M/S. INTERNATIONAL CLEARING & SHIPPING AGENCY,CHENNAI vs. ADDITIONAL CIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

We take up Department appeal in for 2. adjudication:- The assessee is in the business of Clearing & Forwarding and Steamer Agents and filed return of income on 05.11.2007 admitting total income of �3,77,24,415/-. As per the scrutiny norms case was selected and notice u/s.143(2) of the Act was issued. In compliance to notice, the assessee’s ld. Authorised Representative appeared from time to time and furnished details and assessment was completed. The ld. Assessing Officer on perusal of final accounts found that the assessee has claimed expenditure under import and export headings and assessee filed separate profit and loss account in respect of two departments wherein the assessee as an agent maintained receipts and payments of import and export of goods. Subsequently, the profits from each department transferred to ITA Nos.2209/10 & 93/11 :- 3 -:

Profit and Loss account. The ld. Authorised Representative explained that the assessee has been incurring expenditure to expedite work at the customs, harbor and the port area and payments are made to various persons and produced vouchers in support of the payments.

These payments are in nature of speed money to some persons for working expeditiously and the characteristic of the expenses is a hidden and are generally incurred to edge over the competitors to get benefits. The expenditure incurred by the assessee cannot enlightened openly because of its character but have been incurred by the assessee wholly and exclusively for the purpose of business falls within the definition of Sec. 37 of the Act and assessee voluntarily has disallowed 15% of such expenses in the Books of Accounts and subjected to tax. The ld. Assessing Officer found expenditure is against public policy and made further disallowance of �48,80,686/-.

Against this, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

The ld. Commissioner of Income Tax (Appeals) has dealt on 3. this issue and gave a elaborate findings that this practice is a liaison works and common for clearing agents to incur expenditure. The assessee has disallowed 15% of expenses for this assessment year and for earlier assessment year Department accepted such ITA Nos.2209/10 & 93/11 :- 4 -: disallowance and not disputed. The character of hidden expenses cannot be explained but can be felt in working of people. The ld. Commissioner of Income Tax (Appeals) called for the remand report and the ld. Assessing Officer mentioned that the assessee has not proved such expenditure has been incurred wholly and exclusively for the purpose of business. The ld. Authorised Representative filed reply to the remand report and submitted that the payment of money is not disputed and Revenue accepted as speed money to expedite the work to have a edge over the competitors and further supported his arguments on the Jurisdictional High Court decision of CIT vs. South India Corporation Agencies 293 ITR 237 (Mad) and prayed for deletion of disallowance. The ld. Commissioner of Income Tax (Appeals) relying on the findings of the above decision and held as at page no.7 of order as under ‘’The assessee paid incentives to Dock Labour Board Workers in order to achieve maximum output, but 50 percent. Of the same was disallowed by the Assessing Officer finding that the payments were not fully vouched by the persons stated to have received the amounts. The Commissioner (Appeals) and the Tribunal held that the entire payments were deductible’’. and based on the ratio of the case, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to restrict the disallowance to 15% only and allowed the ground. Aggrieved by the order of the ITA Nos.2209/10 & 93/11 :- 5 -:

Commissioner of Income Tax (Appeals), the Revenue has filed an appeal before the Tribunal.

3.1 The ld. Departmental Representative submitted that the Commissioner of Income Tax (Appeals) has erred in deleting the addition of �48,80,686/- which takes the nature of illegal money or speed money and the assessee could not prove expenditure was wholly and exclusively for the purpose of business and relied on the judicial decisions. The ld. Departmental Representative accepted that it is a common practice to incur such speed money and which is in violation of public policy and cannot be considered as wholly and exclusively incurred for the purpose of business.

3.2 Contra, the ld. Authorised Representative reiterated his submissions made before the lower authorities and drew attention to page nos.4 to 6 of paper book explaining the expenditure incurred by the assessee and characteristic of expenditure and the Department has accepted expenditure in earlier years.

3.3 We heard the rival submissions and perused the material on record and judicial decisions cited. We are of the opinion that the expenditure is incurred as a regular practice in the business of ITA Nos.2209/10 & 93/11 :- 6 -: forwarding and clearing agencies at Dock and Ports for loading and unloading of goods and claimed as General and Miscellaneous expenses necessarily for the purpose of conducting business. The Revenue has accepted 15% disallowance in the earlier years and has attained finality. The ld. Commissioner of Income Tax (Appeals) has examined the findings of the Assessing Officer and submissions of the assessee and relied on the Jurisdictional High Court decisions which are acceptable. Therefore, we are not inclined to interfere with the order of Commissioner of Income Tax (Appeals) on this ground and accordinlgy ground of the Department is dismissed.

The second ground raised by the Department in regard to 4. disallowance of Business Promotion Expenses aggregating to �1,88,860/- by Assessing Officer.

4.1 In the assessment proceedings, the Assessing Officer disallowed business promotion expenses to the extent of �1,88,860/- incurred through credit cards of partners and managers as entertainment expenses.

4.2 The Commissioner of Income Tax (Appeals) considered the submissions and also potential of the customers. Many foreign

ITA Nos.2209/10 & 93/11 :- 7 -: dignitaries on business promotions come to Chennai and are entertained with good food and hospitality to improve co-ordinal relationship for promotion of business. The Commissioner of Income Tax (Appeals) considered the remand report of the Assessing Officer and treated expenditure as business expenses and deleted the addition. Aggrieved,, the Revenue is in appeal before Tribunal.

4.3 Before us, the ld. Departmental Representative submitted that the Commissioner of Income Tax (Appeals) has erred in deleting the addition even though assessee could not produce any supporting evidence and expenditure was incurred for the business.

4.4 On the other hand, the ld. Authorised Representative supported his arguments that the business promotion expenses incurred by the Partners and Senior Employees are in the nature of entertainment expenses and to develop the business. Considering the working of agencies, entertainment expenses are meager and relied on the order of the Commissioner of Income Tax (Appeals).

4.5 We are of the opinion that the magnitude of business is high and to develop business relations, it is common to incur expenditure on foreign visitors. Therefore, we do not interfere with the order of ITA Nos.2209/10 & 93/11 :- 8 -:

Commissioner of Income Tax (Appeals) on this ground and uphold the same.

The third ground raised by the Department with to regard to 5. deletion of �8,69,067/- towards subscription to associations.

5.1 The ld. Assessing Officer has disallowed the said amount on the ground that assessee could not substantiate with evidence and there is no nexus between business and associations.

5.2 The ld. Commissioner of Income Tax (Appeals) relied on the judicial decisions and submissions of the ld. Authorised Representative that the expenditure of membership is necessary which enable the assessee to improve business prospects. Such membership subscription also educate on business policies and trade delegations indirectly to improve business universally and deleted the addition.

5.3 Before us, the ld. Departmental Representative argued that there is no nexus or advantage derived which assessee firm could establish.

5.4 On the other hand, the ld. Authorised Representative drew our attention to page no.16 of paper book containing the list of ITA Nos.2209/10 & 93/11 :- 9 -: associations and payments in foreign currency related to the business of the assessee.

5.5 We after hearing the rival submissions and perusal of subscriptions details paid to the Associations for improving business prospects in domestic and international markets and also participation fees paid to various seminars and conference and we confirm the order of Commissioner of Income Tax (Appeals) in deleting the addition of �8,69,067/- and dismiss the ground of the Revenue.

6 The fourth ground raised by the Department on deletion of disallowance of motor car expenses �10,31,034/-.

6.1 The assessee company claimed expenditure on the cars maintenance and the ld. Authorised Representative submitted that the assessee firm maintaining more than 17 cars including luxury cars and assessee suo-motu disallowed expenses in respect of two cars and remaining expenses were disallowed by the Assessing Officer.

The expenses of Cars consolidated amounting to �10,31,034/-.

6.2 The ld. Commissioner of Income Tax (Appeals) considering the submissions and remand report and furnishing of registration

ITA Nos.2209/10 & 93/11 :- 10 -: certificate of all cars and working conditions of the assessee firm deleted the addition.

6.3 Before us, the ld. Departmental Representative submitted that Commissioner of Income Tax (Appeals) has not appreciated that some of the cars are luxury sedans and are used by partners for personal purpose also and the assessee could not prove to the satisfaction of Assessing Officer with any documentary evidence nor log book maintained or any evidence that the cars are used exclusive for the purpose of business.

6.4. Contra, the ld. Authorised Representative of the assessee filed list of cars and maintenance expenses at page Nos. 17 to 20 of paper book including registration certificates to support the bonafide of ownership.

6.5 We have heard the parties. We are of the opinion that the assessee firm maintaining large fleet of cars to the hierarchy of management and assessee disallowed expenditure on two cars which is not disputed but on remaining cars the assessee fails to maintain log book and not produced evidence in assessment proceedings and there is a scope for element of personal usage considering the luxury sedans. Therefore we set aside the order of Commissioner of Income

ITA Nos.2209/10 & 93/11 :- 11 -:

Tax (Appeals) on this ground and confirm the order of the Assessing Officer. The ground of the Revenue is allowed.

7.1 The assessee firm incurred foreign travel expenses amounting to �19,00,000/- and in the assessment proceedings due to non availability of information the assessee could not furnish the details of travel. The ld. Assessing Officer on the presumption that the amount could have been utilized for personal purpose and disallowed 50% of foreign travel expenses of �9,50,000/-.

7.2 The ld. Commissioner of Income Tax (Appeals) on perusal of expenditure on domestic and foreign travel by Managing Partner, Senior employees and Staff and purpose of visit and corresponding invoices and considered the comments of the ld. Authorised Representative on remand report found such travel expenses incurred by Managing Partner and Senior Managers only and not any of their family members and deleted the addition.

ITA Nos.2209/10 & 93/11 :- 12 -:

7.3 Before us, the Revenue has reiterated that assessee has not produced this evidence in the assessment proceeding before the Assessing Officer which could not be examined and contested the submissions of fresh evidence.

7.4 The ld. Authorised Representative referred to page no.55 of paper book containing the list of travelled Countries made by the persons alongwith purpose and details of travel and invoices.

7.5 After hearing both the parties, we are of the opinion that the expenditure incurred if it is supported by evidence the same to be allowed. Hence, we remit the issue to the file of the Assessing Officer to verify the genuiness of documents and pass the order.

8.1 The ld. Assessing Officer found that the assessee firm has made interest free advance of �2,31,62,036/- to M/s. Deepak Agencies Pvt. Ltd and other concerns. The assessee has borrowed funds and paid interest on HP Loans and Motor Car Loans aggregating to �15,52,134/-. The presumption of the Assessing Officer that assessee

ITA Nos.2209/10 & 93/11 :- 13 -: firm has borrowed from individuals and paid interest to the banks and allowed interest free advance to the business concerns. The ld. Assessing Officer on the suspicion that the borrowings made by the assessee is for the purpose of lending to others not for business and considering the list of trade advances and the business advances and ld. Assessing Officer has calculated diversion of funds and disallowed interest claimed u/sec.36(1)(iii) of the Act �15,52,134/-.

8.2 The Commissioner of Income Tax (Appeals) after hearing the submissions of the ld. Authorised Representative relied on the remand report satisfied that the assessee is having adequate credit balance in Capital Accounts and the interest payments to bank are on HP loans disbursed directly to the dealers and relied on the decision of Apex Court in the case of S.A. Builders vs. CIT 288 ITR 1, where it is held that the interest on borrowed funds advanced in the course of business cannot be disallowed and also supported with High Court decision in the case of Hotel Savera vs. CIT 239 ITR 795 (Mad) and CIT vs. Reliance Utilities Industries & Powers Ltd. 313 ITR 340 (Bom) where it is held that if there is sufficient balance available in current or capital account to cover the advances no disallowance could be made and accordingly Commissioner of Income Tax (Appeals) deleted the addition.

ITA Nos.2209/10 & 93/11 :- 14 -:

8.3 Before us, the ld. Departmental Representative argued that the Commissioner of Income Tax (Appeals) has not appreciated that the assessee has failed to prove that such interest expenditure is related to the funds advanced to the sister concerns not for the purpose of business and relied on the judicial decisions.

8.4 Contra, the ld. Authorised Representative drew attention to the paper book explaining details of interest payments and submitted Balance Sheet disclosing interest free funds availability and ledger copies of the parties to whom money was advanced.

8.5 We after hearing the submissions, found that assessee could not submit these details in the assessment proceedings and also not demonstrated with fund flow statement to prove that there are adequate funds available with the firm. Therefore, we set aside the disputed issue to the file of the Assessing Officer who shall verify fund flow statement based on the capital account and balance sheet of the firm and allow deduction after examination. This ground of the Department is partly allowed for statistical purpose.

ITA Nos.2209/10 & 93/11 :- 15 -:

9.1 The Assessing Officer issued letters u/s.133(6) of the Act to leading clients of the assessee to reconcile and confirm the income from the assessee firm on each transaction. In compliance to letters, four major clients filed confirmation and ld. Assessing Officer on comparison the balance with the receipts accounted in the assessee’s books of account found that the assessee has excluded receipts to the extent of �3,51,42,613/-. The ld. Authorised Representative contested that the difference in receipts is due to reimbursement of customs duty and port expenses and also ld. Assessing Officer does not have complete information in the assessment proceedings.

9.2 The ld. Commissioner of Income Tax (Appeals) on perusal of the letters from the leading clients and reply of assessee to the remand report and on reconciliation of accounts found that there are certain payments not incorporated in books and subject to reconciliation. The accounting system adopted by the assessee while making payments of various expenses i.e. freight charges, customs

ITA Nos.2209/10 & 93/11 :- 16 -: duty, storage charges etc are debited to the respective ledger overheads account and after completion of the job, invoices are prepared on the clients for the expenses incurred on behalf of them and are debited to client accounts. If any reimbursement of expenses they are credited to the appropriate expenses account and balance if any is shown in sundry creditors in Balance Sheet. Further, such expenses are subject to TDS wherever applicable and if any net difference it is transferred to Profit and Loss Account. The ld. Commissioner of Income Tax (Appeals) upon examining the accounting treatment and invoice bills and reimbursement of expenses gave a elaborate findings in para 14.5 to 14.12 of his order considering the working mechanism and partly allowed by granting relief to the extent of �2,98,71,222/- 9.3 Before us, the ld. Departmental Representative argued that the Commissioner of Income Tax (Appeals) has erred in not considering the findings made by the Assessing Officer in assessment proceedings and ignoring the contentions raised by the Assessing Officer in remand report filed after verification of documentary evidence furnished by the assessee in appellate proceedings.

ITA Nos.2209/10 & 93/11 :- 17 -:

9.4 On the other hand, the ld. Authorised Representative drew our attention to the paper book page Nos.102 to 132 showing details of invoices raised in respect of clients. The confirmation letters are examined and accounting system reflected in the ledger accounts.

Copy of reconciliation of balance as per the clients accounts and the firm books of accounts produced and difference is due to reimbursement of expenses.

9.5 After hearing both parties, we are of the opinion considering the submissions and material produced and the circumstances and the type of clients and the nature of expenditure and accounting treatment which the Assessing Officer was denied the opportunity of verification in the assessment proceedings. Therefore, we remit this issue to the file of the Assessing Officer for verification and examination. The Assessing Officer shall pass the order on merits after providing opportunity of being heard and in accordance with law.

This ground of the Department is partly allowed for statistical purpose.

ITA Nos.2209/10 & 93/11 :- 18 -:

The first ground raised by the assessee with regard to addition of �67,73,600/- payable to Madras Port Trust.

11.1 At the time of assessment proceedings, the ld. Authorised Representative submitted and explained that the Port Trust has enhanced charges from 1994-2000 pertaining to container storages charges levied by the Madras Port Trust and was challenged before Jurisdictional High Court and stay was granted. The Hon’ble High Court has directed Port Trust to collect charges as per revised tariff dated 19.07.1995 prospectively from 22.11.2000. As per the directions, the assessee has collected revised charges from importers. But the Assessing Officer considered that the assessee has not paid money to Madras Port Trust after contesting before Jurisdictional High Court and believed that money was utilized by the assessee for the purpose of business and treated as income of the assessee and ld. Assessing Officer treated money collected as integral part of transactions and brought to tax by addition of �67,73,600/-.

11.2 The ld. Commissioner of Income Tax (Appeals) upon findings of the Assessing Officer and judicial decisions relied by Assessing Officer in respect of storage collections charges and called for remand

ITA Nos.2209/10 & 93/11 :- 19 -: report brought such proceedings under Purview of Sec. 43B of the Act and relied on Judicial decision of AP High Court judgment and other High Courts and presumed that the assessee cannot retain the money collected without paying to Port Trust. Overlooking arguments of the assessee that the income pertaining to Financial year 2000 cannot be taxed but ld. Commissioner of Income Tax (Appeals) confirmed the addition made by the Assessing Officer. Aggrieved by the order of the Commissioner of Income Tax (Appeals) the assessee assiled an appeal before the Tribunal.

11.3 Before the Tribunal, the ld. Authorised Representative argued the liability is fastened on the agency firm and the amounts were collected as per the guidance of Chennai Steamer Agents Association purely to safeguard against the interest of all agencies and ultimately depend on the outcome of writ petition decision of Hon’ble High Court. The money collected has to be paid to Port Trust or refund to the customers as per decision of High Court. The amount collected pertaining to period from 06.07.1994 to 22.11.2000 and liability is reflected in the Books of Accounts. The firm has disclosed in its Audited Books of Accounts and there is no cessation of liability u/s.41(1) of the Act and cannot be treated as income.

ITA Nos.2209/10 & 93/11 :- 20 -:

11.4 Contra, the ld. Departmental Representative relied on the orders of the Commissioner of Income Tax (Appeals) and vehemently argued on this ground.

11.5 After hearing the rival submissions on this issue and Judicial Decisions and Jurisdictional High Court Writ Petition, the fact that the assessee has collected storage charges as per the directions and due to High Court stay in Writ Petition the amount could not be refunded and the outcome of the Writ Petition is pending and there is a liability falling on the assessee firm to discharge. We are of the opinion on the current circumstances, the assessee shall be allowed deduction on payments based on the outcome of the High Court decision and so far as this assessment year is concerned, we do not interfere with the Commissioner of Income Tax (Appeals) findings on this ground, and accordingly uphold the order of the Commissioner of Income Tax (Appeals). The ground raised by the assessee is dismissed.

ITA Nos.2209/10 & 93/11 :- 21 -:

12.1 The Assessing Officer upon verification found that due to reimbursement of expenditure there is difference of reconciliation for various reasons and the receipts. The ld. Authorised Representative submitted that the nature of reimbursement and cannot be charged in the hands of the assessee firm and but ld. Assessing Officer made a disallowance.

12.2 In the appellate proceedings, the Commissioner of Income Tax (Appeals) has considered the submissions of ld. Authorised Representative and confirmed the orders of the Assessing Officer.

12.3 Before us, the ld. Authorised Representative submitted that reimbursement of expenditure is not an income chargeable in the hands of the assessee firm as such expenditure was incurred on behalf of the clients and purely it is a principle to principle and no profit element is involved.

12.4 On the other hand, the ld. Departmental Representative relied on the orders of the lower authorities.

12.5 After hearing the rival submissions, we are of the opinion that the matter needs to be examined and reimbursement does not ITA Nos.2209/10 & 93/11 :- 22 -: take the character of income. Therefore, we set aside the order and direct the Assessing Officer to consider the issue in dispute after reconciliation and pass orders and allow the appeal of the assessee for statistical purpose.

Order pronounced on Thursday, the 11th day of February, 2016, at Chennai.