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Income Tax Appellate Tribunal, ‘C’ BENCH, MUMBAI
Before: SHRI G.S.PANNU, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-9, Mumbai, dated 27.03.2012, which in itself arises from the assessment framed by the A.O u/s 143(3) of the Income Tax Act, 1961 (in short „the Act‟), dated 16.12.2010. The P a g e | M.F. Global Sify Securities Vs. Addl. CIT assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:-
“On the facts and in the circumstances of the case and in law the Commissioner of Income-tax (Appeals) (hereunder after referred to as CIT(A) erred in; 1. The CIT (A) has erred in law and on the facts, in adding a sum of Rs.29,91,792/- on account of 'Unexplained Deposits' collected from various clients, relying on the provisions of section 68 of the Income-tax Act, 1961 ('the Act') without appreciating the efforts that your assessee had made to provide sufficient available details for each and every such credit in its account.
Without prejudice to the Ground No. 1, the CIT(A) has erred in law and on the facts in not granting credit for a sum of Rs.51,68,195/- being added to the total income during the course of assessments of earlier years and identified subsequently. without appreciating the efforts that your assessee had made to pass on this credits along with credits received and unidentified in earlier years after having sufficient details like Identity of the creditors, PAN No. of depositors, their bank account and more importantly the creditworthiness by way of proving that these are the depositors in normal course of business to trade with clients with your assessee.
The CIT(A) has erred in law and on the facts in adding a sum of Rs. 3,28,767/-being proportionate interest on the borrowings reason being the borrowings were used as short term interest-free credit to the appellant's subsidiary company.
4. The CIT (A) has erred in law and on the facts, in disallowing a sum of Rs.45,97,216/- on account of foreign traveling expenditure considering the same as remote and Illusionary, not wholly and exclusively being incurred for the purpose of business. That the lower authorities were also not justified in disallowing 50% claim of expenses on general and arbitrary basis and the claim of expenses is fully supported and verifiable and there is no valid basis for such disallowance.
5. The CIT (A) has erred in law and on the facts, in enhancing the income on sale of shares of Bombay Stock Exchange (BSE) by denying the benefit of cost of indexation under Income tax Act from the year of acquisition of BSE membership (FY 2000-01) to year of acquisition of Shares of BSE in scheme of demutualisation of exchange (FY:2005-06) and Incorrectly computation of capital gain on sale of such shares. Relief Your appellant prays that the order of learned CIT (A) on the above grounds be set aside. Your appellant, therefore, respectfully prays to direct the Assessing officer to: a) Modify the assessment order to the above extent and P a g e | M.F. Global Sify Securities Vs. Addl. CIT b) Grant other reliefs deemed necessary. Your appellant craves leave to add, amend, alter, substitute, modify and/or to withdraw any or all of the foregoing grounds of appeal
on or before the time of hearing.”
2. Briefly stated, the facts of the case are that the assessee company is engaged in the business of broking for purchase and sale of listed equity shares and listed derivative contracts and is a member of BSE and NSE. The assessee had filed its „return of income‟ for A.Y. 2008-09 on 30.09.2008, declaring total income of Rs. 89,43,65,580/-. The case of the assessee was taken up for scrutiny assessment and the A.O interalia made the following additions/disallowances in the hands of the assessee:- S.No. Particulars Amount
1. Addition of „Unexplained deposits‟ u/s 68. Rs. 29,91,792/- 2. Proportionate disallowance of Interest on Rs. 3,28,767/- borrowed funds. 3. Disallowance of Foreign travelling Rs. 45,97,216/- expenses.
The A.O after deliberating on certain other issues assessed the income of the assessee at Rs. 90,72,28,740/-.
3. The assessee being aggrieved with the assessment framed by the A.O, therein carried the matter in appeal before the CIT(A). The CIT(A) though partly allowed the appeal of the assessee, however, the aforesaid additions/disallowances were upheld.
The assessee being aggrieved with the order of the CIT(A) to the extent the latter had sustained the aforesaid additions/disallowances, had therein carried the matter in appeal before us. The contentions raised by the authorised representatives for both the parties, and our
P a g e | M.F. Global Sify Securities Vs. Addl. CIT adjudication as regards the respective issues assailed before us, is as under:- ADDITION OF ‘UNEXPLAINED DEPOSITS’ U/S 68 : RS. 29,91,792/-
The ld. Authorised Representative (for short „A.R‟) for the assessee taking us to the genesis of the issue under consideration, submitted that the A.O had during the course of the assessment proceedings observed that the assessee had maintained an account under the head “Temp. a/c”. The assessee submitted before the A.O that in order to facilitate early credit of money from the clients, it had advised them to deposit the money directly in its bank accounts and intimate the same by way of a letter or e-mail etc., with the proof of deposit, in order to enable the assessee to reconcile such deposit with the credit in the bank. The ld. A.R submitted that the assessee would credit the amount in the account of the respective client in its records only after the receipt of the said communication. It was submitted by the assessee that in certain cases, either due to non-communication by the clients or for some other reason the amount deposited by the client would not be reconciled. The ld. A.R submitted that the assessee as a matter of consistent practice would after lapse of a period of three years offer the unidentified amounts parked in the “Clients account” for tax. The ld. A.R submitted that the assessee on being called upon by the A.O to furnish the details of all the credits which the assessee had not been able to identify till date, thus furnished with him the necessary details as regards such un-reconciled amounts aggregating to Rs. 29,91,792/- (Page 149 & Page 150-154) of his „Paper book‟ (for short „APB‟). The ld. A.R submitted that the amounts aggregating to Rs.29,91,792/- deposited in the „bank accounts‟ of the assessee was the „Clients money‟ and could not be utilised for any other purpose,
P a g e | M.F. Global Sify Securities Vs. Addl. CIT except for the benefit of the client. The ld. A.R in order to drive home his aforesaid contention, therein drew our attention to a letter addressed by SEBI to the President/Executive directors of all the Stock Exchanges, placed at Page 1-2 of the „Synopsis‟ which was furnished by him during the course of the hearing of the appeal. The ld. A.R referring to the contents of the aforesaid letter therein drew our attention to the strict regulations as were cast upon the member brokers, which made it obligatory on their part to forthwith deposit the money received from the clients in the current or deposit account in the name of the member, or in one consolidated client account for all the clients maintained with a bank. The ld. A.R further took us through the strict regulations as regards withdrawal of the amounts from the “Clients account”, which clearly provided an embargo as regards utilization of the amounts credited in the “Clients account” for any other purpose, except for those permitted therein. The ld. A.R had thus tried to impress upon us that the amounts received in the “Clients account” exclusively belonged to the respective clients, and the utilization of he same being strictly regulated by the specific purposes for which those could be appropriated for the benefit of the client, were thus at no stage available at the disposal of the assessee. The assessee in order to fortify his contention that the unclaimed amounts received from the clients were consistently offered by it for tax after a lapse of a period of three years, therein took us through Page 147 of his „APB‟, which revealed that the assessee in the preceding years, viz. A.Y.2006-07 and A.Y. 2007-08 had on his own offered such unidentified amounts lying in the “Clients account” of Rs. 2,51,576/- and Rs. 3,50,554/-, respectively, for tax. The ld. A.R further averred that the amounts lying in the “Clients account” were held by the assessee only in a fiduciary capacity, and it could at no stage be held to be the owner of the said amount. Alternatively, the ld.
P a g e | M.F. Global Sify Securities Vs. Addl. CIT A.R submitted that though the amounts aggregating to Rs. 29,91,972/- which with the efflux of time had been characterised as unclaimed amount of the clients, however, could not be assessed as an „Unexplained credit‟ u/s 68 in the hands of the assessee. It was averred by the ld. A.R that the addition of the entire amount would lead to a „double addition‟ in the hands of the assessee. It was submitted by the ld. A.R that the A.O while framing the assessment in the hands of the assessee for the preceding years, viz. A.Y. 2006-07 and A.Y. 2007-08 had made a further addition of an amount of Rs. 31,84,070/- and Rs. 29,32,114/- forming part of the “Clients account”, to the returned income of the assessee, by characterising the same as „Unexplained Credit‟ in the hands of the assessee. It was submitted by the ld. A.R that an amount of Rs. 9,49,687.96 (Page 154 of „APB‟) which was already brought to tax in the hands of the assessee in the aforesaid preceding years, viz. A.Y. 2006-07 and A.Y. 2007-08, was however once again subjected to tax during the year under consideration by the A.O, loosing sight of the fact that the same already stood included in the amount of Rs. 31,84,070/-(supra) and Rs. 29,32,114/-(supra) for the A.Y: 2006-07 and A.Y. 2007-08, respectively. It was thus averred by the ld. A.R that for the foregoing reasons the amount of Rs. 9,49,687.96 (supra) even as per the version of the A.O could not be brought to tax in the hands of the assessee. The ld. A.R in order to demonstrate his aforesaid claim, therein took us to S.No. 206 at Page 6 of the „Synopsis‟, as per which an amount of Rs. 30,000/- deposited in the “Clients account” in the period relatable to A.Y. 2007-08, also figured in the amount of Rs. 29,91,792/- for the year under consideration and was added by the A.O as an unexplained credit in the hands of the assessee u/s 68. The ld. A.R fairly submitted that while for no appeal assailing the aforesaid addition was filed by the assessee for A.Y. 2006-07, however, the P a g e | M.F. Global Sify Securities Vs. Addl. CIT matter for A.Y. 2007-08 was carried in appeal before the CIT(A). The ld. A.R in order to support his aforesaid contention that the amounts lying in the “Clients account”, which were held by the assessee in a fiduciary capacity by way of trust money, could not be characterized as amounts held by the assessee for his own benefit and be assessed as the latters income, relied on the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Tanubhai D. Desai (1972) 84 ITR 713 (Bom). The ld. A.R further in support of the settled position of law that merely because an assessee does not offer any explanation for the cash credit entries, the amount solely for the said reason cannot be assessed as his income under Sec. 68, relied on the judgment of the Hon’ble High Court of Gujarat in the case of Mitesh Rolling Mills (P) ltd. Vs. CIT (2002) 258 ITR 278 (Guj).
Per Contra, the ld. Departmental representative (for short „D.R‟) averred that as the assessee had failed to identify the depositor, therefore, the genuineness of the transaction could not be established. The ld. D.R referring to S.No. 17 – Page 5 of the „Synopsis‟, averred that the amount of Rs. 58,162/- mentioned therein stood reflected as a cash receipt. The ld. D.R thus taking support of the aforesaid fact, submitted that on various occasions such cash deposits were received by the assessee, therefore, the fact that the said amount was as a matter of fact the unexplained cash owned by the assessee, could not be ruled out. The ld. D.R relied on the orders of the lower authorities and submitted that the order of the CIT(A) sustaining the aforesaid addition of Rs. 29,91,792/-(supra) did not suffer from any infirmity, therefore, the same may be upheld and the appeal of the assessee on the issue under consideration may be dismissed.
P a g e | M.F. Global Sify Securities Vs. Addl. CIT 7. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have deliberated upon the issue under consideration and after giving a thoughtful consideration to the facts of the case find substantial force in the contentions raised by the ld. A.R before us. We find that it remains as a matter of fact that the assessee by way of a consistent practice which was prevalent in its trade line, had in order to facilitate early credit of money from the clients, advised them to deposit the money directly in the “Client account” maintained by the assessee with the banks at respective places. Though the clients as advised, after depositing the amounts in the bank account would intimate the same by way of letter or e-mail alongwith the proof of deposit to the assessee, who on the basis of the said communication would reconcile the deposits with the credits in the bank account, however, in certain cases either due to non- communication by the clients or for some other reason the amounts deposited in the bank account of the assessee would not be reconciled. We had deliberated on the assessment records of the assessee for the A.Y. 2006-07 and A.Y. 2007-08, and are persuaded to be in agreement with the claim of the assessee that it was consistently, as a matter of practice, after the lapse of a period of three years, offering the unidentified amounts deposited by the clients in its bank account, for tax. We find that in the backdrop of the directions of SEBI to the President/Executive directors of all the Stock Exchanges, therein contemplating strict adherence of its rules regulating both the manner and the mode of dealing with the amounts received by the member brokers from its clients, which made it obligatory on their part to forthwith deposit such money received from the clients to the current or deposit account at a bank to be kept in the name of the member or in one consolidated client account for all the clients, the money
P a g e | M.F. Global Sify Securities Vs. Addl. CIT deposited in the “Client account” maintained with the banks, would by no means loose the color and character as that of being the money of the clients. That still further, the strict regulations monitoring the withdrawal of the amounts from the “Clients account”, which clearly provided an embargo as regards utilization of the amounts credited in the “Clients account” for any other purpose, except for those contemplated therein, thus duly established that the amounts received in the “Clients account” exclusively belonged to the respective clients and would in no way be available to the assessee for being utilised for a purpose other than for the benefit of the client, which too had to be in strict compliance of the parameters laid down by SEBI. We thus in the backdrop of our aforesaid observations are thus of the considered view that it can safely be concluded that the assessee was holding the amounts lying in the “Clients account” only in a fiduciary capacity. We find that the issue that an amount held by a person in a fiduciary capacity cannot be brought to tax as an unexplained credit u/s 68, is no more res integra in light of the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Tanubhai D. Desai (1972) 84 ITR 713 (Bom), wherein the Hon‟ble High Court after referring to the rights and regulations of solicitors, in respect of the amounts of their clients held by them in a fiduciary capacity, had observed as under:- “The relevant principle laid down by the House of Lords in its judgment in that case is that if a person in a fiduciary position receives any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he is authorised to do so. Applying that principle the House of Lords held that on the facts of the case the solicitor was not authorised to keep the interest either by custom or by implied agreement, although, as a matter of fact, a similar practice had long been followed by a number of solicitors in the United Kingdom. As seen earlier, the relevant rules of this High Court do not permit a solicitor to treat the moneys received by him from or on account of his clients as his personal moneys and such moneys are held by him in a fiduciary capacity. Even the income received from such moneys must
P a g e | M.F. Global Sify Securities Vs. Addl. CIT equally be held by the solicitor in a fiduciary capacity. What the solicitor actually does with the income, i.e., whether he appropriates it to himself or not, is, in our opinion, a matter of no consequence. If he appropriates it to himself, it would simply amount to a breach of his fiduciary relationship and whatever may be the consequences in law would follow. But his unauthorised act of converting any part of the corpus or even the income derived therefrom which is not in accordance with the provisions of the rules of this High Court would not convert those amounts held by him in a fiduciary capacity into moneys held by him beneficially, for himself. In the said case before the House of Lords the solicitor had in fact converted the interest earned in that case to his own use, but none-the-less the House of Lords, on the basis that the moneys and, therefore, the interest also was held by the solicitor in a fiduciary capacity, held that the taxation must proceed on the basis that the income did not in fact belong to him and was not liable to be taken into computation in his personal assessment. A similar view has been taken by a Division Bench of the Calcutta High Court in CIT vs. Sandersons & Morgans (1970) 75 ITR 443 (Cal).”
We are of the considered view that in the backdrop of the aforesaid judgment of the Hon‟ble High Court, now when the amounts aggregating to Rs. 29,91,792/-(supra) credited in the “Clients account” maintained by the assessee with the bank, could safely be held to be the clients money which were held by the assessee in a fiduciary capacity, therefore, the same could not be assessed as the unexplained credit in its hands under Sec. 68 of the „Act‟. We are of the considered view that in the backdrop of our aforesaid observations, the amount of Rs. 29,91,792/- (supra) could not have been assessed as the unexplained cash credit of the assessee under Sec.
We are also of the view that now when the revenue had been accepting the aforesaid practice of the assessee in offering the unidentified amounts received from the clients and forming part of the “Clients account” for tax, after a lapse of a period of three years, and on the said basis had assessed the amounts of Rs. 2,51,576/-(supra) and Rs. 3,50,554/-(supra) offered by the assessee for tax after a lapse of a period of three years in AY: 2006-07 and AY: 2007-08, respectively, therefore, a different yardstick and an inconsistent P a g e | M.F. Global Sify Securities Vs. Addl. CIT approach would not be permissible on its part for the year under consideration.
We are of the considered view that as we have set aside the entire addition of Rs. 29,91792/-(supra), therefore, the contention of the assessee that the taxing of the amount of Rs. 9,49,687.96 (supra) during the year under consideration would lead to „double taxation‟ in its hands is rendered as academic. We thus refrain from adjudicating the said contention of the assessee, which thus is left open.
The Ground of appeal No. 1 & 2 are thus partly allowed in terms of our aforesaid observations.
DISALLOWANCE OF INTEREST ON BORROWED CAPITAL : Rs. 3,28,767/-
We now advert to the disallowance by the A.O of the interest on borrowed capital amounting to Rs.3,28,767/- in respect of the short term interest free funds which were made available by the assessee to its subsidiary company. The A.O while deliberating on the claim of the assessee towards interest and finance charges on the borrowed funds amounting to Rs.10,50,90,000/-, had observed that a correlating interest and finance charges of Rs.3,95,20,000/- was claimed by the assessee as an expenditure in its „Profit and loss a/c‟ for the year under consideration. The A.O observed that the assessee who was paying interest at the rate of 12% on the aforesaid interest bearing funds, had however advanced interest free loans to the extent of Rs.10 crore to its subsidiary company, i.e. M/s. M.F. Global Commodities India Pvt. Ltd., against which no interest was being charged by the assessee. The assessee on being called upon by the A.O to explain as to why the proportionate interest relatable to such interest free
P a g e | M.F. Global Sify Securities Vs. Addl. CIT advances may not be disallowed, submitted that as the subsidiary company was also a profit making company, therefore, no disallowance was called for in its hands. The aforesaid contention of the assessee did not find favour with the A.O who held a conviction that no prudent businessmen would necessarily strain the resources of his concern by diverting its interest bearing funds for non-business purposes. The A.O thus relying on a host of judicial pronouncements, including the judgment of the Hon’ble High Court of Bombay in the case of Phaltan Sugar Works Ltd. Vs. CIT (1995) 215 ITR 582 (Bom) proceeded with and carried out a proportionate disallowance of interest amounting to Rs.3,28,767/- in respect of the interest free advances of Rs. 10 crore which were diverted by the assessee to its subsidiary company for a period of 10 days during the year under consideration.
That during the course of the hearing of the appeal, it was submitted by the ld. A.R. that the judgment of the Hon’ble High Court of Bombay in the case of Phalton Sugar Works Ltd. (supra) relied upon by the A.O had been overruled by the Hon’ble Supreme Court while adjudicating the case of S.A. Builders Ltd. Vs. CIT(A) & Anr. (2007) 288 ITR 1 (SC). It was further submitted by the ld. A.R that the Hon’ble High Court in its aforesaid judgment had clearly held that where a „Holding company‟ being prompted by commercial expediency had made available an interest free advance to its „Wholly owned subsidiary‟ company („WOS‟), then no disallowance of any part of the interest paid by the holding company on the borrowed funds advanced to the „WOS‟ would be called for. It was thus submitted by the ld. A.R that the judgment of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. (supra) had not been appreciated by either of the lower authorities. Per contra, the ld. Departmental
P a g e | M.F. Global Sify Securities Vs. Addl. CIT representative relied on the orders of the lower authorities and submitted that as the assessee had made available interest free funds out of its interest bearing funds, therefore, the A.O had rightly disallowed the proportionate interest relatable to such amount.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the issue under consideration before us. We find that it remains as a matter of fact that the assessee had borrowed substantial interest bearing funds on which huge interest was being paid by it. We are of the considered view that the issue as regards the allowability of the interest paid by the assessee, to the extent interest free advances were made available to its subsidiary company, has to be adjudicated in the backdrop of the law laid down by the Hon’ble Supreme Court in the case of S.A. Builders Ltd.(supra), wherein the Hon’ble Apex Court has held that where an interest free advance was made available by a holding company to its subsidiary, on the ground of commercial expediency, then no disallowance in respect of the interest relatable to such interest free advance would be liable to the made in the hands of the holding company. We have perused the orders of the lower authorities and have given a thoughtful consideration to the issue before us. We are of the considered view that the issue as to whether the assessee company had advanced the funds to its subsidiary company on the ground of commercial expediency, or not, had not been deliberated upon by either of the lower authorities. We further find that the judgment of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT 289 ITR 26 (SC) relied upon by the CIT(A) is not on the issue under consideration, but rather pertains to the allowability of deduction under Sec. 32AB,
P a g e | M.F. Global Sify Securities Vs. Addl. CIT which we find is not the issue involved in the case before us. We are further of the considered view that the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possesses sufficient interest free funds of its own, then it is to be presumed that amounts advanced or invested in the sister concern by the assessee were made out of interest free funds, and no part of the interest on borrowings would thus be liable to be disallowed on the ground that the said investments were made out of the interest bearing funds. We find from a perusal of the records that though it is contended by the A.O that advances were made by the assessee out of its interest bearing funds, however, a claim to the contrary was raised by the assessee, therein claiming that the advances to the „Sister concern‟ were made out of the share capital, reserves and surplus which were available with the assessee. We are of the considered view that in the backdrop of the aforesaid facts read with the settled position of law, the matter in all fairness needs to be restored to the file of the A.O. We thus restore the matter to the file of the A.O, with a directon to re-adjudicate the issue keeping in view the aforesaid judgments of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. (supra) and the judgment of the Hon’ble High Court of Bombay in the case of Reliance Utilities Ltd (supra). That in case if it emerges from the records that sufficient interest free funds were available with the assessee at the relevant point of time when the interest free amounts were advanced to the subsidiary company, or it is proved by the assessee that the amount advanced to the subsidiary company was prompted by commercial expediency, then under either of the aforesaid situation the disallowance of interest made by the A.O u/s. 36(1)(iii) shall stand vacated. Needless to say, the A.O shall during the course of the set aside proceedings afford sufficient opportunity of P a g e | M.F. Global Sify Securities Vs. Addl. CIT being heard to the assessee, who shall remain at a liberty to substantiate the factum of availability of sufficient interest free funds at the time of advancing the interest free amount to the subsidiary company, as well as demonstrate before the A.O that the amounts had been advanced to the subsidiary company on account of commercial expediency. We thus restore the aforesaid issue for fresh adjudication to the file of the A.O, who is directed to readjudicate the same in the backdrop of our aforesaid directions. The Ground of the appeal no. 3 raised by the assessee is thus allowed for statistical purposes.
DISALLOWANCE OF FOREIGN TRAVELLING EXPENSE : Rs. 45,97,216/-
We now advert to the disallowance of a sum of Rs.45,97,216/- made by the A.O in respect of the foreign travelling expenditure claimed by the assessee in its „Profit and loss A/c‟. The A.O during the course of the assessment proceedings observed that the assessee had claimed foreign travelling expenses of Rs.91,94,433/-. The A.O called upon the assessee to justify the allowability of the aforesaid expenditure incurred on foreign travelling, and therein substantiate as to how the same was wholly and exclusively related to its business. The assessee in reply to the aforesaid query raised by the A.O, therein submitted that the said expenses were incurred wholly and exclusively for the following purposes of the business of the assessee company: “(a) Off-site meetings arranged for High networth clients i.e. those clients from whom we ear brokerage beyond a particular threshold. (b) Visit to our regional office i.e. Singapore, USA, UK and Hong Kong by our directors. (c) Visit by our sales dealing personnel to meet NRI and FII clients. The A.O after deliberating on the contentions of the assessee was however not persuaded to accept the contention of the assessee, for the reason that the assessee had failed to substantiate as to how the P a g e | M.F. Global Sify Securities Vs. Addl. CIT foreign travelling had helped its business. It was further observed by the A.O that the assessee had neither substantiated as to how the visits to the foreign countries had helped in its business, nor had furnished the details of the meetings as well as the clients with whom the same had taken place. The A.O not finding favour with the unsubstantiated contention of the assessee that the meetings were undertaken to meet the high networth clients by the sales personnel, thus concluded that the assessee had failed to prove that the said expenditure was incurred wholly and exclusively for the purpose of its business. The A.O thus holding a conviction that the assessee had failed to give the details of the meetings that took place with the clients, and also had not brought on record the real benefits that had accrued to it from such foreign travelling, however being of the view that the assessee had some business of foreign clients, therefore, made an adhoc disallowance of 50% of the foreign travel expenditure and made an addition of Rs.45,97,216/- on the said count in the hands of the assessee.
The assessee being aggrieved with the order of the A.O assailed the disallowance of the foreign travelling expenses before the CIT(A). The assessee submitted before the CIT(A) that the foreign travelling expenses were incurred for arranging meetings with clients and to provide them with update and support of trading ideas, arranging meetings with prospective clients, arranging meetings to introduce various leaders of corporate India with FII‟s and also to have discussion on business strategies to expand business and enhance efficiency of operations of the assessee. It was submitted by the assessee that it had during the year under consideration sent representatives/employees to Singapore, Hongkong, U.K., Germany, Dubai, Italy, France, Vienna, Vietnam, South East Asia, London,
P a g e | M.F. Global Sify Securities Vs. Addl. CIT Japan, USA, Seoul, Austria and other countries. The assessee averred before the CIT(A) that considering the size of brokerage revenue earned, it was essential to organize clients meetings in order to maintain relationship with them. It was further submitted by the assessee that the visit to the parent company based in U.K was definitely for business purpose. The assessee during the course of the proceedings before the CIT(A) submitted an application under Rule 46A of the Income tax Rules 1962, therein seeking his permission to place on record fresh evidence on the issue of disallowance of foreign travelling expenses. The CIT(A) confronted the additional evidence to the A.O, who objected to the admission of the same. The CIT(A) however being of the view that as the additional evidence was relevant and required for adjudication of the issue under consideration, therefore, admitted the same. The CIT(A) thereafter deliberated on the contentions of the assessee in the backdrop of the facts of the case, and being of the view that the reasons given by the assessee in respect of incurring of the foreign travelling expenses were non specific and no tangible results were obtained by the assessee from incurring the said expenditure, therefore, concluded that the same could not be held to have been incurred wholly and exclusively for the purpose of the business of the assessee. The CIT(A) further observed that the assessee had neither furnished the details of the meetings, nor brought on record the real benefits which had accrued to it from holding such meetings. The CIT(A) thus being of the view that the incurring of the aforesaid expenditure by the assessee for capital expenditure and expenditure not wholly and exclusively incurred for business could not be ruled out, therefore, concluded that no infirmity as regards disallowance of 50% of the foreign travelling expenses by the A.O emerged from the record. The CIT(A) thus on the basis of his
P a g e | M.F. Global Sify Securities Vs. Addl. CIT aforesaid view upheld the disallowance of Rs.45,97,216/- made by the A.O.
The assessee being aggrieved with the aforesaid proportionate disallowance of the foreign travelling expenses, had assailed the same in appeal before us. The ld. A.R at the very outset submitted that as it was a case of a company and the foreign travelling expenses during the year under consideration had been subjected to „Fringe benefit tax‟ (FBT), therefore, the lower authorities could not have characterized any part of the foreign travelling expenses as having been incurred for non business purposes. The ld. A.R submitted that if the foreign travelling expenses are pitted against the total brokerage receipts of the assessee, the same hardly works out to 0.5% of the said brokerage income. It was submitted by the ld. A.R that the assessee is a Joint venture and its counterpart was a foreign company based in U.K. The ld. A.R submitted that the clientele of the assessee is present in almost 12 countries and it earns substantial brokerage income from catering to the said clients who are settled abroad. The ld. A.R in order to substantiate the genuineness and veracity of incurring of the foreign travelling expenses, which as per him were incurred wholly and exclusively in the course of the business of the assessee, therein submitted that the assessee is a professionally managed company and its clients consists of foreign institutional investors (FII‟s) and Non- resident Indians (NRI‟s) based in the foreign countries. It was thus submitted by the ld. A.R that the assessee in the very interest of its business had to hold regular meetings with its clients, in order to maintain and furtherance of its business relationships with them. The ld. A.R further submitted that as the assessee was a multi-national company, therefore, the directors of the assessee company were required to frequently visit the head office and offices of the other
P a g e | M.F. Global Sify Securities Vs. Addl. CIT group companies located outside India, for business purposes. The ld. A.R further drew our attention to the fact that the foreign travelling expenses included expenses incurred on foreign travelling by the employees of the assessee company for holding business meetings with the clients, as well as visiting of the foreign offices by the directors of the assessee company. It was submitted by the ld. A.R that the complete facts as mentioned hereinabove were furnished by the assessee along with supporting documents with the CIT(A), vide its reply dated 23.12.2011 (Page 46 of „APB‟). The ld. A.R further drew our attention to the fact that the foreign travelling carried out by the employees of the assessee company could only be proceeded with after approval by the Board of Directors. It was submitted by the ld. A.R that the employees had to give the details of expenses, which thereafter were approved only after thorough vetting. The ld. A.R drew our attention to the complete details of foreign travelling expenses for the year ended 31 March, 2008 (Page 23) of „Synopsis‟ filed by him before us. We find that the assessee had furnished complete details of the persons who had undertaken the foreign travelling, along with their respective designations, country visited, amount of expenditure incurred, as well as the purpose of the foreign travelling. The ld. A.R had further drawn our attention to the documents supporting his aforesaid contention in respect of foreign travelling carried out by the employees/directors of the assessee company, by referring to the exhaustive in house documentary evidence placed at Page 220-261 of the „APB‟. The ld. A.R had further taken support of the „Affidavit‟ furnished by the director of the assessee company, viz. Mr. Vineet Bhatnagar, wherein the deponent had clearly deposed that the foreign travelling expenditure was incurred wholly and exclusively for the purpose of the assessee company (Page 31-33) of the „Synopsis‟. The ld. A.R strongly objected to the adhoc disallowance carried out by the P a g e | M.F. Global Sify Securities Vs. Addl. CIT A.O and submitted that the same was not permissible. Per contra, the ld. D.R relied on the order of the CIT(A) and took us through the observations of the CIT(A) recorded at Page 24 - Para 7.6.5 of his order. It was submitted by the ld. D.R that in the absence of complete details in respect of the nature of the foreign travelling expenses incurred by the assessee, the lower authorities had fairly carried out a proportionate disallowance of the said expenditure. It was thus submitted by the ld. D.R that no infirmity did emerge from the order of the CIT(A) and the appeal of the assessee in respect of the issue under consideration lacked any merit and thus was liable to be dismissed.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the issue under consideration. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions raised by the ld. A.R before us. We have deliberated on the material available on record and find that the assessee is a multinational company which primarily caters to its clients, which consists of Foreign Institutional Investors (FII) and Non Resident Indians (NRI‟s) based in foreign countries. We are of the considered view that in the backdrop of the very nature of the business of the assessee, it was indispensably required on its part to hold regular meetings with its clients, in order to both maintain as well as facilitate furtherance of the business relationships with them. We are of the considered view that in light of the business of the assessee whose Head office, as well as the offices of the other group companies are located outside India, frequent visits by the directors of the assessee company and its employees could not be ruled out. We now advert to the details of the foreign travelling expenses, which as claimed by the lower authorities had not been furnished by the P a g e | M.F. Global Sify Securities Vs. Addl. CIT assessee. We find that the assessee in order to substantiate the complete details of the foreign travelling expenses incurred by it to the last of the paisa, had placed on record the complete details of the foreign travelling expenses incurred for the year ended 31 March, 2008, aggregating to Rs.91,94,433/-(Page 122 of „APB‟). We have deliberated on the details furnished by the assessee and find that the same is not merely an eyewash, but rather is duly supported by substantial in house details placed on record by the assessee (Page 220-261) of the „APB‟. We are persuaded to be in agreement with the contentions of the ld. A.R that there was an impeccable procedure for sanctioning by the assessee company of the foreign travelling undertaken by its employees/directors, as well as approval of the expenses incurred therein. We have given a thoughtful consideration to the issue before us and after deliberating on the material available on record in the backdrop of the contentions raised by the authorized representatives for both the parties, are unable to persuade ourselves to be in agreement with the view arrived at by the lower authorities in respect of the proportionate disallowance of the foreign travelling expenses in the hands of the assessee. We thus being of the considered view that the foreign travelling expenses which are irrebutably found to have been incurred by the assessee wholly and exclusively for the purpose of its business, therefore, find no justification for any proportionate disallowance of the said expenditure in the hands of the assessee. We thus delete the disallowance of Rs.45,97,216/-(supra) made by the A.O in respect of the foreign travelling expenses. The order of the CIT(A) confirming the aforesaid disallowance is thus set aside on the issue under consideration. The Ground of appeal No. 4 raised by the assessee before us is allowed.
P a g e | M.F. Global Sify Securities Vs. Addl. CIT 17. The ld. A.R for the assessee had during the course of hearing of the appeal submitted that the Ground of appeal No. 5 is not being pressed. That in light of the concession of the ld. A.R. the Ground of appeal No. 5 is dismissed as not pressed.
The appeal of the assessee is partly allowed in terms of our aforesaid observations.
Order pronounced in the open court on 01.09.2017
Sd/- Sd/- (G.S. Pannu) (Ravish Sood) रेखासदस्म / Accountant Member न्मायमकसदस्म / Judicial Member भ ुंफईMumbai; ददनाुंकDated : 01.09.2017 PS Rohit Kumar आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent 2. आमकय आम क्त(अऩीर) / The CIT(A) 3. आमकय आम क्त / CIT- concerned 4. विबागीम प्रयतयनधध,आमकय अऩीरीम अधधकयण, भ ुंफई / DR, ITAT, Mumbai 5. गार्ड पाईर / Guard File 6. आदेशानुसार/BY ORDER, उि/सहायक िंजीकार(Dy./Asstt.Registrar) आमकय अऩीरीम अधधकयण, भ ुंफई/ ITAT, Mumbai
P a g e | M.F. Global Sify Securities Vs. Addl. CIT