ACIT, New Delhi V. M/s. Vitcom Consulting Pvt. Ltd., New Delhi

ITA 3327/DEL/2014

AI Insights

The case involves the Assistant Commissioner of Income Tax (ACIT) contesting the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] which had deleted several additions made by the Assessing Officer (AO) on account of disallowances under various sections of the Income Tax Act, 1961. The main issues revolved around the disallowance of expenses related to professional charges and seminar expenses, which the AO deemed not wholly and exclusively for business purposes. The CIT(A) had reversed these disallowances, leading to the present appeal by the ACIT. The Tribunal examined the nature of the expenses, the business context, and the legal provisions under which these expenses were claimed.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131779 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2023
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 05-03-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 28-05-2014
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Related party transaction; Principle of natural justice
• Section: 133(6); 37(1); 80G

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL DELHIBENCH ‘D’, NEW DELHI Before Sh. Kul Bharat, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 3327/Del/2014: Asstt. Year: 2008-09 ACIT, Central Circle-25, New Delhi Vs. Vitcom Consulting Pvt. Ltd, 5 th Floor, Gopal Das Bhawan, 28, Barakhamba Road, New Delhi (APPELLANT) (RESPONDENT) PAN No. AACCV5013B Assessee by: None Revenue by: Sh. Sanjay Kumar, Sr. DR Date of Hearing: 06.03.2023 Date of Pronouncement: 10.03.2023 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order of the ld CIT(A)-1, New Delhi dated 04.03.2014 for AY 2008-09. 2. The assessee has raised the following grounds of appeal:- “1. The order of the CIT(A) is not correct in law and facts. 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of Rs.65,00,000/- made by AO u/s 37(1) of I.T. Act, 1961. 3. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.8,87,602/- made by on account of seminar expenses. 4. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of disallowance of Rs.93,97,712/-out of total addition made by AO of Rs.95,86,252/-on account of Professional Charges. ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 2 5. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.5,00,000/- made by AO on account of Professional charges paid to Neosis. 6. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.99,46,480/- made by AO on account of Professional Charges paid to Nira Radia. 7. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the AO to allow deduction u/s 80G of Rs.14,00,000/- in A.Y.2009-10.” 3. Disallowance u/s 37(1)- Rs.65,00,000/-: The Assessing Officer made the disallowance holding that there were discrepancies with regard to dates of seminar, bills, cheques encashment and ledger a/c and inflow of one client gives lot of push to the revenue and its unique services is the result of high value billing is not reasonable and acceptable. The AO further held that as per section 37(1)(iv) the expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. The AO held that in this case the purchase and distribution of agricultural kits is not for the business of the assessee, further the anticipated business did not materialize. Hence, it cannot be said to be used for commercially consideration and business expediency. 4. Before the ld. CIT(A), the assessee submitted that the dates of seminars and that of invoices are irrelevant and their synchronization with that of the seminar dates cannot be a moot question of allowability of a particular expense. It was submitted that the trade practice followed is that generally the material is sent on challans or otherwise and subsequently the invoices are raised which may or may not be on the same date or a subsequent date. It was submitted that encashment of cheques ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 3 on single date as shown in bank statement do not justify the disallowability of a particular expense. It was submitted that debiting the expense from party A/c on a single date when probably the management might have approved the same on that date and hence were booked as expense and ledger of party was thus closed on 31.01.2007 and nothing more was achieved on that date. It was submitted that the AO did not comprehend the time and composite nature and purpose of this expenditure. The AO did not doubt the genuineness of this expense but disallowance was due to, a) The expense is not reasonable and unacceptable in relation to the business activities of the assessee. b) The expenditure has not been laid out or expended wholly and exclusively for the purpose of business of the assessee. c) The anticipated business did not happen. Hence, she concluded this to be unjustified expense. 5. Having gone through the submissions of the assessee and deleted the addition holding that these facts do not establish that the seminar was not held or that the expenditure was not incurred therein. One of the activities of the appellant is to procure business on behalf of its clients. The said seminar was held to procure business on behalf of one of appellant's clients. Therefore, it cannot be concluded that the expenditure was not for the purpose of business of the appellant. Such activities may or may not result in success. Actual procurement of business, or the volume of business procured, cannot determine the expenditure made and, therefore, it cannot also be concluded that the expenditure was excessive. The ld. CIT(A) held that it was a ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 4 matter between the appellant and its client. The receipt from the client has been offered as income and the corresponding expenditure claimed by the appellant. 6. Having gone through the facts before us, we find that the AO needs to examine the receipts from various clients, the mandate given by the client to the assessee as an advertising agency and the expenses incurred are in relevance with the mandate of the clients. The AO may examine this issue afresh and take a decision in accordance with the provisions of the Income Tax Act. 7. Seminar Expenses – Rs.8,87,602/-: The assessee debited an amount of Rs.1.97 lacs on conference charge at Chennai, Rs.4.88 lacs on account of helicopter for Ms. Nira Radia, the consultant for two days and room rent of Rs. 2.01 lac. The ld CIT(A) deleted the addition made by the AO disallowing the above said expenses on the ground that no justification has been provided by the AO while disallowing the expenses. The AO held that these expenses are on account of purchase of agricultural kits distributed during a seminar. Since, the fact of purchase of agricultural kits and incurring of expenses has not been disputed by the AO we decline to interfere with the order of the ld CIT(A) in deleting the addition. 8. Deletion of Profession Charges- Rs. 93,97,712/-, Rs. 5 lacs and Rs. 99,46,480/- The facts relevant to the adjudication of this ground are as under, the submission before the ld CIT(A) is as under:- “The Company 'M/s Vitcom was incorporated with a view to tap the growing service sector business of consultancy, business advisors and communication experts and to cater to the clients ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 5 professionally. To have the presence in many cities they tied up with M/s Vaishnavi Advisory Services Pvt. Ltd. (VASPL) for receiving infrastructure and business support for office premises, IT Support, Accounting Support, BIU supports, Administrative & ITR support i.e. to say the basic office set up & support was provided by M/s VASPL. They in turn had another agreement with VITCOM CONSULTING Pvt. Ltd. (VCCPL) for providing those support services, which is very much a general trade practice. Vitcom paid for Office Support, IT support, Accounting Support, BIU Support, administrative & HR Support to VASPL & VASPL sublet and provided those services through VCCPL which is prevalent business practice followed by business concerns. The Ld. AO has mentioned in detail about the income, expense, Assets and liabilities of M/s Vaishnavi Advisory Services (P) Ltd. She has emphasized that VASPL had just one income and one major expense being professional fees of Rs.87,16,273/- to VITCOM CONSULTING(P) Ltd. (VCCPL). Further emphasizing that VASPL did not have the requisite infrastructure and expertise to cater to Vitcom but have paid major amount to VCCPL. Ld. AO has mentioned about Ms. Karuna Menon as director & shareholder of VASPL and Mr. Vishal Mehta one of the director & shareholder of assessee to be a director of VCCPL. In view of these baseless findings the Ld AO has concluded this expense to be for sole purpose of decreasing profit and VASPL to be a dummy company and this being colorable transaction because not only parties are related but the purpose of transaction is to siphon off the profits and have quoted unrelated cases.. Our Submission: In mentioning the details the Ld. AO has served some purpose of the assessee. The assessee has reiterated that VASPL had sub contracted our agreement and thus major amount was paid through VASPL to VCCPL for the services they provided to M/s Vitcom. The following table shall give your honor a fair picture of Revenue and taxable Income of concerned parties to this transaction. VITCOM VASPL VCCPL Gross Revenue 6,93,51,762 96,67,788 51,05,08,788 Net Profit as per P&LA/c 2,63,97,178 6,81,437 14,72,92,587 Amt paid by Vitcom to VASPL 95,86,25314 - - Amt paid by VASPL to VCCPL 87,16,275 Taxable Income 2,76,65,080 6,61,370 14,99,52,002 ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 6 From above details it amply clear that all the concerned parties have declared much more as taxable income than the payment made for services received. How taxable profits were decreased or siphoned off is better known to Ld. AO when both the contractor and sub contractor has offered nearly whole of the amount in taxable income. For proving related concerns Ld. AO has quoted about Ms. Karuna Menon and Mr. Vishal Mehta. Ms Menon has nothing to do with the assessee and Mr. Vishal Mehta is not the Director of VASPL or VCCPL still the AO is making whole lot of whimsical allegations is highly inconceivable to the assessee. Further when assessee has received the services for which he has paid then their taxability in the hands of income receiver is not the assessee's concern and should not be the subject matter of the assessment. It is now pertinent to mention that pleas taken by the Ld. AO were all baseless and whimsical and need to be reversed in the light of our submission. Therefore it is also requested that this unjustified addition be dropped by your honor.” II. Professional fees Rs.5.00.000/- to Noesis Strategic Consulting Services Pvt. Ltd. The Ld. AO, it appears had only one agenda and that the transaction is hit by Section 40A, hence it is a Colorable transaction to reduce profits and thus is disallowable expense of the assessee. Expenditure to be disallowed under this Section should be based upon three conditions to be fulfilled: 1) The payment is in respect of any expenditure. 2) The payment should be made to a relative as defined Under Clause 2. 3) The payment is excessive and unreasonable having regard to: a. Fair market value of the goods, services or facilities, or b. The legitimate business needs of the assessee's business or profession, or c. The benefit derived by or accruing to the assessee from the payment. If the AO is satisfied that above conditions are fulfilled then he can disallow the expenditure to the extent he considers it ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 7 excessive or unreasonable by the above objective standard or otherwise. Now in our case not a single of the above conditions was discussed or noted by the Ld. AO she had just mentioned it to be sham transaction and disallowed whole amount but she was unable to mention the basis of her decision. There was no basis on which she deduced the transaction to be sham transaction. The Law does not prevent an assessee to transact with the related parties and thus if can never be held that all related party transactions are bogus or sham (as deduced by her). When any assessing authority comes to conclusion that any transaction is bogus transaction then the onus becomes many folds with that authority to base that conclusion to be on a very strong and sound. It should weather all the test of authenticities in the eyes of law. Just because the payment is made to related party it cannot be disallowed unless conclusively proved to be excessive or unreasonable. The assessee provided all the details as were asked by the Ld. AO and she had called for information U/s 133(6) from said company on the point share application money. Who stopped her from asking for other details, transactions or payment between assessee and M/s Noesis. Without any adverse material or record how can anyone deduce the transaction as bogus? The assessee had highlighted that they were new company and in their first year of operations had to successfully execute the project in hand and thus took the help of M/s Noesis Strategic Consulting (P) Ltd. which was established company and was having technical expertise to deal with high profile clients. Enclosed are their copy of Profit & Loss A/c and their computation. The company M/s Noesis was having turnover of 5.01 Crores and net profit of Rs. 80 lakhs in that Financial Year. (pages 49 to 51 of Booklet). Any person of sane mind shall shift his income to those hands where the taxability is either zero or of less tax rate then his own tax otherwise the whole purpose of shifting the expense gets defeated. Nowhere in the eyes of tax law can one tax the same amount twice. Even if the Ld. AO's contention is taken on its face value that this is a related party transaction and done to siphon off the tax then also one is totally oblivion to find how tax is evaded. Both are companies and both are taxable at same rate and both are showing huge taxable profit much more the transaction value then where was tax evasion is better known to Ld. AO. Rather her action has resulted in double taxation for one amount of transaction. ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 8 Therefore, it is earnestly prayed that this disallowance be dropped." III. Professional Fees to Ms. Nira Radia Rs. 99,46,480/- The order passed is bad, lacking natural justice and without any basis the disallowance were made in haphazard manner. This expense relates to professional fees to Ms. Nira Radia. This expense was disallowed by the Ld. AO and she claimed it to be an expense with the sole intention of reducing taxable profits. The expense is claimed as colorable transaction because it is between related parties and thus an act to siphon off profits. How it is such an act is better known to her. The Ld. AO has neither explained nor substantiated her claim. She just states it to be a colorable transaction with the intention to siphon off taxable profits. The Ld. AO has given extracts of agreement between the assessee and Ms. Nira Radia. She has mentioned about an income of Rs. 90,44,980/- and have stated that no detail or evidence in respect of nature of services provided, the qualification, proficiency, technical expertise etc. of Ms. Nira Radia which would have enabled her to provide the consultancy/professional services to the assessee company. The Ld. AO was having every material in her record still she claimed that no evidence was provided is beyond comprehension. She had reproduced the extracts of the agreement and one such clause reproduced is as follows: "In case of any specific assignments the company shall pay to the consultant, fee calculate @ Rs.30,300/- per day of engagement. In addition, the consultant shall be paid 14% success fee upon collection of the specific assignment related billings." Copy of Ledger Account of Ms. Nira Radia along with copy of agreement and the three bills raised by her are enclosed herewith for your honor's kind perusal. The three bills of Ms. Nira Radia are as follows: Bill No./Dated Amount 002/07-08 at 01.03.2008 91,96,480/- 01.03.2008 5,00,000/- 26.03.2008 2,50,000/- The first bill was reproduced by the Ld. AO in her order but she could not find any justification for the same. ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 9 The basis of such bill was the clause in the agreement which has already been reproduced by the Ld. AO in her order and has again given in above paras. The bill is as follows:- i. Consultancy fees for 5 days @Rs. 30,300/-Rs. 1,51,500/- (This is already provided in the agreement) ii. Fees for services against specific assignment @14% Rs.90,44,980/- Ms Nira Radia was instrumental in procuring the client M/s Reliance Industries Ltd. for the assessee and the assessee was able to generate a revenue of Rs.6,46,07,000/- from the said client M/s RIL. Copy of ledger A/c of Reliance Indusries Ltd. In the books of assessee is enclosed herewith. 14% of this is Rs.90,44,980/-. Thus the bill no. 002/07-08 was made on the basis of legally valid agreement. When bill is on the basis of legally valid agreement then no further justification are required and called for. Other two bills were also made on the basis of clauses in the agreement which is as follows:- "The remuneration of the consultant shall be payable at the rate of a minimum of 10 days of consultancy charges at Rs.25,000/- ...." Thus one bill of Rs. 5,00,000/- was for Jan & Feb 2008 @ Rs.25,000/- per day for 10 days in each month & last bill of Rs.2,50,000/- was for March 2008@Rs.25,000/- per day for 10 days in the month" Therefore all the bills were on the basis of agreement of consultancy. Enclosed is copy of return of Ms. Nira Radia for A.Y. 2008-09. Your Honor can see that Ms. Radia has declared total professional fees received from M/s Vitcom of Rs. 99,44,480/- as Professional income, hence, the claim of Ld. AO that this is an act of tax evasion and siphoning of taxable income is wrong and without basis therefore it is requested that this unjustified addition be dropped and obliged. IV. Professional Charges to Mr. Akshay Radia Rs.7.50.000/- The Ld. AO while disallowing the above expense claimed it to be with the sole intention of reducing profits and it is a colorable transaction. The Ld. AO has claimed that no evidence has been provided in respect of expertise of Mr. Akshay Radia for providing professional services to the assessee company. ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 10 Copy of bill of Mr. Akshay Radia his return of income along with computation of income is enclosed herewith for the perusal of your honor. It is evident to note that the whole amount of Rs.7,50,000/- has been declared by Mr. Akshay Radia as his Business/professional income in his return. Therefore the question of reducing taxable income does not arise. Rather the recipient has not claimed any expense in earning this income and have offered full amount as income. Thus, the claim of Ld. AO that this is colorable transaction with a view to reduce taxable income is baseless and wrong. Mr. Akshay Radia did his graduation in B.Sc. Management & System Science from Caas Business School, City University, London, U.K. He was well qualified to impart professional training to the staff for the business development. Hence, the fee was more than justified professional fees to Mr. Akshay Radia for his expertise in the field. Therefore this unjustified addition be deleted and oblige.” 9. With regard to the professional charges paid to Vashnavi Advisory Services P. Ltd. (VASPL) the ld CIT(A) held that the appellant hired the services and infrastructure of Vashnavi Corporate Communications Pvt. Ltd. (VCCPL) at the initial stage of its business through VASPL and paid professional / service charges in respect thereof to VASPL, which in turn paid it to VCCPL. This arrangement was through valid contracts between the appellant and VASPL on the one hand, and between VASPL and VCCPL on the other. Even if the parties are related, what is to be seen for tax purposes is whether the payment is excessive and results in reduction of overall tax liability. Put to this test, all the three companies have taxable income and such income is substantive in the case of the appellant and VCCPL. By passing the transaction through VASPL, the only advantage derived in tax terms was setting off expenses of VASPL to the extent of Rs.1,88,541/- (i.e. Rs.95,86,253/- paid by appellant to VASPL ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 11 minus Rs.87,16,275/- paid by VASPL to VCCPL as reduced by Rs.6,81,437/- being profit disclosed taxed in the hands of VASPL). When services of VCCPL were hired by the appellant, it could have been done directly and there was no need to pass it through VASPL, an associate company of VCCPL. To this extent, the passing of the transaction through VASPL lacks commercial expediency therefore the ld CIT(A) held that the professional charges paid was excessive to the extent of Rs.1,88,541/-, was passed through an entity connected with the beneficiary and resulted in reduction of overall tax liability on the said amount. The disallowance made by the revenue was restricted to this extent and accorded relief of Rs.93,97,712/-. On this ground we find no infarction of law and hence, we decline to interfere with the order of the ld CIT(A). 10. With regard to professional fees of Rs.5,00,000/- paid to Noesis Strategic Consulting Services Pvt. Ltd. (NSCL) is concerned the ld CIT(A) held that there was no absence of any commercial expediency or there was any unlawful purpose involved. On going through the record we find that no justification has been given by the assessee for payment charges, and hence, we are unable to affirm the action of the ld CIT(A) on this issue. 11. With regard to professional fees of Rs.99,46,480/- paid to Ms. Nira Radia, the ld CIT(A) held that the payment was made for procuring for the appellant M/s Reliance Industries Ltd. as a client. The payment was made by the appellant through a valid agreement. The factum of the payment and the commercial reasons behind it are not challenged or assailed. The assessee ITA No. 3327/Del/2014 Vitcom Consulting Pvt. Ltd 12 procured business of Rs. 64607000/- and the amount paid was 14% of the receipt as per the agreement. Hence, we affirm the decision of the ld CIT(A) that the disallowance made cannot be legally sustained and is deleted. 12. Deduction u/s 80G of Rs. 14,00,000/- The assessee made donation to a trust which is validly exempt u/s 80G(5), hence, we hold that the donation is eligible for exemption under rate of 50%. 13. In the result, the appeal of the revenue is partly allowed. Order Pronounced in the Open Court on 10/03/2023. Sd/- Sd/- (Kul Bharat) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 10/03/2023 *Ajay Kumar Keot, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR