TMI Blog2014 (1) TMI 1412X X X X Extracts X X X X X X X X Extracts X X X X ..... and no further disallowance is called for – Decided in favour of Assessee. Disallowance of professional fees – Held that:- There is also no evidence adduced by the assessee to show what exactly were the services rendered by Ms Naina Lal Kidwai so as to justify the professional fees, as found by the CIT(A) - the burden is on the assessee to reveal what information was given to it by Ms Naina Lal Kidwai, which would facilitate its business operations in India – Relying upon Lachminarayan Madan Lal vs. CIT [1972 (9) TMI 4 - SUPREME Court] - the mere existence of an agreement between the parties is not conclusive or decisive of the question whether the payment of commission or professional fees is allowable or not and it is for the assessee to prove that the commission or fees was paid for services which were connected to the assessee’s business and which were actually rendered - the assessee failed to discharge its burden – Decided against Assessee. Deduction u/s 80HHE of the Act - The Assessing Officer has not expressed any opinion on this point because according to his calculation the figure of business profits was negative and, therefore, even at the threshold the assessee’s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Mr. Panan Ved Mr A. K. Mayak ORDER R. V. Easwar, President: These are two appeals, both filed by the assessee, for the assessment years 2001-02 and 2004-05. Since they were heard together, they are disposed of by a common order. 2. The assessee is a company engaged in the business of providing back office support services to various overseas companies. The appeals arise out of the assessments made under section 143(3) of the Income Tax Act, 1961, by orders dated 12.03.2004 and 24.11.2006 respectively. 3. The learned counsel for the assessee has filed charts explaining the disputes in the appeals and both sides have argued on the basis of the charts. The paper books filed by the assessee have also been taken into consideration. 4. Assessment Year 2001-02 : - The first ground relates to the disallowance of interest under section 14A of the Act. This issue is dealt with in paragraph 1 of the assessment order and paragraphs 1 to 5 of the order of the CIT(A). The assessee itself disallowed interest of Rs. 3,40,56,528/- under section 14A of the Act. In calculating the disallowance, the assessee reduced the interest received from the interest paid and the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est, as was done by the assessee. There is also merit in the argument put forth on behalf of the assessee that it is not proper to take into consideration only the value of investments and assets as on 31.03.2001 since interest is paid on funds utilized during the entire period between 31.03.2000 and 31.03.2001 and the more appropriate method is to average the funds position as on these two dates and apply section 14A with reference to the average value. The learned counsel for the assessee is also right in his submission that Rule 8D of the Income Tax Rules does recognize the averaging method. Reference may be made to Sub- Rule (2) of the said Rule, which speaks of average value of the investment. We therefore hold that the disallowance of the interest as made by the assessee is adequate and appropriate and no further disallowance is called for. The ground is thus allowed. 8. The second ground relates to the adhoc disallowance of administrative and other expenses amounting to Rs. 2,00,000/- under section 14A of the Act. This ground is dismissed as not pressed. 9. The third ground relates to the disallowance of professional fees. This issue is discussed in paragraph 2 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. Clause 2 provides for payment of fees of Rs. 34,00,000/-. Clause 3 makes it clear that the agreement shall not be construed as giving rise to a partnership or agency between the parties. Clause 4 prohibits any modification or alteration of the terms of the agreement unless mutually agreed to in writing. A perusal of the agreement shows there is precious little therein to show exactly what kind of services were to be specifically rendered by Ms Naina Lal Kidwai which would be in the interest of the assessee s business in India. Clauses 1(a) and (b) are delightfully vague. Further there is also no evidence adduced by the assessee to show what exactly were the services rendered by Ms Naina Lal Kidwai so as to justify the professional fees, as found by the CIT(A). The assessee s plea that the services were highly confidential and sensitive in nature and were mostly rendered personally over the phone is not acceptable since the burden is on the assessee to reveal what information was given to it by Ms Naina Lal Kidwai, which would facilitate its business operations in India. The reliance placed by the CIT(A) on the judgment of the Supreme Court in the case of Lachminarayan Madan L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the total turnover are the same because the entire computer software is exported. This figure comes to Rs. 5,65,44,376/-. Since the export turnover (numerator) and the total turnover (denominator) are the same, 80% of Rs. 80,46,765/- will enjoy exemption. This figure comes to Rs. 64,37,412/-. 13. According to the learned CIT DR as well as the departmental authorities, the method suggested by the assessee cannot be accepted. In their view, the assessee was not entitled to any deduction under section 80HHE because of the following working: According to the CIT DR, for the purpose of section 80HHE computation, the profits of all the businesses carried on by the assessee have to be considered because of Explanation (d) below the section which defines profits of the business as meaning the profits of the business as computed under the head Profits and gains of business or profession as reduced by 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. He accordingly submitted that the Assessing Officer had rightly taken the figure of profits at Rs. 15,42,52,035/- and he was also ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The Assessing Officer has taken the business income at Rs. 15,42,52,035/-. This figure of profit represents profits of the various businesses carried on by the assessee including the profits on export of computer software (eligible business). From this figure of profit the Assessing Officer has reduced 90% of the commission, brokerage, etc. as also interest on fixed deposits which he has considered to be income from other sources and has arrived at a negative figure of Rs. 1,16,14,062/-. Since there is a negative figure, he has stated that the assessee is not eligible to any deduction under section 80HHE of the Act. In page 4 of the assessment order under the heading Deduction under section 80HHE of the Income Tax Act, 1961 , the Assessing Officer has commented upon the working of the assessee. He has noted two features in the assessee s working. The first is that the assessee has taken the total turnover of the business as representing the turnover of only the back office support services. The second feature noticed by the Assessing Officer is that the assessee s figure of profit of Rs. 80,46,765/- is the profit of only the business of back office support services. After not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1), which is the eligible business, shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. If regard is had to be use of the definite article the , it seems to us that the expression profits of the business appearing in subsection (3) refers only to the profits of the eligible business which is referred to in sub-section (1). In other words, it is only the profits of the business of back office support services which have to be split in the same proportion as the export turnover in the said business bears to the total turnover in the said business. Explanation (d), which defines the expression profits of the business refers to the profits of the business as computed under the head Profits and gains of business . Under the Income Tax Act, having regard to the provisions of Chapter IV read with section 70 and section 71, it seems to us that in the case of an assessee carrying on more than one business, each business is considered as a separate source falling under the head Profits and gains of business . The net result of the computation in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent from assessee s other business. There is no overlapping and mingling of the services or any link between the manufacturing activities of both. Both are exclusive of each other. 36. As rightly contended by the learned counsel, section 80HHC speaks of deduction in respect of profits derived by the assessee from export of such goods or merchandise; whereas section 80HHE speaks of such business. Such business only could mean the business of export of computer software. The scope of consideration has been narrowed down. In other words, whether the assessee derives income from any other business or not, is not a criteria and it is wholly extraneous while granting deduction under section 80HHE, which is exclusively for computing deduction in respect of profit from export of computer software etc. For the reasons stated hereinabove, we allow the claim of the assessee on this ground. In coming to the above conclusion the Tribunal has referred to two judgments of the Madras High Court, in the case of CIT vs. Rathore Brothers (2002) 254 ITR 656 (Mad) and in the case of CIT vs. Madras Motors / M M Forgings Ltd. (2002) 257 ITR 60 (Mad). These two judgments were concerned with s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have upheld the assessee s claim that the profits of the back office support services should be taken at Rs. 80,46,765/-, these grounds are academic and need not be decided. 22. The sixth ground relates to the disallowance of expenses relating to stock broking activities. The issue is discussed at page 3 of the assessment order. The assessee wrote off bad debts of Rs. 8,40,920/- and also claimed deduction in respect of payment of Rs. 8,14,330/- as Provident Fund payment. The assessee claimed that the bad debts are in respect of disputed / lost shares in respect of business carried on by the assessee on behalf of the clients, acting as a broker on the BSE / NSE. It was also claimed that the employees who were looking after the stock broking activity were assured certain rate of return by the Provident Fund, but the investments made by the Provident Fund did not generate the expected rate of return and in order to make good the deficit the assessee was obliged to pay Rs. 8,14,330/- to the Provident Fund. 23. The Assessing Officer called upon the assessee to explain as to why the aforesaid two items of expenses should not be disallowed because they related to the stock broking a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k broking business which was discontinued on 31.03.1999. That business was not carried on in the relevant previous year. It is well settled, as pointed out by the learned CIT DR that expenditure relating to a business which was not carried on during the relevant previous year cannot be allowed as a deduction against the profits of the other businesses. This principle is however conditioned by the rider that if all the businesses constituted a single business because of their interconnection, interlacing, intertwining, etc., then such expenses will be allowable as a deduction. During the relevant year the assessee has received commission, brokerage and profits of Rs. 41,41,726/-. The CIT(A) has observed that this amount may represent recoveries of the brokerage relating to the closed business which however does not mean that the assessee was carrying on the stock broking business in the relevant year. He has also observed in paragraph 25 of his order that the assessee was not responsible for the loss of the shares while dealing with the clients and that the cost of replacing the shares to the clients would represent capital expenditure. We are unable to agree with this part of his d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. Respectfully following the judgment of the Hon ble Bombay High Court, we hold that despite the fact that some recovery of brokerage relating to the discontinued stock broking business is brought to tax under section 41(1)(a) of the Act, the assessee is not entitled to claim any expenditure against the said receipt. 26. The other contention based on the judgment of the Supreme Court in the case of B R Ltd. vs. V P Gupta, CIT (supra) cannot apply to the present case because the assessee has not adduced any evidence to show that there was interlacing, interdependence, dovetailing, etc. between the different businesses of the assessee so that they can constitute a single business. Apart from that in relation to the payment to the Provident Fund it is not understood why the assessee should make the payment because if the Provident Fund is not able to give guaranteed returns to the employees, in the absence of any agreement, it is not the obligation of the assessee to make good the difference. There is no evidence of any business considerations involved in the act of the assessee. We are in agreement with the conclusion of the CIT(A) on this point in paragraph 25.1 of the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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