TMI Blog2017 (10) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the ld CIT(A) in deleting the disallowance on account of expenditure made under subscription deposit scheme. - Decided in favour of assessee. Addition u/s 40A(2) - AO disallowed payment pertaining to 33 parties out of 34 parties @2% of such expenditure holding it in excess of the prevailing market rate - CIT(A) deleted the above disallowance - Held that:- Assessing Officer is not authorized to disallow 2% of the total expenditure but to disallow only the expenditure which is unreasonable and excessive after considering the circumstances provided u/s 40A(2) of the Act. Thus we set aside the whole issue back to the file of the ld Assessing Officer to examine the payment made to the related parties after considering the nature and rate of services provided by them to the assessee and then compare their fair market value, legitimate need of the assessee and benefit derived by the assessee and then if there is any amount found to be unreasonable or excessive then only disallow to that extent. The assessee is further directed to submit before the Assessing Officer above details. The AO is further directed to examine the matter in a fair and reasonable manner bearing in mind that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed deposit of sum is deposited by customers based on the number of magazines which would be given to him free of cost till the membership continues. The deposit is utlised for the purposes of the business and when the deposit is asked for refund, supply of magazine is stopped and deposit is refunded. For the supply of the magazines the assessee pays sum to Delhi Prakashan Vitran Ltd and other parties towards to cost of purchase of this magazine and claimed it as deduction. The ld Assessing Officer rejected the claim of the assessee stating that sales with regard to the above magazine are not credited to the profit and loss account and no part of refundable deposit is utilized by the assessee for its own business and assessee is passing on the benefit to sister concerns who publish the magazines, therefore, he disallowed the above sum. 5. The assessee also paid expenditure to 34 related parties covered u/s 40A(2)(b) of the Act and ld Assessing Officer asked the assessee company vide letter dated 10.10.2011 to justify the above payments. The assessee submitted its reply on 9.12.2011. The ld Assessing Officer on the basis of examination of the bills and quotation of rates for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AL No. 5001/DEL/2014 A.Y. 2010-11. Hon ble Sir(s) The captioned appeal has been filed by the department against the order of CIT(A) dated 17.12.2012. The revenue raked up two grounds of appeal. First ground of appeal is against the disallowance of ₹ 2411392/- which are expenses relating to the Subscription Deposit Scheme With respect to the ground of appeal relating to subscription deposit scheme for ₹ 2411392/- it is submitted that the assessee company way back in 1968 launched a scheme namely Subscription Deposit Scheme. It is submitted that as the media business is known for the cut throat competition and it is essential for every media house to introduce various schemes to allure customers and to enhance it s reader base from commercial expediency point of view. With a view to curb the competition and to increase the sale of magazine, the assessee launched a scheme named as Subscription Deposit Scheme way back in 1968 and at present the total subscribers are more than 15,000. Under the scheme the subscribers/readers are invited to deposit a fixed amount of money depending upon the number of magazines required by him and he is given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istory when these expenses have been allowed to the asses see. He shall regard a specific finding about the direct nexus of the funds vis-a-vis their utilization in the business . If it is established that funds have been utilized in the business then no disallowance ought to be made. Contention of the A.O:- During the assessment proceedings for A.Y 2009-10, the Ld. A.O following the earlier year order contended by raising a query that why the expenditure on purchase of magazines claimed as deduction should not be disallowed on the pattern of the preceding year as no income has been offered in this regard by the assessee. The A.O. has disallowed the expenditure in respect of subscription deposit scheme by applying the matching principle of income v/s expenditure. It is pertinent-to mention hear that before the passing of assessment order in the set-aside proceeding for A.Y 2005-06 to 2007-08 by the A.O i.e in the second round, the appeal of the assessee for the A.Y 2009-10 came-up for hearing before CIT(A) and the CIT(A) in the line of direction of Hon ble ITAT vide order dated 15..07.2011 given while disposing-off the appeal of revenue for A.Y 2005-06 to 2007-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for business purpose, it would have to incur expenditure by way of interest. Thus the company saved amount on interest that would otherwise have been paid to the bank in respect of borrowings. Obviously it is the cost which has been avoided by the assessee company by taking Subscription Deposit from customer. The same has been used in the business and it becomes a part of the profit earned by the assessee company. Basic commercial principle is that expenditure saved is profit earned. Therefore, it cannot be said that no income has been offered in this regard by the assessee company. The A.O failed to appreciate that the expression Income includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it by oneself and also which can be converted into income. (Reliance is placed on the case of Toyo Engg India Ltd v/s Joint CIT, 100 TTJ 373(Mum) The disallowance of expenditure by the Ld. A.O is arbitrary and devoid of any merit. The Assessing Officer has failed to appreciate the benefit derived by the company under the scheme from the point of commercial expediency. The Assessing Officer has erred in dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken into consideration by the Hon ble ITAT, (Third Member) in the appeal of the revenue in assessment years 1993-94 and 1994-95. The issue before the Hon ble Tribunal was not directly with regard to claim of expenditure under head Subscription Deposit Scheme , but the issue was with regard to allocation of this expenditure in relation to Subscription Deposit Scheme between different units of the assessee company from the point of view of claim of deduction u/s 801. While giving finding on the main issue involved, the Hon ble Tribunal also passed observation regarding this scheme. It is pertinent to mention here the observations of Third Member as here under. It is clear from record that books are supplied free of cost to the subscriber who made deposit of requisite amount under the scheme. Expenditure claimed by unit no. 1 pertains to supply books and magazines free of cost. The scheme was launched by unit No. l. The deposits were received by the said unit and, therefore, expenses are debited in account of the said unit. There is no dispute on above fact In my humble opinion on facts and circumstances of the case there is no justification for placing onus on the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard are that the the assessee is in the business of Printing 8s Publishing since 1968. However at present the main work of the company is to undertake the work of printing from the newspapers and periodical publishes which is being executed from it s printing press at Sahibabad. It produces various magazines in different languages which are circulated to the remotest corner of India. The magazines have to be before the specified date on the stands of the sellers. In order to ensure the timely printing, quality of printing and dispatch of the same so as to ensure its being in the hands of the buyers before-the specified date, the assessee had since inception of the company being getting it printed including transportation, mailing etc., etc., through its sister concerns. The A.O. has merely following the earlier order of A.Y 2008-09 8 2009-10, disallowed expenditure on hypothetical basis of 8% of the expenditure incurred being excessive paid to the sister concern. The A.O disallowed the entire expenditure including director remuneration and interest paid after deduction 8s deposit of T.D.S in accordance with law to persons with respect to unsecured loan . The adhoc disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he related as well as Outside Party is enclosed which is at Page 15-53. of P.B). From the above facts, it is crystal clear that various works viz, Data Processing, Stacking 85 Bundling, Plate Processing, Proof Reading 8 Printing has been done by the related party at a lesser rates than the market rates. It is submitted that to invoke the power under section 40A(2)(b) of the Income- tax Act, 1961, the ingredients to be satisfied are : (i) the assessee should incur an expenditure in respect of which payment has been or is to be paid to any person ; (ii) in the Assessing Officer's opinion, such expenditure should be excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom ; and (iii) the expenditure, which is considered by the Assessing Officer to be excessive or unreasonable, shall not be allowed as a deduction. The words in section 40A(2)(a) the Assessing Officer is of the opinion indicate that the opinion must be formed by the Assessing Officer and it is of course, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of tax are similar and therefore there is no logic in inflating the expenditure to reduce profit. In this context reliance is also placed on the decision of CIT v/s indo Saudi Service (Travel) Pvt Ltd 310 ITR 306 (Bom) wherein the Hon ble Bombay High court in the context of Commission has held that where commission has been paid to sister concern and the said sister concern is paying tax at a higher rates, there is no case of evasion of taxes. Hence Section 40A(2) cannot be invoked. Similar view has been expressed in Modi Revlon Pvt Ltd v/s ACIT 2 ITR (trib) 632. Further contended that the A.O without making any outside enquiry and without Unreasonableness of the expenditure, made the addition on adhoc basis on complete suspicion, surmises and conjecture which is not sustainable in the eyes of law. It is submitted that any addition made on adhoc basis i.e without any material on record is not sustainable in the eyes of law because as per the provision of section 40 (A) (2) (b), once the A.O. is of the opinion that expenditure incurred by the Assessee is excessive or unreasonable, then so much of the expenditure as is so considered by him to be excessive or unr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 SOT 379 (Mum) that an expenditure being excessive cannot be inferred based on some subjective perception of the authority dealing with the same, it has to be based on cogent material on record. In the instant appeal the AO has simply disallowed 10% 2% of expenditure on adhoc basis without any inquiry, as regards the market price. The disallowance is arbitrary and unjustified. Further in the Present case the adhoc addition has been made purely on the basis of suspicion and it is settled position in law the suspicion howsoever strong, cannot partake the character of evidence. The Hon ble Supreme Court in the case of Dhirajll Girdharilal v/s CIT reported in 26 ITR 736 (SC) has held that mere existence of reason for suspicion would not tantamount to evidence. But it should not be based on mere suspicion, conjecture or guess work or on irrelevant or inadmissible material. The reliance is also being placed on the decision of the Hon ble Supreme Court in the case of of Lalchand Bhagat Ambica Ram Vs. Commissioner of Income-tax reported in 37 ITR 288, wherein it has been held that no addition can be made on the basis of suspicion, conjecture and guess work. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business. The only reason for disallowances that sales with regard to the magazine were not included on credit in the profit and loss account. It is also not denied that such deposits are refundable. These are refundable as and when demanded by the subscribers and from that date the supply of magazine is discontinued. Merely because the relevant income on receipt according to the ld Assessing Officer is not credited to the profit and loss account such disallowance is made. According to us the assessee is getting a benefit of interest free deposit for the purposes of the business of the assessee in lieu of the cost of the above magazine. It is not the case of the Revenue that money is utilized for other than business purposes and expenditure incurred and claimed against business income. The ld CIT(A) has held that assessee is saving interest cost by collecting this deposit and therefore such saving of interest has definitely gone in increasing the profit of the assessee. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the disallowance of ₹ 2411392/- on account of expenditure made under subscription deposit scheme. In the result gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edia Pvt. Ltd. Printing charges ₹ 360 thousand per ₹ 600 per thousand 5. Media Services Data processing charge ₹ 20/10 per page 22/11 per page 6. Sankhiya Sanchar Sahyog Pvt. Ltd, Data processing charge ₹ 20 per page 40 per page 7. DP Communication Data processing charge ₹ 20 per page 22 per page 8. AN Logistics Processing charge ₹ 36 per page 40 per page 9. Delhi Press Samachar Patra Processing charge Rs, 535 per plate 600 per plate 10. Pratichhaya Graphics Place processing charge Rs, 535 per plate 600 per plate 11. DP Movers. Stackinig and bundelin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. In the present case when the assessee has not given the details about the nature of services performed by the related parties it is irrelevant to consider the market value of such services. Further the market value has to be contemporaneous. The quotation for plate making charges, printing charges etc submitted by the assessee placed at page No. 33 of the paper book are dated 24.11.2010 whereas the impugned assessment before us is Assessment Year 2009-10. Furthermore, the bills of the related parties except in case of Delhi Press Samachar Patra Pvt. Ltd were also not provided. Even in that bill too the details of quantity and the rates are not mentioned. Further, in many cases the nature of services rendered are also not mentioned ex. Page No. 54 where the bill of Prerna Sahyog Pvt. Ltd is produced. Further, surprisingly the quantity of the work and the rates are not mentioned in the bills of the related parties but the rates are given separately in the different sheets, where the AO has mentioned that nature of such expenses are also not mentioned by the assessee. The ld CIT(A) has held that the appellant had during the course of assessment proceeding submitted comparative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excessive then only disallow to that extent. The assessee is further directed to submit before the Assessing Officer above details. The AO is further directed to examine the matter in a fair and reasonable manner bearing in mind that the provision is intended to check, evasion of tax through excessive and unreasonable payment to related parties. In the result ground No. 2 of the appeal of the revenue is allowed with above direction. 21. In the result appeal of the revenue ITA No.1061/Del/2013 for Assessment Year: 2009-10 is partly allowed with above direction for statistical purposes. ITA No.1433/Del/2013 (Assessment Year: 2008-09) 22. In this appeal similar grounds as in Assessment Year 2009-10 were raised. The parties before us submitted that the facts and circumstances leading to above disallowances are also similar and their arguments are remains the same. 23. The ground No. 1 of the appeal is with respect to deletion of disallowance of expenditure of ₹ 1319989/- under subscription deposit scheme. We confirm the order of the ld CIT(A) for the reasons given by us in ITA No. 1061/Del/2013 for AY 2009-10 deleting the above disallowance. In the result ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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