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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 09/10/2012 of the CIT (A)-17,Mumbai the assessee has filed the present appeal.Assessee-company,engaged in business of running amusement park,filed its return of income on 27/09/2009,declaring income of Rs. 1,21,31,886/-.The Assessing Officer (AO)completed the assessment u/s.143(3),on 22.12.2011,determining the income of the assessee at Rs. 1,54,07,290/-.
2.First ground of appeal is about addition of Rs.5,00,604/-.During the assessment proceed - ings,the AO found that the assessee had ownership of two flats,that is it was showing the flats under the heads current assets and at cost, that it had not offered any income under the heads income from the properties,that in the earlier years the said flats were rented out.He directed the assessee to file explanation in that regard. The assessee replied that it was using the flats for office premises.The AO held that as per the provisions of section 23. (1) of the Act,annual value of the income from house property had to be worked out he made an addition of Rs. 5, 00,604/-to the total income of the assessee under the head income from house property. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA) and contended that it had used the flats for purpose of office during the year under consideration, that it had not earned any rental income. However, the 7605/M/12-Muchhala Magic FAA held that assessee was not able to substantiate that renovation was carried out for converting the flats to office premises.He upheld the order of the AO. 2.2.During the course of hearing before us, the Authorised Representative (AR) argued that there was repair and renovation in the office premises of the assessee, that the AO himself has treated the repair expenses as capital expenditure,that he did not make any addition on account of rental income while computing the assessment order for the AY. 2011-12, that it had filed an affidavit before the AO in the assessment proceedings of the subsequent years in that regard and he had not made any addition. He referred to pages number 13,70-76 and 107 of the paper book.The Departmental Representative (DR) supported the order of the FAA. 2.3.We have heard the rival submissions and perused the material before us. We find that assessee was owner of two flats, that same were rented in the earlier years and it had offered the rental income in its returns,that before the AO/FAA it was claimed that during the year under consideration repair and renovation was carried out and the flats were not rented out, that it was also claimed that the flats were used for office premises,that in the subsequent years the AO had not made any addition under the head beings rental income. Once the assessee had produced the bills of repairs and renovation of the flats and the AO had treated the said expenditure as capital expenditure,there was no justification for making any addition under the head house property income.Both the authorities have not proved that the flats were rented out during the year under appeal.As per the settled principles of taxation if any sum has to be taxed the AO has to bring on record the necessary facts for taxing the same. In our opinion,the AO had not discharged the onus in that regard. Therefore, reversing the order of the FAA,we decide the first ground of appeal in favour of the assessee.
3.Second ground deals with addition of Rs.12,500/- under section 14 A read with Rule 8D of the Income Tax Rules, 1962 (Rules). During the assessment proceedings the AO found that assessee had shown investment in shares amounting Rs.25 lakhs, that it had not made any disallowance under section 14 A of the Act. On a query by the AO in that regard, the assessee stated that it had not earned any tax-free income during the year under consideration, that therefore no disallowance was made. However, the AO made a disallowance of Rs. 12, 500/- (of percent of the average value of investment). 3.1.Before the FAA,the assessee argued that it had not incurred/claimed any direct/indirect expenses on the tax-free income, that the AO was not justified in making the disallowance. After considering the available material, the FAA upheld the order of the AO.
7605/M/12-Muchhala Magic 3.2.Before us, the AR stated that assessee had made investment in shares of the subsidiary/ associated company in the earlier years, that the investment was made for strategic purposes only, that it was made for purpose of holding controlling stake in the group concern and not for earning any dividend or capital gains, that it was not required to incur any expenditure. The DR supported the order of the F AA. 3.3.We have heard the rival submissions.We find that assessee had not incurred any expenditure nor had it claimed any expenditure with regard to the tax-free income during the year under consideration.Therefore,there was no justification of any kind to make any dis - allowance invoking the provisions of section 14 A of the Act. The basic precondition for making disallowance under the said section is earning of tax-free income and incurring of expenditure by the assessee.As both the preconditions are absent in the case under considera - tion therefore, in our opinion,the order of the FAA has to be reversed. Ground number two is decided in favour of the assessee.
4.Next ground pertains to disallowance of Rs. 1.31 lakhs on account of non-deduction of tax at source.During the assessment proceedings,the AO found that the assessee had claimed advertisement expenses of Rs. 31.10 lakhs and business promotion expenses of Rs.10.38 lakhs. On verification of the expenses he found that the assessee had not detected tax at source while making payments to 3 parties he directed the assessee to file explanation in that regard. After considering the submission of the assessee, the AO held that the assessee had incurred the expenses for promotion of its business, that as per the provisions section 194C of the Act the assessee had to deduct tax for all the payments exceeding Rs. 20,000/-. Referring to the provisions of section 40 (a) (ia) of the Act he made a disallowance of Rs. 1.31 lakhs. 4.1.During the course of appellate proceedings,before the FAA,the assessee argued that it had deducted tax at source, amounting Rs.637/-, for the payment made to Smart Advertisement Agencies,that in case of other two parties the assessee had made payment of tax deducted at source in later year, that deduction in that regard would be made accordingly. The FAA,after considering the material on record, held that as per the provisions of section 194C the assessee had to deduct the tax at source,that the AO was justified in making the disallowance. 4.2.Before us, the AR contended that second proviso to section 40 (a) (ia) of the Act was inserted by Finance Act at 2012, that as per the proviso wherever payee pays the tax the payer is not supposed to deduct the tax, that the parties to whom the assessee had made the 7605/M/12-Muchhala Magic payments had paid the taxes, that the matter could be restored to the file of the AO for verification. The DR left the issue to the discretion of the bench. 4.3.After considering the rival submissions we are of the opinion that matter should be restored back to the file of the AO. He is directed to afford a reasonable hearing to the assessee to prove its claim that tax was actually paid by the recipient. The assessee is directed to produce all the necessary evidence before the AO. Ground number three is decided in favour of the assessee,in part.
5.Next ground is about addition of Rs.79,722/- for non-deduction of tax on payment of interest on car loan to Mahindra and Mahindra Finance Company Ltd. Following our order for the earlier ground,we restor back the issue to the file of the AO for making verification, that the recipient of the income had paid tax on the disputed amount. The assessee would produce relevant documents before the AO.Ground number four is partly allowed.
6.Ground number five is about addition of Rs.1.04 lakhs, being the pre paid expenses.During the assessment proceedings, the AO found that assessee had paid Rs. 84,000/-to Beekay legals in respect of the bill dated 04/03/2008, that petty cash expenses amounting to Rs. 20, 531/-were also debited to legal expenses. He directed the assessee to file explanation in that regard. It was stated that expenses were booked in the year in which they were settled for payment. The AO held that in the Mercantile System of accounting expenses of the relevant year were allowable, that earlier years expenses could not be allowed, that what was important was accrual or reliability to pay and not the actual payment, that the expenses were of the prior period and hence were not allowable. Accordingly he made an addition of Rs.1,04,531/-. 6.1.Before the FAA, the assessee argued that it had made payments to Bekay Advocates, amounting to Rs.84,000/- after deducting the tax at applicable rates the bill dated 4/03/2008 was settled on 08/08/2008, that the petty expenses for the period 21/03/2008 to 31/03/2008, amounting to Rs.20,531/- was settled on 01/04/2008, that the assessee was following similar policy for the earlier years and subsequent years.After considering the assessment order and the submission of the assessee, the FAA held that assessee was following Mercantile System of accounting, that the expenses pertaining to prior period could not be allowed in the year under consideration. Finally, he upheld the order of the AO.
7605/M/12-Muchhala Magic 6.2.Before us,the AR contended that as per the accounting policy, followed by the assessee, expenses were booked in the year when they were settled for payment, the payment to Beekay Legal was made on 08/08/2008. The DR supported the order of the AO and the FAA. 6.3.We have heard the rival submissions. We find that legal payments were made during the year under consideration and the amounts in question pertain to earlier year. Prior period expenses, as per the taxation principles, can be allowed if they are crystallised during the subsequent year. The AO/FAA has not given any finding as to whether the assessee was following the same accounting policy in the earlier and subsequent years of claiming pre paid expenditure on account of crystallised expenditure in the later years.There is no doubt about the genuineness of the payment and therefore same has to be allowed in one of the years. Considering the peculiar facts and circumstances of the case and the fact that assessee had made the payment after the receipt of the bills in the subsequent year,we are of the opinion that ground number 5,filed by the assessee ,should be allowed.
Next ground of appeal is about disallowance of remuneration paid to the directors. During the assessment proceedings, the AO found that the assessee had paid Rs.6 lakhs to one of the directors, namely Ritika Muchala(RM).He directed the assessee to explain as to why the remuneration paid to RM should not be disallowed for the reason that she had not rendered any service to the company.In its reply,the assessee submitted that RM was director of the company since inception and was actively involved in the day-to-day matter of the business activities, that she had declared the income and had paid tax thereon. The AO held that submission of the assessee was of general nature, that it was not based on documentary evidences, that it had not filed explanation regarding the educational qualification of the director and about the services rendered by her, that the onus was on the assessee to show that expenditure had been incurred wholly and exclusively for the purpose of business. Finally, he disallowed the demolition paid to RM, amounting Rs. 6 lakhs. 7.1.Before the FAA, the assessee argued that RM was attending all day-to-day affairs of the company,that she had given personal guarantee to banks, that she had paid tax on the remuneration received from the company.Referring to the order of the FAA for the AY. 2008-09, he restricted the disallowance to Rs.3 lakhs. 7.2.Before us, the AR argued that remuneration paid to RM(Rs. 6 lakhs) was allowed by the Assessing Officer,while passing the order for the AY. 2011-12, that there was no basis to hold that RM was not providing services to the assessee. He referred to the pages 82 of the paper book. The DR supported the order of the AO and the FAA. 5
7605/M/12-Muchhala Magic 7.3.We have heard the rival submissions and perused the material. We find that the AO had disallowed the entire remuneration paid to the director, that the FAA restricted it to 50%, that the director had offered the remuneration income in her individual return of income, that the return of the director was accepted by the Department, that the AO had not made any enquiry about the assertion made before the assessee before him, that it was claimed that she was attending the day-to-day affairs of the company and had stood as guarantor to the banks, that in the subsequent year the AO had allowed the remuneration (Rs. 6 lakhs) paid to her. Considering these facts we are of the opinion that there was no justification for restricting the expenditure to Rs.3 lakhs. Reversing the order of the FAA, we decide ground number six in favour of the assessee.
8.Last ground of appeal is about disallowance of Rs.1.66 lakhs out of the business promotion expenditure. During the assessment proceedings the AO disallowed 20% of Rs. 8.31 lakhs holding that personal element in incurring the business promotion expenditure could not be denied. 8.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA.Before him, it was argued that assessee was a private limited company, that expenses were incurred during the course of business and for the purpose of business, that there could not be any expenses for personal purposes. The FAA held that the assessee had not produced any evidence to rule out any personal expenses out of the business promotion expenses incurred through the credit card. He upheld the order of the AO. 8.2.We have heard the rival submissions and perused the material before us. We find that the AO had held that assessee had incurred an expenditure of Rs.8.31 lakhs through credit cards, that he did not call for any details in that regard, that he had made an ad hoc disallowance at the rate of 20%, that the FAA had confirmed his order. In our opinion in case of corporate assessees disallowance on account of personal element can be made only if the expenditure incurred was for the personal use of any of the directors/employee and that expenditure did not have any relation with the carrying out of the business. We don’t find that AO/FAA had carried out any such exercise. If the AO had any doubt, it was his duty to make further investigation and pinpoint the actual expenditure not incurred for the business of the assessee. In the circumstances, we are of the opinion that making and upholding the disallowance was not justifiable.Reversing the order of the FAA,we decide the last ground in favour of the assessee.
7605/M/12-Muchhala Magic