ITO, WD-8(1), KOLKATA, Kolkata V. M/s Arun Electrical Pvt. Ltd., Kolkata

ITA 1205/KOL/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4081 (ITAT-KOLKATA)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 06-12-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 27-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PINAKI MUKHERJEE JCITSRDR
• Assessee Lawyers: AKKAL DUDHWEWALA ACA
• Keywords: Business expenditure; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI A.T.VARKEY, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 1205 / KOL / 2016 ASSESSMENT YEAR :2012-13 ITO WARD-8(1), P7, CHOWRINGHEE SQUARE, 5 TH FLOOR, KOLKATA-700 069 V/S . M/S ARUN ELECTRICAL PVT. LTD., B1-D, 3 RD FLOOR, WHITE HOUSE, 119, PARK STREET, KOLKATA-700 016 [ PAN NO. AAHCA 9675 K ] /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI PINAKI MUKHERJEE, JCIT, SR-DR /BY RESPONDENT SHRI AKKAL DUDHWEWALA, ACA /DATE OF HEARING 06-12-2016 /DATE OF PRONOUNCEMENT 21-12-2016 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-16, KOLKATA DATED 29.03.2016. ASSESSMENT WAS FRAMED BY ITO WARD-8(1), KOLKATA U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 16.0 1.2015 FOR ASSESSMENT YEAR 2012-13. SHRI PINAKI MUKHERJEE, LD. SENIOR DEPARTMENTAL REPR ESENTATIVE APPEARED ON BEHALF OF REVENUE AND SHRI AKKAL DUDHWEWALA, LD. AU THORIZED REPRESENTATIVE APPEARED ON BEHALF OF ASSESSEE. 2. THE ISSUE RAISED BY THE REVENUE IN THIS APPEAL G ROUND IS THAT LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE A O FOR RS. 32,94,114/- AFTER HAVING RELIANCE ON THE ADDITIONAL DOCUMENTS SUBMITT ED BY THE ASSESSEE ITA NO.1205/KOL/2016 A.Y. 2012-13 ITO WD-8(1), KOL. VS. M/S ARUN ELECTRICAL PVT. LTD. PAGE 2 WITHOUT TAKING REMAND REPORT FROM THE AO WHICH IS I N CONTRAVENTION OF THE RULE 46A OF INCOME TAX RULES 1962. 3. BRIEFLY, THE FACTS ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN MANUFACTURING OF ELE CTRIC FAN PARTS. AT THE OUTSET THE LEARNED DR BEFORE US SUBMITTED THAT THE RELIEF HAS BEEN GIVEN ON THE BASIS OF RECONCILIATION STATEMENT SUBMITTED BY THE ASSESSEE FIRST TIME BEFORE THE LEARNED CIT(A) AND NO OPPORTUNITY FOR CR OSS EXAMINATION TO THE AO WAS PROVIDED FOR THE SAME. AS SUCH THE PROVISIONS O F RULE 46A OF INCOME TAX RULES WAS CONTRAVENED BY THE LEARNED CIT(A). THE LD THE DR VEHEMENTLY SUPPORTED THE ORDER OF AO. ON THE OTHER HAND, LD AR BEFORE US SUBMITTED THAT NO FRESH EVIDENCE WAS SUBMITTED AT THE TIME OF APPE LLATE STAGES. THE IMPUGNED RECONCILIATION STATEMENT WAS ALSO SUBMITTE D BEFORE THE AO AT THE TIME OF ASSESSMENT AND HE SUPPORTED THE ORDER OF LD . CIT(A). 4. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE RECONCILIATION S TATEMENT WAS SUBMITTED BY THE ASSESSEE AT THE TIME OF ASSESSMENT AS EVIDENT F ROM THE ORDER OF AO WHICH READS AS UNDER:- IT HAS BEEN EXPLAINED BY MR ROY THAT PURCHASE OF O THERS OF 19,59,676/- DEBITED TO OTHER ACCOUNT AND SALES TAX OF 11,58,657/- WERE EXCLUDED FROM THE PURCHASE. THE EXPLANATION AS WELL AS RECONCILIATION OF PURCHASE HAS NO BASIS AT ALL. ON ANALYZING THE VARIOUS HEADS OF EXPENSES AS PER NOTE 19 TO 24 OF THE AUDIT ED PROFIT & LOSS ACCOUNT IT IS SEEN THAT THE FOLLOWING HEADS HAVE BE EN INCORPORATED IN THE PROFIT & LOSS ACCOUNT. FROM THE ABOVE OBSERVATION, IT IS AMPLY CLEAR THAT THE RECONCILIATION STATEMENT AS CHALLENGED BY THE REVENUE AS FRESH EVIDENCE IS N OT ACTUALLY ADDITIONAL EVIDENCE. ACCORDINGLY WE HOLD THAT THE PROVISIONS O F RULE 46A OF INCOME TAX RULES 1962 HAS NOT BEEN CONTRAVENED BY THE LD CIT(A ). IN THE LIGHT OF ABOVE REASONING, WE HOLD THAT THE ORDER OF THE LD. CIT(A) IS CORRECT AND IN ACCORDANCE WITH LAW AND NO INTERFERENCE IS CALLED F OR. HENCE, WE UPHOLD THE SAME AND THIS GROUND OF REVENUE;S APPEAL IS DISMISS ED. ITA NO.1205/KOL/2016 A.Y. 2012-13 ITO WD-8(1), KOL. VS. M/S ARUN ELECTRICAL PVT. LTD. PAGE 3 4. NEXT ISSUE RAISED BY REVENUE IN THIS APPEAL IS T HAT LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR RS.5,44,56 1/- BY HOLDING AS BUSINESS EXPENSES. 5. ON EXAMINATION, AO FOUND THAT SALE PROMOTION EXP ENSES ARE REPRESENTING THE BILLS PAID TO THE VARIOUS CLUBS. A CCORDINGLY, AO HAS CALLED UPON THE ASSESSEE TO EXPLAIN AND ESTABLISH THAT THE SE CLUB EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. IN COMPLIANCE THERETO, THE ASSESSEE SUBMITTED THAT VARIOUS MEETIN G WERE HELD WITH THE CUSTOMERS AND THEIR REPRESENTATIVES FOR THE PURPOSE OF ITS BUSINESS IN THE CLUBS AND ACCORDINGLY THESE EXPENSES WERE INCURRED. HOWEVER, AO DISREGARDED THE PLEA OF ASSESSEE BY OBSERVING THAT THE EXPENSES WERE INCURRED VERY FREQUENTLY AND THE DETAILS OF THE CUS TOMERS WITH WHOM THE MEETINGS WERE HELD WERE NOT FURNISHED. ACCORDINGLY, AO DISALLOWED THE SALE PROMOTIONAL EXPENSES FOR RS 5,44,561/- AND ADDED TO THE TOTAL INCOME OF ASSESSEE. 6. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A) WHEREAS ASSESSEE SUBMITTED THAT ALL THE EXPENSES WERE INCUR RED BY THE DIRECTORS AND SENIOR EMPLOYEES OF ASSESSEE FOR HAVING INTERACTION WITH THE CUSTOMERS FOR THE PURPOSE OF TECHNICAL AND COMMERCIAL NEGOTIATION S. SUCH INTERACTION WITH SUPPLIERS AND CUSTOMERS WERE NECESSARY IN ORDER TO FINALIZE AND NEGOTIATE RATES, CONTRACTS ETC. THESE EXPENSES WERE ALSO NECE SSARY TO MAINTAIN CORDIAL BUSINESS RELATIONSHIP WITH THE RESPECTIVE PARTIES A SSOCIATED WITH THE ASSESSEE. AS OF NOW, THE CLUBS ARE PROVIDING PERFEC T PLATFORM FOR INTERACTION, EXCHANGE OF INFORMATION AND CONDUCT OF SUCH BUSINES S MEETINGS. THEREFORE, ALL SUCH EXPENSES WERE INCURRED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSE OF ASSESSEES BUSINESS. AFTER CONSIDERING THE SAME, LD . CIT(A) DELETED THE ADDITION MADE BY AO BY OBSERVING AS UNDER:- 9. I HAVE CONSIDERED THE A/RS SUBMISSIONS AND PERUS ED THE IMPUGNED ORDER OF THE AO MAKING DISALLOWANCE OF SALES PROMOTION EX PENSES. I HAVE ALSO PERUSED THE DETAILS OF SALES PROMOTION EXPENSES AND THE JUDICIAL DECISIONS RELIED UPON BY THE A/R OF THE ASSESSEE. FROM THE DE TAILS OF THE SALES PROMOTION EXPENSES IT IS OBSERVED THAT THE EXPENDIT URE COMPRISE OF EXPENSES PAID AT CLUBS. BEFORE THE AO THE ASSESSEE HAD EXPLA INED THAT THESE EXPENSES ITA NO.1205/KOL/2016 A.Y. 2012-13 ITO WD-8(1), KOL. VS. M/S ARUN ELECTRICAL PVT. LTD. PAGE 4 WERE INCURRED TOWARDS BUSINESS MEETINGS HELD AT CLU BS WITH THE CUSTOMER REPRESENTATIVES FOR TECHNICAL & COMMERCIAL NEGOTIAT IONS. THE A/R EXPLAINED THAT IN THE ASSESSEES LINE OF BUSINESS, THE DIRECT ORS ARE REQUIRED TO ENGAGE IN CONSTANT LIASONING WITH CUSTOMERS, SUPPLIERS & BUSI NESS ASSOCIATES. MEETINGS WITH OUT-STATION CUSTOMERS & ASSOCIATES ARE COMMONL Y HELD AT CLUBS TO NEGOTIATE CONTRACT & DEALS. IT IS THE ASSESSEES CL AIM THAT THE CLUB EXPENSES ARE INCURRED BY THE DIRECTORS IN THE COURSE AND FOR THE PROMOTION OF THE BUSINESS INTERESTS OF THE ASSESSEE. IN SUPPORT OF I TS CLAIM FOR SALES PROMOTION EXPENSES INCURRED AT CLUBS, THE ASSESSEE RELIED ON DECISIONS OF VARIOUS HIGH COURTS. ON GOING THROUGH THE FACTS OF THE CASE, I F IND PRIMA FACIE MERIT IN THE ASSESSEE;S CLAIM. IT IS VERY COMMON IN THIS MODERN AGE TO HOLD BUSINESS MEETINGS AT CLUBS TO ENTERTAIN CLIENTS AND ALSO DIS CUSS BUSINESS. BEFORE THE AO THE APPELLANT HAD EXPLAINED THE NATURE & PURPOSE OF INCURRENCE OF SUCH EXPENSES. ALL THE EXPENSES WERE VOUCHED FOR. THE AO ALSO ADMITS THAT THE EXPENSES WERE PAID THROUGH PROPER BANKING CHANNELS. CONSIDERING THE NATURE & SCALE OF ASSESSEES BUSINESS, THE QUANTUM OF SALE S PROMOTION EXPENSES IS ALSO FOUND TO BE REASONABLE. I FURTHER NOTE THAT TH E AO HAS ALSO NOT BEEN ABLE TO PIN-POINT OR PROVE ANY SPECIFIC INFIRMITY IN THE DETAILS OF SALES PROMOTION EXPENSES OR THAT ANY OF THE EXPENSES WERE PERSONAL IN NATURE. THE FULL BENCH OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS GROZ BECKERT ASIA LTD (SUPRA) HAS HELD THAT SUCH CLUB EXPENSES A RE INCURRED BY THE DIRECTOR TO FACILITATE RUNNING OF BUSINESS WHICH IN TURN BEN EFITS THE ASSESSEE AND THEREFORE IT WAS HELD FULLY ALLOWABLE BY WAY OF DED UCTION FROM THE PROFITS OF THE BUSINESS. FOR THE REASONS SET OUT IN THE FOREGOING AND IN LIGHT OF THE DECISION OF PUNJAB 7 HARYANA HIGH COURT IN THE CASE OF CIT VS GROZ BECKERT ASIA LTD (SUPRA), I HOLD THAT THE SALES PROMOTION EXPENSES OF RS.5,44,561/- WAS A DEDUCTIBLE BUSINES EXPENDITURE. THE AO IS ACCORDING LY DIRECTED TO DELETE THE DISALLOWANCE OF RS.5,44,561/-. GROUND NO.2 IS THERE FORE DISMISSED. BEING AGGRIEVED BY THIS, REVENUE HAS COME UP IN APP EAL BEFORE US. 7. BEFORE US LD. DR FOR THE REVENUE HAS SUBMITTED T HAT PARTIES WITH WHOM THE MEETINGS WERE HELD BY ASSESSEE WERE NOT FURNISH ED AT THE TIME OF ASSESSMENT PROCEEDINGS. HE VEHEMENTLY RELIED ON THE ORDER OF AO. ON THE OTHER HAND, LD. AR FOR THE ASSESSEE SUBMITTE D THAT ALL THE NECESSARY DETAILS OF SALES PROMOTION EXPENSES WERE FURNISHED AT THE TIME OF ASSESSMENT PROCEEDINGS. LD. AR FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE RATES IN THE CLUBS ARE THE CONCESSIONAL RATES AND THEREFORE IT I S ALWAYS COST-EFFECTIVE TO HOLD THE BUSINESS MEETING WITH THE CLUBS. THE ASSES SEE WAS ABLE TO ACHIEVE ITS TURNOVER OF RS. 4 CRORES APPROXIMATELY BY MAINT AINING THE CORDIAL ITA NO.1205/KOL/2016 A.Y. 2012-13 ITO WD-8(1), KOL. VS. M/S ARUN ELECTRICAL PVT. LTD. PAGE 5 RELATIONSHIP WITH ITS BUSINESS ASSOCIATES. LD. AR R ELIED ON THE ORDER OF LD. CIT(A) AND STATED THAT ISSUE MAY BE DECIDED ON MERI T. 8. HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATE RIALS AVAILABLE ON RECORD. WE FIND THAT IN THE INSTANT CASE THE AO DIS ALLOWED THE CLUB EXPENSES CLAIMED BY THE ASSESSEE ON THE GROUND THAT THESE WE RE NOT INCURRED FOR THE PURPOSE OF THE BUSINESS. HOWEVER THE SAME WERE ALLO WED BY THE LD CIT(A) BY HOLDING THAT THESE EXPENSES WERE INCURRED TO HOLD B USINESS MEETINGS AT CLUBS TO ENTERTAIN CLIENTS AND EXPAND THE BUSINESS . NOW THE ISSUE BEFORE US ARISES FOR THE ADJUDICATION SO AS TO WHETHER THE CLUB EXPE NSES INCURRED BY THE ASSESSEE ARE HAVING ANY NEXUS WITH THE BUSINESS OF THE ASSESSEE IN THE AFORESAID FACTS AND CIRCUMSTANCES. IN THIS CONNECTI ON, WE FIND THAT THE CLUBS PROVIDED SEVERAL KINDS OF FACILITIES SUCH AS CONFER ENCES, BUSINESS MEETINGS, AS WELL AS PROVISION FOR MULTIMEDIA EXHIBITION. MA NY CLUBS ALLOW MEMBERSHIP TO COMPANIES OR OTHER BUSINESS ENTITIES. THE MEMBER SHIP IS GIVEN IN NAME OF COMPANY OR OTHER CONCERN. IT IS VERY WELL KNOWN THA T THE CLUBS ARE A PLATFORM TO MEET PEOPLE. THE MEETINGS CAN BE PRIVATELY ORGAN IZED OR CAN BE IN THE COURSE OF MASS MEETINGS OR GATHERINGS AT THE TIME O F FUNCTIONS OR CELEBRATIONS AT CLUB. BY VISITING CLUBS, CHANCES OF MAKING NEW C ONTACTS IMPROVE. WITH NEW CONTACTS PEOPLE CAN DO MORE INTERACTIONS WHICH CAN BE BENEFICIAL FOR BUSINESS AND PROFESSION. THEREFORE BUSINESS ORGANIZATIONS LI KE COMPANY, FIRM, BANK, CO-OPERATIVE SOCIETY ETC. FUNCTIONS THROUGH HUMAN A GENCIES WHICH MAY BE DIRECTORS OR OTHER OFFICERS OF BUSINESS ORGANIZATIO N. THEREFORE, BUSINESS ORGANIZATIONS PROVIDE FACILITY TO THEIR OFFICERS TO ATTEND AND AVAIL SERVICES OF CLUBS. CLUBS MAKE COMPANY OR OTHER BUSINESS ORGANIZ ATION AS ITS MEMBER. THIS IS GENERALLY CALLED AS CORPORATE MEMBERSHIP. T HE EXPENSES MAY BE IN NATURE OF ENTRANCE FEES, ANNUAL FEES, LIFE MEMBERSH IP FEES AND REIMBURSEMENT OF ACTUAL EXPENSES ETC. THE PURPOSE OF THE EXPENDIT URE IS TO HAVE A SUITABLE PLATFORM FOR MEETING PEOPLE AND GETTING ADVANTAGES OF MEETING MANY PEOPLE AT A TIME TO MAINTAIN OLD CONTACTS AND ALSO TO MAKE NEW CONTACTS. THE MAIN PURPOSE OF THE ORGANIZATION IS TO INDUCE ITS OFFICE RS TO ATTEND SUCH PLACES FOR ITA NO.1205/KOL/2016 A.Y. 2012-13 ITO WD-8(1), KOL. VS. M/S ARUN ELECTRICAL PVT. LTD. PAGE 6 MAINTAINING AND MAKING CONTACTS FOR THE BENEFIT OF BUSINESS. EVEN IF SOME PERSONAL ADVANTAGE IS OBTAINED BY OFFICERS, IT WILL BE IN NATURE OF MAINTAINING GOOD RELATIONS WITH OFFICERS AND IN NATURE OF STAFF WELFARE EXPENSES. THEREFORE, THE EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS. BY OBTAINING MEMBERSHIP FOR A PERIOD OF MORE THAN O NE YEAR, THERE MAY BE AN ADVANTAGE OF ENDURING NATURE. HOWEVER, SUCH ADVANTA GE IS IN THE FIELD OF REVENUE BENEFIT AND NOT FOR OBTAINING ANY CAPITAL A SSET OR OBTAINING BENEFIT IN CAPITAL FIELD. THEREFORE SUCH EXPENSES WILL BE OF R EVENUE NATURE. IN VIEW OF ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF LD CIT( A). HENCE, THIS GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 9. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 21/ 12/2016 SD/- SD/- ( !') ( !') (A.T.VARKEY) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP, SR.P.S $!% &- 21 / 12 /201 6 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-ITO WRD-8(1), P7, CHOWRINGHEE SQUARE, 5 TH FLOOR, KOLKATA-69 2. /RESPONDENT-M/S ARUN ELECTRICAL PVT. LTD., B1-D, 3 RD FLOOR, WHITE HOUSE, 119 PARK STREE T, KOLKATA-16 3. %.%/0 2 / CONCERNED CIT KOLKATA 4. 2- / CIT (A) KOLKATA 5. 567 /0, /0 , / DR, ITAT, KOLKATA 6. 7:; <= / GUARD FILE. BY ORDER/ ! , /TRUE COPY/ / % /0 ,