HUF cannot be a partner in firm but it is competent to the manager or karta acti

 

HUF cannot be a partner in firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership

Coal India Ltd. & Anr. Vs Continental & Eastern Agencies (Delhi HC)

In the case reported as (1967) 66 ITR 613 (SC) Ram Laxman Sugar Mills v,Commissioner of Income-Tax, U.P. & Ors. the Hon'ble Supreme Court has categorically held that it is open to the manager of a joint Hindu Family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person and by the partnership agreement no members of family, except the manager acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners.

The authority relied upon by the learned counsel for the appellants in the case reported as (1998) 2 SCC 49 Rashiklal & Co.V.Commissioner of Income Tax is not helpful to him. In this case R, the karta of a HUF, was a partner in a firm which was carrying on, inter alia, the business of mining. The Honble Supreme Court observed that a firm is a compendious way of describing the individuals constituting the firm. An HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. It further observed that if a karta or any other member of the HUF joins a partnership, he can do so only as an individual. His rights and obligations vis-à-vis other partners are determined by the Partnership Act and not by Hindu Law. Whatever may be the relationship between an HUF and its nominee partner, in a partnership, neither the HUF nor any member of the HUF can claim to be a partner or connected with the partnership through a nominee.

From the judgments cited above it stands established that an HUF as such cannot be a partner in a firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the karta of another family.

In the present case Mr.V.P.Verma had joined partnership with the respondent-firm as karta of HUF and there was no bar on him to join the partnership as karta of HUF.

HIGH COURT OF DELHI

Judgment delivered on: 14thDecember, 2011

RFA (OS)37/2003

COAL INDIA LTD. & ANR.

versus

CONTINENTAL & EASTERN AGENCIES

1. Appellants have filed the present appeal against the Judgment and decree dated 20.5.2003 passed by learned Single Judge whereby suit for recovery of Rs. 5,89,434/- filed by the respondent was decreed for a sum of Rs. 2,92,977.46 paisa only.

2. The respondent filed the suit for recovery of Rs. 5,89,434/- towards agent commission against the appellants claiming himself to be an agency of defendant No.3 (in the suit) an Italian Company, in India. Appellants floated a global tender for purchase of two hydraulic Crankshaft Grinding Machines on 24.09.1986. Respondent gave an offer dated 22.09.1986 for two machines. Earlier the respondent had supplied four similar machines to the appellants vide their order dated 05.02.1985. Later on the appellants sought some clarifications and amendment in terms if four machines were purchased instead of two.

3. The respondent had offered in the original offer that Agency commission would be 15% of FOB value of order. By letter dated 07.03.1987, respondent offered discount of 5% on commission if entire order was placed on him and 100% commission was paid on receipt of shipping documents.

4. Appellants wrote letter dated 10.08.1987 to the respondent that the requirement was raised to four Grinder Machines and the respondent should submit reduced price bid accordingly.

5. Respondent vide letter dated 14.08/1987 did the needful and informed the appellants that the price of machine would be the same and be multiplied by four in place of two and discount of 5% on agency commission of 15% would be valid if (i) entire order is placed on the respondent and (ii) 100% agency commission released on presentation of shipping documents. Vide letter dated 09.11.1987, defendant No.3 in the suit, informed the appellants that respondent would not accept any amount less than already offered by them as their work involved lot of expenditure.

6. Further case of the respondent before the learned Single Judge was that the appellants thereupon placed order dated 25.04.1988 addressed to defendant No.3 on the respondent at Delhi who in turn forwarded it to defendant No.3 in Italy only for two machines. An amendment dated 06.0.1985 was issued by appellants to this letter. In the order placed, appellants unilaterally reduced the commission payable to the respondent from 15% to 10% of FOB value, even though discount of 5% was offered only as to quantity discount on four machines and was not applicable to two machines only. Respondent protested against this unilateral action of the appellants as the appellants never consented to 5% discount for only two machines. By letter dated 17.05.1988 the respondent accepted the order at Delhi with the exception of the discount clause.

7. The appellants did not issue any amendment but acted on the respondent‟s letter allowing 5% discount and established Letter of Credit in favour of defendant No.3 in the suit. Two machines were shipped on 09.01.1989 by the foreign seller. The complete machinery was received by the appellants at site on or before 30.08.1989. The respondent repeatedly wrote to the appellants asking for readiness of site to enable him to commission the machine. Since there was no response, he served legal notice dated 08.04.1989 on the appellants demanding 15% commission.

8. The appellants contested the suit and pleaded that the respondent vide letter dated 22.09.1986 had offered to allow discount of 5% on the FOB price on placement of order for two machines. The appellants had specifically stated in the order dated 25.04.1988 the terms of the discount. There was no such condition that the said discount would be payable only if four machines were purchased. It was specifically mentioned to the respondent that agency commission would be payable after commissioning was completed by the respondent. Since the respondent had failed to commission the machines in time there was no occasion for the appellants to release 100% agency commission to him. In fact the appellants have been put to heavy losses because of the non-commissioning of the machines. The respondent was not entitled to any commission because he failed to perform his part of the contract.

9. Following issues were framed by the learned Trial Court on the basis of the pleadings of the parties:

(1) Whether this Court has the territorial jurisdiction to try and entertain the suit? OPP

(2) Whether the plaint has been instituted, signed and verified by a duly authorized person? OPP

(3) Whether the plaintiff is entitled to receive `4,39,466.20 being 15% agency commission or any lesser amount? OPP

(4) Whether the plaintiff is entitled to interest on `4,39,466.20 or any lesser amount and if so at what rate and period thereof? OPP

(5) Whether the plaintiff agreed to give discount of 5% and charge 10% commission payable after commissioning of machine? OPP

(6) Whether the discount of 5% was available only on conditions set out in the plaintiff‟s letter 07.03.1987 and 14.08.1987 being fulfilled? OPP

(7) Whether the plaintiff is not entitled to any commission due to its breaches and failure to perform its obligations as set out in para 3(c ) of the preliminary objection and 23 and 24 of the written statement on merits? OPP

(8) Whether the defendant Nos. 1 and 2 had the site ready for installation of the equipment/machinery in terms of amendment to the contract dated 06.05.1988? OPP

(9) Relief.

10. On recording evidence of the parties and considering the rival contentions, the learned Single Judge passed the impugned judgment and decree dated 20.05.2003. The learned Single Judge while deciding issue No.2 regarding maintainability of the suit filed by the respondent returned the findings that Mr.V.P.Verma had the authority to sign, verify and institute the suit.

11. Aggrieved by the said orders the appellants have come up in the present appeal.

12. Relevant issue for disposal of appeal before us is issue No.2 as during the course of arguments, the learned counsel for the appellants restricted his arguments only on two aspects i.e. the suit filed by the respondent was barred under Section 69(2) of Partnership Act alleging that the respondent was not a registered partnership firm on the date of filing of the suit. Secondly Mr.V.P.Verma who had instituted the suit on behalf of the respondent was not a partner in the said firm on the date of institution of the suit and also was not authorised to institute, sign and verify the plaint.

13. Contention of the learned counsel for the appellants is that the respondent failed to adduce any evidence on record before the court that the respondent-firm was a registered partnership firm on the date of institution of the suit and thus under Section 69(2) of the Partnership Act, it had no authority to institute the suit. The respondent did not file on record any document to show if Mr.V.P.Verma was a partner in the respondent-firm on the date of institution of the suit or that he was duly authorised to file the suit on behalf of the respondent firm. It was further urged that Ex.P-6, certificate of registration, filed on record by the respondent before the learned Single Judge did not depict Mr.V.P.Verma as a partner in the respondent-firm in his individual capacity. He has been shown as a partner only as „karta‟ of Hindu Undivided Family (HUF). Under Hindu Law a karta of HUF cannot enter into a partnership with any other association of persons.

14. Learned counsel for the appellants further pleaded that adverse inference is to be drawn against the respondent for not filing Form „A‟ along with plaint to show that Mr.V.P.Verma was a partner in the respondent-firm on the date of institution of the suit.

15. Learned counsel for the respondent has controverted all these arguments and has vehemently put reliance on Ex.P-6 whereof there is specific mention that Mr.V.P.Verma was a partner in the respondent-firm.

16. In the plaint filed in Court on 26.5.1993 the respondent-firm specifically pleaded that respondent-M/s Continental Eastern Agencies was a registered partnership firm and Mr.V.P.Verma was duly authorised and competent to file and prosecute the suit for and on behalf of the respondent-firm and to sign and verify the pleadings, swear affidavits, engage counsel and to do acts necessary and incidental to the filing of the suit. In the written statement the respondent merely denied this assertion of the appellants and simply pleaded that the plaint has not been instituted, signed and verified by an authorised person and the respondent-firm was not registered partnership firm. It also denied that Mr.V.P.Verma was authorised and competent to file and prosecute the suit. No reasons were disclosed by the appellants as to how Mr.V.P.Verma was not authorised or competent to file and prosecute the suit. Respondent did not specifically plead that Mr.V.P.Verma was not a partner in the respondent-firm and had no authority to file the suit.

17. The burden to prove issue No.2 was upon the respondent and the respondent examined Mr.Ved Prakash Verma to prove its case. In his evidence filed by way of affidavit Mr.Ved Prakash Verma testified on oath that respondent was a registered partnership firm and he was duly authorised and competent to file the suit for and on behalf of the respondent and to sign and verify the pleadings and to do all acts necessary and incidental thereto. He further testified that the form-A of certificate of registration (Ex.P-6) showed that the respondent was duly registered under the Indian Partnership Act and that he was a partner therein. Thus Mr.Ved Prakash Verma categorically claimed the respondent-firm to be a registered partnership firm and he being one of its partners. In the cross-examination, the witness reiterated that he was partner in the respondent-firm from 1973 till 30.11.1999. He further stated that it was not true that he was not a partner in the respondent-firm on the date of institution of the suit. He admitted that he was partner in the respondent- firm as the karta of HUF. He admitted it to be true that on the date of institution of the suit in his personal capacity, he was not a partner in the respondent-firm. He denied that he was not authorised to sign and verify the plaint and institute the suit on behalf of the respondent-firm.

18. Overall testimony of this evidence read as a whole shows that the witness categorically claimed himself to be a partner as karta of HUF in the respondent-firm. The appellants merely put suggestion to the witness in the cross-examination controverting these assertions. Nothing was suggested to this witness in the cross-examination if respondent-firm was not a registered partnership firm or that it had not continued its existence since the date of registration till the date of issuance of certificate of registration Ex.P-6. This witness specifically pleaded that he remained a partner in the respondent-firm till 30.11.1999. Nothing was suggested to this witness if he had ceased to be a partner on any specific date in the respondent-firm prior to the registration of the present suit.

19. Appellants examined one witness Mr.G.Chaudhary who also filed his evidence by way of affidavit. On perusal of affidavit filed on record by the sole witness of the appellants, it reveals that at nowhere he testified that the respondent was not a registered partnership firm or that Mr.V.P.Verma was not a partner in the said firm on the date of filing of the suit. This witness did not utter a word if Mr.V.P.Verma was not authorised to file the suit or to sign and verify the pleadings on behalf of the respondent-firm. Virtually there is no counter evidence adduced on record by the appellants to falsify the claim of Mr.V.P.Verma recording his status in the respondent-firm.

20. We have gone through Ex.P-6 (form-A) issued by Registrar of Firms under Section 69 of the Indian Partnership Act.

21. This document Ex.P-6 shows the date of registration of the respondent firm on 08.12.1986. Among others Mr.Ved Prakash Verma has been shown a partner as Karta (HUF). This document Ex.P-6 is a certified copy issued by the Registrar of Firms, Delhi on 18.06.1993. It does not contain if after registration of the firm on 08.12.1986 Mr.Ved Prakash Verma has ceased to be a partner in the respondent-firm at any time. There is mention of one Mr.Ashok Verma who was admitted as partner in the respondent-firm on 08.04.1991 vide notice dated 30.04.1991. It shows that whenever there was a change in the constitution of the respondent-firm, the said change was duly recorded with the Registrar of firms and the Registrar in turn carried out the changes in the form-A (Ex.P-6). No contrary evidence has been filed on record by the respondent to show that Mr.V.P.Verma had ceased to be a partner at any stage in the respondent-firm.

22. The present suit was filed on 26.5.1993. The certified copy Ex.P-6 showing the names of the partners has been issued on 18.06.1993. There is no substance in the plea of the learned counsel for the appellants that on the date of institution of the present suit Mr.V.P.Verma was not a partner in the respondent-firm. Under Section 69(2) of the Partnership Act there is no condition precedent where the respondent firm was under legal obligation to file on record the certified copy of Form-A along with plaint. The only requirement under the partnership Act is that the person filing the suit must be a partner as shown in Form-A of the Registrar of firm on the date of institution of the suit. Merely because Ex.P-6 was obtained after the filing of the suit, it did not affect the status of respondent-firm as on 26.5.1993. There is nothing unusual to get certified copy after some days of its applying for the same. Since the name of Mr.V.P.Verma finds mention as partner in the Form-A the certified copy of which has been issued on 18.06.1993, in the absence of any evidence to the contrary, it can safely be held that Mr.V.P.Verma was a partner in the respondent firm on the date of filing of the present suit and had continued to be a partner.

23. We do not subscribe to the argument of the learned counsel for the appellants that Mr.V.P.Verma was not authorised to file the present suit. Admittedly number of letters on record were exchanged between the parties during negotiation of contract. In all these documents Mr.V.P.Verma had correspondence with the appellants claiming himself to be a partner of the respondent-firm. At no stage the appellants challenged the authority of Mr.V.P.Verma to act on behalf of respondent-firm as its partner.

24. There is no substance in the plea of learned counsel for the appellants that Mr.V.P.Verma as karta of HUF could not have entered into any partnership with the respondent firm.

25. In the case of Commissioner of Income Tax, MP v.Sir Hukamchand Mannalal & Co. 1970 (2) SCC 352, which contains observation in Mayne‟s Hindu Law (9th Edition) at P.398 to the following effect:

"Where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act, in such a case the family as a unit does not become partner but only such of its members has in fact enter into a contractual relation with the strangers, the partnership will be governed by the Act."

26. In the case reported as (1967) 66 ITR 613 (SC) Ram Laxman Sugar Mills v,Commissioner of Income-Tax, U.P. & Ors. the Hon'ble Supreme Court has categorically held that it is open to the manager of a joint Hindu Family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person and by the partnership agreement no members of family, except the manager acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners.

27. The authority relied upon by the learned counsel for the appellants in the case reported as (1998) 2 SCC 49 Rashiklal & Co.V.Commissioner of Income Tax is not helpful to him. In this case R, the karta of a HUF, was a partner in a firm which was carrying on, inter alia, the business of mining. The Honble Supreme Court observed that a firm is a compendious way of describing the individuals constituting the firm. An HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. It further observed that if a karta or any other member of the HUF joins a partnership, he can do so only as an individual. His rights and obligations vis-à-vis other partners are determined by the Partnership Act and not by Hindu Law. Whatever may be the relationship between an HUF and its nominee partner, in a partnership, neither the HUF nor any member of the HUF can claim to be a partner or connected with the partnership through a nominee.

28. From the judgments cited above it stands established that an HUF as such cannot be a partner in a firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the karta of another family.

29. In the present case Mr.V.P.Verma had joined partnership with the respondent-firm as karta of HUF and there was no bar on him to join the partnership as karta of HUF.

30. Thus there is no substance in the arguments of the appellants that the suit filed by the respondent-firm is barred under Section 69(2) of Partnership Act or that Mr.V.P.Verma was not duly authorized to file, sign and verify the pleadings.

31. As observed above, that learned counsel for the appellants did not opt to challenge the findings of the learned trial court on other issues.

32. We find no merit in the appeal filed by the appellants and the same is dismissed.

33. No order as to costs.

S. 72: Gains arising from “business assets” not eligible for set-off against B/fd business loss

S. 72: Gains arising from “business assets” not eligible for set-off against B/fd business loss


The assessee sold land & building used for business purposes. Though the gain was offered as capital gains, the assessee claimed, relying on Cocanada Radhaswami Bank Ltd 57 ITR 306 (SC) and other judgements, that as the assets were “business assets”, the gains there from were eligible for set-off against the brought forward business loss u/s 72. The issue was referred to a Special Bench. HELD by the Special Bench against the assessee:

S. 72 (1) allows brought forward business loss to be set-off against the “profits & gains of any business or profession” of the subsequent year. The expression “profits & gains of business” means income earned out of business carried on by the assessee and not just income connected in some way to the business or profession carried on by the assessee. The land & building were fixed & capital assets used by the assessee for its business purposes. The gains arising there from were assessable as capital gains and were not eligible for set-off against the brought forward business loss u/s 72 (Express Newspapers 53 ITR 250 (SC) followed; Cocanada Radhaswami Bank 55 ITR 17(SC) distinguished; Steelcon Industries reversed)

Transfer fees ***mutuality ?

 

INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.5027/Mum/2010 – (Assessment Year: 2005-06)
Twinstar Jupiter Co-op. Hsg. Soc. Ltd.
Vs
ITO -12(2)(4)
Date of Pronouncement: 19.08.2011
O R D E R
PER R.S. PADVEKAR, JM:
In this appeal the assessee has challenged the impugned order of the Ld. CIT (A)-23, Mumbai dated 18.03.2010 for the A.Y. 2005-06.

2. In this case the assessee has filed an application for adjournment but same was rejected as apparently it was seen that the issues arising from the appeal are covered and hence, this appeal is disposed off after hearing the Ld. D.R.

3. The first issue is in respect of the addition of Rs. 3,50,000/- towards transfer fees received from the outgoing Members of the assessee-society.

4. The facts which revealed from the record are as under. The assessee is Co-operative Housing Society. The return filed by the assessee was selected for scrutiny and assessment was completed u/s.143(3). It was also noticed by the A.O. that the assessee has collected Rs. 7,50,000/- towards voluntary contribution on transfer of flats received from the outgoing Members and the aid amount was credited to the general reserves in the Balance-sheet and claimed exemption relying on the principles of mutuality. The A.O. had noted that as per the agreement with Members and purchasers of the flats, the transfer fee is to be borne 50-50%. The A.O., therefore, made the addition of Rs. 3,75,000/- that was in respect of the contribution fee received from the purchasers of the flat i.e. transferee. The assessee challenged the said addition before the Ld. CIT (A). The Ld. CIT (A) was not convinced with the plea of the assessee that though the assessee was relied on the decision of the Hon'ble jurisdictional High Court in the case of Sindh CHS Ltd. 317 ITR 47(Bom). In view of the Ld. CIT (A) the decision in the case of Sindh CHS Ltd.(supra) is not applicable to the assessee's case. The Ld. CIT (A) further observed that up to limit only, the transfer fee is exempt within the framework of the bye-laws. The Ld. CIT (A) further observes that the Hon'ble High Court has not considered the applicability of a Notification issued by the Govt. of Maharashtra as the assessment order in the said case was prior to the date of the Government notification dated 9.08.2001. He, therefore, held that upto the limit of Rs. 25,000/- received per transfer is deleted and any excess of Rs. 25,000/- the same is confirmed. Now, the assessee is in appeal before us.

5. The short controversy is rowing around whether the transfer fee received from the incoming Members is exempt on the principles of mutuality in the case of co-operative housing societies.

6. In the case of Sindh CHS Ltd (supra) the Hon'ble High Court made it clear that in the said case the bye-laws provide that the amount has to be paid by the transferor Member. In the present case, nowhere it is the case of the A.O. that there is a provision that only the transferor has to bear the amount of the transfer fees. We, further, find that nowhere it is the case of the A.O. that no commerciality is involved in the objects or activities of the assessee society as the assessee has credited the amount to the general reserve funds to be used for the repairs and maintenance of the society. Their Lordships have also considered the Notification given by the Government of Maharashtra and the reference made is to only to extent of argument of the parties to the on Govt notification dated 9.8.2001. As per the notification dated 10.12.1989 if the bye-laws are amended then only the society could not charge what was set out in the notification.

7. In the present case, ultimately, the transfer fee received from the Members has merged with the common pull of funds and there is no commercial motive. In our opinion, assessee's case is squarely covered by Sindh CHS Ltd. (supra). We, accordingly decide this issue in favour of the assessee and direct the A.O. to delete the entire addition. Accordingly, first issue in this appeal is allowed.

8. The next issue is regarding addition towards the penal interest of Rs. 35,000/-.

9. We find that the penal interest is collected from its Members only on account of delay in payment of the dues of the society. In our opinion, the said addition cannot be sustained as it is covered on the principles of mutuality and as per the ration laid down in the case of Sindh CHS Ltd. (supra). We accordingly, delete the same.

10. In the result, assessee's appeal is allowed.

Order pronounced in the open court on this day of 19th August 2011.

Transfer Pricing: Important Principles on scope, data & comparability set out

 

Genisys Integrating Systems vs. DCIT (ITAT Bangalore)

Transfer Pricing: Important Principles on scope, data & comparability set out

In a transfer pricing matter, the Tribunal had to consider the following issues (i) whether transfer pricing adjustments have to be restricted to AE transactions only, (ii) whether a turnover filter can be applied and only companies with turnover within the range can be considered for comparison; (iii) whether the TPO is entitled to collect information u/s 133(6) for determining the ALP or he is confined to data available in public domain on the specified date, (iv) Whether the +/-5% adjustment is a "standard deduction", (v) whether an adjustment to the ALP can be made for "low capacity utilization"? HELD by the Tribunal:

(i) Under Chapter X, only international transactions between AEs are required to be computed having regard to the ALP. Accordingly, the transfer pricing adjustments have to be restricted to the AE transactions by adopting the operating revenue and operating costs of only those transactions (Starlite 133 TTJ 425 (Mum) followed);

(ii) Though the Act & Rules does not provide for a turnover filter, there has to be an upper and lower limit because size does matter in business. A big company is in a position to bargain the price and attract more customers. It also has a broad base of skilled employees who are able to give better output. A small company may not have these benefits and the turnover would come down reducing profit margin. When are loss making companies are excluded from comparables, super-profit making companies should also be excluded. A reasonable classification of companies on the basis of net sales or turnover has to be made (Sony India 114 ITD 448 (Del), Indo American Jewellery 41 SOT 1 (Mum) & Philips Software 26 SOT 226 followed);

(iii) While Rule 10D(4) requires that the information should be "contemporaneous" and exist latest by the "specified date", there is no "cut-off date" upto which only the information available in public domain can be considered by the TPO. Even data that becomes available in the public domain after the specified date can be considered. If the TPO collects information u/s 133(6), he is not required to inform the assessee about the process used by him nor is he required to furnish the entire information to the assessee. However, the assessee must be given proper hearing if any information is proposed to be used against it;

(iv) The +/-5% adjustment is a "standard deduction" and not merely the range within which if the ALP falls that the ALP of the assessee is required to be accepted (Philips Software 26 SOT 226, Development Consultants 23 SOT 455 followed)

(v) All comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure.

__,_._,___

Purchase from grey market

 

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F", MUMBAI
BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI J. SUDHAKAR REDDY (A.M.)
ITA No. 3541 to 3144/Mum/2007
Assessment Years : 2001-02 to 2004-05
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
Vs.
Dy. Commissioner of IncomeTax, Central Circle -7,
Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
(Appellant) (Respondent)
ITA No. 3661 & 3662/Mum/2007
Assessment Years : 2002-03 & 2003-04
Dy. Commissioner of IncomeTax, Central Circle -7,
8th
floor, Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
Vs.
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
(Appellant) (Respondent)

O R D E R
PER D.K. AGARWAL, J.M.
These appeals by the assessee and Revenue are directed against
separate orders all dated 28.2.2007 passed by the ld. CIT(A) for A.Ys.
2001-02, 2002-03, 2003-04 and 2004-05. Since the facts are identical
and the issues involved are common, all these appeals were heard ITA No.3541 to 3244/M/07 & 2661 to
3662/M/07, M/s Free India Assurance Services Ltd.

together and are disposed of by this common order for the sake of

convenience.

ITA No. 3541/Mum/2007 for A.Y. 2001-02(Assessee's appeal)

2. Briefly stated facts of the case are that the assessee company is engaged in the business of multi level marketing under the name and style of Free India Concepts. A search and seizure action u/s 132 of the Income Tax Act, 1961 (the Act) was carried out on 25.6.2003. In response to notice u/s 153A, the assessee filed return declaring total income of ` 9,55,310/- for the A.Y. 2001-02. During the course of assessment proceeding, the A.O. observed that in the search, blank/written or unused vouchers for Diwali bonus, conveyance and unused bills of various restaurants were found and seized. The assessee was asked to explain as to why the expenses under these heads should not be disallowed on estimate basis. In reply, it was, inter alia, stated by the assessee that vouchers found were blank or unused which clearly shows that these vouchers were not used for booking of any expenses in the books of account. All these expenses were debited in the books of account and claimed in the P&L A/c are the genuine business expenses, hence, no disallowance on estimate basis can be made. However, the A.O. was of the view that the onus of proving that these vouchers had not been used for claiming bogus expenses was on the assessee which the assessee has clearly failed, therefore, he disallowed 20% of the expenses which have been debited under the head conveyance and staff welfare to P&L account by way of inflation by making use of the blank signed bills kept in the premises as and when it required. Thus he has estimated the disallowance at 20% of the each year as under (Page 3 of the assessment order) :-

3              Details A.Y. 01-02 A.Y. 02-03 A.Y. 03-04 A.Y. 04-05

Conveyance 7,21,955 12,25,457 14,48,312 11,25,033

Staff welfare 3,31,084 6,29,415 5,76,599 6,67,805

Total 10,53,039 18,54,872 20,24,911 17,92,838

¼ for A.Y.2004-05

from Apr to Jun 2005 4,48,210

20% of the above 2,10,608 3,70,974 4,04,982 1,12,052

Thus, for this A.Y. the A.O. disallowed ` 2,10,608/- being 20% of `10,53,039/-. On appeal, the ld. CIT(A) while agreeing with the views of the A.O., upheld the disallowance made by the A.O.

3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us challenging in both the grounds the sustenance of disallowance of 20% out of conveyance and staff welfare expenses disallowed ` 2,10,608/-.

4. At the time of hearing, the learned counsel or the assessee while referring to the comparative chart of staff welfare and conveyance expenses in proportion to gross income and net income for the A.Ys. 2001-02, 2002-03, 2003-04 and 2004-05 appearing at page No. 107 of the assessee's paper book submits that in view of the percentage of the expenses to the gross income, the disallowance made by the A.O. and sustained by the ld. CIT(A) is highly excessive and therefore due relief may be allowed to the assessee.

5. On the other hand, the ld. D.R. supports the order of the A.O. and ld. CIT(A).

6. We have carefully considered the submissions of the rival parties and perused the relevant material available on record. We find that there is no dispute that the assessee has filed month-wise details of staff welfare and conveyance expenses. It is also not in dispute that the said expenses claimed by the assessee are for business purposes. However, in the absence of any material to show that the vouchers which were found at the time of search were not used by the assessee for booking of expenses under the head conveyance and staff welfare, we are of the view that some disallowance is called for. Considering the totality of the facts and circumstances of the case and the percentage of expenses, we are of the view that it would be reasonable to sustain the disallowance at 10% as against 20% made by the A.O. and confirmed by the ld. CIT(A). We hold and order accordingly. The assessee gets a relief of ` 1,05,304/- out of total addition of ` 2,10,608/-. The grounds taken by the assessee aretherefore partly allowed.

ITA NO. 3542/Mum/2007 for A.Y. 2002-03 (Assessee's appeal)

7. Ground No. 1 is against the sustenance of disallowance of expenditure ` 174829/-.

8. At the time of hearing, the ld. counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.

9. That being so and in the absence of any supporting material placed on record by the ld. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.ITA

No.3541 to 3244/M/07 & 2661 to  3662/M/07, M/s Free India Assurance Services Ltd.

10. Ground Nos. 2 & 3 are against sustenance of disallowance of 20% expenses of ` 3,70,974/- out of conveyance and staff welfare expenses.

11. At the time of hearing, both the parties have agreed that the facts of the above issue are similar to the facts of the case for the A.Y. 2001-02, therefore, the plea taken by them in the appeal for the A.Y. 2001-02 may be considered while deciding the above ground of appeal.

12. After carefully hearing the rival submissions and perusing the material available on record and keeping in view of our findings recorded in assessee's appeal for the A.Y. 2001-02 in paragraph No. 6 of this order, we direct the A.O. to restrict the disallowance to 10% as against 20% made by him. In other words, the assessee gets relief of `1,85,487/- out of total disallowance of ` 3,70,974/-. The ground taken by the assessee is, therefore, partly allowed.

13. Ground No. 4 is against the sustenance of disallowance of 20% `6,16,346/- out of cash purchases of ` 30,80,730/- u/s 40A(3) and ground No. 1(ii) in Revenue's appeal in ITA No. 3661/Mum/07 for A.Y. 2002-03 is against the relief allowed by the ld. CIT(A) of ` 24,65,384/- out of total disallowance of bogus purchases ` 30,80,730/-.

14. The facts of the above issue are that the A.O. found from page No. 140 of the seized documents of Annexure A-6 seized from Prime Plaza that the assessee had made purchases amounting to ` 30,80,730/- from Shri Deepak for which the assessee had issued a cheque of `30,80,730/- and in lieu thereof he received cash from Shri Deepak. Therefore, the A.O. issued show cause notice as to why the purchases of ` 30,80,730/- should not be disallowed. The assessee replied vide letter dated 8.3.2000 as under (Para 8 at page 12 of the assessment order) :- "In para 10, reference is made for page No. 140 of Annexure A-6 seized from Prime Plaza. The amount mentioned is ` 30,80,730/-. In the show cause notice, your honour have mentioned that these entries pertains to Deepak but these entries pertain to M/s Hira Cloth Agency and M/s Shreeram Sales & Synthetics which is already explained in the explanation to seized materials. Purchase bills were taken from these parties to cover up the purchase actually made in the grey markets. The cheques were issued to them against which cash was received and this very cash was in turn utilised for the payment of purchases made of fabrics from grey market. This fabric was purchased in the year 2001-02 (AY 2002-03) and was lying in stock as on 31.3.2002. the closing stock as on 31.3.2002 includes this fabric purchased and the amount of closing stock was shown in the trading account on the credit side and against which the expenses under the head purchases were shown on the debit side of the trading account. By showing the closing stock on the credit side and the expense i.e. purchases on the debit side of the trading there remains no effect on the profit of the year under consideration. It goes without saying that there cannot be a closing stock without its corresponding purchases. The effect of both these items considered collectively results into no effect on the taxable income. As such no disallowance is warranted on this count." However, the A.O. did not accept the assessee's explanation. According to the A.O. Shri Ashish Mehta himself accepted in the statement recorded u/s 132(4) on 26.06.2003 that the assessee made certain cheque payments and received the cash back and since assessee had clarified that the purchases were not made from Deepak Enterprises but from the Grey market it was established that the assessee did not purchase material from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. Hence the A.O. concluded that assessee admitted bogus purchases amounting to ` 30,80,730/- from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics and accordingly added the same to the income of the assessee.

15. On appeal, the ld. CIT(A) while observing that as long as the stock is reflected in the books of account, to that extent of fabrics purchased by this firm, credit has to be given to the purchases made by the assessee and since it is an admitted fact that the assessee had made the purchases by way of cash from the Grey market held that the provisions of section 40A(3) are attracted and hence he disallowed ` 6,16,346/- being 20% of purchase of ` 30,80,730/- and thus allowed relief of `24,65,384/-.

16. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) refers to page No. 145 to 152 of the assessee's paper book to show that cheques amounting to ` 15,50,730/- and ` 15,30,000/- aggregating to ` 30,80,730/- were issued to two parties M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics respectively against the purchases of fabrics. He further submits that against the said cheques payments, the assessee received back the amount in cash from the said two parties and purchased the cloth of the same amount from Grey market. He further submits that the said cloth amounting to ` 30,80,730/- is lying in the closing stock as on 31.3.2002 onwards which may be verified from the details of closing stock as on 31.3.2003 appearing at page No. 147 of the assessee's paper book. In the light of the above, he submits that the A.O. was not justified in treating the above purchases as bogus purchases without verifying the fact that the assessee has shown the above purchases in the regular books of account and also shown the same in the closing stock in the regular return filed by the assessee. With regard to the disallowance made by the ld. CIT(A) u/s 40A(3), the ld. Counsel for the assessee submits that during the course of search, no such material was found to show that the assessee has made cash payments more than ` 20,000/- or the assessee has violated the provisions of section 40A(3).

8         therefore, the ld. CIT(A) was not justified in invoking the provisions of section 40A(3) and in making the disallowance of ` 6,16,346/- being 20% of the above purchases of ` 30,80,730/-. In support the reliance was also placed on the following decisions:-

1) Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune)

2) Western India Bakers (P) Ltd. V. DCIT [2003] 87 ITD 607 (Mum)

3) Sharma Associates v. ACIT (1996) 217 ITR (AT) page 1

He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

17. On the other hand, the ld. D.R. while relying on the order of the A.O. submits that the assessee has placed no material on record to show that the assessee has not made bogus purchases of ` 30,80,730/- and has made cash payments against the said purchases less than `20,000/-. He, therefore, submits that the A.O. was justified in treating the said purchases of ` 30,80,730/- as bogus purchases and the ld. CIT(A) was not justified in applying the provisions of section 40A(3) in sustaining the addition of ` 6,16,346/-. He, therefore, submits that the addition made by the A.O. be restored.

18. Having carefully heard the submissions of the rival parties and perusing the material available on record, we find that there is no dispute that the assessee has made payments of ` 30,80,730/- by cheques to M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. During the course of search, the statement was also recorded of Shri Ashish Mehta on 20.6.2003 wherein he has stated that against the cheque transactions, cash has been received which is found recorded at page No. 152 of the assessee's paper book. During the course of assessment proceeding, it was stated by the assessee that the said cash, against cheque payments was utilised to purchase cloth from the Grey market and in support, the assessee has also filed details of closing stock as on 31.3.03 appearing at page 143 of the assessee's paper book wherein fabric cloth totalling to ` 30,80,730/- is appearing as closing stock. In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than purchases or the entry recorded in the closing stock amounting to `30,80,730/- is found to be fictitious or false or no such closing stock was found during the course of search, we are of the view that the assessee has made cash purchases of ` 30,80,730/- which undisputedly found recorded in the inventory of closing stock, therefore, the A.O. was not justified in treating the said purchases of ` 30,80,730/- as bogus purchases.

19. As regards the application of provisions of section 40A(3) of the Act, we find that during the course of search, no such material was found to show that the assessee has made cash payments in violation of provisions of section 40A(3) of the Act. Disallowance cannot be made merely on presumption basis that the assessee had made the purchases by way of cash from the Grey market in violation of the provisions of section 40A(3) of the Act.

20. In the case of Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune), it has been held ( Head note – page 86) :- "The provision of section 40A(3) is to be invoked when the department has evidence with itself that the assessee has made payments in cash exceeding the prescribed limits. Disallowance cannot be made merely on a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Hence, the impugned addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was to be deleted."

21. In the case of Western India Bakers (P.) Ltd. V. DCIT [2003] 87 ITD 607 (Mum) it has been held (Head note page No. 609) :-

" When a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. If it is not possible to find out how the violation of the provision was done, addition cannot be made on the basis of inference and surmises. In the instant case, it was not known at what point of time and how assessee violated the provisions of section 40A(3). As such, no addition on that count was warranted. [para 29]."

22. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the aforesaid decisions and for the reasons as discussed above hold that the ld. CIT(A) was not justified in sustaining the addition of ` 6,16,346/- being 20% of total purchase of `30,80,730/- and accordingly we delete the entire addition of `30,80,730/-. The ground taken by the assessee is therefore allowed and the ground taken by the Revenue is dismissed. 23. Ground No. 5 is against the sustenance of addition of ` 19,29,711/- incurred on renovation of office premises.

24. Briefly stated facts of the above issue are that the A.O. found that the assessee had debited ` 19,29,711/- under the head `office renovation expenses' which according to the A.O. to be capital in nature and hence he issued a show cause to the assessee as to why the same should not be disallowed as capital expenditure. The assessee vide its reply dated 8.3.2006 submitted that the assessee's office at Prima Plaza is a rented one. It was taken on leave and license in the financial year 2001-02 and after taking the possession, the company incurred expenses on furnishing the said rented office. Expenses for wooden partitions, cabins, cubicles & desks for staff persons were made and debited under the head office renovation. No additions/alterations to the basic structure of the unit were made nor any new capital assets was created and debited under this head. The assessee also filed details of the said expenses. It was further submitted that the expenses resulted in creation of no fixed assets and the partitions etc. have no realizable value and also are not in the nature of shifting to other places, therefore, the expenses incurred cannot be said to be in the capital nature and needs to be allowed as revenue expenditure. However, the A.O. did not accept the contention of the assessee for the following reasons:-

"(1) The expenditure had been incurred before the assessee started business in its office and these expenses were not of routine nature but of one time expenditure.

(2) The wooden partitions, cabins, cubicles, desks are in the nature of permanent furniture and fixtures for starting the business. The said premises was owned by the Directors of company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta, who had more than 50% of the shares of the company. Therefore, this premises was going to be with the assessee permanently for all practical purposes, thus it has resulted in enduring benefit of the Company. Hence, it is capital in nature.

(3) Once, they are capital in nature, only depreciation is allowable as per provisions of Explanation to Sec. 32(1). Hence, he disallowed the renovation expenditure of ` 19,29,711/- as capital expenditure, but allowed depreciation of ` 96,485/- on the said disallowed amount."

25. On appeal, the ld. CIT(A) while applying Explanation 1 to section 32 of the Act held that the value addition of ` 19,29,711/- to the value of the building taken on lease from the Directors of the company by way of making wooden partitions, creation of office cabins etc. are in the nature of `doing of any work' as improvement to the building as stated in the said Explanation and accordingly he confirmed the disallowance made by the A.O.

26. At the time of hearing, the ld. counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that the assessee had taken office premises on leave and license agreement basis. The description of office premises taken on lease is as under:-

Sr,

No.

Description of premises Monthly

Rent

Area of

Gala

1 Gala No. 105, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

2 Gala No. 106, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

3 Gala No. 107, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

15,000 570 sq.ft.

4 Gala No. 108, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

25,000 560 sq.ft.

He further submits that the assessee has also filed details of the expenses incurred on office renovation appearing at page No. 164 to 166 of the assesse's paper book. The nature of expenses incurred by the assessee in this regard was wooden partitions, cabins, cubicles, desks etc. and no additions/alterations to the basic structure of the unit was  made. He, therefore, submits that all the expenses incurred by the assessee on renovation on leased premises cannot be treated as capital expenditure. Reliance was also placed on the decision in the case of DCIT vs. Smt. Geeta V. Mehta (2008) 26 SOT 455 (Mum). He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

27. On the other hand, the ld. D.R. while relying on the order of A.O. and ld. CIT(A) distinguished the decision relied on by the ld. counsel for the assessee and further submits that the expenses incurred by the assessee are capital in nature and therefore the A.O. was fully justified in treating the same as capital expenditure.

28. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the assessee has taken the premises on lease owned by the Directors of the company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta who held more than 50% shares of the company. We further find that the period of lease was commenced from 16.10.2001 in respect of three properties and in respect of fourth property the lease period was commenced from 1.4.2002, relevant to the A.Y. 2003-04. We further find that the premises were taken on lease for three years subject to the condition that the rent shall be increased by 15% of the rent at the end of 11 months. We further find the assessee has incurred renovation expenses of ` 19,29,711/- on the renovation of office by providing wooden partitions, cabins, cubicles, desks etc. We further find that the assessee has started the above expenditure on repairs from 1.4.2001 i.e. prior to the property taken on lease. We further find that there is no material on record to show that the said expenses had been incurred by the assessee on the repairs of already existing wooden partitions, cabins, cubicles, desks etc. We further find that the A.O. has invoked Explanation 1 to section 32 of the Act which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1-4-1988 which reads as under:- "Explanation1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee".

On going through the above Explanation, it became explicitly clear that where the assessee carries out repairs on certain premises taken on lease or other right of occupancy and any capital expenditure is incurred by way of renovation or extension and improvement to the building, then section 32 shall apply as if the said structure or the building is owned by the assessee. The effect of this insertion is that any capital expenditure incurred by the assessee on any premises acquired otherwise than on ownership basis, has to be treated as a building owned by such person and depreciation is allowable on it under section 32 as if it is building owned by him.

29. In Ballimal Naval Kishore vs. CIT [1997] 224 ITR 414 (SC), the Hon'ble Supreme Court approved the test in the case of New Shorrock Spinning and Manufacturing Co. Ltd. V. CIT [1956] 30 ITR 338 (Bom) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows (page 417) : "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of `repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." 30. Applying to the Explanation 1 to section 32 of the Act in the light of the test laid down to the facts of the present case, we are of the view that since the assessee has incurred huge expenditure on purchase of plywood/furniture etc. for making wooden partitions, cabins, cubicles desks etc., the assessee has built an altogether new office premises, therefore, there is no doubt that these expenditure incurred by the assessee are for fixed capital asset and therefore capital in nature not allowable as revenue expenditure. This view also finds support from the judgment of Hon'ble Delhi High Court in the case of Bigjo's India Ltd. Vs. CIT [2007] 293 ITR 170 (Delhi) wherein expenditure incurred for acquiring new assets such as lift shaft and wooden counters etc. on the licensed premises was held to be capital in nature, not deductible as revenue expenses.

31. In DCIT vs. Smt. Geeta V. Mehta [2008] 26 SOT 455 (Mum) relied on by the learned counsel for the assessee, the facts of that case are that as per the assessee, the property to which the repairs were incurred was held by the assessee through a Franchise Agreement dated 1.1.2002. The assessee used the said property for running Mehta Institute of Technology and she was a Franshisee of Mehta Classes and Mehta College. The assessee was under obligation to incur expenditure on repairs of the premises as per the said Franchise Agreement which was ITA valid for one year at one time and it was not a case of a perpetual lease. The assessee undertook renovation of the leased licensed premises and during the year relevant to A.Y. 2003-04 the assessee incurred an expenditure of ` 8,27,276/-. The A.O. invoked the Explanation 1 to section 32(1) of the Act and held that assessee holds the `right of occupancy' in the property within the meaning of Explanation 1 to section 32(1) and accordingly disallowed the repair expenses. On appeal, the ld. CIT(A) deleted the addition made by the A.O. on the ground that the expenditure has been incurred by the assessee for the purpose of business allowable u/s 37(1) of the Act. On further appeal before the Tribunal, the Tribunal while observing that it is a settled law that every case has to be seen independently whether a particular expenditure is revenue or capital depending on the facts of each case held that expenditure incurred by the assessee by way of purchase of tiles, grills, electrical fittings, ply, plywood, granite and related labour charges incurred in this connection with keeping the classrooms fit for use is revenue in nature allowable u/s 37 of the Act.

32. Whereas in the case before us, the property was taken on lease for three years commencing from 16.10.2001 in respect of three properties and the fourth property was taken on lease from 1.4.2002 not relevant for the year under consideration. The assessee has starts repairs expenses from 1.4.2001 i.e. prior to the property taken on lease. The assessee has placed no material on record to show that there was any obligation to the assessee to incur expenditure on repairs of the premises taken on lease. Therefore, the decision relied on by the ld. Counsel for the assessee is distinguishable and not applicable to the facts of the present case.

33. In this view of the matter, we are of the view that the expenditure incurred by the assessee are capital in nature not allowable as revenue expenditure as claimed by the assessee. Accordingly, we are inclined to uphold the finding of the ld. CIT(A) in confirming the disallowance of expenditure of ` 19,29,711/- subject to allowance of depreciation. The ground taken by the assessee is, therefore, rejected. ITA NO. 3661/Mum/2007 A.Y.2002-03 (Revenue's Appeal)34. Ground No. 1(i) is against the deletion of addition of commission payment of ` 38,70,055/- to Shri Vinod Jaiswal. 35. Brief facts of the above issue are that during the course of search several documents were seized from which it was found by the Assessing Officer that the assessee had made payments to Shri Vinod Jaiswal and this expenditure was not accounted for in the regular books of accounts maintained by the assessee. This expenditure was claimed by the assessee only in the return filed in response to notice u/s.153A. Since this expenditure were not accounted in the regular books of accounts the A.O. required the assessee to show cause why it should not be disallowed and added to returned income. The assessee filed the written reply vide its letter dated 08.03.2006 in which it was submitted that the notings of these pages denote working of amount of incentive paid to Mr. Vinod Jaiswal and this income was included in the income of Shri Vinod Jaiswal in the return filed by him u/s. 153A for the A.Y. 2002-03 and 2003-04 and the assessee filed detailed explanation for this objection in the said assessment proceedings which was finalized by the same Assessing Officer. The assessee contented that these payments were made wholly and exclusively for the purpose of business and since neither it was in the nature of capital expenditure nor personal expenditure and since it was wholly and exclusively incurred for the purpose of business, it should be allowed. The Assessing Officer did not accept this contentions of the assessee. He has stated that (pages 17 to 19 of the order of the ld. CIT(A) :- 1. "Most of the payments have been made not by the assessee company but by the other parties. The assessee has claimed expenditure on the payments which was not made by it. 2. For Example: The payment were made by Asha Pura International, Bench Mark International, Jinneswar Trading, Himalaya Impex etc. These were the parties to whom the assessee had booked bogus printing and stationery and labour charges. The bogus expenses of these parties have already been admitted by the and therefore same Modus-Operandi is employed by the asssessee for making unaccounted payments to bogus parties. Assessing Officer observed that when these parties had been utilized by the assessee for claiming expenses under the head Printing & Stationery, how the same parties, which did not exist would make payments to Shri Vinod Jaiswal. The Assessing Officer also cited other examples in the books in the assessment order.

3. One such example was the entry of Sghri Santosh Jaiswal amounting to ` 2,50,000/- which was claimed to have paid to Shri Vinod Jaiswal. Since the amount was paid to Shri Santosh Jaiswal, it cannot be claimed to have been paid to Shri Vinod Jaiswal. In respect of another expenditure of a Cheque No.629581, the Assessing Officer had noted the entries which are as under :- ` 23,67,700-00

Vinod Jaiswal Cheque No.629581 ` 5,00,000-00` 28,67,700-00

(-) Cash to be received M.D. ` 5,00,000-00` 23,67,700-00

From the above entry Assessing Officer concluded that the assessee had paid ` 5,00,000.00 by way of Cheque and the same amount was received back by cash from the MD, who is none other than Shri Vinod Jaiswal and there are also other entries noted by the Assessing Officer, which were related to either for Mobile or for TV, each had no link that the services rendered by the said Shri Vinod Jaiswal to the company. Assessing Officer has also concluded that the services also were not established to have been rendered by Shri Vindo Jaiswal for the following reasons:_

a) There should be a written agreement for any incentive to be paid or any payment to be made, which is based on services rendered by the persons. In this case, the assessee has failed to produce any agreement or documentary evidence on the basis of which payment has been made to Shri Vindo Jaiswal on account of so called service rendered to the Company. b) If the services are rendered by Shri Vinod Jaiswal to the Company, then it is the duty of the Company to make the payment to him. However, the facts are contrary to this as the payments have been made by other parties and not by the assessee Company.

c) If the payments were made for services rendered by him, then the amount received in cheque should be retained by him. However, the department has seized the documentary evidence, which proves that cash has been received back from him against the cheque issued as discussed above.

d) Had the expenses been genuine, than, the assessee would have made these payments and booked the expenses in its regular books of accounts.

Therefore the assessing Officer concluded that the assessee had claimed these expenditure by shifting bogus expenses from head of Printing & Stationery to another head of incentive paid to Shri Vinod Jaiswal and since this expenditure was also not debited in the regular books of accounts, this could not be allowed as expenditure at all. The assessee's theory of commission by way of incentive payable to Managing Director, Shri Vinod Jaiswal was also not accepted by Assessing Officer who held that assessee had not proved the rendering of service by Shri Vinod Jaiswal to the Company but the assessee had tried to shift this expenditure of Printing & Stationery to incentive. Thus, in view of the above, the Assessing Officer has disallowed the entire expenditure of :-

- ` 38,70,055/- for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055/- and added back the same to the income returned."

36. During the course of appellate proceedings, Assessee's Representative submitted written submissions as follows (para 3.2 at page 19 of the order of the ld. CIT(A) :- "It is submitted that during the course of search the authorized officer seized diary maintained by Shri Ashish G. Mehta as per Annexure A-6. On page no.122-124 of this seized diary there were entries of incentive at the rate of ` 12.50 per member payable to Shri Vinod Jaiswal, the director of the company, which are as under :- Period No. of members Seized page no. of Annexure A-6

Page no. of

Paper book

Amount

payable to

Vinod

Jaiswal

April to 29.07.01 58739 122 126 7,34,238

30.07.01 to

02.09.01

22872 122 126

2,85,900

03.09.01 to

30.09.01

33370 122 126

4,17,130

01.10.01 to

29.10.01

42528 122 126

5,31,600

29.10.01 to

31.12.01

53635 123 127

6,70,438

01.01.02 to

03.03.02

52208 123 127

6,52,600

04.03.02 to

31.03.02

46252 124 128

5,78,150

Total 38,70,055

"On page no.122 of seized material there is evidence of payment of ` 13,60,000/- made to Vindo Jaiswal upto 27.09.01. On page No.122 & 123 there are evidences of further payment made to Vinod Jaiswal on account of incentives. It is submitted that during the course of assessment proceedings the appellant had filed before A.O. the details of incentive due to Vinod Jaiswal on the basis of seized material, which is placed page No. 135 of the paper book. It was contended before the A.O. that out of incentive amounting to ` 38,70,055/- payable to Vinod Jaiswal an aggregate amount of ` 12,00,000/ were paid by cheque toVinod Jaiswal and his wife and was claimed as expenditure in the Profit & Loss Account. Out of the balance amount an aggregate amount of ` 19,90,600/- was paid to Vinod Jaiswal by taking bogus bills for printing & stationery mainly through Ashapura International. The details of the payments made to Vinod Jaiswal are also placed at page No. 131 of the paper book. The appellant in its revised computation of total income for A.Y. 2002-03 has offered the entire purchases made from Ashapura International including G.P. at 4.22% amounting to ` 30,86,275/- as the undisclosed income, which has been accepted by the A.O. in the impugned order. The appellant also claimed the balance incentive paid/payable to Vinod Jaiswal, which either accounted by way of bogus printing & stationery bills of Ashapura International or paid in cash / remained outstanding in its return of income filed u/s. 153A. The copy of return of income filed u/s. 153A, computation thereof and the revised computation are placed at page No. 6-11 of the paper book. The A.O. having accepted the additional income of ` 30,88,275/- in respect of purchases made from Ashapura International was not justified in disallowing the appellant's claim of deduction amounting to ` 26,70,055/- being incentive paid / payable to Vinod Jaiswal, which are duly recorded in the seized material discussed above..........." It was further submitted that the A.O. while computing the total income in the impugned order has taken the starting point as the total income as per return filed on 31.10.2002 u/s. 139(1) amounting to ` 56,30,790/-. Therefore it was submitted that the AO's addition of ` 38,70,055/- in respect of payments to Vinod Jaiswal is totally unwarranted and incorrect and the same be deleted. 37. The learned CIT(A) after examining the matter found that the assessee's objection is correct, deleted the addition made by the learned AO. 38. At the time of hearing, the ld. D.R. while relying on the order of the A.O. submits that in view of the entries recorded in the seized material appearing at page No. 245 to 250 of the assesee's paper book, it is clear that the assessee has claimed bogus expenses of ` 38,70,055/- in the name of Shri Vinod Jaiswal. He further submits that since the assessee has failed to prove that the said payment was made for business purchases, the ld. CIT(A) was not justified in deleting the addition made by the A.O. He further submits that even otherwise the said expenditure is not allowable u/s 69 of the Act. Reliance was also placed on the decision of CIT vs. J.K. Panthaki & Co. [2009] 316 ITR 452 (Kar). He, therefore, submits that the addition made by the A.O. be restored. 39. On the other hand, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that it is not a case of the A.O. that the expenditure is not allowable u/s 69 of the Act, therefore, the new plea taken by the ld. D.R. is devoid of any merit. He, therefore, submits that the assessee has explained through a chart appearing at page No. 20 of the order of the ld. CIT(A) that the above payment of ` 38,70,055/- was made by the assessee to Shri Vinod Jaiswal on the basis of entries of incentive @ ` 12.50 per member payable to Shri Vinod Jaiswal, the Director of the company. He further submits that since the A.O. has himself allowed the payment by cheques, therefore, the disallowance of cash payment for the same purpose is not justified. He further submits that in the Income Tax Return filed by Shri Vinod Jaiswal, he has disclosed the same amount as his income and the A.O. after considering in detail has also taxed the same. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld. 40. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that before the ld. CIT(A), the assessee has filed a complete chart appearing at page No. 20 of the order of the ld. CIT(A) showing the period, No. of members made/introduced by Shri Vinod Jaiswal, page No. of seized documents, page No. of assessee's paper book and amount paid to Shri Vinod Jaiswal ITA No.3541 to 3244/M/07 & 2661 to 3662/M/07, M/s Free India Assurance Services Ltd. l 23etc. We further find that the ld. CIT(A) after considering the assessee's submission has deleted the addition vide paras 3.3.0 and 3.3.01 of his order which are reproduced as under:-

"3.3.0: I have considered the submissions of the appellant. During the course of appellate proceedings the Assessee's Representative submitted that the Assessing Officer had proceeded ahead with the computation based upon the income returned in the Original return filed u/s.139 at ` 56,30,790/- instead of the income returned by the assessee as per the return filed u/s.153A, which was subsequently revised at ` 94,30,793/-. [In the original return filed u/s.153A on 23.02.2004 at ` 83,54,659/- (page 6 to 10 of Paper Book) which was subsequently revised to `94,30,793/-(page 7 of the paper book]. It is only in the return riled u/s.153A on 23.02.2004 the assessee had made this claim for the deduction of this expenditure at ` 26,70,055/-. Therefore, it was submitted that since the Assessing Officer has started the computation with the total income declared by the assessee as per the return filed u/s.139 on 31.10.2002 at ` 56,30,790/-, in which the assessee has not made any claim of ` 26,70,055/-, there was no need for disallowing thesaid expenditure. To put it in other words, the assessing Officer has disallowed the entire expenditure of :_

- ` 38,70,055/ – for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055 and added back the same to the income returned.

3.3.1: On verification of the return of income on the statement of total income filed along with the said return, I find that the assessee's objection is correct and therefore the disallowance made by the Assessing Officer to the extent of ` 38,70,055/- is deleted."

41. In the case of CIT vs. J.K. Panthaki And Co. [2009] 316 ITR 452 (Kar) Their Lordships have remanded the matter for reconsideration by the Tribunal on the ground that the Tribunal has failed to consider the case in the light of the Explanation to sub-section (1) of section 37 of the Act. Whereas in the present case, before us, it is not the case of the Revenue that the payment made by the assessee are not allowable in view of the Explanation to section 37(1) of the Act, therefore, the decision relied on by the ld. D.R. is distinguishable and not applicable to the present case.

42. In the absence of any contrary material placed on record by the Revenue to show that the chart prepared by the assessee appearing at page No. 20 of the order of the ld. CIT(A) is not correct or the entries recorded therein are not matching with the relevant seized material or the part of the amount was not paid by cheque or the same was not allowed as deduction or the payment has not been made to Shri Vinod Jaiswal to introduce the new members to carry on the business. This being so and in the absence of any finding recorded in respect of the application of the provisions of section 69 of the Act and TDS, we are of the view that the payment made by the assessee are allowable under Act as business expenditure and accordingly we decline to interfere with the order of the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

43. Ground No. 1(ii) is against the deletion of addition of ` 24,65,384/- out of purchases of ` 30,80,730/-.

44. In view of our finding recorded in paras No 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3543/Mum/2007 for A.Y. 2003-04 (Assessee's appeal).

45. Ground Nos. 1 & 2 are against sustenance of addition of ` 4,04,982/- being 20% disallowance out of conveyance and staff welfare expenses.

46. In the absence of any distinguishing feature brought on record by the parties and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 404982/- is reduced to ` 202491/-. The ground taken by the assessee is therefore partly allowed.

47. Ground No. 3 is against the sustenance of disallowance u/s 40A(3) ` 2,88,000/- being 20% of expenditure out of cash purchases of `14,40,000/-.

48. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 18 to 22 of this order, the addition made by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the assessee is, therefore, allowed. ITA No. 3662/Mum/2007 for A.Y. 2003-04(Revenue's appeal).

49. Ground No. 1(i) is against the deletion of addition of ` 70,74,272/- being payments to Shri Vinod Jaiswal.

50. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 40 to 42 of this order, we decline to interfere with the order passed by the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

51. Ground No. 1(ii) is against the deletion of addition of ` 11,52,000/- out of purchases of ` 14,40,000/-.

52. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3544/Mum/2007 for A.Y. 2004-05 (Assessee's appeal).

53. Ground Nos. 1 & 2 are against sustenance of addition of `4,48,210/- being 20% disallowance out of conveyance and staff welfare expenses.

54. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 4,48,210/- is reduced to ` 2,24,105/-. The ground taken by the assessee is therefore partly allowed. 55. In the result, assessee's appeals stand partly allowed and the Revenue's appeals are dismissed.

Order pronounced on this 30thday of March, 2011.

Sd/-

(J. SUDHAKAR REDDY)

ACCOUNTANT MEMBER

Sd/-

(D.K. AGARWAL)

JUDICIAL MEMBER

Mumbai, Dated 30th

March, 2011.

RK ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

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Copy to:

1. The Appellant

2. The Respondent

3. Commissioner of Income Tax (Appeals)- Concerned, Mumbai

4. DIT (International Taxation), Concerned, Mumbai

5. Departmental Representative, Bench `F', Mumbai

//TRUE COPY// BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

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1 Draft dictated on 2.3.11 Sr PS

2 Draft placed before Author on 3.3.11 Sr PS

3 Draft proposed & Place before the

2nd

member

JM/AM

4 Draft discussed/approved by 2nd

Member

JM/AM

5 Approved draft comes to the Sr PS Sr.PS

6 Kept for pronouncement on Sr PS

7 File sent to the Bench Clerk Sr PS

8 Date on which file goes to the Head

Clerk

9 Date on which file goes to the AR

10 Date of despatch Sr PS