TMI Blog2012 (6) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... tory, the other similar trade practices etc. Hence, the ld. CIT (A) rightly deleted the disallowance Onus of proof - Instead of claiming expenditure, the assessee was in receipt of tuition fees (net of refund). To allege a receipt as income of the assessee, onus always lay upon the Revenue. Therefore, it was for the AO to prove the correct amount of receipt to compute income Advertisement expenses - expenses incurred on advertisement and banners – AO disallowed Payment to cricket club, Payment to ABVP, Payment on account of donation etc. – Held that:- payments were advertising the name of the Institutes at all places which will be frequented by target group (young students). Obviously, the best place/time would be the Sport Events or the events where students in general would participate. The AO has not alleged any personal element in these payments nor has the payment been doubted. Obviously, all the payments are either by cheque or are acknowledged by the concerned person. Since alt the above payments were made for the purposes of the business and were for advertising Institute. Since the expenses have been incurred on advertisement and banners are also a mode of advertisement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uineness of payment then there must be some material to suggest that fair market value of services rendered by a concern covered u/s 40A(2)(b) is less as compared to actual payment. Hence, in absence of evidence collected by the AO, CIT(A) was justified in deleting the addition. Decided in favor of asseessee Addition out of computer expenses - AO noted that payments were prima-facie of capital nature as new items/assets were purchased by the assessee – Held that:- motherboard is a component of the computer and expenditure on its replacement cannot be treated as a “capital cost”. On the other hand, the UPS, though necessary for a computer, is a separate component and decision of the assessing officer to treat its cost, as capital cost is in order. CIT(A) was justified in deleting the expenses. Appeal partly allowed. Staff welfare expenses - random verification during the course of assessment proceedings, it was found that most of these expenses have been incurred in cash and also that part of the expenses are claim on the basis of self made vouchers – Held that:- assessee has not given the details of services rendered. The paper book also do not contain copy of such vouchers. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whereas in 322 cases, the refund was made through cheques, out of total refund of ₹ 83,73,040/-. 2.3 To ascertain the genuineness of such refund of tuition fees, the AO made enquiries u/s 133(6) from these students on test check basis. He alleged that in some of the cases the notices sent u/s 133(6) were received back with the remark of the postal authorities that the persons are not available or incomplete addresses and in 7 cases he alleged that either the students or their parents to whom tuition fees has been refunded in cash, denied to have received any such refund from the assessee. Table of such persons is available at page 2 of the assessment order. As stated, the AO gave a show cause notice dated 22.11.2007 asking to explain why refund of ₹ 21,51,100/- in cash be not added in its income and the copy of letters received from such persons are also stated to be made available to the assessee. The assessee in compliance filed a written reply dated 26.11.2007, reproduced at page 3 of the assessment order. Subsequently, in 4 cases also letters denying receipt of refund was received, which was also confronted to the assessee. 2.4 Not satisfied with reply of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually there remained responses only from six (6) students denying receipt of refund. Because the appellant was not allowed any opportunity to cross-examine the six students, in my view, the inference in these six cases is provisional, more so because on his own, the appellant had subsequently obtained clarification from remaining five, of the 11 students, denying the version given to the assessing officer and accepting that they had indeed received refund of fees. On a random perusal of the application forms for refund, the assessing officer found that these were not properly filled in . He noticed, for example on 10.06.2004, refund of ₹ 11,800/- was shown through cash to Neelam Verma and on the application for the fee refund, there is no signature of Miss Neelam Verma. However, in the portion of this application for office use , signature on revenue stamp have been obtained of Neelam Verma. However, such signatures do not prove to have actually received such amount of tuition fees. Similar was the position in respect of application forms and payments shown to Sh. Amit Dahiya, Amit Singh, Abheera Sharma, Ankush Nag, Abhinav Marvel, Rakshita Chaudhory, Laksh Sharma an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, who accepted that they had levied the refund in cash. This letter dated 05/02/2010 along with enclosures was made available to the assessing officer, who did not make any adverse comments. To sum up, from 175 cases of cash refund, the assessing officer issued notice under section 133 of the I T Act, 1961 to 45 persons; only eleven (11) responded to him, denying receipt of refund of fees. In course of appeal proceedings, the appellant produced letters from five (5) of the said 11 persons, now disowning their earlier letters to the assessing officer and confirming receipt of refund of fees. These letters were made available to the assessing officer and his reply dated 08/01/2010(PB 38-39) has been disposed off above. In the result, on record there is denial of receipt of cash refund only in six (6) cases and the total amount involved is ₹ 86,500/-. In these six cases too, the appellant is aggrieved that he was not given an opportunity to cross examine these persons. While there is no evidence that notices issued by the assessing officer were indeed served in remaining 34 cases (45-11), in course of appeal proceedings, the appellant produced letters from eight (8) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee could not have been successful. Therefore, to win the confidence of the students and to prove genuineness on its part, to arrange quick refunds of their tuition fees in the cases of unsatisfied students, without much formality, was a part of good business policy. Proceeding on the same, the assessee used to quickly refund the tuition fees in case the student did not feel satisfy without harassing him with a view to compelled retaining/continuance. Needless to say that a delayed refunds an attempt to retain the student would have brought a bad name to the assessee. In addition, students come normally in July when the session starts however, within a period of 2-3 months few of the them has to go back for varieties of reasons viz the climate does not suit, some of the students feel homesick, some are not able to go with the standard of the studies/tutorials or for some other reasons. Therefore, against the tuition fees of Rs. ₹ 60,000/- to Rs. ₹ 70,000/- hardly ₹ 10,000/- to ₹ 15,000/- are refunded and not the entire fees, which is hardly 5-10% of total fees charged. Wherever it was practicable, the fee was refunded through cheque however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in 8 cases and were submitted to ld. CIT(A) vide written submission dated 05.02.2010 (PB 40-42). Here also, when the AO confronted, there was no adverse comment made by him. These fact, are to be further appreciated in the light of the facts that there was no evidence that notices issued by the AO in all those remaining 34 cases (45-11), were even served or not. Moreover, out of those 11 denial cases (wherein 5 students already accepted later on as aforesaid) finally what remained, was only 6 denial cases out of total 175 students. Now again out of those 6 cases one was the case of Neelam Verma. The AO started from this case and after referring to some more cases, he reached to a firm conclusion with regard to all the 175 cases. 2.2 Improper size selection of Sample: In these circumstances, a question arises whether the sample chosen by the AO, is a good sample, based upon which a reasonable acceptable conclusion could be drawn. It can be seen that the sample chosen by the AO consisted of only 11 cases in all for 175 cases. Firstly, the size of the sample itself was too short (i.e. hardly 2% of total refund cases) to be relied upon. Secondly, in one solitary case of Neel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... di Co. Pvt. Ltd. (1998) 230 ITR 580 (SC). In the present case, what was apparent was that the assessees admittedly obtain application form for refund which contained the signature of the payee in addition to his complete name and address. Therefore, in all the other cases (except the alleged cases where there were denial but not those cases where there was no response at all), it has to be assumed that based on the application form duly signed, there was a due and proper evidence in support of claim of refund. In absence of any evidence contrary there to either available or brought on record by the AO, the onus to prove that the apparent is not real, is not discharged. 5. Defective enquiry: There apart, the way / manner in which nature of inquiry was made was also defective and do not inspire confidence. On this aspect it was submitted (PB 3-4): It is stated by the learned AO that he had sent inquiry letters to students to whom refunds were issued. But it is not known as to how many notices u/s 133(6) were issued and how many of them were received back on account of incomplete or incorrect addresses. It is also not known as to what did the AO did to enforce reply and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precious little to see possible reasons for such denials. In quite good number of cases, # the refunds are received by the guardians and student may not know after all most of them were in their teens at the relevant point of time conversely there could also be cases,# where the refund is received by the student and not reposted to their parents (not every parent will get back to the institute to check on the veracity of their ward s statement).Still further ,# there are bound to be cases where the parent, having not disclosed the payment of fee (quite significant amount ) in their records, would not like to admit he refund of fee. In fact, most of the parents who insisted on cash payment are likely to be those who may not have paid the Institute fee from their clearly explained sources of income. It is more likely to be in the case of government servants. For government servants, at another station which is also quite significant. The learned AO also made quite a fuss of the issue of refund of query letters because of change of address or inadequate address. He forgot that the students who left were no longer in touch with us and there was certainly no practical or legal need to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appear in any periodical tests conducted after refund of fees. The records of such tests is produced before your honour for kind perusal. 4. It will be appreciated that mostly students from outstation would refuse to accept outstation cheques and then get into the hassles of outstation clearance etc. Inspite of that, we have not refunded fee in cash to any student in excess of ₹ 20, 000/- 6. That any person who had not shown the payment of fee to the institute in his accounts/ records, would definitely avoid answering to query from the income tax department as to receipt of refund from the Institute. This is further highlighted by the fact that larger number of people to whom query letters were written by learned AO refrained from responding to the query of the AO. 7. Even in the replies received there are instances where they have stated that they do not remember it because it is and old matter. It was unjustified, for AO, to draw adverse inference from such replies. For example take the cases of students from Muzaffarpur and Chittorgarh as mentioned earlier. 9. It will be appreciated that in case of students coming from outstation, guardians do not alw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is refunding the tuition fee to those students who are not keen to pursue the coaching in the institute. Refund is not of the entire fee. It is a normal incidence of business of coaching to refund part of the tuition fee if the student wants to leave before the end of period upto which he has to continue. The AO was doubtful of the entries relating to refunds made in cash. In many cases, receipt of refunds stands admitted. The assessee is having receipts to show the payment. The onus was on the Revenue to establish that such receipts are not genuine. The receipts are prepared by the staff and signature of the student is taken. In cases where the Revenue has been able to collect evidence then such receipts can be held as non-genuine. We have noticed that receipt of refund is by the student i.e. Shri Abhuav Marval while the letter stating that refund has not been received is by his father. The father of Neelam Verma admitted that her daughter discontinued the coaching and second installment was not deposited but he stated that refund of ₹ 15,000/- has not been received. The receipt of refund is signed by Neelam Verma and the enquiry should have been made from her. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer did not explain why expenses on banners displayed in functions where students would be present did not constitute advertisement for the appellant and in his letter dated 08/01/2010, the assessing officer adopted an unrealistic and impractical when he stated, advertisement expenses are only those expenses which were incurred on banner to be displayed . In given facts and circumstances, the addition of ₹ 63,000/- is not confirmed. Ground 2 of the appeal is accepted. 3.4 The ld. AR submitted as under: 1. Firstly, we rely upon the written submissions (PB 8-9) filed before the ld. CIT (A) and his order on this part. The same are reproduced in verbatim: The Institute was started only about 3 years back in competition of a very welt entrenched and established Institute and therefore, publicity was the need of the hour and necessary for survival. Any chance of publicity was not missed by us and therefore we also contributed to organizing sports activities and also rallies etc where our Banners are exhibited/displayed. Such type of expenses is the need of our business especially become it catches the attention of younger lot. It will be appreciated that no pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticipate. The AO has not alleged any personal element in these payments nor has the payment been doubted. Obviously, all the payments are either by cheque or are acknowledged by the concerned person. Since alt the above payments were made for the purposes of the business and were for advertising our Institute, the same need to be allowed. The only reasons given are that either there was no Bill or there was no proof of advertisement. While all missing bills except one have been located, as stated earlier there could not have been physical form of proof of such advertisements. The AO should have appreciated that even if the proof of advertisement in physical form was not available, the same should have been allowed u/s 37 of the l.T. Act as a genuine business expense incurred wholly and exclusively for the purpose of business as there was no personal element in any of those payments, not they were capital expenditure. Accordingly, it is requested that the aforesaid addition be deleted. 3.5 We have heard both the parties. Since the expenses have been incurred on advertisement and banners are also a mode of advertisement, hence the ld. CIT(A) was justified in deleting the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/- . There are certain expenses, which have been incurred in cash and which are not supported by the bills. For example, payment of ₹ 2, 370/- on 25.05.2004; ₹ 3, 000/- on 10.07.2007; ₹ 12,826/- on 27.06.2007 are without any authentic bills. As the payment made in cash and either without any bills or through self made vouchers is not subject to proper verification therefore, to cover up the possible leakage of income ₹ 50, 000/- are disallowed from the building maintenance expenses and added in the income of the assessee. 5.3 In the first appeal, the ld. CIT (A) held as under:- The total expenditure on building maintenance debited to the profit loss account is ₹ 10, 82,443/-. In context of this huge amount of expenditure and given the nature of work, I find merit in claim of the appellant that from time to time petty works become necessary and these have to be carried out through small-time, illiterate masons and contractors, who do not carry bill books and seek payments in cash. In any case, he identified only three such bills and the total amount Is less than ₹ 19,000/-. I also do not agree with logic of the appellant (should be AO) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessing officer noticed that an amount of ₹ 2,93,557/- was debited to the P L account on account of telephone and mobile expenses. He further found that during the year the appellant, who is the proprietor of Resonance, had used 3 mobile phones and 2 land lines were installed at his residence, on which expenses of ₹ 47,883/- was incurred. In absence of details of usage of the phones, the assessing officer disallowed 1/5 of total expenses of ₹ 2,93,557/-, which resulted in addition of ₹ 58,711/-. In course of appeal proceedings, the appellant submitted that disallowance for personal use should be applied to 3 mobiles used by the appellant and 2 land lines at his residence, because all other telephones were dedicated for business purposes. I am satisfied with this claim of the appellant. Similarly, find merit in claim of the appellant that disallowance for personal use at 1/5 should apply only to the expenses of ₹ 1,29,035/- on two cars, exclusively used by the appellant. In conclusion, I am satisfied with the contention of the appellant that disallowances for personal use, at 1/5, should apply only to 3 mobiles used by him and 2 land lines installe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness premises of M/s Resonance have been used for such work and also that such work was got done through the paid employees. Therefore, though the incurrence of such expenses is not disputed but the payment was definitely in excess to the business needs. Accordingly out of the total payment ₹ 1 Lac is disallowed u/s 40A (2) (b) of I.T.Act and added in the income. 7.3 In the first appeal, the ld. CIT(A) held as under: I have perused the assessment order, considered submissions (PB 11) of the appellant and carefully studied various provisions of law. The assessing officer noticed that the appellant had paid ₹ 9,33,000/-(correct figure ₹ 9.35 lacs ) (PB 64) for copy checking to SRK Associates, a proprietary concern of Sunita Verma, his wife and after considering reply dated 8.10.07, he observed, the assessee . the paid employees . Consequently, he invoked section 40A(2)(b) of the IT Act,1961 and disallowed ₹ 1,00,000/-, on adhoc basis. In my considered opinion, the assessing officer was wrong in holding that it was the responsibility of the appellant to prove that the payment was not in excess ... and (it was) ... as per the prevailing ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of ₹ 1, 00, 000/- for making disallowance. The fact that the proprietor of SRK Associates was wife of the appellant is good reason for invoking section 40A (2)(b) of the IT Act, 1961. But the adhoc disallowance is not justified for this decision is only based on assumptions and guesswork and the assessing officer did not show that payments to SRK Associates were excessive, with reference to fair market prices for such services or that there was no legitimate need for such payments. The disallowance of ₹ 1,00,000/- is not confirmed and ground 6 of the appeal is accepted. 7.4 We have heard both the parties. The AO has not disputed the incurring of expenses. The Hon'ble Apex Court in the case of CIT vs Edward Keventer (P) Ltd. 115 ITR 149 observed that the AO must not apply provisions of Section 40A(2)(b) [in the old Act as Section 10(4A) capriciously as a matter of routine and Section is to be applied judiciously. The legitimate business needs must be judged from the viewpoint of a prudent business man. The benefit derived or occurring must also be considered from the angle of a prudent businessman. Benefit may not necessarily be capable of accurately mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital cost . On the other hand, the UPS, though necessary for a computer, is a separate component and decision of the assessing officer to treat its cost, as capital cost is in order. The assessment order should be modified accordingly. Ground 7 is partly accepted. 8.4 We have heard both the parties. The ld. CIT(A) has rightly appreciated that expenses deleted are of current repair and are not capital expenses. We therefore, hold that the ld. CIT(A) was justified in deleting the expenses. 9.1 The eighth ground of appeal is against relief of ₹ 71,233/- out of staff welfare expenses. 9.2 The facts of the case noted by the AO are as under:- The assessee has claimed total expenses of ₹ 7, 12,330/- under the head stag welfare expenses. On random verification during the course of assessment proceedings, it was found that most of these expenses have been incurred in cash and also that part of the expenses are claim on the basis of self made vouchers. For example the assessee has shown expenditure of ₹ 25,000/- on 08.09.2004 and this expenditure was incurred through Shri Sanjay Gupta and it was claimed on the basis of self made vouchers (vouchers prepared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by authentic bills. We therefore, feel that AO was justified in disallowing part of the expenditure. The disallowance is excessive and hence is restricted to ₹ 35,000/-. It is noticed that part of such expenses for which no independent bills are available are in round figures. 10.1 The ninth ground of appeal is against restricting the interest at 6% instead of 11% on interest free payment. 10.2 The facts noted by the AO is as under:- On perusal of computation of income it was found that the assessee has paid interest to bank against loan and overdraft for ₹ 10,99,099/- and such interest payment was reduced from the bank interest for FDR for ₹ 24,46,843/-. On perusal of Schedule- VIII of the Balance sheet, it was found that the assessee has made interest free advances to the following persons: (AO Pg 11) The assessee as per this office letter No.14-12-2007 was informed that as per computation of Income, he has shown interest from Bank FDRs for ₹ 24,46,843/- and against this income interest payment to bank on loan and overdraft have been shown at ₹ 10,99,099/-. It was also brought to his notice that as per schedule-8, he has advanced loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hom the assessee was not having any business. As regards written submission of the assessee that the assessee has not given any loan/advances by taking overdrafts is factually not correct and in fact the assessee in the same reply has admitted that overdraft limits were utilized on the FDRs of the longer period. In fact the assessee as per his own version availed overdraft limit on his FDRs and on such loans more interest was paid as compared to interest received. As regards another contention of the assessee that he was having capital for ₹ 5, 70, 74,967/- as on 31st March, 2005 and that loan advances are given out of capital of the assessee, it may be stated that though it is correct that the assessee was having capital to such an extent but it is also correct that the capital remained utilized mainly in the fixed assets for ₹ 213.99 lacs, other fixed assets for ₹ 247.10 lacs and investment in moveable assets for ₹ 375.19 lacs etc. Apart from his own capital the assessee was having loans and borrowings for ₹ 349.16 lacs mainly loan from banks and other creditors for ₹ 221.37 lacs. The existence of such huge loans and other liabilities itself pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order, the assessing officer recorded, as regards ... contention of the assessee that he was having capital for ₹ 5,70,74, 967/- as on 31st March,2005 and that loan advances are given out of capital of the assessee, it may be stated that though it is correct that the assessee was having capital to such an extent but it is also correct that the capital remained utilized mainly in the fixed assets for ₹ 213.99 lacs, other fixed assets for ₹ 247.10 lacs and investment in moveable assets for ₹ 375.19 lacs etc. Apart from his own capital, the assessee was having loans and borrowings for ₹ 349.16 lacs mainly loan from banks and other creditors for ₹ 221.37 lacs. The existence of such huge loans and other liabilities itself proves that the capital of the assessee was not adequate and therefore he has to borrow funds. In this backdrop, he relied on decision in the case of Abhishek Industries Ltd (286 ITR 1) and disallowed interest of ₹ 8,03,702/-, being interest at 11%, at prevailing rate of interest , according to him. In course of appeal proceedings, the appellant essentially reiterated his contention before the assessing officer that int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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