BENTEL ASSOCIATES RE BENTEL ASSOCIATES REALTY DESIGN CONSULTANTS P.LTD,MUMBAI vs. ITO 8(1)(2),

Disallowance of expenses under section 14A of the Act of Rs. 9,998 3.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 9,998 under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 as expenses incurred for earning exempt income.

5. Penalty proceedings under section 271(1)(c) of the Act 5.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not quashing the penalty proceedings under section 271(l)(c) of the Act initiated against the Appellant against the disallowance of expenses claimed by the Appellant.

3. We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. At the outset of hearing, the Ld. AR of the assessee submits that he is not pressing the Ground No.3. For Ground No.4, the Ld. AR of the assessee submits that the Assessing Officer made double disallowance by disallowing unpaid leave encashment and the assessee has already made an application under section 154 of the Act before assessing officer for rectification of the order. Considering the contention of Ld. AR of the assessee, Ground No. 3 is dismissed as not pressed. However, so far as Ground No.4 is concerned, we direct the Assessing Officer to verify the fact with regard to the application of the assessee, and pass the order under section 154 in accordance with law. 4. Ground No.1 relates to disallowance of success fees at Rs. 63,50,442/-. The Ld. AR of the assessee submits that the Assessing Officer disallowed the success fees of Rs. 63,50,442/- claimed by the assessee. The Assessing Officer disallowed the success fees treating as bogus and unexplained business expenditure. The Ld. AR of the assessee submits that assessee 3 entered in a business of reality design consultancy with ICS Realty Pvt. Ltd. for provision of marketing and business development services and for securing contract for the assessee and to provide various services at various stage of business to the assessee, ICS Realty Pvt. Ltd. is in the business of consultancy and had wide range of contracts in the said business. The assessee paid success fees to ICS Realty Pvt. Ltd. ICS Realty Pvt. Ltd for providing services related with preliminary concept, concept designing, schematic designing, design development and working drawing. Details of all payments made against the success fees were filed before the Assessing Officer. The assessee paid success fees @ 10% of gross revenue of six parties. In order to verify the genuineness of services, the Assessing Officer issued notice under section 133(6) to the said parties. Out of six parties M/s Blue Horizons Hotels Pvt. Ltd. confirmed the transaction through ICS reality and other remaining five parties have stated that they were engaged directly and no mediator or introducer was involved. Therefore the Assessing Officer disallowed the amount of success fees of all remaining parties. The Ld. AR of the assessee further submits that similar claim of success fees was allowed by Revenue in assessment for Assessment Year 2006-07, 2007-08 and in 2010-11 in the assessment order passed under section 143(1) of the Act. Moreover, for Assessment Year 2008-09 the expanses were allowed in the assessment order passed under section 143(3). Again in the Assessment Year 2013-14 & 2014-15 the Assessing Officer allowed similar expenses related 4 with success fees. It was submitted that the assessing officer disallowed the similar relief in assessment year 2012-13, however it was allowed by ld Commissioner (Appeals) On the other hand, the Ld. DR for the Revenue supported the order of authorities below. The Ld. DR for the Revenue submits that principle of resjudicata is not applicable in the Income Tax Proceedings. The Ld. DR for the Revenue submits that the parties were different in this year. Moreover, ICS Realty Pvt. Ltd. (supra) is filing Nil return of income. The onus to prove the genuineness of success fees is not proved by the assessee.

The assessee filed its reply dated 29.01.2014. In the reply the assessee contended that ICS Reality Pvt. Ltd. has contractual arrangement with assessee and not with their clients (parties). ICS Reality Pvt. Ltd. was not acting as intermediary for the parties, so that they were not in a position to 6 reply in affirmative. ICS Reality Pvt. Ltd. has been assisting to the assessee and has generated good business. The contention of the assessee was not accepted by Assessing Officer holding that the perusal of agreement furnished by assessee shows that payment made to ICS Reality Pvt. Ltd. as a service provider for promoting the service offered by assessee, identified and introduced various client and ensuring good relation on ongoing basis and to ensure proper co-ordination etc. The assessee in its submission with regard to the queries submitted that transaction with the companies were direct, the ICS Reality Pvt. Ltd. has a contractual agreement with assessee and not with their client as they are not in a position to reply in affirmative. The assessee has allegedly paid 10% of the gross revenue to ICS Reality Pvt. Ltd. as per the said agreement. Therefore, the Assessing Officer rejected the contention of assessee. The Assessment Officer also observed that except the Blue Horizons Pvt. Ltd. no evidence has been furnished to substantiate the involvement of ICS Reality Pvt. Ltd. or to prove about rendering the services, thus, the success fees paid by assessee to ICS Reality Pvt. Ltd. was held as non-genuine business expenditure. The Assessing Officer further concluded that the onus to prove the genuineness of expenditure was on the assessee and assessee failed to discharge his onus. Even otherwise all payments were made through entries at the fag end of the Financial Year. As Blue Horizons Pvt. Ltd. accepted the involvement of ICS Reality Pvt. Ltd. payment of Rs. 11,89,400/- being 6.26% of Rs. 1,90,00,000/- was allowed as 7 business expenditure and remaining amount of Rs. 63,50,442/- (Rs. 75,39,842 – Rs. 11,89,400/-) was disallowed. The ld. CIT(A) confirmed the disallowance holding that the assessee failed to prove genuinity of payment made to ICS Reality Pvt. Ltd despite giving the sufficient opportunity. Before us the ld AR for the assessee submitted that similar claim of success fees was allowed by Revenue in assessment for Assessment Year 2006-07, 2007-08 and 2010-11 in the assessment order passed under section 143(1) and in assessment year 2008-09 allowed in the assessment order passed under section 143(3) of the Act. Again in the Assessment Year 2013-14 & 2014-15 the Assessing Officer allowed similar expenses related with success fees. We have also gone through the assessment order for Assessment Year 2008-09. There is no reference of claim of success fees in assessment order dated 29.11.2010 passed under section 143(3) for Assessment Year 2008-09. Though, the assessee has filed a detail of bill-wise summary of success fees on record before us related with Assessment Year under consideration. Thus, considering the fact that similar success fee was allowed to the assessee in Assessment Year 2006-07 to 2010-11 and again on Assessment Year 2013- 14 and in Assessment Year 2014-15. The similar disallowance was made for Assessment Year 2012-13, however, on appeal before the ld. CIT(A), the assessee was granted the relief. The copy of the assessment order for Assessment Year 2006-07 to 2010-11 and again for Assessment Year 2012- 12 to 2014-15, except the assessment order for Assessment Year 2008-09, is 8 not placed on record. Hence, we deem it appropriate to restore this ground of appeal to the file of Assessing Officer to verify the correctness of claim made and the relief granted in various Assessment Years and to pass the order by following the principle of consistency and in accordance with law. In the result, ground no.1 of the appeal raised by assessee is allowed for statistical purpose.

6. Ground No.2 relates to disallowance of consultancy fees of Rs. 32,61,624/-. The ld. AR of the assessee argued that the Assessing Officer disallowed the consultancy fees paid to ICS Reality Pvt. Ltd. on the ground that consultancy fees has not been qualified by the Auditor in Form 3CD (Auditor’s Report). The ld. AR of the assessee submits that the assessee furnished the details of consultancy fees, details of which is furnished at page no. 9 of the Paper Book. The ld. AR of the assessee further submits that as per agreement with ICS Reality Pvt. Ltd., ICS Reality Pvt. Ltd. agreed to depute Senior Management Personnel to work for three-four days to work in a week. Mr. Nakul Patel who was deputed was Senior Management Personnel and working 60% to 80% of his time to manage the affairs of the assessee. The salary of Mr. Nakul Patel was Rs. 47.50 Lakhs and the assessee paid Rs. 32,61,624/- which is around 68% of the salary. The cost of remuneration/consultation given by him was reasonable. Due to the involvement of Mr. Nakul Patel the business of assessee was substantially improved, the turnover of assessee was increased and assessee earned 9 substantial operating profit. On the other hand, the ld. DR supported the order of authorities below. The ld. DR submits that no documentary evidence was filed by assessee to prove the nexus of expenses made and the services rendered by Mr. Nakul Patel. The payment was made at the end of Financial Year.

7. We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer disallowed the consultancy payment made to ICS Reality Pvt. Ltd. holding that ICS Reality Pvt. Ltd. holds 100% of the share holding of the assessee. Form-16 issued by ICS Reality Pvt. Ltd. shows that Mr. Nakul Patel received gross salary of Rs. 47,58,076/-. As per the agreement of assessee-company with ICS Reality Pvt. Ltd., Mr. Nakul Patel has to render services to the assessee- company for three to four days in a week. ICS Reality Pvt. Ltd. is charging Rs. 2.71 Lakh per month to use the services of Mr. Nakul Patel, from assessee. The Assessing Officer further concluded that ICS Reality Pvt. Ltd. has already been paid success fess and accounts writing charges etc. The payments made to ICS Reality Pvt. Ltd. are through Journal entries of at the end of Financial Year. No evidentiary documentary evidence is filed to establish the services rendered to the assessee. The payment made on account of consultancy charges has not been certified by Auditor in Form- 3CD. The ld. CIT(A) confirmed the action of Assessing Officer holding that the consultancy fees has not been qualified by the Auditor in its Audit 10 Report. The ld. CIT(A) also concluded that payment is made to person specified under section 40A(2)(b) of the Act and that the assessee failed to rebut the fining of Assessing Officer. We have noted that the Assessing Officer has not disputed the services rendered by Mr. Nakul Patel. The Assessing Officer has disallowed the payment holding it as unreasonable.

The ld. CIT(A) has not given any different finding, excerpt approving the finding of Assessing Officer. The Co-ordinate bench of Mumbai Tribunal in Edwise Consultants (P.) Ltd. vs. DCIT [2017] 83 taxmann.com 27 (Mum.Trib.) while considering the similar issue held that the Assessing Officer is required to find out if the payments made to person referred in section 40A(2)(b) is excessive or unreasonable having regard to the Fair Market Value of the goods, services or facilities which payment is made or the legitimate need of the business or the profession of the assessee or the benefit derived by accruing the assessee therefrom.