I LOUNGE,KOLKATA vs. ACIT, CIR-26, KOLKATA, KOLKATA

ORDER Per Shri M. Balaganesh, AM:

This appeal by assessee is arising out of order of CIT(A)-7, Kolkata vide Appeal No. 444/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 AY 2010-11 vide his order dated 30.03.2013.

3.1. The brief facts of this issue is that the assessee is running a restaurant cum Bar in Metropolis Mall. The ld AO observed that the assessee paid a sum of Rs. 96,750/- to Relax Art and a sum of Rs. 28,206/- paid to Unicon India which included a portion towards cost of materials , 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 argued that the payments were made for purchase of leather coated

2 I Lounge, AY 2010-11 chairs and prayed that the bills for the same would be produced if given an opportunity before the ld AO and the same could not be produced before the ld CITA as the order was passed exparte. The production of those bills would prove that the same was incurred towards cost of materials on which there would no TDS applicability and hence the provisions of section 40(a)(ia) of the Act could not be invoked. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

3.2. We have heard the rival submissions. We find that the assessee in its statement of facts filed before the ld CITA that the said payments were incurred towards cost of materials , but however , the same was not subjected to verification by the lower authorities. Hence we deem it fit and appropriate to set aside this issue to the file of the ld AO to verify the bills for the same and decide the applicability of section 40(a)(ia) of the Act on the same in the interest of justice. Accordingly, the Ground No. 3(a) raised by the assessee is allowed for statistical purposes.

4. The next issue to be decided in this appeal is as to whether the ld CITA is justified in upholding the disallowance u/s 40(a)(ia) of the Act in respect of payment made towards rent in the sum of Rs. 2,32,910/- in the facts and circumstances of the case.

4.1. The brief facts of this issue is that the assessee had made payment of Rs. 21,01,548/- as rent debited to profit and loss account. It included a sum of Rs. 2,32,910/- towards municipal taxes and commercial surcharges which was paid by the assessee tenant on behalf of the landlord without deduction of tax at source. For the remaining sums, the assessee had duly complied with the TDS provisions. The assessee replied that TDS is not applicable for the payment of municipal taxes and commercial surcharges to the tune of Rs. 2,32,910/- . But the ld AO did not agree to the said explanation and made disallowance u/s 40(a)(ia) of the Act. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us.

4.2. The ld AR placed reliance on the Question No. 4 of the CBDT Circular No. 718 dated 22.8.1995 which squarely clarifies that there would be no TDS applicability on the 3 I Lounge, AY 2010-11 payment of municipal taxes. He also drew our attention to the ledger account of Rent for the period 1.4.2009 to 31.3.2010 together with sample monthly invoices of R.D.Developers Pvt Ltd. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

4.3. We have heard the rival submissions and perused the materials available on record. We find that the CBDT Circular No. 718 dated 22.8.1995 vide Question No. 4 is squarely applicable to the facts of the instant case which is reported in (1995) 127 CTR (St) 81 . For the sake of convenience, the relevant question and reply given thereon is reproduced herein :-

However, we find that the revenue had not been given any opportunity to examine the invoices of R.D.Developers Pvt Ltd properly and record proper findings thereon. Hence in the interest of justice and fairplay, we deem it fit and appropriate, to set aside this issue to the file of the ld AO to decide this issue in the light of the Circular stated supra, in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the Ground No. 3(b) raised by the assessee is allowed for statistical purposes.

5.1. The brief facts of this issue is that the ld AO observed that a sum of Rs. 12,900/- incurred by the assessee towards donation and subscription as not incidental to the business 5.2. 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.

5.3. 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(c) raised by the assessee is allowed for statistical purposes.

6.1. The brief facts of this issue is that the assessee did not get a Value Added Tax (VAT) Registration of its own and was obligated to use its sister concern , another partnership firm styled as ‘Yo Foodies’ VAT licence for this purpose. The ld AO observed that the assessee’s total sales as on 31.3.2010 were Rs. 89,43,272/- as against the total sales reported by the assessee at Rs. 43,33,314/-. A notice was issued to the assessee by the ld AO to show cause as to why the unreflected sales should not be added to its total income. The assessee vide its letter dated 17.12.2012 that M/s Yo Foodies (sister concern) had started the food court on 17.8.2004 i.e much before the assessee and had the required VAT registration for Yo Foodies only. When the assessee started its business on 1.10.2006 they had applied for VAT and WBST Registration with the respective authority. The assessee pursued the matter vigorously and deputed its sales tax consultant Mr Santanu Chowdhury for this , but however, the application was rejected by the respective department due to some technical grounds. Hence the assessee was forced to carry on its liquor business under the WBST Registration of Yo Foodies. It was further stated that assessee had to purchase food for its 5 I Lounge, AY 2010-11 customers from Yo Foodies and hence VAT on food and the value of food received from customers against bills was deposited with VAT account of Yo Foodies and value of food to Yo Foodies Ledger Account. In support of this, the assessee filed a detailed statement giving item wise break up of total sales, liquor sales, WBST, VAT, Tips and Service Charges including Challans of VAT for food used, WBST for liquor used , photocopy of credit card settlement slip mentioning tips etc, Tips and Service Charge voucher in support of above statement. The assessee also reconciled the total sales and stated that it had transferred Rs. 30,79,319/- being its sale to Yo Foodies Ledger Account together with VAT on Food @ 12.5% amounting to Rs. 3,74,190/- , WBST on liquor sale of Rs. 8,45,000/- , Tips paid to Staff Union of Rs. 32,263/- and Service charge paid to staff of Rs. 3,64,891/- and ultimately concluded that there is no unreflected sale of rs. 44,29,177/- as pointed out by the ld AO in the show cause notice.

The ld AO however concluded that the purchase of raw material for foods were not reflected in the books of assessee and both the sale and sale proceeds were reflected in the assessee’s books before their transfer to Yo Foodies, which is nothing but an arrangement showing that the assessee was using its own labour for preparing food and its service for which there was no consideration received by it from Yo Foodies. He further stated that Yo Foodies was showing both the purchases and sales in its books, but the expenses on labour that went into the preparation of food and its service to customers were not debited to the books of Yo Foodies. The labour was in fact provided by the assessee. Accordingly , he applied estimates and held that 50% of the total expenditure of Rs. 61,77,940/- excluding opening stock and purchases debited to assessee’s profit and loss account was attributable to such food preparation and its service to customers which were not incurred wholly and exclusively for the purpose of business of the assessee and accordingly disallowed a sum of Rs. 30,88,970/- thereon in the assessment. This action of the ld AO was upheld by the ld CITA . Aggrieved, the assessee is in appeal before us.

6.2. The ld AR argued that the brief modus operandi of the business in absence of VAT registration was that the purchases and sales of Food and VAT thereon were collected by the assessee were routed through the books of Yo Foodies and separately accounted for. The 6 I Lounge, AY 2010-11 assessee purchases food and snacks from Yo Foodies and supplies to the customers in Bar while serving the drinks to them. The assessee showed sale of food and snacks made on behalf of Yo Foodies in Metropolis Mall which was duly explained before the ld AO by filing the reconciliation of total sales of the assessee which was accepted by the ld AO and no addition was made on this account. He argued that the entire profit and loss account of the assessee was before the ld AO. When the ld AO had agreed to the modus operandi of shifting of sales to Yo Foodies without making any addition, how could there be any disallowance of expenditure on estimate basis. He argued that a sum of Rs. 14,71,100/- was reflected in Contractors Job Charges in the profit and loss account which is enclosed in page 31 of the Paper Book , which is nothing but servers / bearers salary paid thereon. He also impressed upon the Bench that there was no expenditure debited towards salary in the books of the assessee which would prove that the entire labour charges as stated by the ld AO is debited in the Contractors Job Charges which is nothing but the salary and wages paid to those contract labourers working with assessee on contract basis. He further argued that once this expenditure is ignored, what is left out is only expenditure towards audit fees, rent, professional tax , other administrative expenses etc., which cannot be apportioned on the basis of sale of materials. They are all fixed expenses and not variable expenses. Accordingly he questioned the basis of disallowance of 50% of total expenditure by the ld AO without appreciating the business model of the assessee together with its accounting pattern. He fairly prayed for setting aside of this issue to the file of the ld AO for reexamination of the whole issue. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

6.3. We have heard the rival submissions. We find that the assessee had filed the audited profit and loss account and balance sheet before the ld AO together with the Tax Audit Report and the ld AO had not found any discrepancies in the quantitative details of the assessee. It is not in dispute that the ld AO had accepted the sales reported by the assessee. However, from the elaborate arguments advanced by the ld AR above , we deem it fit and appropriate, in the interest of justice and fairplay, that this issue requires to be re-examined by the ld AO in the light of factual submissions made by the ld AR in consonance with the business model and accounting pattern adopted by the assessee . Needless to mention that 7 I Lounge, AY 2010-11 the assessee be given reasonable opportunity of being heard. The assessee is directed to provide necessary co-operation to the ld AO by providing necessary evidences for better appreciation of the facts and also given liberty to adduce fresh evidences, if need arises. Accordingly the Ground 3(d) raised by the assessee is allowed for statistical purposes.