).
The brie facts qua the issue are that on perusal of Form No. 3CD, clause 16(b), it was noted by the AO that the assesse has not deposited the PF and ESI on time as per the rules of PF and ESI Act. Therefore, the late deposit of employees’ contribution to PF/ESI amounting to Rs. 1,11,321/- and Rs. 3,48,711/- respectively was disallowed by the assessing officer, as per section 36(1)(va) read with section 2(24)(x) of the Act and added back to total income of the assessee company.
Aggrieved by addition made by the AO, the assessee carried the matter in appeal before the ld. CIT(A), who has deleted the impugned addition. Aggrieved, the Revenue is in appeal before us.
The ld. DR for the Revenue submitted before us that Ld.CIT (Appeals) was erred in deleting the disallowance of Rs.4,60,032/- ( Rs. 1,11,321 + Rs. 3,48,711) on account of delayed payment of employees contribution towards PF by wrongly invoking provision of section 43B of the Act which is relating to employer's contribution to PF while employees contribution to PF is governed by section 36(1)(va) read with section 2(24)(x) of the Act. Thus, ld CIT(A) deleted the addition without taking into consideration the position of law at present that both provisions are operative and contributions have to be paid in accordance with the provisions of law as contained under section 36(1)(va) of the Act and explanation thereto read with section 2(24)(x) of the Act for Employee's contribution and Employer's contribution comes under the provisions of section 43B of the Act. The ld DR also pointed out that the amount received towards contribution to the employee
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was money belonging to the employee and the assessee was not entitled to utilize the said fund and therefore, it is separately governed by the provisions of section 36(1)(va) read with section 2(24)(x) of the Act, hence addition made by the assessing officer should be sustained.
On the other hand, Shri S.K. Tulsiyan, ld counsel for the assessee begins by pointing out that during the relevant assessment year the assessee had claimed deduction of Rs. l,11,321/- paid as Employee's contribution to Provident Fund and Rs.3,48,711/- paid as Employees Contribution to ESI. These payments towards PF and ESI were made by assessee company before the due date of filing the return under section 139 of the Income Tax Act, therefore assessee is entitled to claim the deduction. The ld Counsel also relied on the judgment of Hon`ble Calcutta High Court in the case of Assistant Commissioner of Income-tax Vs. M/s.Vijay Shree Ltd, ITA No. 245 of 2011(Cal), wherein it was held that if the assessee makes payment towards PF and ESI before the due date of filing the return under section 139 of the Income Tax Act, it would be a sufficient compliance and assessee is entitled to claim the deduction.
We have heard both the parties and perused the material available on record. We note ld Counsel for the assessee submitted before us a summary of Statement of ESI and PF payments and the challans supporting the date of payments of PF and ESI, vide paper book Pages 1 to 20. Since the assessee company had made the payments of PF and ESI before the due date of filing the return of income u/s. 139 of the Act, therefore it is eligible to claim the deduction. We note that in a plethora of judgments it has been held that the word ‘contribution’ as understood in EPF and ESI Acts refers to both employees' and employer's contribution and therefore no distinction is to be made while understanding Section 43B of the Act. Therefore, deduction is available for employees' contribution under section 43B of the Act. For this, we rely on the judgment of Hon`ble Calcutta High Court in the case of Assistant Commissioner of Income-tax Vs. M/s.Vijay Shree Ltd, ITA No. 245 of 2011(Cal), wherein it was held as follows:
“The assesse collected ESI & PF from its employees but did not pay the sum to the respective funds within the due date prescribed in relevant legislation. ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 7
The amount was, however, paid before the due date u/s. 139(1) for filing the ROI. The AO & CIT(A) disallowed the payment u/s. 36(1)(va) read with s. 2(24)(x). Before the Tribunal, the department justified the disallowance by relying on Ashika Stock Broking Ltd [ 139 TTJ 192 (Kol)] ( which in turn relied on ITC Ltd [ 112 ITD 57 (Kol)(SB) where it was held that s. 43B does not apply to employee’s contribution). However, the Tribunal declined to follow that law and allowed the appeal by relying on Sabari Enterprises [298 ITR 141 (Kar) and P.M. Electronics Ltd [ 220 CTR 635 (Del) where it was held that s. 43B applied also to employees’ contribution to ESI and PF and that if a payment was made within the due date u/s. 139(1) of filing the ROI, the disallowance cannot be made. On appeal by the department to the High Court, HELD dismissing the appeal: "The only issue involved in this appeal is as to whether the deletion of the addition by the AO on account of employees' contribution to ESI and PF by invoking the provision of s. 36(1)(va) read with s. 2(24)(x) of the Act was correct or not. In CIT vs. Alom Extrusion Ltd 390 ITR 306 the Supreme Court has held that the amendment to the second proviso to s. 43(B) as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' Contribution beyond due date was deductible by invoking the aforesaid amended provisions of s. 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal”. 16. We note the AO has made this addition on the ground that late deposits were made in the government account. However, after perusal of paper book submitted by the assessee, ( vide pb 1 to 20), we find that though deposits were made slightly late but all the PF and ESI amounts were deposited before the due date of the filing of the return of income under section 139 of the Act. The Hon'ble Calcutta High Court in the case of M/s Vijay Shree Ltd (supra) has held that any sum deposited in the government account for PF and ESI before the due date of the filing of the return is to be allowed as expenditure u/s 36(1)(va) read with section 2(24)(x) of the Act. We have considered the findings of the AO and the ratio decided by the Hon'ble Calcutta High Court on this issue and respectfully following the judicial ratio of the Jurisdictional High Court on this issue, we are of the view that there is no infirmity in the order passed by the ld CIT(A). The conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A). ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 8
Ground no. 8 relates to deletion of disallowance of Rs.3,59,52,944/- u/s. 36(1)(iii) of the Act, made on account of interest expenses as the borrowed fund was utilized for share application money.
The brief facts qua the issue are that during the assessment proceedings, the assessee submitted before the AO a statement showing ‘interest paid’. On perusal of statement of ‘interest paid’ the AO noticed that assessee debited interest in the profit and loss account to the tune of Rs. 5,31,41,590/- against loan amount of Rs. 80.08 crores. On perusal of balance sheet as at 31.03.2012, it was noted that long term borrowing and short term borrowing together comes to Rs. 42.32 crores. Further, it was noted by AO that advances made to various parties to the tune of Rs. 4.62 crores against which no interest is charged and also the purpose for which the advances given has not been explained by assessee. The AO also noted that an amount of Rs. 46,09,34,000/- was paid by the assesse company towards share application, which apparently shows that the loan fund has been utilized for non-business purpose. In this regard a show-cause notice dated 19.03.2015 & 20.03.2015 was issued & served on the assesse requiring it to show cause as to why the said interest payment of Rs. 5,31,41,590/- should not be disallowed, being non-business expenditure.
In reply to the show cause notice the assessee submitted that as per Schedule 14 to the notes to accounts, details of ‘Short term loans & advances’ are given in the audited accounts and as per audited books of accounts a sum of Rs. 46,09,34,000/- is shown as ‘share application money’. As far as advances of Rs. 4.62 crores are made, these advances have been given to associates/sister concern of the assessee company in the normal course of business out of the fund sourced from internal accruals like credit balance in sundry creditors viz BMA Wealth Creators Ltd. The assessee has taken interest bearing loan to the tune of Rs.42.32 crores out of which Rs.18.05 cores have been utilized on interest bearing advances and the rest of Rs. 24.29 crores have been used for business purpose in the form of dealing in shares and securities (including share application money, forming part of trade in shares and
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securities. The assessee company is a non-banking finance company, registered with the RBI and is engaged in the business of purchase and sale of shares. To substantiate this the assessee company submitted the object clause of Memorandum of Association of the company, which reads as under:
“To carry on the business of investment & financial company and to invest in and acquire and hold and otherwise deal in shares, stock, debentures-stocks, bonds, obligations, and securities issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debentures, debenture-stocks, bonds, obligations and securities issued or guaranteed by any Government, State, Dominion, Sovereign Ruler, Commissioner, Public body or Authority, Supreme Municipal, Local or otherwise, whether in India or else where”.
From the above, it is clear that the assessee was authorized by its Memorandum to conduct business in share trading. As per Schedule 15 to the notes to accounts to the profit and loss account, the assessee has shown sale of shares as revenue from operations. Moreover, the income from sale of shares was offered to tax its ‘business income’ as apparent from the computation of total income and return of income filed by the assesse. Thus, it is clear that dealing in shares constitutes a part of the business of the assessee. Consequently, the borrowed funds utilized for acquiring shares i.e paid towards application money can be said to be applied for purpose of business. Accordingly, interest expenditure incurred thereon is allowable u/s. 36(1)(iii) of the Act.
Further, it is submitted that merely because no revenue was generated from deploying funds in shares, it cannot be said that the borrowed funds were utilized for non-business purposes. It is pertinent to note here, that section 36(1)(iii) uses the expression ‘for the purposes of business’ which is wider in its meaning than the expression ‘for the purpose of earning profits’. A businessman may deploy funds for the purposes of business which may not generate any revenue to him. However, this fact alone will not make interest for the purpose of business to be disallowable u/s. 36(1)(iii) of the Act. In the light of the above, it is clear ‘for the purpose of business’ does not necessarily main business of the assesse. Even if the ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 10
borrowed funds are used by sister concern for its business, the expenditure shall be allowed. Accordingly, it was prayed by the assessee company that interest expenditure of Rs. 5,31,58,032/- be allowed.
However, the assessing officer rejected the contention of the assessee and noted that during the year under consideration the turnover of the assesse is Rs.11.64 crores comprising business income of Rs.22,476/- on the account of share trading and the balance amount is income from commission, interest on loan and income from other sources. Thus, the business income from share trading is negligible in comparison to commission income and income from other sources. The borrowed fund has been utilized for making payment in share application. Utilisation of borrowed fund in share application did not form part of stock-in- trade. The assessee company’s main source of income is commission and other sources income, therefore, the application of borrowed fund in share application is purely in the nature of investment. Thus, the borrowed fund utilized for payment towards share application money cannot be said to be applied for the purpose of business. Moreover, the nexus between the expenditure on account of interest and the purpose of business is not established. Therefore, the expense incurred towards payment of interest is for non-business purpose only. The AO noted that however, since a part of the borrowed fund admittedly have been utilized on interest bearing advance and earned interest income to the tune of Rs.1,72,05,088/- the difference of income and expenditure on account of interest i.e. Rs.3,59,52,944/- (Rs. 5,31,58,032–1,72,05,088) should be disallowed. Accordingly, AO disallowed Rs.3,59,52,944/-.
Aggrieved by the stand so taken by the AO, the assesse carried the matter in appeal before the ld. CIT(A), who has deleted the addition. Aggrieved, the Revenue is in appeal before us.
The ld. DR for the Revenue submitted before the Bench that Ld. CIT (Appeals) was erred in law as well as on facts in deleting the disallowance of Rs. 3,59,52,944/- u/s. 36 (1) (iii) of the IT Act, 1961, made by assessing officer on account of interest expenses as the
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borrowed fund was utilized for share- application money. Since the assessee has used money for non-business purpose therefore, assessing officer had disallowed the interest expenses, hence the disallowance made by assessing officer should be sustained.
On the other hand, Shri S.K. Tulsiyan, ld counsel for the assessee submitted before us that the assessee is a non-banking finance company, registered with RBI and is engaged in the business of purchase and sale of shares, granting and taking of loans and advances. With regard to investment under the head 'Share Application Money', the closing balance as on, 31-03-2012 was Rs. 46,09,34,000/- and the opening balance was Rs. 18,99,60,000/-. Hence, an amount of Rs.27,09,74,000/- was invested in share application money during the year. Further, the amount of interest free loan funds given during the year was Rs.3,62,00,000/-. The balance of Rs. l,00,80,000/- (4.62 cr - 3.62 cr) was balance outstanding in the books since last year. The investments outstanding in the last year in share application money of Rs.18.99 crores and interest free loans given of Rs.l.00 crores was made out of own funds of the company and the same was also not disputed by the learned AO in the last year. The same is evident from the assessment order passed for the immediately preceding year i.e AY 2011- 12 wherein no disallowance of interest expense was made which signifies that investments in share application money and interest free loans given was made out of own funds of the company and no part of the borrowed funds were diverted for the same. The Counsel submitted a copy of the assessment order for AY 2011-12. The ld Counsel also stated that during the current year, fresh investments were made of Rs.27,09,74,000/- and Rs.3,62,00,000/- which comes to a total of Rs.30,71,74,000/- (Rs.27,09,74,000 + Rs.3,62,00,000). The said fresh investments of Rs.30,71,74,000/- were not made out of interest bearing loan funds to warrant the disallowance of interest expenses. Therefore, the order passed by the ld CIT(A) on this issue should be sustained.
We have heard both the parties and perused the material available on record. We note that assessee company was availing stock broking services from BMA Wealth Creator Ltd, a sister concern of the assessee company. As such, the ledger of BMA Wealth Creator Ltd was grouped under the head "Trade Payables" in the books of the assessee. However, during the ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 12
year, in the normal course of business, the assessee company had also received interest free advances from BMA Wealth Creator Ltd and part of these advances were repaid as and when funds were available with the assessee company. The assessee used to maintain two different ledgers namely BMA Wealth Ltd - Loan account and BMA Wealth Creator Ltd – Creditors account. A copy of both the ledgers was submitted by the assessee during the appellate proceedings (vide 82-88 of the Paper Book). As at the end of the year, the amount of short term advances taken from BMA Wealth Creator Ltd stood at Rs. 31,00,67,000/- and the amount of trade payables was Rs.91,26,037/-, thus aggregating to Rs.31,91,93,037/- (Rs. 31,00,67,000 + Rs.91,26,037). However, in the accounting software used by the assessee for preparing the accounts, both the ledgers were inadvertently grouped under the head "Trade Payables" instead of segregating the same between "Trade Payables" and "Short Term Loans and Advances”'. Hence, the entire amount of Rs.31,91,93,037/- was shown under the head "Trade Payables" and accordingly was reflected as such in the Audited Accounts. However, the wrong grouping done by assessee does not alter the nature of the transaction entered into with BMA Wealth Creator Ltd. The entire outstanding amount of Rs.31,00,67,000/- was received by the assessee during the year as interest free advances from BMA Wealth Creator Ltd. The same is evident from the ledger copy attached at Page 82-86 of the Paper Book. The said interest free advance was deployed by the company in making the fresh investments of Rs.30,71,74,000/- in share application money and interest free loans. Since no part of the interest bearing loan funds were diverted for the purpose of investment in share application money and granting of interest free loans, no part of the interest expense can be disallowed.
We note that the main finding of the AO in the assessment order is that the total revenue earning from business income is Rs.22,476/- on account of share trading during the relevant assessment year. Since this amount is very small in comparison to income from commission and income from other sources, therefore the AO has made disallowance of interest expenditure for the business of share trading. We note that the investments outstanding in the last year in share application money of Rs.18.99 crores and interest free loans given of Rs.1.00 crore was made out of own funds of the company and the same was also not disputed
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by the learned AO in the last year A.Y.2011-12. The same is evident from the assessment order passed for the immediately preceding year i.e. AY 2011-12, wherein no disallowance of interest expense was made out of own funds of the company and no part of the borrowed funds were diverted for the same.
We note that the Revenue has accepted same interest expenses based on the same facts and circumstances in the assessment year 2011-12, ( as noted above) as business expenditure and no any disallowance was made. (vide assessment order for A.Y. 2011-12-paper book page 77-80). It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular's view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon’ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows:
"We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of lncome-tax in the earlier proceedings, a different and contradictory stand should have been taken." We note that AO has never disputed the nature of business of the assessee that the assessee is NBFC and it is also engaged in trading of shares. Further, in earlier assessment year also the assessee has made similar investments. But the department has been accepting it as part of assessee's business. Therefore, in the current assessment year simply because the total revenue from this segment of assessee's business is very small, interest on ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 14
expenditure/investment in share trading should not be disallowed. Once the AO has accepted share trading as one of the activities/part of assessee's business, in that case disallowance of interest on share application cannot be logically denied.
We are of the view that the above cited precedents on principle of consistency are squarely applicable to the assessee under consideration and therefore ld CIT(A) has rightly deleted the addition.
We note that in the present case, the learned AO observed that the interest expense claimed by the assessee net of interest income was Rs.3,59,52,944/-. He disallowed the entire net interest expense of Rs.3,59,52,944/- and added back to the income of the assessee. In doing so, the learned AO proceeded on the alleged premise as if the entire loan bearing funds taken net of interest bearing loans given during the year were diverted for the purpose of non- business activity only. At the outset itself, the learned counsel for the assessee brought to our notice that the assessee had interest free funds and the assessee has utilized said interest free fund. The entire outstanding amount of Rs.31,00,67,000/- was received by the assessee during the year as interest free advances from BMA Wealth Creator Ltd. Therefore, applying the ratio laid by the Hon’ble Bombay High Court in Reliance Utility and Powers Ltd. vs CIT 312 ITR 340 (Bom.) wherein their lordship held where the assessee is possessed of mixed funds which includes its own funds in sufficient quantity, the presumption that its own funds were utilized for the advances is to be drawn. We note that the Ld. CIT(A) has not appreciated the fact that the assessee had its own interest free funds which were received by the assessee during the year as interest free advances from BMA Wealth Creator Ltd. We note that in case there are both interest bearing loans and interest free loans a presumption would arise that investments were made out of the interest-free funds available with the company, if the interest-free funds were sufficient to meet the investments. For that we also rely on the judgment of the Hon`ble Calcutta High Court in the case of Woolcumbers of India Ltd vs CIT (134 ITR 219)(Calcutta High Court), wherein it was held as follows:
"That, on the facts of the case, the profits were sufficient to meet the advance tax liability. The entire profits were deposited in the overdraft ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 15
account. It should be presumed that in its essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business. Therefore, the interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should also have been allowed as an admissible deduction in the computation of the assessee's business income. We note that in the present case, the assessee was having sufficient interest free funds to make investments in share application money and advancing of interest free loans. Therefore, applying the ratio of the above decisions to the facts of the assessee, it can be safely concluded that the investments were made from interest free funds and no part of the loan funds were diverted for making investments and as such disallowance of interest expense is unjustified in law. We also note that the company being a NBFC company is engaged in the business of taking and granting loans and advances, trading and investment in shares and securities. Further, merely because no revenue was generated from deploying funds for investment in shares and advancing of interest free funds does not imply that borrowed funds were not utilized for the purpose of business. Section 36(1)(iii) of the Act uses the expression '’for the purpose of business' which is wider in its meaning than the expression 'for the purpose of earning profits'. A businessman may deploy funds for the purpose of business which may not generate any revenue. This fact alone will not make the interest incurred for the purpose of business to be disallowed u/s 36(1) (iii) of the Act as held by the Apex Court in the case of Madhav Prasad Jatta vs CIT (1979) 118 ITR 0200 wherein it was held as follows:
"Under s. 10(2)(iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. It cannot be disputed that the expression ''for the purpose of business" occurring in s. 10(2)(iii) and also in s. 10(2)(xv) is wider in scope than the expression "for the purpose of earning income, profits or gains" occurring in s. 12(2) and, therefore, the scope for allowing a deduction under s. 10(2)(iii) or s. 10(2)(xv) would ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 16
be much wider than the one available under s. 12(2).- CIT vs. Malayalam Plantations Ltd. (1964) 53ITR 140 (SC) relied on." We note that section 10(2)(iii) of the old Income Tax Act, 1922 is similar to section 36(1)(iii) of the Income Tax Act, 1961. In view of the above we confirm the order of ld CIT(A) in deleting the addition of Rs.3,59,52,944/-.
Ground No. 9 raised by the Revenue relates to deletion of disallowance of Rs.30,68,635/- made by AO on account of sale promotion expenses.
Brief facts qua the issue are that during the year under consideration the assessee incurred Rs.61,18,696/- towards sales promotion expenses. In order to verify the genuineness of transactions regarding business/sales promotion expenses notices u/s. 133(6) of the Act, were issued by AO on test check basis to the following parties at the given address provided by the assesse:-
1). M/s. Mahalaxmi Info Services Rs.18,20,155/- Gurunanakvihar, Bikashpuri Extension, New Delhi-110041. 2).Shri Amit Kumar 1706/850A Mohalla Preet nagar, Ludhiana, Rs.8,32,343 Punjab-141003 3) Shri Rajiv Kumar Rs.4,16,137 SCO 360-361, Sector-34A, Chandigarh
The above notices returned un-served by postal authority with the remark non-existent. As the above parties were non-existent and the expenses remained un-verified, therefore a show cause notice dated 23.03.2015 was issued by AO requiring it to show cause as to why the said expenses towards business promotion should not be disallowed.
In reply to show cause notice, the assesse furnished a submission dated 26.03.2015, the relevant portion is reproduced as under:-
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“We submit that transaction regarding sales promotion expenses was made in FY 2011-12. Payment has been made through A/c payee cheque only. We have deducted tax at source wherever applicable and issued TDS certificate to the parties. At present we are not dealing with these parties, Address & PAN in invoices are same as provided to your good office. So as far our record, the address given is correct. Hence, question of disallowance of sales promotion expenses on the basis of bogus expenditure does not arise at all.” However, the assessing officer rejected the contention of the assessee and held that the assesse company has employed a large number of employees for selling & marketing of insurance product which constitutes its main business activity. By making payment of commission after making TDS through banking channel does not prove the genuineness of transaction. Non- service of notice u/s 133(6) of the Act by the postal authority at the recorded addresses only indicates that the above referred parties are non-existent. Therefore, the genuineness of transaction in the colour of commission to the above referred parties remained unverified. The onus is on the assessee company to prove the genuineness of expenditure which the assessee company failed to do so. Thus, the commission payment in respect of above parties of Rs.30,68,635/- was disallowed by AO.
Aggrieved by the order of the assessing officer, the assesse company carried the matter in appeal before the ld. CIT(A), who has deleted the addition. Aggrieved, the Revenue is in appeal before us.
Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee relied on the submissions made before the authorities below.
We have heard both the parties and perused the material available on record, we note that during the year, the assessee had claimed sales promotion expenses to the tune of Rs.61,18,696/-. In order to verify the genuineness of the expenses, show cause notice u/s 133(6) of the Act was issued on a test check basis by the learned AO to the following parties.
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1) M/s Mahalaxmi Info Services - Rs. 18,20,155/- 2) Shri Amit Kumar - Rs.8,32,343/- 3) Shri Rajiv Kumar- Rs. 4,16,137/-
However, the above notices were returned unserved by the postal authority and accordingly AO made addition. We note that for marketing and selling the insurance products, the company has to perform various activities which include Lead Generation Activities, Direct Mailers Distributions, Road Shows and Customer Meets. However, instead of performing all these activities itself, the company used to hire vendors to provide these services. Accordingly, the above three vendors were also hired by the assessee to aid in the marketing and selling of the insurance products. The payment to the above three parties was made through normal banking channels and TDS was deducted on such payments. In this regard, assessee submitted before AO, the ledger copy of the above three parties, TDS certificates and the relevant Bank Statements at Page 21-49 of the paper book. The PAN of the parties was also provided to the AO. It was further submitted by the assessee that during the time of assessment proceedings, there were no dealings with these parties and the address as recorded in the system of the assessee was provided to the learned AO. The TDS certificates were also issued at the same address as given to the learned AO. Since all these parties were income tax assessees, it was incumbent on the learned AO to trace the whereabouts of these parties as the learned AO has been empowered with all powers to enforce the attendance of income tax assessees. For that we rely on the judgment of the Hon'ble Delhi High Court in the case of C.I T. vs. Dwarkadhish Investment P Ltd. (2011) 330 ITR 298, wherein it was held as follows:
"In any matter, the onus of proof is not a static one. Though in section 68 of the Income-tax Act, 1961, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors/share applicants by either furnishing their PAN number or income-tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the Revenue. Just because the creditors/share applicants could not be found at the address given, it would not ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 19
give the Revenue the right to invoke section 68. One must not lose sight of the fact that it is the Revenue which has all the power and wherewithal to trace any person.”
We note that it was an unfounded assumption on the part of the learned AO that since the notice u/s 133(6) remained unserved, the parties are non-existent and as such the payment made to these parties were not genuine. We note that assessee made the payment by account payee cheque and proper TDS has been deducted on such payment and deposited into the central government account. The assessee has shown the relevant payment vouchers to the AO. No cogent reason was given by the learned AO to support that the expenses are not genuine. The contention of the learned AO is based on sheer suspicions and conjectures without any material evidence on record. On the other hand, the assessee has duly submitted all the supporting vouchers in support of the sales promotion expenses incurred. In view of the above, we do not find any infirmity in the order of ld CIT(A).
We note that the AO has nowhere denied that expenditure under the head sales promotion is not to be accepted. AO's only objection is that expenditure under this head could not be verified u/s 133(6) of the Act. We note that Assessing Officer has not pointed out any specific defects in the books of accounts of the assessee. Moreover, the books of accounts have been duly audited, the details were submitted before the Assessing Officer. The Assessing Officer has not invoked section 145(3) of the Act and he has not rejected the books of account of the assessee. Under the circumstances, adhoc disallowance is without any basis. We note that the AO has brought on record anything to disprove the claim of the assessee. The only reason that the claim expenditure could not be verified by issuing notice U/s 133(6) should not be the only basis for rejecting the entire claim of the assessee. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on this issue is therefore, upheld and the grounds of appeal of the Revenue are dismissed.
ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 20
Ground No. 10 raised by the Revenue, relates to deletion of disallowance of Rs.3,86,08,000/- made by AO on account of salary expenses.
The brief facts qua the issue are that on perusal of Profit and loss account it was noted by AO that a large amount of Rs. 7,82,87,320/- was claimed by assessee as expenses towards employees benefit. The salary statement submitted for the month of March 2012 contains name of 1221 employees but in profit and loss account there is no claim of expenses which are general in regard with having such large number of employees such as, conveyance, office expenses, staff welfare etc. There was also no expense on employee benefit in the immediate preceding year though income in all the head except interest on loan were earned by the assessee company. Therefore, an explanation was sought from the assessee by the AO, during the assessment proceedings.
In response, the assessee submitted that assessee company is a non-banking financial company registered with Reserve Bank of India. Apart from carrying out NBFC activity, company is also a corporate agent of Birla Sun Life Insurance Company Ltd and engages in sale of various life insurance products of Birla Sun Life Insurance Company Ltd. The Company also extends its assistance to Birla Sun Life Insurance in marketing of their products. Sale of insurance products is based on the direct relationship with the customer by the employees. Most of the policies are sold solely on the basis of relationship between the employees and the customers. Employee has to interact with customer, need to understand their requirement with respect to investment, financial and tax planning. According to their requirement, employee has to convince the customer for the investment/purchase of insurance product. Employee has to keep one to one relation with the customer till the form gets signed along with cheque and ensure that the policy is issued to the customer. The requirement of human resources in this type of business is very high as the entire business depends upon the marketing skills, efficiency and capability of human resource only. Hence, it is quite obvious that the salary component would be high. Income from insurance business has been increased significantly during the year. The Company has received Rs. 6.73 crores as insurance
ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 21
commission and Rs. 3.03 crores as income from assisting in marketing of the products by the company and the same has been shown as other income. Salary paid during the year under review amounting to Rs. 7.82 crores is much lower as compared to income generated of Rs. 9.76 crores from this vertical.
As discussed above, sale of insurance product is carried out with the help of personal net work and direct relationship with the customer. The employee has to move all around to procure the business hence there is no need of dedicated office. However, wherever this is needed company uses rent free office space of sister concern.
However, on perusal of the list of employees, the assessing officer noted that the name of particular employee was appearing more than once for a particular month. The number of employees against whom PF and ESI has been collected and deposited to the respective authorities are much below than the total strength of the employees who are on regular pay roll. The number of employees as appears from the salary statement is given below:-
Month No. of employees Month wise gross No. of employees PF (Employee & from salary salary from annual PF employer statement statement for the contribution) period from 01.04.2011 to 31.03.2012 July, 2011 530 Rs.67,48,688 Rs.25,421 Aug’2011 496 Rs.63,44,705 Rs.22,999 Sept, 2011 534 Rs.63,33,941 Rs.26,120 203 Oct,2011 529 Rs.69,74,136 Rs.14,281 Nov,2011 Rs.85,08,704 Rs.19,958 Dec,2011 Rs.85,08,704 Rs.26,123/- Jan, 2012 Rs.104,27,868 Rs.36,253/- Feb,2012 Rs.1,08,46,886 Rs.36,253/- Mar, 2012 1221 Rs.1,46,90,289 Rs.42,464/-
From the above table, AO noted that for the period from 01,04.2011 to 31.03.2012, the PF has been collected from 203 employees only, who were appear to be on regular pay roll. PF contribution is a statutory liability on the part of the employer. Further, from the statement of ESI contribution for the month of March, 2012 it appears that only 531 nos. of employees ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 22
have contributed to ESI. Had the assessee company engaged 1221 number of employees on regular pay roll, then PF contribution should have been from the similar number of employees, which is a statutory liability. In the present case it has not happened so.
In this regard, the assessee submitted before the AO that there are many cases in the statement of salary where salary component are not for the full month and those are actually outside the purview ESI & PF. It further submitted that there are employees who have been recruited as trainees and have been paid stipend and the payment of the same has been clubbed with salary.
However, the AO rejected the contention of the assessee and held that the assessee failed to substantiate satisfactorily with supporting documents, the expenditure incurred towards employee benefit of Rs. 7.82 crores which appears to be excessive in comparison to the volume of business it had. Thus, it is an indicative that all the employees are not on regular pay roll and the assessee company claimed a bogus expenditure to some extent in the form of salary. Therefore, 50% of expense towards salary was disallowed by AO which comes to Rs. 3,86,08,000/-(50% of Rs. 7,72,15,993/-).
Aggrieved by the order of the AO, the assesse carried the matter in appeal before the ld. CIT(A), who has deleted the impugned addition. Aggrieved, the Revenue is in appeal before us.
Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee relied on the submissions made before the authorities below.
We have heard both the parties and perused the material available on record, we note that assessing officer disallowed the expenditure incurred towards employee benefit of Rs.7.82 crores solely on the reason that said expenses appeared to him to be excessive in comparison to the volume of business, the assessee company had. Thus, AO noted that it was an
ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 23
indicative that all the employees were not on regular pay roll and the assessee company claimed a bogus expenditure to some extent in the form of salary. The AO also noted the irregularity in deducting EPF and ESI in respect of number of employees. Therefore, 50% of expense towards salary was disallowed which comes to Rs.3,86,08000/- (50% of Rs.77215993/-).
The ld Counsel submitted before us a brief note in respect of Employees` Providend Fund (EPF) and ESI. We note that employees working in private sector, drawing basic salary upto Rs 6500/- have to compulsorily contribute to the Provident fund and employees drawing above Rs 6501/- have an option to become member of the Provident Fund. It is beneficial for employees who draw salary above Rs. 6501/- to become member of Provident Fund as it is deducted from the salary before it is deposited on bank or given hence compulsorily saving happens. From September 1, 2014 salary limit has been increased to Rs 15,000/ for EPF therefore those who started job after 1st September 2014 and earning more than Rs.15,000 in basic and DA will not be contributing to the EPS or Pension scheme.
Table below gives the rates of contribution of EPF as under:
Scheme Name Employee contribution Employer contribution
Employee provident fund 12% 3.67%
So far the Employee Provident Fund (EPF) is concerned, the Employee's contribution is matched by Employer's contribution (till 12%). The employer contribution is exempt from tax and employee's contribution is taxable but eligible for deduction under section 80C of Income tax Act. The EPF amount earns interest as declared by Government.
We note that the ESI Corporation has approved to enhance wage ceiling from Rs 10,000/- per month to Rs.15,000/- per month w.e.f 01.05.2010. Therefore, for FY 2011-12 limit is Rs.15,000/- p.m. The ESI Act covers workers in the organized sector only. However, workers in the organized sector to which the ESI Act does not apply remain outside the social security umbrella due to the following reasons:- ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 24
(i) Employees of Central and State Govts. who are provided social protection under the rules of the respective Governments;
(ii) Workers of factories/establishments employing less than 10 persons.
(iii) Workers of factories/establishments situated in the non-implemented areas, where the ESI Scheme has not been implemented;
(iv) Workers of seasonal factories/establishments;
(v) Workers drawing wages exceeding Rs.15,000/- per month.
The ESI Scheme is financed mainly by contributions from employers and employees. The rate of contribution by employer is 4.75% of the wages payable to employees. The employees' contribution is at the rate of 1.75% of the wages payable to an employee. Therefore, the findings of the assessing officer that the number of employees against whom PF and ESI has been collected and deposited to the respective authorities are much below than the total strength of the employees who are on regular pay roll, is not correct. We note that there are many cases in the statement of salary where salary component are not for the full month and those are actually outside the purview ESI & PF. We further note that there are employees who have been recruited as trainees and have been paid stipend and the payment of the same has been clubbed with salary. The assessing officer failed to examine these areas and made addition on ad-hoc basis which is not acceptable. The assessee`s books of accounts are audited by chartered accountant and books of accounts of the assessee company are not rejected by the assessing officer therefore, we do not accept the ad hoc addition made by AO. The assessing officer failed to bring any cogent evidence on record to prove that salary expenses claimed by the assessee were inflated and bogus.
We note that assessee company is a non-banking financial company registered with Reserve Bank of India. Apart from carrying out NBFC activity, company is also a corporate agent of Birla Sun Life Insurance Company Ltd and engages in sale of various life insurance products of Birla Sun Life Insurance Company Ltd. Company also extends its assistance to
ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 25
Birla Sun Life Insurance in marketing of their products. Sale of insurance products is based on the direct relationship with the customer by the employees. Most of the policies are sold solely on the basis of relationship between the employees and the customers. Employee has to interact with customer, need to understand their requirement with respect to investment, financial and tax planning. According to their requirement, employee has to convince the customer for the investment/purchase of insurance product. Employee has to keep one to one relation with the customer till the form gets signed along with cheque and ensure that the policy is issued to the customer. The requirement of human resources in this type of business is very high as the entire business depends upon the marketing skills, efficiency and capability of human resource only. Hence, it is quite obvious that the salary component would be high in this type of business.
We note that assessee`s income from insurance business has increased significantly during the year. In the current year, there was a steep rise of 88% in the income from insurance business as against the income in the immediately preceding year. The assessee company has earned Rs.6.73 crores as insurance commission and Rs.3.03 crores as income from marketing and distribution of the insurance products. Therefore, Salary paid during the year under review of Rs. 7.82 crores is much lower as compared to income generated at Rs.9.76 crores. We note that sale of insurance products is carried out with the help of personal network and direct relationship with the customer. The employee has to move all around to procure the business hence there was no need of dedicated office. More so, in case of need, the assessee was using the office space of sister concern free of cost. We note that only the reason that the AO has discussed is that the expenditure under the head salary is very high and that, some of the names of employees were repeated in the list. We note that the income of the assessee from the insurance business has also gone up and increased during the assessment year and this fact has been accepted by the AO. The AO has also accepted increased income of the assessee. But when the expenditure increases the AO has his doubts. We note that assessing officer has not pointed out any specific defects in the books of accounts of the assessee. Moreover, the books of accounts have been duly audited, the details
ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 26
were submitted before the Assessing Officer. The Assessing Officer has not invoked section 145(3) and he has not rejected the books of account. The Assessing Officer has made a guess work and disallowed 50% salary which we do not accept. We note that assessing officer can not make an assessment based of pure guess, surmise and conjecture, for that we rely on the judgment of the Hon`ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. Vs. Commissioner of Income Tax, 26 ITR 775 (SC), wherein it was held as follows:
“Though it is agreeable that the ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-s. (3) of s. 23, the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under s. 23(3).” Under the circumstances, adhoc disallowance is without any basis. Hence, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals) and therefore, we uphold the same.
In the result, the appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on 27-02-2019
Sd/- Sd/- ( A. T. Varkey ) (Dr. A.L.Saini) Judicial Member Accountant Member
Dated: 27 -02-2019 *PRADIP (Sr.PS) Copy of the order forwarded to: 1. The Assessee/Department: ACIT, CC-3(2), Aaykar Bhawan Poorva, 5th Floor, 110 Shanti Pally, Kolkata-107. The Respondent/Assessee: M/s. Snowtex Investment Ltd Block DN-62, 8th 2 Floor, Tower-II, Sector-V, Salt Lake, Kolkata-91. 3. The CIT-, 4. The CIT(A)-, ITA No. 1799/Kol/2017 M/s. Snowtex Investment Ltd 27
DR, Kolkata Benches, Kolkata