CHEIL INDIA PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

AY 2010-11 S.No. Name of the Vendors As per As per assessee confirmation 1. TLG India Ltd. 722522398 No reply 2. Bates India Ltd. 142369639 No reply 3. Platinum Communication Pvt. 134801473 42920246 Ltd.

ESPN Software India Pvt. Ltd. 70000000 Received back unserved 5. Electrospark 58551808 No reply 6. Communique Marketing 55735946 No reply Solutions Pvt. Ltd.

New Colour Screen Pvt. Ltd. 47933574 No reply 8. Tata Teleservices Ltd. 44168372 No reply 9. Lustra Print Process Pvt. Ltd. 41534580 - 10. Shark Design Studio Pvt. Ltd. 34542617 No reply 11. Next Step Engineering Pvt. Ltd. 38973075 No reply 12. Primesite Outdoor Advertising 34012655 - Pvt. Ltd.

Kalpakaaru Projects Pvt. Ltd. 33328317 Received back unserved

On the basis of the above chart, the ld. CIT(A) observed that no confirmations were at all received from six parties and three parties partly confirmed the amounts. He, therefore, drew a chart of confirmation/non-confirmation as follows:-

Electrospark 58551808 - Confirmation The unconfirmed not received amount of Rs.58551808 to be disallowed. 6. Communique 55735946 - Confirmation The unconfirmed Marketing not received. amount of Solutions Pvt. Ltd. Rs.55735946 to be disallowed. 7. New Colour Screen 47933574 3341390 44592184 The unconfirmed amount of Pvt. Ltd. Rs.44592184 to be disallowed. 8. Tata Teleservices 44168372 - Confirmation The unconfirmed not received. amount of Ltd. Rs.44168372/- to be disallowed. 9. Lustra Print 41534580 9829279 31705301 The unconfirmed amount of Process Pvt. Ltd. Rs.31705301 to be disallowed. 10. Shark Design 34542617 Confirmed - Confirmed

Next Step 38973075 - Confirmation The unconfirmed Engineering Pvt. not received. amount of Ltd. Rs.38073075 to be disallowed on account of non- confirmation.

Primesite Outdoor 34012655 Confirmed - Confirmed Advertising Pvt. Ltd. 13. Kalpakaaru 33328317 Confirmed - Confirmed.

We have heard the rival submissions and perused the relevant material on record. The assessee is carrying on the business of doing advertisement mainly for Samsung group of companies in print and electronic media. This work is outsourced from vendors. The vendors raise bill on the assessee for the amount payable to them and the assessee raises bill for the amount payable to vendors plus its remuneration on its clients. The assessee drew its Profit & Loss Account, a copy of which is available on page 64 of the paper book, by showing its remuneration as revenue. In other words, the assessee did not declare the receipts from its clients on income side and payments to vendors on the expenditure side. In our view, the mere fact of the assessee adopting a particular way of presenting its accounts, cannot per se be conclusive of under-statement of income, which needs to be determined on the touchstone of the factual and legal position prevailing in a case. Adverting to the facts of the instant case, we find that the assessee has been consistently adopting this approach of declaring income, which has been constantly rejected by the AO by making similar additions in the earlier years. This issue has been the subject 9 matter of attention by the tribunal in earlier years, which has restored the matter to the AO for procuring requisite details from the vendors by the exercise of his powers and, thereafter, making reconciliation with the transactions recorded in the assessee’s books of account before making any addition for deficiency or otherwise. A copy of the Tribunal order for the immediately preceding assessment year, namely, 2009-10 is available on page 93 of the paper book. As the facts and circumstances of the instant year are mutatis mutandis similar to those of the earlier years, respectfully following the precedent, we set aside the impugned order and remit the matter to the file of the AO for deciding this issue afresh after seeking details from the assessee and vendors and, thereafter, reconciling the position. If the payments are proved to have been genuinely made by the assessee to the vendors, then, of course, no addition can be made to that extent. If however, the payments are found to be not genuinely made, then such alleged payments would qualify for addition.

Before parting with this issue, we would like to deal with the contention of the ld. AR that the restoration should be confined only to Rs.48.27 crore, being the amount for which confirmations were not received out of 13 parties and no restoration should be made in respect of the remaining amount because the ld. CIT(A) did not specifically cause these vendors to be investigated. We are unable to accept this contention for the obvious reason that the assessee did not furnish complete details before the AO at the assessment stage, with the result the requisite investigation could not be done. The ld. CIT(A) started investigation at the instance of the assessee and firstly required the complete details which were not filed and then sought confirmations from 13 parties “on a random/sample basis.” This does not mean that the payments made to vendors qua the remaining transactions were found to be genuine by the AO or the ld. CIT(A). Since the details concerning the remaining parties were never made available to the AO, their genuineness cannot be accepted unless the verification is made by the AO on supply of such details by the assessee. We, therefore, direct that the entire addition of Rs.90.86 crore will be the subject matter of 11 examination by the AO in fresh proceedings and such examination will not be restricted to a sum of Rs.48.27 crore. Needless to say, the assessee will be allowed a reasonable opportunity of hearing and will be obliged to furnish necessary details as called for by the AO to satisfy himself as to the genuineness of the vendor payments.

The last issue is about the enhancement made by the ld. CIT(A) by making disallowance of Rs.2,85,34,862/- u/s 40(a)(ia) of the Act for payments made without deduction of tax at source.

The assessee has filed a request for admission of additional evidence, being, two bills of Rs.27,000/- each drawn in the name of the assessee, which were originally in the name of Cheil World Wide. The ld. AR submitted that the new bills could not be filed before the ld. CIT(A) as these were not available at the material time and the assessee could manage to obtain the same only later on. As regards the remaining sum of Rs.1.77 lac, the ld. AR submitted that the evidence which was earlier not available now can be produced for examination. It was, therefore, prayed that this issue may be restored for a fresh consideration. The ld. DR submitted that it would be more appropriate if the restoration is made to the AO instead of the ld. CIT(A), to which the ld. AR did not object. Since the details of Rs.2.91 lac were not available with the assessee at the time when the ld. CIT(A) made enhancement, in our considered opinion, the ends of justice would meet adequately if this issue is restored to the file of AO for a fresh consideration and decision. We order accordingly.

Second item of disallowance is a sum of Rs.97,45,288/-, being non-deduction of tax due to lower withholding certificate furnished by the vendors. The ld. CIT(A) noticed that the assessee claimed to have made payments to parties on which tax was not deducted due to lower/nil withholding certificates, the details of which were furnished.

The ld. AR contended that TLG India Pvt. Ltd. and TLG India Pvt. Ltd. (Leo Burnett) are one and the same entity having only one 17 permanent account number. It was submitted that the certificate of lower/nil withholding was applicable in respect of the payments amounting to Rs.97.45 lac as well. On a perusal of details furnished before the ld. CIT(A), a copy of which is available on page 377 of the paper book, we find that the assessee, in fact, made classification of the payments to the entities as recorded by the ld. CIT(A). Since the assessee itself had shown TLG India Pvt. Ltd. and TLG India Pvt. Ltd. (Leo Burnett) as separate entities, the ld. CIT(A) could not have presumed the same to be one entity alone. However, considering the entirety of the facts and circumstances of the case, we are satisfied that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of AO for verifying the assessee’s contention and, then, deciding it accordingly. Both the sides were unanimous in their argument that this issue may be restored for fresh examination by the AO.

The third component of disallowance made by the ld. CIT(A) u/s 40(a)(ia) is a sum of Rs.64,92,390/-, being payments made to certain vendors on which no tax at source was deducted u/s 194C of the Act.

On a perusal of the above chart, the ld. CIT(A) held that most of the payments did not qualify as transactions of sale, but involved use of labour for packing, assembling and dismantling. He, therefore, made disallowance of Rs.14,89,867/-, being the amount discussed above and further disallowed 50% of the remaining amount of Rs.100,05,058/- (Rs.114,94,919/- minus Rs.14,89,861/). This resulted into disallowance of Rs.64,92,390/- u/s 40(a)(ia) of the Act.

After considering the rival submissions and perusing the relevant material on record, it is seen that the ld. CIT(A) made the disallowance as, in his opinion, these payments were made without deduction of tax at source u/s 194C of the Act. The ld. AR contended that the ld. CIT(A) did not examine the details properly inasmuch as the quid pro quo for the consideration paid did not qualify as ‘work’ in all the cases. This contention has not been refuted by the ld. DR. We are satisfied that this issue has not been properly examined. and the disallowance has been made u/s 40(a)(ia). Acceding to the request from both the sides, we set aside the impugned order on this score and remit the matter to the file of AO for a de novo adjudication of this issue. The ld. AR’s argument that the restoration should be made only for the disallowance to the tune of Rs.14,89,861/- and not for the 50% of the remaining amount, is not acceptable in view of the reasons given by us while dealing with the second issue. We, therefore, direct a fresh examination of the disallowance made by the ld. CIT(A) at Rs.64,92,390/- at the AO’s end.

Next item of disallowance is a sum of Rs.120,49,546/-, being Reimbursement of expense paid to employees/vendors. The assessee paid a sum of Rs.1.20 crore as reimbursement of costs incurred by employees on its behalf. The ld. CIT(A) observed that the assessee did give a detailed list of employees and description of costs incurred. Since the expenditure shown against each employee was running into lacs of rupees, the ld. CIT(A) required the assessee to furnish evidence like bank statement of employees to prove that these expenses were actually incurred by them. In the absence of the same, the ld. CIT(A) made disallowance of Rs.1.20 crore u/s 40(a)(ia) of the Act.

We have heard the rival submissions and perused the relevant material on record. Details of reimbursement of expenses is available on page 491 to 522 of the paper book. This is a date-wise chart giving employee’s name incurring the expenses, then, the description of the expense and, then, the amount. Nature of expenses as given on these pages varies from Staff entertainment to Car parking, Mobile expenses, Drivers’ salaries, Travelling expenses, Cricket match fee, Stationery, Snacks, Entertainment, Medical reimbursement, Telephone reimbursement and Petrol bills etc. These are the amounts incurred by the employees, but, reimbursed by the assessee. A perusal of the description of expenses indicates that these are otherwise of revenue nature not requiring any deduction of tax at source under the relevant provisions of the Act. The ld. CIT(A) has made disallowance by noticing that the payments were running into lacs while the assessee could not file any evidence like bank statement of employees to prove that these expenses were actually incurred. That is how, he ended up making a disallowance u/s 40(a)(ia) amounting to Rs.1.20 crore. In our considered opinion, there is a marked difference between an addition made by the AO while finalizing the assessment and enhancement made by the ld. CIT(A). Whereas it is open to the AO to examine any issue or any aspect concerning the assessment, the power of the CIT(A) in making enhancement is restricted to the notice of enhancement. As the ld. CIT(A) in the instant case issued notice for enhancement on account of disallowance for non-deduction of tax at source, he ought to have confined himself to the disallowance u/s 40(a)(ia). It is not open to the CIT(A) to issue enhancement notice on one ground and make actual enhancement on another. Reverting to the facts, we find that the ld. CIT(A) issued notice of enhancement for disallowance u/s 40(a)(ia) and has also, in fact, made this disallowance by mentioning ‘Amount of Rs.120,49,546/- is hence disallowed u/s 40(a)(ia).’ There is a preliminary presumption in making disallowance u/s 40(a)(ia) that the expenses were genuinely incurred but there was failure on the part of the assessee in making a proper deduction of tax at source. If an expense 23 itself is bogus or non-genuine, the same is disallowable at the threshold, and there can be no question of application of section 40(a)(ia) of the Act. Since, in the instant case, the ld. CIT(A) has taken recourse to the power of enhancement on the ground that the amounts were disallowable u/s 40(a)(ia), he was supposed to confine himself to that score rather than travelling beyond in examining the very deductibility or otherwise of such expenses. On going through the details of such expenses, it transpires that these are payments of revenue nature not requiring any deduction of tax at source under the relevant provisions.

The last component of this disallowance is a sum of Rs.16,638/-, being `Expense below threshold limit’. Without going deep into the details, it is found that the assessee made payment of Rs.16,638/- in total to two parties which is less than the prescribed limit of Rs.20,000/- u/s 194C requiring any deduction of tax at source. We, therefore, hold that the ld. CIT(A) was not justified in making the disallowance of this sum. The same is, therefore, deleted.

In the result, the appeal is partly allowed.