YO FOODIES,KOLKATA vs. ACIT, CIR-26, KOLKATA, KOLKATA

This appeal by assessee is arising out of order of CIT(A)-7, Kolkata vide Appeal No. 445/CIT(A)-7/Cir-26/14-15 dated 02.12.2015. Assessment was framed by ACIT, Circle-53, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2010-11 vide his order dated 30.03.2013.

4.1. The brief facts of this issue is that the assessee is running a restaurant in Mani Square Mall. The ld AO observed that the assessee paid a sum of Rs. 61,650/- to HCL Infosystems Ltd towards supply of HCL machines and Thermal Printer and a sum of Rs. 21,000/- paid to 2 Yo FOODIES AY 2010-11 IDS Softwares Pvt Ltd towards product service contract charges for Fortune R & B Software without deduction of tax at source u/s 194C of the Act and accordingly invoked the disallowance u/s 40(a)(ia) of the Act, which was also confirmed by the ld CITA in first appeal. The ld AR produced the bills that were produced before the lower authorities and prayed that in respect of payment of Rs. 61,650/- to HCL Infosystems Ltd, the same represents only purchase of machines and printer for which provisions of section 194C of the Act could not be invoked and consequential disallowance u/s 40(a)(ia) of the Act could not be made thereon. However, he fairly conceded that the disallowance u/s 40(a)(ia) of the Act was rightly made in respect of AMC charges of RS. 21,000/- paid to IDS Softwares Pvt Ltd. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

4.2. We have heard the rival submissions. We find from the perusal of the relevant bills enclosed in pages 1 & 2 of the paper book, the argument of the ld AR deserve to be accepted and we direct the ld AO to delete the disallowance u/s 40(a)(ia) of the Act to the extent of Rs. 61,650/- on this account. Accordingly, the Ground No. 3(a) raised by the assessee is partly allowed.

5.1. The brief facts of this issue is that the ld AO observed that the assessee paid a sum of Rs. 6,61,829/- to Mani Square Ltd without deduction of tax at source under Chapter XVIIB of the Act. Similarly an amount of Rs. 3,15,529/- was paid to Mani Square Ltd as common area maintenance charges without deduction of tax at source. The assessee justified the non deduction of tax at source in its reply by stating that a practice followed in all malls is that there is a common cash counter in the food court of Mani Square where the customer pays cash and collects a debit card which customers use to spend at any of the various food stalls. So the entire cash collection is handled by Mani Square only. At the end of every fortnight, Mani Square mall management would do an account of the sales and the cash collections.

3 Yo FOODIES AY 2010-11 They deduct their share of the revenue and pay the remaining sale proceeds to the assessee. This reply not satisfied with this reply disallowed the total payment of Rs. 9,77,358/- u/s 40(a)(ia) of the Act, which was also confirmed by the ld CITA in first appeal. Aggrieved, the assessee is in appeal before us.

5.2. The ld AR argued that as per the Joint Venture agreement entered into with Mani Square Food Court at Mani Square Mall dated 15.7.2008, vide clause 10(i) and 10(ii) of the agreement, the assessee has to pay Mani Square Ltd a percentage of the gross sale proceeds and the basis of the amount to be paid is also stipulated thereon at fixed percentage based on the turnover achieved thereon. He drew the attention of the bench to Clause 10(i) , Clause 11.1 (revenue sharing between assessee and Mani Square at 75:25 ratio respectively) , Clause 12 towards payment of fixed common area maintenance charges of Rs. 23,295/- plus service tax on account of servicing, managing and maintaining the common area installation and facilities in the mall including electricity, repairs, replacement, refurbishment, painting, maintenance, cleaning and security of common indoor and outdoor sitting area etc and also the forecast costs on account of advertisement , promotion and marketing of the food court , Clause 12.1 containing minimum guarantee amount of Rs. 80,000/- per month payable by the assessee to Mani Square Ltd (MSL) with an option given to the vendor to retain the portion of the sales or minimum guarantee whichever is higher. He also argued that the assessee scope of deliverables as per the JV agreement is as follows:- “a. All ingredients and raw material for preparation of food. b. Necessary well cooked food with good wrap and hygiene. c. Cooking area equipment built in food grade material/quality. d. Necessary Tiling & Plumbing in the cooking area. e. Cleanliness of the attire provided by MSL for the persons/representatives facing the customer. f. Equipment for Counter. g. Staff and employees for food preparation and inline staff. h. Any other deliverable not expressly constituting MSL’s deliverables.”

4 Yo FOODIES AY 2010-11 He also argued that as per Clause 7 of the agreement, the price list of the food products vended by the assessee would be prepared in consultation with Mani Square Ltd. Apart from this, as per Clause 8 of the agreement, MSL will promote, advertise to make popular as a destination the food court and for this purpose put in the necessary costs and competencies required in this behalf. He argued apart from all these payments, the assessee had to pay Rs 38.67 lakhs per annum as common area maintenance charges and Rs. 60 lakhs per annum as Rent to carry out the food business in the said mall. He ultimately argued that MSL is only a business partner of the assessee and it is only a case of revenue sharing arrangement which would not fall under the ambit of provisions of Chapter XVIIB of the Act and hence no disallowance u/s 40(a)(ia) of the Act would get attracted. He however, prayed for setting aside of this issue to the file of the ld AO to reconsider these evidences afresh in the interest of justice. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

5.3. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee in this regard comprising of pages 3 to 19. We find that there is no clear finding recorded by the authorities below with regard to the nature of each and every payment made by the assessee to MSL in accordance with various clauses of the Joint Venture Agreement dated 15.7.2008 which is the basis on which various payments were made. There is no finding as to whether the said agreement is a mere revenue sharing arrangement or it is merely an agreement allowing the assessee to carry on the food vending business on hire together with some common facilities. We find that such a clear finding would determine the issue of applicability of tax deduction provisions as per Chapter XVIIB of the Act. In these facts and circumstances, we deem it fit and appropriate, in the interest of justice and fairplay, to set aside this issue to the file of the ld AO to decide the same afresh, in accordance with law by critically examining each and every payment made by the assessee to MSL in accordance with various clauses of the agreement dated 15.7.2008. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the Ground 3(b) raised by the assessee is allowed for statistical purposes.

6.1. The brief facts of this issue is that the ld AO observed that the assessee had paid a sum of Rs. 1,91,816/- to Kotak Mahindra Bank Ltd as interest on unsecured loan without deduction of tax at source under Chapter XVIIB of the Act. Accordingly he disallowed the same u/s 40(a)(ia) of the Act, which was also upheld by the ld CITA. Aggrieved, the assessee is in appeal before us.

6.2. The ld AR argued that there is no need to deduct tax at source when the interest is paid to a banking company. In response to this, the ld DR vehemently relied on the order of the lower authorities.

6.3. We have heard the rival submissions. We find lot of force in the argument of the ld AR in this regard and accordingly hold that no disallowance u/s 40(a)(ia) of the Act would operate in respect of payment of interest in the sum of Rs. 1,91,816/- in the instant case. Accordingly, the Ground 3(c ) raised by the assessee is allowed.

7.1. The brief facts of this issue is that the ld AO observed that a sum of Rs. 7,400/- incurred by the assessee towards donation and subscription as not incidental to the business of the assessee and accordingly disallowed the same, which was also confirmed by the ld CITA . Aggrieved, the assessee is in appeal before us.

6 Yo FOODIES AY 2010-11 7.2. The ld AR argued that these payments represent regular pooja expenses and subscriptions paid to various organizations which could be directed to be verified by the ld AO with the receipts thereon. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

7.3. We have heard the rival submissions. We find that this issue requires to be examined by the ld AO on verification of the receipts or any other evidences to be submitted by the assessee for justification of its claim and accordingly the Ground 3(d) raised by the assessee is allowed for statistical purposes.

8.1. The brief facts of this issue is that there was a survey conducted in the business premises of the assessee on 23.3.2010, wherein a profit and loss account till that date was found as per which the net profit was reflected at Rs. 71,37,016/-. The ld AO observed that the net profit disclosed by the assessee in the return of income was Rs. 3,78,009/-. The assessee explained that lot of actual expenses incurred were not entered in the accounts and in the profit and loss account prepared on the date of survey. It was also explained that expenses like depreciation, interest on bank loan, rent , bad debts, deferred revenue write off and other outstanding expenses as on 31st March etc were provided only at the end of the year thereby resulting in huge reduction of profits between 23.3.2010 and 31.3.2010. The ld AO however observed that in respect of salary payments, the same are payable every month and there cannot be substantial variance between salary reported in the profit and loss account as on 23.3.2010 and that on 31.3.2010 except the provision to be made for the month of March 2010 thereon. The ld AO observed that the salary reflected in the final profit and loss account was Rs. 64,71,010/- as against Rs. 40,36,896/- on the date of survey. The assessee was asked to furnish the details of salary expenses. The assessee filed complete details in 6 pages vide reply dated 18.11.2011 before the ld AO including the 7 Yo FOODIES AY 2010-11 details of salary and wages paid directly and also paid through contractor named Kolkata Dynamic Service Pvt Ltd. The ld AO observed that the assessee had shown salary for March 2010 as only Rs. 5,50,781/- apart from observing some discrepancies in the total salary figure given by the assessee from time to time before the ld AO. He also observed that the individual salaries of 66 persons out of 84 persons are below Rs. 50,000/- each. He accordingly concluded that with high attrition rate generally among employees getting such low salaries and disbursal of the same in cash, it was very easy for the assessee to inflate its expenses under this head. The assessee also explained that the ledger was not updated at the time of survey. The ld AO did not accept to this proposition and concluded that the salary for the first eleven months was Rs. 40,36,896/- which works out to Rs. 3,66,990/- per month (40,36,896 / 11) . Accordingly, he determined the total salary at Rs. 44,03,886/- ( 40,36,896 + 3,66,990) for the whole year as compared to Rs. 64,71,010/- disclosed by the assessee and added the difference of Rs. 20,67,124/- to the total income of the assessee towards inflation of expenses. This action of the ld AO was upheld by the ld CITA . Aggrieved, the assessee is in appeal before us.

8.2. The ld AR argued that the year end adjustment entries , reconciliation entries, bonus provision for the whole year, salary and wages provision for March month, etc would be provided only at the end of the year which obviously could not have been reflected in the accounts maintained upto the date of survey on 23.3.2010. Apart from this, the accounts upto the date of survey was not updated on several counts . He argued that the books of accounts of the assessee have been duly audited by an independent chartered accountant and forming part of records of the lower authorities and hence prayed for verification of this issue afresh in the light of various evidences and the books of accounts by the ld AO in the interest of justice. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

8.3. We have heard the rival submissions and perused the materials available on record. We find in the instant case, that the entire issue of salary account requires re-examination by the ld AO in the light of various evidences available with the assessee together with the 8 Yo FOODIES AY 2010-11 books of accounts and accordingly we deem it fit and appropriate to set aside this issue to the file of the ld AO to decide the same afresh in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the Ground 3(e) raised by the assessee is allowed for statistical purposes.

Order pronounced in the open court on 02.12.2016.