Service Income Receipt - Business Income or Income from Other Sources - AO, agreement b/w the parties is not duly signed, witnessed nor executed on stamp paper. Also, in current AY, service income received is equivalent to 110 per cent of the expenditure, thus, treated it as income from other sources - CIT(A) considered it as business income - HELD THAT:- The word "business" is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income - objection of the AO on account of authenticity of the agreement, that agreement has duly been signed by the both parties, there is no specific defect referred by the him - AO miserably failed to appreciate the facts and circumstance.
Assessee has been offering income from consultancy, etc., as a business income. It has duly been accepted by the Department since 1998-99. AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, the learned first authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground - Thus rejected.
Income from Other Sources - Invoices Prepared Inadvertently - AO, assessee has raised two separate invoices on Pizza Hut Llc and KFCIH of some amount and it has failed to disclose these receipts - CIT(A) deleted the addition as it was made on assumption based on two pieces of paper - HELD THAT:- Assessee has explained its position that these invoices were prepared inadvertently. It has filed the affidavit of the director, who has explained the mistake. TPO had also accepted the case of the assessee about the arm's length prices. The invoices involved an international transaction. Had they paid by virtue of the alleged invoices then there should be entries in the bank account and there should be trail of the money. AO has unnecessarily treated two documents as sufficient for demonstrating the alleged undisclosed income. The learned first appellate authority has rightly deleted the addition. We do not see any reason to interfere in his finding - Thus ground rejected.
Non deduction of TDS u/s 40(a)(ia) - Amount Paid to Subsidiary for incurring expenses towards Advertising media and promotional activities - CIT(A) considered such amount paid to the subsidiary is an allowable expense - deleted the addition - HELD THAT:- From reading the orders of AO and CIT(A), it is not discernible whether assessee has included the said amount or not.
The case of the AO is that assessee has received amount from Pepsi Food and ought to account it as income. How the assessee has treated it in the accounts and whether it transmitted it to the subsidiary concern is an issue which is to be reconciled.
As taken a credit of tax paid by Pepsi Food. It is a business receipt because it is taking care of all marketing and promotional activities, though in this year through its subsidiary concern. Therefore, we set aside the finding of the CIT (A) restore this issue to the AO for verification and readjudication - Matter restored Back
Addition on account of Unexplained Cash - Addition made as Assessee has drawn certain cheques for withdrawal on a particular dates and entered them on the same date in ledger, whereas actual cash withdrawal from the bank has taken place on the subsequent date - CIT(A) deleted the addition as the assessee has explained that due to certain practical difficulties actual cash could not be taken out from the bank account - HELD THAT:- AO has made the addition in a theoretical way, without realising the practical aspect. There is only one day difference between actual withdrawal of cash from the bank. The AO has not brought any material on the record that this much of cash was introduced in the books from an unexplained sources and after withdrawal taking place from the bank the said cash was returned to that source. After taking into consideration the detailed finding recorded by the CIT, we do not find any force in this ground of appeal - Thus, rejected
Disallowance on Royalty Expenses - AO observed that Government of India has restricted payment of royalty in its initial approval and assessee was permitted to pay technical service fee only - CIT(A) deleted the disallowance stating that it should be allowed as a business expenditure - HELD THAT:- In our opinion, the AO has misread the approvals granted by the Government of India while arriving at a conclusion that the assessee has not been remitting the payment as per the approvals. In the approval SIA has used expression "royalty as well as fee for technical services" loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15 per cent plus the research and development cess. assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore FAA has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance.
Administrative Expenses in connection with Subsidiary Company - To be Allocated to Subsidiary Company - As per AO, the assessee should not bear the overhead expenses at the head office pertaining to subsidiary company (YRMPL) - Thus has allocated the expenses in equal, i.e., 50 per cent and made disallowance - CIT(A) deleted the disallowance - HELD THAT:- As per the tripartite agreement, the franchise shall pay AMP contribution to subsidiary co. and the assessee may not pay a separate contribution. In a way, YRMPL was to carry out the activities on no profit no loss basis. AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remit the amount to YRMPL towards such cost. From both angles, it is the assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. CIT(A) has rightly deleted this disallowance.
Disallowance for Depreciation - Discrepancies in maintenance of WDV of Assets - As per CIT(A) there may be some discrepancies but that does not mean that total depreciation would be disallowed to the assessee - HELD THAT:- In our opinion, the AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee's business then he should make out a case for disallowance of depreciation. By making general observation, he cannot deny the total claim of the depreciation of the assessee. No merit in this ground of appeal. CIT(A) has already directed the AO to give effect to the outcome of 1999-2000. The depreciation disallowed in the assessment year 1999-2000 would be considered for disallowance in this year also.
Including Income in Previous AY - As per revenue, CIT(A) included an income in the AY 2002-03 whereas it pertains to the AY 2001-02 - HELD THAT:- The major item appears to be taxable in the present AYs. The other two items have been considered by the learned CIT(A) as taxable in this year on the ground that tax rates are similar. It will create unnecessary complication by excluding these receipts from here and including them in the assessment year 2001-02. Considering the finding of the learned Commissioner of Income-tax (Appeals), we do not wish to interfere in it. This ground of appeal is rejected.
Disallowance of Excess Provision - Assessee made certain provision on the basis of the mercantile system of accounting followed by it, such provision was not utilised by him in the next AY - AO disallowed excess provision - CIT(A) deleted the disallowance stating if the provision has not been exhausted by the assessee, then it does not mean that there was no possibility of such type of expenditure arising when provision was made - HELD THAT:- The assessee has made the provision by keeping in view past experience and the possibility of certain expenses. Assessee has filed the details exhibiting the nature of intending expenses. It is a separate issue that such occasion did not arise to incur those expenses but that does not mean that when the provision was made it was not bona fide. If some amount remained unutilised it will be offered for tax in the next assessment year. No reason to interfere in the order of CIT(A). Hence, this ground of appeal is rejected.
Addition of Liability as Cease to Exist - AO made the addition on the ground that liability to pay has ceased as such liability has been shown as outstanding for a number of years - CIT(A) has deleted it on the ground that the AO cannot classify a particular liability as "liability no longer required" - HELD THAT:- It is the assessee who has to proceed after taking into account the requirement of its business for writing of such liability. If the assessee is willing to pay the amount, then it would not be construed as liability no longer required. On due consideration of the learned Commissioner of Income-tax (Appeals)'s order, we do find any merit in this ground of appeal. It is rejected.
Interest Charged u/s 234D - As per revenue, CIT(A) has erred in deleting the interest charged by the AO u/s 234D - HELD THAT:- Tribunal in the case of EKTA PROMOTERS (P.) LIMITED. [2008 (7) TMI 452 - ITAT DELHI-E] has held that interest u/s 234D cannot be leviable prior to the assessment year 2004-05 because operation of this section would be perspective in nature.This ground of appeal is rejected.
Accrual of Income - An amount was paid to assessee for advertising and promotional activities for KFC outlets. The assessee could spend some amount and balance was shown as liability under the head of "Accrued marketing" - CIT(A) upholded the addition of balance amount received for advertising and promotional activities for subsidiary co. - HELD THAT:- It may be true that the subsidiary is actually carrying out advertisement activities but it is the assessee who is collecting the money first and then transmitting to the subsidiary concerned. In the case of the assessee, it is collecting as business receipts but contending that it is meant for subsidiary Co., therefore, it is not income in the hands of the assessee. There is no distinguishing feature of these receipts as to why it cannot be revenue receipts in the hands of the assessee. It may be a different case that the moment the amount is transferred to YRMPL, it can attain the character of business expenditure but it cannot be concluded that this amount was not a revenue receipt in the hands of the assessee. The ld CIT(A) has rightly confirmed the addition and we do not find any error in it. This ground of appeal is rejected.
Payments made to person Covered u/s 40A(2)(b) - Assessee took a house property on a sub-lease for providing a residence to its director - Annual lease rent has been settled at Rs. 15 lakhs p.a. - He had incurred a sum on the residence and incurred a sum for repair, renovation and upgradation of the facilities in the house properties. It has amortised the expenses in three years, therefore in the present AY, he has claimed the deduction - CIT(A) observed rent paid for the residential accommodation of the managing director is an allowable expenditure - HELD THAT:- Under section 40A(2)(b), if it is established that the assessee has paid an amount in excess than the one available in the open market for availing of such services from a person or entity falling within the ambit of this section then such excess amount would be disallowed to the assessee.
On basis of facts, AO has discussed that this payment of rent is associated with the salary of the executive director and house rent allowance is fixed at 60 per cent. of their salary. We find that the assessee has extended extra pecuniary benefit to its managing director. Thus, taking into consideration the overall evidence on record, we set aside the order of the learned Commissioner of Income-tax (Appeals).
We direct the AO to allow payment of rent to the extent of Rs. 20,000 per month for the accommodation taken on rent for director, the balance has to be disallowed. The estimation of this rent on the basis of the original rent agreement would take care of all other notional rent computed by the AO on the basis of interest-free deposits. In brief, against the claim of any rent made by the assessee for the residence provided to director, only a sum of Rs. 2,40,000 would be allowed. There will not be any disallowance on account of notional rent worked out on the basis of interest-free security. The AO shall carry out this exercise.
As far as the rent claimed in respect of the residence of Shri Ajay Bansal, we remit this issue to the file of the Assessing Officer for readjudication because he has not worked out fair rent this property can fetch, which can be allowed to the assessee.
As far as the disallowance of Rs. 7,50,000 is concerned, we find that this disallowance has been confirmed by the learned CIT(A) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year.
Crystalisation of Liability to Pay - Assessee claimed certain expenses which were disallowed by AO and CIT(A) as it does not relate to the present AY - Assessee pleaded that liability to pay had been crystallised during the current year and, therefore, should be allowed - HELD THAT:- Assessee failed to show crystallisation of the liability to pay in the present accounting year. Its accounts are complicated. A special auditor has been appointed who recommends for disallowance of the expenditure. The AO has given fair opportunity to the assessee. Before us, it is just merely harping upon the proposition of law instead of buttressing it on facts, therefore, we do not find any force in this ground of appeal, it is rejected.
Disallowance of Expenditure - AO while making the disallowance of certain expenditure observed that bills are either in the name of TRIM, on persons, who are neither directors nor employees or also in the name of sister concern - CIT(A) allowed some of the expenses - HELD THAT:- AO conclusions are based on special audit report as well as failure of the assessee to prove a nexus of business expediency with the expenses. They may not be a personal expenditure but these were not incurred for the purpose of the business. We have also gone through the chart submitted by the assessee and the details of expenditure. Taking into consideration the findings of the CIT, we do not see any reason to interfere in it.
Disallowance of Prepaid Expenditure - As per special audit report, the assessee had incurred certain expenses whose benefit will be available in the next AY thus were disallowed by CIT(A) on the ground that these are prepaid expense - HELD THAT:- Expenses which are relatable to the present assessment year can be allowed. The income against those expenses is assessable in the present AY. AO has disallowed the claim of the assessee on the basis of various defects in its account and the opinion expressed by the special auditor. This is purely a factual issue. There are discrepancies pointed out by the special auditor in the maintenance of accounts and those discrepancies have been affirmed by the learned Revenue authorities below. Thus, the CIT(A) has rightly disallowed the claim.
Software Expenditure - Revenue or Capital in Nature? - CIT(A) confirmed the addition of software expenses as capital expenditure - As per assessee, it has paid internet charges and other charges for repair of computers - HELD THAT:- CIT(A) has allowed depreciation to the assessee on these expenses. The assessment year involved herein is 2002-03. The decision of the Special Bench in the case of AMWAY INDIA ENTERPRISES. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(1), NEW DELHI. [2008 (2) TMI 454 - ITAT DELHI-C] was not available with the Assessing Officer as well as the CIT(A). The cost incurred on such repairs or development of software must have been recouped by the assessee in the shape of depreciation.
We do not deem it necessary to set aside this issue for readjudication at the level of the AO in the light of the Special Bench decision keeping in view the above factual background. No fruitful purpose will be served. The assessee might have a good case on merit as far as expenses incurred on small repairs on such a trivial issue. But in case of reverification is not worth to carry out, in terms of the monetary benefit to the assessee, therefore, we do not wish to interfere in the order of the CIT(A).
Expenses incurred on Conference and Seminars - Expenditure incurred were disallowed by stating that expenditure incurred were personal in nature and were not incurred during the normal course of business - main dispute is how the assessee is able to prove that expenses incurred by it were for the purpose of the business? - HELD THAT:- Making a reference to general proposition or the proposition discussed in other authoritative pronouncement would not suffice to say that expenses are to be allowed to the assessee, such expenses are to be allowed the moment it is proved that they were incurred wholly and exclusively for the purpose of the business. This aspect, the assessee has miserably failed to prove. Taking into consideration the findings, we do not find any merit in this ground of appeal.
Disallowance of Personal Expenditure - CIT confirmed the disallowance of certain amount incurred towards the fee of employee who pursued MBA course out of the total disallowance made in the assessment order under the head "Personal expenditure" - HELD THAT:- Assessee failed to bring any policy decision arrived at by the management for reimbursing the fee incurred on education. The fee was paid because of the personal influence of the employee and it was not incurred for any business purposes. The assessee failed to bring any material on the record to this effect. The learned Commissioner of Income-tax (Appeals) has rightly confirmed the disallowance.
Other amounts are concerned, we find that these relate to medical expenses of a director and the expenses incurred on the uniforms of his driver. These expenses are to be termed as expenses relating to the day to day business of the assessee. Thus, the ground of appeal raised is rejected.
Disallowance of Capital Expenditure -assessee had incurred expenditure on purchase of projector lamp, purchase of room heater, purchase of imported chair and fire extinguishers, etc - CIT(A) allowed the deduction in respect of purchase of projector lamp, room heaters and purchase of ten imported chairs. She disallowed rest of the expenses - HELD THAT:- As far as the purchase of project lamp is concerned, it required frequent changes after completed number of hours of running, hence it cannot be a capital expenditure and CIT(A) has rightly allowed it. Similar is the position with regard to other two items. These expenses were incurred for replacement of existing assets. As far as the purchase of fire extinguishers and purchase of electronic equipments are concerned, these have rightly been disallowed by the CIT(A) because these are in the capital field.
TP Adjustment - Exclusion of Loss Making Companies from Comparables - ALP for International Transaction u/s 92C - TPO has excluded three loss making companies from comparables - Assessee pointed out that there is no provision in the Income-tax Act which can indicate that loss making company would be rejected from being comparable - HELD THAT:- We find that the TPO has not excluded loss making companies simply for the reason that they are making losses. We have no hesitation in observing that merely because a company is showing losses it would not loose its status of comparable if other criteria depicted status of comparables. Declaration of loss is incidental business which is at par with the profit. The assessee has considered these companies on the basis of their FAR analysis
TPO has pointed out that comparability of companies has been taken into consideration by the assessee on the basis of FAR analysis and other aspects have not been considered. The learned Transfer Pricing Officer looked into other aspects also. The assessee has placed on record a large number of documents in the paper book as well as judgments, namely, in the case of PHILIPS SOFTWARE CENTER (P) LIMITED. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX. [2008 (9) TMI 466 - ITAT BANGALORE-B]. We have considered all those issues which were addressed at the time of arguments. In view of the above discussion, we do not find any merit in this ground of appeal.
Addition of Notional Interest in Value of Rent - AO added a notional interest income to the returned income of the assessee, on account of security deposits placed with wife and sister of director finance of the assessee for obtaining rent free accommodation for its director - HELD THAT:- In AY 2002-03, the AO has added the notional interest in the value of the rent. We have deleted that part. In the present AY, Dispute Resolution Panel has not associated this issue with the rent-free accommodation, he construed this payment of tax-free security as a utilisation of fund for non-business purposes. When the tenant can have the accommodation by making a deposit of Rs. 50,000 only from the original landowner, we do not see any justification for the payment of Rs. 50 lakhs by the assessee to the tenant. The assessee has been paying this amount in the capacity of a sub-tenant, in other words, it is just an extension of benefit to the relatives of the director.
DRP has rightly held that it is the user of business fund for non-business purposes and has rightly directed the AO to verify if any interest expense has been debited to the profit and loss account and if used, disallow the proportionate interest expense as not having been incurred for the purpose of the business. We do not find any merit in both these grounds of appeal. They are rejected.
Software Expenses - Capital or Revenue Expenditure - Dispute Resolution Panel disallowed the software expenses by holding them to be of capital nature - HELD THAT:- Similar expenses were incurred by the assessee in the assessment year 2002-03. We would have remitted the issue to the file of the learned Revenue authorities for readjudication in the light of AMWAY INDIA ENTERPRISES. [2008 (2) TMI 454 - ITAT DELHI-C] because of the involvement of very small amount we desist. This year also, the amount claimed by the assessee has already been allowed to the assessee, now the assessee might have recouped its cost.
one more round of litigation is not worth it, keeping in view the amount involved and the rate of depreciation. The assessee might have a very good case on the merit of its details are required to be looked into in the light of the Special Bench's decision at the level of the AO. We put it to the learned representative also and they have conceded the proposal on the ground that it may not be treated as a precedent in the subsequent year.
Expenses on Food Tasting, Trials and Studying Demographic Trends - Revenue or Capital Expenditure? - DRP directed the AO to treat certain expenditure as capital in nature - HELD THAT:- In its day to day operations, the assessee is experimenting new dishes, where it incurred expenses on food items and spices, etc. Flavour may not come to the expectation for commercialised use. Thus, these are the routine research work carried out by the assessee and no capital assets came into existence. DRP has erred in treating this amount as a capital expenditure. We delete the addition.
Interest Income - Income from Other Sources u/s 56 or Business Income? - HELD THAT:- The assessee has nowhere indicated as to how this interest income is linked with its business activity. It has simply surplus fund which has been deposited in the bank giving rise to interest income. DRP has rightly treated this income as income from other sources. This ground of appeal is rejected.
Disallowance of expenses incurred on Foreign Travel - HELD THAT:- The assessee is earning its income from service agreement which provide fixed fee plus reimbursement of travel expenses incurred in performance of its duties. In such situation, how the assessee can say that it has incurred expenses on its own. As far as the agreement that amount in question was incurred by the assessee at its own is concerned, we find that no material was brought to the notice therefore, this ground of appeal is without any merit and accordingly rejected.
