DCIT, CHENNAI V. M/s. Malabar Hotels Pvt. Ltd., CHENNAI

ITA 2832/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5705 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 29-09-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: G BASKAR
• Keywords: Depreciation; Fair market value
• Section: 37; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , , # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NOS. 2364/MDS/2014 & 2832/MDS/2016 / ASSESSMENT YEARS : 2010-11 & 2011-12 6 DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -4(1), CHENNAI. VS. M/S. MALABAR HOTELS PVT LTD., 1/238, OLD MAHALINGAPURAM ROAD, SEMMANCHERRY, CHENNAI 600 119. [PAN: AADCM 5836G] ( / APPELLANT) ( / RESPONDENT) %& / APPELLANT BY : SHRI. V. SREENIVASAN, JCIT )*%& / RESPONDENT BY : SHRI. G. BASKAR, ADVOCATE & /DATE OF HEARING : 29.08.2017 & /DATE OF PRONOUNCEMENT : 23.11.2017 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE REVENUE FILED THESE APPEALS AGAINST THE ORDERS OF THE COMMISSIONERS OF INCOME TAX (APPEALS)-IV& 8, CHENNA I IN ITA NOS. 472/2013-14 DATED 28.03.2014& 66/2014 DT 30.6.2016, FOR THE ASSESSMENT YEARS 2010-11 & 2011-12, RESPECTIVELY. :-2-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 2. M/S. MALABAR HOTELS PVT LTD., THE ASSESSEE, RUN S A FIVE STAR HOTEL BY NAME, ASIANA HOTEL, AT SHOLINAGANALLUR, OLD MAHABAL IPURAM MR, CHENNAI SINCE A Y 2008-09. FOR THE ASSESSMENT YEAR 2010-11, TH E ASSESSEE, INTER ALIA, CLAIMED RS. 96,36,411/ - AS MANAGEMENT FEE BASED ON AN AGREEMENT DATED 09.11.2007, BETWEEN THE ASSESSEE, M/S. MALABAR HOTE LS (P) LTD.AS A 'OWNER COMPANY', AND ASIAN HOTEL MANAGEMENT (LABUAN) INCOM E TAX ACT JALAN MERDIKA, FEDERAL TERRITORY OF LABUAN, MALAYSIA, BY WHICH THE ASSEESSEE CLAIMED TO HAVE APPOINTED THE SAID ASIAN HOTEL MANA GEMENT (LABUAN) AS MANAGER, TO ADVISE, ASSIST, MANAGE AND OPERATE TH E HOTEL, TERMS AND CONDITIONS SET OUT INCLUDING THE DUTIES OF THE MAN AGER AND MANAGEMENT FEE, ETC.FOR THE SERVICES PROVIDED, IT CLAIMED TO HAVE PAID ONE PERCENT OF THE REVENUE AND 6% OF THE GROSS OPERATING PROFIT AS FEE TO THE MANGER. THE AO FOUND , INTER ALIA, THAT 'ASIANA HOTEL MANAGEMENT COMPANY PRIVATE LIMITED , INDIA HOLDS 23.09% OF SHARES IN THE ASSESSEE COMPAN Y. IN TURN, 'ASIANA HOTEL MANAGEMENT COMPANY PTE LIMITED', SINGAPORE HOLDS 98 .84% OF SHARES IN ASIANA HOTEL MANAGEMENT COMPANY PRIVATE LIMITED, IN DIA' AND MR. SRIHARAN HOLDS SUBSTANTIAL INTEREST IN THE COMPANY 'ASIANA H OTEL MANAGEMENT COMPANY PTE LIMITED' SINGAPORE. THEREBY, MR. SRIHARAN, THE SOLE OWNER OF THE SHARES OF COMPANY' HOLDS THE DECISION MAKING AUTHORITY IN THE OWNER COMPANY. MR. SRIHARAN IS ONE OF THE FOUNDER SHAREHOLDER AND DIRE CTOR OF THE COMPANY AND WAS HAVING A SUBSTANTIAL INTEREST IN THE ASSESSEE C OMPANY AT THE TIME OF TAKING DECISION OF ENTERING INTO MANAGEMENT AGREEME NT ALSO. MR. S. SRIHARAN :-3-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 IS THE ONLY SHAREHOLDER IN THE MANAGING COMPANY. MR . S. SRIHARAN IS THE ONLY SHAREHOLDER IN THE MANAGING COMPANY ETC. THUS , AFT ER CONSIDERING OTHER FACTORS , THE AO WAS OF THE VIEW THAT THE IMPUGNED EXPENDITURE INCURRED CANNOT BE SAID TO HAVE BEEN INCURRED WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF BUSINESS AND HENCE PROPOSED TO DISALLOW IT . AF TER CONSIDERING THE ASSESSEES EXPLANATION ETC , THE AO , INTER ALIA , HELD THAT THE EXPENDITURE OF RS.96,36,441 INCURRED BY THE ASSESSEE IS NOT JUST A ND IN THE BEST INTEREST OF THE ASSESSEE, THE ASSESSEE FAILED TO PROVE THAT TH E EXPENDITURE OF HOTEL MANAGEMENT FEE HAS BEEN INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS AND DISALLOWED IT. FURTHER, THE AO DENIED DEPRECIATION ON CERTAIN BUSINESS ASSETS IN RESPECT OF WHICH THE RELEVANT PU RCHASE BILLS WERE NOT BE PRODUCED BY THE ASSESSEE BEFORE HIM. IN THE ASSES SMENT MADE FOR A Y 2011- 12, THE AO , FOLLOWING HIS PREDECESSORS ORDER,ON SIMILAR GROUNDS , DISALLOWED THE ENTIRE MANAGEMENT AND INCENTIVE FEE AT RS.1,76, 86,813/-. AGGRIEVED, THE ASSESSEE FILED APPEALS BEFORE THE CIT (A) FOR BOTH THE ASSESSMENT YEARS. WHILE DISPOSING THE APPEAL FOR AY 2010-11, THE CIT (A) DELETED THE ADDITION MADE ON ACCOUNT OF MANAGEMENT FEES AND IN RESPECT O F DENIAL OF DEPRECIATION DIRECTED THE ASSESSEE TO PRODUCE THE RELEVANT EVI DENCES BEFORE THE AO , WHO WILL , AFTER DUE CONSIDERATION ALLOW DEPRECIATION. FOR THE AY 2011-12, THE CIT(A) FOLLOWING HIS PREDECESSORS ORDER, DELETED T HE ADDITION MADE ON ACCOUNT OF MANAGEMENT AND INCENTIVE FEE. AGGRIEVED, THE REVENUE FILED THESE APPEALS WITH FOLLOWING GROUNDS OF APPEAL. :-4-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 FOR AY 2010-11 : 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO L AW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE LEARNED CIT(A) ERRED IN DELETING THE DISAL LOWANCE OF EXPENDITURE OF RS.96,36,441/- MADE U/S 40A(2)(A) OF THE ACT. 2.2. THE LD.CIT(A) HAS FAILED TO APPRECIATE VARIOUS FACTS LIKE THE INFLUENCE OF THE RECIPIENT OF THE MANAGEMENT FEE ON THE DECISION OF THE APPELLANT COMPANY FOR INCURRING THE EXPENDITURE AND VARIOUS OTHER SUR ROUNDING FACTORS LEADING TO THE DECISION OF EXPENDITURE WHICH PROVIDE CIRCUMSTA NTIAL EVIDENCE TO PROVE THAT THE TRANSACTION IS ONLY MAKE-BELIEVE IN NATURE. 2.3. THE LD.CIT(A) ERRED IN NOT FOLLOWING THE RATIO OF JUDGEMENT IN THE CASE OF I)CIT VS PREMIER BREWERIES LTD.(KERALA)(2005)279 IT R 51 WHERE IN IT IS HELD THAT THE MERE FACT THAT PAYMENT HAS BEEN MADE UNDER CONTRACT OR AGREEMENT IS NOT CONCLUSIVE THAT THE EXPENDITURE IS INCURRED WHO LLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 2.4 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE LA NGUAGE EMPLOYED IN SECTION 40A(2)(A) WHICH READS THUS: WHERE THE ASSES SEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTIO N, AND THE [ASSESSING] OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS 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 BUSI NESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO H IM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EX CESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. FOR AY 2011-12 : 1. THE ORDER OF THE CIT(A) IS CONTRARY TO THE LAW A ND FACTS AND CIRCUMSTANCES OF THE CASE. :-5-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF MANAGEMENT AND INCENTIVE FEE OF RS. 1,76,86,813/- MADE U/S 40A(2)(A). 2.1. THE CIT(A) FAILED TO APPRECIATE THE FINDINGS O F THE AO THAT THE EXPENSES INCURRED ON MANAGEMENT AND INCENTIVE FEE IS EXCESSI VE HAVING REGARD TO THE LEGITIMATE NEEDS OF BUSINESS AND HENCE THE IMPUGNED EXPENDITURE FALLS UNDER THE AMBIT OF CLAUSE(A) OF SUB-SECTION 2 OF SECTION 40A OF INCOME TAX ACT 1961. 2.2. THE CIT(A) ERRED IN NOT APPRECIATING THE FINDI NGS OF THE AO THAT NO REGISTERED DOCUMENT ON MANAGEMENT AGREEMENT WAS FUR NISHED BY THE ASSESSEE TO JUSTIFY HUGE PAYMENT OF MANAGEMENT AND INCENTIVE FEE TO MR.SRIHARAN, WHO IS A FOUNDER DIRECTOR WITH SUBSTAN TIVE INTEREST IN THE ASSESSEE COMPANY AND HENCE THE IMPUGNED PAYMENT IS LIABLE TO BE DISALLOWED U/S40A(2)(A). 2.3. THE CIT(A) ERRED IN ALLOWING RELIEF TO THE ASS ESSEE WITHOUT APPRECIATING THE FINDINGS OF THE AO THAT PAYMENT OF MANAGEMENT AND I NCENTIVE FEE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND THE ABOVE ISSUE WAS SUBJECT TO DISCRETION OF REVENUE AUTHORIT IES TO BE EXERCISED UNDER SECTION 40A(2)(A) ON THE BASIS OF MATERIAL ON RECOR D. 2.4. HAVING REGARD TO THE HON'BLE APEX COURT'S DECI SION IN THE CASE OF NUND&SAMONTA CO.P.LTDVS.CIT(SC) 78 ITR 268 WHEREIN IT IS HELD THAT REASONABLENESS HAS TO BE PROVED BY ASSESSEE AND NOT BY DEPARTMENT, THE CIT(A) OUGHT TO HAVE UPHELD THE IMPUGNED DISALLOWAN CE MADE BY THE AO. 2.5. THE CIT(A) FAILED TO NOTE THAT THE EXCESSIVE E XPENDITURE INCURRED BY THE ASSESSEE REDUCES THE INCOME BY EQUIVALENT AMOUNT AN D ABSOLVES THE ASSESSEE FROM PAYMENT OF TAXES TO THE RELEVANT EXTENT. THERE FORE THE IMPUGNED PAYMENTS WERE A DEVICE ADOPTED TO REDUCE THE ASSESS EE'S TAXABLE INCOME. 2.6. THE CIT(A) ERRED IN HOLDING THAT THESE EXPENSE S WERE ALLOWED IN ASSESSMENT YEAR 2011-12 WITHOUT APPRECIATING THAT T HE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO DECISIONS OF INCOME-TAX AUTHOR ITIES AS EACH ASSESSMENT YEAR IS A SEPARATE PROCEEDINGS. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD. CIT (A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. :-6-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 3. THE DR SUBMITTED THAT THE CIT(A) ERRED IN GIVING A FINDING THAT THE AO HAS NOT DISPUTED THE SERVICES RENDERED BY SHRI SRIH ARAN AND ALSO THE BUSINESS EXPEDIENCY OF THE ASSESSEE COMPANY FOR AVAILING THE SERVICES OF AN EXPERT TO RUN THE FIVE STAR HOTEL. MERELY FOR THE REASON THA T THE MANAGEMENT AGREEMENT IS UNREGISTERED, THE SAME CANNOT BE SUMMA RILY DISMISSED AS FICTITIOUS OR NOT GENUINE ETC. THE DR SUBMITTED TH AT THE ASSESSEE HAS NOT ESTABLISHED THAT IT HAS INCURRED THE IMPUGNED EXPEN DITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE DR A LSO INVITED OUR ATTENTION TO THE FACT THAT WHILE EXAMINING THE EXPENDITURES CLAI MED TO HAVE BEEN PAID TO RELATED PARTIES, THE AO HAS TO EXAMINE WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATION TO ANY OF THE REQUIREME NTS PRESCRIBED IN THE SECTIONS WHICH ARE INDEPENDENT AND ALTERNATIVE TO E ACH OTHER AND HENCE, THE AO CAN EXAMINE THE EXPENDITURE U/S. 37 AS WELL AS U /S. 40A(2) ALSO. PER CONTRA, THE AR RELIED ON THE ORDERS OF THE CIT(A). 4. WE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PO RTION OF THE ASSESSMENT ORDER FOR AY 2006-07 IS EXTRACTED AS UND ER : 2.1 IT IS OBSERVED THAT THE ASSESSEE COMPANY HAS ENTERED INTO A 'HOTEL MANAGEMENT AGREEMENT' WITH 'ASIANA HOTEL MANAGEMENT (LABUAN), MALAYSIA; ON ACCOUNT OF WHICH INCURRED AN EXPENDITURE OF RS.9 6,36,441, DURING THE RELEVANT PREVIOUS YEAR. THE ASSESSEE IS CALLED 'OWN ER COMPANY' AND THE OTHER MALAYSIAN COMPANY IS CALLED 'MANAGING COMPANY'. FOL LOWING OBSERVATIONS ARE MADE WITH REGARD TO THIS TRANSACTION: :-7-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 THE EXPENDITURE INCURRED IS IN PURSUANCE OF A CON TRACT (HOTEL MANAGEMENT AGREEMENT) DATED 9TH NOVEMBER 2007, BETW EEN THE ASSESSEE COMPANY (OWNER) AND A COMPANY BY NAME 'ASIANA HOTEL MANAGEMENT (LABUAN) INC. (MANAGER)' INCORPORATED IN THE COUNTRY, 'MALAY SIA'. THE EXPENDITURE FALLS UNDER THE AMBIT OF CLAUSE ( A) OF SUB-SECTION-2 OF SECTION 40A OF THE INCOME TAX ACT, 1961. BUT, THE A UDITORS HAVE NOT REPORTED ABOUT THIS TRANSACTION IN THE REPORT SUBMITTED IN F ORM 3CD. THE EXPENDITURE FALLS UNDER THE PROVISIONS OF CHA PTER- X OF THE INCOME TAX ACT, 1961. BUT, NO STUDY HAS BEEN CONDUCTED AS REQUIRED UNDER CHAPTER- X OF THE INCOME TAX ACT, 1961 AND OBVIOUSLY REPORT OF THE AUDITORS/ ACCOUNTANT ON THIS TRANSACTION IS NOT FILED. MR.S.SRIHARAN IS THE ONLY SHAREHOLDER IN THE MANA GING COMPANY. MR.SRIHARAN HOLDS 1.47% SHARES IN THE OWNER COMPA NY. THE COMPANY 'ASIANA HOTEL MANAGEMENT COMPANY PRIV ATE LIMITED , INDIA HOLDS 23.09% OF SHARES IN THE ASSESSEE COMPAN Y. IN TURN, 'ASIANA HOTEL MANAGEMENT COMPANY PTE LIMITED', SINGAPORE HOLDS 98 .84% OF SHARES IN ASIANA HOTEL MANAGEMENT COMPANY PRIVATE LIMITED, INDIA' AN D MR.SRIHARAN HOLDS SUBSTANTIAL INTEREST IN THE COMPANY 'ASIANA HOTEL M ANAGEMENT COMPANY PTE LIMITED' SINGAPORE. THEREBY, MR.SRIHARAN, SOLE OWNE R OF THE SHARES OF COMPANY' HOLDS THE DECISION MAKING AUTHORITY IN THE OWNER CO MPANY. MR.SRIHARAN IS ONE OF THE FOUNDER SHAREHOLDER AND DIRECTOR OF THE COMP ANY A WAS HAVING A SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY AT THE TIME OF TAKING DECISION OF ENTERING INTO MANAGEMENT AGREEMENT ALSO. THE 'MANAGER COMPANY' DOES NOT MAINTAIN ANY BOOKS OF ACCOUNTS AND THE TAXES PAID BY THE SAID COMPANY IN IT'S NATIVE C OUNTRY ARE ONLY NOMINAL. THEREFORE, THE INCOME EARNED BY THE MANAGING COMPAN Y IS ALMOST TAX-FREE. IN TURN, THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON THIS COUNT REDUCES THE INCOME BY EQUIVALENT AMOUNT AND A BSOLVES THE ASSESSEE COMPANY (OWNER COMPANY) FROM PAYMENT OF TAXES, TO THE RELEVANT EXTENT. ALL THE RECEIPTS EARNED BY THE 'MANAGING COMPANY' IS STRAIGHT AWAY P REFIT OF MR.SRIHARAN, SANS MEAGRE COSTS INCURRED BY THE MANAGING COMPANY, IF ANY; AS HE IS THE SOLE OWNER OF THE SHARES. THE ONLY EMPLOYEE OF THE MANAGING COMPANY, DEPUTE D FOR MANAGING THE COMPANY IS MR.SRIHARAN. :-8-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 THE SERVICES THAT ARE RENDERED BY THE MANAGING CO MPANY ARE SAID TO BE 'PROFESSIONAL AND ADVISORY' IN NATURE. THE MANAGING COMPANY DOES NOT UNDERTAKE ANY OTHER JOB OTHER THAN MANAGING THE OWNER COMPANY. EVEN IF THE ASSESSEE COMPANY HAS AVAILED OF ANY S ERVICES FROM MR.SRIHARAN, IT IS ONLY AS IT'S RIGHT AS MR.SRIHARA N IS A DIRECTOR EVEN WITHOUT THIS MANAGEMENT AGREEMENT AND NEEDS TO OFFER SERVICES TO THE ASSESSEE COMPANY. MR .SRIHARAN HAS NOT FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-2011. 2.2 IN VIEW OF THE ABOVE, IT IS EVIDENT THAT THE EN TIRE TRANSACTION IS 'COLOURED' AND MADE UNDER INFLUENCE; AND IS DESIGNED TO PROVID E' FOR EXPENDITURE IN THE BOOKS OF THE ASSESSEE COMPANY TO REDUCE THE TAX LIA BILITY AND TO TRANSFER THE PROFIT INTO THE HANDS OF AN INDIVIDUAL (HAVING SUBS TANTIAL INTEREST IN THE ASSESSEE COMPANY), WHICH IS TAX FREE. HENCE, IT WAS OPINED T HAT THE EXPENDITURE INCURRED CAN NOT BE SAID TO HAVE BEEN INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE, IT WAS PROPOSED TO DISALLOW TH E SAID EXPENDITURE OF RS.96,36,441. THE ASSESSEE WAS GIVEN AN OPPORTUNITY TO SHOW-CAUSE AS TO WHY THE SAID EXPENDITURE SHALL NOT BE DISALLOWED. 2.3. IN RESPONSE TO THE SHOWCAUSE NOTICE, WRITTEN S UBMISSIONS WERE MADE ON 8.3.2013 OBJECTING FOR THE PROPOSED DISALLOWANCE OF EXPENDITURE. IT WAS ARGUED THAT IN THE INDUSTRY OF THE HOSPITALITY (HOTEL), IT IS MANDATORY TO HAVE A MANAGEMENT CONSULTANT FOR EFFECTIVE MAINTENANCE OF STANDARDS PRESCRIBED FOR STAR RATED HOTELS. IT WAS ALSO ARGUED THAT EVEN IF THE CONTRACT OF MANAGING THE HOTEL WAS NOT GIVEN TO 'ASIANA HOTEL MANAGEMENT INC ': IT SHOULD HAVE BEEN GIVEN TO SOME OTHER MANAGING COMPANY. IT WAS FURTHE R PUT- FORTH THAT THE FEE AGREED WITH THE MANAGING COMPANY IS WELL WITHIN THE FAIR MARKET VALUE OF THE SERVICES, GENERALLY ADOPTED IN THE INDUSTRY. IT WAS ALSO BROUGHT OUT THAT THIS EXPENDITURE OF MANAGEMENT CONSULTANT FEE HAS BEEN I NCURRED IN PURSUANCE OF A WRITTEN AGREEMENT DATED 9.11.2007. 2.4 THE ASSESSSEE'S ARGUMENT IS WELL TAKEN. IT MIGH T BE CORRECT THAT SOME OF THE TOP RATED HOTELS OF THE COUNTRY ENGAGE THE SERV ICES OF THE MANAGEMENT CONSULTANT. BUT, IT IS NEITHER COMPULSORY, NOR MAND ATORY FOR EVERY HOTEL TO ENGAGE A MANAGEMENT CONSULTANT. THERE MIGHT BE EQUA L NUMBER OF HOTELS THOSE WHO ENGAGE OR DO NOT ENGAGE MANAGEMENT CONSUL TANTS. EACH AND EVERY :-9-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 CASE, THE FACTS AND CIRCUMSTANCES NEEDS TO BE STUDI ED AND ANALYSED INDEPENDENTLY ABOUT THE REQUIREMENT OF A HOTEL TO E NGAGE A MANAGEMENT CONSULTANT AND THE GENUINITY AND CORRECTNESS OF THE FEE BEING FIXED IN THIS CONTEXT. AS HAS BEEN ALREADY DISCUSSED IN THE EARLI ER PARAGRAPHS, MR SRIHARAN, THE FOUNDER DIRECTOR OF THE ASSESSEE COMPANY IS THE ONLY SHAREHOLDER AND DIRECTOR OF THE MANAGING COMPANY, ASIANA HOTEL MANA GEMENT, MALASIYA. IT IS LEARNT THROUGH THE ASSESSMENT PROCEEDINGS THAT HE I S A VETERAN IN THE INDUSTRY AND WORKED IN VARIOUS CAPACITIES ACROSS THE GLOBE. HE, BEING THE SHAREHOLDER WITH A SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY THROUGH HIS INVESTMENT IN OTHER COMPANIES AND ALSO BEING THE PROMOTER DIRECTO R, IT IS DEFINITELY NOT NECESSARY FOR THE ASSESSEE TO ENGAGE THE SERVICES O F ANOTHER PROFESSIONAL TO MANAGE THE AFFAIRS OF THE HOTEL. PRESUMING THAT THE HOTEL OF THE ASSESSEE COMPANY NEEDS TO BE MANAGED BY ANOTHER MANAGING COM PANY, AS ARGUED; AS CAN BE SEEN FROM THE RECORDS AND UNDERSTOOD DURING THE COURSE OF THE PROCEEDINGS, THE MANAGING COMPANY IN THE PRESENT CA SE HAS GOT A SINGLE SHAREHOLDER WITH 100% SHARE HOLDING AND SINGLE DIRE CTOR WHOSE IS NONE OTHER THAN MR SRIHARAN, THE PROMOTER DIRECTOR OF THE ASSE SSEE COMPANY, WITH NO EMPLOYEES AND WITH NO BOOKS OF ACCOUNTS AND WITH NO PROVEN RECORD OF DOING ANYTHING ELSE OTHER THAN MANAGING THE ASSESSEE COMP ANY'S HOTEL. ULTIMATELY, IT IS ONLY MR SRIHARAN, IF AT ALL TO BE BELIEVED ABOUT THE FACTS, IS MANAGING THE COMPANY SINGLE HANDED. IT IS IMPORTANT TO KNOW THAT APART FROM MR SRIHARAN, NO OTHER PERSON HAS BEEN DEPUTED ON THE PARTICULAR JOB OF MANAGING THE ASSESSEE COMPANY. THE WHOLE OF THE STAFF OF THE ASSESSEE COM PANY ARE PAID REMUNERATION BY THE ASSESSEE COMPANY. THERE IS VIRT UALLY NO DIFFERENCE BETWEEN MR SRIHARAN, THE FOUNDER DIRECTOR WITH SUBS TANTIVE INTEREST IN THE ASSESSEE COMPANY AND ASIANA HOTEL MANAGEMENT PRIVAT E LIMITED, MALASYIA. THE SO CALLED MANAGEMENT AGREEMENT IS ONLY AN UNREG ISTERED DOCUMENT CREATED FOR THE PURPOSE OF MAKING THE ASSESSEE COMP ANY TO PAY A FEE TOWARDS THE HOTEL MANAGEMENT TO THE BENEFIT OF MR SRIHARAN. THIS DOCUMENT IS ONLY A SELF SERVING DOCUMENT EXECUTED UNDER THE INFLUENCE OF MR SRIHARAN. 2.5 IN VIEW OF ABOVE REASONS, I AM OF THE OPINION T HAT THE EXPENDITURE OF RS.96,36,441 INCURRED BY THE ASSESSEE COMPANY IS NO T, JUST AND IN THE BEST INTEREST OF THE ASSESSEE COMPANY. THEREFORE, THE AS SESSEE COMPANY FAILED TO PROVE THAT THE EXPENDITURE OF HOTEL MANAGEMENT FEE HAS BEEN INCURRED WHOLLY :-10-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN VIE W OF THE FACTS AND CIRCUMSTANCES NARRATED IN THE PRIOR PARAGRAPHS, EXP ENDITURE OF HOTEL MANAGEMENT FEE INCURRED BY THE ASSESSEE COMPANY AMO UNTING TO RS.96,36,441 IS DISALLOWED. 5. FROM THE ABOVE, IT IS CLEAR THAT THE AO FOUND V ARIOUS FACTS AND CIRCUMSTANCES SPECIFIED THEREIN IN SUB PARA 2.1 AB OVE , AND DEDUCED THAT THE ENTIRE TRANSACTION IS 'COLOURED' AND MADE UNDER INF LUENCE; AND IS DESIGNED TO PROVIDE' FOR EXPENDITURE IN THE BOOKS OF THE ASSESS EE COMPANY TO REDUCE THE TAX LIABILITY AND TO TRANSFER THE PROFIT INTO THE H ANDS OF AN INDIVIDUAL (HAVING SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY), WHIC H IS TAX FREE. HENCE, THE AO OPINED THAT THE EXPENDITURE INCURRED CANNOT BE SAID TO HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE, HE PROPOSED TO DISALLOW THE SAID EXPENDITURE OF RS.96, 36,441/- GIVING AN OPPORTUNITY TO THE ASSESSEE TO SHOW-CAUSE AS TO WHY THE SAID EXPENDITURE SHALL NOT BE DISALLOWED. FOR WHICH, THE ASSESSEE R EPLIED , INTER ALIA, AS IS SEEN , SUPRA, THE NEED TO HAVE A MANAGEMENT CONSULTANT, ITS AGREEMENT, M/S. SHRIHARANS PROFILE. THEREAFTER, THE ASSESSING OFF ICER HAS ARRIVED THE CONCLUSION AS EXTRACTED, ABOVE. 5.1 AS PER THE COPY OF THE AGREEMENT AVAILABLE ON R ECORD, THE FOLLOWING ARE SEEN TO BE THE MAIN SERVICES TO BE RENDERED BY M/S. ASIANA HOTEL MANAGEMENT (LABUAN) INC, MALAYSIA :-11-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 (I) ADVISE TO THE BOARD OF DIRECTORS OF THE APPELLA NT COMPANY, ITS OFFICERS AND STAFF ABOUT THE BEST AND MOST PRODUCTI VE METHODS OF MANAGING, OPERATING, MARKETING, PROMOTING AND EXPAN DING THE BUSINESS OF THE HOTEL. (II) ENGAGING ALL EMPLOYEES REQUIRED FOR THE OPERAT ION OF THE HOTEL AND ENTER INTO CONTRACTS NECESSARY FOR THE CONTINUOUS O PERATION OF THE HOTEL. (III) COORDINATING AND CONDUCTING ALL PHASES OF MAR KETING, PROMOTION AND PUBLICITY RELATING TO THE HOTEL (IV) PROVIDING INFORMATION, STATISTICS AND KEY PERF ORMANCE INDICATORS TO ENABLE THE BOARD OF DIRECTORS TO ASSESS THE PERFORM ANCE OF THE HOTEL. (V) ENSURE COMPLIANCE WITH THE LAW RELATING TO HOTE L BUSINESS AND PREMISES. IT IS CLEAR FROM THE ABOVE, THAT THE ASSESSEE HAS N OT LAID ANY MATERIAL TO PROVE AS TO WHETHER IT HAS RECEIVED THE SERVICES MENTIONE D ABOVE AND IF IT IS SO, TO WHAT EXTENT ETC. THUS, IT IS CLEAR THAT THERE IS N O FINDING AS TO WHETHER THE ASSESSEE HAS RECEIVED SUCH SERVICES OR NOT AND IF YES, THEN TO WHAT EXTENT. FURTHER, IT IS NOT KNOWN WHETHER SHRI. SRIHARAN WAS IN RECEIPT OF ANY PAYMENT OR PERQUISITE FROM THE ASSESSEE AS A DIRECTOR OF TH E ASSESSEE COMPANY. IT IS CLEAR FROM THE ASSESSMENT ORDER THAT SHRI SRIHARAN IS AN INTERESTED PARTY. THE ASSESSEEE CLAIMED THE ABOVE SUM AS AN EXPENDITURE AND HENCE, THE BURDEN OF PROVING THE NECESSARY FACTS VIZ :-12-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 (1) IT SHOULD BE AN EXPENDITURE, (2) THAT EXPENDITURE SHOULD BE LAID OUT OR EXPENDED , (3) IT SHOULD BE SO LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR A CERTAIN PURPOSE, AND (4) THE PURPOSE SHOULD BE THE PURPOSE OF THE ASSESS EE'S BUSINESS, IS ON IT. 6. THE ONUS IN RESPECT OF THE ABOVE ITEMS ARE ON T HE ASSESSEE AND IT SHOULD BE SEEN WHETHER THE AMOUNT WAS SPENT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS.ALTHOUGH THE PAYMENT MIGHT HAVE BEEN MADE AND ALTHOUGH THERE MIGHT BE AN AGREEMENT IN EXISTENCE, IT WOULD BE OPEN TO THE AO TO TAKE INTO CONSIDERATION VARIOUS FACTORS WHIC H WOULD GO TO SHOW WHETHER THE AMOUNT WAS PAID AS REQUIRED BY THE SECT ION. FOR INSTANCE, THE AO MAY TAKE INTO CONSIDERATION WHETHER THE MONEYS WERE PAID TO A NEAR RELATION OF AN ASSESSEE. HE MAY TAKE INTO CONSIDERATION THE EXTENT OF THE BUSINESS AND THE PARTICULAR SERVICES RENDERED BY THE IMPUGNED PE RSON WHICH CALLED FOR A SPECIAL REMUNERATION AT THE HANDS OF THE ASSESSEE. HE MAY TAKE INTO CONSIDERATION THE QUANTUM OF THE PAYMENT MADE WITH A VIEW TO DECIDE WHETHER THE PAYMENT WAS OR WAS NOT GROSSLY OUT OF P ROPORTION TO THE WORK DONE BY THE PERSON. THE COURTS HAVE ENUMERATED CERT AIN ILLUSTRATIVE CIRCUMSTANCES VIZ., (1) WHETHER THE PAYMENT WAS MAD E TO A NEAR RELATION, (2) :-13-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 THE EXTENT OF THE BUSINESS, (3) THE PARTICULARS OF SERVICE RENDERED, (4) WHETHER THE SERVICE WAS SUCH AS TO REQUIRE SPECIAL REMUNERA TION, (5) WHAT WAS THE QUANTUM OF PAYMENT, (6) WHETHER THE PAYMENT WAS OR WAS NOT GROSSLY OUT OF PROPORTION TO THE WORK DONE BY THE PERSON. TO THIS LIST OF CIRCUMSTANCES MIGHT BE ADDED OTHER CIRCUMSTANCES, E.G., (7) WHAT WAS TH E PRACTICE IN THE TRADE FOR PAYMENT TO THE PERSON IN SIMILAR CIRCUMSTANCES, (8) WHAT WERE THE QUALIFICATIONS OF THE PERSON, (9) WHAT WAS THE AMOU NT PAID TO A PREDECESSOR OR A SUCCESSOR RENDERING THE SAME SERVICE, (10) WHE THER THE ALLOWANCE OF A CERTAIN PERCENTAGE WAS A NORMAL ALLOWANCE OR WAS EX TRAORDINARY HAVING REGARD TO, THE PROFITS AND THE PRACTICE IN THE TRAD E, (11) WHETHER THE METHOD OF WORKING OUT PROFITS FOR CALCULATING THE PERCENTA GE OF COMMISSION WAS THE NORMAL METHOD OR AN ABNORMAL METHOD, AND (12) IF TH ERE WAS ANY EXTRAORDINARINESS OR ABNORMALITY IN THE ARRANGEMENT , WAS THERE ANY SPECIAL REASON OR CIRCUMSTANCES FOR SUCH EXTRAORDINARINESS OR ABNORMALITY.IF AFTER TAKING THESE FACTORS INTO CONSIDERATION THE AO COME S TO THE CONCLUSION THAT THE PAYMENT WAS NOT MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, IT WOULD BE OPEN TO HIM E ITHER TO DISALLOW THE WHOLE SUM OR A PART OF THE SUM PAID.THUS, IN ORDER TO CLA IM THIS DEDUCTION AS EXPENDITURE, THE ASSESSEE HAS NOT ONLY TO PROVE TH AT THE EXPENSE WAS INCIDENTAL TO THE BUSINESS BUT TO SHOW THAT THE EXP ENSES WERE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. SINCE, THE REQUIRED FACTS ARE NOT AVAILABLE ON RECORD, WE DEEM IT FIT TO SET ASIDE THE :-14-: ITA NOS. 2364/MDS/2014 & 2832/MDS/2016 ORDERS OF THE CIT (A) AND REMIT THE ISSUES TO THE A O FOR RE-EXAMINATION AND AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE T O DECIDE THE ISSUES ON THE ABOVE LINES. THE REVENUES APPEALS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, THE REVENUES APPEALS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 23 RD DAY OF NOVEMBER, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) ! ' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 0 /DATED: 23 RD NOVEMBER, 2017 JPV & )12 32 /COPY TO: 1. %/ APPELLANT 2. )*% /RESPONDENT 3. 4 ) (/CIT(A) 4. 4 /CIT 5. 2 ) /DR 6. 7 /GF