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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, DCIT, Circle 8 (1), New Delhi (hereinafter referred to as ‘the revenue’), by filing the present appeal sought to set aside the impugned order dated 31.10.2012 passed by the Commissioner of Income-tax (Appeals)-XI, New Delhi qua the assessment year 2009-10 on the grounds inter alia that :-
“1. The Ld.CIT(A) has erred in deleting the addition of Rs.6,21,95,582/- made by the Assessing Officer on account of account of inter-company charges on account of deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
2. The Ld. CIT (A) has erred in deleting the addition of Rs.70,18,413/- made by the Assessing Officer on account of royalty payment.
3. The Ld. CIT (A) has erred in admitting the additional evidence submitted by the assessee u/r 46A of the income-tax Rules, 1962.
4. The Ld. CIT (A) has erred in deleting the disallowance of Rs.8,67,240/- made by the Assessing Officer under section 14A of the Income-tax Act. 1961.
5. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal".
Briefly stated the facts of this case are : during the scrutiny proceedings, notice u/s 143 (2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire was issued to the assessee for 25.02.2011 and in response thereto, Shri A.P.
Shringi put in appearance as AR and filed details. Assessee company is into the business of manufacturing of printing and packaging Inks and it was called upon to explain to justify the claim of Rs.6,21,95,582/- debited in the profit & loss account on account of management consultancy expenses and as to why the same should not be disallowed on the basis of reasoning recorded in the assessment order of Assessment Year 2008-09. Assessee filed reply dated 21.10.2011. AO, on the basis of findings recorded qua the claim of Rs.6,21,95,582/- for AY 2008-09, disallowed the said amount and added back the same to the total income of the assessee.
Assessee also claimed a royalty of Rs.70,18,413/- in the profit & loss account reflected under the head related party disclosures of books of account. AO noticed that royalty given for the previous year was Rs.15,12,580/-. Assessee reported to have not furnished the details of documents to substantiate this royalty payment and also failed to explain if the payment is capital in nature or revenue in nature and as to whether TDS was made on such payment or not and consequently, the AO disallowed the amount of Rs.70,18,413/- and added back the same to the total income of the assessee.
Assessee, during the year under consideration, also shown dividend income of Rs.1,94,17,695/- in the profit & loss account.
AO by invoking the provisions contained u/s 14A of the Act read with Rule 8D of the Income-tax Rules (for short ‘the Rules’) worked out the disallowance to the tune of Rs.8,67,240/- and added the same back to the income of the assessee.
Assessee carried the matter before the ld. CIT (A) who has allowed the appeal. Feeling aggrieved, the revenue has come up before the Tribunal by way of filing the present appeal.
Ld. DR for the revenue challenging the impugned order contended inter alia that an identical issue has cropped up during the earlier AY 2008-09 and the order passed by ld. CIT (A) qua AY 2008-09 was set aside by the ITAT and the case was restored to the AO for de novo assessment and now the fresh order dated 31.01.2014 passed by the AO is not a speaking order; that assessee has failed to prove if inter-company charges paid are genuine one; that addition of Rs.70,18,413/- has been deleted by ld. CIT (A) without calling any remand report from the AO.
However, on the other hand, ld. AR for the assessee relied upon the order passed by the ld. CIT (A) as well as order passed by AO dated 31.01.2014 qua the AY 2008-09 and further contended that the assessee duly demonstrated the services rendered for which amount of inter-company charges to the tune of Rs.6,21,96,582/- has been claimed; that the AO has proceeded on the basis of conjectures and surmises without perusing the record put forth before him; that an amount of Rs.70,18,413/- on account of royalty payment has been paid in accordance with the agreements for use of technology during the current year of the licence and the assessee would not acquire any proprietary right in the information and technology assistance for which royalty payment has been made; that the assessee has filed the remittance certificate and TCR certificates to prove the genuineness of the royalty payment.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1
Undisputedly, AO made an addition of Rs.6,21,95,582/- debited by the assessee in profit & loss account on account of management consultancy expenses merely by following the assessment order of AY 2008-09 and affirmed by the ld. CIT (A).
However, when the matter was challenged before the ITAT, the order of CIT (A) qua the AY 2008-09 was set aside and restored the matter to the file of AO for de novo examination in the light of the observation made by the Tribunal.
It is also not in dispute that the AO passed fresh assessment order dated 31.01.2014 and decided the issue, as to the claim of Rs.6,21,95,582/- debited in profit & loss account on management consultancy expenses, in favour of the assessee.
Ld. CIT (A) overturned the findings made by the AO by making following observations :-
“ Before me the appellant has submitted all the documents to show that payments were made to the following group companies for work done by them for the appellant. 1) M/s Siegwerk Benelux N.V. for providing technical services, 2) M/s Siegwerk (Asia Pacific) Pvt Ltd for providing technical services also which differed from the services provided by MIs Siegwerk Benelux N.V., 3) M/s Siegwerk Druckfarben provided management in support services. It is apparent from the above, that the appellant has incurred expenditure in the course of his business. The AO has nowhere disputed the fact that this amount was not spent or that the expenditure was not incurred. It is evident from the documents produced by the appellant that the expenditure was incurred and the same amount has also been shown as income by the three companies. Certificate from the auditors ENY show that the amounts have been invoiced by the three entities and shown as income. It is thus evident that the amounts in question are not loans or advances, but payment for services rendered.
As per Sec.2(22)(e) "any payment by a company, not being a company in which the public are substantially interested of any sum (whether as representing a part of the assets of the company or otherwise) (made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting power, or to any concern in which such sharesholder is member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder to the extent to which the company in either case possesses accumulated profits."
Some definition of dividend is given in judicial decisions as below:- Dividend in its ordinary meaning is a distribute share of the profits or income of the company given to its shareholders. By the definition in section 2(22), 'dividend' means dividend as normally understood - Kantilal Manilal v CIT (1961) 41 ITR 275 (SC).
The word 'dividend' means dividend as ordinarily understood under the Companies Act and also the head of payment or distribution specified therein - Hari Prasad Jayantilal & Co. v V.S. Gupta, ITO (1966) 59 ITR 794 (SC)
'Dividend' in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholders - CIT v Nalin Behari Lall Singha (1969) 74 ITR 849 (SC).
The word 'profits' occurring in section 2(22) means profits in the commercial sense, that is to say the profits made by the company in the real and true sense of the term - P.K. Badiani v CIT (1976) 105 ITR 642 (SC)
From a plain reading of Section 2(22)(e) it is seen that the payments made by the appellant to the three group concerns does not fall within the definition of dividend. One of the basic conditions of Sec. 2(22)(e) is that the payment by a company should be by way of advance of loan. The payments made by the appellant to M/s Siegwerk Benelux N.V., M/s Siegwerk (Asia Pacific) Pvt Ltd & M/s Siegwerk Druckfarben is payment for work done. It is not in the nature of loan or advance. It is not a case where the monies advanced would be returned back.
In view therefore it is clear that the amount of Rs.6,21,95,582/- is not an advance or loan and therefore Sec. 2(22)(e) cannot be invoked in the matter. The addition of Rs.6,21,95,582/- is therefore deleted. The ground of appeal is ruled in favour of the appellant.”
Bare perusal of the findings returned by the AO goes to prove that he has merely followed the assessment order of the earlier year AY 2008-09 and has not applied his mind whereas CIT (A) has examined the issue threadbare. It is proved on record inter alia that the payment made by the assessee to three group concerns is not a dividend nor the payment made by the company was by way of advance of loan rather the payment was made by the assessee to M/s. Siegwerk Benelux N.V., M/s. Siegwerk (Asia Pacific) Pvt. Ltd. & M/s. Siegwerk Druckfarben for work done.
So, we find that no case is made out to interfere into the findings returned by the CIT (A), hence ground no.1 is determined against the revenue.
GROUND NO.2 13. AO further made addition of Rs.70,18,413/- claimed by the assessee being royalty in profit & loss account on the ground that assessee has not filed any detail or documents to substantiate its claim of royalty payment nor assessee has proved if TDS has made on such payment or not.
However, on the other hand, ld. CIT (A) examined the issue threadbare and determined inter alia that royalty payable under the agreement was computed on the basis of quantum of sales by relying upon documents lying at pages 362-A to 362-I of the paper book and as such, the same is revenue expenditure; that after perusing the remittance certificate and TCR certificate, he has held the payment as genuine; that he has also examined the TDS deduction to the tune of Rs.70,18,413/- and found the same to be valid and ultimately deleted the addition made by the AO.
We are of the considered view that when the AO has merely made the addition on account of payment of royalty to the tune of Rs.70,18,413/- on the grounds inter alia that assessee has failed to furnish the expenses to substantiate its claim of royalty payment; that the nature of payment is that the assessee has failed to explain if payment is capital or revenue in nature; that the genuineness of the actual payment has not been proved; that it is not proved that tax at source has been deducted or not, but CIT (A) has not preferred to call the remand report qua the said documents nor entertained the said documents on the basis of some request for additional evidence. However, it is admitted fact that the royalty payment made by the assessee company qua the AY 2008-09 and AY 2010-11 has already been allowed as revenue expenditure by the revenue authorities. In these circumstances, we find it expedient to restore the matter to the AO to decide afresh. AO to allow the royalty payment to the tune of Rs.70,18,413/- after due verifications of the documents relied upon by the assessee. So, the ground no.2 is determined in favour of the revenue.
GROUND NO.3 16. This ground is hereby determined against the revenue having not been pressed during the course of arguments.
GROUND NO.4 17. Assessee has shown dividend income of Rs.1,94,17,695/- of the profit & loss account. AO by invoking the provisions contained u/s 14A of the Act read with Rule 8D of the Rules computed the disallowance to the tune of Rs.8,67,240/-, disallowed the same and added back to the income of the assessee. However, on the other hand, the ld. CIT (A) ordered the deletion of Rs.8,67,240/- by returning the following findings :-
“ Thus whenever the issue of 14A arises the AO should ascertain the correctness of the claim of the appellant in respect of expenditure incurred or not incurred in relation to income which does not form part of the total income under the Act.
In case the AO is satisfied with the claim of the appellant, the AO should accept the claim of the appellant so far as the quantum of disallowance is concerned. In case the AO after giving the appellant an opportunity of being heard, is not satisfied with the correctness of the claim of the appellant, he should reject the claim after giving reasons. The AO is to then determine the amount of expenditure incurred in relation to income which does not form part of the total income.
The language of sub section 14A(1) is abundantly clear that relation has to be seen between the exempt income and expenditure incurred in relation to it. The AO has nowhere shown why the claim of the appellant was not correct. No reasons have been given as to why the claim was rejected.
Reference is made to the order of the Hon. ITA T dated 09/08/12 in in the appellants own case wherein it is stated:-
"Admittedly for AY 08-09 Rule 8D was applicable. However as per section 14A sub-section (2), the AO could apply Rule 8D provided he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which did not form part of the total income of assessee. The AO has not commented upon the assessee's claim that no expenditure was allocable towards earning of exempted income. The mandate of section 14A(2) clearly requires the AO to first consider the assessee's claim and after rejecting the same should resort to Rule 8D. We, therefore, consider it in the interest of justice that the matter should be restored back to the file of AO for denovo consideration in terms of above observations."
In view of the above, the addition of Rs.8,67,240/- is deleted. The ground of appeal is ruled in favour of the appellant.”
18. Undisputedly, when identical issue has been determined by the coordinate Bench of the Tribunal in date of decision 09.08.2012 AY 2008-09 in assessee’s own case in its favour by restoring the matter back to the file of the AO for de novo consideration in the light of observations made therein, AO passed fresh order dated 31.01.2014 (copy available on the file) and accepted the contention of the assessee that expenditure of Rs.1,32,520/- was made for earning of exempt income, the file is required to be restored back to AO to determine the issue afresh in the light of his earlier year order as well as in view of the mandate of section 14A(2) by considering the assessee’s claim by providing opportunity of being heard and if the assessee’s claim is rejected then he should resort to Rule 8D. So, ground no.4 is also determined in favour of the revenue.
19. In the light of the findings returned on the aforesaid grounds, present appeal is partly allowed for statistical purposes. Order pronounced in open court on this 31st day of May, 2016.