ACIT, CIRCLE-2(2), BHUBANESWAR, BHUBANESWAR vs. M/S. SRB CONSULTANCY PVT. LTD., BHUBANESWAR

Per N.S.Saini, AM

These are cross appeals filed by the Revenue and Assessee against

the order of CIT(A)-II, Bhubaneswar, dated 27.8.2013, for the assessment

year 2010-2011.

2 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 3. In Ground No.1 of the appeal, the grievance of the revenue is that

the CIT(A) erred in deleting the addition of Rs.13,24,16,282/- made by the

Assessing Officer by adding back 20% of the relevant previous years

income deferred by the assessee to the subsequent year and not included

in its total income.

that the gross receipts shown in the income tax return and that shown in

the Service Tax return was not the same. On being asked to explain the

difference, the assessee submitted that the Service Tax had not been paid

since Financial year 2003-04 as there was confusion regarding the nature

of receipt and the category in which it was to be considered-whether the

assessee is receiving against services provided as management consultant

or not. Thus, the service tax paid was based on receipts since Financial

Year 2003-04. However, in the case of income tax, the receipts covers

advances received in Financial Year 2008-09 alongwith receipts in financial

year 2009-2010. It was submitted that in selected cases, 80% of the

receipt in Financial year 2009-2010 was recognised as revenue for the year

and the balance 20% of the receipt was recognised the next year i.e.

Financial year 2010-2011. The accounts of the related parties in the ledger

were submitted in support of the diversion of revenue to the next financial

year. The Assessing officer observed that the ledger accounts of the

parties and the expenditure claimed under different heads show that they

do not reflect party wise details of expenditure. He observed that though it

3 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 was submitted that revenue recognisation of 20 % of the receipt was

deferred to the next year because some work was still pending in the said

projects, it could not be reasonably submitted as to how that was

determined at 20% for all the projects in which the revenue recognisation

was deferred. Moreover, entries in the ledger account show the payment is

against the final bill which indicates that the payment was not against any

advance claim and it was unlikely that some work was still pending. The

terms of the contract indicates that bills are to be submitted on reaching

some stage. The bank account/ledger show that the payments received are

well before the year end and, therefore, even if some work was pending

when the service fees was received, it could not be held good for the year

end also. Taking all these facts into consideration, the Assessing Officer

held that it was reasonable to not to accept the submission of the assessee

regarding revenue recognisation of 20% of its receipt is Financial Year

2010-11 and added the said receipt of Rs. 13,24,16,282 to the income of

the assessee.

observing as under:

“Having carefully analysed the facts which have emerged through the appeal proceedings, I am inclined to decide the case on a primary issue. I clearly find that in the assessment order, the Assessing Officer has contradicted his own stand. On the first page of the order, he has clearly noted that the professional fees of the earlier year which were deferred to the current year amounting to Rs. 17,57,51,564/- have been dutifully admitted by the appellate company in its income for the current year. The Assessing Officer has simply not disturbed this inclusion. In other words, in principle, the Assessing Officer has accepted the deferment of income from F/Y. 2008-09 to F/Y. 2009-10 whereas he is not accepting the deferment of a similar part from F/Y 2009-10 to F/Y 2010-11. This is a clear contradiction

4 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 of stand by itself which is not acceptable in law. Although in the remand report, the AO has opined that the accounting policy/practice followed by an assessee must have a legal support, in his above mentioned action, he does not seem to have followed the same. Secondly, in the second paragraph of page 2 of remand report, the AO says that the appellant has consistently followed a cash system. This does not seem to be correct, because the earlier year's receipt to the extent of about Rs. 17 crore which has been admitted by the appellant during the current year as income, has been accepted by the AO.

The appellant has been consistently insisting on a "Matching concept" of recognition of income. Thus, it is being pleaded that revenue should be recognized proportionate to the progress of a consultancy project. Usually, in AS-7, the principle is applied to multi-year Project Developments. In a way, where big management consulting companies execute a service project spread over multiple years, it is fair to accept that irrespective of the date of billing or date of receipt or payments, a similar concept for recognition of revenue can be accepted commensurate with the stage of the service delivered. Applied to the instant case, the appellant company indeed claimed that notwithstanding the billings on a client on certain dates and receipt of the billed amount on certain other dates, the services delivered could not be completed strictly by the last date of billing or receipts of payments. Accordingly, the appellant company chooses to follow a consistent system for recognizing revenue on matching concept for recognition of revenue. This principle has been regularly followed and can be viewed as an accepted accounting method. Whereas on the principle itself, I have no objection, it was clear to me that it was incumbent on the appellant company to prove to the AO that indeed in all the concerned cases where revenue is deferred, the principle has been actually followed. The appellant was therefore directed to furnish all relevant evidences before the AO and the AO was specifically directed to examine appellant's claim regarding the consistency of the method followed and whether a principle of common thread existed. In my view, in the remand report, the AO has not brought out proper factual conclusions stating that there was no basis on which deferments of income had been made. However, be that as it may, since the earlier year's deferred income of about Rs. 17 crore has been assessed by the AO as this year's income, he is not allowed to deny the deferment of this year's income of Rs. 13 crore to the next year. Accordingly, I direct deletion of the addition of Rs. 13,24,16,282/-.”

supported the order of the CIT(A).

record, we find that ld D.R. could not point out any specific error in the

order of the CIT(A). We find that the CIT(A) has held that the assessee

5 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 has in earlier years deferred income of Rs.17 crores which has been

assessed by the Assessing Officer, there was no reason for him to deny

deferment of this year’s income of Rs.13 crores. Thus, if the Assessing

Officer does not allow deferment of income of Rs.13 crores of this year,

simultaneously, he should not tax deferred income of earlier year of Rs.17

crores. We are of the considered view that the assesse has been following

this method of showing income for incomplete service projects and over a

long period of time, it is revenue neutral and hence cause no loss of revenue

to the department. Hence, we uphold the findings of the CIT(A) and dismiss

this ground of appeal of the Revenue.

the CIT(A) erred in deleting the addition of Rs.6,58,488/- on account of

disallowance of loss on sale of fixed assets.

the assessee has claimed loss on sale of assets of Rs.6,58,488/-. He

observed that the loss on sale of depreciable assets is not revenue in

nature, for which expenses claimed by the assessee is not allowed u/s.37

of the Act. Hence, he added Rs.6,58,488/-to the income of the assessee.

observing that when the loss pertaining to depreciable assets, the

Assessing Officer should have excluded Rs.51,876/- which pertained to

6 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 assessee’s gain on sale of assets, which was offered for taxation under the

head “other income”. He observed that the Assessing Officer apparently

missed to see that a sum of Rs.51,876/- was really included as a revenue

income. Accordingly, the CIT(A) directed the Assessing Officer to exclude

the profit and loss pertaining to transactions of capital assets subject to

provisions of section 41(2) of the Act.

us.

record, we find that the CIT(A) while adjudicating this issue has not

considered the provisions of section 43(6) of the I.T.Act, 1961 and Section

50 of the I.T.Act, 1961. Therefore, we are of the considered view that the

issue requires to be restored to the file of the Assessing Officer for

adjudicating the same afresh considering the provisions of section 43(6) of

the Act and section 50 of the act. We order accordingly. Thus, this ground

of the revenue is allowed for statistical purposes.

the CIT(A) was not justified in allowing 20% of the claim of Rs.1,49,000/-

added by the Assessing Officer on account of filing fees u/s.35D of the Act.

the authorized share capital of the assessee company is enhanced from

Rs.2,00,000/- to Rs.100,00,000/- during the relevant previous year.

7 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 Ledger account of fees and subscription shows that the assessee has

claimed deduction of expenses at Rs.1,49,000/- towards ROC filing

expenses which related to such enhancement in authorized share capital.

This expense being capital in nature is not an allowable business expense

u/s.37 of the act and hence, the deduction of Rs.1,49,000/- was disallowed

by the Assessing Officer.

argued before him that if the amount was not allowed u/s.37 of the Act,

20% of the claim should be allowed u/s.35D of the Act and, therefore,

directed the Assessing Officer to amortise 20% of the claim u/s.35D of the

Act.

record, we find that as per section 35D(1) of the Act, where an assessee

being an Indian company or a person (other than a company) who is

resident in India, incurs, after the 31st day of March, 1970, any expenditure

specified in sub-section (2) before the commencement of his business or

after the commencement of his business, in connection with the extension

of his undertaking or in connection with his setting up a new unit, the

assessee shall, in accordance with and subject to the provisions of this

8 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 section, be allowed a deduction of an amount equal to one-tenth of such

expenditure for each of the ten successive previous years beginning with

the previous year in which the business commences or, as the case may

be, the previous year in which the extension of the undertaking is

completed or the new unit commences production or operation. We find

that the CIT(A) has not examined the issue from this angle and brought

relevant material on record. Therefore, we are of the considered view that

issue needs to be adjudicated afresh by the CIT(A) considering the

provisions of section 35D(1) of the Act and 35D(2) of the Act. Therefore,

we set aside the order of the CIT(A) and restore the issue back to his file

for adjudication of the issue afresh in the light of the discussion made

hereinabove after allowing reasonable opportunity of hearing to the

assessee. Hence, this ground is allowed for statistical purposes.

“On the facts and in the circumstances of the case, the CIT(A) was not justified in accepting the contention of the assessee and not accepting the findings of the AO in violation of Rule 46A.”

adjudicated upon.

adjudication.

statistical purposes.

9 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1

Now, we take up the appeal of the assessee in ITA No.566/CTK/2013:

filing the appeal before the Tribunal.

supported by affidavit for condoning the delay in filing the appeal.

assessee had reasonable cause for not filing the appeal within the stipulated

time. Ld D.R. did not have any objection for condoning the delay. We,

therefore, condone the delay of 29 days in filing the appeal before the

Tribunal and admit the appeal for hearing.

no separate adjudication by us.

the CIT(A) erred in confirming the disallowance of Rs.7,87,040/- made by

the Assessing Officer.

during the year the assessee has claimed expenses of Rs.7,87,040/-

towards finance charges to Tata Capital Limited. Since expenses are not

to be allowed considering the assessee’s failure to deduct tax at sources

from the interest payment./credit as per provisions laid down in section

194A of the Act, he disallowed deduction of Rs.7,87,040/.

10 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 26. On appeal, the CIT(A) observed that the assessee has argued that

the recipients of the amount were reputed public companies and were

assessed to income tax. These payments were recognized as revenue in

their accounts and due taxes had been paid by them independently in their

hands and, therefore, there was no necessity of disallowing these payments

u/s.40(a)(ia) of the Act. The CIT(A) did not accept the submission of the

assessee on the ground that second proviso to section 201(1) r.w.s.

40(a)(ia) were applicable from assessment year 2013-14.

submitted that Hon’ble Delhi High Court in the case of CIT vs. Ansal Land

Mark Township (P) Ltd., 377 ITR 635 (Del), has held that the second proviso

to section 40(a)(ia) is declaratory and curative in nature and has

retrospective effect from 1st April 2005.

lower authorities, we find force in the submissions of the assessee that

second proviso to section 40(a)(ia) is declaratory and curative in nature

and has retrospective effect from 1st April 2005. Therefore, respectfully

following the same we restore this issue back to the file of the CIT(A) for

adjudication afresh after verifying whether the recipients of the said

amount has disclosed the same in their return of income and paid due tax

thereon or not. Needless to say that the CIT(A) shall allow adequate and

reasonable opportunity of being heard to the assessee. Hence, this ground

is allowed for statistical purposes.

11 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 29. In Ground No.3 of the appeal, the grievance of the assessee is that

the CIT(A) erred in confirming the disallowance of Rs.2,50,000/- under the

head “advertisement expenses”.

Rs.2,50,000/- to Bhubaneswar Golf Club as donation. The claim of

advertisement nature of donation could not be proved. It could not be

evidenced also that the donation is an allowable one because of its business

nexus. Therefore, the Assessing Officer disallowed Rs.2,50,000/- paid as

donation and added the same to the total income of the assessee.

on the ground that the assessee was not able to establish the aspect of

business expediency of the amount spent. He observed that there is no

doubt that corporate donations are given to the prestigious clubs either

directly or through sponsorship but this donation cannot be connected to

any business benefits eventually obtained by the corporates from such

donations and business expediency is not proved.

of water fall under the name of “SRB Water Fall” of Bhubaneswar Golf Club

and the said expenditure helps the assessee in advertisement of its

services before the persons who visits to club and, therefore, it was in the

nature of advertisement and the assessee gets future benefit from the

same.

12 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 33. Ld D.R. supported the orders of lower authorities.

parties, we are of the considered view that the assessee has claimed this

amount under the head advertisement expenses”. The assessee claims

that this amount was spent on construction of “SRB Water Fall” on which

the name of the assessee is written and this helps in advertisement of the

assessee company of services rendered by it to persons visiting the Club

and thereby procuring new business. It is not the claim of the assessee

that it has given donation to the club. Therefore, the lower authorities are

not justified in disallowing deduction to the assessee. Hence, we set aside

the orders of the lower authorities and allow Rs.2,50,000/- as deduction to

the assessee.

the CIT(A) erred in confirming the action of the Assessing Officer in

disallowing Rs.11,09,651/- on account of business promotion expenses..

assessee has claimed deduction for an amount of Rs.11,09,651/- under the

head “business promotion expenses”. Since the assessee failed to explain

the nature of expenditure and established the nexus between the payment

and assessee’s business, the Assessing Officer disallowed the deduction for

the same.

13 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 37. On appeal, before the CIT(A), ld A.R. explained that the company had

distributed Gold and Silver coins to various associates who were regularly

helping the company for arranging finances and obtaining various

approvals. Ld A.R. argued that the Assessing Officer has never questioned

the genuineness of the payments and payments were for personal benefits

of the Directors. Since the coins were under a definite scheme for

promotion of assessee’s business, it should be accepted as genuine

business expenditure.

that there was no material evidence supporting the claim of the assessee

actually purchased Gold and Silver coins worth Rs.11,09,651/- and if it did,

whether at all the same were really distributed as customary gifts to

connected business associates. Hence, he confirmed the disallowance.

authorities.

of both the parties, we find that no material has been brought on record by

the ld A.R. of the assessee to show that Gold and Silver coins were

distributed to business associates for the business promotion of the

assessee. In absence of the same, we find no infirmity in the order of the

14 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 CIT(A), which is hereby confirmed and dismiss ground of appeal of the

assessee.

the CIT(A) erred in confirming the addition of Rs.26,000/- on account of

business promotion expenses.

serious argument on this ground of appeal due to the smallness of the

amount. Hence, we dismiss this ground of appeal of the assessee.

the CIT(A) erred in confirming the disallowance of Rs.9,15,361/- on account

of expenditure on account of expenditure incurred on maintenance and

repair of library hall of ICAI.

the assessee had incurred a sum of Rs.9,15,361/- for repair and

maintenance of library hall of ICAI. The Assessing Officer observed that

since this expenditure was incurred wholly and exclusively for the purpose

of the assessee, he disallowed deduction for the same.

authorities and ld D.R. relied on the orders of lower authorities.

15 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 48. After considering the rival submissions and perusing the materials

available on record, we find the assessee has spent the amount of

Rs.9,15,361/- on renovation of library hall of ICAI and has claimed the

amount as advertisement expenses. Ld A.R. explained that assessee’s

name is displayed on the library hall with the services provided by the

assessee. The Chartered Accountants visiting the library who do the project

work, this serves as an advertisement of the services of the assessee

company to them and in this way, it helps the assessee to procure new

business. The revenue has not doubted the genuineness of the payment.

Therefore, in our considered view, the expenditure helps the assessee in

procuring new business and serves as an advertisement of its business and,

therefore, incurred for the purposes of business of the assessee. Hence,

we set aside the orders of lower authorities and vacate the disallowance of

Rs.9,15,361/- and allow this ground of appeal of the assessee.

the CIT (A) erred in confirming the addition of Rs.11,97,000/- on account

of expenditure on foreign travel.

assessee has incurred Rs.11,97,000/- on foreign tour to Singapore. The

assessee explained that a team had gone to Singapore on an exposure visit

which was a professional necessity for those who are managing the affairs

of the company. Since no documentary evidence was procured, the

Assessing officer disallowed for the same.

16 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 51. On appeal, the CIT(A) confirmed the action of the Assessing Officer

observing that it was unclear who were the team members, what were their

roles in the assessee company, what were the exact visit itineraries and

which knowledge clarifying workshops, symposia and meetings they had

attended. Similarly, it was also not known as to how this tour was linked

with the subsequent award of the toll way projects to the assessee

company. Merely filing the ledger accounts copy of the tour expenses would

not establish the business expediency of the expenditure.

authorities and ld D.R. supported the orders of lower authorities.

available on record, we find that no evidence was brought on record by ld

A.R. to show that the expenditure incurred on foreign tour for the purposes

of business. In absence of the same we find no good and justifiable reason

to interfere with the order of the CIT(A), which is hereby confirmed and

dismiss ground of appeal of the assessee.

statistical purposes.

Order pronounced in the open court on 16 /06/2017 in the presence of parties. Sd/- sad/- (Pavan Kumar Gadale) (N.S Saini) JUDICIALMEMBER ACCOUNTANT MEMBER Cuttack; Dated 16 /06/2017

17 ITA No. 504/CT K/ 2013 ITA No. 566/CT K/ 2013 Asse ssment Year : 20 10- 201 1 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant/Revenue : ACIT, Circle 2(2), Bhubaneswar 2. The Respondent/Assessee: M/s. SRB Consultancy Private Limited,5th floor, IDCO, Tower, Janapath, Bhubaneswar. 3. The CIT(A)-II, Bhubaneswar 4. Pr.CIT-II, Bhubaneswar. 5. DR, ITAT, Cuttack BY ORDER, 6. Guard file. //True Copy// SR.PRIVATE SECRETARY ITAT, Cuttack