TMI Blog2011 (5) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... ity 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 DRP 23-9-2010 16-12-2009 under section 143(3)/144C First we take appeal of the Revenue in the assessment year 2002-03, i.e. I.T. A. No. 4154/D/2006 In the first ground of appeal, it has been pleaded by the Revenue that the learned Commissioner of Income-tax (Appeals) has erred in holding the service income receipt of Rs. 12,67,04,206 as business income. The brief facts of the case are that assessee has filed its return of income on October 28, 2002 declaring total income at nil. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) dated October 17/24, 2005 was sent through a registered post. The Assessing Officer felt that accounts of the assessee are of complex nature after taking necessary approvals he sent for special audit of the accounts. Shri S.C. and Associates was appointed as special auditor. This reference was challenged before the hon'ble High Court but ultimately issue was decided against the assessee. The special auditor has handed over the report dated October 5, 2005. Before adverting to the issue disputed in this ground of appeal, we deem it necessary to note brief background of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessing Officer, in the earlier assessment years, the service income received was equivalent to the cost incurred. Whereas in this assessment year, the income received as equivalent to 110 per cent. of the expenditure. The Assessing Officer doubted the agreement itself. According to him, the agreement is not duly signed, witnessed nor executed on stamp paper. He further observed that the very dominant intention of the assessee, right from the beginning was never to enter into any business activity, but to secure and pass on the income earned by the international companies in Indian sub-continent without payment of tax. He also observed that in order to claim the expenditure incurred in excess of its receipts as in the earlier years, the assessee through some device alleged during such years claimed such losses as business losses, contrary to the facts and circumstances. According to the Assessing Officer, the income alleged to have been received by the assessee, i.e., 110 per cent of the total expenditure reimbursed is not on account of exploitation for business or use of commercial assets. He also alleged that in the service agreement countries consisting Pakistan, Sri L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure which forms the basis for computation of the service income has been held to be business expenditure. Also the perusal of assessment order reveals that the Assessing Officer has not given any concrete reasons to support the action of treating service income as 'income from other sources'. There is a lack of reasoning to support the Assessing Officer's conclusion that the appellant was not carrying on any business, or that the service income earned by it was not derived from business. In my view, the existence and operation of the Pizza Hut Restaurants and KFC Restaurants in various cities across India can be seen by anybody and needs no proof. These outlets are either operated by the appellant or operated through franchisees. These franchisees have been provided with support services on behalf or the brand holders as discussed earlier. In addition to the provision of these services to the franchisee, the appellant has also provided services to the brand holders in the U.S.A. by way of collection and remittance of royalty, providing them services by way of research and development, etc. All such activities are visible and there is evidence to substantiate these activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd pointed out that the Assessing Officer has observed that income was earned by the assessee without exploitation of any business assets. On the other hand, learned counsel for the assessee relied upon the order of the learned Commissioner of Income-tax (Appeals). He took us through the submissions reproduced by the learned Commissioner of Income-tax (Appeals) on pages 5 to 10 of the impugned order. We have duly considered the rival contention and gone through the record carefully. The learned first appellate authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2(13) provides the definition of expression "business" according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. In various authoritative pronouncement of the hon'ble Supreme Court and the hon'ble High Court, meaning and scope of expression "business" has been propounded. It is not necessary to recite and recapitulate of those decisions, but on the strength of them, it would be suffice to say that word "business" is one of wide import and which means an activity carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned Commissioner of Income-tax (Appeals) coupled with the finding recorded by the learned Commissioner of Income-tax (Appeals) (extracted supra), we are of the view that the Assessing Officer miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy, etc., as a business income. It has duly been accepted by the Department since 1998-99. The Assessing Officer 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 of appeal it is rejected. Ground No. 2 : In this ground of appeal, grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 12,60,21,989. The brief facts of the case are that the assessee is in the business of franchising Pizza Hut and Kentucky Fried Chicken Restaurant in India for which it has entered into technology licence agreement with the respective brand owners, i.e., KFC and Pizza Hut International LLC. It has entered into a service agreement on April 1, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of the name of the party in the voucher. Why different invoices were signed on the same day by different persons, etc. The learned Commissioner of Income-tax (Appeals) has deleted the addition by observing that the Assessing Officer has made the addition only on presumption basis. The said assumption is purely on two pieces of paper ; have they been acted upon or not ? How the money has travelled is not discernible ? With the assistance of the learned representative, we have gone through the record carefully. The assessee has explained its position that these invoices were prepared inadvertently. It has filed the affidavit of the director, Mr. Ajay Bansal, who has explained the mistake. The Transfer Pricing Officer 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. The Assessing Officer has unnecessarily treated two documents as sufficient for demonstrating the alleged undisclosed income. The assessee has explained its position properly and no addition deserves t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount to its subsidiary company, i.e., YRIPL to be incurred on advertising media and promotional activities. It had not deducted any tax at source while making this payment. The Assessing Officer has made the addition on the ground that Pepsi has made the payment to the assessee. The assessee on its own has raised a debit note. Credit for taxes deducted at source by Pepsi was claimed by the assessee in its return of income. The assessee did not claim the amount transferred to its subsidiary concern, i.e., YRIPL as its expenditure. It has not deducted taxes at source at the time of transferring the amount. In this way the learned Assessing Officer has made the addition. Dissatisfied with the addition, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals). It was contended by the assessee that even if this amount was treated as income of the assessee the corresponding expenditure has been allowed to it. Thus, there will not be any tax implication on the assessee. The learned Commissioner of Income-tax (Appeals) accepted the contention of the assessee on the ground that as far as transmission of this amount to the subsidiary is concerned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Sitaldas Tirathdas reported in [1961] 41 ITR 367 (SC) and the judgment of the hon'ble Allahabad High Court in the case of CIT v. U.P. Upbhokta Sahkari Sangh Ltd. reported in [2007] 288 ITR 106 (All). We have considered all these contentions but we do not find any discussion on these issues in the assessment order. Somewhat similar is again by the assessee in its ground No. 2 which will be discussing in the later part of the order. The Assessing Officer has made the observation in one paragraph on page 8. The reasoning assigned by the learned Commissioner of Income-tax (Appeals) is that the assessee has debited a similar expenditure of Rs. 5,18,33,006 in the profit and loss account towards marketing contribution to YRIPL. It has been fully allowed by the Assessing Officer. From reading of both orders it is not discernible whether assessee has included this amount in Rs. 5,18,00,000 or not. The case of the Assessing Officer is that it has received this amount from Pepsi Food it and ought to account it an 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. It has taken a credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned Commissioner of Income-tax (Appeals) we do not find any force in this ground of appeal it is rejected. Ground No. 5 The grievance of the Revenue in this ground is that the learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 3,23,01,939 which was paid by the assessee on account of royalty expenses. At the cost of repetition, it is observed that the primary business activity of the assessee relates to the operation and development Pizza Hut and Kentucky Fried Chicken restaurant, in the Indian sub continent, For this purpose, the assessee-company had entered into a technology licence agreement on April 1, 1995 with Kentucky Fried Chicken HI. Similarly, technology licence agreement has been executed between the assessee and the Pizza Hut on January 15, 1996. As per these agreements, the assessee has been granted the rights to use the technology and system in the business of operating service restaurant such as Kentucky Fried Chicken restaurant, outlets and Pizza Hut. In both agreements, it was settled that for grant of licence as a technology, a licence fee would be payable by the assessee which is equivalent of 5 per cent. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961. The expenditure under this section can be claimed by the assessee, if the assessee satisfied the conditions flowing out from the section. The conditions are that expenditure should not be of the nature described under sections 30 to 36. It should not be of a capital nature and it should not be of a personal expenditure. The expenditure should have been laid out or expended wholly and exclusively for the purpose of the business. It was explained before the learned first appellate authority that the learned Assessing Officer has failed to construe the approval letters in true perspective. It was also pointed out that fee paid in technology transfer case can be said to be both royalty and fee for technical services. The SIA has been using the terms royalty and technical service fee loosely and interchangeably in its various approval letters. The assessee has explained that nomenclature licence fee as royalty is irrelevant consideration so long as the licence fee payment is justified and indispensable to the assessee's business. According to the assessee, there exist a direct nexus between the payment of licence fee and business of the assessee. The learned Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) irrespective of this clarification the impugned payment cannot be said to be excessive or unreasonable taking into account the fact that the licence fee/royalty has been paid at 5 per cent. (net of taxes) as per the Government approvals and also the aforesaid transaction being in the nature of an international transaction, the Transfer Pricing Officer vide its order dated February 18, 2005 has held the same to be at the arm's length price. Thus, the disallowance of Rs. 3,23,01,939 being without any basis, is deleted. 9.14 In view of the above discussion, the disallowance of Rs.3,23,01,939 made by the Assessing Officer being without any basis is deleted and the appeal is allowed on this ground." With the assistance of the learned representative, we have gone through the record carefully. The main reason for disallowing the royalty payment by the assessee to M/s. KFC International Holding Inc. and M/s. Pizza Hut with whom it had entered into technology licence agreement is that the Government of India has permitted the assessee to pay technical fees which is restricted to seven years and the assessee is paying it as a royalty. The learned Commissioner of Income-tax (Appeals) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in equal, i.e., 50 per cent. for YRMPL and 50 per cent. for the assessee. In this way, he worked out a disallowance of Rs. 3,26,01,574. On appeal, the learned Commissioner of Income-tax (Appeals) deleted the disallowance. With the assistance of the learned representative, we have gone through the record carefully. It emerges out from the record that YRMPL was incorporated on June 8, 1999. It is a 100 per cent. owned subsidiary of the assessee. It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise. The assessee had entered into a tripartite agreement with its franchise and YRMPL. As per this agreement, the franchise shall pay AMP contribution to YRMPL 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. The Assessing Officer 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 separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy but that does not mean that total depreciation would be disallowed to the assessee. As far as the assets sold out in the assessment year 1999-2000 is concerned, the learned Commissioner of Income-tax (Appeals) has already directed the Assessing Officer to give effect to the outcome of assessment proceeding in the assessment year 1999-2000 in this year also. On due consideration of the facts and circumstances, we are of the view that the Assessing Officer has highlighted certain discrepancies in the maintenance of written down value of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that the assessee was not having any asset and they were not used for the purpose of business. In our opinion, the Assessing Officer 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. Taking into consideration these aspects, we do not find a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Appeals) 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. Ground No. 13 This ground will be taken along with ground No. 6 of the assessee's appeal. Ground No. 14 In this ground of appeal grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 5,56,428. The brief facts of the case are that at the end of the year, the assessee has made certain provisions on the basis of the mercantile system of accounting followed by it. According to the Assessing Officer, this provision was not utilised by the assessee in the next assessment year. Therefore, in his opinion, excess provision deserves to be disallowed. The learned Commissioner of Income-tax (Appeals) deleted the disallowance on the ground that the provision is being made by keeping in view the possibility of certain expenses. If the provision has not been exhau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 17 In this ground of appeal, grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in deleting the interest charged by the Assessing Officer under section 234D of the Income-tax Act. Learned counsel for the assessee at the very outset submitted that this issue is covered in favour of the assessee by the order of the Special Bench of the Tribunal in the case of ITO v. Ekta Promoters P. Ltd. [2008] 305 ITR (AT) 1 (Delhi). He also pointed out the hon'ble Delhi High Court has also affirmed the order of the Tribunal in I. T. A. No. 491/2008 rendered in the case of Director of Income-tax v. Jacabs Civil Incorporated [2011] 330 ITR 578 (Delhi). He placed on record copy of the hon'ble High Court's decision dated August 30, 2010. The Special Bench of the Tribunal has held that interest under section 234D cannot be leviable prior to the assessment year 2004-05 because operation of this section would be perspective in nature. In view of the judgment of the hon'ble Delhi High Court this ground of appeal is rejected. In view of the above discussion, the appeal of the Revenue is partly allowed for statistical purpose. Now we take the appeal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year. The amount of Rs.14,65,706 was actually spent by the assessee during the year. The amount of Rs. 14,65,706 was booked as income as well as expenditure and also showed the balance amount of Rs. 11,35,994 as liability under the head of 'Accrued marketing'." It is noticed that the assessee disclosed and spent Rs. 14,65,706 as advertising contribution out of a total of Rs. 26,01,700 received from M/s. Dodsals Hotels and Resorts P. Ltd. The balance, Rs. 11,35,994 was shown as liability under the head of "Accrued marketing". The assessee was thus required to explain as to why credits of Rs. 11,35,994 be not treated as its income. The assessee failed to place on record any reply. It is thus presumed that the assessee has nothing to say, thus Rs. 11,35,994 is treated as income (understated income of Rs. 11,35,994). The appeal to the learned Commissioner of Income-tax (Appeals) did not bring any relief to the assessee. The assessee has contended that every receipt is not an income. The Assessing Officer has wrongly recorded that the assessee failed to file any explanation. The assessee has submitted its reply. Learned counsel for the assessee drew our attention toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. As per its memorandum of association, it is required to provide consultancy and advisory services in connection with the establishment, organisations, financing, management and operation of restaurants, cafes and cafeterias, etc. In performance of activities, it is also conducting advertisement media and marketing operations. The assessee had made an arrangement that this AMP activity would be carried out by way of its 100 per cent. subsidiary, i.e., "YRMPL". 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. The business line of the assessee is also similar. Its arrangement with the subsidiary would not make much differences. The decision of the hon'ble Supreme Court was relied upon by the assessee in the case of Bijli Cotton Mills P. Ltd. [1979] 116 ITR 60 (SC), in that case, the assessee has received certain amounts towards Dharmarth charges. This nominal amount was collected from the customers and it was meant for Dharamsthal. In that background, the hon'ble Supreme Court has observed that it does not contain the character of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has challenged the disallowance of Rs.7,50,000. It emerges out from the record that the assessee has incurred a sum of Rs. 22,50,000 for repair, renovation and upgradation of the facilities in the house properties. It has amortised the expenses in three years because lease agreement was for a period of three years and thereafter it was to be renewed. In this way, in the present assessment year, the assessee has claimed the deduction of Rs. 7,50,000. This deduction was disallowed to the assessee by the Assessing Officer on the ground that lease agreement is a bogus one. On appeal, the learned Commissioner of Income-tax (Appeals) has observed that rent paid for the residential accommodation of the managing director is an allowable expenditure. He estimated the reasonable rent at Rs. 50,000 and disallowed the balance, i.e., nine lakhs of rupees has been disallowed. With regard to Rs. 7,50,000, the learned Commissioner of Income-tax (Appeals) has observed that this amount could be allowed in the year in which it was incurred. The assessee in its appeal is challenging the disallowance of Rs. 9 lakhs. The Assessing Officer has made a total disallowance of Rs. 25,71,600 out of le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to allow payment of rent to the extent of Rs. 20,000 per month for the accommodation taken on rent for Shri Sandeep Kohli, the balance has to be disallowed. The estimation of this rent on the basis of the original rent agreement between the landowner and Hotel Mezbaan would take care of all other notional rent computed by the Assessing Officer on the basis of interest-free deposits. In brief, against the claim of any rent made by the assessee for the residence provided to Mr. Sandeep Kohli, 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 Assessing Officer 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 Commissioner of Income-tax (Appeals) on the ground it was not incurred in the present year. Since the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 43B read with section 40A(7) of the Act. The Assessing Officer after verification of this aspect allowed this claim. As far as the proposition of law, contended by the assessee that if the liability to pay has been crystallised during the accounting year relevant to this assessment year then the expenses are allowable is concerned, we do not have any dispute. Our difficulty is that the 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 Assessing Officer 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. In ground No. 6, grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 1,64,999 out of the total disallowance of Rs. 3,36,789. This ground is interconnected with ground No. 13 of the Revenue's appeal. The Revenue is challenging deletion of disallowance in ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation the findings of the learned Commissioner of Income-tax (Appeals), we do not see any reason to interfere in it. The ground of appeal raised by the assessee as well as the Revenue is rejected. Ground No. 7 : In this ground of appeal, grievance of the assessee is that the learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 3,30,474. The brief facts of the case are that the special auditor has quantified certain expenses which are prepaid in nature. According to the special audit report, the assessee had incurred certain expenses whose benefit will not be available in the present assessment year rather it will be available in the next assessment year. The Assessing Officer has disallowed those expenses on the ground that these are prepaid expenses. Appeal to the learned Commissioner of Income-tax (Appeals) did not bring any relief to the assessee. The assessee has pleaded that amounts paid were in pursuant to annual maintenance contracts. Once the amounts are paid they are irretrievable and these cannot be claimed back. The assessee also pointed out that certain payments towards annual maintenance contracts were claimed as an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred the decision of the Special Bench of the Income-tax Appellate Tribunal in the case of Amway India Enterprises v. Deputy CIT reported in [2008] 301 ITR (AT) 1 (Delhi) and contended that if functional tests are applied to the facts of the present case then these expenses would be allowed to the assessee as revenue expenses. On due consideration of the facts and circumstances, we are of the view that the learned Commissioner of Income-tax (Appeals) has allowed depreciation to the assessee on these expenses. The assessment year involved herein is 2002-03. The amount involved is not a substantial amount in comparison to the financial status of the assessee. The decision of the Special Bench in the case of Amway India Enterprises [2008] 301 ITR (AT) 1 (Delhi) was not available with the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals). 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 Assessing Officer in the light of the Special Bench decision keeping in view the above factual bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon different circumstances and different facts then that of the assessee, are clearly distinguishable thus cannot be relied upon. Thus from the reply furnished by the assessee, the following automatically arises : (a) That no evidence regarding nature of activity carried out at Goa. (b) Need and outcome of Goa visit. (c) Objectives of the programmes so carried out. (d) Proofs to show that the programmes as alleged and business meetings were carried out. (e) Extent of and active participation of family members accompanied by employees in such meetings. Thus in view of the above followings are inferred : (a) The meeting was not held for the business purposes. (b) The cases relied upon since referred to in a context where business meetings were held is therefore not applicable. (c) The expenditure thus incurred is the personal expenditure of the employees. The expenditure is thus unconnected and not incurred during the normal course of business, therefore, disallowed." Appeal to the learned Commissioner of Income-tax (Appeals) did not bring any relief to the assessee. Before us, the assessee has contended that recreational meeting at offsite are organised for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that these expenses were not for the purposes of the business. The case law cited by the assessee are of no help unless it proved factually that expenses were incurred for the purpose of the business. Taking into consideration the findings recorded by the Assessing Officer (extracted supra), we do not find any merit in this ground of appeal. It is rejected. In the result, the appeal of the assessee is dismissed. I. T. A. No. 142/Del/2006 : Ground No. 1 is general in nature, hence does not require any adjudication. It is rejected. Grounds Nos. 2 and 3 are interconnected with grounds Nos. 4 to 7 of the Revenue's appeal in this assessment year. All these grounds read as under : "2. That on the facts and circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) was not justified in upholding the disallowance of lease rent to an extent of Rs. 9 lakhs, paid on account of rent free accommodation provided to the managing director of the assessee-company. 3. That the learned Commissioner of Income-tax (Appeals) was not justified on the facts and circumstances of the case and in law in upholding the disallowance of an amount of Rs. 7,50,000 in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentatives, we have gone through the record carefully. It revealed that a sum of Rs. 33,460 was incurred towards the fee of Mr. Rajiv Kumar who pursued MBA course. The 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. As far as the other amounts are concerned, we find that these relate to medical expenses of Mr. Sandeep Kohli who is 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 by the assessee as well as of the Revenue are rejected. Ground No. 6 : In this ground, grievance of the assessee is that the learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 1,498 which has been disallowed on the ground that these expenses were paid for the benefit requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 5 in the assessment year 2002-03. In that assessment year, a similar disallowance of Rs. 3,23,01,939 was made by the Assessing Officer. The learned Commissioner of Income-tax (Appeals) has deleted the disallowance and we have upheld the order of the learned Commissioner of Income-tax (Appeals). In view of our findings on ground No. 5 in the assessment year 2002-03, this ground of appeal is rejected. Ground No. 3 : In this ground of appeal, grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 3,16,08,889. This ground is similar to ground No. 6 raised by the Revenue in the assessment year 2002-03. In this ground, grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in allowing on its subsidiary concern, namely, YRMPL. The disallowance made by the Assessing Officer has been deleted by the learned Commissioner of Income-tax (Appeals) for the assessment year 2002-03 and we have upheld the deletion. Keeping in view of our findings on ground No. 6, this ground of appeal is rejected. Ground No. 8 : In this ground of appeal, grievance of the Revenue is that the learned Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 2002-03, this ground of appeal is rejected. In view of the above discussion, the appeal of the Revenue is partly allowed for statistical purposes. I. T. A. No. 5122/Del/2010 : The present appeal is directed at the instance of the assessee against the order of the learned Dispute Resolution Penal passed under section 144C(5) of the Income-tax Act, 1961 on September 23, 2010 in the assessment year 2006-07. The grounds of appeals taken by the assessee are not in consonance with rule 8 of the Income-tax (Appellate Tribunal) Rules, they are descriptive and argumentative in nature. In ground No. 1, the assessee has taken 10 sub-grounds. In all these grounds, it has pleaded that the learned Revenue authorities have erred in making adjustment in the arm's length price disclosed by the assessee with regard to its international transaction and thereby erred in making an addition of Rs. 2,28,47,737. The brief facts of the case are that the Assessing Officer had made a reference to the learned Transfer Pricing Officer under section 92CA(3) of the Act in respect of international transaction entered into by the assessee during the financial year 2005-06. It emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four comparable to arrive at the mean of 11.89 percent. as arm's length margin. The learned Transfer Pricing Officer rejected the application of multiyear data. He used current year data. In this way, an adjustment of Rs. 2,28,47,737 has been proposed by the Transfer Pricing Officer which has been incorporated in the draft assessment order by the Assessing Officer. The draft assessment order was forwarded to the assessee on December 16, 2009 which was received by the assessee on the same day. It has filed objection before the Dispute Resolution Panel in time. The learned Dispute Resolution Panel has considered the objections of the assessee but did not concur with them. Before us, learned counsel for the assessee reiterated the objections of the assessee. His main thrust of arguments was that the learned Transfer Pricing Officer has excluded the loss making companies from the comparables. He pointed out that the assessee itself had applied filter of persistent loss making companies to eliminate those companies from the comparables but assessee has excluded those companies which were reporting loss continuously for three years. The learned Transfer Pricing Officer has rejected co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nspection, third party quality inspection India Tourism Dev. Corpn. Ltd. Reject 3.38 per cent. Services in relation to organising international events. Similar to co-ordination activities of the assessee. In House Productions Ltd. Reject -5.62 per cent. Healthcare division which provides access to information, relating to healthcare to healthcare institutions. He also appraised us as to how the comparables shown by the assessee are comparables. On the other hand, the learned Departmental representative relied upon the order of the learned Dispute Resolution Panel. He pointed out that the first objection of the assessee before the learned Dispute Resolution Panel was that learned Transfer Pricing Officer has recommended adjustment in the arm's length price of international transaction by using current year data, according to the assessee, multiple year data ought to have been used. He pointed out that the learned Dispute Resolution Panel has dealt with this proposition. The learned Transfer Pricing Officer while making a reference to rule 10B(4) has observed that current year data has to be use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o database which contain commercial information. These database are "Prowess" and "Capitaline plus". The prowess has been up dated up to September 9, 2006 when it was used by the assessee. It is a database compiled and managed by the centre for monitoring Indian economy. Similarly, capitaline plus was updated until September 8, 2006. This database has been compiled and managed by capital market publisher. Both these database contain financial information of more than ten thousand Indian companies. These database contains business, profile, annual reports, shareholding pattern and names of subsidiaries/joint ventures of listed and major unlisted public companies. The assessee has used different key words for carving out comparable cases. At annexure 2 of its analysis, it has identified 342 companies on prowess, 617 companies on capitaline. There are 90 companies which are common and assessee has identified one additional company. After application of filter, it has rejected 861 companies and carved out 9 comparable as noticed by us in paragraph 84. The main argument of the assessee before us is that the learned Transfer Pricing Officer has excluded three loss making companies. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Pricing Officer. We find from annexure 2 of the assessee's analysis available on page 188 of the paper book IA for the assessment year 2006-07 that the assessee itself has applied a filter of persistent operative losses. It has excluded three companies out of total 861 on the basis of this filter, then what is the basis for inclusion of the loss making companies. The learned Transfer Pricing Officer has examined their financial result by applying other tools, before exclusion from comparable. We have duly considered the other issues also agitated before the learned Dispute Resolution Panel though those issues have not specifically been agitated before us, but we do not find any error in the order of the learned Dispute Resolution Panel on those issues. The learned Transfer Pricing Officer has considered all the objections of the assessee in selecting the comparable and thereafter find out four comparables. After going through the order of the learned Transfer Pricing Officer as well as of the learned Dispute Resolution Panel, we do not find any force in the objections of the assessee. The loss making companies have not been excluded simplicitor on the ground that they are decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Commissioner of Income-tax (Appeals). There is no disparity on facts hence the learned Dispute Resolution Panel ought to have not upheld the draft proposal made by the Assessing Officer on this issue. The learned Dispute Resolution Panel should have taken into consideration the findings of the learned Commissioner of Income-tax (Appeals) in the assessment years 2002-03 and 2003-04. Respectfully following our discussion in those assessment years, we allow this ground of appeal and delete the disallowance. Ground No. 4 : In this ground of appeal, grievance of the assessee is that the learned Dispute Resolution Panel has erred in making a hypothetical disallowance of the administrative expenses of Rs. 8,97,22,346. The facts and circumstances of this ground are similar to the issue agitated by the Revenue in ground No. 6 of its appeal for the assessment year 2002-03. The assessee had a 100 per cent. subsidiary, namely, YRMPL who was taking care of advertisement, marketing and promotional activities. It is also functioning from the same premises. The Assessing Officer allocated the head office expenses in the ratio of 50 : 50 percent between the assessee and its subsidiari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 27,12,000 to M/s. Mezbaan Hotelier. In the assessment years 2002-03 and 2003-04, we have upheld the grant of deduction to the extent of Rs. 2,40,000 which is equivalent to the rent paid by M/s. Mezbaan Hotel. This is the assessment year 2006-07. The facts, how much rent was paid by M/s. Mezbaan Hotelier to its landlord is not available on the record. It is not ascertainable whether any enhancement of rent was made by the landlord against M/s. Mezbaan Hotelier. The learned Dispute Resolution Panel has allowed the deduction of rent paid by the assessee in the capacity of a sub-tenant at Rs. 2,40,000 only. We have observed in the assessment year 2002-03 that tenancy agreement as well as sub-tenancy agreement were executed on the same day and there cannot be any difference in rent value at this magnitude. Keeping in view our discussion, in the assessment year 2002-03, we modify the order of the learned Dispute Resolution Panel and direct the Assessing Officer to grant a deduction of rent payment to the assessee equivalent to the amount paid by M/s. Mezbaan Hotelier to the original land owner in this assessment year. In the assessment year 2002-03, the Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Resolution Panel has erred in disallowing the software expenses amounting to Rs.1,33,000 by holding them to be of capital nature. The assessee has pleaded that these expenses have not resulted in the creation of any capital assets. These expenses pertain to purchase software of the self-consultancy charges and maintenance charges. According to it, the learned Dispute Resolution Panel ought to have examined the case of the assessee within the right of the Special Bench's decision of the Income-tax Appellate Tribunal rendered in the case of Amway India Enterprises v. Deputy CIT reported in [2008] 301 ITR (AT) 1 (Delhi). It has also relied upon a number of other decisions. On the other hand, the learned Departmental representative has relied upon the order of the learned Dispute Resolution Panel. 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 below for readjudication in the light of the Special Bench's decision, because of the involvement of very small amount we desist. This year also, the amount claimed by the assessee is Rs. 1,33,000 and depreciation at 60 per cent. ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute Resolution Panel has erred in confirming the treatment of interest income as income from other sources. It emerges out from the record that the assessee has a surplus fund which was invested by it. The learned Dispute Resolution Panel on the strength of the hon'ble Supreme Court's decision rendered in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) had held that such interest income is to be assessed under section 56 of the Act. The income is not a part of the assessee's business activities. Learned counsel for the assessee submitted that interest income has to be assessed as business income because in the past, the Assessing Officer has assessed such income as business income except in the assessment year 2005-06. He relied upon the decision of the hon'ble Mumbai High Court in the cases of CIT v. Punit Commercial Ltd. reported in [2000] 245 ITR 550 (Bom) and CIT v. Paramount Premises P. Ltd. [1991] 190 ITR 259 (Bom). The learned Departmental representative on the other hand relied upon the order of the Assessing Officer. We have duly considered the rival contentions and gone through the record carefully. The decisions relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the hon'ble Supreme Court in the case of Badridas Daga v. CIT reported in [1958] 34 ITR 10 (SC). He also submitted that expenses of Rs.86,89,626 is not covered by the service agreement. This was incurred as a part of routine business operation, hence it could have not been disallowed by the Assessing Officer. He relied upon the decision of the hon'ble Supreme Court in the case of CIT v. Panipat Woollen and General Mills Co. Ltd. reported in [1976] 103 ITR 66 (SC). The learned Departmental representative on the other hand relied upon the order of the learned Dispute Resolution Panel as well as of the Assessing Officer. We have duly considered the rival contentions and gone through the record carefully. The Assessing Officer has made a reference to clause 4 of the service agreement and observed that the assessee would receive a fixed service fee along with reimbursement of travel expenses incurred in performance of its duties. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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