The ITO, Ward-2(1)(2), Ahmedabad V. Krone Finstock Pvt. Ltd., Ahmedabad

ITA 2917/AHD/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7943 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 19-10-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T SANKAR
• Assessee Lawyers: S N DIVATIA
• Keywords: Business expenditure; Maximum Marginal Rate; Tax effect
• Section: 37(1)

Judgement Text

, LH LHLH LH IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD L LL LOZJH OZJH OZJH OZJH OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN] U;KF;D LNL; ] U;KF;D LNL; ] U;KF;D LNL; ] U;KF;D LNL; DS LE{KA DS LE{KA DS LE{KA DS LE{KA BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ./ I.T.A. NO.2917/AHD/2015 ( / ASSESSMENT YEAR : 2012-13) THE INCOME TAX OFFICER, WARD-2(1)(2), AHMEDABAD / VS. KRONE FINSTOCK PVT. LTD., MONARCH HOUSE OPP: ISHWAR BHUWAN, NR. COMMERCE SIX ROAD, NAVRANGPURA, AHMEDABAD 380 009 ./ ./ PAN/GIR NO. : AACCK 9850 B ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI T. SANKAR, SR. D.R. / RESPONDENT BY : SHRI S. N. DIVATIA, A.R. / DATE OF HEARING 11/05/2018 !'# / DATE OF PRONOUNCEMENT 03/07/2018 $% / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE REVENUE AGAINST THE APPELLATE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-2, AHMEDABAD [CIT(A) IN SHORT] VIDE APPEAL NO.CIT(A)- 2/444/ITO, WD.2(1)(2)/2014-15 DATED 11/08/2015 ARIS ING IN THE ASSESSMENT ORDER PASSED UNDER S.143(3) OF THE INCOM E TAX ACT, 1961 (HERE-IN-AFTER REFERRED TO AS 'THE ACT') DATED 23/ 01/2015 RELEVANT TO ASSESSMENT YEAR (AY) 2012-13. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 2 - 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER: 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.54,00,000/- MADE BY THE AO ON AC COUNT OF INFRASTRUCTURE AND REFERRAL FEE TREATING THE SAME A S NON BUSINESS EXPENSES, WITHOUT PROPERLY APPRECIATING THE FACTS O N THE CASE AND THE MATERIAL BROUGHT ON THE RECORD. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 3. IT IS THEREFORE, PRAYED THAT THE ORDER OF THE L D. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE REST ORED TO THE ABOVE EXTENT. 3. THE ISSUE RAISED BY REVENUE IN GROUND NO.1, 2 A ND 3 IS THAT LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 54 ,00,000/- ON ACCOUNT OF INFRASTRUCTURE AND REFERRAL FEE. 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY, REGISTERED AS NBFC WITH RBI AND ENGAGED IN THE BUSINESS OF FINANCING. THE ASSESSEE IN THE YEAR UNDER CONSIDERA TION DEBITED EXPENSES FOR RS.60,00,000/- UNDER THE HEAD COMMON INFRASTRUCTURE & REFERRAL FEE WHICH IS TO BE PAID TO THE FOLLOWING COMPANIES: 1. MONARCH PROJECT & FINMARKET LTD. (GOREGAON) RS. 36 LACS 2. MONARCH RESEARCH & BROKERAGE PVT. LTD. RS. 24 LACS THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVED C ERTAIN FACTS ABOUT THE ABOVE EXPENSES AS DETAILED UNDER: ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 3 - I) THE NET PROFIT RATIO OF ASSESSEE REDUCED FROM THE P RECEDING YEAR FROM 25.1% TO 3.63% OF THE TURNOVER THOUGH THE RE WAS NO CHANGE IN THE BUSINESS ACTIVITY OF THE ASSESSEE. II) THE SAID FEES OF RS. 60 LACS WERE PAID TO THE ABOVE COMPANIES FOR THE UTILIZATION OF COMMON INFRASTRUCT URE OF ABOVE COMPANIES AS WELL AS FOR REFERENCE OF CLIENTS . HOWEVER, ON VERIFICATION, IT WAS FOUND THAT ALL THE CLIENTS, I.E. 44, WERE OF AHMADABAD EXCEPT TWO CLIENTS WHERE AS ASSESSEE HAS ITS INFRASTRUCTURE IN AHMADABAD. III) ON PERUSAL OF THE AGREEMENT FOR THE USE OF COMMON INFRASTRUCTURE AND REFERRAL FEES, IT WAS NOTICED TH AT THE AGREEMENT WAS MADE AMONG THREE PARTIES FOR THE USE OF COMMON INFRASTRUCTURE OWNED/POSSESSED BY ALL THREE PARTIES, BUT ASSESSEE COMPANY HAS NOT RECEIVED ANY INCOME AG AINST THE INFRASTRUCTURE FACILITY OWNED/POSSESSED BY IT F ROM THE ABOVE TWO PARTIES. IN VIEW OF ABOVE, THE EXPLANATION WAS SOUGHT BY THE AO FROM THE ASSESSEE ON THE OBSERVATION AS DISCUSSED ABOVE. THE ASSESSEE IN COMPLIANCE TO IT SUBMITTED THAT: A) IT IS USING COMMON INFRASTRUCTURE FACILITY FOR I TS BUSINESS LOCATED AT MONARCH HOUSE OPP. JAGGERS PARK , NR, ISHWAR BHAWAN NAVRANGAPURA AHMEDABAD THOUGH IT IS REGISTERED OFFICE IS LOCATED AT C.G. R OAD AHMEDABAD. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 4 - B) THE COMMON INFRASTRUCTURE FACILITY AVAILED BY TH E ASSESSEE INCLUDE THE ELECTRICITY, INTERNET, ADMINISTRATIVE AND SALARY EXPENSES ETC. IT IS ENJOY ING ABOUT 1800 SQ. FT. AREA IN SUCH PREMISES. C) THE REFERENCE OF THE CLIENT HAS NO RELEVANCE/ CONNECTION WITH THE EXPENDITURE AS THE SAME WAS INCURRED FOR AVAILING THE FACILITY AS DISCUSSED ABO VE. D) THE EXPENDITURES ABOVE WERE TO BE INCURRED COMPULSORILY IRRESPECTIVE OF THE BUSINESS. MOREOVER , THE PAYMENTS MADE TO THE PARTIES ABOVE HAVE SUFFERE D TAX AT THE MAXIMUM MARGINAL RATE IN THEIR INDIVIDUA L HANDS. HENCE THERE IS NO LOSS TO THE REVENUE. HOWEVER ASSESSING OFFICER DISREGARDED THE CONTENTIO NS OF THE ASSESSEE BY OBSERVING AS UNDER: I. THERE IS NO REFERENCE TO THE CLIENT MADE BY THE ABO VE-SAID PARTIES THOUGH THE AGREEMENT REQUIRES SO. II. THE BUSINESS OF THE ASSESSEE IS MAINLY BASED IN AHM ADABAD ONLY EXCEPT TWO CLIENTS. THE BUSINESS OF THE ASSESS EE HAS BEEN CARRIED IN AHMADABAD ONLY FOR THE LAST SEVERAL YEARS. THEREFORE THERE WAS NO REASON TO UTILIZE THE INFRAS TRUCTURE FACILITY OF THESE TWO COMPANIES WHICH ARE ALSO SITU ATED OUTSIDE THE AHMADABAD. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 5 - III. THE MOU AMONG ALL THE THREE PARTIES WAS EFFECTIVE F ROM 01/04/2012 WHICH EVIDENCES THAT THE SAME IS NOT APP LICABLE FOR THE YEAR UNDER CONSIDERATION, I.E. F.Y. 2010-20 11. IV. AS PER THE MOU, THE ASSESSEE WAS TO UTILIZE THE INFRASTRUCTURE FACILITY OF THESE COMPANIES AVAILABL E AT VARIOUS LOCATIONS IN AHMADABAD & OUTSIDE AHMADABAD. BUT THE ASSESSEE HAS NOT USED ALL THE INFRASTRUCTURE FA CILITY EXCEPT THE ONE AS DISCUSSED ABOVE. V. THE ASSESSEE HAS ALREADY DEBITED SALARY & ADMINISTR ATIVE AND MISCELLANEOUS EXPENSES IN ITS PROFIT & LOSS A/C FOR RS. 7,62,171.00 AND 76,168.00 DURING THE YEAR AGAINST R S. 6,98,750.00 AND RS. 33,511.00 AS CLAIMED IN THE PRE CEDING YEAR. THUS THERE WAS NOT ANY BUSINESS EXPEDIENCY FO R SUCH HUGE EXPENDITURE. VI. ONE OF THE COMPANY HAS FILED ITS RETURN OF INCOME D ECLARING THE LOSS. THUS THE ARGUMENT OF THE ASSESSEE THAT BO TH THE COMPANIES HAVE SUFFERED TAX AT THE MAXIMUM MARGINAL RATE IS INCORRECT. VII. BOTH THE PARTIES ARE RELATED PARTIES IN PURSUANCE T O THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT TO THE A SSESSEE, AND THEREFORE THE UNREASONABLE & EXCESSIVE AMOUNT H AS BEEN PAID BY THE ASSESSEE. IN VIEW OF ABOVE, THE AO DISALLOWED THE EXPENSES OF RS. 60 LACS AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 6 - 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LD. CIT(A). THE ASSESSEE BEFORE THE LEARNED CIT(A) SUBMITTED THAT T HE PREMISE FROM WHERE IT WAS CARRYING ON ITS BUSINESS WAS REGISTERE D OFFICE AND BRANCH OFFICE OF MRBPL AND MPFL RESPECTIVELY. THUS, THE SA ID PREMISES WAS MANAGED BY BOTH THE COMPANIES. THEREFORE, THE PAYME NT WAS MADE BY THE ASSESSEE TO EACH OF THEM. THE AO MISUNDERSTOOD THAT MPFL HAS NO OFFICE FACILITIES IN AHMADABAD AND THE ASSESSEE HAS MADE THE PAYMENT TO MPFL FOR USING THE INFRASTRUCTURE FACILITIES OUTSID E THE AHMADABAD. THE ASSESSEE ALONG WITH BOTH THE COMPANIES AS DISCU SSED ABOVE WAS USING THE SAME PREMISES, I.E. MONARCH HOUSE NAVRANG PURA, AHMEDABAD FOR ITS BUSINESS ACTIVITIES. THEREFORE, IT WAS QUIT E NATURAL THAT THE ASSESSEE HAD TO BEAR PART OF THE EXPENSES. AS SUCH THE ASSES SEE HAS MADE THE PAYMENT FOR USING THE COMMON INFRASTRUCTURE FACILIT Y SUCH AS ELECTRICITY, INTERNET, ADMIN AND SALARY EXPENSES. THE ASSESSEE W AS ENJOYING THE 1800 SQ.FT. AREA OF THE SAID PREMISES. IT IS ALSO PERTIN ENT TO NOTE THAT THE ASSESSEE HAS SHARED THE EXPENSES TO THE EXTENT OF 6 % OF ALL THE EXPENSES RELATING TO SUCH PREMISES. THE ASSESSEE WAS USING VARIOUS TYPES OF INFRASTRUCT URE FACILITIES INCLUDING A LIFT, TELECOMMUNICATION AND INTERNET, ELECTRICITY AND PARKING FACILITIES ETC. THUS, THE COMMON INFRASTRUCTURE FACILITY WAS N OT LIMITED TO SALARY AND WAGES AND MISCELLANEOUS EXPENSES. THEREFORE, TH E REASONABLENESS OF THE EXPENSES OF RS.60,00,000/- BORN BY THE ASSESSEE CANNOT BE DOUBTED. IT IS ALSO IMPORTANT TO NOTE THAT MRBPL HAS PAID TH E TAXES ON MAXIMUM MARGIN RATE WHEREAS MPFL HAS PAID THE TAX UNDER MAT . THEREFORE, IT ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 7 - CANNOT BE CONCLUDED THAT THE ASSESSEE HAS INCURRED THE COST OF USING THE COMMON INFRASTRUCTURE FACILITY TO AVOID THE PAYMENT OF TAX. THE LD. CIT-A AFTER CONSIDERING THE SUBMISSION OF T HE ASSESSEE RESTRICTED THE DISALLOWANCE TO THE EXTENT OF 10% OF THE TOTAL EXPENSES, I.E. 60 LACS AND DELETED THE REMAINING AMOUNT, I.E. RS. 54 LACS BY OBSERVING AS UNDER: 3.3. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. THE AO HAS MADE THE DISALLOWANCE OF RS.60 LACS CLAIMED AS EXPENDITURE M ADE FOR UTILISATION OF THE COMMON INFRASTRUCTURE AND REFERRAL EXPENSES PAID TO THE RELATED PERSONS AS SPECIFIED U/S. 40A(2)(B) OF THE I. T. AC T, 1961. THE AFORESAID CLAIM OF EXPENDITURE PERTAINING TO MONARCH PROJECT AND FINMARKETS LTD. (MPFL IN SHORT) WAS AT RS.36 LACS AND MONARCH RESEARCH AND BROKERAGE PVT. LTD. (MRBPL IN SHORT) WAS AT RS. 24 LACS. THE CLAIM OF AFORESAID EXPENDITURE HAS BEEN DISALLOWED FOR THE R EASONS DISCUSSED IN PARA NO. 3.2 OF THE ASSESSMENT ORDER. BRIEFLY, THE EXPENDITURE WAS HELD TO BE NOT FOR THE BUSINESS EXPEDIEN CY AS PER THE AO. IT WAS OBSERVED BY THE AO THAT THE COMMON INFRASTRUCTURE A ND REFERRAL FEE EXPENSES HAVE NOT BEEN MADE FOR ANY CLIENT REFERENC E TO THE APPELLANT COMPANY. FURTHER THESE PAYMENTS HAVE BEEN MADE TO T HE RELATED PARTIES COVERED UNDER THE PROVISIONS OF SECTION 40A(2)(B) O F THE I. T. ACT, 1961. IT WAS ALSO OBSERVED THAT ASSESSEE COMPANY HAVE ITS CLIENT BASE IN AHMEDABAD SINCE LONG AND THERE WAS NO REASON TO UTI LISE THE INFRASTRUCTURE FACILITY OF MONARCH RESEARCH AND BRO KERAGE PVT. LTD. AND MONARCH PROJECT AND FINMARKETS LTD., GUREGAON, SITUATED OUTSIDE AHMEDABAD. AS PER THE MOU AGREEMENT WHICH WAS EXECUTED BETWEEN THE APPELLANT COMPANY, M/S. MONARCH RESEARCH AND BR OKERAGE PVT. LTD. AND M/S. MONARCH PROJECT AND FINMARKETS LTD., THE SAME WAS EXECUTED ON TOO RUPEE STAMP PAPER AND WAS NOT NOTARIZED OR REGISTERED. FURTHER, THE VARIOUS TERMS AND CONDITIONS OF THE MOU HAVE NOT BEEN FULFILLED. 3.4. ON THE OTHER SIDE, THE APPELLANT COMPANY HAS C ONTENDED THAT THE PAYMENTS TO BOTH THE PARTIES WERE MADE FOR GETTING THE COMMON INFRASTRUCTURE FACILITIES BY THE APPELLANT COMPANY. IT WAS POINTED OUT ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 8 - THAT THE APPELLANT AND THE TWO OTHER RECIPIENT TWO COMPANIES WERE CARRYING ON THE BUSINESS AT THE SAME PREMISES I.E. MONARCH HOUSE, NAVRANGPURA, AHMEDABAD, AND WERE UTILIZING THE COMMON INFRASTRUCTURE PROVIDED TO THEM. SO IT WAS BUT NATU RAL THAT THE PART OF THE SAID EXPENSES WERE TO BE BORNE BY EACH OF THEM. THE APPELLANT WAS USING THE COMMON INFRASTRUCTURE FACILITIES IN THE F ORM OF OFFICE SPACE AREA OF 1800 SQ. FT., ELECTRICITY, INTERNET, LIFT, ADMIN & SALARY EXPENSES OF EMPLOYEES, TELECOMMUNICATION AND PARKING FACILIT IES ETC. IT WAS FURTHER ARGUED THAT THE TOTAL EXPENDITURES ON THESE COMMON INFRASTRUCTURE FACILITIES WERE TO THE TUNE OF RS.13 ,24,04,774/-, OUT OF WHICH THE APPELLANT COMPANY HAS BORNE APPROXIMATELY 5% OF THE TOTAL INFRASTRUCTURE COST WHICH WAS VERY REASONABLE. 3.5. FROM THE SUBMISSION, IT IS ALSO FOUND THAT THE TWO RECIPIENT COMPANIES WERE HAVING THEIR LOCAL OFFICES, WHEREFRO M THEY WERE DOING THE BUSINESS ACTIVITIES OF SHARE BROKING LIKE SHERKHAN OR ANGEL BROKING. EVEN IN THE MOU DATED 01/04/2011, THE REGISTERED OFFICE OF THE M/S. MONARCH RESEARCH AND BROKERAGE PVT. LTD. HAS BEEN SHOWN OF THE COMMON OFFICE. LIKEWISE, THE ANOTHER RECIPIENT COMPANY I.E. MONARC H PROJECT AND FINMARKETS LTD. WAS ALSO HAVING ITS BRANCH OFFICE A T THIS COMMON PREMISES, THOUGH ITS REGISTERED OFFICE WAS AT MUMBA I, THUS, IT IS NOT THE CASE THAT THE APPELLANT COMPANY HAS MADE ANY PAYMEN TS FOR UTILISATION OF THE SERVICES OUTSIDE THE AHMEDABAD. 3.6. ON GOING THROUGH THE DETAILS AND SUBMISSION, I T IS ALSO SEEN THAT M/S. MONARCH RESEARCH AND BROKERAGE PVT. LTD. WAS R EGULARLY ASSESSED TO FAX AT THE MAXIMUM MARGINAL RATE AND MONARCH PRO JECT AND FINRNARKETS LTD. HAD PAID THE TAX UNDER MAT. SINCE THE PAYMENTS TO M/S. MONARCH PROJECT AND FINMARKETS LTD. HAS BEEN R EFLECTED IN THE P & L ACCOUNT, THUS IT WAS THE PART OF THE BOOK PROFI TS, THEREFORE, THE TAXES HAVE ALSO BEEN PAID ON THE BOOK PROFITS BY M/S. MON ARCH PROJECT AND FINMARKETS LTD.. THUS, IF WAS TAX NEUTRAL EXERCISE AND THERE WAS NO REASON FOR MAKING THE DISALLOWANCE OF THE ENTIRE EX CESSIVE CLAIM OF THE EXPENDITURE BY THE APPELLANT. IT HAS BEEN NOTICED T HAT AN MOD DATED 01/04/2011 BETWEEN THE APPELLANT AND OTHER TWO RECI PIENT COMPANIES HAVE BEEN EXECUTED ON THE STAMP PAPER AND RELEVANT PORTION OF THE SHARING OF THE INFRASTRUCTURE FACILITIES AMONG THEM IS REPRODUCED AS UNDER:- ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 9 - ALL COMPANIES HERE AGREES WITH MUTUAL CONSENT TO S HARE INFRASTRUCTURE AND COMMON EXPENSES BORNE CARRYING B USINESS IN A GROUP HEREBY INCLUDES USAGE OF OFFICE ALONG WITH OFFICE UTILITIES, LOUNGE, RECEPTION WITH COMPETENT PERSONNEL TO HANDL E MESSAGES, SECRETARIAL SERVICES, INTERNET AND TELECOM FACILITI ES, ELECTRICITY, WATER SUPPLY, PANTRY AND SECURITIES, SALARY OF EMPL OYEE, BRANCH GENERAL EXPENSES (INCLUDING RENT, FURNITURE COST, O THER ADMINISTRATIVE COST, BACK OFFICE COST), OTHER ADMIN ISTRATIVE COST. HERE THE TERM RENT MEANS ANY PAYMENT, BY WHATEVER N AME CALLED, UNDER ANY LEASE, SUB-LEASE, TENANCY OR ANY OTHER AGREEMENT OR ARRANGEMENT FOR THE USE OF (EITHER SEP ARATELY OR TOGETHER] ANY' A. LAND; OR B. BUILDING; OR OFFICE; OR C. LAND APPURTENANT TO A BUILDING; OR D. EQUIPMENT; OR E. FURNITURE; OR F. FITTINGS, WHETHER OR NOT ANY OR ALL THE ABOVE ARE OWNED BY TH E PAYEE. 3.7. MERELY THAT THE SAME HAVE BEEN EXECUTED ON TH E STAMP PAPER WITHOUT NOTARIZING AND REGISTRATION WOULD NOT MAKE ANY DIFFERENCE LEGALLY FOR THE REASON THAT ALL THE THREE PARTIES A RE RELATED AND THEY HAVE SHOWN THE TRANSACTIONS IN THEIR BOOKS OF ACCOUNTS. MOREOVER, FROM THE DETAILS OF TOTAL EXPENDITURE, THE ALLOCATION OF EXP ENDITURE ON THE APPELLANT WAS ONLY 5% WHICH CAME TO APPROXIMATELY R S. 60 LACS WHICH WAS COMMENSURATING TO THE INCOME RATIO OF 6% OF THE TOTAL REVENUE OF ALL THE THREE COMPANIES. THE DETAILS OF THE POST SH ARING EXPENSES ARE NOTED AS UNDER:- PARTICULAR MONARCH PROJECT & FINMARKETS LTD. MONARCH RESEARCH & BROKERAGE PVT. LTD. KRONE FINSTOCK PRIVATE LTD. TOTAL TOTAL INCOME (AS PER BSFY 2011-12) 202,764,509.00 70,518,461.00 19,015,429.00 292,298,399.00 ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 10 - PERCENTAGE INCOME RATIO 6% PAYMENT MADE AS PER CONTRACT 3,600,000.00 2,400,000.00 --- 6,000,000.00 PARTICULAR SALARY 57,712,474.00 6,626,904.00 0 64,339,378.00 ADMINISTRATIVE EXPENSES 44,895,943.00 5,172,867.00 0 50,068,810.00 ELECTRICITY EXPENSES 4,983,914.00 26,035.00 0 5,009,949.00 COMMUNICATION EXPENSES 3,335,155.00 90,152.00 0 3,425,307.00 INTERNET & OTHER CONNECTIVITY 6,269,327.00 1,020,345.00 0 7,289,672.00 TRAVELLING & CONVEYANCE EXP. 1,838,576.00 433,082.00 0 2,271,658.00 TOTAL EXPENSES 119,035,389.00 13,369,385.00 0 132,404,774.00 3.8. THE AO HAS NOT EVEN CONTROVERTED THE APPELL ANT'S CONTENTION THAT THE APPELLANT COMPANY HAS NOT UTILISED OR ENJOYE D THE INFRASTRUCTURE FACILITIES PROVIDED IN THE FORM OF OFFICE SPACE OF 1800 SQ. FT., TELECOMMUNICATION EXPENSES, ELECTRICITY EXPENSES, I NTERNET AND SALARY OF COMMON EMPLOYEES ETC. WHEN THESE COMMON FACILITI ES HAVE BEEN UTILIZED BY THE APPELLANT COMPANY WITH THE OTHER TW O GROUP COMPANIES, THEN IT WAS OBLIGATORY ON THE PART OF THE APPELLANT TO SHARE THE TOTAL EXPENDITURES APPROXIMATELY AS PER THE REVENUE YIELD ING RATIO. AO'S FINDING THAT THESE EXPENDITURES WERE MADE WITHOUT A NY BUSINESS EXPEDIENCY IS NOT BASED UPON ANY INFORMATION / EVID ENCES. AO HAS NOT DENIED THAT THE SAID COMMON PREMISES WITH FACILITIE S HAVE NOT BEEN UTILISED BY THE APPELLANT COMPANY FOR ITS BUSINESS ACTIVITIES. MOREOVER, IT HAS BEEN FOUND THAT THE APPELLANT COMPANY HAS MA DE THE TDS ON THE TOTAL PAYMENT OF RS. 60 LACS UNDER THE PROVISIONS O F SECTION 194J OF I. T. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 11 - ACT TOTALING TO RS.6,27,000/- AND THE SAME HAVE BEE N DEPOSITED ON 27/06/2012 IN THE GOVERNMENT ACCOUNT. THUS, THE GEN UINENESS OF THE CLAIM OF THE EXPENDITURE IS ALSO REMAINED EXPLAINED NOT ONLY FROM THE TERMS AND CONDITIONS OF THE MOU BUT FROM THE DEDUCT ION OF TDS UPON THE PAYMENTS. SINCE THE CLAIM OF EXPENDITURES HAVE BEEN REIMBURSED TO THE RELATED PARTIES, THEREFORE, THE POSSIBILITY OF MAKING THE EXCESS PAYMENT CANNOT BE RULED OUT, AND CONSIDERING THE AP PELLANT'S CONTENTION VIDE LETTER DATED 05/01/2015 IN THE ASSESSMENT PROC EEDINGS AS HAS BEEN REPRODUCED ON PAGE 7 OF THE ASSESSMENT ORDER WHICH READS AS UNDER:- IN VIEW OF THE ABOVE, PROPOSED DISALLOWANCE OF RS. 60 LACS MAY PLEASE BE DROPPED OR IN THE ALTERNATIVE REDUCED SUB STANTIALLY. THE DISALLOWANCE OF THE AFORESAID EXPENDITURE @ 10% WHICH AMOUNTED TO RS. 6 LACS IS CONFIRMED AND THE RELIEF IS GRANTED FOR THE BALANCE AMOUNT. 3.9. THE RELATED GROUNDS OF APPEAL ARE ACCORDIN GLY PARTLY ALLOWED. BEING AGGRIEVED BY ORDER OF LD. CIT(A), THE ASSESSE E IS IN THE SECOND APPEAL BEFORE US. THE LEARNED DR BEFORE US SUBMITTED THAT THE ASSESSE E MADE THE PAYMENT TO BOTH THE COMPANIES IN PURSUANCE TO THE MEMORANDU M OF UNDERSTANDING, WHICH IS EFFECTIVE FROM 1 ST APRIL 2012. THUS, THE ASSESSEE CANNOT CLAIM ANY EXPENSES UNDER THE YEAR UNDER CONS IDERATION. IT IS ALSO UNDISPUTED FACT THAT THE ASSESSEE AND OT HER TWO COMPANIES ARE ASSOCIATED CONCERN AS THE DIRECTORS IN ALL THE COMP ANIES ARE COMMON BUT THE DISALLOWANCE WAS NOT MADE BY THE AO MERELY AFTE R INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. RATHER, IT WAS ALSO DISALLOWED UNDER THE PROVISION OF SECTION 37(1) OF THE ACT. IN DEED THE AO HAS MADE THE REFERENCE AND REMARKS TO THE PROVISIONS OF SECT ION 40A(2)(B) IN HIS ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 12 - ASSESSMENT ORDER, BUT THAT WAS NOT THE SOLE BASIS F OR MAKING THE DISALLOWANCE. ONE OF THE COMPANIES HAS PAID THE TAXES UNDER THE P ROVISIONS OF VAT WHICH CANNOT BE EQUATED WITH THE RATE OF TAX UNDER NORMAL COMPUTATION OF INCOME. THEREFORE, THE ARGUMENT OF THE ASSESSEE THAT THE PAYMENT TO BOTH THE COMPANIES HAS NEUTRAL TAX EFFECT IS WRONG. THE ARGUMENT OF THE ASSESSEE THAT THE EXPENSES CLAI MED BY IT REPRESENT ONLY 6% OF TOTAL EXPENSES INCURRED ON SUCH PREMISES TOWARDS COMMON INFRASTRUCTURE FACILITY DOES NOT HOLD GOOD. IT IS B ECAUSE IT CANNOT BE THE CRITERIA TO DECIDE THE REASONABLENESS OF THE EXPENS ES. THERE WAS NO CHANGE IN THE FACTS AND CIRCUMSTANCES IN THE BUSINESS ACTIVITY OF THE ASSESSEE, BUT THE PROFIT HAS COME D OWN DRASTICALLY FROM 25.5% TO 3.1% OF THE TURNOVER. ON THE OTHER HAND, THE LEARNED AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 47 AND SUBMITTED THAT THERE WAS NO LOSS TO THE REVENUE ON ACCOUNT OF SUCH PAYMENT MADE BY THE ASSESSEE IN VIE W OF THE FACT THAT BOTH THE COMPANIES HAVE PAID THE TAXES. THE LEARNED AR ALSO SUBMITTED THAT THE ASSESSEE INC URRED THE EXPENSES FOR ITS BUSINESS ACTIVITIES. THE PROVISION OF LAW D OES NOT REQUIRE THAT THE EXPENSE SHOULD GIVE POSITIVE RESULTS TO THE ASSESSE E FOR BUSINESS EXPENSES INCURRED BY IT. THE EXPENSES HAVE BEEN INCURRED EXC LUSIVELY AND WHOLLY FOR THE BUSINESS. THEREFORE, THE SAME SHOULD BE ALL OWED AS DEDUCTION U/S 37(1) OF THE ACT. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 13 - 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE PRESENT CASE, THE ASSES SEE HAS INCURRED EXPENSES OF RS. 60.00 WHICH WERE PAID TO TWO COMPAN IES AS DISCUSSED ABOVE. AS PER THE ASSESSEE, SUCH EXPENSES WERE INCU RRED FOR USING THE INFRASTRUCTURE FACILITY OWNED BY BOTH THE COMPANIES . BUT THE AO DISAGREED WITH THE CONTENTION OF THE ASSESSEE AND M ADE THE DISALLOWANCE. BUT THE LD. CIT-A RESTRICTED THE DISALLOWANCE TO TH E TUNE OF 10% OF THE TOTAL EXPENSES, I.E. RS. 6 LACS. FROM THE PRECEDING DISCUSSION, WE NOTE CERTAIN FACT S AS DETAILED UNDER: 1. THERE WAS NO PAYMENT MADE BY THE ASSESSEE IN THE PR ECEDING YEAR TO THE ABOVE-SAID COMPANIES AS EVIDENT FROM NOTE 13 ATTACHED TO THE FINANCIAL STATEMENTS OF THE ASSESSEE. THE RELEV ANT EXTRACT IS PLACED ON PAGE 12 OF THE PB AND REPRODUCED AS UNDER : NOTE: 13-ADMINISTRATIVE, SELLING AND DISTRIBUTION PARTICULARS FIGURES FOR THE PERIOD ENDED 31ST MARCH 2012 FIGURES FOR THE PERIOD ENDED 31ST MARCH 2011 ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 14 - ADMINISTRATION EXPENSES AUDIT FEES A STATUTORY AUDITOR B TAX AUDITOR POSTAGE, PRINTING & STATIONERY SOFTWARE DEVELOPMENT CHARGES COMMON INFRASTRUCTURE AND REFERRAL FEES LEGAL & PROFESSIONAL CHARGES 10 000 5000 971 0 60 00 000 9000 10 000 5000 36 225 55 150 0 0 60 4 971 1 06 375 2. ALL THE PAYMENTS TO BE MADE TO THE ABOVE-SAID COMPA NIES FOR RS.60 LACS WAS OUTSTANDING EXCEPT THE AMOUNT OF TDS DEDUCTED BY THE ASSESSEE. THE RELEVANT EXTRACT IS PLACED ON PAG E 9 OF THE PB AND REPRODUCED BELOW: NOTE:5 OTHER CURRENT LIABILITIES PARTICULARS FIGURES AS AT 31 ST MARCH, 2012 FIGURES AS AT 31 ST MARCH 2011 SUNDRY CREDITORS AUDIT FEES PAYABLE 54,00,000 30,000 24,150 30,000 54,30,000 54,150 PAYABLE TOWARDS ENTITIES IN DIRECTORS OF THE COMPANY ARE 54,00,000 0 ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 15 - HOLDING DIRECTORSHIP AND SHAREHOLDING THE AMOUNT OF SALARY & WAGES AND ADMINISTRATION EXP ENSES INCURRED IN THE PRECEDING YEAR WAS ALSO INCURRED IN THE RELEVANT YEAR. THEREFORE THERE IS NO BUSINESS EXPEDIENCY OF SUCH EXPENSES ESPECIALLY WHEN BUSINESS WAS CARRIED ON BY THE ASSE SSEE WITH ITS STAFF AT ITS PLACE IN THE CURRENT YEAR AS WELL AS I N THE PRECEDING YEAR. THUS PAYMENT MADE TO BOTH THE PARTIES IN THE RELEVA NT YEAR APPEARS UNREASONABLE. 3. IT WAS ALSO NOTED THAT THE LD. CIT-A ADMITTED THE A GREEMENT DATE W.E.F. 01/04/2011, BUT WE WOULD LIKE TO DRAW ATTENT ION TO THE FACT THAT PAYMENT TO BOTH THE PARTIES REMAINED UNPAID FO R THE WHOLE YEAR THOUGH THE AGREEMENT DATE WAS FROM 01/04/2011. 4. THERE WAS NO MONTHLY PAYMENT MADE BY THE ASSESSEE T O BOTH THE PARTIES WHEREAS IT IS MENTIONED IN AGREEMENT THAT B OTH THE PARTIES SHALL RAISE THE BILL TO THE ASSESSEE ON A MONTHLY B ASIS AS EVIDENT FROM CLAUSE 2 OF THE AGREEMENT. THE RELEVANT CLAUSE IS PLACED ON PAGE 34 OF THE PB AND REPRODUCED AS UNDER : 2. PAYMENT TERMS. A) AGAINST ALL SUCH COMPANY EXPENSES, PARTY ON SECO ND PART RAISE RS.200000 & PARTY ON FIRST PART RAISE RS.300000 PER MONTH SHARED ON ANNUAL BASIC TO PARTY ON THIRD PART. 5. THUS IT APPEARS THAT THE AGREEMENT WAS MADE AFTERTH OUGHT TO DIVERT THE PROFIT OF THE ASSESSEE COMPANY TO ANOTHER COMPA NY AS IT HAD A ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 16 - HIGH RATE OF NET PROFIT OF 25.1% IN LAST YEAR AND D UE TO THIS TRANSACTION ALONE THE NET PROFIT OF COMPANY FALLS T O 3.63% IN THE YEAR UNDER CONSIDERATION. 6. THE TDS WAS DEDUCTED AND DEPOSITED FOR THE WHOLE TH E YEAR INSTEAD OF MONTHLY DEDUCTION & DEPOSIT OF THE SAME. IT WAS DONE AT THE END OF THE YEAR TO PROVE THE GENUINENESS OF THE TRANSACTION. TDS AMOUNT WAS OUTSTANDING UNTIL THE FINALIZATION O F FINANCIAL STATEMENTS AS EVIDENT UNDER : NOTE: 6 SHORT-TERM PROVISIONS PARTICULARS FIGURES AS AT 31 ST MARCH 2012 FIGURES AS AT 31 ST MARCH 2011 A. SALARY PAYABLES B. OTHERS - PROVISIONS FOR INCOME TAX - TDS COLLECTION & REMITTANCE - OTHERS 0 21,56,500 8,84,496 550 51,600 19,60,000 2,33,312 2,620 30,41,546 22,47,532 7. M/S MONARCH RESEARCH PVT LTD. WAS ASSESSED TO TAX A T THE MAXIMUM MARGINAL RATE BUT MONARCH PROJECT AND FIN-M ARKETS LTD. HAD PAID TAX UNDER MAT. THEREFORE THE PLEA OF THE A SSESSEE THAT BOTH THE COMPANIES HAVE SUFFERED THE TAX ON MAXIMUM MARGINAL RATE IS WRONG. MOREOVER, IT IS NOWHERE MENTIONED IN ANY LAW THAT IF ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 17 - ANY PAYMENT MADE BY A PERSON WHICH IS TAXABLE IN TH E HAND OF THE RECIPIENT WILL NOT BE DISALLOWED TO THE PAYER. IT I S ALSO IMPORTANT TO NOTE THAT ONE OF THE COMPANIES IS PAYING TAX UNDER MAT FOR WHICH TAX CREDIT CAN BE CLAIMED IN FUTURE YEARS. IT IS NOTED THAT COMMON INFRASTRUCTURE FACILITY AVA ILABLE AT MONARCH HOUSE OPP. JAGGERS PARK, NR, ISHWAR BHAWAN NAVRANGA PURA AHMADABAD WHICH IS OWNED BY THE MRBPL AND IF ASSESS EE HAD USED INFRASTRUCTURE FACILITY ONLY AT AHMADABAD THEN THERE WAS NO REASON TO PAY RS.3,00,000 PER MONTH TO MONARCH PROJ ECT AND FINMARKET LIMITED, MUMBAI. FURTHER PERUSAL OF AGREEMENT REVEALS THAT INFRASTRU CTURE FACILITY OF BOTH THE PARTIES IS LOCATED AT THE VARIOUS LOCATION AT ITS HEAD OFFICE, CORPORATE OFFICE, AND BRANCHES WHICH WILL BE USED B Y ASSESSEE COMPANY. HOWEVER THE AGREEMENT ONLY SPECIFIES THE A DDRESS OF REGISTERED OFFICE OF ALL THE COMPANIES. AS SUCH THE AGREEMENT NEITHER REVEALS ANY DETAILS REGARDING BRANCHES AND CORPORATE OFFICE ADDRESSES NOR ASSESSEE IN ITS ANY SUBMISSIONS FILE THE DETAILS BEFORE BOTH THE LOWER AUTHORITIES. AS PER ASSESSEES SUBMISSION THAT IT HAS USED INFRA STRUCTURE FACILITY AT MONARCH RESEARCH AND BROKERAGE PRIVATE LIMITEDS REGISTERED OFFICE AT MONARCH HOUSE OPP. J OGGERS PARK NEAR COMMERCE SIX ROAD, NAVRANGPURA, AHMEDABAD- 380 009 WHEREAS IT ENTITLED TO USE ALL THE INFRASTRUCTURE F ACILITIES OF BOTH THE ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 18 - COMPANIES. HOWEVER, THERE IS NO EVIDENCE THAT THE A SSESSEE HAS USED ANY OTHER INFRASTRUCTURE FACILITY LOCATED AT S UCH OTHER PLACES. IT IS ALSO EVIDENT THAT THE ASSESSEE TILL THE PRECEDIN G ASSESSMENT YEAR WAS ABLE TO DO SAME NATURE OF BUSINESS ACTIVITY FRO M ITS PLACE OF BUSINESS. IT IS ALSO UNDISPUTED FACT THAT THE ASSES SEE DID NOT GET ANY REFERRAL CLIENT. THERE IS NO DETAIL AVAILABLE ON THE RECORD ABOUT TH E NUMBER OF BRANCHES OWNED BY BOTH THE COMPANIES AND WHICH THE ASSESSEE WAS ENTITLED TO USE. THE ASSESSEE CLAIMED TO HAVE U SED THE OFFICE PREMISES TO THE EXTENT OF 1800 SQ FEET ALONG WITH O THER FACILITIES OF THE SAID COMPANIES. BUT THERE ARE NO INDIVIDUAL DET AILS OF THE FACILITY USED BY IT HAS BEEN FURNISHED, E.G. HOW TH E AREA WAS DETERMINED, HOW THE SITTING ARRANGEMENT OF THE ASSE SSEE STAFF WAS MADE, HOW MANY TELEPHONE LINE WAS ALLOTTED TO THE A SSESSEE, WHAT WAS THE BASIS OF THE SHARING OF THE EXPENSES. FURTHERMORE, WE NOTE THAT SINCE ASSESSEE COMPANY IS AN NBFC REGISTERED WITH RBI, AND IT IS CARRYING ITS BUSINES S ACTIVITY FROM A PLACE OTHER THAN ITS REGISTERED OFFICE. THERE WAS N O DETAIL FILED BY THE ASSESSEE WHETHER THIS FACT WAS COMMUNICATED TO RBI INTIMATING THAT IT IS CARRYING ON ITS FINANCIAL ACT IVITIES FROM A PLACE OTHER THAN ITS REGISTERED OFFICE. BUT NO SUCH DETAI L WAS AVAILABLE ON RECORD. ITA NO.2917/AHD/2015 THE ITO VS. KRO NE FINSTOCK PVT. LTD. ASST.YEAR 2012-13 - 19 - IN VIEW OF ABOVE, WE ARE OF THE VIEW THAT THE AO SH OULD RE-EXAMINE THE ENTIRE ISSUE AND THEREFORE TO VERIFY THE GENUINENES S OF THE TRANSACTION, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH ADJUDIC ATION BY THE LAW AND IN THE LIGHT OF ABOVE-STATED DISCUSSION. THUS THE GROU ND OF APPEAL RAISED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSES. THIS ORDER PRONOUNCED IN OPEN COURT ON 03/07/2018 SD/- SD/- EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; YKS[KK LN YKS[KK LN YKS[KK LN YKS[KK LN L; L; L; L; (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 03/07/2018 PRITI YADAV, SR.PS !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. & '( ) / CONCERNED CIT 4. ) () / THE CIT(A)-2, AHMEDABAD. 5. ,-. //'( , '(# , 12$&$ / DR, ITAT, AHMEDABAD 6. .34 5 / GUARD FILE. % & / BY ORDER, , / //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD