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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
1. These are the four appeals filed by the ITO, Ward-10(1), New Delhi (in short AO) for different Assessment Years involving identical issues wherein, the ld CIT(A)-VI, New Delhi (in short ld CIT(A)), deleted the disllwoance made by the ld Assessing Officer on account of expenditure on subscription deposit scheme and disallowance u/s 40A(2)(b) of the Act. The parties before us submitted that for AY 2009-10 the order of the ld CIT(A) has been followed in all other assesemment years involved in these appeals and therefore, same may be taken as lead matter. Hence, for AY 2009-10 filed by the AO against the order of the ld CIT(A)-XIII, New Delhi is taken as lead matter and are facts culled out therefrom.
A Y 2009-10 2. The ld Assessing Officer has raised following two grounds in its appeal:- “1. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting the addition of disallowance of expenditure of Rs. 2411392/- made by the AO under subscription deposit scheme.
ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 2. on the facts and circumstances of the case and in law the ld CIT(A) has erred in deleting the addition made by AO u/s 40A(2)(b) of the Act of Rs. 1297897/-. Brief facts 3. The assessee is a company engaged in the business of printing and publishing. Its main work is to undertake the work of printing from the newspapers and periodical published. For the year it filed its return of income on 26.09.2009 for Rs. 1377850/-.
Assessment Proceedings before AO 4. The case of the assessee was selected for scrutiny and the ld Assessing Officer noted that a sum of Rs. 2411392/- is claimed as deduction under the head „subscription deposit scheme service‟. The assessee submitted its reply on 30.11.2011 contending that under the scheme a fixed deposit of sum is deposited by customers based on the number of magazines which would be given to him free of cost till the membership continues. The deposit is utlised for the purposes of the business and when the deposit is asked for refund, supply of magazine is stopped and deposit is refunded. For the supply of the magazines the assessee pays sum to Delhi Prakashan Vitran Ltd and other parties towards to cost of purchase of this magazine and claimed it as deduction. The ld Assessing Officer rejected the claim of the assessee stating that sales with regard to the above magazine are not credited to the profit and loss account and no part of refundable deposit is utilized by the assessee for its own business and assessee is passing on the benefit to sister concerns who publish the magazines, therefore, he disallowed the above sum.
5. The assessee also paid expenditure to 34 related parties covered u/s 40A(2)(b) of the Act and ld Assessing Officer asked the assessee company vide letter dated 10.10.2011 to justify the above payments. The assessee submitted its reply on 9.12.2011. The ld Assessing Officer on the basis of examination of the bills and quotation of rates for similar type of work held that the quotation provided are for different period and the bills of sister concern are for different period. Hence he rejected such information. Further, assessee also contended that some of the related parties are profit making and the rate of tax are similar, therefore, there is no question of reducing the profit. However, as no copy of return of income was submitted, the AO rejected the explanation of the assessee for 33 parties and accepted the explanation, in view of separate submission by the assessee with respect to 1 company i.e. Delhi Press Samachar Patra Pvt. Ltd. Hence, the AO held that payment is in excess of the prevailing market rate and then 2% of the total 2 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 expenses amounting to Rs. 1946818/- was disallowed u/s 40A(2) of the Act. Consequently assessment order u/s 143(2) of the Act was passed on 22.12.2011 determining the total income of the assessee at Rs. 5736060/- against returned income of Rs. 1377850/-. The assessee being aggrieved with the order of the ld AO preferred appeal before the ld CIT(A). Order of the ld CIT(A) 6. The ld CIT(A) with respect to the disallowance of subscription deposit scheme expenses held that deposit money is utlised for the purpose of the business and does not carry any interest. The magazines are supplied by purchasing it from its sister concern Delhi Prakashan Vitran Ltd and cost is debited to the P&L Account. Therefore, he held that such expenses are allowable.
With respect to the payment u/s 40A(2) he held that all the companies whom payments have been made are accessed to tax and therefore, there is no question of diversion of profits. He further stated that 2% disallowance made by the ld AO is merely on the basis of suspicion and without brining any adverse material on record. Therefore, he deleted the disallowance of Rs. 1946818/-. The revenue aggrieved by the order of the ld CIT(A) dated 17.12.2012 has preferred appeal before us. Arguments of the Revenue 8. The revenue submitted that subscription deposit scheme expenditure are not matching with the revenue booked by the assessee and with respect to the payment made to relatives the reliance was placed on the order of the Assessing Officer. Argument of the assessee 9. The assessee submitted written submission with respect to above two disallowances which are as under:- “APPEAL No. 5001/DEL/2014 A.Y. 2010-11. Hon‟ble Sir(s) The captioned appeal has been filed by the department against the order of CIT(A) dated 17.12.2012. The revenue raked up two grounds of appeal
. First ground of appeal is against the disallowance of Rs. 2411392/- which are expenses relating to the Subscription Deposit Scheme With respect to the ground of appeal relating to subscription deposit scheme for Rs. 2411392/- it is submitted that the assessee company way back in 1968 launched a scheme namely Subscription Deposit Scheme. It is submitted that as the media business is known for the cut throat competition and it is essential for every media house to introduce various schemes to allure customers and to 3 | P a g e ITO, Ward
10. (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited ITA NO 1433 , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 enhance it‟s reader base from commercial expediency point of view. With a view to curb the competition and to increase the sale of magazine, the assessee launched a scheme named as “Subscription Deposit Scheme” way back in 1968 and at present the total subscribers are more than 15,000.
Under the scheme the subscribers/readers are invited to deposit a fixed amount of money depending upon the number of magazines required by him and he is given magazine free of cost as long as he continues to be the member of the scheme. The money collected under this scheme was utilized in the running of the business of the company. The deposit is refundable at six months‟ notice by either side. Till the deposit is with the company the reader shall continue -to get the magazines free of charge. On refund of the deposit the supply of the magazines shall be stopped. The objective of the scheme is to broaden the reader base of the assessee company which is declining day by day after the introduction of electronic media and technology. On this deposit no interest is paid by the assessee company. It means the assessee gets an amount without any liability to pay interest which can be used for the business purpose. During the year under assessment the total closing balances at the end of the year was Rs.3.17 crores. To supply the magazines to these subscribers the assessee buys magazines from Delhi Prakashan Vitran Pvt. Ltd. and others and purchase cost of these magazines are debited to Profit & Loss Account as Subscription Deposit Expenses, (see relevant pg 156 of PB i.e. Schedule J of P& L A/C)). The Copy of account of scheme is also enclosed which forms part of paper book at pg 141-145). It is submitted that the aforesaid expenditure was consistently allowed by the department up to the A.Y.2004-05 and for the first time the addition was made by disallowing the expenditure in the A.Y. 2005-06 on the ground of matching principle and thereafter repeated till the A.Y. 2013-14. It is pertinent to mention here that in the first round the appeals of the A.Y. 2005-06, 2006-07 and 2007-08 were allowed by the CIT(A) against which the department had filed appeal before the Hon‟ble ITAT. In further appeal the Hon‟ble ITAT vide it‟s common order dt. 15.07.2011 for all the three years i.e. from A.Y. 2005- 06 to 2007-08 after examining the issue set aside the order and remanded before the AO with very specific directions i.e. to examine whether subscription deposit receipts have been utilized for the purpose of business or not and if it has been utilized for the purpose of business then no disallowance ought to be made. The relevant portion of the order is reproduced as under. ( Copy of order dt.15.07.2011 is enclosed which forms part of P.B at Page 76-95) “We make it clear that the A.O. shall keep in mind the past history when these expenses have been allowed to the asses see. He shall regard a specific finding about the direct nexus of the funds vis-a-vis their utilization in the business”. If it is established that funds have been utilized in the business then no ” disallowance ought to be made. Contention of the A.O:- During the assessment proceedings for A.Y 2009-10, the Ld. A.O following the earlier year order contended by raising a query that why the expenditure on purchase of magazines claimed as deduction should not be disallowed on the pattern of the preceding year as no income has been 4 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 offered in this regard by the assessee. The A.O. has disallowed the expenditure in respect of subscription deposit scheme by applying the matching principle of income v/s expenditure. It is pertinent-to mention hear that before the passing of assessment order in the set-aside proceeding for A.Y 2005-06 to 2007-08 by the A.O i.e in the second round, the appeal of the assessee for the A.Y 2009-10 came-up for hearing before CIT(A) and the CIT(A) in the line of direction of Hon‟ble ITAT vide order dated 15..07.2011 given while disposing-off the appeal of revenue for A.Y 2005-06 to 2007-08 examined the nexus of the receipt with the business of the assessee and after examining the issue with this angle allowed the appeal of the assessee for the A.Y 2009-10. As the facts of A.Y 2010-11 was entirely same, therefore by following the order of A.Y 2009-10,the appeal of A.Y 2009-10 was allowed by the CIT(A). It is submitted that pursuant to the direction of Hon‟ble ITAT the assessee before the CIT(A) had proved the nexus of the funds of subscription deposit scheme wholly and exclusively for the purpose of business. The fund was exclusively utilized for the purpose of business i .e. for procurement of fixed assets as well as current assets and it is because of utilization of these funds the assessee company was least dependent on the secured loan for the purpose of business. A“chart of net amount of subscription deposit receipt vis-a-vis it‟s Utilization for the purpose of business forms part of paper book at pg.
It is also pertinent to mention here that assessee company/appellant had also filed the copy of bank statement before the CIT(A) wherein the money received from different- parties under the scheme had been deposited in the bank accounts of the appellant directly (IDBI Bank the main business account of the assessee company) and such amount was exclusively utilized for the business purpose. There is a nexus between deposit of receipt under the scheme and utilization of such amount for the business purpose of the appellant like purchase of raw materials, ink and paper etc. The CIT(A) on account of nexus of this fund with the business of the assessee and taking into account the past history that the expenditure had consistently been allowed earlier i.e. prior to A.Y. 2005-06 had allowed the appeal of assssee. Without prejudice to the aforesaid, here we would like to submit that besides the scheme, the Ld. A.O has not appreciated the fact that under this scheme the company gets interest free deposit which at present is to the tune of approximately Rs 3.17 Cr which is to be used for the purpose of business. It is because of utilization of deposit amount towards the Fixed Assets as well as working capital of the company, that the company dependence of the loan is almost minimal. For the allow ability of any business expenditure, it has to be nexus with the business. Had the company taken or borrowed any secured loans for business purpose, it would have to incur expenditure by way of interest. Thus the company saved amount on interest that would otherwise have been paid to the bank in respect of borrowings. Obviously it is the cost which has been avoided by the assessee company by taking Subscription Deposit from customer. The same has been used in the business and it becomes a part of the profit earned by the assessee company. Basic commercial principle is that expenditure saved is profit earned. 5 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 Therefore, it cannot be said that no income has been offered in this regard by the assessee company. The A.O failed to appreciate that the expression „Income “includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it by oneself and also which can be converted into income. (Reliance is placed on the case of Toyo Engg India Ltd v/s Joint CIT, 100 TTJ 373(Mum) The disallowance of expenditure by the Ld. A.O is arbitrary and devoid of any merit. The Assessing Officer has failed to appreciate the benefit derived by the company under the scheme from the point of commercial expediency. The Assessing Officer has erred in disallowing the expenditure without appreciating the scheme and by wrongly applying the matching principle It is well settled law that in order to claim deduction of expenditure it is not necessary that there must be income on the other side. The statute does not require the party claiming the deduction to show that any profit was in fact earned by the expenditure in question. (Moore v/s Stewarts (6 TC 625).This principle has been reaffirmed by the Supreme Court in Eastern Investment Ltd v/s CIT (20 ITR 1) & CIT v/s Rajendra Prasad Moody (115 ITR 519) . Lord Thankerton said in Hughes v/s Bank of New Zealand,(6 ITR 636) that expenditure in course of trade which is unremunerative is none the less a proper deduction ,if wholly and exclusively made for the purpose of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. Apart from this, it is further contended that the Ld.A.O failed to appreciate the expenditure from the point of commercial expediency. It is submitted that the expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure it was incurred on grounds of commercial expediency from a prudent businessman point of view. The Hon‟ble Supreme Court in the case of CIT v/s S.A.Builders (288 ITR 1). while agreeing with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman “can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. Moreover, without prejudice to the above, this issue has been taken into consideration by the Hon‟ble ITAT, (Third Member) in the appeal of the revenue in assessment years 1993-94 and 1994-95. The issue before the Hon‟ble Tribunal was not directly with regard to claim of expenditure under head „Subscription Deposit Scheme‟, but the issue was with regard to allocation of this expenditure 6 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 in relation to Subscription Deposit Scheme between different units of the assessee company from the point of view of claim of deduction u/s 801. While giving finding on the main issue involved, the Hon‟ble Tribunal also passed observation regarding this scheme. It is pertinent to mention here the observations of Third Member as here under. “It is clear from record that books are supplied free of cost to the subscriber who made deposit of requisite amount under the scheme. Expenditure claimed by unit no. 1 pertains to supply books and magazines free of cost. The scheme was launched by unit No. l. The deposits were received by the said unit and, therefore, expenses are debited in account of the said unit. There is no dispute on above fact In my humble opinion on facts and circumstances of the case there is no justification for placing onus on the assessee and for holding that stand of the assessee cannot be accepted. All the ingredients of this scheme and all expenses claimed were made available on record which further reflect “that assessee had sufficient profit to make investment in unit No.2 and 3.”
Therefore, in view of the afore mentioned observations of the Hon‟ble Third member of the Tribunal, it is submitted that the issue with regard to claim of expenditure under this scheme has been accepted by the Hon‟ble Tribunal in principle. The case is relevant to the year under assessment to the extent that expenditure claimed stands allowable by the Hon‟ble ITAT. The Said order has attained finality in law. It is therefore submitted that the Ld.A.O erred in not following the order of Hon‟ble ITAT which is against the Judicial Propriety.(The Copy of Order of Hon‟ble ITAT Third Member dated 21st March,2006 is enclosed which is at Page 75-111 of P.B, relevant page 100 to 104 i.e para 32 to 36.) Lastly it is submitted that the scheme is in vogue since 1968 and the assessee is claiming expenditure under this scheme which has been allowed consistently. Prior to A.Y 2005-06.. During the year there is no material change in the facts of the case. Therefore we are also placing reliance on the rule of consistency. “It is settled legal position in plethora of decisions by the Hon‟ble Supreme Court as well as various High Courts including the jurisdictional High Court that although^ the doctrine of resjudicata does not apply to income tax proceedings since each assessment year is independent of the other but where an issue had been decided consistently in a particular manner for earlier assessment years ,for the sake of consistency the same view should continue to prevail for subsequent years unless there is material change in the facts. For the said proposition, reliance is placed on the following judicial pronouncements” 1. 193 ITR 321 (SC) ( Radhasoami Satsang v/s CIT) 2. 245 ITR 492(Del) (CIT v/s Neo Poly Pack(P) Ltd) 3. 264ITR 276(Del) (CIT v/s ARJ Security Printers) 4. 279ITR 86(Del) (CIT v/s Rajeev Grinding Mills)
ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 2. The Second ground of appeal is against the addition of Rs 48,59,360 by disallowing certain part of the expenditure i.e @ 8% on estimate /adhoc basis without making any inquiry with respect to transaction covered u/s 40(A)(2)(b). The Facts in this regard are that the the assessee is in the business of Printing 8s Publishing since 1968. However at present the main work of the company is to undertake the work of printing from the newspapers and periodical publishes which is being executed from it‟s printing press at Sahibabad. It produces various magazines in different languages which are circulated to the remotest corner of India. The magazines have to be before the specified date on the stands of the sellers. In order to ensure the timely printing, quality of printing and dispatch of the same so as to ensure its being in the hands of the buyers before-the specified date, the assessee had since inception of the company being getting it printed including transportation, mailing etc., etc., through its sister concerns. The A.O. has merely following the earlier order of A.Y 2008-09 8& 2009-10, disallowed expenditure on hypothetical basis of 8% of the expenditure incurred being excessive paid to the sister concern. The A.O disallowed the entire expenditure including director remuneration and interest paid after deduction 8s deposit of T.D.S in accordance with law to persons with respect to unsecured loan . The adhoc disallowance of director‟s remuneration and interest amounts to double taxation as the same has already been taxed in the respective hands. Further the Ld. A.O while making disallowance has also mechanically disallowed the Magazine Purchase Expenditure in respect of Delhi Prakashan Vitran (P) Ltd, Delhi Press, Delhi Press Patra Prakashan (P) Ltd
86. Vishav Vijay Pte Limited. The Expenditure made in respect of the said parties are relating to magazine for the purpose of Supplying to subscribers under the Subscription Deposit scheme Therefore it is also submitted that once the entire expenditure relating to Subscription Deposit Scheme has been disallowed ,there is no question of adhoc disallowance again in respect of the same expenditure. It is submitted that the A.O instead of 2% rate of earlier year has applied the rate of disallowance 8% this year without making any enquiry or due application of mind which is arbitrary and unjust. The disallowance is without bringing any evidence on record as to how the amounts paid are excessive and above the market prevailing rate. The A.O. has not made any enquiry whatsoever and simply holding that the payments in excess of the prevailing market rate has disallowed the expenditure on adhoc basis. Thus the A.O on a complete mechanical basis and without making any outside enquiry has disallowed the expenditure @ 8% on adhoc basis and erred in making addition of Rs 48,59,360/- For the perusal
85. Convenience, we are enclosing a comparative Chart Party wise which contains the detail of nature of Work and the rates charged for the same work by our related party and by the outside Party and furnished before CIT(A) too. From the chart it is crystal clear that the various works viz Data Processing work has been done by related Party @25 86 15 per page whereas for the same work, the rate of Outside Party is Rs 28 85 15 per page. For the Work of Stacking 8& Bundling, the rate charged by the related party is @ 5/- per thousand whereas for the same work the rate of Outside party is Rs 6.50/- per thousand. The rate of Printing with related party is 560/250 per thousand forms whereas the same with outside party is for 600/- per thousand forms, The rate of Proof reading charge 8 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 with related party at RS 35 per Page whereas for the same work the outside rate is RS 40/- per page . (The Chart with Rates of both the related as well as Outside Party is enclosed which is at Page 15-53. of P.B). From the above facts, it is crystal clear that various works viz, Data Processing, Stacking 85 Bundling, Plate Processing, Proof Reading 8& Printing has been done by the related party at a lesser rates than the market rates. It is submitted that to invoke the power under section 40A(2)(b) of the Income- tax Act, 1961, the ingredients to be satisfied are : (i) the assessee should incur an expenditure in respect of which payment has been or is to be paid to any person ; (ii) in the Assessing Officer's opinion, such expenditure should be excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom ; and (iii) the expenditure, which is considered by the Assessing Officer to be excessive or unreasonable, shall not be allowed as a deduction. The words in section 40A(2)(a) “the Assessing Officer is of the opinion” indicate that the opinion must be formed by the Assessing Officer and it is of course, implicit that the opinion must be an honest opinion, having been formed based on the circumstances available before him. There should be some material available for the Assessing Officer for invoking section 40A(2)(a) to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned there under. But, at the same time, before taking any final decision by invoking the power under section 40A(2)(b), either allowing or disallowing such expenditure incurred as excessive or unreasonable, such decision of the Assessing Officer should be based on reasons well-founded, which are judiciously acceptable.(Reliance is placed on the Decision of CIT v/s NEPC India Ltd 303 ITR 271(Mad) Further the Hon‟ble Karnataka Tribunal vide it‟s decision reported in 286 ITR (AT) 210(S.K.Engg v/s JCIT) has held that reasonableness of any expenditure is to be seen from the view point of the businessman and not from the view point of the Revenue authorities. CIT v. Gangadhar Banerjee and Co. P. Ltd. [1965] 57 ITR 176 (SC) ; [1965] 35 Comp Cas 620 and CIT v. Edward Keventer P. Ltd. [1978] 115 ITR 149 (SC) applied. - Further the Assessing Officer must establish that the payment is excessive or unreasonable. The authorities cannot proceed merely on the basis of surmises and conjectures. The Revenue has to place on record evidence as regards excessiveness or unreasonableness. Marghabhai Kishanbhai Patel and Co. v. CIT [1977] 108 ITR 54 (Guj) followed. In the instant case the A.O mechanically disallowed 2% of expenditure holding to be unreasonable without making any enquiry despite the fact that the works were undertaken with the relatives at a lower rates in comparisons to the rates charged by non-relatives. In this context reliance is also placed on the decision of Hon‟ble Punjab & Haryana High court vide the decision of CIT v/s Brij Pal Sharma 333 ITR 229 wherein it has been held that as per section 40A(2) if the payment to relatives are unreasonable, only then disallowance can be made. 9 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 If the payment to relative for service or goods is lower than amount paid to other parties for service or goods, the payment to relatives cannot be said to be unreasonable. It is also submitted that the Assessing Officer further failed to appreciate that all the companies with whom transaction has been entered into are profit making and the rate of tax are similar and therefore there is no logic in inflating the expenditure to reduce profit. In this context reliance is also placed on the decision of CIT v/s indo Saudi Service (Travel) Pvt Ltd 310 ITR 306 (Bom) wherein the Hon‟ble Bombay High court in the context of Commission has held that where commission has been paid to sister concern and the said sister concern is paying tax at a higher rates, there is no case of evasion of taxes. Hence Section 40A(2) cannot be invoked. Similar view has been expressed in Modi Revlon Pvt Ltd v/s ACIT 2 ITR (trib) 632. Further contended that the A.O without making any outside enquiry and without Unreasonableness of the expenditure, made the addition on adhoc basis on complete suspicion, surmises and conjecture which is not sustainable in the eyes of law. It is submitted that any addition made on adhoc basis i.e without any material on record is not sustainable in the eyes of law because as per the provision of section 40 (A) (2) (b), once the A.O. is of the opinion that expenditure incurred by the Assessee is excessive or unreasonable, then “so much of the expenditure as is so considered by him to be excessive or unreasonable” is to be disallowed under the said provision. The expression „so much of the expenditure‟ indicates that A.O. needs to be objectively determine the quantum of the expenditure which has to be disallowed. He cannot make an adhoc disallowance in respect of such expenditure under this section. Reliance is placed on the following judicial pronouncements.
DCIT Vs Surendra Buildtech Pvt. Ltd. (12 taxmann.com 178 (Del).
Neha Protin Ltd. Vs ACIT 4 SOT 433 (Jodhpur).
Kanubhai Ramjibhai Makwana Vs. ITO 44 SOT 264 (Ahmd).
Bharti Airtel Ltd. Vs. ACIT 41 SOT 175 (Mum).
CIT Vs. Modi Zerox Ltd. 10 Taxmann.com 73 (All).
ACIT Vs. Swift Audio Video Entertainment Pvt. Ltd. 2 ITR (Trib) 539 (Chen) 7. Gujarat Guardian Ltd. Vs. JCIT 174 Taxmann 151 (Chd).
CIT Vs. Modi Revlon Pvt. Ltd. 26 Taxmann.com 133 (Del).
Further what is essentially required is that market price of these services is established and then amount paid in excess of such market price is to be disallowed. The disallowance cannot be made only based on estimation without any basis (Reliance is placed on M/s Vinod Kumar Vs. JCIT 22 Taxmann.com 249 ((Chd). Further a disallowance under section 40 (A) (2) (b) on adhoc basis, as percentage 10 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 of total expenditure is incurred inherently bad in law because such disallowance can never have reasonable nexus with the market price of services for which the payment is made. Reliance is placed on Emersons Process Management India Pvt. Ltd. Addl.CIT 13 Taxmann.com 149 (Mum). The foundation of disallowance thus must rest on categorical findings that the payment for the services are indeed excessive or unreasonable vis-a-vis fair market value of the services. So far as, expenditure being excessive or unreasonable having regard to the fair market value of the services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b). The disallowance based on quantum of expenditure incurred rather than the fair market value of services for which expenditure was incurred was contraiy to the scheme of the company as held in the case of Orchard Advertising Pvt. Ltd. v Addl. CIT 8 Taxmann.com 162 (Mum). It has also been held in the case of Battibala & Karani V ACIT 2 SOT 379 (Mum) that an expenditure being excessive cannot be inferred based on some subjective perception of the authority dealing with the same, it has to be based on cogent material on record. In the instant appeal the AO has simply disallowed 10% & 2% of expenditure on adhoc basis without any inquiry, as regards the market price. The disallowance is arbitrary and unjustified. Further in the Present case the adhoc addition has been made purely on the basis of suspicion and it is settled position in law the suspicion howsoever strong, cannot partake the character of evidence. The Hon‟ble Supreme Court in the case of Dhirajll Girdharilal v/s CIT reported in 26 ITR 736 (SC) has held that mere existence of reason for suspicion would not tantamount to evidence. But it should not be based on mere suspicion, conjecture or guess work or on irrelevant or inadmissible material. The reliance is also being placed on the decision of the Hon‟ble Supreme Court in the case of of Lalchand Bhagat Ambica Ram Vs. Commissioner of Income-tax reported in 37 ITR 288, wherein it has been held that no addition can be made on the basis of suspicion, conjecture and guess work. It is further submitted that as in the earlier assessment year i.e prior to A.Y 2008- 09, the expenditure made u/s 40(A)(2)(b) has been accepted by the department which was incurred on cost basis , therefore assessee/appellant is heavily relying on the rule of consistency which has been propounded by the Hon‟ble Supreme Court as well as various High Courts including the Jurisdictional .High Court that although the doctrine of res judicata does not apply to income tax proceedings since each assessment year is independent of the other but where an issue had been decided consistently in a particular manner for earlier assessment years ,for the sake of consistency the same view should continue to prevail for subsequent years unless there is material change in the facts. For the said proposition, reliance is placed on the following Judicial pronouncements
1. 193 ITR 321 (SC) ( Radhasoami Satsang v/s CIT) 11 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 2. 245 ITR 492(Del) (CIT v/s Neo Poly Pack(P) Ltd) 3. 264ITR 276(Del) (CIT v/s ARJ Security Printers) 4. 279ITR 86(Del) (CIT v/s Rajeev Grinding Mills) In view of the aforesaid factual as well as legal submission, it is respectfully prayed that the appeal of the revenue may kindly be dismissed.”
He further referred to the paper book containing 138 pages for above disallowances. He referred to page No. 15 of the paper book where the comparative chart of nature of work, rate charged by the sister concern as well as the market rate is mentioned. He further referred to various quotations given therein. In the end he submitted that the ld Assessing Officer has made the addition wrongly and same has been deleted by the ld CIT(A).
Reasons and Decision 11. We have carefully considered the rival contentions and also perused the orders of the lower authorities as well as the paper books and written submission submitted by the assessee.
With respect to ground No.1 of disallowance of subscription deposit scheme expenses, it is apparent that assessee is inviting interest free deposit from various customers for certain period and in lieu of this deposit magazines are supplied to them. For supply of such magazine assessee incur certain cost and same is claimed as deduction. It is undisputed that the payment is made to Delhi Prakashan Vitran Pvt. Ltd and others. The amount of interest free deposit is utlised for the purposes of the business. The only reason for disallowances that sales with regard to the magazine were not included on credit in the profit and loss account. It is also not denied that such deposits are refundable. These are refundable as and when demanded by the subscribers and from that date the supply of magazine is discontinued. Merely because the relevant income on receipt according to the ld Assessing Officer is not credited to the profit and loss account such disallowance is made. According to us the assessee is getting a benefit of interest free deposit for the purposes of the business of the assessee in lieu of the cost of the above magazine. It is not the case of the Revenue that money is utilized for other than business purposes and expenditure incurred and claimed against business income. The ld CIT(A) has held that assessee is saving interest cost by collecting this deposit and therefore such saving of interest has definitely gone in increasing the profit of the assessee. In view of this we do 12 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 not find any infirmity in the order of the ld CIT(A) in deleting the disallowance of Rs. 2411392/- on account of expenditure made under subscription deposit scheme. In the result ground No. 1 of the appeal of the Revenue is dismissed.
Ground No.2 of the appeal of the Revenue is against deletion of addition of Rs. 1297879/- u/s 40A(2) of the Act. During the year assessee has made a payment to 34 parties amountinig to Rs. 65521166/- and AO asked the assessee to justify the reasonableness of the payment. The assessee submitted the bills and quotation of rates of the related party and outside company for similar type of work done. It was further contended that some of the parties are profit making and the rates of tax paid by them are similar. The ld Assessing Officer held that the rate submitted by the assessee of the outside company are as at 24.11.2010 and are not related to the corresponding period of payment made to the sister concern. The AO further pointed out the same to the assessee but no further explanation was given. With respect to the taxability of the sister concern the relevant details showing the profitability and copy of income tax return to show the similarity of the tax was not provided. Therefore, the ld AO disallowed payment pertaining to 33 parties out of 34 parties @2% of such expenditure holding it in excess of the prevailing market rate. The ld CIT(A) deleted the above disallowance on the basis of the judicial precedent as well as accepting the contention of the assessee that the companies to whom payment have been made are assessed to tax and has shown profit. He further held that the payment made to such associated concerned was already allowed in AY 2007-08.
The chart submitted by the assessee at page No. 16 of the paper book showed as under:-
Sl Name of the company Nature of work done Rate charge Market No. Rate (rs.) VV Media Pvt. Ltd. Printing charges Rs. 360 per Rs. 600 1. thousand per thousand Vinapar Pvt. Ltd Printing charges Rs. 540 per Rs. 600 2. thousand per thousand PSPC Press Pvt. Ltd Printing charges Rs. 360 per Rs. 600 3. thousand per thousand Woman‟s Era Media Pvt. Printing charges Rs. 360 per Rs. 600 4. Ltd. thousand per 13 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 thousand Media Services Data processing Rs. 20/10 per 22/11 per 5. charge page page Sankhiya Sanchar Data processing Rs. 20 per page 40 per 6. Sahyog Pvt. Ltd, charge page DP Communication Data processing Rs. 20 per page 22 per 7. charge page AN Logistics Processing charge Rs. 36 per page 40 per 8. page Delhi Press Samachar Processing charge Rs, 535 per plate 600 per 9. Patra plate Pratichhaya Graphics Place processing Rs, 535 per plate 600 per 10. charge plate DP Movers. Stackinig and Rs. 600 per 6.5 per 11. bundeling charge thousand thousand.
It is at page Nos. 3 and 4 of the assessment order where the ld Assessing Officer has mentioned list of 33 parties to whom the payments have been made. The assessee has not mentioned the nature of such expenditure. Further, with respect to the payment for services to the related parties assessee has not produced the bills of those parties to show the nature of expenditure as well as the rates at which such expenditure have been incurred. The ld Assessing Officer noted 34 parties and out of which the payment made to Delhi Press Samachar Patra Pvt. Ltd was accepted by him at market rate, however, with respect to other 33 parties in absence of proper detail, where from the comparative market rate can be established, the ld Assessing Officer disallowed applying percentage. The various bills submitted by the assessee of non related parties gives the rate of the work done, however, with respect to the payment made to the related parties no such bill are shown, demonstrating comparable rate at which amounts are paid to them, before us as well as before lower authorities that rates charged by the related parties are comparable. Even the quality of the printing and various other charges was also not explained. With respect to the 33 parties what is the nature of work carried out by them was also not mentioned. Same is also not mentioned in the order of the ld CIT(A).
According to the provisions of section 40A(2), where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person and ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 the ld Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to a. Fair market value of the goods, services or facilities for which the payment is made or b. The legitimate needs of the business of the assessee or c. The benefits derived or accruing to the assessee Then the Assessing Officer shall not allow the deduction of so much of the expenditure as is considered by the Assessing Officer to be excessive or unreasonable. Therefore, it is apparent that assessee is required to demonstrate the nature of services performed by or goods supplied by the sister concern, the fair market value of such goods, the legitimate needs of the business and benefit derived by the assessee. In the present case when the assessee has not given the details about the nature of services performed by the related parties it is irrelevant to consider the market value of such services. Further the market value has to be contemporaneous. The quotation for plate making charges, printing charges etc submitted by the assessee placed at page No. 33 of the paper book are dated 24.11.2010 whereas the impugned assessment before us is Assessment Year 2009-10. Furthermore, the bills of the related parties except in case of Delhi Press Samachar Patra Pvt. Ltd were also not provided. Even in that bill too the details of quantity and the rates are not mentioned. Further, in many cases the nature of services rendered are also not mentioned ex. Page No. 54 where the bill of Prerna Sahyog Pvt. Ltd is produced. Further, surprisingly the quantity of the work and the rates are not mentioned in the bills of the related parties but the rates are given separately in the different sheets, where the AO has mentioned that nature of such expenses are also not mentioned by the assessee. The ld CIT(A) has held that the appellant had during the course of assessment proceeding submitted comparative rate for the work done by the related parties as well as the outside party along with the ledger accounts whereas, ld Assessing Officer has mentioned that even the nature of work carried out by the related parties were not mentioned by the assessee. The question whether the expenditure is excessive or reasonable in a given case has to be examined keeping in view the services for which the payment is made and the rates at which they are provided. In the present case the rates at which the services have been provided are not available in the bills of sister concern. 15 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 17. Further, the ld CIT(A) has relied upon the several decisions but in none of the decisions the facts are that details of services provided by the sister concern is not mentioned before the ld Assessing Officer. In view of this none of the decisions apply to the facts of the case.
The ld CIT(A) further believed that payments made to related parties are assessed to tax and has shown the profits. The parties to whom the payments have been considered for disallowance are 33 in number, it is not possible that tax rates of all these parties can be similar as many of them are private limited companies and status of other parties is not known. Some of the assesses are also in the status of HUF. Therefore, it is not the case where the assessee as well as recipient of the income are paying taxes at the same rate. In view of this the above argument of the assessee and finding of the ld CIT(A) is not sustainable. Furthermore, each assessee is to be independently assessed on his due income according to the scheme of the act. Furthermore, it is also not available on record that whether the parties belong to the same ownership or not.
Furthermore, the ld Assessing Officer is also not authorized to disallow 2% of the total expenditure but to disallow only the expenditure which is unreasonable and excessive after considering the circumstances provided u/s 40A(2) of the Act.
In view of the above facts and circumstances we set aside the whole issue back to the file of the ld Assessing Officer to examine the payment made to the related parties after considering the nature and rate of services provided by them to the assessee and then compare their fair market value, legitimate need of the assessee and benefit derived by the assessee and then if there is any amount found to be unreasonable or excessive then only disallow to that extent. The assessee is further directed to submit before the Assessing Officer above details. The AO is further directed to examine the matter in a fair and reasonable manner bearing in mind that the provision is intended to check, evasion of tax through excessive and unreasonable payment to related parties. In the result ground No. 2 of the appeal of the revenue is allowed with above direction.
In the result appeal of the revenue ITA No.1061/Del/2013 for Assessment Year: 2009-10 is partly allowed with above direction for statistical purposes.
(Assessment Year: 2008-09) 22. In this appeal similar grounds as in Assessment Year 2009-10 were raised. The parties before us submitted that the facts and circumstances leading to above disallowances are also similar and their arguments are remains the same. 16 | P a g e ITO, Ward 10 (1) , New Delhi Vs Delhi Pres samachar Patra Private Limited , 1061/ Del/2013 & 5001 & 6515/ Del/2014 A.Y. 2008-09 to 2011-12 23. The ground No. 1 of the appeal is with respect to deletion of disallowance of expenditure of Rs. 1319989/- under subscription deposit scheme. We confirm the order of the ld CIT(A) for the reasons given by us in ITA No. 1061/Del/2013 for AY 2009-10 deleting the above disallowance. In the result ground No. 1 of the appeal of the Revenue is dismissed.
Ground No. 2 of the appeal is regarding deletion of the disallowance u/s 40A(2) of the Act. we set aside the whole issue back to the file of the Assessing Officer to decide it afresh with similar direction given by us in ITA NO. 1061/Del/2013 for AY 2009-10. In the result ground No. 2 of the appeal of the revenue is allowed for statistical purposes.
In the result appeal of the revenue Assessment Year: 2008-09 is partly allowed with above direction for statistical purposes.
ITA No. 5001/Del/2014 (Assessment Year 2010-11) 26. In this appeal similar grounds as in Assessment Year 2010-11 were raised. The parties before us submitted that the facts and circumstances leading to above disallowances are also similar and their arguments are remains the same.
The ground No. 1 of the appeal is with respect to deletion of disallowance of expenditure of Rs. 2940449/- under subscription deposit scheme. We confirm the order of the ld CIT(A) for the reasons given by us in for AY 2009-10 deleting the above disallowance. In the result ground No. 1 of the appeal of the Revenue is dismissed.
Ground No. 2 of the appeal is regarding deletion of the disallowance u/s 40A(2) of the Act. we set aside the whole issue back to the file of the Assessing Officer to decide it afresh with similar direction given by us in ITA NO. 1061/Del/2013 for AY 2009-10. In the result ground No. 2 of the appeal of the revenue is allowed for statistical purposes.
In the result appeal of the revenue ITA No.5001/Del/2014 for Assessment Year: 2010-11 is partly allowed with above direction for statistical purposes.
(AY 2011-12) 30. In this appeal similar grounds as in Assessment Year 2011-12 were raised. The parties before us submitted that the facts and circumstances leading to above disallowances are also similar and their arguments are remains the same. 17 | P a g e