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Income Tax Appellate Tribunal, MUMBAI BENCHES “J”, MUMBAI
Before: SHRI C.N.PRASAD & SHRI ASHWANI TANEJA
O R D E R
Per ASHWANI TANEJA, AM
This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals)[hereinafter called CIT(A)] dt 08-05-2014 passed against the assessment order u/s 143(3) dt 28-12-2011 for A.Y. 2009-10 on the following grounds:
“On the facts and circumstances of the case and in law: 1. Adhoc Disallowance The learned CIT(A) erred in confirming the adhoc disallowance @ 5% of the total expenditure although the expenditure was incurred solely for the purpose of business.
2. Disallowance u/s. 14A - a.The learned CIT(A) erred in confirming the adhoc disallowance u/s. 14A of Rs. 2,58,650/- made by the AO towards estimated expenses which have not been incurred on earning tax free dividend income. b. The learned CIT(A) erred in confirming the disallowance u/s. 14A by using formula set out in Rule 8D of the Income Tax Rules but failing to take into consideration that the AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on an objective basis that the Appellant is unable to establish the correctness of its claim. c. The learned CIT(A) failed to establish any nexus between the expenditure incurred and the exempt income earned and failed to take into consideration the Supreme Court decision in the case of Rajasthan Warehousing reported in 242 ITR 450 and in the case of CIT Vs. Hero Cycles (Punjab and Haryana High Court) which held that no expense can be disallowed if the nexus cannot be established for incurring expenditure for earning tax free income and section 14A cannot be merely applied on presumption.
3. Disallowance of Professional Fee of Rs. 4,00,000/- The learned CIT(A) erred in confirming the disallowance of the Professional fees paid to an Interior Designing Consultant, on the ground that it was not incurred for the running of the business, although the genuineness of the transaction can be evidenced by the bills/ vouchers and TDS Certificates, which were duly submitted before Assessing Officer and CIT(A). 4. Disallowance of Conducting Fee / Commission Fee of Rs.15,78,624/- a. The learned CIT(A) erred in disallowing the Commission fee paid to M/s Northpoint Training & Research Pvt. Ltd., on the ground of misappropriation of profit with intention to divert income. b. The learned CIT(A) erred in not following the Order of the Hon’ble ITAT, in its own case, for Assessment Year 2007-08, having identical facts and circumstances, wherein the addition made was deleted, on the ground that in the current year there is a profit and no issue of brought forward loss and these facts were different in the previous year. . c. The learned CIT(A) erred in holding that the Appellant has not substantiated that the expense was incurred wholly for the purpose of business, although the same explanation was given during Hon'ble ITAT, who after satisfaction deleted the addition in Assessment year 2007-08.”
2. Ground 1: In this ground, the assessee challenged the action of Ld. CIT(A) in confirming the disallowance @5% of the total expenditure.
3. The brief background is that the Assessing Officer had made an adhoc disallowance of Rs.1,75,267 being 10% of the total expenditure as personal expenditure on the ground that the expenses were made without supporting evidences. The assessee contended before the CIT(A) that expenses were incurred solely for the purpose of business, and there was no personal use involved. The Ld. CIT(A) reduced the disallowance to 5%.
4. Before us, the Ld. Counsel drew our attention on the decision of the Tribunal in assessee’s own case for A.Y. 2010-11 in dt 11-06-2015. We have gone through the orders of lower authorities and decision of the Tribunal. It is noted that in A.Y. 2010-11, the Tribunal has further reduced the disallowance from 5% to 2% with the following observations:- 2.1 I have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a training institute in advertising for post graduate residential students, declared income of Rs.1890/- in its return filed on 07/10/2010. The assessee claimed Rs.10,49,800/- to have been incurred for printing and stationary, telephone and travelling expenses for business purposes. The Assessing Officer suspected the genuineness of these expenditure by holding that there was element of personal use, thus, he made disallowance at the rate of 10% of such expenditure. On appeal, before the ld. Commissioner of Income Tax (Appeals), the disallowance was restricted to 5% of the claimed expenses incurred under various heads, thus, part relief was granted to the assessee against which, the aggrieved assessee is in appeal before this Tribunal.
2.2. If the observation made in the assessment order leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, I find that ad-hoc disallowance was made by the Assessing Officer by suspecting that there is a element of personal use. However, the ld. Assessing Officer has not pinpointed that which expenses are of personal in nature. The assessee also produced the copy of the statement of account. The Assessing Officer was of the view that the genuineness of the expenses was also not proved. Before the ld. Commissioner of Income Tax (Appeals) and also before this Tribunal, the assessee produced the copy of the ledger account of various heads of expenses by claiming that such expenses were incurred wholly and exclusively for the purposes of business. All the expenses were incurred against bills and for commercial expediency; thus, no disallowance is expected to be made u/s 37(1) of the Act. The assessee is a institution, thus, no ad-hoc addition is permitted unless and until it is proved otherwise. There is no recording of satisfaction by the Assessing Officer that the assessee made a bogus claim. There are no borrowed funds also, thus, to put an end to litigation, the disallowance is restricted to 2% against 5% sustained by the ld. Commissioner of Income Tax (Appeals). It is made clear that the observation made by the Bench is peculiar to the facts available to the impugned assessment year and may not be quoted for further reference. This ground of the assessee is partly allowed.”
5. During the course of hearing before us, both the parties fairly agreed that the decision taken by the Tribunal for A.Y. 2010-11 can be applied in this year. Under these circumstances, the disallowance is restricted to 2% against 5% sustained by the Ld. CIT(A). Thus, assessee gets part relief accordingly.
6. Ground 2: This ground is regarding disallowance u/s 14A. It has been contended during the course of hearing that for A.Y. 2010-11, the Tribunal has reduced the disallowance to Rs.1 lakh in place of Rs.3,41,763 as was sustained by the Ld.CIT(A) in the said order. Both the parties fairly agreed that the order of the Tribunal may be followed in this year also. It is noted that the Tribunal had made following observations:
3.1. I have considered the rival submissions and perused the material available on record. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, I am of the view that Rule-8D of the Rules can be applied, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee with respect to the expenditure incurred in relation to exempt income. Even if, the assessee claims that no expenditure was incurred in respect to exempt income, the Assessing Officer is supposed to follow the mandate of Rule-8D. Section 14A is called for when the Assessing Officer is not satisfied with the claim of the assessee having incurred no expenditure or some amount expenditure in relation to exempt income. Therefore, following the decision of jurisdictional High Court in Godrej & Boyce, 328 ITR 81 (Bom), wherein, it was held that the disallowance has to be on reasonable basis, therefore, to put an end to the litigation, I direct the ld. Assessing Officer to reduce the disallowance to Rs.1 lakh in place of Rs.3,41,763/- sustained by the ld. Commissioner of Income Tax (Appeals). Thus, this ground is partly allowed.
7. Respectfully following the order of the Tribunal for the earlier year, the disallowance in this year also reduced to Rs.1 lakh and the remaining disallowance is directed to be deleted.
8. Ground 3: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the disallowance of professional fee paid to an interior designing consultant of Rs.4 lakhs on the ground that it was not incurred for the running of the business. During the course of hearing it was submitted by the Ld. Counsel that the payment was made for availing consultancy to do refurbishing of the office building but due to certain reasons, the consultancy received could not be implemented. The payment was made by account payee cheque against which TDS was deducted. The payment has not been doubted by the lower authorities.
9. Per contra, the Ld. DR submitted that since no benefit has been received by the assessee, therefore, the disallowance has been rightly made by the lower authorities.
We have gone through the orders of the lower authorities. It is undisputed fact that the payment has been made by cheque on which TDS was deducted. It is also not disputed that services were rendered by Mr. Roshan Bahar, a professional interior designing consultant for providing suggestions on refurbishing of rooms. Under these circumstances, undisputedly, services were rendered by the consultant. Thus, merely because the assessee could not get the real benefit out of it, it cannot be said that the expenses were not incurred for the purposes of business of the assessee. Rendering of services and receipt of actual benefit are two different ends. What is important for allowability of an expense as business expense is that the assessee must receive service from the service provider and it should be meant for the purpose of business of the assessee. Both of these conditions are undisputedly fulfilled here. Thus, in our view, the disallowance has been wrongly made by the Assessing Officer and the same is, therefore, directed to be deleted. 11. Ground 4: In this ground, the assessee has challenged the action of lower authorities in disallowing commission fee paid to M/s Northpoint Training & Research Pvt Ltd. 12. During the course of hearing, the assessee brought to our notice that the Tribunal had in assessee’s own case for A.Y. 2007-08 allowed the commission paid to the same party. The Ld. DR did not bring any distinction in facts or law, in the present year and A.Y. 2007-08. We have gone through the orders of the lower authorities as well as the order of the Tribunal for A.Y.| 2007-08 dt 07- 12-2012 in ITA No.1206/Mum/2012. The observations of the Tribunal are reproduced hereunder:-
“3. During the assessment proceeding, the Assessing Officer observed that the assessee has shown payment of commission at the rate of Rs.3% of gross receipt to a related company namely, M/s North Point Training & Research Pvt. Ltd.. He observed that no evidence of any kind for work done by the related company has been produced. The Assessing Officer also noted that the three persons, who are Directors of the said company, are also member of the AOP of the assessee company. Accordingly, the Assessing Officer observed that without rendering any services, commission fees paid, was not justified. Accordingly, he disallowed.
4. It was submitted before the CIT(A) that the assessee AOP consists of twelve (12) Lintas Employees Welfare Trust, which is running a training centre at Khandala. There are 750 members of this trust. Since the assessee AOP was unable to run the institution alone, they hired the assistance of M/s North Point Training and Research Pvt. Ltd., which was incorporated for the purpose of management of the training and research activities of the assessee AOP. It was further submitted that the Directors of the said company are prominent management personnel having experience in the field of finance and accounts and for their assistance the said commission equivalent fee of 3% of the gross turnover was paid. It was also submitted that the said company has offered the commission as income and it paid on that. Therefore, the commission amount paid by the assessee is allowable otherwise it amounts to double taxation. However, the learned CIT(A) was not satisfied with the contention of the learned AR as no evidence was produced on account of rendering of services. Now, the assess is in appeal here before the Tribunal.
The contention raised before the lower authorities are reiterated here before the Tribunal. The attention of the Bench was drawn on the list of the beneficiaries of 12 Trusts, which is 750 numbers, placed in paper book at pages 60 to 63. It was further explained that in fact the assessee had acquired certain properties in Khandala for the common objective of developing and conducting a training and research centre. The assessee AOP has constructed 12 buildings fully furnished with air-conditioners, furniture, fixtures, audio-visual, conferences rooms, sport facilities, club house and other equipments. The said premises were constructed for the purposes of running a Training and Research Centre. However, as the members of the AOP were unable to obtain the clients and run the entire institution, they hired the services of M/s North Point Training and Research Pvt. Ltd.
as per terms of the conducting agreement entered between the parties. An agreement was entered on 15-6-2004, copy of the agreement is placed in the paper book at pages 49 to 57. It was also explained that the assessee AOP has paid similar commission for earlier two years and assessment had been completed under Section 143(3). No such disallowance was made for those two years. Accordingly, it was submitted that in view of the consistency also, the disallowance made by the Assessing Officer, which is confirmed by the CIT(A), is not justified.
On the other hand, learned DR strongly placed reliance on the order of the Assessing Officer as well as the CIT(A).
After considering the orders of the authorities below, I found that the assessee deserves to succeed in its appeal. I noted that the agreement entered on 15-6-2004 pertains to assessment year 2005- 06. In that year also the assessee paid a commission fee of Rs.10,39,800/-. The Conductor i.e. M/s North Point Training and Research Pvt. Ltd. has shown its receipts in its profit and loss account. The fee has been offered for taxation by filing regular return under Section 139(1) of the Act. Copy of the same is placed on record. Accordingly, the commission fee was paid for subsequent year i.e. assessment year 2006-07 at Rs.14,49,940/-. The same was also offered for taxation. The return was filed. Copy of the same is also placed on record. It is further seen that the assessee AOP filed its return declaring huge losses. The assessments were completed under Section 143(3). Copies of the same are placed on record for assessment year 2005-06, that declared loss of Rs.2,16,96,919/- was accepted by the AO. Similarly for 2006-07, declared loss of Rs.1,79,54,391/- was accepted. Copy of the assessment order is placed on record. In similar manner, the assessee paid commission fee to the Conductor for same services. However, in this year, the AO disallowed on the ground that the assessee could not file any proof of rendering services and CIT(A) also confirmed the action of the AO. The Assessee has explained that the same services were rendered by the Conductor, however, the same was not accepted. I noted that a certificate from the Conductor M/s North Point Training and Research Pvt. Ltd. is placed on record, by which it has been stated that they have been appointed for the following services :- “1. To obtain clients and business for Northpoint Centre of Learning when Centre is not in use by Lintas India Private Limited.
To manage the properties and facilities of training and research of Centre.
To manage training and research activities for development of knowledge and skills through training & research.
To obtain licenses/permissions for day to day management of the Centre and its activities.
5. To conduct the activities of Centre at its optimum utility and in a professional manner.” These services are as per agreement dated 15-6-2004. For the earlier two years, the claim of the assessee has been accepted. Copy of the return filed by the Conductor for all the years are also placed on record and they have offered the receipts in their profit and loss account and due tax has been paid. Therefore, I feel that disallowance made by the AO, which is confirmed by the CIT(A), is not justified. The Assessing Officer has accepted the claim of the assessee for immediately two years. The same services are rendered, therefore, for this reason also, disallowance is not justified.
It is also a matter of fact that there is huge loss shown by the assessee in earlier two years, which has been accepted by the department also. If those losses are brought forward then during the year under consideration also, there is a loss. It shows that the assessee is not showing any expenses on account of commission fee for reducing the tax liability.
In view of the aforesaid facts and circumstances of the case, I delete the disallowance.”
In the year before us, the Ld. CIT(A) refused to follow the order of the Tribunal for A.Y. 2007-08 on the ground that the Tribunal had allowed relief on the ground that huge loss was shown by the assessee in earlier two years and, therefore, there was no motive to evade taxes and that is how the Tribunal was pleased to allow the relief. We find that the CIT(A) has not read the order of the Tribunal completely. The Tribunal had analysed the complete facts and it was found that the payee had rendered services against which payment has been made. It was also found that the expenses have been incurred for the purpose of business of the assessee. Thus, the decision was taken by the Tribunal keeping in view all the factors and incurring of loss was merely one of them. It is further noted by us that in the year before us also, the factum of payment has not been disputed. It is brought to our notice that complete documentary evidences have been brought on record by the assessee evidencing the payment and availment of services rendered by the payee. In our view, the Tribunal has rightly allowed the claim of the assessee. No different decision can be taken in the year before us. The payee remains the same; all the facts and circumstances also remain the same. Thus, respectfully following the order of the Tribunal for A.Y. 2007-08, we allow the payment of commission of Rs.15,78,624 paid to M/s Northpoint Training & Research Pvt Ltd. The ground is allowed.
As a result, the appeal is partly allowed. Order pronounced in the court on this 21st day of September,2016.