DEPUTY COMMISSIONER OF INCOME-TAX vs. ASSOCIATED DAIRY FAB PVT. LTD.,, JALGAON

The cross appeals filed by the assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.177/PUN/2014 has raised following grounds of appeal:- 1] The learned CIT(A) erred in holding that the professional fees paid in relation to factory repairs were capital expenses and hence, the same could not be allowed as a revenue expenditure. 1.1] The learned CIT(A) failed to appreciate that the expenditure incurred on factory repairs was a revenue expenditure and hence, the professional fee paid by the appellant in relation to the factory repairs was also a revenue expenditure. 2] The learned CIT(A) erred in holding that the expenditure incurred of Rs.22,02,002/- on factory repairs was a capital expenditure and hence, could not be allowed as a deduction while computing the income of the appellant. 2.1] The learned CIT(A) failed to appreciate that the expenditure incurred on factory repairs did not result in acquisition of any new asset and the said expenditure ought to have been allowed as a revenue expenditure. 3] The learned CIT(A) erred in confirming the disallowance of foreign travel expenditure of Rs.4,18,225/- on the ground that the said expenditure was incurred for personal purposes. 3.1] The learned CIT(A) ought to have appreciated that the expenditure incurred on foreign travel to Hongkong and Thailand was for the purpose of the business of the appellant and accordingly, the said expenditure was incurred wholly and exclusively for the purpose of business and

The Revenue in ITA No.211/PUN/2014 has filed modified grounds of appeal, which read as under:- 1. On facts and in circumstances of the case, the Ld. CIT-A erred in deleting the amount of Rs.10,81,490/- claimed as professional Charges, without appreciating the fact that the professional charges were paid for the work done for the another concern, namely, Khambete Kothari Cans and Allied Products P Ltd and not for the assessee. 2. On facts and in circumstances of the case, the Ld. CIT-A erred in allowing the depreciation on the Building of the Chincholi Plant as the Building and Land are registered in the names of the directors and the asset has not been put to use in the year under consideration,

The learned Authorized Representative for the assessee at the outset pointed out that out of grounds of appeal No.1 to 7 raised by the assessee, only grounds of appeal No.4 and 5 are pressed. Hence, grounds of appeal No.1 to 3 and 6 and 7 are dismissed as not pressed.

The issue raised in ground of appeal No.4 is against the claim of depreciation in respect of vehicles which were registered in the name of directors of the assessee company. The claim of assessee was that the vehicles were acquired from the funds of assessee and were also used for assessee’s business and thus, the assessee being beneficial owner of said vehicles was entitled to claim of depreciation on the said vehicles, was denied to the assessee. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised vide ground of appeal No.4 is squarely covered in favour of assessee by the ratio laid down by the Pune Bench of Tribunal in Manraj Motors

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below.

We have heard the rival contentions and perused the record. The assessee was a Private Limited Company and was engaged in the business of trading of stainless cans, items and its accessories. The case of assessee was selected for scrutiny. The Assessing Officer noted that the assessee had claimed depreciation on vehicles i.e. cars which were registered in the name of its directors. The Assessing Officer denied the vehicles expenses including depreciation of Rs.4,66,533/-. The CIT(A) upheld the disallowance of depreciation on cars since the cars were registered in the name of directors. In this regard, he placed reliance on the ratio laid down by the Mumbai Bench of Tribunal in the case of Edwise Consultants Pvt. Ltd. Vs. Addl.CIT (supra). However, we find that the Mumbai Bench of Tribunal in Edwise Consultants Pvt. Ltd. Vs. DCIT (supra) has in the appeals relating to assessment years 2008-09 to 2010-11 had allowed the claim of assessee since the vehicles were used for the purpose of business of assessee company. The Tribunal also observed that funds for purchase of vehicles were provided by the assessee and were also

We further find that similar issue arose before the Tribunal in Manraj Motors Pvt. Ltd. Vs. DCIT (supra) and on similar claim of depreciation on vehicles which were registered in the name of one of the directors, it was held as under:- “9. We have heard the rival contentions and perused the record. The assessee for the year under consideration had claimed depreciation on vehicles which were registered in the name of one of its Directors. The cost of the said vehicles were admittedly borne by the assessee company out of its own funds and the said vehicles were reflected as assets of the assessee company in the list of fixed assets as on the end of the year. The expenditure of running and repairs of the said vehicles has been borne by the assessee company. The said vehicles were being used by the assessee company for its business, the explanation of the assessee for registering the same in the name of the Directors of the assessee company was that there was saving in the registration cost. But merely because the vehicles were registered in the name of the Directors of the assessee company does not establish the case of the revenue for not allowing depreciation on such assets. The concept of financial ownership has been laid down by the Hon‟ble Supreme Court in Mysore Minerals Ltd. vs. CIT, (1999) 239 775 (SC) and hence followed in series of decisions admittedly where the funds of the assessee company have been utilized for the purchase of vehicles, even though the vehicles are not registered in the name of the assessee company, does not establish the case of the Revenue especially where the domain/control of the said assets was with the company itself and the vehicles were being utilized for the purpose of carrying on business of the assessee company. We hold that the assessee is entitled to the claim of depreciation on such vehicles which were owned by it and was being used for its business though it was registered in the name of the Directors. In this regard, we find support from the ratio laid down by the Pune Bench of the Tribunal in ACIT vs. Talera Motors Pvt. Ltd. in ITA No.1208/PN/2009 relating to assessment year 2006-07 – order dated 11.05.2011, wherein reliance was placed on the ratio laid down by another decision of the Pune Bench of the Tribunal in Rohan Builders and Developers Pvt. Ltd. vs. ACIT in ITA No.942/PN/2006 relating to assessment year 2004-05, order dated 29.08.2008 and it was held as under :- “4. After hearing both the parties and perusing the material on record, we find that the issue raised in this appeal is squarely covered by the decision of Pune Bench of the Tribunal in the case of Rohan Builders and Developers Pvt. Ltd. (supra) wherein it has been held that the depreciation was allowable to be assessee in respect of the motor cars purchased by it and used for the purpose of its business, though registered in the name of the Managing Director. In the present case, the assessee purchased the vehicles called Demo cars in the name of the Directors though ownership thereof did not lie with the assessee. The facts of the present case are in pari materia with those in the case of Rohan Builders and Developers Pvt. Ltd. (supra). So, respectfully following the said decision of the Tribunal, we do not find any infirmity in

Accordingly, we hold that the assessee is entitled to claim of depreciation on cars which are registered in the name of directors, where the funds for purchase of the said vehicles has been paid by the assessee company and the same have been shown as asset of the assessee company and also the vehicles were used by the assessee company. In view thereof, we allow the claim of depreciation in the hands of assessee.

Before parting, we may also refer to the observations of the CIT(A) vide paras 4.13 to 4.14 at pages 32 to 50 of the appellate order, wherein the CIT(A) has though referred to the decision of the Pune Bench of Tribunal in ITO vs. Shree Panchganga Agro Impex Pvt. Ltd. in ITA No.956/PN/2009 relating to assessment year 2005-06, order dated 31.05.2011, wherein the claim of depreciation on vehicles registered in the name of directors of the company was allowed. Reference was also made to the decision in the case of Rohan Builders and Developers Pvt. Ltd. vs. ACIT in ITA No.942/PN/2006 relating to assessment year 2004-05, order dated 29.08.2008. However, the CIT(A) has failed to follow

The next issue raised by way of grounds of appeal No.5 to 5.2 is against disallowance of remuneration paid to the directors.

Briefly, in the facts of the case, the assessee had paid fixed remuneration of ₹ 1,20,000/- each to its two directors plus performance sales commission of ₹ 67,10,810/- as percentage on sales i.e. aggregating ₹ 1,36,61,620/-. The case of assessee was that its total turnover was increased by ₹ 14.13 crores i.e. almost 286% as compared to the earlier year and the increase in turnover was due to the efforts taken by the key directors and hence, the directors were eligible for overall commission @ 7% of total turnover achieved during the year. The assessee also pointed out that the payment was approved by the Board of Directors and since both the directors were assessed to tax paying taxes at the same rates as applicable to the assessee company, the said expenditure is to be allowed in the hands of assessee. However, the Assessing Officer applying the provisions of section 40A(2)(b) of the Act disallowed ₹ 1,00,61,620/- on the ground that the salary paid was higher when compared to the salary paid to the other employees. The assessee before the CIT(A) pointed out that the issue of

The CIT(A) upheld the order of Assessing Officer partially, against which the assessee is in appeal. The CIT(A) allowed partial relief to the assessee, against which Revenue is not in appeal.

The learned Authorized Representative for the assessee pointed out that remuneration paid to the directors at ₹ 1.36 crores is to be allowed in entirety. He referred to the order of CIT(A) and pointed out that the CIT(A) accepts the remuneration to be reasonable but disallowed the remuneration on sales to sister concern of ₹ 3.26 crores. He was of the view that no commission is to be paid on such sales to sister concern. The learned Authorized Representative for the assessee further pointed out that the Revenue is not in appeal against the directions of CIT(A), though several grounds of appeal have been raised by the Revenue in its appeal.

We have heard the rival contentions and perused the record. The issue which arises vide ground of appeal No.5 is against the claim of assessee in respect of remuneration paid to the directors @ 7% of sales. The case of

Coming to the appeal filed by the Revenue, wherein several grounds of appeal have been raised. Both the learned Authorized Representatives were heard on each of the grounds of appeal and we proceed to decide the same.

The first issue raised vide ground of appeal No.1 is against deletion of addition made on account of disallowance of professional charges of ₹ 10,81,490/-.

Brief facts relating to the issue are that the assessee had paid professional charges of ₹ 14,25,325/- to various persons. The Assessing Officer disallowed the said expenditure observing that the supports filed by the assessee i.e. e-mail communication in the name of K.K. Cans & Allied Products Pvt. Ltd., were not relating to the assessee. The Assessing Officer disallowed sum of ₹ 13,56,325/-. The CIT(A) held that the disallowance to the extent of ₹ 10,81,490/- was not justified and the same was deleted; however, he held that an expenditure of ₹ 2,74,835/- was capital in nature and the same was disallowed.

The learned Departmental Representative for the Revenue referring to the observations of Assessing Officer at pages 6 to 9 pointed out that the work undertaken did not relate to the assessee and hence, the expenditure was not allowable.

The case of assessee on the other hand, was that the expenses amounting to ₹ 10,81,490/- were incurred relating to the business of assessee company and simply because e-mails were sent to K.K. Cans & Allied Products Pvt. Ltd., would not mean the expenditure did not pertain to the assessee. The

The second issue raised in the present appeal is against disallowance of depreciation on building.

Brief facts relating to the issue are that two directors of the assessee company had purchased the old factory building situated at Gat No.88/1, Village Chincholi, Tal. Jalgaon in the year ending on 31.03.2008 for ₹ 62 lakhs. During the year under consideration, the assessee company spent ₹ 22,02,002/- on account of repairs and maintenance of the said building. The claim of assessee was that since it was engaged in the business of assembling of bulk milk coolers, which require large space for storage of spares / bulk coolers, then some modification / repairs were carried out by the assessee at total cost of ₹ 22,02,002/- and the same was claimed as revenue expenditure. The Assessing Officer observed that the construction work was carried out throughout the year and even in the next year. The Assessing Officer was of the view that where the previous owner had demolished certain part of building, flooring and walls and construction work was carried out by the assessee was of a capital nature.

The plea of assessee before the CIT(A) was that no benefit of enduring nature was obtained nor any new asset came into existence, hence the expenditure is to be allowed as revenue in nature. It was also admitted by the assessee that the said premises was owned by two directors and no written agreement was entered into between the assessee company and its directors in this regard. The CIT(A) held that expenditure is capital in nature. However, he held the assessee to be entitled to claim of depreciation in respect of said expenditure under section 32(1) of the Act.

The Revenue is in appeal against the same and the learned Departmental Representative for the Revenue in this regard has placed reliance on the ratio laid down by the Hon’ble High Court of Delhi in M.M. Fisheries (P.) Ltd. Vs. CIT (2006) 152 Taxman 247 (Del) for the proposition that where the ownership of asset was with the director of the company in the personal capacity, then the assessee would not be entitled to claim depreciation under section 32 of the Act.

The learned Authorized Representative for the assessee however, pointed out that the repairs were to the building by the assessee company to make it habitable and the CIT(A) held it to be capital asset and hence, an asset, on which depreciation is to be allowed.

We have heard the rival contentions and perused the record. The issue which is raised by way of ground of appeal No.2 by the Revenue is in respect of depreciation on expenditure incurred of a factory building by the assessee which is not owned by it. Admittedly, the directors of the assessee company had bought the said building in the preceding year but the building was not being used by the assessee company for its business. The expenditure which has been incurred by the assessee on repairs to the said building has not been allowed as revenue expenditure by the authorities below, against which the assessee is not in appeal. However, the CIT(A) has held the same to be capital expenditure and directed the Assessing Officer to allow depreciation, against which the Revenue is in appeal. There are two aspects to the issue; the first is that expenditure has incurred by the assessee on an asset which is not owned by it, so the first question is whether the same can be held to be capital expenditure of the assessee and whether the depreciation can be allowed. The second aspect is that the asset is still under repair and has not been put to use and hence, allowability of depreciation on the same was premature. We find merit in the plea of Revenue on both regards, where first of all, the land and building belongs to the directors which has been given on rent free basis to the assessee company but the repairs undertaken by the assessee are held to be capital repairs. In case, they are held to be capital in nature, then depreciation is not allowable as the assessee company do not own the building on which repairs are undertaken. It does not fall within the definition of section 32(1) of the Act. Secondly, the said asset has not been put to use in the year under consideration and on this ground also, the assessee is not entitled to the claim of depreciation. Accordingly, we reverse the order of CIT(A) in this regard and hold that the assessee is not entitled to the claim of depreciation on such improvements to the land and building.

The next issue raised by way of ground of appeal No.3 is against deletion of addition made on account of sales and commission charges of ₹ 16,05,570/-. The assessee during the year under consideration had paid sales commission to the parties. The claim of assessee was that its turnover had increased from ₹ 5.33 crores to ₹ 20.03 crores and hence, the commission. However, the Assessing Officer disallowed the commission paid to two out of three parties i.e. M/s. Ceepee Refrigeration and Shalibhadra V Mehta.

The CIT(A) however, in view of the fact that two parties carried out the said work deleted the said addition.

The Revenue is aggrieved by the order of CIT(A) in allowing the claim of ₹ 16,05,570/-. In the written submissions filed before the CIT(A), the assessee has explained the activities undertaken by the agents which are at pages 24 to 27 of the appellate order. The CIT(A) after considering the same has held as under:- “4.10 The appellant company was a new entrant in the business of Bulk Milk Cooler and its nature of business required the services of agents at pre and post sales stage. The fact that commission is paid and tax is also deducted at source is not disputed. Also, none of the concerned parties is a „relative‟ within the meaning of section 40A(2)(a) of the Act. The A.O. has disallowed part of commission paid viz ₹ 16,05,570/- without bringing on record any material to justify the same. It is also seen that there is a substantial increase in the turnover by an amount 275% over the preceding year. The A.O. has disallowed the said sum which was paid to two of the three parties only on the ground that no documentary proof with respect to service rendered by these two parties. It is contended by A/R that with the increasing use of technology / mobile phones etc office working is becoming more and more paperless. This apart, it was also argued that all available evidences with respect to services rendered by the said parties were filed. This is confirmed by A.O. in para – 8 on page – 13 of his order. However, the A.O. has ignored the same on the ground that the proof filed related to earlier year/s. There is a force in the arguments put forward by the A/R. It is not necessary that every services rendered must result into business in the same year. The appellant is dealing in items for which efforts may be made in one year and sale may be effected in later year.

The learned Departmental Representative for the Revenue in this regard pointed out that in view of the ratio laid down by the Hon’ble High Court of Delhi in Schneider Electric India Ltd. Vs. CIT (2008) 171 TAXMAN 177 (Del), the order of CIT(A) be reversed. However, we find no merit in the plea of learned Departmental Representative for the Revenue in view of the evidences filed before the Assessing Officer and the CIT(A). The CIT(A) has given a finding that the available evidences with respect to services rendered by such parties were filed before the Assessing Officer, who in turn, has ignored the same on the ground that the proof filed related to earlier years. Finding of CIT(A) is that not necessarily every services rendered must result into business in the same year since the assessee was dealing in items for which persistent efforts were required. We find merit in the reasoning of CIT(A) in this regard and accordingly, uphold the order of CIT(A) in allowing the claim of service commission totaling ₹ 16,05,570/-. Reliance placed upon by the learned Departmental Representative for the Revenue on the decision of the Hon’ble High Court of Delhi in Schneider Electric India Ltd. Vs. CIT (supra) is factually distinguishable. The ground of appeal No.3 raised by the Revenue is thus, dismissed.

The next ground of appeal No.4 raised by the Revenue is against deletion of addition made on account of foreign trip expenses of ₹ 1,27,784/-.

Brief facts relating to the issue are that the assessee had incurred foreign travel expenditure of ₹ 6,39,009/-. The Assessing Officer allowed ₹ 93,000/- and disallowed balance expenditure related to visit of Hong Kong and Thailand by one of the directors and his family members, which was upheld by the CIT(A), against which the assessee is not in appeal. Another visit was by the directors of the assessee company to China and the CIT(A) allowed the said claim. The Revenue is in appeal against the same. We find no merit in the plea of Revenue, wherein the foreign trip was undertaken by the directors to Chine for their business needs as referred by the CIT(A). Accordingly, upholding the order of CIT(A), we dismiss the ground of appeal No.4 raised by the Revenue.

The next ground of appeal No.5 raised by Revenue is against the order of CIT(A) in deleting disallowance made under section 40A(3) of the Act at ₹ 11,62,631/-.

Brief facts relating to the issue are that for the year under consideration, the assessee claimed that it had paid transport and freight charges for and on behalf of customers and had recovered most of the same through sale invoices. In total sum of ₹ 33,08,973/-, including cash payment of ₹ 29,79,121/- was paid by the assessee. Against the same, assessee recovered sum of ₹ 30,17,611/- through sale invoices and the balance of ₹ 2,91,362/- was claimed as deduction in Profit and Loss Account. The assessee explained that out of said sum of ₹ 2,91,362/- only two payments of ₹ 23,000/- each were made in cash to a single party in a day. The assessee thus, pleaded in its written submissions that if at all only ₹ 46,000/- was hit by provisions of section 40A(3) of the Act. The assessee further claimed that deduction on account of transport and freight charges was

The CIT(A) noted that though the assessee had made cash payment of ₹ 33,08,973/-, it had recovered ₹ 30,17,611/- from customers on whose behalf the payment was made. No deduction was claimed in respect of said amount, it was only the balance sum of ₹ 2,91,362/- was claimed as deduction, out of which two payments i.e. totaling ₹ 46,000/- exceeded the specified limit of ₹ 20,000/- under section 40A(3) of the Act. Therefore, CIT(A) restricted disallowance to ₹ 46,000/- and deleted addition made by the Assessing Officer at ₹ 11,62,631/-.

Revenue is in appeal against the same.

The learned Departmental Representative for Revenue placed reliance on the order of Assessing Officer.

The learned Authorized Representative for the assessee in this regard submitted that where the amounts have been paid on behalf of customers though in cash, but were recovered from the customers and since the assessee had not claimed any expenditure in the Profit and Loss Account on the said account, then there is no merit in the order of Assessing Officer in holding the same to be hit by provisions of section 40A(3) of the Act.

We have heard the rival contentions and perused the record. In the facts of the present issue raised before us, the assessee had paid ₹ 34,84,068/- to various transporters on behalf of its customers and also for own business. Out of the said amount, sum of ₹ 29,79,121/- was paid in cash. The assessee against payment of ₹ 33,08,973/- had recovered ₹ 30,17,611/- from its customers through sale invoices, the balance sum of ₹ 2,91,362/- was debited to Profit and Loss Account. The assessee had made two payments totaling ₹ 46,000/- which were in excess of ₹ 20,000/- in cash in a day. The CIT(A) has disallowed the same. The Assessing Officer on the other hand, had made disallowance of ₹ 11,62,631/- after noting factual aspect of recovery of ₹ 30,17,611/- out of expenses incurred on transport at ₹ 33,08,973/-. We find no merit in the order of Assessing Officer where assessee had booked expenses only to the extent of amount not recovered from its customers i.e. ₹ 2,91,362/-. The assessee has explained that the cash expenditure made on behalf of customers has been recovered from the customers through sale invoices, etc. Accordingly, where the assessee had not claimed the aforesaid expenditure made in cash as deduction, in the Profit and Loss Account, then the same is not hit by provisions of section 40A(3) of the Act. Hence, we uphold the order of CIT(A) and dismiss the ground of appeal No.5 raised by Revenue.

The last issue raised vide ground of appeal No.6 is against deletion of addition of ₹ 54,90,657/-. The said issue is raised by invoking provisions of section 40A(2)(b) of the Act.

In the facts relating to the issue, the assessee for the year under consideration had sold certain bulk milk coolers and related items to its sister concern K.K. Cans & Allied Products Pvt. Ltd. The said products were sold by

The CIT(A) deleted the addition on the ground that addition made by the Assessing Officer was on hypothetical basis and where no expenditure was incurred, the provisions of section 40A(2)(b) of the Act were not attracted. The CIT(A) also noted that both the concerns were paying taxes at highest rates.

Revenue is in appeal against the same.

Both the learned Authorized Representatives have put forward their contentions.

We have heard the rival contentions and perused the record. The Assessing Officer had applied provisions of section 40A(2)(b) of the Act on the ground that the items which were sold by assessee to its sister concern were in turn, sold by the said sister concern to third party and hence, it was alleged by the Assessing Officer that the assessee had diverted profits to its sister concern. The provisions of section 40A(2)(a) of the Act are attracted where the assessee incurs expenditure in respect of which payment has been made to a person referred to in clause (b). The assessee in the present case has not incurred any expenditure nor claimed the same but has shown sale of its products to its sister concern. Hence the order of Assessing Officer in invoking provisions of section 40A(2)(a) of the Act is misplaced; even though the assessee had sale transactions with its sister concern. Thus, upholding the order of CIT(A), we

In the result, appeal of assessee is partly allowed and appeal of Revenue is dismissed.