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DCIT, Circle-11 (1) , New Delhi and others Versus International Institute of Planning & Management Pvt. Ltd. and others

2015 (6) TMI 599 - ITAT DELHI

Justification for claiming Royalty expense as revenue expenditure - Held that:- The assessee has received on the job training with the stated aim of improving its efficiency and effectively expand its growth with the enhancement of team efficiency and capability for the growth of the business sphere of the educational institution. The incurring of expenses has not been doubted. No effort let alone a cogent discussion in the order has been made by the AO nor any arguments have been advanced by th .....

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nt have been inserted for propagating the business of the assessee is not in doubt. The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance. There is no evidence that in the magazines of the assessee there is a variance in the rates for the assessee as compared to outsiders. There should be some evidence on the basis of which the action of the AO can be hel .....

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oans to its sister concerns as the funds so advanced are generated from assessee’s own revenues. These facts are not disputed by the Revenue. Accordingly in the face of these admitted facts, we find that there is no legal precedent on the basis of which the claim of the Revenue can be held to be justified on facts. Infact legal precedent is to the contrary. The purchase of a specific property on instalment payment from which business of the assessee has been conducted is a matter of record. The .....

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2) TMI 82 - SUPREME COURT] - Decided in favour of assessee. - I.T.A .No.-4136/Del/2013,I.T.A .No.-4024/Del/2013 - Dated:- 10-6-2015 - Smt Diva Singh and Sh.T.S. Kapoor,JJ For the Petitioner: Sh. K.K. Jaiswal, Sr. DR For the Respondent: Sh. Ved Jain, CA ORDER PER DIVA SINGH, JM These are cross Appeals filed by the Revenue and the assessee assailing correctness of the order dated 26.04.2013 of CIT(A) XV, New Delhi pertaining to 2009-10 Assessment Year. The following grounds have been taken by the .....

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case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts. 2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of A.O. in disallowing an amount of ₹ 1,00,20,920/- out of interest paid to Anant Raj Industries. 3.(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of inte .....

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are that the assessee who in the year under consideration was engaged in the business of educational activities declared an income of ₹ 2,11,15,617/-. The case was selected for scrutiny after issuance of notice u/s 143(2). In the course of the assessment proceedings, the assessee was required to explain the allowability of interest expenses in view of the fact that the assessee had given interest free advance and loans to its sister concerns. In view of thereof, the assessee was required t .....

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nd an addition by way of a disallowance was made. The specific reasoning of the AO, considering the explanation of the assessee is reproduced hereunder for ready-reference:- The contention of the assessee is not acceptable, since, on one side they are paying the interest against mortgage of property amounting ₹ 118 crore and simultaneously on the other side they have paid loan and advances to the following companies in which the directors has substantial interest as interest free, as under .....

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. [1991] 187 ITR 363; and (iv) CIT vs V.I.Baby & Co. [2002] 123 TAXMAN 894 (Ker.). 2.2. In view of the above judicial precedent the proportionate disallowance of interest was worked out in the following manner resulting in ₹ 1,00,20,920/-:- Therefore, in view of the above discussions and principle laid down in various judicial pronouncements, the proportionate interest is being disallowed as: 85,00,000/- X 13,36,12,277/- = 1,00,20,920/- 118,00,00,000/- 2.3. Apart from the above additio .....

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the AO. Rejecting the same, the AO invoking section 40A(2) made a disallowance of 5% of the amount booked for want of commercial expediency and reasonableness of the payments thereby resulting in the additions of ₹ 50,41,892/- and ₹ 82,85,000/- on account of 5% of royalty payment and 5% of advertisement expenses respectively. 3. These additions were challenged in appeal before the CIT(A). The CIT(A) upheld the action of the AO in making disallowance u/s 36(1)(iii) in respect of the i .....

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on that in the facts where both the companies were admittedly under the same management, the assessee s explanation accepted by the CIT(A) in paras 6.3 & 6.4 on facts should be reversed, as in the facts of the present case, excessive and unreasonable payment has been made to the associate concern and the AO is empowered to exercise his judgement in a reasonable and fair manner and the disallowance of 5% of the expenses claimed is a very reasonable disallowance and on facts, it should be uphe .....

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mp; 5.4 of the order and referring to the same, it was submitted that none of these facts and finding have been assailed by the Ld. Sr. DR. Referring to the same, it was reiterated that the assessee is engaged in the business of providing, establishing, promoting, maintaining, educational solutions, conducting periodical or regular courses, short term courses for educational purposes through educational and management institutions, companies and other entities by entering into agreement for the .....

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onsultancy in running the assessee s educational institutions more effectively and efficiently so that profit earning is enhanced. The payment it was stated was made for the said purpose in order to make the team more efficient and enable the assessee s company to use their skills efficiently and prudently for education and allied purposes. 5.1. Similarly qua the advertisement expenses, the payment it was submitted is not in dispute. The payment has been made exclusively for business purposes of .....

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nable. It was argued that as per record there is no allegation that an element of personal nature attached to the said expenditure. No cogent material has been brought in either by the AO or the Sr. DR to justify invoking the provisions of section 40A(2). 6. We have heard the rival submissions and perused the material available on record. It is worthwhile to extract the explanation offered by the assessee to the AO to justify the payment of royalty and advertisement expenses to the associate con .....

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g into agreements for the purpose. The company is already engaged in conduction of courses in collaboration of a number of foreign universities such as University of California and others. The company was incorporated in 2006. To run the business more profitably and enlarging the sphere of business it was decided to engaged the Planman Consulting India Pvt. Ltd. (PCIPL), a company pioneer in the field of consultancy and on job training. The PCIPL was engaged to provide on job training and consul .....

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, efficient and timely manner for education and allied purposes so as to provide the monetary advantage to the company either today or tomorrow..................... ................................. Advertisement expenses: The advertisements are inserted invariably in dailies so as to attract prospective students for enrolment in various courses. The advertisements are mostly inserted in daily newspaper across India. Sometimes these advertisements are also inserted in magazines.................. .....

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cal or regular courses, short term courses for educational purposes through educational and management institutions, companies and other entities by entering into agreements for the purpose. The company is already engaged in conducting of courses in collaboration of a number of foreign universities such as University of California and others. The company was incorporated in 2006. To run the business more profitably and enlarging the sphere of business it was decided to engage the Planman Consult .....

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m Choudhary. It was decided that the PCIPL will provide on job training which with make our team more efficient and use their skill in a prudent, competent, efficient and timely manner for education and allied purposes so as to provide the monetary advantage to the company either today or tomorrow. The special features of such an engagement can be summarized as under: * The consultancy/on job training was provided by experts and experienced professionals of PCIPL for increasing the efficiency of .....

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ent company PCIPL has shown such receipts as its business income. * By incurring such expenses the company has not acquired an intangible assets of the nature know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature... 3.5.It is clearly from the above that the assessee made payment of royalty wholly and exclusively for the business purposes. The assessing officer has nowhere doubted the genuineness of the agreement as well as th .....

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impugned order is reproduced hereunder:- 5.5. Regarding the disallowance under Section 40A(2)(b) out of advertisement expenses, the appellant made the following submissions:- . .......An amount of ₹ 16.57 crores was paid during the year by the assessee to Planman Consulting India (P.) Ltd. It is not in dispute that the assessee made payment of advertisement wholly and exclusively for the business purposes. The Assessing Officer has nowhere doubted the genuineness and the fact of actual pay .....

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ng certain cogent material on record to show that the payment made by the assessee is unreasonable. For this, he has to bring certain comparable instances to prove the same. This exercise, the AO somehow choses to skip and just made an adhoc disallowance......... 6.3. It is in the above factual background that the CIT(A) decided the issue in favour of the assessee holding as under in paras 6.3 and 6.4 of the impugned order:- 6.3 Regarding the Ground No.6 relating to payment of Royalty expenses, .....

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lso not cast doubts on the genuineness of the payment to PClPL. The AD had disallowed 5% of the royalty expenses invoking the provisions of Section 40A(2) in an adhoc manner. In order to make disallowance under same provision, the onus is on the AD to prove that such expenditure is excessive or unreasonable having regard to the fair market value for the goods, services or facilities or the legitimate needs of the business of the assessee or the benefit derived by them. On careful perusal of the .....

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x avoidance either. It was not the case that the said PCIPL may have been claiming any losses in its return against which such payment would have been set off. Keeping in view the above, I hold that the AD was not justified in making an adhoc disallowance under Section 40A(2)(b) without satisfying the necessary conditions under that provision. Under the circumstances, the addition made by making disallowance of 5% of royalty expenses is deleted. 6.4 Regarding the payment of ₹ 16.57 crores .....

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fortnightly) -The Sunday Indian -English (weekly) -The Sunday Indian -Regionals (weekly) It was informed that IIPM had published full advertisement in these magazines from time to time. Relevant vouchers of the same and also the copies of the relevant publications were also shown to me during the appellate proceedings. I find that the Ld. AO has also not raised the issue of genuineness of such expenses. On careful consideration, I find that the appellant has charged the advertisement expenses in .....

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ourt:- (i) Casio India Ltd. (ITA No.10 of 2011); (ii) CIT vs Citi Financial Consumer Fin. Ltd. (ITA No.-1820 of 2010); (iii) Swatch Group (India) (ITA No.-871/2011); (iv) CIT vs Salora International Ltd. (308 ITR 199) 6.5. In the context of the above facts and circumstances where admittedly in the case of royalty expenses, the assessee has received on the job training with the stated aim of improving its efficiency and effectively expand its growth with the enhancement of team efficiency and cap .....

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the impugned order. The finding of the CIT(A) in absence of any material to the contrary accordingly is upheld. Similarly qua the advertisement expenses it is seen that the fact on record is that advertisement have been inserted for propagating the business of the assessee is not in doubt. The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance. There is no .....

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agitated by the assessee in its appeal, Ld. AR submitted that the addition has been made on account of disallowance of proportionate interest expenditure in respect of the advance of ₹ 13.36 crores made to the sister concern out of the interest paid to M/s Anant Raj Industries relying upon certain decisions. Inviting attention to the assessment order it was submitted that in response to this specific query made by the AO, the assessee had given a detailed reply stating that the property f .....

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t the year end, it was submitted was reflected as secured loan from M/s Anant Raj Industries Ltd. in the balance sheet. The scheme it was pointed out is similar to what is offered by banks on housing loans where instalments are paid wherein a portion of the same is adjusted towards principal and a portion of it is adjusted towards interest. It was submitted that it has not been doubted by the Revenue that the said property has been used for the purposes of assessee s business, it is a matter of .....

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ted by the assessee from its business and has not been taken as a loan. In the said background it was argued the Revenue cannot dictate to the assessee how to spend its money. It was his submission that there is no legal precedent on the basis of which the Revenue can presume to dictate to the assessee that it should first pay off M/s Anant Raj Industries and then consider advancing loans to its sister concern. It was his submission that how the assessee chooses to utilise its funds as per judic .....

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CIT(A) it was submitted is a factual finding which is full of mistakes and is an arbitrary finding. It was submitted that the Revenue is barred to make out a case that had the interest free advance not been made to the sister concern, the payment of interest to M/s Anant Raj Industries would have reduced. Attention was invited to similar arguments before the CIT(A). In these circumstances, reliance was placed upon SA Builders Ltd. vs CIT 288 ITR 1 (SC)(2006); ACIT vs Gillete Diversified Operati .....

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the specific land and building then the interest component of the payment would have been reduced. 9. We have heard the rival submissions and perused the material available on record. Before we address the same, it is considered appropriate to extract the justification and explanation offered by the assessee before the AO in support of its claim which has been extracted in the earlier part of this order also. For ready-reference, the same is reproduced again from the assessment order:- The asses .....

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mount at the year end was reflected as secured loan from Anant Raj Industries Ltd. in the balance sheet. The scheme was similar to the purchase of an assets on lease/hire where payments are made in monthly instalments termed EMIs. The above premises is being used by our company for running its educational institution which is the prime object of the business of the company. From the above discussion following points emerge: * The company purchased on immovable property/capital assets, which is b .....

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on business that this interest is paid. * The payment of interest was for the purposes of the business of the assessee company, because in the event of failure to pay interest accruing due, the Anant Raj Industries Ltd. would enforce the lien, and the business of the assessee company would come to an end and that in any event the expenditure was necessary on grounds of business expediency and incurred in order directly or indirectly to facilitate the carrying on of business. * The transaction of .....

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al amount at the year end towards such property. * The unpaid amount of a capital assets cannot be termed as borrowed capital in cash and as there is no amount of loan receipt in cash the question of diversion of funds does not arise at all. * The scheme of purchase/business expenditure is to be looked into from the point of wise prudent, pragmatic and ethical business man. The present scheme allowed the company to manage it cash flow and liquidity in effective and efficient manner. The above di .....

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ich is extracted hereunder:- "-Our company purchased land situated in the revenue estate of village Shahoorpur, Tehsil Hauz Khas, New Delhi together with building and structures raised thereon from Anant Raj Industries Ltd. The above property was purchased for ₹ 151 crore in September, 2008. Out of the above amount ₹ 33 crore was paid initially as down payment and balance amount of ₹ 118 crore was to be paid in instalments. The instalments were comprising of two components .....

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mount of capital assets and same was incurred wholly and exclusively for the purpose of business. Therefore, the interest on unpaid principle amount of capital assets is a business expenditure allowable under Section 37(1) of the I. T. Act. The issue of alloability of interest as revenue expenditure on outstanding balance of principle amount of asset purchased have been settled long back by various courts in their judgments. Some of the case laws relevant on this issue are as under: • Inter .....

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td. {1997} 227 ITR 465/95 Taxman 73 {SC}-" 9.2. In the afore-mentioned peculiar facts and circumstances of the case, we find where admittedly no loan from any bank has been raised by the assessee for advancing loans to its sister concerns as the funds so advanced are generated from assessee s own revenues. These facts are not disputed by the Revenue. Accordingly in the face of these admitted facts, we find that there is no legal precedent on the basis of which the claim of the Revenue can b .....

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the interest component of the purchase price. The Courts have repeatedly held that the tax authorities cannot sit in the chair of the businessman and dictate how the business is to run. The decision of the Hon ble Madras High Court relied upon in the case of K. Somasundaram & Bros. Vs. CIT (1999) is distinguishable on facts as apart from other reasons it is not a case where the funds are self-generated as in the facts of that case there is a borrowing of funds from the bank. On a similar re .....

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