I.T.O WD - 4(2),KOLKATA, KOLKATA vs. M/S MARCOPOLO PRODUCTS PVT LTD, KOLKATA

The brief facts of the case are that the assessee is a company engaged in the business of tea, plastic & silicon rubber products along with also involved in loans and investments. The return of income was filed disclosing the total income of Rs.27,82,963/- on 29-09-2009. Notices under section 143(2) and 142(1) of the Act issued and in response to such notices, the Ld.AR appeared filed various relevant details before the AO.

During the assessment proceedings, the AO found that the assessee has paid an amount of Rs.45 lakhs in cash towards insurance premium for its three directors having coverage for five years and the sum assured being 75 lakhs. The assessee submitted that its policy to protect the company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death. AO added Rs. 45 laks to the total income of the assessee for non explanation of how the services of the said directors are being utilized for the benefit of business and thereto earn profits and for not following principle of “key man policy”. The CIT-A, in first appeal, was of the view that it is assessee’s decision as to who is the key man to be protected against any risk and found satisfied by the educational qualifications of such directors being studied in USA in MS Plastics and PhD thereafter and having several years of experience in marketing and business development. The CIT-A relied on the case law of Bilaspur Bench of Tribunal and Hon’ble Bombay High Court and held that the key man’s insurance premium is as an allowable business deduction, thereby, directed the AO to allow the deduction.

In support of the ground no-1 raised by the revenue the learned DR relied on A.O.’s order. The learned AR submits that the insurance premium under keyman policy paid for five years and it is taxable on maturity and relied on the CIT-A order.

Heard both parties, perused the relevant material on record and carefully considered the judgement of Hon’ble High of Bombay. It is noticed from the order of CIT-A that it has taken into consideration the clarification issued by the CBDT vide its circular No.762 dated 18-2-1998 where in it is categorically explained at paragraph 14.1 that the insurance premium towards directors under key man policy is an allowable deduction. It is observed the Hon’ble Bombay High Court while deciding the similar issue under consideration taken into account a clarification issued by the CBDT.

The Hon’ble HIGH COURT OF BOMBAY in the case of COMMISSIONER OF INCOME TAX vs. B.N. EXPORTS reported in 323 ITR 0178 where the Revenue therein raised a question of law before the Hon’ble High Court as to Whether on the facts and circumstances of the case and in law, the Tribunal was justified in confirming the order of the CIT(A) deleting the addition of Rs. 31,68,775 being insurance premium paid by the assessee firm on a keyman insurance policy ?" The relevant portion of which is reproduced herein below:

In first appeal, the assessee contended that there is no limitation for a private limited company to pay remuneration out of its net profit. The assessee also submitted that said director is based in Pune exclusively dealing with Tata Motors for the benefit of assessee and he raised business with Tata Motors worth Rs.614.86lakhs and relied on the case laws. The CIT-A examined the details of the said Director Sri Sunil Kumar Jain and found that he studied in U.S.A. and has vast 5 experience of business development with variety of industries. Having found his gross total income of Rs.73,68,380/- for assessment year 2009-10 and payment of income tax of Rs.23,84,897/- held that he is a full- time working director does not falls in terms of section 40 A(2)(a) of the Act and deleted the adhoc disallowance of Rs.10,00,000/-.

The learned DR relied on the order of AO. The learned AR relied on the order of CIT-A .

Heard both parties and perused the relevant material on record. The question before us is as to whether the CIT-A is justified in holding the disallowance u/s 40A(2)(a) as unsustainable. For the sake of better understanding let us examine the said provision

Ground no.3 relating to disallowance of expenditure incurred towards club memberships.

We may refer to the provision of Section 37 which is reproduced herein below for the benefit of better understanding of the same in the context of case on hand 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

The bare reading of the above suggests that in order to qualify or the true test for qualification of expenditure under s. 37 of the Act is that it should be incurred 7 wholly and exclusively for the purposes of business and the expenditure should not be towards capital account.

The Hon’ble HIGH COURT OF DELHI in the case of COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD reported in 326 ITR 0425, the facts involved therein was that the assessee has paid corporate membership fee to Indian Habitat Centre and Sports & Cultural Club, Noida amounting to Rs. 5 lakhs and Rs. 1 lakh respectively. The AO disallowed the expenditure as it does not bear any nexus with the business carried on by the assessee and the CIT(A), on appeal, directed the AO to disallow 20% of Rs. 6 lakhs and allow the balance amount as revenue expenditure on the ground that the entire expenditure was not incurred for business purposes. The Tribunal concluded that since membership allowed the employees to interact with its customers and the expenses were for business purposes. The Hon’ble High Court held as follows:

In the instant case, the expenditure paid to various clubs, thus, in the light of aforesaid decision, is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise. Applying the principle laid down above, we hold that expenditure amount paid to various clubs is an expenditure incurred wholly and exclusively for the purposes of business of the assessee.

The MUMBAI 'B’ BENCH of ITAT in the case of DEPUTY COMMISSIONER OF INCOME TAX vs. BANK OF AMERICA SECURITIES (INDIA) (P) LTD reported in (2011) 136 TTJ 0441, the facts involved therein was that the assessee has made payment of entrance fee to a club namely Bombay Gymkhana amounting to Rs. 16 lacs. The AO disallowed Rs. 16 lacs as capital outlay and added to the income of the assessee. The CIT(A) deleted the addition of Rs. 16 lacs made by the AO being entrance fee to Bombay Gymkhana Club. The relevant portions of Tribunal’s order as follows:

Respectfully following the above decisions of the Hon’ble jurisdictional High Court and the Tribunal in the assessee’s own case and for the reasons as mentioned in para 5.3 in the case of Samtel Color Ltd. (supra), we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise and accordingly we are inclined to uphold the finding of the learned CIT(A) in deleting the disallowance of Rs. 16 lacs made by the AO. The grounds taken by the Revenue are, therefore, rejected.

In the present case, the assessee contended that the expenditure paid to club and did not bring into existence an asset or advantage for the enduring benefit of the business of assessee to treat the same as capital expenditure. The club expenditure, it only facilitates smooth and efficient running of a business of the assessee. Therefore, we hold that the ratio of the aforesaid case law is applicable to the present case and the club expenditure paid for staff is an allowable expenditure.

In the light of above, respectably following the above, we dismiss the ground no-3 raised by the appellant Revenue.

Let us take up the cross objection filed by the assessee in CO 100/KOL/2013 where in the learner AR submitted that the assessee is not interested to prosecute ground no.1 and sought to dismiss the same as not-pressed accordingly ground no.1 is dismissed as not-pressed.

The assessee raised the following grounds in cross objection:

That on the facts and in the circumstances of the case, Ld. CIT(A) is wrong in confirming the action of Assessing Officer who considered liability of Rs.43,571/- towards Sundry Creditors as deemed income U/s. 41(1) of IT Act, 1961.

Ground no.2 relating to the addition of amount of Rs.43,571/- on account of cesstion of the liability u/s 41(1) of the Act. The AO found that the amount as indicated above has remained as unclaimed by creditors for a considerable period of time. For not offering proper explaination the A.O. added the amount to the total income of the assessee. Before the CIT-A the assessee contended that the addition made by the A.O. is not sustainable in the absence of any concrete proof that the suppliers given up their claim. The CIT-A was of the view that the onus is on assessee to establish that the liability is still existing having failed so confirmed the addition by the A.O. Before us, the learned AR submitted that the said issue is covered by order of B bench, Kolkata Tribunal in ITA1345/KOL/2011 for assessment year 2008-09 .

In the present case, the contention of the assessee was that the addition made by the A.O. is not sustainable in the absence of any concrete proof that the suppliers given up their claim. The observation of the Tribunal was that in the aforesaid decision Section 41 (1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present the AO noted that the assessee admitted that the amount of Rs.43,571/- has remained as unclaimed by creditors for a considerable period of time. Therefore the fact remains undisputed that the liability carried forward for many years and there was no cessation or remission in the case on hand. As held by the Tribunal supra there are two conditions are to be fulfilled in order to attract provisions of Section 41 (1) of the Act, i.e cessation or remission and it should be of previous year and that those two conditions were missing in this case under consideration. In our view, the order of Tribunal supra is applicable to the facts and circumstances of the case and we hold that application of Section 41 (1) of the Act is not applicable and addition made thereon is bad under law, accordingly, ground no-2 raised by the assessee is allowed.

In the result, the appeal of the Revenue is dismissed and the Cross Objection of the assessee is partly allowed.