ITO 2(3)(1), MUMBAI vs. RELIANCE ASSET RECONSTRUCTION CO.LTD, MUMBAI

The only effective ground raised by the Department is as under:–

Brief facts are, the assessee a company is engaged in asset reconstruction and management. For the assessment year under consideration, assessee filed its return of income on 4th October 2010, declaring total income of ` 5,95,110. During the assessment proceedings, the Assessing Officer noticed that in the computation of total income assessee had claimed deduction of ` 1,73,44,455 on account of salary expenses which was not debited to Profit & Loss account. He, therefore, called upon the assessee to justify the claim of deduction and also to show cause why the salary expenses claimed should not be disallowed. In response, it was submitted as assessee was in the initial year of its business it did not have the required infrastructure or manpower to carry on its activities. Therefore, the assessee utilised the manpower and infrastructure facilities of Reliance Capital Ltd. (RCL) for carrying on its activities. He submitted, after finalisation of assessee’s account for the relevant financial year the assessee received a debit note vide invoice dated 15th September 2000 of ` 17,344,455 from RCL towards assessee’s share of employee cost which was incurred by RCL. Assessee submitted, since by that time the audited accounts of the assessee for the relevant financial year had already been finalised, the assessee had no other option but to claim the deduction in the return of income. It was further submitted that 3 Reliance Asset Reconstruction Co. Ltd. the assessee had not debited any employee cost to the Profit & Loss account as it was using the services of employees on the pay roll of RCL. The assessee submitted, as the expenditure related to assessment year 2010–11 and assessee had not filed the return of income for A.Y. 2010–11 on the date of receipt of debit note from RCL it claimed the expenditure in the return of income. It was submitted by the assessee under some misconception / misapprehension the assessee did not make necessary entries relating to salary expenditure in books of account for assessment year 2010–11. However, the same will not debar the allowability of expenditure claimed under section 37(1) of the Act. The Assessing Officer, however, was not convinced with the explanation of the assessee. He observed that the claim of salary expenses in the return of income in the absence of any entry in the audited books of account or even Profit & Loss account indicates that the claim of expenditure is an after thought and meant for reducing the tax liability. He further observed, when the assessee company had sufficient funds to meet the day–to–day expenditure, it was not necessary for RCL to incur the expenditure on behalf of the assessee. He also observed, from the information submitted by RCL in response to notice issued under section 133(6), it is not verifiable whether RCL has reduced its salary and bonus expenditure to the extent of debit note raised against the assessee. Thus, on the basis of aforesaid consideration, the Assessing Officer disallowed salary

Learned Commissioner (Appeals) after considering the submissions made by the assessee in the context of facts and material on record, having found that the Assessing Officer had not called for or verified the necessary cost sharing arrangement / agreement between the assessee and RCL, called for information in terms of rule 46A(4). In response thereof, the assessee submitted a copy of letter dated 18th May 2009, addressed to RCL requesting for cost sharing which was duly accepted by RCL. On a perusal of the said letter, it was found by the learned Commissioner (Appeals) that as the assessee had just commenced its business activities, setting–up of infrastructure facilities in terms of office space, trained and experienced employees and maintaining the same infrastructure facilities would have resulted in a far higher cost to the assessee. Whereas by carrying out its activities with the help of infrastructure facilities of RCL, which is already existing, the assessee had entered into the cost sharing arrangement for making available office space, providing service of skilled and talented persons, consultant, etc. He also noted that as per the arrangement between the parties, RCL would prepare an account of all the costs incurred for user of the infrastructure facilities by the assessee and raise a bill to the assessee. On going through the 5 Reliance Asset Reconstruction Co. Ltd. accounts of the assessee, the learned Commissioner (Appeals) found that during the year, assessee had earned income from interest as well as profit on redemption of security receipts. However, it had not debited any expenditure to the Profit & Loss account on account of employee cost. From these facts, the learned Commissioner (Appeals) concluded that as the assessee had commenced its business recently it could not have had the required infrastructure facilities, therefore, it hired the services of RCL to carry on its business and for providing such services / facilities, RCL had issued the debit note towards cost incurred for services rendered to the assessee. The learned Commissioner (Appeals) also appreciated the fact that by the time RCL issued the debit note, since assessee’s accounts were finalised the assessee could not have debited the expenditure to the Profit & Loss account, hence, claimed the salary expenditure in the computation of income filed along with the return of income. The learned Commissioner (Appeals) observed, for running any business requirement of staff / employees essential. Therefore, the assessee could not have carried on its business activities without employing any staff / employee. Thus, claim of assessee that it had carried on its business activities through the employees / staff of RCL is believable. He also noted that on verification of the accounts of RCL, it was found by him that RCL has claimed expenditure on account of salary and bonus after reducing the amount of ` 1,73,44,455 for which it has 6 Reliance Asset Reconstruction Co. Ltd. raised debit note on the assessee. Thus, being of the view that the assessee had genuinely incurred the salary expenditure of ` 1,73,44,455, learned Commissioner (Appeals) deleted the addition.

Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, as the assessee had not debited any salary expenditure either in the books of account or to the Profit & Loss account the expenditure claimed is not allowable.

Learned Authorised Representative strongly supporting the order of the learned Commissioner (Appeals) and reiterating the stand taken before him submitted that there being no dispute to the fact that the assessee had used the infrastructure facilities of RCL, the reimbursement of cost incurred by RCL on behalf of the assessee towards salary of staff / employees is allowable as deduction. Learned Authorised Representative submitted, only because the expenditure was not debited to the books of account or Profit & Loss account due to the reason that the debit note was issued by the RCL after closure of accounts would not disentitle the assessee from claiming the expenditure. Learned Authorised Representative submitted, in fact after the expenditure was disallowed in the impugned assessment year, the assessee in a revised return of income filed for assessment year 2011–12, had claimed the salary expenditure as a prior period expenditure and in the note appended to the revised computation of 7 Reliance Asset Reconstruction Co. Ltd. income it has specifically stated that in the event the expenditure is allowed in assessment year 2010–11 by the appellate authority, deduction claimed in assessment year 2011–12 should be withdrawn. He submitted, while completing the assessment for A.Y. 2011–12, the Assessing Officer has allowed salary expenditure claimed by the assessee pertaining to assessment year 2010–11. He, therefore, submitted as far as genuineness of assessee’s claim of salary expenditure is concerned, the same stands proved / authenticated by virtue of assessment order passed by the Assessing Officer for assessment year 2011–12 accepting assessee’s claim. Learned Authorised Representative fairly submitted, since the salary expenditure has been allowed in the impugned assessment year, necessary directions can be given to the Assessing Officer to withdraw the expenditure claimed by the assessee on account of salary cost pertaining to assessment year 2010–11 in assessment year 2011–12.

We have considered the submissions of the parties and perused the material available on record. As is evident from the assessment order, the primary and fundamental reason for which the Assessing Officer disallowed assessee’s claim of salary expenditure is, such expenditure was neither provided in the books of account nor debited to the Profit & Loss account. However, as could be seen from the materials on record, there was valid reason for not debiting such 8 Reliance Asset Reconstruction Co. Ltd. expenditure to the Profit & Loss account. It has been demonstrated by the assessee that RCL raised the debit note towards assessee’s share in salary cost amounting to ` 1,73,44,455 in invoice dated 15th September 2010, which was after the closure of books of account of the assessee for the relevant financial year and also finalisation of its accounts on 23rd June 2010. Thus, the assessee could not have debited the salary expenditure to the Profit & Loss account in the absence of debit note raised by the RCL. However, since the debit note was received by the assessee before filing of return of income, it claimed the expenditure in the return of income. As far as genuineness of the expenditure claimed, there cannot be any doubt as learned Commissioner (Appeals) after verifying the information called from the assessee as well as RCL has given a factual finding that in terms of request made by the assessee vide letter dated 18th May 2009, RCL agreed to provide its infrastructure facilities on costs sharing basis. Moreover, learned Commissioner (Appeals) has also recorded a finding of fact that RCL has claimed salary / bonus expenditure net of ` 1,73,44,455. These facts clearly demonstrate that the expenditure claimed by the assessee is genuine. It is also necessary to observe that in the course of hearing, learned Authorised Representative has brought to our notice the assessment order passed for assessment year 2011–12 under section 143(3) and the revised return of income filed for that assessment year. On a perusal of the aforesaid

In the result, appeal stands dismissed. Order pronounced in the open Court on 24.08.2016