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.
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.
l
27
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.
l
28
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 
