LODHA PROPERTIES P. LTD, MUMBAI V. ACIT CEN CIR 42, MUMBAI

ITA 2012/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1798 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 24-03-2014
• Court: TRIBUNAL
• Department Lawyers: DR SANTOSH MANKOSKAR
• Keywords: Business expenditure; Commercial expediency; Revenue expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD , JM ITA NO. 2012 / MUM/20 1 4 ( ASSESSMENT YEAR : 2009 - 10 ) M/S. LODHA PROPERTIES DEVELOPMENT PRIVATE LIMITED , 216, SHAH & NAHAR INDUSTRIAL ESTATE, OFF . E.MOSES ROAD, WORLI, MUMBAI 400018 VS. ACIT - CC - 42, MUMBAI - 400020 PAN/GIR NO. AABC12222K APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI VIJAY MEHTA REVENUE BY DR. SANTOSH MANKOSKAR DATE OF HEARING 07 / 11 /2016 DATE OF PRON OUNCEME NT 06 / 12 /2016 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR 2009 - 2010 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT WHEREIN THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE OF HOTEL EXPENSES OF RS.54,72,091/ - AS BEING NOT INCURRED FOR PURPOSE OF BUSINESS. 2. THE LEARNED CIT(A) ERRED IN NOT ADMITTING THE EVIDENCE IN THE FORM OF BOARD RESOLUTION DATED 31 ST JULY 2007, WHICH APPROVED THE REIMBURSEMENT OF RS.54,72,091/ - INCURRED FOR MR. SAMYAK VEERA, WHO WAS APPOINTED AS AN ADVISOR OF THE COMPANY ON CORPORATE PR OPERTY DEVELOPMENT MATTERS. ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 2 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 3. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN DEVELOPMENT AND CONSTRUCTION OF REAL ESTATE PROPERTIES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSING OFFICER S TATED THAT THE ASSESSEE HAD INCURRED EXPENSES OF RS.56,04,604/ - UNDER THE HEAD TRAVELLING AND CONVEYANCE VIZ. TRAVELLING EXPENSES OF RS.1,32,513/ - AND HOTEL EXPENSES AT MUM BAI AMOUNTING TO RS. 5 4,72,091/ - . THE ASSESSEE WAS ASKED TO PRODUCE THE HOTEL EXPENSE S BILLS AND WAS ALSO ASKED WHY THE HOTEL EXPENSE S SHOULD NOT BE DISALLOWED ON THE GROUND THAT IT WAS INCURRED FOR NON - BUSINESS PURPOSES. IN RESPONSE THE ASSESSEE SUBMI TTED THAT THE HOTEL EXPENSES RS.54,72,091/ - INCURRED FOR STAY OF SHRI SAMYAK VEERA, WHO S TAYED IN INDIA AS A STRATEGIC INVESTOR FOR MONITORING PROJECT. SINCE HE IS NON - RESIDENT AND HENCE COMPANY HAS INCURRED H OTEL EXPENSES FOR HIS STAY IN INDIA. HOTEL EXPENSES INCURRED IS IN THE NATURE OF REVENUE EXPENDITURE AND NOT IN THE NATURE OF CAPITAL EX PENDITURE AND EXPENDED WHO L LY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION HENCE SHO ULD BE ALLOWED AS REVENUE EXPENDITURE. 4. THE SUBMISSION MADE BY THE ASSESSEE WAS NO T ACCEPTED BY ASSESSING OFFICER ON THE GROUND THAT THE ASSESSEE IS A V ERY REPUTED BUILDER AND DEVELOPER AND HAS WIDE NETWORK OF CONSTRUCTION ACTIVITIES MONITORED BY HIGHLY QUALIFIED ENGINEERS SUPERVISORS AND OTHER SKILLED LABOURES. HENCE THE QUESTION OF MONITORING BY ANY INDIVIDUAL CLIENT DOES NOT ARISE UNLESS THERE IS SOME PERSONAL OBLIGATION BY THE DIRECTORS. HENCE THE EXPENSES ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 3 INCURRED OF RS.54,72.091/ - AT TAJ WELLINGTON MEWS, MUMBAI FOR THE PERIOD FROM 1ST MAY 2008 TO 27.10.2008 CANNOT BE TREATED AS BUSINESS EXPENSES AND ACCORDINGLY WAS ADDED TO THE TOTAL INCOME OF THE AS SESSE E. 5. BY THE IMPUGNED ORDER CIT(A) CONFIRMED THE ACTION OF THE AO BY OBSERVING THAT PAYMENT MADE BY ASSESSEE COMPANY FOR THE REIM BURSEMENT OF BOARDING AND LODGING EXPENSES ARE IN THE NATURE OF PERSONAL EXP ENDITURE OF SHRI SAMYAK VEERA AND THEREFORE, W ILL NOT BE TREATED AS BUSINESS E XPE NSES OF THE ASSESSEE. 6. AGAINST THE ABOVE ORDER OF CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELI BERATED ON THE JUDICIAL PRONOUNCEMENTS RELIED ON BY LEARNED AR IN THE CASE OF CIT VS. DISCOVERY COMMUNICATION INDIA (DELHI HIGH COURT) 370 ITR 57. DELHI HIGH COURT IN CASE OF YUM RESTAURANTS INDIA PVT. LTD., - 371 ITR139 IN SUPPORT OF THE PROPOSITION THA T EXPENDITURE LAID OUT AND EXPENDED WHO L LY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS IS TO BE ALLOWED. 8. I N SUPPORT OF THE ABOVE CONTENTIONS, LEARNED AR HAD ALSO RELIED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: . 1. SASSOCN J. DAVID AND CO. (P.) LT D. VS. CIT[118 ITR 0261] [SC] 2. CIT VS. DHA NRAJGIRJI RAJA NARASINGIRJI [91I TR 44][SC] 3. CIT V MALAYALAM PLANTATIONS LTD. [053 ITR 0140] [SC] 4. BR ALCO METAL INDUSTRIES PVT. LTD. VS. CIT[206 ITR 477] ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 4 5. CIT VS. GOPAL RAO EKBOTE AND RAMACHANDRA RA JU P. JJ. [076 ITR 0664] [AP] 9. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND CONTENDED THAT EXPENDITURE SO INCURRED WAS PERSONALLY IN NATURE AND CANNOT BE BRANDED AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS . 10. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LEARNED AR IN THE CONTEXT OF FACTUAL MATRIX OF THE INSTANT CASE. FROM THE RECORD W E FOUND THAT D URING THE YEAR UNDE R CONSIDERATION, THE ASSESSEE COMPANY WAS IN THE PROCESS OF DEVELOPING A PROJECT OF 30 STOREYS BUILDING AT WALKESHWAR, MUMBAI. BEING A HUGE PROJECT IN SOUTH MUMBAI, MR. SAMYAK VEERA (HEREINAFTER REFERRED AS MR. VEERA) WAS I NTERESTED IN THE PROJECT. THEREFORE, MR. VEERA HAS INVESTED RS. 40,38,56,125/ - IN THE ASSESSEE COMPANY BY WAY OF 1 % CONVERTIBLE/REDEEMABLE PREFERENCE SHARES AND RS.12,71,97,953/ - BY WAY OF ADVANCE BOOKING AGAINST FIAT; THUS, THE TOTAL INVESTMENT MADE BY M R.VEERA IN THE A SSESSEE COMPANY WAS RS.53,10,54,0 78/ - (I.E. RS.40,38,56,125 + 12,71,97,953/ - ). WE FOUND FROM RECORD THAT THE PROJECT AT WALKESHWAR WAS SURROUNDED BY MANY IN - ADVERSITIES (LIKE THE TENANTS RESIDING AT THE LAND WERE NOT READY TO VACATE THE LAN D AND THE APPELLANT WAS NOT GETTING THE APPROVAL FROM THE STATUTORY AUTHORITIES ETC.). THEREFORE, PENDING THE APPROVAL FROM STATUTORY AUTHORITIES AND GETTING THE VACANT LAND BY REMOVING THE TENANTS, THE AMOUNT SO RECEIVED FROM SHRI ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 5 VEERA HAS BEEN ADVANCE D BY ASSESSEE COMPANY TO VARIOUS COM P ANIES ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT AT INTEREST. 11. WE ALSO FOUND THAT AMOUNT RECEIVED FROM MR. SAMYAK VEERA WAS INTEREST FREE. MR. SAMYAK VEERA IS A NON - RESIDENT INDIAN HAVING NO RESIDENCE IN INDIA. MR. SAMAYAK VEERA WAS INTERESTED IN MAKING SUBSTANTIAL INVESTMENT IN REAL ESTATE IN INDIA THROUGH THE ASSESSEE COMPANY AND THE ASSESSEE COMPANY WANTED TO USE THE FINANCIAL POTENTIAL OF MR. VEERA BY PERSUADING HIM TO INVEST HUGE AMOUNT IN ITS GROUP. MR. VE ERA BEING A NON - RESIDENT HAVING NO PLACE OF RESIDENCE, THE ASSESSEE ACTED PRUDENTLY BY PROVIDING LODGING AND BOARDING TO MR. SAMYAK VEERA FOR USING HIS FINANCIAL POTENTIAL FOR ITS BUSINESS PURPOSES. THE AMOUNT OF RS. 40.38 CRORES HAS BEEN RECEIVED IN JAN 2 007 AND THE SAME HAS BEEN REFUNDED TO MR. VEERA IN AUG, 2009; THUS, THE ASSESSEE USED THE INTEREST FREE FUND OF MR. VEERA FOR TWO AND HALF YEARS(31 MONTHS ). AS PER MATERIAL PLACED ON RECORD AMOUNT INVESTED BY MR. SAMYAK VEERA WAS RS.53,1 0,54,078/ - AGAINST WHICH THE ASSESSEE COMPANY HAS INCURRED HOTEL EXPENSES OF RS. 54,72,091/ - ; WHICH IS ONLY 1.03% OF THE TOTAL INVESTMENT MADE BY MR. VEERA. H AD THE ASSESSEE BORROWED THE SAME AMOUNT FROM SOME FINANCIAL INSTITUTION, IT WOULD HAVE INCURRED AN INTEREST EXPENSES AT AN AVERAGE RATE OF 12% WHICH IS MUCH HIG HER THAN THE EXPENSES INCURRED B Y THE ASSESSEE COMPANY BY WAY OF HOTEL EXPENSES (I.E. ONLY 1.03%) . 12. FROM THE RECORD WE ALSO FOUND THAT THE INVESTMENT MADE 'BY MR. VEERA WAS VERY HUGE AND KEEPING IN VI EW THE POTENTIAL INVESTMENT IN ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 6 FUTURE, IT WAS MUTUALLY AGREED BETWEEN THE ASSESSEE AND MR. VEERA T HA T THE LATER SHALL BE IN MU M BAI FOR SOMETIMES TO OBSERVE THE PR O JECT. IT IS ALSO MATTER OF RECORD THAT MR. VEERA WAS ALSO APPOINTED AS AN ADVISOR TO THE COM PANY FOR ADVISING ON CORPORATE DEVELOPMENT PROPERTIES MATTERS VIDE BOARD RESOLUTION DATED 31ST JULY, 2007 AND IT WAS ALSO RESOLVED THAT THE ASSESSEE SHALL REIMBURSE THE LODGING, BOARDING; TRAVELLING AND CONVEYANCE E XPENSES INCURRED BY MR.VEERA DURING HIS S TAY IN MUMBAI. A S MUTUALLY AG RE ED BETWEEN THE A SSESSEE AND MR. VEERA AND DECIDED BY THE ASSESSEE IN BOARD MEETING, THE ASSESSEE HAS REIMBURSED THE HOTEL AND TRAVELLING EXPENSES OF MR. VEER A AND DEBITE D THE SAME TO THE PROFIT AND LOSS A/C AND CLAIMED THE SA ME AS BUSINESS EXPENDITURE WHICH IS COMMERCIALLY JUSTIFIED IN VIEW OF THE FACTS STATED HEREIN ABOVE. 13. WE HAD ALSO CAREFULLY GONE THROUGH THE MOU ENTERED BY SAMYAK VEERA FOR OBSERVING THE PROJECT. 14. MR. VEERA WAS NOT 'ONLY' A PURCHASER OF FLAT BUT ALS O A STRATEGIC INVESTOR IN THE ASSESSEE COMPANY HAVING INVESTED RS.40.40 CRORES IN PREFERENCE SHARES OF THE ASSESSEE COMPANY . HOWEVER HE WAS ALSO AN ADVISOR ON CORPORATE PROPERTIES MATTER. V IDE BOARD RESOLUTION DATED 31ST JULY, 2007 IT WAS DECIDED IN THE BO ARD MEETING THAT ASSESSEE SHALL REIMBURSE THE LODGING, BOARDING, TRAVELLING AND CONVEYANCE EXPENSES INCURRED BY MR.VEERA DURING HIS STAY IN MUMBAI. IN VIEW OF THE B OARD RESOLUTION PASSED BY THE ASSESSEE COMPANY, ASSESSEE COMPANY WAS UNDER OBLIGATION TO INC UR HOTEL EXPENSES FOR MR. SAMYAK VEERA. ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 7 15. HONBLE DELHI HIGH COURT IN THE CASE OF DISCOVERY COMMUNICATION INDIA(SUPRA) HELD AS UNDER: - THE WORDS 'WHOLLY AND EXCLUSIVELY' THO UGH NOT SYNONYMOUS AND ARE SUFF ICIENTLY WIDE AND NOT RESTRICTED TO EXPENDITU RE S OLELY INCURRED FOR THE PUR POSE OF EARNING OF PROFITS. FOR AN AMOUNT TO BE TREATED AS AN ADMISSIBLE EXPENDITURE UNDER SECTION 37(1) OF THE INCOME - TAX ACT, 1961, THE AMOUNT SHOULD BE FOR THE PURPOSE OF BUSINESS AND NOT FOR THE PURPOSE OF EARNING INCOME. WHET HER AN EXPENDITURE WAS WHOLLY AND EXCLUSIVELY INCURRED OR LAID OUT FOR THE PURPOSE OF BUSINESS OR PROFESSION MUST BE DETERMINED FROM THE ASSESSEE'S PERSPECTIVE AND CHOICE. IT IS SUBJECTIVE. WHAT ONE ASSESSEE MAY WANT TO INCUR, ANOTHER MAY NOT LIKE TO INCUR . THE QUANTUM MAY ALSO DIFFER AND VARY. SECTION 37(1) DOES NOT CURTAIL OR PREVENT AN ASSESSEE FROM INCURRING AN EXPENDITURE WHICH HE FEELS AND WANTS TO INCUR FOR THE PURPOSE OF BUSINESS. EXPENDITURE INCURRED MAY DIRECTLY OR INDIRECTLY BENEFIT THE BUSINESS IN THE FORM OF INCREASED TURNOVER, BETTER PROFIT, GRO WTH, ETC. AS LONG AS THE EXPEN DITURE INCURRED IS 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS, THE ASSESSING OFFICER CANNOT BY APPLYING OF HIS OWN MIND, DISALLOW WHOLE OR A PART OF THE EXPENDITUR E. THE ASSESSING OFFICER CANNOT QUESTION THE REASONABLENESS BY PUTTING HIMSELF IN THE ARM - CHAIR OF THE BUSINESSMAN AND ASSUME STATUS OR CHARACTER OF THE ASSESSEE. HOWEVER, EXCEPTION CAN BE CREATED BY A STATUTORY PROVISION LIKE SECTION 40A(2), WHEN THE REVE NUE AS PER THE STATUTORY MANDATE MAY HAVE JURISDICTION TO EXAMINE THE ISSUE OF PRICE/CONSIDERATION. FOR INCURRING ADVERTISEMENT EXPENDITURE, IN THE RELEVANT YEARS, THERE WERE NO STATUTORY STIPULATIONS. WHEN THE EXPENDITURE IS INCURRED FOR THE ASSESSEE'S OW N BUSINESS, THE MERE FACT THAT THE EXPENDITURE WOULD ENDURE TO THE BENEFIT OF A THIRD PARTY OR THE THIRD PARTY INCIDENTALLY OBTAINS SOME ADVANTAGE, WOULD NOT AFFECT OR DETRACT FROM THE FINDING THAT THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY WAS FOR THE AS SESSEE'S BUSINESS. FOR EXAMPLE, A RETAIL TRADER MAY ADVERTISE DIFFERENT PRODUCTS WHICH MAY INCI DENTALLY BENEFIT THE MANUFACTUR ERS BUT THIS DOES NOT MEAN THAT THE ADVERTISEMENT EXPENDITURE FAILS TO MEET T HE REQUIREMENT OF 'WHOLLY AND EXCLUSIVELY'. 16. SIMI LARLY IN THE CASE OF YUM RESTAURANTS INDIA PVT. LTD., (SUPRA), HONBLE DELHI HIGH COURT OBSERVED AS UNDER: - IN EXAMINING A CLAIM FOR DEDUCTION UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961, ON THE GROUND OF COMMERCIAL EXPEDIENCY, WHAT IS TO BE SEEN IS NO T WHETHER IT WAS COMPULSORY FOR THE ASSESS EE TO MAKE THE PAYMENT BUT ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 8 WHETHER IT WAS OF COMMERCIAL EXPEDIENCY. AS LONG AS THE PAYMENT IS MADE FOR THE P UR POSES OF THE BUSINESS AND NOT BY WAY OF PENAL TY FOR INFRACTION OF ANY LAW, THE PAYMENT WOULD BE ALLOWABL E AS A DEDUCT ION. THE COMMERCIAL EXPEDIENCY OF A BUSINESSMAN'S DECISION TO INCUR A PARTICULAR EXPENDITURE CANNOT BE TESTED THE TOUCHSTONE OF STRICT LEGAL LIABILITY TO INCUR SUCH EXPENDITURE. SUCH DE C ISIONS ARE TO BE TAKEN FROM A BUSINESS POINT OF VIEW AND HAVE TO BE RESPECTED THE AUTHORITIES, REGARDLESS OF THE FACT THAT I T MAY APPEAR, TO THE LATTER, TO BE EXPENDITURE INCURRED UNNECESSARILY OR AVOIDABLY. 17. APPLYING PROPOSITION OF LAW DISCUSSED HEREINABOVE TO THE FACTS OF INSTANT CASE, WE FOUND THAT THE EX PENDITURE INCURRED BEING WHOLLY AND EXCLUSIVELY DOES NOT MEAN THAT IT HAS TO BE INCURRED NECESSARILY. THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 37 OF THE I T. ACT DOES NOT MEAN NECESSARILY AND THE PAYMENTS MADE VOLUNTARILY ARE NOT TO BE DISAL LOWED ONLY ON ACCOUNT OF THEIR VOLUNTARY CHARACTER. SO LONG AS THERE IS A REASONABLE NEXUS BETWEEN THE EXPENSES INCURRED AND THE BUSINESS OF THE ASSESSEE, THE EXPENSES WILL BE REGARDED AS HAVING BEEN INCURRED FOR THE PURPOSES OF BUSINESS. THUS, THE TEST TO FIND OUT WHETHER A PARTICULAR EXPENDITURE IS WHOLLY OR PARTLY JUSTIFIED OR EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS IS NOT TO SEE WHETHER IT IS NECESSARY, BUT TO BE CONSIDERED AS COMMERCIAL EXPEDIENCY AND HAS TO BE JUDGED FROM A PRUDENT BUSINESSMA N'S POINT OF VIEW. THE TRUE TEST IS TO FIND OUT WHETHER THE BUSINESS MAN, WHEN HE EXPENDS THE MONEY IS ACTING REASONABLY IN THE INTEREST OF HIS OWN BUSINESS. E VERY BUSINESSMAN KNOWS HIS INTEREST BEST AND IT IS FOR ASSESSEE TO DECIDE HOW TO PROMOTE HIS BUSI NESS INTEREST. THEREFORE, THE DISALLOWANCE MADE BY THE AO ON ITA NO. 2012/MUM/2014 LODHA PROPERTIES DEVELOPMENT PVT. LTD., 9 THE GROUND THAT THE HOTEL EXPENSES WAS NOT INCURRED 'EXCLUSIVELY' FOR THE BUSINESS PURPOSE I S NOT JUSTIFIED. 18. IN VIEW OF ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THE ACTION OF LOWER AUTHO RITIES DISALLOWING THE EXPENDITURE INCURRED BY ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. 19. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 06 / 12 /2016 S D/ - ( RAVISH SOOD ) S D/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 06 / 12 /201 6 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR , ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//