ASK PROPERTY INVESTMENT ADVISORS P.LTD,MUMBAI vs. ASST CIR 2(1)(1), MUMBAI

1635/Mum/2016 M/s. Ask Property Investment Advisors Pvt. Ltd., Circle 2(1)(1), & Dy. Commissioner of Income Tax, Circle-2(1) respectively Mumbai (hereinafter referred to as ld. AO). As the issues involved are identical in both these appeals, they are taken up together and disposed off by this common order for the sake of convenience.

The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of Client Referral Fees in the sum of Rs 8,67,18,139/- in the facts and circumstances of the case.

The brief facts of this issue are that the assessee company was incorporated on 19.1.2009 and engaged in the business of assisting real estate/ property related funds ; in mobilizing investments and providing advisory and consultancy services in the areas of development, management and investments; in the real estate, infrastructure and utilities development; and project finance. During the year under consideration, the assessee was appointed as advisors and distributors for a term of 5 + 2 years by associate concern M/s Ask Investment Managers Private Limited, to assist them in mobilizing investments and providing advisory and consultancy services for their new real estate fund named as “ASK PMS Real Estate Special Opportunities – Portfolio I” (hereinafter referred to as „the Fund‟) which was closed on 29.12.2009. As the assessee‟s infrastructure was not fully ready in the year under consideration, to carry out its obligations, the assessee was required to utilize the marketing channels of M/s ASK Investment Managers Private Limited, to market and distribute the Fund. As per the Income Agreement, the assessee was entitled to receive set up fee and investment advisory fee in the range of 1 % to 2% of the value of funds under management as well as performance fee, depending on performance of the Fund, in consideration of services to be provided by the assessee. Further, all the marketing costs incurred for raising

The ld CITA however observed that the Client Referral Fee expenditure is not of the assessee as all invoices / debit notes were in the name of ASK Investment Managers Private Limited and that the assessee had not been able to demonstrate with evidence that it had done any work for which expenditure of Rs 10,11,71,162/- was incurred. With these observations, the ld CITA upheld the action of the ld AO. In other words, the ld CITA having given the aforesaid observation that Client Referral Fee was not incurred by the assessee, but allowed deduction of 1/7th of the total expenditure by upholding the action of the ld AO.

We have heard the rival submissions and perused the materials available on record and the paper book filed by both the parties including the judicial pronouncements relied upon by both the sides before us at the time of hearing. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated herein for the sake of brevity. We find lot of force in the argument of the ld AR that as per Clause 8 and Clause 10 of the Income Agreement (enclosed in page 22 of the paper book before us), the assessee was required to utilize the marketing channel of M/s ASK Investment Managers Private Limited and reimburse the actual cost. In terms of the above arrangement, the assessee had taken support of referral partners of M/s ASK Investment Managers Private Limited to mobilize subscriptions to the Fund. The referral partners have raised their invoices / debit notes on M/s ASK Investment Managers Private Limited who had in turn recovered actual

The only reason which persuaded the LD AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of accounts, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion.

Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the LD AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs.55 per debenture towards interest as one time payment. By allowing only 1 /5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the LD AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the LD AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.

The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of accounts is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of accounts. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the LD AO would have been 1635/Mum/2016 M/s. Ask Property Investment Advisors Pvt. Ltd., right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thus, it was exercising the statutory right which could not be denied.

We find that the High Court has taken into consideration the provisions of Section 36(1)(iii) of the Act and the conditions which are to be fulfiled for allowing the deduction on this account in the following words: “...The term “interest” has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 - Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word “Paid” is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word “Paid” in Section 36(1 )(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting...” Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accounting, book profits are liable to be taxed and in order to determine the net income of an Accounting Year, the revenue and other incomes are to be matched with the cost of resources consumed (expenses). For this reason, in the opinion of the High Court, this matching concept is required to be done on accrual basis. As per the High Court, in this case, payment of Rs.55 per debenture towards interest was made, which pertained to five years, and, thus, this interest of five years was paid in the first year. We are of the opinion that it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii)

The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.

What is to be borne in mind is that the moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs.55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax (2000) 6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: “The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be disharged is not certain.” The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.

Judgment in Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax, (1997) 4 SCC 666 was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the 1635/Mum/2016 M/s. Ask Property Investment Advisors Pvt. Ltd., following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: “ The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.”

Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.

What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.

In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to 1635/Mum/2016 M/s. Ask Property Investment Advisors Pvt. Ltd., the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta, (1972) 3 SCC 252; Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (1997) 6 SCC 117 ; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta, (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta, (1999) 8 SCC 338].

At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the LD AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.

In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs.2,72,25,000 and Rs.55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs.

We find that the issue in dispute is exactly similar to that raised hereinabove for Asst Year 2010-11, which fact was accepted by both the parties before us. The following chart would prove the bonafide of the assessee beyond doubt which is enclosed in page 170 of the paper book:- Financial Assessm Investment Client Investment Year ent Year Management Referral/Marke Management Fees Fees ting Exps net of Clients (Rs.) (Rs.) Referral Fees (Rs.) 2009-10 2010-11 - - - 2010-11 2011-12 - - - 2011-12 2012-13 16,96,99,497 20,17,45,750 (3,20,46,253) 2012-13 2013-14 23,15,60,711 10,11,31,784 13,04,28,927 2013-14 2014-15 16,66,50,000 4,03,21,250 12,63,28,750 2014-15 2015-16 16,66,49,997 2.20,12,500 14,46.37,497 2015-16 2016-17 14,58,24,710 76,25,000 13,81,99,710 2016-17 2017-18 12,55,26,448 12,55,26,448 Total 1,00,59,11,363 37,28,36,284 63,30,75,079

In the result, both the appeals of the assessee are allowed.