OPTSOE CONSULTANT P.LTD, MUMBAI V. ITO 9(2)(4), MUMBAI

ITA 2713/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59808 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 07-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Assessee Lawyers: NUPOOR AGARWAL; V SHREDHARAN
• Keywords: Principle of natural justice; Additional evidence; Revenue expenditure
• Section: 194C; 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH -MUMBAI BEFORE SHRI D. MANMOHAN,(V.P.)(MZ) AND SHRI RAJENDRA SINGH,(A.M.) ITA NO.2713/MUM/2011 ASSESSMENT YEAR : 2007-08 M/S. OPTSOE CONSULTANT PRIVATE LIMITED; 107-8-9, A-WING SAMARTH AANGAN II, OFF K.L. WAWALKAR MARG, OSHIWARA ANDHERI WEST, MUMBAI PIN-400 053. P.A. NO.(AAACO 7298 R) INCOME TAX OFFICER-9(2)(4); ROOM NO.255 AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-20. ( APPELLANT ) VS. ( RESPONDENT ) APPELLANT BY SHRI V. SHREDHARAN & NUPOOR AGARWAL RESPONDENT BY : : SHRI P.K.B. MENON DATE OF HEARING : 1.2.2012 DATE OF PRONOUNCEMENT :3 .2.2012 O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 31.1.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING DISALLOWANCE OF CLAIM OF DEDUCTION OF RS.40,20,822/- ON ACCOUNT OF PAYMENTS MADE TO THE DIRECTORS. ITA NO. 2713/M/11 A.Y.07-08 2 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS ENG AGED IN THE BUSINESS OF UNDERTAKING CONTRACTS FOR PROVIDING VAR IOUS LIAISON ACTIVITIES IN TELECOMMUNICATION STRATEGY HAD ENTERED IN TO CONTRACT DATED 5.1.2005 WITH M/S. ZTE CORPORATION, A CHINESE COMPANY. IN TERMS OF THE SAID CONTRACT, THE ASSESSEE WAS TO AID THE CLIE NT BY PERFORMING TECHNICAL SERVICES IN THE CAPACITY OF AN INDEP ENDENT CONTRACTOR IN RELATION TO VARIOUS TELECOM OPERATORS SUCH AS TATA, HUTCH, ESSAR AND IDEA WHO WERE CUSTOMERS OF THE CHINESE CO MPANY. SOON AFTER ENTERING INTO SAID CONTRACT, THE ASSESSEE COMPAN Y HAD ENTERED INTO IDENTICAL SUB CONTRACTS ON 1.4.2005 WITH EACH OF THE TWO DIRECTORS I.E., SHRI GAUTAM BALAKRISHNAN AND SMT. KALP ANA MADAN TO EXECUTE ALL OR PORTIONS OF THE WORK RECEIVED FROM THE CLIENTS. THE AO NOTED THAT THE ASSESSEE DURING THE YEAR HAD RECEIVED CONT RACT CHARGES OF RS.41,18,669/- FROM M/S. ZTE CORPORATION AND IN TU RN HAD PAID SUB CONTRACT CHARGES OF RS.40,20,822/- TO ITS DIRECTORS. THE A SSESSEE SUBMITTED BEFORE THE AO THAT SINCE DIRECTORS IN INDIVID UAL CAPACITY WERE NOT IN A POSITION TO ENTER INTO A CONTRACT WITH A CHINESE COMPANY, THEY HAD INCORPORATED THE COMPANY OPTSOE CONS ULTANTS PVT. LTD. FOR ENTERING INTO THE SAID CONTRACT. THE ASSESSEE A LSO SUBMITTED THAT IT HAD DEDUCTED TAX AT SOURCE @ 2% ON THE PAYMEN TS MADE TO THE DIRECTORS UNDER SECTION 194C OF THE ACT. AO HOWEVER NOTE D THAT IN THE CONTRACT WITH THE CHINESE COMPANY, THE ASSESSEE HAD BEEN R EFERRED TO ITA NO. 2713/M/11 A.Y.07-08 3 AS A CONSULTANT AND THE CHINESE COMPANY AS CLIENT. THE A GREEMENT ALSO PROVIDED FOR TECHNICAL SERVICES OF CONSULTANCY BY THE A SSESSEE TO ASSIST THE CHINESE COMPANY. THE AO, THEREFORE, HELD TH AT THE DIRECTORS WERE PROVIDING PROFESSIONAL SERVICES AS CONSULTANT TO THE ASSESSEE COMPANY IN INDIA AND, THEREFORE, PROVISIONS OF SE CTION 194J AS PER WHICH TAX WAS REQUIRED TO BE DEDUCTED @5% IN RESP ECT OF PROFESSIONAL SERVICES OR TECHNICAL SERVICES WERE APPLICALE. B UT SINCE THE ASSESSEE HAD DEDUCTED TAX ONLY @ 2% , THERE WAS SHORTFALL OF TAX BY 3%. HE, THEREFORE, DISALLOWED THE CLAIM OF EXPENDIT URE PROPORTIONATELY I.E. @ 60% WHICH CAME TO RS.24,12,413/ - WHICH WAS DISALLOWED UNDER SECTION 40(A)(IA) OF THE ACT. 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED B EFORE THE CIT(A) THAT IT WAS ENGAGED IN THE BUSINESS OF PROV IDING LIAISONING SERVICES IN THE TELECOM SECTOR AND, AS PER CONTRACT, IT WAS REQUIRED TO PROVIDE BUSINESS DEVELOPMENT SERVICES, ESTABLISH AND MAINT AIN BUSINESS RELATIONSHIPS, ARRANGE MEETINGS, ENCOURAGE COMMU NICATION, PROVIDING SUPPORT SERVICES, ETC. THE ASSESSEE MADE SUB-CONTRA CT PAYMENTS TO THE DIRECTORS ON BUSINESS EXPEDIENCY AND IN NO RMAL COURSE OF BUSINESS. THE ASSESSEE FILED DOCUMENTS SUCH AS COPIES OF BILLS AND DEBIT NOTES, NAMES AND ADDRESSES OF SUB-CONTRACTOR S ALONGWITH P.A. NOS., BANK STATEMENTS, TDS CERTIFICATES ET C. IN SUPPORT OF THE CLAIM OF EXPENDITURE. IT WAS ALSO SUBMITTED THA T BOTH THE ITA NO. 2713/M/11 A.Y.07-08 4 DIRECTORS HAD DECLARED PAYMENTS AS THEIR INCOME IN THEIR RESPECTIVE RETURNS OF INCOME. THEREFORE, THERE WAS NO LOSS OF TAX R EVENUE. CIT(A), HOWEVER, OBSERVED THAT THE PROVISIONS OF SECTIO N 40(A)(IA) WERE APPLICABLE ONLY WHEN THE EXPENDITURE WAS FOUND D EDUCTIBLE UNDER THE PROVISIONS OF SECTION 37. THEREFORE IT WAS REQUIRE D TO BE FIRST EXAMINED WHETHER PAYMENT WAS ALLOWABLE AS REVENUE EXP ENDITURE WHICH HAD NOT BEEN DONE. THE ASSESSEE HAD NOT SUBMITTE D ANY PROOF IN SUPPORT OF VARIOUS SERVICES CLAIMED TO HAVE BEEN RENDE RED BY THE DIRECTORS. EVEN IN THE EARLIER YEAR I.E. 2006-07, TH E ASSESSEE HAD ONLY GIVEN DETAILS OF SERVICE AND MENTIONED THAT BOTH THE D IRECTORS HAD EXPERTISE IN TELECOM STRATEGY SERVICES. THE AO IN THAT YEAR HAD ALSO CONSIDERED ONLY APPLICABILITY OF PROVISIONS OF SECTION 40( A)(IA) AND HAD NOT GONE INTO THE RENDERING OF ACTUAL SERVICES. HE, THE REFORE, ASKED THE ASSESSEE TO JUSTIFY THE ADMISSIBILITY OF THE EXPENDITU RE UNDER THE PROVISIONS OF THE ACT. THE ASSESSEE REPLIED THAT THE AO H AD ALLOWED THE CLAIM OF EXPENDITURE AS REVENUE UNDER SECTION 37 AF TER DUE APPLICATION OF MIND AND THEREFORE THE SAME ISSUE COULD N OT BE CONSIDERED AGAIN. THE CIT(A) HOWEVER DID NOT ACCEPT TH E CONTENTION RAISED. IT WAS OBSERVED BY HIM THAT THERE WAS NO EVIDE NCE WHATSOEVER FOR PROVING OF SERVICES RENDERED BY THE SUB-CO NTRACTORS. CIT(A) ALSO OBSERVED THAT THE ASSESSEE CO HAD BEEN FORMED ONLY TO FACILITATE THE CHINESE COMPANY FOR MAKING THE IMPUGN ED PAYMENTS TO ITA NO. 2713/M/11 A.Y.07-08 5 SHRI GAUTAM BALAKRISHNAN AND SMT. KALPANA MADAN AND THERE WAS NO APPARENT COMMERCIAL OR BUSINESS INTEREST BETWEEN THE ASSE SSEE AND THE CHINESE COMPANY. THE SO CALLED ARRANGEMENT WAS SHAM ARRANGEMENT FOR FACILITATING THE DIRECTORS TO RECEIVE M ONEY FROM THE CHINESE COMPANY. THERE WAS NO BUSINESS PURPOSE OR COMMERCI AL EXPEDIENCY ESTABLISHED. CIT(A) FURTHER OBSERVED THAT M ERELY BECAUSE THE PAYMENTS HAD BEEN SHOWN AS INCOME IN THE CASE OF DIRE CTORS, THE SAME COULD NOT BE ALLOWED AS DEDUCTION IN THE CASE OF ASSESSE E COMPANY WITHOUT ESTABLISHING THE ADMISSIBILITY OF THE EXPENDITURE UNDER THE PROVISIONS OF THE ACT. MOREOVER CIT(A) ALSO POINTED OUT THAT THE DIRECTORS HAD REDUCED THEIR INCOME SUBSTANTIALLY BY CL AIMING VARIOUS EXPENSES AND HAD NOT PAID TAXES ON THE ENTIRE A MOUNT. HE, THEREFORE, DIRECTED THE AO TO DISALLOW THE ENTIRE CLA IM OF EXPENDITURE OF RS.40,20.822/-. AGGRIEVED BY THE SAID DECISION, ASSESSE E IS IN APPEAL BEFORE TRIBUNAL. 4. BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAD MADE THE PAYMENTS TO DIRECTORS FOR VA RIOUS SERVICES RENDERED BY HIM AS THEY HAD NECESSARY EXPERTISE IN TELECOMMUNICATION STRATEGIES, MARKETING AND SALES AS WELL AS BUSINESS DEVELOPMENT. IT WAS ALSO SUBMITTED THAT IN ASSESSMENT YEA R 2006-07 CLAIM HAD BEEN ALLOWED BY THE AO AS REVENUE EXPENDITU RE AND DISALLOWANCE HAD BEEN ONLY MADE UNDER THE PROVISIONS OF SECTION ITA NO. 2713/M/11 A.Y.07-08 6 40(A)(IA). SIMILARLY, IN ASSESSMENT YEAR 2008-09, THE CLAIM HAS BEEN ALLOWED BY THE AO AND NO ACTION HAS BEEN TAKEN UNDER SECTION 263 OF THE IT ACT. IT WAS FURTHER POINTED OUT THAT IN ASSESSM ENT YEAR 2006- 07, THE ORDER OF CIT(A) ALLOWING THE CLAIM AS REVENUE EXPENDITURE HAS BEEN ACCEPTED BY THE DEPARTMENT. IT WOULD NOT THEREF ORE BE CORRECT TO DISALLOW THE CLAIM IN THIS YEAR. THE LD. AR ALSO ARGUE D THAT CIT(A) HAD NOT PROVIDED ANY SPECIFIC OPPORTUNITY TO THE ASSESSEE FOR PROVING VARIOUS SERVICES RENDERED BY THE DIRECTOR. THERE WAS THE REFORE VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. IT WAS SUBMI TTED THAT IN CASE THE ASSESSEE HAD BEEN PROVIDED OPPORTUNITY IT WOULD HAV E PRODUCED NECESSARY EVIDENCE. THE LD. AR ALSO SUBMITTED THAT THE A SSESSEE COMPANY VIDE LETTER DATED 30.1.2012 HAS FILED APPLICAT ION FOR ADMITTING ADDITIONAL EVIDENCE IN THE FORM OF VARIOUS CORRESPONDEN CE REGARDING RENDERING OF SERVICE WHICH MAY BE ADMITTED BY THE TRI BUNAL AS NO SPECIFIC OPPORTUNITY HAD BEEN PROVIDED BY THE CIT(A). IT WAS ACCORDINGLY REQUESTED THAT THE MATTER MAY BE SENT BACK T O CI(A) FOR FRESH ADJUDICATION AFTER CONSIDERING THE ADDITIONAL EVI DENCE AND AFTER HEARING THE ASSESSEE. 5. THE LD. DR ON THE OTHER HAND SUBMITTED THAT THE A SSESSEE HAD NOT PRODUCED ANY EVIDENCE REGARDING ACTUAL RENDERING O F THE SERVICES BY THE DIRECTORS. IT WAS POINTED OUT THAT IN ASSESSMENT Y EAR 2006-07 NEITHER THE AO NOR CIT(A) HAD EXAMINED THE ACTUAL RE NDERING OF THE ITA NO. 2713/M/11 A.Y.07-08 7 SERVICES AND TREATED PAYMENTS AS REVENUE EXPENDITURE WI THOUT ANY EXAMINATION. THE CASE HAD BEEN EXAMINED ONLY FROM T HE LIMITED ANGLE OF APPLICABILITY OF PROVISIONS OF SECTION 40(A)(IA). SI MILARLY, IT WAS FURTHER POINTED OUT THAT THE ASSESSMENT ORDER DATED 27. 9.2010, A COPY OF WHICH WAS PLACED AT PAGE-84 OF THE PAPER BOOK WAS A NON-SPEAKING ORDER IN WHICH ISSUE OF RENDERING ACTUAL SERVICES HAD NOT BEEN EXAMINED. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CIT(A) SHOULD BE UPHELD. 6. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWA BILITY OF EXPENDITURE AMOUNTING TO RS.40,20,822/- ON ACCOUNT OF PAYMENTS MADE TO THE DIRECTORS AS SUB-CONTRACT CHARGES. THE ASSESSEE CO HAD BEEN INCORPORATED FOR UNDERTAKING CONTRACTS FOR PROVIDI NG VARIOUS LIAISONING ACTIVITIES IN THE TELECOM SECTOR. IT HAD ENTE RED INTO A CONTRACT WITH CHINESE COMPANY, M/S. ZTE CORPORATION FO R PROVIDING SUCH SERVICES AS PER WHICH IT HAD RECEIVED CONTRACT CHARGES OF RS.41,18,969/-. THE ASSESSEE HAD SUB CONTRACTED VARIOUS SER VICES TO BE PROVIDED TO ITS TWO DIRECTORS TO WHOM TOTAL PAYMENT S OF RS.40,20,822/- HAD BEEN MADE WHICH THE ASSESSEE CLAIMED AS REVENUE EXPENDITURE. THE AO IN THE ASSESSMENT ORDER DID NOT QU ESTION THE ALLOWABILITY OF CLAIM AS REVENUE EXPENDITURE. HE THU S ACCEPTED THE CLAIM AS REVENUE EXPENDITURE WITHOUT ANY EXAMINATION AND MADE ITA NO. 2713/M/11 A.Y.07-08 8 DISALLOWANCE UNDER THE PROVISIONS OF SECTION 40(A)(IA) ON THE GROUND THAT DEDUCTION OF TAX AT SOURCE HAD NOT BEEN MADE FUL LY. CIT(A) ON DETAILED EXAMINATION NOTED THAT NO EVIDENCE HAD BEEN PRODUCED BY THE ASSESSEE REGARDING RENDERING OF ACTUAL SERVICES BY THE DIRECTORS. HE HAS THEREFORE DIRECTED THE AO TO DISALLOW THE ENTIRE CLAIM AS NON REVENUE EXPENDITURE FOR WANT OF EVIDENCE. HOWEVER, W E NOTE FROM THE SHOW CAUSE LETTER DATED 7.10.2010 ISSUED BY THE CIT(A) T O THE ASSESSEE THAT CIT(A) HAD ONLY ASKED THE ASSESSEE TO JUSTIFY T HE ADMISSIBILITY OF THE EXPENDITURE. NO SPECIFIC QUERY HA D BEEN RAISED TO PRODUCE EVIDENCE REGARDING SERVICES RENDERED. IN ASSESSMENT YEAR 2006-07 ON WHICH THE LD. AUTHORISED REPRESENTATIVE HAS RELIED ALSO THE ACTUAL RENDERING OF THE SERVICES HAD NOT BEEN EXAMINED AND SIMILAR WAS THE POSITION IN ASSESSMENT YEAR 2008-09. THEREFORE, IN OUR VIEW, THE ISSUE REGARDING RENDERING OF ACTUAL SERVICES BY THE D IRECTORS REQUIRES FRESH EXAMINATION AS CIT(A) HAS DISALLOWED THE CLAIM WITHOUT ANY SPECIFIC OPPORTUNITY TO THE ASSESSEE IN THE MATTER OF RENDERING OF SERVICES. THE ASSESSEE HAS ALSO FILED SOME ADDITIONAL EVIDEN CE WHICH IN OUR VIEW WILL BE USEFUL WHILE DECIDING, THE ISSUE OF RENDERING OF THE SERVICES. WE, THEREFORE, ADMIT THE SAME, AND SET ASIDE T HE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION OF ADDITIONAL EVIDENCE FILE D BY THE ITA NO. 2713/M/11 A.Y.07-08 9 ASSESSEE AND IN ACCORDANCE WITH LAW AND AFTER PROVIDING P ROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 3.2.2012. SD/- SD/- ( D. MANMOHAN ) VICE PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 3.2.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.