ACIT CIR 4(3), MUMBAI V. NEDLLOYD LOGISTICS I. P. LTD, MUMBAI

ITA 2027/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87988 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 20-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 12-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEER LA
• Assessee Lawyers: NIRAJ SHETH
• Keywords: Related party transaction; Income from undisclosed sources; Principle of natural justice
• Section: 69; 69C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI , BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. : 2027/MUM/2010 (ASSESSMENT YEAR: 2006-07) DY. COMMISSIONER OF INCOME-TAX 4(3), 6 TH FLOOR, ROOM NO. 649, AAYAKAR BHAVAN, MUMBAI -400 020 VS M/S NEDLLOYD LOGISTICS (I) P LTD, URMI ESTATE, 11 TH FLOOR, TOWER A, GANPATRAO KADAM MARG, LOWER PAREL, MUMBAI -400 013 .: PAN: AAACE 1475 G (APPELLANT) ! (RESPONDENT) ' # APPELLANT BY : SHRI PAVAN KUMAR BEERLA ! ' # RESPONDENT BY : SHRI NIRAJ SHETH $% & '( /DATE OF HEARING : 20-11-2014 )*+ & '( / DATE OF PRONOUNCEMENT : 16-01-2015 ORDER PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE DEPARTMENT AGAINST THE ORDER OF CIT(A) 8, MUMBAI, DATED 18.12.2009, WHEREIN THE FOLLOWING REVISED GROUNDS HAVE BEEN TAKEN: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, LD. CIT(A) ERRED IN DELETING THE ADDITION O F RS. 2,21,54,570/- MADE U/S 40A(2)(B) OF THE I.T. ACT BY ASSESSING OFFICER. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LD. CIT(A) ERRED IN DELETING THE ADDITION O F RS. 20,22,638/- MADE ON ACCOUNT OF DISALLOWANCE OF EXPENSES FROM CUSTOMS CLEARANCE EXPENSES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE IMPUGNED ORDER OF LD. CIT(A) IS CONTRARY TO LAW TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 4. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 2 2. WE PROCEED TO ADJUDICATE ON THE REVISED GOA AS FILED ABOVE BY THE DEPARTMENT ON 24.06.2014. 3. THE FACTS ARE THAT THE ASSESSEE COMPANY WAS IN THE BUSINESS OF CONTAINER MOVEMENT AND IS A SUBSIDIARY OF P&O (INDIA) PVT LTD. THE ASSESSEE COMPANY AS WELL AS ITS HOLDIN G COMPANY ARE AGENTS OF PONL LTD. UK, WHICH HAS NOW MERGE D WITH MAERSK INDIA PVT LTD. 4. IN THE ASSESSMENT PROCEEDINGS, THE ISSUE OF SERVICE C HARGE WAS TAKEN UP BY THE AO, FOR WHICH, THE ASSESSEE REPLIED THAT, THAT THE ASSESSEE COMPANY HAS STARTED PAYING SERVI CE CHARGES AND SUBMITTED AN AGREEMENT BETWEEN HOLDING CO. AND THE ASSESSEE WHICH IS EFFECTIVE FROM 01/04/2003 FOR BEARING, COMMON EXPENSES FOR THE USE OF COMMON OFFICE BY BOTH THE COMPANIES. IN THIS RES PECT THE ASSESSEE COMPANY HAS SUBMITTED DETAILED NOTE WHICH READS AS UNDER: 4.1 THE PARENT COMPANY HAVE CREATED APPROPRIATE INFRASTRUCTURE LOCALITY IN ORDER TO PERFORM THEIR A CTIVITIES AND THE ASSESSEE AS THE LOGISTIC SERVICE PROVIDER U NDER COMMON ROOF OPERATED FROM SAME PREMISES. ON SIMILAR ISSUE AROSE IN A.Y. 2004-05 THE AR OF THE COMPANY SUBMITTED THE DETAILS FOR SHARING COMMON EXPENSES. THE SAME ARE COPIED DOWN AS THE PRESENT DETAILS ARE NOT SO ELABORATIVE THOUGH THE CENTRE MEANING IS SAME. 1. PONIPL IS OUR PARENT COMPANY AND IS THE AGENT FO R PONL LTD. UK. THEY HAVE CREATED APPROPRIATE INFRASTRUCTURE FACILITIES IN ORDER TO PERFORMANCE T HEIR ACTIVITIES. WE, AS THE LOGISTICS SERVICE PROVIDER R EPRESENT PONL LTD., UK IN INDIA. 2. IN ORDER TO PROVIDE CUSTOMER SERVICE UNDER A COM MON ROOF, WE S LOGISTICS COMPANY, OPERATE FROM THE SAME PREMISES THAT OF PONIPL ACROSS IN, HA. PONIPL IS TH E LESSEE OF THE PREMISES AND MOST OF THE INFRASTRUCTU RE IS REGISTER' FIN THEIR NAME. ALSO, FOR COMMON FACILITI ES THE VENDOR CONTRACTS ARE REGISTERED IN THEIR NAMES SO A S TO AVAIL ECONOMICS OF SCALE, WE BOTH SHARE THE SAME COMMON RESOURCES FOR WHICH PONIPL INCURS THE INITIA L COST. 3. BASED ON EITHER THE OFFICE SPACE AND/OR NUMBER O F EMPLOYEES, SUCH COSTS ARE THEN ALLOCATED BY PONIPL TO US. THIS IS DONE FOR ADMINISTRATIVE EASE, OR ELSE W E WOULD HAVE HAD TO REGISTER SEPARATELY FOR SUCH SERV ICES WHICH WOULD HAVE BEEN AT A HIGHER COST CONSIDERING THE SIZE OUR OPERATIONS. 4. THESE COST ARE CATEGORIZED AS SERVICE CHARGES AN D ARE RECOVERED BY PONIPL THROUGH A MONTHLY DEBIT NOTE. THESE CHARGES INCLUDE:- A. EMPLOYEE RELATED COSTS, M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 3 B. UTILITIES, C. PRINTING & STATIONARY, AND D. TELEPHONE CHARGES. 5. ALL THE STAFF OF PONCLIPL ARE EMPLOYED BY PONIPL AND SECONDED TO PONLIPL. AS A GROUP OR OUR STAFF AR E GIVEN OPPORTUNITIES TO WORK ACROSS FUNCTIONS/ENTITI ES, HENCE FOR ADMINISTRATIVE EASE WE KEEP PONIPL AS THE IR EMPLOYER. BASED UPON THIS, THE EMPLOYEE RELATED COS TS INCLUDE SALARY. 5. THE AO, CALLED FOR THE BOOKS, FOR WHICH THE ASSESSEE SUBMITTED THAT BECAUSE OF THE VOLUME OF BUSINESS, THE VO UCHERS ARE IN THE GODOWNS, WHICH BY THEMSELVES HAVE BECOME HAZARDOUS. 6. THE AO, NOT GETTING APPROPRIATE SUPPORT FROM THE ASSESSEE, DISALLOWED 25% OF RS. 2,51,39,981/-, WHICH AMOUNTED TO RS. 62,84,995/-. 7. THE ASSESSEE APPROACHED THE CIT(A), WHO AFTER CONSIDE RING THE SUBMISSIONS OF THE ASSESSEE, HELD THAT DISALLOWANCE OF 25% AS MADE BY THE AO IS SUSTAINED ON COMMON EXPENSES BUT EXCLUDED THE SEPARATE PAYMENTS OF RENT, TELEPHONE, COUR IER AND POSTAGE, PRINTING AND STATIONARY AND GENERAL EXPENSES. HE , THEREFORE, SUSTAINED THE DISALLOWANCE OF RS. 55,38,642/- AND GAVE A RELIEF OF RS. 7,46,353/-. 8. AGAINST THIS RELIEF OF RS. 7,46,353/- THE DEPARTMENT IS IN APPEAL BEFORE THE ITAT. BEFORE US, THE DR SUBMITTED THAT THE ENTIRE PAYMENTS WERE CONCERNING THE ASSESSEE AND ITS R ELATED PARTY AND THEREFORE, THE AO WAS JUSTIFIED TO MAKE THE DISALLOWANCE. 9. THE AR, WHILE ACCEPTING THE DISALLOWANCE AS SUSTAINED, SUBMITTED THAT THE CIT(A) HAS FAIRLY GIVEN RELIEF ON THE ITEM S OF EXPENSES, WHICH WERE DIRECTED FROM THE RELATED PARTY TRANSACTIONS. THE AR, THEREFORE, PLEADED THAT THERE WAS N O INFIRMITY IN THE ORDER OF THE CIT(A). M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 4 10. WE HAVE HEARD THE ARGUMENTS AND HAVE PURSUED TH E ORDERS. WE FIND THAT THE CIT(A) HAD DISSECTED THE EXPENSES FRO M RELATED PARTY TRANSACTIONS AND UNRELATED PARTY TRANSACTIONS, AS W AS DONE IN ASSESSMENT YEARS 2004-05 AND THAT ORDER WAS ACCEPTE D BY THE DEPARTMENT. SINCE THE ISSUE AND DISALLOWANCE IS THE SAME IN NATURE, WE HOLD THAT THE ORDER OF THE CIT(A) DID NOT SUFFER FROM ANY INFIRMITY. 11. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) AND REJECT THE GROUND OF APPEAL AS FILED BY THE DEPARTMENT. 12. GROUND NO. 1 IS THEREFORE, REJECTED. 13. GROUND NO. 2 PERTAINS TO DISALLOWANCE OF RS. 20 ,22,638/- MADE ON CUSTOM CLEARANCE ETC. 14. THE CIT(A) HELD, AFTER CONSIDERING THE OBSERVAT IONS OF THE AO AND THE SUBMISSIONS OF THE ASSESSEE, THAT, GROUND NO. VI IS REGARDING ADDITION OF RS. 20,2263 8/- OF UNACCOUNTED INCOME FROM CUSTOM CLEARANCE THE AO. HAS DISCUSSED THIS ISSUE AT PARA 9 AND PARA 10. THE AO. HAS QUOTED THE APPELLANTS SUBMISSION AND HELD THAT ACCOUNTING SYSTEM OF THE APPELLANT IS NOT SPECIFIC TO WHICH THE INCOME IS SHOWN, THE COMPANY IS NOT QUANTIFIED AS TO HOW MUCH EXPENSES HAVE BEEN BOOKED UNDER RESPECTIVE HEADS AND SUBMITTED ANY DOCUMENTAR Y EVIDENCE ASKED FOR, THEREFORE, HE COMPUTED THE INCO ME AS FOLLOWS: LAST YEAR THE ASSESSEES OPERATING INCOME FROM CUS TOM CLEARANCE WAS RS. 88,36,109/- AND EXPENSES UNDER SIMILAR HEAD WERE OF RS. 70,37,547/-. THE PERCENTAG E OF EXPENSES AS COMPARE TO GAIN WORKS OUT AT 79.64% IF THE PERCENTAGE IS APPLIED TO THE EXPENSES CLAIM BY THE COMPANY THE 100% GAIN WORKS OUT TO RS. 80,74,529/- WHEREAS GAIN SHOWN ONLY OF RS. 60,51,891/-. HENCE T HE DIFFERENCE OF RS. 20,22,638/- IS ADDED TO THE INCOM E OF THE ASSESSEE AS NOT PROPERLY ACCOUNTED AS DISCUSSED ABOVE. FOR THIS THE REASONING GIVEN FOR MOBILE EXPE NSES WHILE DISALLOWING ASSESSEES CLAIM U/S 40A[2][B] AN D U/S 69C OF THE I T ACT IS ALSO TAKEN INTO CONSIDERA TION TO EMPHASIS THE ASSESSEE'S FAULTY METHOD OF RECORDING THE EXPENSES WHICH ULTIMATELY RESULT IN LOWERING THE PR OFIT.' 6.1 THE APPELLANT SUBMITTED AS UNDER: (I) WE SUBMIT THAT THE ADDITION MADE BY THE AC IS ENTIRELY ON NOTIONAL BASIS. INSTEAD OF COMPARING TH E NET OPERATING MARGINS ON AN OVERALL OPERATING INCOME BASIS, THE AO HAS MADE A COMPARISON OF THE MARGINS EARNED FROM CUSTOM CLEARANCE ON A STANDS ALONE BASIS. THE AO HAS NOT APPRECIATED THE SUBMISSION OF THE APPELLANT THAT DURING THE CAPTIONED YEAR, IN CE RTAIN M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 5 CASES, THE CONSOLIDATED FREIGHT INCOME TOWARDS CUST OM CLEARANCE HAS BEEN INVOICED AND ACCOUNTED UNDER THE OTHER HEADS OF OPERATING INCOME. (II) FURTHER, THERE IS NO PROVISION IN THE ACT, WHI CH ALLOWS THE AO TO MAKE AN ADDITION ON A NOTIONAL BASIS. ACCORDINGLY, THE SAID ADDITION BASED ON RATI O OF ONE HEAD OF EXPENSE TO THE CORRESPONDING HEAD OF IN COME IS IRRATIONAL. THE SAID ADDITION MADE BY THE AO IS UNWARRANTED AND UNREASONABLE SINCE THE SAME WOULD TANTAMOUNT TO TAXING THE APPELLANT WRONGLY ON A HYPOTHETICAL INCOME WHICH IS NEITHER RECEIVED OR AC CRUED NOR DEEMED TO RECEIVE OR DEEMED TO ACCRUE TO THE APPELLANT AS PER PROVISIONS OF SECTION 5 OF THE ACT . FURTHER, SUCH AN APPROACH IS ENTIRELY UNSUSTAINABLE IN LAW. SUCH AN ADDITION IS THEREFORE UNWARRANTED AND AGAINST ALL CANONS OF EQUITY, NATURAL JUSTICE AND F AIR PLAY. WE THEREFORE EARNESTLY REQUEST YOUR HONOR TO DELETE THE ADDITION OF RS, 20,22,638/- ERRONEOUSLY MADE BY THE AO TO AVOID UNDUE HARDSHIP TO THE ASSESSEE AND THE FISCAL LAWS MAY BE CORRECTLY APPLIED. 6.2 I HAVE GONE THROUGH THE ORDER OF THE AO, AND SUBMISSION OF THE APPELLANT. THE AO HAS MADE AN ESTIMATED DISALLOWANCE, BASED ON THE CUSTOM CLEARAN CE INCOME OF AY 2004-05 AND ALSO ON THE BASIS OF REASO NING GIVEN FOR MOBILE EXPENSES WHILE DISALLOWING THE ASSESSEES CLAIM U/S 40A(2)(B) AND U/S 69C OF THE INCOME-TAX ACT. THE AO HAS NOT BROUGHT ANY EVIDENCE TO SHOW THAT THERE IS ANY DEFECT IN THE ACCOUNTS OF TH E ASSESSEE AND HAS FOLLOWED THE RESULTS OF CUSTOM CLEARANCE ACTIVITY OF AY 2004-05. TWO YEARS CANNOT BE IDENTICAL, IN ONE YEAR THERE MAY BE PROFIT AND ANOT HER YEAR THERE MAY BE LOSS AND UNLESS SPECIFIC DEFECT I N THE BOOKS OF ACCOUNTS AND THE ACCOUNTS OF THE ASSESSEE IS POINTED OUT, THE DISALLOWANCE ON ESTIMATE CANNOT BE JUSTIFIED. THE ADDITION OF RS. 2,02,263/- IS, THERE FORE, DELETED. 15. THE CIT(A), THEREFORE DELETED THE ADDITION MADE AT RS. 20,22,638/-. 16. AGAINST THIS ORDER, THE DEPARTMENT IS IN APPEAL BEFORE THE ITAT. 17. BEFORE US THE DR RELIED ON THE ORDER OF THE AO, WHER EAS, THE AR RELIED ON THE ORDER OF THE CIT(A) ON THE ISSUE, WHIC H IS AS UNDER, I HAVE GONE THROUGH THE ORDER OF THE AO, AND SUBMISS ION OF THE APPELLANT. THE AO HAS MADE AN ESTIMATED DISALLOWA NCE, BASED ON THE CUSTOM CLEARANCE INCOME OF AY 2004-05 AN D ALSO ON THE BASIS OF REASONING GIVEN FOR MOBILE EXPENSES WHILE M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 6 DISALLOWING THE ASSESSEES CLAIM U/S 40A(2)(B) AND U/S 69 C OF THE INCOME-TAX ACT. THE AO HAS NOT BROUGHT ANY EVIDENCE TO SHOW THAT THERE IS ANY DEFECT IN THE ACCOUNTS OF THE ASS ESSEE AND HAS FOLLOWED THE RESULTS OF CUSTOM CLEARANCE ACTIVITY OF AY 2004-05. TWO YEARS CANNOT BE IDENTICAL, IN ONE YEAR THERE MAY BE PROFIT AND ANOTHER YEAR THERE MAY BE LOSS AND UNLESS SPECIFI C DEFECT IN THE BOOKS OF ACCOUNTS AND THE ACCOUNTS OF THE ASSES SEE IS POINTED OUT, THE DISALLOWANCE ON ESTIMATE CANNOT BE JUSTIFIED. TH E ADDITION OF RS. 20,02,263/- IS, THEREFORE, DELETED. . 18. ON GOING THROUGH THE ORDERS OF THE REVENUE AUTH ORITIES, WE FIND THAT THE CIT(A), AFTER DUE CONSIDERATION OF THE ISS UE PLACED BEFORE HIM, HAS GIVEN A VERY REASONABLE FINDING, AS REPRODUCED HERE ABOVE. 19. SINCE THE PAYMENT IS PURELY FOR THE PURPOSES OF BU SINESS AND THERE CANNOT BE ANY SCOPE OF RELATED PARTY TRANSA CTION, WE DO NOT FIND ANY REASON TO DISTURB THE ORDER OF THE CIT(A ), WHICH WE SUSTAIN. 20. WE, THEREFORE SUSTAIN THE ORDER OF THE CIT(A) ON THE ISSUE AND REJECT THE GROUND OF APPEAL AS FILED BY THE DEPARTMENT. 21. GROUND NO. 2 IS THEREFORE, REJECTED. 22. GROUND NO. 3 & 4 ARE GENERAL IN NATURE. 23. IN THE RESULT, THE APPEAL AS FILED BY THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH JANUARY, 2015. SD/- SD/- ( ) ( ) / / / / / / / / (R C SHARMA) ( VIVEK VARMA ) ACCOUNTANT MEMBER J UDICIAL MEMBER MUMBAI, DATE: 16 TH JANUARY, 2015 M/S NEDLLOYD LOGISTICS (I) P LTD ITA 2027/M/2010 7 '/ COPY TO:- 1) / THE APPELLANT. 2) ! / THE RESPONDENT. 3) THE CIT(A)-8, MUMBAI. 4) THE CIT -4, MUMBAI. 5) 0%12 '$ , , / THE D.R. G BENCH, MUMBAI. 6) 234 5 COPY TO GUARD FILE. /6$ / BY ORDER / / TRUE COPY / / 7 / 8 , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * *CHAVAN, SR.PS