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Income Tax Appellate Tribunal, BENCH “F”, MUMBAI
Before: SHRI PAWAN SINGH & SHRI RAJESH KUMARPER PAWAN SINGH:
Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee under section 253 of Income Tax Act (‘the Act’) is directed against the order of Ld. Commissioner of Income-Tax (Appeals)-10, Mumbai, [for short the ld. CIT(A)] dated 20.11.2015 for Assessment Year 2011-2012 which in turn arises from the assessment order passed by Assessing Officer under section 143(3) of the Act dated 20.03.2014. The assessee has raised the following grounds of appeal:
I. Disallowance of Guarantee Commission ofRs.1.51.50.000/- u/s. 37(1) 1. The Learned CIT(A) erred in confirming the disallowance of Guarantee Commission of Rs. 1.51.50.000/- u/s 137(1) aid to Promoters Share Holder & Directors at the rate of 1% of the each guarantee for the purpose of business. Hence the same may be allowed u/s. 37(1) of the Act.
The Learned CIT(A) erred in not following the earlier year order for AY 2010- 2011 passed by the Hon'ble ITAT in which the issue of disallowance of Guarantee Commission was deleted. Hence, not following order of the higher authority is not correct as per law.
II. Adhoc Disallowance of Travelling Expenditure of Rs. 4,06.200/- u/s. 37(1) 3. The Learned CIT(A) erred in confirming the adhoc disallowance of Travelling Expenses of Rs.4,06,200/-, without appreciating that the said Stay Charges and Travelling expenditure is lower than the stay charges at other five star hotels. Hence the same may be deleted. III. Disallowance of Prior Period Expenditure of Rs.6,26,228/-.
4. The learned CIT(A) erred in confirming the disallowance of Prior period expenditure of Rs.6,26,228/- without appreciating that the said expenditure accrued and crystalized in current years. Hence, the same may be allowed as business expenditure in the same year and not as prior period expenditure. IV. Disallowance of 14A of Rs.2,33,533/- 5. The Learned CIT(A) erred in confirming the 14A disallowance, without appreciating that the investment in SBI Mutual Funds was made out of own funds (surplus) and no borrowed funds were utilized for the purpose of investment. There is no other fresh investment other than SBI Mutual Funds Therefore, disallowance confirmed by the CIT(A) of Rs.2,33,533/- may be deleted. V. Exempt Income of Rs.13,15.327/- in the form of Dividend not considered.
The Learned CIT(A) failed to decide the ground raised
by the appellant for the issue of Exempt Income of Rs.13,15,327/- as the dividend income was wrongly taken in miscellaneous receipts. Hence, the same may be treated as exempt income.
2. Brief facts of the case are that the assessee-company is engaged in the business of manufacturing, exporting and trading of industrial valves, erection, commissioning and civil works, filed its return of income for Assessment Year 20111-12 on 30.09.2011 declaring total income of Rs. 10,91,18,660/-. The assessment was completed under section 143(3) of the Act. The Assessing Officer while passing the assessment order disallowed the commission payment of Rs. 1,51,50,000/- paid to the two Directors for extending personal guarantee for availing the credit facility from Bank, disallowed Rs. 4,06,200/- on account of Travelling Expenses, disallowed Rs. 6,26,228/- on account of prior period expenses and Rs. 2,33,533/- under section 14A of the Act. On appeal before the ld. CIT(A), all the disallowances made by assessing officer was confirmed. Thus, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.
We have heard the Ld. Authorized Representative (AR) of the assessee and Ld. Departmental Representative (DR) for the Revenue and perused the order of authorities below. Ground No. I relates Disallowance of Commission payment. The Ld. AR of the assessee submits that assessee-company paid the guarantee commission to its two Director as they stood personal guarantee to the Bank of India for getting loan/credit facilities for the purpose of business. The assessee paid Rs. 75,75,000/- each to Ms. Soumyalatha S. Shetty and Shri Sameer Shetty. The assessee furnished all the details related with sanction of credit facility issued by State Bank of India on 13.03.2010, certificate of personal guarantee and the guarantee commission paid to the Directors. The assessee vide its letter dated 20.03.2014 furnished the note of guarantee commission. The Assessing Officer disallowed the guarantee commission on his observation that no extraordinary work has been performed to pay such huge guarantee commission. The guarantee given by the Directors in normal routine of business. Performance of Directors has not affected the sale of the assessee and that the money siphoned to understate the income. The Ld. AR of the assessee further submits that similar guarantee commission was allowed in assessee’s own case for Assessment Year 2010- 11. The Copy of the decision was filed before ld CIT(A), the Ld. CIT(A) despite having the knowledge of order of Tribunal, upheld the addition. The order of Tribunal is a binding precedent on the lower authority. The Revenue has not challenged the said order of Tribunal before the Hon'ble High Court. The Ld. AR of the assessee further submits that by the personal guarantee of the founder Director, the assessee has been able to obtain the Bank Finance of Rs. 75.75 crore. Extending the personal guarantee was pre-condition of lender/Bank for credit facility. Therefore, guarantee commission has been paid fully and exclusively for the purpose of business and is allowable deduction.
On the other hand, the Ld. DR for the Revenue supported the order of authorities below. The Assessing Officer has given a finding that guarantee given by the Directors are part of their commitment to mobilize required fund. The assessee was having healthy balance which can it shall be used for guarantee for Bank Loan. The Directors are inactive Directors.
We have considered the rival contention of Ld. Representative of the parties and have gone through the orders of the authorities below. The Assessing Officer during the course of assessment proceeding asked the assessee to explain the nature of services rendered by the Directors against the huge commission payment. The assessee filed its reply dated 27.02.2014. In the reply, the assessee contended that Ms. Soumyalatha S. Shetty is the promoter and Shri Sameer Shetty is the Director of the company. Both the directors were paid Guarantee Commission for extending personal guarantee for credit facility availed by the company from State Bank of India, IFB Branch for Rs. 75.75 crore. The Directors are not paid remuneration from the company they stand guarantee in their personal capacity and take the risk of banking facility enjoyed by the assessee in order to compensate the risk factor, the company paid commission @ 1% each to both the Directors. The assessee also furnished the copy of sanction of over limit dated 13.03.2010 issued by lender Bank. The contention of assessee was not accepted by Assessing Officer. The Assessing Officer concluded that the Directors have only given guarantee to get the loan sanctioned from the Bank, which is a basic necessity to sanction a loan. The Directors have not performed any extraordinary work, the work done by the Directors are normal routine business. The assessee has sufficient asset for mortgage for availing eligible loan. The assessee has no where justified the commission in Profit & Loss A/c. The Ld. CIT(A) confirmed the action of Assessing Officer on his observation that the Directors were inactive Directors.
6. We have noted that the similar disallowance was made in Assessment Year 2010-11. We have further noted that the assessee has furnished the copy of order of Tribunal. The Ld. CIT(A) despite the fact that the order of Tribunal dated 16.09.2015 was brought in the notice of Ld. CIT(A). In the written submission/statement of fact furnished before him. We have noted that the disallowance of Guarantee Commission the Tribunal on almost similar ground of appeal as passed the following order; ( for comparison of facts we are extracting the major part of the order)
“4. Brief facts of the case are that the assessee company is engaged in the business of manufacturing, exporting and trading of industrial valves, erection, commissioning A and civil works. During assessment proceedings, the Assessing Officer observed that assessee company has paid commission to two directors Mrs. Soumyalatha S Shetty and Mr. Sameer S Shetty. The assessee contended before the Assessing Officer that these two directors have given personal guarantee on behalf of the company for the bank facility of Rs.75.75 crores and 1% commission on the bank loan was paid to them as commission on which tax deducted at source which is matter of records before us. The Assessing Officer did not agree with the submission of the assessee on the ground that the directors have only given the guarantee to get the bank loan which is basic necessity for sanction of loan. The performances of directors have not affected the sale / business of the assessee. Therefore, the commission paid to the directors is nothing but siphoning of funds to understate true income of the assessee. Accordingly the commission was disallowed by the Assessing Officer. On appeal, the CIT(A) confirmed the order of A.O.
4.1 We have gone through the orders of the authorities below and material on record. We find force in the contention of the ld. Counsel for the assessee that the issue before the Hon 'ble Bombay High Court in the case of Indo Saudi Services (Travels) P. Ltd. (supra) wherein the assessee was a general sales agent of foreign airlines. It earned commission at the rate of 12 per cent from S on the tickets booked / sold by it. The assessee appointed several agents including its sister concern and paid incentive mission to such agents by way of handling charges. For the assessment years 1991-92, and 1992-93, the Assessing Officer held that the incentive commission paid to the sister concern was half per cent more than that paid to other sub-agents. The Assessing Officer invoked section 40A(2) Income-tax Act, 1961, and disallowed the excess commission paid to the concern at the rate of half per cent. This was confirmed by the commissioner (Appeals). On appeal, the Tribunal, while dismissing the appeal held that the assessee apart from paying handling charges at the rate of 9.5 per cent to its sister concerns had paid handling charges at the same rate to other agents also. For the assessment years 1986 -87 and 1987-88) the assessee had paid handling charges at the rate of 10 per cent to the sister concern and such charges were considered to be reasonable by the Revenue. For the assessment year 1989-90, the assessee had reduced the payment of handling charges to 9.5 per cent and had been allowed after due scrutiny. For the assessment year 1990-91, claim of the assessee at the rate of 9.5 per cent had been allowed though it not been dealt with by the Assessing Officer specifically in the order. For the assessment year 1993-94, the rate of 9.5 per cent had been held reasonable and had been allowed. When the matter reached before the Hon 'ble Bombay High Court, the Court observed that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-Tax (Appeals) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during assessment years 1991-92 and 1992-93 and accordingly dismissed the appeal filed by the Revenue. Since the facts involved in this appeal are similar to the facts in the case of Indo Saudi Services (Travels) P. Ltd., respectfully following the same, we set aside the order of the ld. CIT(A) and delete the disallowance of Rs. 1,52,68,356/-.
Considering the fact that similar set of fact the addition was deleted by Guarantee Commission of Tribunal. We do not find any justification in sustaining the disallowance when the order of Tribunal was brought in the notice of Ld. CIT(A). Even there are no variations of fact related with the issue under consideration in this year. Thus, respectfully following the principle of consistency, the Ground No. I of the appeal is allowed.
Ground No. II relates to disallowance of Travelling Expenses. The Ld. AR of the assessee submits that during the relevant Financial Year, the assessee incurred expenditure of Rs. 8,12,400/- on account of Travelling Expenditure.
The Assessing Officer disallowed 50% of the expenses on adhoc basis. No reason for adhoc disallowance is recorded by Assessing Officer. The registered officer of the assessee is at Mumbai; however, the manufacturing unit of Industrial valves are located at Bangalore and Aurangabad. The Directors of the assessee-company visited the site to evaluate the performance and to monitor the business. The Assessing Officer disallowed 50% of expenditure due to non-submission of evidences. Before the Ld. CIT(A), the assessee furnished all details and confirmed from the companies for stay of guest house by Suchitra Hegde and Ritvik Hegde. The assessee also furnished additional evidence along with application under Rule 46A before Ld CIT(A) to substantiate the contention in the form of Tariff Card of Bangalore and Aurangabad Hotel for justification of Hotels rate compared to Guest house rate. The Ld. AR of the assessee further submits that there was no personal element in the Travelling Expenditure. The payment made to Guest house is less than the Hotels rate. The disallowance @ 50% on adhoc basis is not justified. In support of his submission, the Ld. AR of the assessee relied upon the decision of Gujarat High Court in Sayaji Iron & Engineering Co. v CIT [2002] 253 ITR 749 (Guj).
On the other hand, the Ld. DR for the Revenue supported the order of authorities below. The Ld. DR for the Revenue submits that the tax auditor of the assessee raised objection on the expenditure shown on Travelling Expenses. During the assessment, the assessee has not filed any evidence to substantiate justification of the expenditure. The guest house for which expenses was claimed is owned by one of the shareholders.
We have considered the rival submission of the parties and perused the record. The Assessing Officer disallowed 50% of the expenditure on his observation that no evidence has been furnished by the assessee. The Ld. CIT(A) after considering the comparative rate furnished by assessee for Guest house charges and prevalent rate of Five Star hotel concluded that the rate of Guest house are not less than the Five Star hotels.
The Hon'ble Gujarat High Court in Sayaji Iron & Engineering Co. v CIT (supra) while considering the grounds related with Business Expenditure for use of vehicle of assessee-company by its Director held that when vehicle were used by Directors in a limited company “Even if they proportionately used by the Director, because the limited company by its nature cannot have personal use”, the limited company is an any intimate person and there cannot be anything person about such entity. Once the expenditure in question was in term as provided in section 309 and 198 of Companies Act, therefore, not be any non-business purpose so far as the assessee companies are concerned. It was further held that it was wrong in disallowing 1/6 of the total Car expenditure and depreciation claimed by assessee-company on account of personal use of the Car which has been used by the Directors. In our view, it is settled law that the Revenue authority cannot step into the shoes of businessmen to dictate them how to make the expenditure for running their business. The lower authorities have not brought anything on record that visit of the Directors namely Suchitra Hegde and Ritvik Hegde was not for the purpose of business. In absence of any finding or any material on record that the visit and stay of Directors was for stay of personal use, this ad-hock disallowance in not justifiable. Thus, we do not find any justification in adhoc disallowance on account of Travelling Expenses. In the result, Ground No.II of the appeal is allowed.
Ground No.III relates to disallowance of Prior Period Expenditure of Rs.6,26,228/-. The Ld. AR of the assessee submits that during the year, the assessee-company declared bonus @ 20% instead of 8.33% to the employee.
Therefore, the liability of payment of bonus accrued in the year under consideration. Before the Assessing Officer, the assessee furnished the details of payment of bonus and ex-gratia to its employee vide letter dated 27.02.2014. The Assessing Officer disallowed the same on the ground that the payment of bonus did not pertain to the present Assessment Year as the assessee is following the mercantile system of accounting. The Ld. CIT(A) also confirmed the action of Assessing Officer despite explaining the facts and furnishing the written submission. The Ld. AR of the assessee further submits that as the liability for payment on account of bonus was crystallized during the year, the payment was liable to be allowed. In support of his submission, the Ld. AR of the assessee relied upon the decision of Hon'ble Delhi High Court in CIT Vs. Exxon Mobile Lubricants (P) Ltd. [2010] 328 ITR 17 (Del) and the decision of Hon'ble Apex Court in Nonsuch Tea State Ltd. Vs. CIT [1975] 98 ITR 189 (SC). On the contrary, the Ld. DR for the Revenue supported the order of authorities below. The ld. submits that the assessee is following the mercantile system of accounting. The expenditure claimed by the assessee was not related to the year under consideration.
We have considered the rival submission of the parties and perused the order of authorities below. During the assessment, the Assessing Officer noted that assessee claimed an expenditure of Rs. 6,26,228/- as Prior Period Expenses. The assessee was asked to substantiate the payment of Prior Period expenses. The assessee filed its reply dated 27.02.2014. In the reply the assessee contended that as per Bonus Act, bonus was paid @ 8.33% for Financial Year 2009-10. However, the bonus was declared @ 20% after completion of balance-sheet and the profit declared for Financial Year 2009-10. The difference is debited to the current year account and hence, the liability is debited to current financial year 2010-11. The bonus was declared in October/November 2010; hence, difference of bonus is paid as ex-gratia to the employee of the company. The contention of the assessee was not accepted by Assessing Officer as the assessee is following the mercantile system of accounting. The Ld. CIT(A) concurred with the finding of Assessing Officer holding that the expenses do not pertain to the year. The assessee has clearly brought out on record that bonus was declared in October/November 2010 and the difference of bonus was paid as ex-gratia to the employee. The bonus was declared by management of the assessee after completion of the balance-sheet on the profit prevailing for Financial Year 2009-10. Thus, the assessee was entitled to debit the difference from the current Financial Year i.e. 2010-11.
The Hon'ble Delhi High Court in case of CIT Vs. Exxon Mobile Lubricants (P) Ltd. (supra) while considering the ground related with Prior Period Expenditure held that when the liability of the assessee under agreement had arisen and accrued in August 2002 when agreement was executed, therefore, the liability of the assessee to pay for the period January 2002 to March 2002 arose and crystallized in August 2002. If the assessee had shown the Prior Period Expenses and the Assessing Officer had not excluded while working out the current year taxable income than there was no reason on the part of Assessing Officer to disallow only one part of the Prior Period Adjustment i.e. Prior Period Expenditure. It was held that the addition by Assessing Officer was not sustainable. We have noted that the facts of the present case in principle are similar.
The Hon’ble Supreme Court in case of Non-such Tea State Ltd. Vs CIT (supra) held that when the liability to pay is crystallized in the year of approval, therefore, deductable in computing the profit from the period ending when liability was crystallized. Further, the Hon'ble Supreme Court in case of Saurashtra Cement & Chemical Industry Vs CIT 213 ITR 523 (Guj)
held that merely because the expenses related to a transaction of an earlier year does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question. 16. In view of the above legal position, the liability to make the ex-gratia payment was crystallized during the year under consideration. In our view, the assessee was entitled for deduction of the said Prior Period Expenses. In the result, this ground of appeal is allowed.
17. Ground No. IV &V relates to disallowance under section 14A of the Act. The Ld. AR of the assessee submits that during the year under consideration, the assessee earned exempt income of Rs. 13,15,327/-. The assessee voluntary disallowed Rs. 4,318/- under section 14A r.w.Rule 8D. The assessee also furnished the working under section 14A before the Assessing Officer. The Assessing Officer disallowed Rs. 2,33,533/- by invoking the provision of Rule 8D r.w.s. 14A. The Ld. AR of the assessee further submits that the assessee earned dividend income from the investment made in mutual funds. The investments were made from the surplus fund available with the assessee-company. The assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment made in the tax free securities. The assessee made an investment from its own fund. The assessee made investment of Rs. 1,75,54,727/- against reserve and surplus fund of Rs. 17,83,07,003/-. The Ld. AR of the assessee further submits that interest disallowance under Rule 8D(2)(ii) cannot be made in view of the decision of jurisdictional High Court in case of CIT Vs. HDFC Bank (366 ITR 505) (Bom). The Ld. AR of the assessee further submits that the assessee during the assessment made a claim before the Assessing Officer that dividend of Rs. 13,15,325/- on SBI Mutual Fund not claimed as exempt income and requested to treat the same as exempt income and reduce the income to that extent. The Assessing Officer failed to consider the same. The assessee raised specific ground of appeal before the Ld. CIT(A) vide Ground No.7. The Ld. CIT(A) failed to decide the issue. The Ld. AR of the assessee finally submits that this ground of appeal may be restored to the file of Assessing Officer for considering the disallowance afresh.
18. On the other hand the Ld. DR for the Revenue supported the order of authorities below. The Ld. DR for the revenue further submits that the Assessing Officer has recorded its satisfaction about the working of disallowance furnished by assessee, before invoking the provisions of Rule 8D(2)(ii). The assessee has not taken into consideration the investment of Rs. 1,73,65,327/- in SBI Mutual Fund. The Ld. DR for the Revenue submits that he has no objection if this ground of appeal is restored to the file of Assessing Officer for considering it afresh.
19. We have considered the rival submissions of the parties and perused the material available on record. Considering the contention of Ld. AR of the assessee that Assessing Officer has not considered the claim of assessee regarding the dividend income of Rs. 13,15,324/- on SBI Mutual Fund. We have also noted that the assessee raised specific ground of appeal before the Ld. CIT(A) vide Ground No.7. Hence, considering the totality of the facts related with the grounds of appeal under consideration, this ground of appeal is restored to the file of Assessing Officer with the direction to consider the claim of assessee with regard to the exempt income of Rs. 13,15,325/- earned on SBI Mutual Fund. The Assessing Officer is further directed to re-compute the disallowance under section 14A read with under Rule 8D in accordance with law. The assessing officer is also directed to consider the decision of jurisdictional High Court in case of CIT Vs. HDFC Bank (supra). Needless to say the Assessing Officer shall provide reasonable and sufficient opportunity to the assessee before passing the order in accordance with law. In the result the ground No. IV & V are allowed for statistical purpose.
In the result, appeal filed by assessee is allowed. Order pronounced in the open court on 23rd day of March 2018.