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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the assessee against the order of ld. CIT(A)-IX, New Delhi dated 25.10.2013 for the assessment year 2010-11 on the following grounds :
“On the facts and in the circumstances f the case and in law the Ld. CIT(A) erred in confirming the following disallowances made to the returned income by the Assessing Officer : a) Rs.2,86,860/- u/s. 14A of the Act. b) Rs.16,43,000/- under the head ‘Legal & Professional charges. c) Rs.9,00,000/- under the head ‘Consultancy fee’.
The above action being arbitrary, fallacious and unlawful must be quashed with directions for relief.
The brief facts of the case are that the assessee company is engaged in the business of leasing and financing activities registered with RBI as an NBFC. The assessee company filed its return of income on 15.10.2010 declaring an income of Rs.1,19,20,130/- and exempt income of Rs.609/- as dividend income. The case was selected for scrutiny and statutory notices were issued. The assessment was completed by the Assessing Officer by enhancing the income by disallowing Rs.3,01,907/- u/s. 14A r.w.r. 8D of the Act, legal and professional charges of Rs.16,43,000/- and consultancy fee paid of Rs.9,00,000/-. During the course of scrutiny proceedings, the Assessing Officer noted that the assessee has made investment in shares, the income from which does not and shall not form the part of total income and asked the assessee why the expenses u/s. 14A should not be disallowed as per relevant provisions of law. In response, the assessee submitted on 06.11.2012 that complete details of the investments have been given and a sum of Rs.609/- has been received as dividend. After considering the submissions of the assessee, the AO computed the disallowance u/s. 14A r.w.r. 8D of Rs.3,01,907/-. Aggrieved, the assessee carried the matter before the first appellate authority where he made detailed submissions stating as under :
"A.O. seriously erred in believing that there was income from shares which did not form part of the total income. That is so because the assessee had declared long term capital gains in respect of the sale of these very shares whose dividend the A.O had construed as exempt of tax. As these shares were un-quoted shares, the capital gains derived from them were taxable and which has, therefore, been duly returned for assessment in terms of the statement of computation of income as filed. Thus, the basic premise of the A.O that there is an income which is tax free and so expenditure in earning such income should not be allowed is per se wrong.
The assessee had denied that there is any expenditure involved in the earning of dividend. During the year there are no transactions of any purchase in shares. There is only liquidation of investment in shares. With regard to such liquidation of investment capital gain has been separately returned. In such circumstances the case of the assessee that it had not incurred any expenditure in the earning of dividend income remained un-repudiated by the A.O. The Assessing Officer has not recorded any satisfaction to this effect. That being so there was no warrant or authority with the A.O, to disallow any assumed expenditure U/s 14A of the Act.
Even on the Assessing Officer's own findings all that has been earned by way of an exempt income is in a sum of Rs.609/- for earning such, no sane person would expend a massive sum of Rs.3,01,901/-. The disallowance made by the AO relying on Rule 8D is, thus, irrational and unreasonable. None of the case laws as brought on record by the A.O visualizes the type of contingency as is contained in the facts of the subject matter. By applying Rule 8D a disallowance cannot be worked out hypothetically which is many times larger than the income itself."
The ld. CIT(A) noted that the assessee has taken car loan and interest was paid thereon of Rs.51271/- and sum of Rs.1978/- as bank charges.
Therefore, the ld. CIT(A) accepted the submissions of the assessee in regard to interest and he allowed Rs.15047/- as computed by the Assessing Officer by the Assessing Officer under second limb of Rule 8D. But the CIT(A) upheld the disallowance Rs.2,86,860/- under third limb of Rule 8D.
The ld. Assessing Officer has disallowed legal and professional charges in a sum of Rs.16,43,000/- paid to five professionals. The details are as under :
S.No Name of Party Bill No. Date Amount (Rs.) Remarks 1. D&D/MSFL/O 01.08.2009 5,00,000/- Dhir & Dhir Professional charges Associates, Advocates, 9-10/LDP for consultation on 33843 Office D-35, leasing matters income Defence Colony, New tax matters and Delhi -110024 conference with senior executives. 2 Amrit Singh 2009- 30.07.2011 10,00,000/- Professional charges Chandiok, Advocates, 10/336/MF for consultation on C-524 Defence leasing maters, income Colony, New Delhi- tax matters & 110024 conference with Sr. Executives 3. Nil 17.11.2009 8.000/- P&G Associates Co. Secretaries, 30/11 Professional charges Gr. floor, Rajinder for ROC work Nagar, New Delhi-60 4. S K Gandhi, 253, 176/2009-10 27.01.2010 1,00,0007- Consultation on Lawyers' Chambers, takeover of sick company Delhi High Court, New Delhi -110 003 5. 274/209 04.12.2009 35,000/- Sampath Iyengar Professional charges Associates, 112 Hans for conference Bhawan, New Delhi-2 andmultiple appearances & drafting written submissions before CIT(A)-IX for A.Y. 2002-03 The assessee submitted before the AO as under : a) “Further submitted that the assessee is a NBFC duly registered with the RBI, besides leasing and finance activities as permitted by the RBI, the company is also pursuing new lines of business in the area of asset reconstruction and take-over of sick companies and has taken legal opinions in various matters relating to diversification of business. The company is in active dialogue with various scheduled banks and financial institutions like IFCI, IDBI, PNB etc. for take-over of the stressed assets of financial institutions and banks. However, before the assets is taken over, the company needs to conduct extensive due diligence with regard to sick companies in various Courts and Forums like DRT, DRAT, High Court and other civil courts besides verification of records with the local revenue authorities like Tehsildar, Patwari etc.
The company, during the financial year 2012-13, has acquired the assets of a sick unit M/s S.K. Galvanising Works Pvt. Ltd. situated at Plot No.B- 2, Phase-1, Eldeco, Sidcul Industrial Park, Sitarganj (Uttrakhand) from Punjab National Bank for the consideration of Rs. 7,01,00, 000/-. b) Further, the assessee has incurred legal and professional charges for dispute resolution with companies to whom assets have been given on lease and advice with respect to formulation of letters, agreements, MoUs and sending legal notices to various companies and due diligence with respect to various proposals received for lease finance/rent from various clients. c) Legal charges includes expenditure for various matters relating to income tax including drafting of documents, appeals and appearance before various forums Commissions of Income Tax, ITAT and Hon'ble High Court of Delhi. Besides, it includes charges for consultations on RBI matters and discussions and meeting with the concerned RBI Officers in Delhi and Mumbai and making representations to them and filing of returns with respect to compliance in RBI guidelines. The expenses of Rs.16,43,000/- on account of legal charges is legitimate business expenditure incurred by the assessee for the genuine business requirements paid to reputed lawyers and are duly supported by bills and vouchers,"
The Assessing Officer did not accept the above submissions of the assessee due to the assessee has shown income only from lease rental, car hiring charges, dividend and interest on loans only and further no any evidence was produced by the assessee in respect of litigation matters as submitted by the assessee. Therefore, he disallowed the professional charges paid of Rs.16,43,000/-. The ld. CIT(A) also upheld the action of the Assessing Officer.
On scrutiny of accounts, the Assessing Officer further noted that the assessee has debited in the profit and loss account under the head ‘consultancy fee’ of Rs.9,00,000/-. In this regard, the assessee submitted before the AO that a meager amount of Rs.4,95,121/- has been debited as salary and wages and three persons were engaged on contractual basis and it has been accounted for as consultancy charges. The details of consultancy charges paid to three persons are available at page 13 of the paper book.
Aggrieved by the above addition, the assessee appealed before the first appellate authority who after considering the submissions of the assessee, noted that the security service charges has been debited into the consultancy fee and the assessee was unable to describe that what type of consultancy services were received from rest two persons. Therefore, he upheld the action of the assessing officer. The CIT(A) further noted that the books of account have been audited by a qualified auditor but he also did not make any comment on the wrong classification of the expenditures head. Therefore, he upheld the action of the Assessing Officer. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. AR submitted in respect of ground No. 1 that the company had not made any fresh investment during the year and he has liquidated the shares which were purchased earlier and capital gain/loss has been offered for taxation on the sale of shares. A meager amount of Rs.609/- has been received towards dividend. The appellant company has not incurred any expenditure for receiving the dividend. Therefore, the Assessing Officer has wrongly applied the provisions of Rule 8D which is totally unjustified.
In respect of ground No. 2, the ld. AR of the assessee reiterated the submissions made before the Assessing Officer, as reproduced above, and has submitted that the expenditure incurred on legal charges for the services as explained in the table above are eligible for deduction u/s. 37 of the Act. It was submitted that the decision to take over a sick unit is a time consuming process and the expenditure incurred thereon cannot be disallowed on imagination. All the payments have been made on the basis of the bills raised by concerned legal professionals.
With respect to ground No. 3, it was submitted that the appellant has made payment of Rs.9,00,000/- on account of ‘consultancy fee’ to three persons kept on contractual basis, which is legally allowable, as the assessee has incurred meager amount of Rs.4,95,121/- on salary and wages. TDS has also been deducted from the payments made to them. It makes no difference to the Revenue whether the said payment was made as wages/salary/contractual payment or as consultancy fee.
The ld. DR, on the other hand, relying on the order of the ld. CIT(A) submitted that the ld. CIT(A) has passed the reasoned order and the findings recorded by first appellate authority could not be rebutted on behalf of the assessee. It was submitted that the assessee failed to adduce evidence to support either the services rendered by various professionals or in support of consultancy fee to arrive at a conclusion whether the said expenditure were laid wholly and exclusively for the purpose of business. It was submitted that the disallowance u/s. 14A made by the ld. CIT(A) is also in accordance with law and needs no interference.
We have considered the rival submissions and have perused the material available on record. As far as the first issue is concerned, we find that the contention of the assessee that he had not made any fresh investment during the year but only liquidated the shares which were purchased in preceding years, is not found in consonance with the finding recorded by the ld. CIT(A) in the impugned order. It has been categorically recorded by the ld. CIT(A) that the investment in shares both quoted and unquoted has increased from Rs.5,23,72,033/- in the year ending 31.03.2009 to Rs.6,23,72,033/- in the year ending 31.03.2010. In view of this finding, there is increase in share by Rs. One crore, whereas the assessee has stated to have not purchased any share during the year. No evidence is available before us to examine this contradictory fact before finally deciding the issue of disallowance u/s. 14A of the Act and further to reach a conclusion whether the assessee has incurred any expenditure during the year for earning exempt income or not. We, therefore, set aside the issue and restore the same to the file of the Assessing Officer to verify the above fact and then to decide the issue afresh in accordance with law after giving reasonable opportunity of being heard to the assessee. Accordingly, this ground of assessee deserves to be allowed for statistical purposes.
As far as the second issue regarding disallowance of legal and professional fees of Rs.16,43,000/- is concerned, we do not find any justification in the instant case to discard the conclusions reached by the ld. CIT(A) on this count. It is notable that major expenditure shown by the assessee is on account of legal and professional charges and the assessee has claimed the deduction thereof u/s. 37(1) on the basis of bills/vouchers issued by various professionals. It is worth consideration that only those expenditure are deductible u/s. 37(1) which are laid wholly and exclusively for the purpose of business. The bills and vouchers may establish that expenditure was incurred, but there should be evidence on record so as to establish that the said expenditure were incurred wholly and exclusively for the purpose of business. The assessee has failed to adduce any proof/evidence to establish as to which matters relating to the business of the assessee were handled and resolved by the said professionals and further to support the alleged services rendered by them as mentioned in the table above. Therefore, the claim of assessee regarding expenditure incurred as legal and professional charges has rightly been discarded by the authorities below particularly when the assessee failed to lay any documentary evidence to support the alleged services stated to have been rendered by such professionals for the purpose of business of the assessee. Therefore, for want of requisite evidence even before us, we uphold the impugned order on this issue.
Adverting to the last issue, the record reveals that the assessee has shown to have paid Rs.50,000/-, Rs. 10,000/- and Rs.15,000/- to three persons per month, which were kept by assessee on contract. The total payment to these three persons is said to have been made by assessee of Rs.9,00,000/- on account of consultancy fee. The assessee has even failed to furnish complete details of such persons before the authorities below, such as names of the persons, types of services rendered by them to the assessee and even the mode of payments made to them. The ld. CIT(A) mentioned that Rs.15,000/- per month is said to have been paid for security services.
However, no evidence or agreement with respect thereto is filed by the assessee. The nature of services received from other two persons is also not made clear nor any evidence was laid to establish as to what consultancy was made by those persons or whether such services were for the purpose of business or not. The ld. CIT(A) has recorded that the appellant is audited by qualified auditor and it is not clear why payments made to security agencies were debited as consultancy fees. However, it was incumbent upon the assessee in discharge its burden, to produce material evidence to establish that these payments were made for a particular services received by assessee for the purpose of its business, which is lacking in the present case. In presence of all these facts, the ld. CIT(A) appears to have committed no error while confirming the disallowance, relying on the decision of Hon’ble Delhi High court in the case of CIT vs. Motor General Finance Limited, 254 ITR 449.
Accordingly, this ground of appeal deserves to fail.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 18.01.2017.