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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI JOGINDER SINGH & SHRI RAMIT KOCHAR
PER RAMIT KOCHAR, Accountant Member These two appeals, filed by the assessee, being 1629/Mum/2015 for assessment year(s) 2009-10 & 2010-11 respectively are directed against separate appellate orders dated 11.01.2013 and 22.02.2014 passed by learned Commissioner of Income- tax(Appeals)-3 , Mumbai (hereinafter called "the CIT(A)") & learned CIT(A)- 4,Mumbai for AY 2009-10 and 2010-11 respectively , the appellate proceedings had arisen before learned CIT(A) from separate assessment orders dated 28-12-2011 & 25.02.2013 respectively passed by the learned Assessing Officer (hereinafter called “the AO” ) u/s 143(3) of the Income-tax I.T.A. 1629/Mum/2015 Act, 1961 (hereinafter called "the Act") for assessment year(s) 2009-10 & 2010-11 . 2. First we shall take up appeal of the assessee for AY 2009-10 in . The grounds of appeal
raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") in ITA no. 1658/Mum/2013 for AY 2009- 10 read as under- “1. The learned CIT(A)-3, has erred in confirming disallowance of interest of Rs. 4,14,548/- made by the learned Assessing Officer concluding that there is an element of diversion of funds from interest bearing borrowings and earning less interest than paid despite full explanation submitted to the Assessing officer and to learned C.I.T.(A)-3 at the time of hearing and confirmation is without appreciating full facts submitted at the time of hearing.
2. The learned C.I.T.(A)-3 has erred in confirming estimating cash expenses and disallowance of Rs. 4,42,767/- out of total expenses under various heads made of Rs. 17,71,068/- without appreciating full facts and coming to conclusion that all expenses are cash expenses without verifying the details & breakup submitted of the bank payments & cash payments and in addition coming to conclusion without any specific instance noticed of any personal expenses.
3. The learned C.I.T. A(3) has erred in not considering the details submitted of explanation of AIR discrepancy including affidavit of the individual who has confirmed that he has spent such amount any paid from his account and has further erred in not considering additional evidence filed and without appreciating full facts has erred in confirmed the AIR discrepancy amount of Rs. 2,49,162/-.
4. The learned CIT(A)-3 has erred in confirming disallowance of Rs. 5,14,804/- out of foreign travel expenses made by Assessing officer without appreciating full facts and details submitted.
5. The learned C.I.T.(A)-3 has erred in confirming the disallowance of Rs.11,45,780/- u/s 14A r.w.rule 8D for the reasons stated in his order without appreciating full facts submitted.
6. The appellant craves to add, alter or amend the above several grounds of appeal before or at the time of hearing.”
The brief facts of the case are that the assessee is engaged in business of production , distribution, exhibition of films , studio equipment hire etc..
I.T.A. 1629/Mum/2015 4. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act, the AO observed that the assessee has obtained secured and unsecured loans of Rs. 28,16,98,843/- and part of the same were invested in its sister concern M/s Whistling Woods International Limited as deposit. The opening balance at the beginning of financial year with Whistling Woods International Limited was Rs. 17.65 crores while at the year end, it was Rs. 21.85 crores. It was further observed that the assessee during the year obtained loan from Kotak Mahindra Bank at the interest rate of 10.5% per annum while the interest charged from said sister concern was only 9% p.a.. The AO observed that the assessee had paid interest of Rs. 2,76,36,508/- during the year and consequently differential interest being 1.5% to the tune of Rs. 4,14,548/- was brought to tax by the AO by relying on decisions of Hon’ble Madras High Court in the case of K. Somusundaram & Bros. v. CIT 238 ITR 939 and Hon’ble Bombay High Court in the case of Phelta Sugar Works Limited (208 ITR 989) vide assessment order dated 28.12.2011 passed by the AO u/s 143(3), which was later confirmed by learned CIT(A) while disposing of first appeal vide appellate order dated 11.01.2013 passed by learned CIT(A). 5.Now, the assessee has filed an second appeal with tribunal. The learned counsel for the assessee submitted at the outset that authorities below erred in disallowing the interest to the tune of Rs. 4.14 lacs. It was submitted that in earlier years , the borrowings were made from LIC on the interest rate of 9% p.a. and it is only in the month of January 2009, the loan was raised from Kotak Mahindra Bank Limited at the interest of 10.5% p.a. . It was submitted that major loan is from LIC. Thus, it was submitted that the assessee has rightly charged interest @9% p.a. from its sister concern which is subsidiary company and the amounts were advanced in the course of business. The assessee also contended that these loans were advanced based on commercial expediency and relied on the decision of Hon’ble Supreme Court in the case of S A Builders Limited v. CIT (2007) 288 ITR 1(SC) and Hero Cycles Private Limited v. CIT (2015) 379 ITR 347(SC). The learned DR on the other hand relied upon the appellate order of learned CIT(A) and fairly submitted that under these circumstances to verify the contentions of the assessee, matter may be restored to the file of the AO for I.T.A. 1629/Mum/2015 re-adjudication of the issue on merits de-novo wherein the AO can decide the matter afresh after considering the contentions of the assessee.
We have considered rival contentions and perused the material on record including orders of the authorities below and case laws cited before us. We have observed that the assessee is engaged in business of production , distribution, exhibition of films and studio equipment hire. The assessee has raised several loans from banks /NBFC as well from private entities both secured and unsecured . The total loans as on the closing of the financial year ending on 31-03-2009 were Rs. 28.18 crores as per ledger account of Loans (pb/page 21) submitted before the tribunal. The major loan outstanding was from LIC of Rs. 19.80 crores while there are also different car loans for purchasing cars etc.. The loan outstanding from Kotak Mahindra Bank Limited was Rs. 4.61 crores as at year end and the said loan was raised stated to be raised on interest @10.5% p.a. which as per ledger account (filed in paper book/page 31), the first disbursed took place on 28- 01-2009. There were also loans outstanding from corporate bodies namely Oracle Corporate Services Limited of Rs. 3.56 crores as at year end. The assessee has also advanced deposits to its sister company which is its subsidiary company namely Whistling Woods International Limited wherein opening balance as at beginning of the year was Rs. 17.65 crores while at the year end the outstanding balance of deposit was Rs. 21.85 crores. The interest recoverable from this company by the assessee is @9% p.a. and now the grievance of revenue is that amounts were borrowed at higher rate of interest @10.5% p.a. which were advanced to this subsidiary company at lower rate of interest @9% p.a.. The assessee has disputed this finding of fact by the AO by contending that major borrowing were from LIC which was on the interest rate @9% p.a. and it is only at fag-end of the year in January 2009 , the borrowings were made from Kotak Mahindra Bank Limited on the interest rate @10.5% p.a. which cannot be benchmarked in the manner done by the AO to disallow the differential interest @1.5% for the whole year on the total deposit advanced to the subsidiary company namely Whistling Woods International Limited . Secondly, it is the claim of the assessee that the amounts were advanced keeping in view commercial expediency and no disallowance is warranted . The assessee had relied upon decision of Hon’ble Supreme Court in the case of S A Builders Limited(supra) and Hero Cycles I.T.A. 1629/Mum/2015 Private Limited(supra) . These contentions of the assessee requires verification by the AO as it required investigation of facts. In our considered view, the matter need to be set aside and restored to the file of the AO for fresh adjudication of the issue on merits in accordance with law after giving proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The AO will admit the evidences / explanations filed by the assessee in its defence in de-novo proceedings and adjudicate the same afresh de-novo on merits in accordance with law in set aside proceedings. This disposed of Ground No. 1 raised by the assessee in memo of appeal filed with the tribunal. The ground no. 1 is allowed for statistical purposes. We order accordingly.
The Second ground raised by the assessee is w.r.t. disallowance of expenses to the tune of Rs.4,42,767/- out of total expenses to the tune of Rs. 17,71,068. The AO observed that the assessee has claimed following miscellaneous expenses which were incurred in cash :
S.No. Head of Expenditure Amount (In Rs.) 1. Conveyance Expenses 3,46,906 2. Diwali Festival Expenses 3,15,744 3. Food & Refreshment 7,71,513 4. Guest House expenses Royal Palms 1,32,614 5. Lodging & Boarding Expenses 1,22,870 6. Entertainment Expenses 7,150 7. Business Promotion Expenses 74,271 Total 17,71,068 The AO observed that these were expenses incurred in cash and were self vouched in which personal element cannot be ruled out and hence 25% of the said expenses were disallowed and added to the income of the assessee which led to the addition of Rs. 4,42,767/- vide assessment order dated 28.12.2011 passed u/s 143(3) of the 1961 Act. The learned CIT(A) also dismissed the appeal of the assessee by holding that the most of cash expenses were paid in cash, self vouched and also nature of expenses are I.T.A. 1629/Mum/2015 such that personal element cannot be ruled out, vide appellate order dated 11.01.2013 passed by learned CIT(A).
Aggrieved by the appellate order dated 11.01.2013 passed by learned CIT(A), the assessee has filed an appeal before the tribunal. The learned counsel for the assessee submitted that ad-hoc disallowance has been made on presumption that there is personal element in these expenses keeping in view nature of expenses and that these expenses were paid in cash, without bringing any specific incriminating reasons for disallowance. Our attention was drawn by learned counsel for the assessee to page no. 176 and 178 of the paper book filed with the tribunal, to show the manner in which self vouchers were made to pay for small petty day to day expenses. It was submitted that there is no personal element in these expenses. It was also contended that fringe benefit tax was also paid by the assessee on all these expenses for the impugned year under consideration. Attention was drawn to copy of income-tax return filed with Revenue which is placed in paper book /page 1-3, wherein fringe benefit was declared to the tune of Rs. 25,56,971/- and Fringe Benefit tax of Rs. 8,69115/- was paid by the assessee for the impugned assessment year. The learned DR would rely on the appellate order of learned CIT(A).
We have considered rival contentions and perused the material on record. We have observed that expenses to the tune of Rs. 17,71,068/- were incurred by the assessee towards following heads , out of which 25% of expenses were disallowed on the allegation that the payments were made in cash, nature of expenses are such that personal element could not be ruled out and also that the self vouchers are prepared by the assessee to claim these expenses. The total expenses out of which 25% disallowance were made are as under:
S.No. Head of Expenditure Amount (In Rs.) 1. Conveyance Expenses 3,46,906 2. Diwali Festival Expenses 3,15,744 3. Food & Refreshment 7,71,513 4. Guest House expenses Royal Palms 1,32,614 5. Lodging & Boarding Expenses 1,22,870 6. Entertainment Expenses 7,150 I.T.A. 1629/Mum/2015 7. Business Promotion Expenses 74,271 Total 17,71,068 The assessee has drawn our attention to the manner in which such self vouchers are prepared and the signatures of the payee were also obtained while making payments in cash. There is no specific incriminating information brought on record by the authorities below to contend that these expenses were incurred for personal purposes or were bogus expenses claimed or that these expenses were not incurred wholly and exclusively for the purposes of business of the assessee rather an adhoc disallowance to the tune of 25% of the expenses were made . The general reference is made as to the nature of expenses, personal elements not being ruled out and that payments were made in cash. The assessee is a company who is an artificial juristic person created by law and recognised as a separate legal entity having a distinct and separate identity. The company cannot incur personal expenses as it is not natural person . At best the grievance of the Revenue could be that some of these expenses are attributable to have been incurred for benefit of its employees or directors and hence disallowance is justified. But the impugned assessment year 2009-10 was also subject to separate tax regime namely fringe benefit tax whose purpose was indeed to collect tax keeping in view perquisite element in these expenses which are for the benefit of the employees. The separate regime of taxation called Fringe Benefit Tax was introduced vide Finance Act, 2005. The relevant extract of Budget Speech of the Hon’ble Finance Minister while introducing Fringe Benefit Tax in Finance Bill, 2005 is reproduced hereunder: “160. I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a I.T.A. 1629/Mum/2015 new name, namely, Fringe Benefits Tax. The rate will be 30 per cent on an appropriately defined base.” The nature of the expenses incurred by the assessee which are covered above were all subject to Fringe Benefit Tax and in-fact the assessee assessed its fringe benefit to the tune of Rs. 25.56,971/- and paid fringe benefit tax of Rs. 8,69,115/- which is evident from the copy of income tax return filed with the tribunal(page 1-3/pb). The details of computation of fringe benefit of Rs. 25,56,971 is placed at page 2/pb .The learned counsel for the assessee also stated before us that all these expenses were duly included while computing fringe benefit tax liability and due fringe benefit tax was separately paid by the assessee on these expenses. It is also not the grievance of the Revenue that these expenses were not incurred wholly and exclusively for the purposes of the business of the assessee . Under these situations it was incumbent on the Revenue to have come out with specific disallowance by going through each of the expenses to come to the conclusion that these expenses were not incurred wholly and exclusively for the purposes of the business or were bogus expenses which has not been done by the authorities below rather an adhoc disallowance has been made by the authorities below on certain assumptions which is not sufficient to fasten tax liability in the instant case. Thus, keeping in view totality of circumstances and peculiar facts of the case before us , we are of the considered view that the disallowance as was made by the AO and as confirmed by learned CIT(A) is not sustainable and is hereby ordered to be deleted. Ground No. 2 is decided in favour of the assessee. We order accordingly.
Ground No. 3 relates to additions made owing to difference in AIR statement. The AO observed from AIR information that the assessee has made payments of Rs. 2,49,162/- towards American Express Bank Credit Card . The assessee in reply submitted that it did not made payment to American Express Bank Credit Card and no such card was held by it. The AO also observed that some payments were made by the assessee towards American Express Bank Credit Card which were reflected in books of accounts of the assessee for which instances were given in the assessment order and contentions of the assessee were held by the AO to be factually incorrect and hence the additions to the tune of Rs. 2,49,162/- was made by the AO to the income of the assessee as an unexplained expenditure u/s 8 I.T.A. 1629/Mum/2015 69C , vide assessment order dated 28.12.2011 passed by the AO u/s 143(3). Later disallowance on this count was reduced by the AO to Rs. 2,23,216/- vide rectification order dated 05.01.2012 passed by the AO u/s 154 of the 1961 Act. The assessee carried the matter in appeal before learned CIT(A) and filed additional evidences by way of affidavits and statement of American Express Bank Credit Cards to contend that no disallowance is warranted but learned CIT(A) refused to admit additional evidences and appeal of the assessee stood dismissed by learned CIT(A), vide appellate order dated 11.01.2013 passed by learned CIT(A).
Aggrieved by the appellate order dated 11.01.2013 passed by learned CIT(A), the assessee has come in an appeal before the tribunal. The assessee has also filed American Express Bank Credit Card statements in paper book filed with the tribunal. The assessee has filed an application for admission of additional evidence under Rule 29 of Income-Tax (Appellate Tribunal) Rules, 1963 , wherein affidavit dated 20-11-2012 of Mr. Puneet Agarwal is filed wherein he has owned up these American Express Bank Credit Card attributable to his personal payments having no connection with the assessee. These additional evidences goes to the root of the matter and needs to be admitted in the interest of justice . The learned CIT(A) ought to have admitted these additional evidences in the interest of substantial justice and thereafter adjudicated on merits. Rule 46A of the 1962 Rules is meant to advance justice and not to scuttle genuine assessee’s. The assessee has rightly relied upon decision of Hon’ble Bombay High Court decision in the case of Smt Prabhavati Shah v. CIT (1998) 231 ITR 1(Bom.). We direct admission of these additional evidences in the interest of substantial justice. The learned DR has relied upon the orders of authorities below. After hearing both the parties and after perusal of the material on record, we are of the considered view, that this issue need to be restored to the file of the AO for de-novo adjudication of the issue on merits in accordance with law after giving proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The AO shall admit evidences and explanations submitted by the assessee in its defence and adjudicate the issue , thereafter, on merits in accordance with law. The ground no. 3 is allowed for statistical purposes. We order accordingly.
I.T.A. 1629/Mum/2015 12. The next grievance of the assessee vide ground no. 4 is with respect to disallowance of foreign travelling expenses to the tune of Rs. 5,14,804/-. The AO observed that the Chairman Sh. Subhash Ghai , Director of the assessee along with Shri Rahul Puri travelled to London, Singapore, France, Madrid/Alchante , Frankfurt, Europe and Dubai. The purpose stated for these foreign visit by the assessee was business promotion, while the AO observed that the assessee did not undertook any business in Madrid, London, France, Dubai etc. . The AO allowed the expenses incurred for visiting film festivals abroad while the rest of the foreign travel visit expenses were disallowed by the AO by holding that these expenses were not incurred wholly and exclusively for the purposes of business of the assessee, vide assessment order dated 28.12.2011 passed by the AO u/s 143(3). The assessee filed first appeal with learned CIT(A) who dismissed the same vide appellate order dated 11.01.2013 .
Aggrieved by the appellate order dated 11.01.2013 passed by learned CIT(A), the assessee has filed second appeal before the tribunal. The learned counsel drew our attention to the orders of the authorities below but no substantive arguments were advanced nor any evidence is brought to our notice by learned counsel to justify that these expenses were incurred wholly and exclusively for the business of the assessee and that the ingredients of provisions of Section 37(1) are duly complied with. The learned DR relied upon the order of learned CIT(A). After hearing both the parties and on perusal of material on record including orders of the authorities below, we are of the considered view that the assessee could not establish by way of cogent evidences that these expenses to the tune of Rs. 51,4,804/- claimed to be incurred towards foreign travel expenses for visiting foreign countries by Mr Subhash Ghai , Chairman and Director as well by Sh. Rahul Puri were incurred wholly and exclusively for the purposes of the business of the assessee and under these circumstances we hold that the assessee could not establish that all ingredients of provisions of Section 37(1) stood complied with. Under these circumstances, disallowance as was made by the AO and confirmed by learned CIT(A) stood confirmed. We therefore dismiss this ground no. 4 raised by the assessee. The assessee fails on this ground. We order accordingly.
I.T.A. 1629/Mum/2015 14. The last ground being ground no. 5 raised by the assessee is w.r.t. disallowance of Rs. 11,45,780/- u/s 14A r.w.rule 8D of Income-tax Rules, 1962. The AO observed that the assessee received dividend of Rs. 21,63,091/- which was claimed as an exempt income. The assessee on being asked by the AO submitted that it had invested surplus funds for making investments and no borrowed funds were used for making investments in securities which yielded exempt income. The AO observed that the assessee had invested high costs funds for making deposits with its sister concern at lower rate of interest and hence it is a case of mixed pool of funds and hence the AO concluded that portion of the interest expenditure has to be attributed to earning of an exempt income. The AO held that the assessee has necessarily incurred expenses towards managing these investments . It was also observed by the AO that during the year itself, some of securities held as investments were sold while others were purchased and it is not a case where no fresh activity in purchase/sale of securities / investments happened during the year. The AO made disallowance of expenditure in relation to earning of exempt income by applying Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules, wherein disallowance were made u/s 14A r.w.r. 8D(2)(ii) to the tune of Rs. 9,04,440/- , while an amount of Rs.2,41,340/- was disallowed by invoking Rule 8D(2)(iii) read in conjunction with Section 14A of the 1961 Act, thereby total disallowance of an amount of Rs. 11,45,780/- was made by the AO u/s 14A r.w.r. 8D, vide assessment order dated 28.12.2011 passed by the AO u/s. 143(3). The assessee filed first appeal with learned CIT(A) who dismissed the appeal of the assessee vide appellate order dated 11.01.2013. Aggrieved by the appellate order passed by learned CIT(A) on 11.01.2013, the assessee filed an appeal before the tribunal. The learned counsel for the assessee drew attention of the Bench to the orders of authorities below. The attention of the Bench was also drawn to the audited Balance Sheet of the assessee which is placed in the paper book/page 12 to contend that the share capital of the assessee was Rs. 11.29 crores as at 31-03-2009 and 31-03-2008 , while reserves and surplus were to the tune of Rs. 115.29 crores as at 31-30-2009 and Rs. 113.84 crores as at 31-03-2008 , while investments are to the tune of Rs. 68.22 cores as at 31-03-2009 and Rs. 68.45 crores as at 31-03-2008. Perusal of the schedule of investments will reveal that inter-corporate deposit of Rs. 28.51 crores as at 31-03-2009 ( Rs. 23.25 crores as at 31-03- I.T.A. 1629/Mum/2015 2008) is also included in the total investments held by the assessee. There was also debit balance of Rs. 51.3 lacs as at 31-03-2009 towards miscellaneous expenditure which ought to be reduced from assessee’s own funds ( Rs. 102.61 lacs as at 31-03-2008) , but still the assessee’s own funds are higher than average investment held by the assessee and in our considered view, presumption will apply that the assessee invested its own funds towards making investments in securities, as held by Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Limited (2009) 313 ITR 340(Bom.) and HDFC Bank Limited v. DCIT (2016) 383 ITR 529 (Bom.). Thus, we hold that no disallowance of interest expenses are warranted u/s 14A r.w.r.8D(2)(ii) of Rs. 9,04,440/- as disallowed by the AO in view of presumption that the assessee invested its own funds towards investments in securities in view of above stated decision of Hon’ble Bombay High Court and also in the absence of any adverse findings on record by the authorities below that the assessee indeed utilised interest bearing borrowed funds for making investments in securities. Thus, in nut-shell this disallowance of interest expenses as was made by the AO and confirmed by learned CIT(A) u/s 14A r.w.rule 8D(2)(ii) to the tune of Rs. 9,04,440/- stood deleted. We order accordingly. So far as disallowance of expenditure being 0.5% of the average investments by invoking Rule 8D(2)(iii) r.w.s. 14A of the 1961 Act is concerned , we hold that the disallowance of expenditure in relation to the earning of exempt income is to be made by the AO u/s 14A r.w.r. 8D(2)(iii) keeping in view factual matrix of the case and also keeping in view ratio of decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited (2018) 91 taxmann.com 154(SC) as no justification is brought on record by learned counsel for not sustaining the additions on this ground . The assessee fails on this ground .We order accordingly.
In the result, appeal of the assessee in for AY 2009-10 is partly allowed as indicated above. ITA No. 1629/Mum/2015-AY 2010-11 16. Now We will take up assessee’s appeal in ITA No. 1629/Mum/2015 for AY 2010-11. We have observed that similar issues are involved in assessee’s appeal in ITA no. 1629/Mum/2015 for AY 2010-11 as were there in