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Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri R.C. Sharma (AM) & Shri Pawan Singh (JM)
O R D E R Per R.C. Sharma (AM) :- These are cross appeals filed by the assessee and the Revenue against the order of learned CIT(A) for A.Y. 2009-10.
At the outset, learned AR pointed out that the tax effect in the appeal filed by the Revenue is less than 10 lakhs, therefore, in view of the CBDT Circular No. 21/2015 dated 10.12.2015 the appeal is not maintainable.
2 M/s. Odyssey Capital Pvt. Ltd. 3. We have gone through the orders of the authorities below and found that in respect of addition deleted by learned CIT(A), tax amount works out to be 5,84,503/-. Accordingly, following the CBDT Circular No. 21/2015 dated 10.12.2015 the appeal filed by the Revenue is not maintainable.
In the appeal filed by the assessee, the assessee is aggrieved for disallowance of administrative expenses of 3,99,62,011/-.
Rival contentions have been heard and perused the record. Facts in brief are that the assessee is a company engaged in the business of trading in shares and securities and finance. It furnished return of income for Assessment year 2009-10 on 28.09.2009 disclosing total loss at Rs.7,55,82,608/-. During the assessment proceedings it was noted by the AO from the P&L account that the assessee has debited administrative and other expenses of Rs.4,79,54,413/- in the P & L account. The assessee was required to furnish documentary evidence in support of its claim of such huge expenditure. The AO also deputed ward inspector to the office of the assessee company to ascertain the extent of expenses which might be required for earning the income of the assessee. The ITI has reported to the AO that the premises of the assessee has area of 20,000 sq.ft. approximately, consisting of 13 cabins and a big office hall where 60-70 employees were working for the assessee company and other seven group companies. It is also reported by the ITI that it was difficult to identify that which employees are working for which companies. It is further mentioned by the AO in the assessment order that the assessee companies’ representative Shri Mayur Gala could also not identify the employees of different company. Accordingly, the AO has proportionately allowed only 1/8th of administrative expenses which resulted in disallowance of Rs.4,19,60,112/- out of the administrative expenses claimed by the assessee.
3 M/s. Odyssey Capital Pvt. Ltd. 6. By the impugned order of learned CIT(A), the learned CIT(A) partly allowed the assessee’s claim after observing as under :
“After considering the rival submissions as well as the material fact of the case in entirety, it is noted that while disallowing the expenses the AO has overlooked few important aspects such as (i) it has ignored the fact that appellant has got reimbursed Rs.45 lakhs from other companies (ii) the two group companies namely M/s. Rapid Supplier Pvt. Ltd. and M/s. Anreka (Trades & Services Pvt. Ltd. are non functional during the year under consideration (iii) the other companies have also debited more than Rs.13 crore administrative expenses in their P&L account. After considering these material facts as well as the fact that there is no proper demarcation of area and emp1oyees of different companies of the group, as has been brought out in the report of the ITI, it appears that the expenses of the appellant debited under the head administrative expenses are being allocated among the various group companies at the sweet will of the appellant and other group concerns. Under these circumstances, entire administrative expenses claimed by the appellant are not satisfactorily explained therefore a reasonable disallowance is justified. However, considering the fact that two companies out of the eight group companies are not functional during the year therefore, no disallowance is required in respect of these companies. The AO is accordingly directed to reallocate these expenses equally among the remaining 6 companies including the appellant and a further allowance be given for the reimbursement of expenses to the extent of Rs.45,91,976/- out of the total disallowance worked out as directed above. This ground is accordingly partly- allowed.” We have considered rival contentions and found from record that total 7. administrative expenses incurred by the group company amounts to 22.02 crores. The assessee has debited total administrative expenditure of 4.79 crores. The assessee has recovered administrative expenses from the group company amounting to ` 45.91 lakhs. Thus, net administrative expenses works out to be 27.27 crores, 1/6th of such expenditure incurred by the assessee and its group company works out to be 4.54 crores. From the record we found that the AO had wrongly disallowed 7/8th of the administrative expenses considering that the said expenses are incurred for the other 7 group companies mentioned in the order. The 7 group companies have their own business set up and functions independently, are separately assessed under the 4 M/s. Odyssey Capital Pvt. Ltd. Income Tax Act and do not have any common business interest with the assessee. We found that expenses incurred for and on behalf of such companies aggregating to Rs.45,91,976/- have been recovered from the said group companies. A statement showing the said recovery with a brief rational was submitted before the lower authorities. This shows that no part of the group companies expenses are included in the Profit & Loss account of the company which the learned DCIT has wrongly noted.
We had also verified the break-up of the expenses included in the Administrative Expenses are fixed overheads in nature and irrespective of the volume / turnover of the company; it has to be incurred and cannot be reduced immediately. The Administrative expense are incurred based on the set up of the business and commercial expediency in the context of type of activity, business profile of the company and the volume of turnover / activity. We also found that during the year under consideration expenses have been reduced by 7% as compared to the expenditure of last year. Moreover, company’s total income for the AY 2009-10 was Rs.2.89 crores as per Profit and Loss Account which is more or less same as per last year.
In view of the above, we do not find any justification for the disallowance so made by the AO.
Assessee is also aggrieved for disallowance interest expenses of Rs.1,64,86,521/-. Facts in brief are that the assessee is non-banking financial company and also engaged in trading in shares and securities. During the course of assessment order the Assessing Officer observed that assessee's total borrowed capital as on the Balance Sheet date is Rs.4702.85 lakhs., on which total interest expenditure of Rs.37981 170 has been claimed by the assessee. At the same time, it is also noted from the Balance Sheet that the outstanding balance in loans and advances given is at Rs.4400.40 lacs. The 5 M/s. Odyssey Capital Pvt. Ltd.
assessee submitted ledger 1account of persons to whom loans and advances have been given. It was noted by the Assessing Officer from the ledger account of the following persons that assessee has not charged interest on the advances made. AO further stated that the assessee has also not given any reasons to show as to why no interest is charged. AO therefore, proceed to disallow assessees claim of interest expenditure to the extent of interest chargeable on such loans and advances treating the same as not incurred for the purpose of business, The same is worked out as under: Date Name Debit Credit balance Interest Interest per day chargeable 3.6.2008 Harsh Mohan Gupta 40,00,000 40,00,000 1,315 3,94,521 1.4.2008 Lucky Trading Company 50,00,000 90,00,000 2,959 10,80,000 1.4.2008 Mukesh Kothari 26,55,342 1,55,342 1,15,00,000 3,781 13,80,000 1.4.2008 Myzus Infotech Pvt. Ltd. 34,45,473 2,95,473 1,46,50,000 4,816 17,58,000 1.4.2008 SHS Enterprises 50,00,000 1,96,50,000 6,460 23,58,000 1.4.2008 Thrive Energy Technologies 1,00,00,000 2,96,50,000 9,748 35,58,000 Pvt. Ltd. 1.4.2008 Vijay Tukaram Roundal 2,05,93,869 5,93,869 4,96,50,000 16,323 59,58,000 Total : 1,64,86,521 Total disallowance under this head works out to Rs.1,64,86,5211-.
It was argued by learned AR that the concept of “real income” based on commercial principles cannot be given a go-by in the course of determining an income. In fact “prudence” demands that in view of uncertainty attached to future events income cannot be anticipated but recognised only when realised.
As per learned AR, well defined principles of accounting lays down that where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of provisioning/raising a claim the revenue recognition is postponed to the extent of uncertainty involved. In such cases it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made 13. Reliance was placed by learned AR on the decision of Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (330 ITR 440), wherein the Court held as under: “The assessee, a non-banking financial company bound by the directions of the Reserve Bank of India, advanced certain intercorporate deposits upon which it did not receive interest for more than six months. Since the Non- Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 6 M/s. Odyssey Capital Pvt. Ltd. mandated a non-banking financial company to declare such advances as non- performing assets when the accrued interest therein is not paid by the debtor continuously for six months, treating the said intercorporate deposit as a non- performing asset, the assessee did not show the interest as its income, which according to the assessee was not realisable. The Assessing Officer, however, added the interest as income of the assessee holding that if had "accrued" to the assessee even if it was not actually realized as the assessee was following mercantile system of accounting. The Commissioner(Appeals) affirmed the order of the Assessing Officer but the Tribunal deleted the interest. On further appeal: Held. dismissing the appeals, that the assessee-company being a non- banking financial company, was bound by the provisions of the Reserve Bank Ai India Act, 1934, and the 1998 Directions, under which it was mandatory the part of the assessee not to recognize the interest on the intercorporate deposit as income, having regard to recognized accounting principles. The amounting principles which the assessee was indubitably bound to follow are AS-9. The admitted position was that the assessee had not received any interest on the intercorporate deposit since the assessment year 1996-97 as it had become a non-performing asset in accordance with the Prudential Norms which was entered in the books of account as well. Even in the succeeding Assessment years, no interest was received and the position remained the same until the assessment year 2006-07. Winding up petitions were filed by many creditors against the debtor company. These circumstances led to an uncertainty in so far as recovery of interest was concerned. Even the principal itself had become doubtful of recovery. In this scenario it was legitimate to infer that interest thereupon had not "accrued". Moreover the assessee-company was governed by the provisions of the Reserve Bank of India Act. Having regard to the provisions of section 45Q of the Reserve Bank of India Act and Prudential Norms issued by the Reserve Bank of India in exercise of its statutory powers, the intercorporate deposit had become a non-performing asset and on such non- performing asset where the interest was not received and the possibility of recovery was almost nil, it could not be treated to have accrued in favour of the assessee.”
In support of the proposition that in respect of borrowings of earlier year, where no disallowance of interest was made in the earlier year, for the same amount the Department cannot make disallowance during the current year.
Reliance was placed on the decision of Hon'ble Madras High Court in the case of Hotel Savera (239 ITR 795) and also on the decision of Hon'ble Bombay High Court in the case of Kishanchand Chellaram (114 ITR 645).
7 M/s. Odyssey Capital Pvt. Ltd. 16. Reliance was also placed on the decision of Hon'ble Gujarat High Court in the case of Virendra R. Gandhi (in Tax Appeal No. 124 of 2005), wherein the Court observed as under :-
We have heard learned advocates for the parties and perused the material on record. In our view, the decision of the Karnataka High Court in the case of Sridev Enterprises(supra) is directly on the issue posed in this appeal. It is necessary to reproduce relevant paragraph of the above decision, which reads as under:-
"We are in agreement with the view expressed by the Appellate Tribunal. The status of the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the case where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot be subsequently be held by it to have become bad prior to that year.
We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities and their respective orders as well as cited by learned AR and DR during course of hearing before us.
8 M/s. Odyssey Capital Pvt. Ltd.
From the record we found that AO had disallowed interest attributable to funds given free of interest or given on interest but no interest on such advances were accounted for in the books of accounts. It was contention of learned AR that even recovery of the principle advance was doubtful, therefore, interest income has not been accounted for all such advances and for this purpose reliance was placed on the decision of Delhi High Court in case of Vasisth Chay Vyapar Ltd, 330 ITR 440. It was also contention of learned AR that assessee was having sufficient interest free funds which were advanced in earlier years on which no disallowance was made. We have considered the rival contention and found that for not providing interest income on advances, no material was brought on record by assessee to substantiate that even principle amount is in doubt. In the interest of justice, we restore this issue back to the file of the AO to find interest free funds available with the assessee which has been used for giving interest free advances. Assessee is also directed to place on record the position of borrower so as to find out if the principle loan itself is in doubt, so as to justify assessee’s claim of not accounting of interest on such advances. We direct accordingly. AO is to decide the matter afresh after considering all the documents discussed herein above and applying the judicial pronouncements as discussed above to the facts of instant case.
In the result, appeal of the assessee is allowed in part whereas appeal of revenue is dismissed. Order has been pronounced in the Court on 21/10/2016 Sd/- sd/- (PAWAN SINGH) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER