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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: SHRI JASON P. BOAZ (AM) & SHRI RAM LAL NEGI (JM)
This appeal has been preferred by the revenue against impugned order dated 29/10/2014 passed by the Ld. CIT (Appeals)-9, Mumbai, for the assessment year 2010-2011, whereby the Ld. CIT(A) partly allowed the appeal of the assessee filed against assessment order dated 22/03/2013 passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’).
This appeal was filed on 08/01/2015 and fixed for hearing on 17/08/2016, notice was sent to the assessee/respondent on 22/07/2016 to appear on 17/08/2016. However, none appeared on behalf of the assessee and fresh notice was accordingly issued for 18/10/2016. On 18/10/2016 none appeared on behalf of the assessee and notice through departmental representative was issued for 08/12/2016. On 08/12/2016 again notice by RPAD was issued for 16/01/2017, however, none appeared on behalf of the assessee. From the conduct of the assessee, we are convinced that sufficient opportunity has been given to the respondent/assessee to appear before the Tribunal and present its case. In our considered opinion no fruitful purpose would be served in case fresh notice is issued. From the conduct of the assessee it appears that the assessee is willfully evading the service of notice. We accordingly, decided to proceed further on the basis of material on record after hearing the departmental representative (DR)
Brief facts of the case are that the assessee company engaged in the business of Management Consultants, filed its return of income declaring the total income of Rs. 57,66,655/-. The return was processed u/s 142(1) and after scrutiny assessment order u/s 143(3) of the Act, was passed determining the total income of the assessee at Rs. 98,50,330/- after making additions of Rs. 1,96,133/- i.e. 50% of the expenses on recruitment claimed by the assessee, making disallowance of Rs. 7,82,474/- and Rs. 28,09,099/- on account of SOX compliance testing, and ISAP Award claimed by the assessee.
Feeling aggrieved by the assessment order, the assessee preferred first appeal before the Ld. CIT (A). Ld. CIT (A) after hearing the assessee deleted all the additions made by the assessee. Against the said order the revenue is in appeal before the Tribunal by raising the following grounds of appeal:-
1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) was right in directing the Assessing Officer to delete the addition made on account of (1) Recruitment expenses amounting to Rs. 1,96,133/-
(2) SOX compliance testing expenses amounting to Rs. 7,82,474/-
(3) ISAP award expenses amounting to Rs. 28,09,009/- treating the same as revenue expenses whereas the same is enduring in nature and is capital expenditure.”
Before us, the Ld. DR relying on the assessment order submitted that the Ld. CIT(A) has wrongly deleted the additions made by the AO. The AO has made the disallowances in accordance with the law laid down by the Hon’ble Supreme Court in Brook Bond India Limited (225 ITR 798) therefore, the findings of the Ld. CIT(A) are liable to be set aside.
We notice that the Ld. CIT(A) has deleted the additions made by the AO observing as under:- “Ground Nos. 1,2 & 4 regarding recruitment expenses, SOX compliance testing expenses and ISAP awards to the director: These expenses have been primarily disallowed by the A.O on the ground that these expenses are capital in nature because they have created benefit of enduring nature, accordingly, by applying the ration of the case of M/s. Brooke Bond India Ltd.(Supra) the A.O has disallowed 50% of recruitment expenses and 100% of SOX compliance testing expenses and ISAP awards to the director. On the other hand, it is the claim of the appellant that the expenses of all the three heads are regular routine expenditure which are revenue in nature. The appellant has submitted that the recruitment expenses and SOX compliance testing expenses are incurred for fresh recruitments and on professional fees paid for regular and frequent testing at the services provider site of the group companies, a part of which is reimbursed by the appellant company. As regards the ISAP awards paid to the director it is contended by the appellant that it is a very common method of rewarding the employees of the company on the basis of their performance. Such payment made to the director has also been disclosed by the said director as income from salary. Therefore, it was contended that none of the expenditures in question qualifies for the test laid down by the Apex Court for holding an expenditure as capital expenditure. After considering the rival submissions as well as the nature, frequency and quantum of the expenditures in question, I agree with the contention of the appellant that none of the expenditure appears to be of capital in nature because they have been incurred on regular routine works of recruitment of new staff, professional fees for compliance testing and by way of remuneration to employee director via ESOP award. The appellant has not been benefited from these expenditures for very long period, therefore, the same cannot be held as capital expenditure giving rise to benefit of enduring nature. The case law of M/s. Brooke Bond India Ltd. (supra) relied upon by the A.O is not applicable to the facts of this case as the expenses were not incurred in respect of expansion of capital base or creation of assets. Such expenses are routine expenses of revenue nature which deserves to be allowed. The additions on this account are directed to be deleted.”
The first ground of appeal relates to addition of recruitment expenses to the income of the assessee. After having gone through the material on record including the contention of the assessee, we find merit in the contention of the assessee, made before the authorities below that the recruitment expenses is the one time professional fees paid to the Recruitment Agency. Such expenditure is incurred in the normal course for running the business more professionally and efficiently. Therefore, the same does not fall within ambit of capital expenditure. Hence, there is no justification in disallowing 50% of expenditure incurred on payment of recruitment agency. The Ld. CIT (A) has accordingly, held that the expenditure is revenue in nature. We therefore, do not find any infirmity in the impugned order. Moreover, it is not the case of the revenue that the assessee has claimed more than the actual expenses incurred. Hence, we uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal of the revenue.
Ground No 2 relates to expenditure on compliance of Sarbans Oxley Act, 2002 (SOX). As per the assessee the affiliated/associate enterprises of the appellant/assessee were based in United States and therefore, the provisions of SOX were applicable to the assessee during the assessment year under consideration. The assessee accordingly appointed M/s Mahajan & Aibara, Chartered Accountants, Mumbai to carry out SOX compliance audit. In view of the submissions of the assessee made before the authorities below, the Ld. CIT(A) has rightly held that the payment relates to the professional fees paid to M/s. Mahajan & Aibara, who were appointed to conduct SOX compliance at the service provider site of its group companies. The Ld. DR did not produce any case law to substantiate its contention. Hence, we concur with the Ld. CIT (A) and hold that the expenditure on compliance of provisions of SOX does not fall within ambit of capital expenditure. This ground of appeal is accordingly dismissed.
8. Ground no. 3 of the appeal pertains to International Share Award Plan (ISAP). As per the submissions of the assessee made before the authorities below, the actual amount of ISAP awards expenditure was Rs. 11,26,726 which has inadvertently been mentioned as 28,09,009/-. The expenditure on ISAP awards incurred by the assessee is akin to salary paid to the employees for their services which cannot be treated as enduring benefit to the assessee. Moreover, the ISPA award is taxed in the hands of the director concerned.
Therefore, the ISAP Award paid to Mr. Anupam Kashiv under the head ‘remuneration to directors’ cannot be treated as capital expenditure. In our opinion the Ld. CIT(A) has rightly held that ISPA award expenditure/expenses are routine expenses of revenue nature. Therefore, the same must be allowed. In our considered opinion since he facts of the case of Brook Bond India Ltd.(supra) are different from the facts of the present case, the ratio laid down in the said case is not applicable in the present case. Hence, we are of the opinion that there is no infirmity in the order of the Ld. CIT (A). We therefore, uphold the findings of the Ld. CIT (A) and dismiss this ground of appeal of the revenue.
In the result, appeal filed by the revenue for assessment year 2010-2011 is dismissed.
Order pronounced in the open court 31st January, 2017.