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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI JOGINDER SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the assessee/appellant are directed against the order of the Commissioner of Income Tax (Appeals)-6, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are Sistas Private Ltd. 1256, 1255/Mum/2016 involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience. We begin with the AY 2007-08. Assessment Year: 2007-08 2. The grounds of appeal read as under:
1. The Ld. CIT(A) erred in confirming the disallowance u/s 14A to the extent of 10% of salaries, printing and stationery, postage, telegram, telephones, miscellaneous expenses, without appreciating the fact that the said expenses incurred were wholly and exclusively for the purpose of business of corporate communication consultants carried on by the appellant during the year under appeal and not for the earning of exempt income envisaged u/s 14A of the Act.
The Ld. CIT(A) erred in confirming the action of the AO of disallowing business loss of Rs.10,68,690/- on the ground that the appellant had not been carrying out any business activity. 3. Briefly stated, the facts of the case are that the appellant filed its return of income for the assessment year (AY) 2007-08 on 12.11.2007 declaring total income of Rs. Nil with current year loss of Rs.10,68,890/-. The Assessing Officer (AO) completed the assessment u/s 143(3) on 29.12.2009 determining the total income at Rs.49,17,630/- after disallowing the business loss and also Rs.2,84,670/- by applying the provisions of section 14A. Then, the AO passed an order u/s 143(3) r.w.s. 254 on 29.03.2014 holding that there is hardly any business activity to justify such heavy expenditure on professional fees, legal fees, travel expenses etc. Therefore, the AO held that only those expenses are justified which are incurred towards earning rental income and making Sistas Private Ltd. 1256, 1255/Mum/2016 and maintaining investments. Further he held that the expenses towards maintenance and upkeep of rented premises are allowed as deduction by virtue of section 24 of the Act and the expenses towards making and maintaining investments are to be disallowed as per provisions of section 14A of the Act. Therefore, he disallowed the entire business loss as claimed by the appellant. 4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) observed that the AO has not made any addition u/s 14A r.w. Rule 8D to the income computed under normal provisions. However, he has added Rs.2,84,670/- being disallowance u/s 14A to the book profit u/s 115JB. The Ld. CIT(A) held that it would be reasonable if 10% of salaries, printing and stationary, postage, telegram, telephones, miscellaneous expenses are disallowed u/s 14A. Therefore, he directed the AO to disallow the same u/s 14A and add to the income u/s 115JB. 5. We find that the above issue has been decided in favour of the assessee by the Special Bench of the Tribunal in ACIT v. Vireet Investment (P.) Ltd. (2017) 165 ITD 27 (Delhi-Trib) (SB), wherein it is held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w. Rule 8D. By following the above decision, we set aside the order of the Ld. CIT(A) on the above issue and allow the 1st ground of appeal.
Sistas Private Ltd. 1256, 1255/Mum/2016 6. Now we turn to the 2nd ground of appeal
. In appeal by the assessee, the Ld. CIT(A) followed the order of his predecessor for the AY 2009-10 and AY 2011-12 and dismissed the said appeal on the ground that the assessee was not carrying out any business activity.
7. Before us, the Ld. counsel of the assessee files a Paper Book (P/B) containing (i) Memorandum and Articles of Association of the Company, (ii) Audited Financial Statements as at 31st March 2007, (iii) Computation of Total Income for the AY 2007-08, (iv) Original Assessment Order u/s 143(3) of the Income Tax Act, 1961 for AY 2007- 08 dated 29 December 2012, (v) Order of the Commissioner of Income Tax (Appeal) u/s 254 of the Act dated 15 June 2010, (vi) Order of the Income Tax Appellate Tribunal dated 16 July 2012, (vii) Written submissions to the Assessing Officer dated 19 March 2014 after the ITAT restored the issues to the file of the Assessing Officer, (viii) Assessment order u/s 143(3) of the Income Tax Act, 1961 for AY 2009- 10, (ix) Assessment Order u/s 143(3) of the Income Tax Act, 1961 for AY 2011-12 and (x) Written submissions before the CIT(A). The Ld. counsel submits that the appellant has carried out its business activities as per the objects for which it is established. Further it is submitted that particulars of expenses in detail were submitted before the AO to prove beyond doubt that the expenses incurred by the appellant were incurred solely for its business activity.
8. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
Sistas Private Ltd. 1256, 1255/Mum/2016 9. We have heard the rival submissions and perused the relevant materials on record. As per the audited accounts, the appellant has shown Rs.31,102,750/- as income in its profit and loss account for the year ended 31.03.2007. The details of income are (i) license fee/rent of Rs.32,37,222/-, (ii) profit on sale of investment of Rs.2,77,79,201/- and (iii) dividend on shares and units of Rs.86,327/-. Also it has shown loss on share trading at Rs.7,65,127/-. It has incurred expenses of Rs.74,48,457/- and debited depreciation of Rs.30,33,138/-. A company may not obtain, or be able to execute, a single business contract for months and yet it may be deemed to carry on its business, if during the period of lull or inactivity it is kept alive and if it retains its registered office and holds meetings. The mere fact that a businessman has not been able to obtain a contract and the business has for some time been in this sense dormant would not mean that it has ceased to exist, if the assessee continues to maintain an establishment and incur expenses in the expectation that work would come and business would be successful. We may refer here to the decision in L.Ve. Vairavan Chettiar v. CIT, (1969) 72 ITR 114, 119 (Mad); General Corporation Ltd. v. CIT (1935) 3 ITR 350, 355 (Mad); CIT v. Bharat Nidhi Ltd., (1966) 60 ITR 520 (Punj); Inderchand Hari Ram v. CIT, (1953) 23 ITR 437, 442-3 (All); Karsondas Ranchhoddass v. CIT, (1972) 83 ITR 1, 20 (Bom); Mrs. Sarojini Rajah v. CIT, (1969) 71 ITR 504 (Mad).
Sistas Private Ltd. 1256, 1255/Mum/2016 The ratio laid down in the decisions mentioned hereinabove squarely applies to the instant case. In the instant case, while making the disallowance of expenses neither the AO nor the Ld. CIT(A) has bothered to look into the specific accounts and find fault with it. The books of the accounts of the appellant which are audited have not been rejected before making the disallowance of expenses. The Memorandum of Association permits the appellant to carry on, develop and turn to account the business of advertising agents, brokers, consultants, specialists and contractors in all its branches. All the more, the income of the appellant comprises of license fees/rent; profit on sale of investment; dividend on shares of units and share trading. The Memorandum of Association of a company is its charter defining the object of its existence and operations. As held in Dr. Lakshmanaswami Mudaliar v. LIC, AIR 1963 SC 1185, the memorandum has to be considered like any other document. The expenses disallowed by the AO relate to the above income earned by the appellant. As the disallowances of expenses made by the AO which later on were confirmed by the Ld. CIT(A) are not based on facts, we delete the same and allow the 2nd ground of appeal
10. In the result, the appeal is allowed.
Sistas Private Ltd. 1256, 1255/Mum/2016 Assessment Year: 2009-10 11. The grounds of appeal read as under:
1. The Ld. CIT erred in confirming that the appellant had not carried out any business activity during the year under consideration and further erred in confirming the consultancy income received of Rs.6.50 lakhs as income from other sources.
2. The Ld. CIT erred in confirming action of AO of disallowing expenses of Rs.42,95,151/- without appreciating that the said expenses incurred were wholly and exclusively for the purpose of business of corporate communication consultants carried on by the appellant during the year under appeal.
12. We begin with the 1st ground of appeal. In the assessment order dated 30.12.2011, the AO has brought to tax Rs.6,50,000/- with the following reasons: “5. The sections governing the earning heads are clear and do not include most the expenses which have been claimed. In the past scrutiny assessment the same expenses were debated and disallowed being non relevant to earning of income. To give its operation a business look it has offered (sacrificed) Rs.6.50 lakh under consultancy, since allowability of expenses relevant to business income have recently been main litigant area in previous scrutiny assessments and are pending for adjudication before various appellate authorities. Assessee could not explain why it started receiving commission all on a sudden, from whom, for what service or why there was no deduction of TDS for earning the same as provisions of the Act. In absence of any satisfactory explanation the income offered is considered as income from other sources and related expense is allowed against that income.”
Sistas Private Ltd. 1256, 1255/Mum/2016 13. In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and confirmed the taxability of Rs.6.50 lakhs as income from other sources.
Before us, the Ld. counsel of the assessee files a P/B containing inter alia (i) annual accounts, (ii) copy of submission dated 02.12.2011 along with supporting documents filed before the AO, (iii) details of business income earned in subsequent years, (iii) note on services rendered to Saffron Brand Consultant (India) Pvt. Ltd., (iv) TDS certificate issued by Saffron Brand Consultant (India) Pvt. Ltd. evidencing deduction of tax u/s 194J being fees for professional or technical services.
On the other hand the Ld. DR relies on the order of the Ld. CIT(A) and submits that the so-called services rendered by the appellant- company is fixation of meeting and attending meetings by Mr. Shambu Venkatrao Sista and the appellant had created a facad to claim expenditure. It is stated that fixing of meeting and attending of meeting cannot be considered as in the nature of business or even profession of the appellant-company. Thus the Ld. DR submits that the order of the Ld. CIT(A) in confirming the order of the AO taxing Rs.6.50 lakhs as income from other sources be confirmed.
We have heard the rival submissions and perused the relevant material on record. It is found that the AO has brought to tax Rs.6.50 lakhs as income from other sources on general propositions as extracted at para 12 hereinbefore. The Ld. CIT(A) has also resorted to such finding of the AO. It is a settled position that general propositions do not decide Sistas Private Ltd. 1256, 1255/Mum/2016 concrete cases. As the findings of the AO as well as that of Ld. CIT(A) are not supported by materials, we allow the 1st ground of appeal
17. We now turn to the 2nd ground of appeal. It is found that this ground of appeal is similar to the 2nd ground of appeal for the AY 2007-
08. Therefore, our decision at para 9 hereinbefore applies equally here. Thus the 2nd ground of appeal is allowed.
18. In the result, the appeal is allowed. Assessment Year: 2011-12
19. The grounds of appeal read as under:
1. The Ld. CIT(A) erred in confirming the action of AO of disallowing expenses of Rs.73,11,118/- without appreciating that the said expenses were incurred wholly and exclusively for the purpose of business of corporate communication consultants carried on by the appellant during the year under appeal.
2. The Ld. CIT(A) erred in confirming the action of the AO of disallowing bad debts, claimed of Rs.4,55,000/- us/ 36(1)(vii), even though the same was included in the disallowance of all expenses, without appreciating that the said bad debts were claimed in respect of receipts offered for tax in earlier years as business income.
3. The Ld. CIT(A) erred in not reducing the quantum of expenses disallowed, despite demonstration of double disallowance.
20. We find that the facts leading to the 1st ground of appeal is similar to the 2nd ground of appeal for the AY 2007-08. Facts being identical, we follow our decision at para 9 hereinbefore and allow the 1st ground of appeal.
Sistas Private Ltd. 1256, 1255/Mum/2016 21. Finally, we come to the 2nd ground of appeal
. In the assessment order dated 30.03.2014, the AO observed that the assessee had derived consultancy income of Rs.10,95,000/- from M/s Saffron Brand Consultants India Pvt. Ltd. TDS credit of Rs.1,09,500/- relating to this transaction was claimed. Having gone through the details of bad debts written off, the AO found that Rs.4,55,000/-, which pertains to this party, has been written off. The AO made a disallowance of Rs.4,55,000/- on the basis that the transaction with this party is crowded in suspicion.
22. In appeal, the Ld. CIT(A) held that the assessee was not carrying out any business activity and the various expenses disallowed by the AO have been confirmed. The bad debt of Rs.4,55,000/- being one such disallowance was confirmed by the Ld. CIT(A).
23. Before us, the Ld. counsel of the assessee submits that the assessee has been providing consultancy services to Saffron on a regular basis since past several years and the income from the same has been offered to tax as business income. The assessee has raised an invoice of Rs.4,55,000/- on Saffron during the financial year 2008-09. However, thereafter, certain commercial dispute arose between the assessee and the customer. It is stated that considering the relationship with the customer, the assessee decided to write off the said amount during the year under consideration.
24. On the other hand, the Ld. DR relies on the order of Ld. CIT(A).
25. We have heard the rival submissions and perused the relevant materials on record. We find that the amount of any bad debt or part Sistas Private Ltd. 1256, 1255/Mum/2016 thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction u/s 36(1)(vii) subject to the provisions of section 36(2) which delineates that such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year. In view of the above position of law, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a fresh order keeping in mind our above observation and after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. Thus the 2nd ground of appeal is allowed for statistical purposes.
26. As the 1st ground of appeal has been allowed, the 3rd ground of appeal becomes academic in nature.
27. In the result, the appeal is partly allowed.
28. To sum up, the appeals for the AY 2007-08 and AY 2009-10 are allowed, whereas the appeal for the AY 2011-12 is partly allowed. Order pronounced in the open Court 22/06/2018 Sd/- Sd/- (JOGINDER SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER