LASTRA NIRAJ P.LTD, MUMBAI V. DCIT 7(1)(2), MUMBAI

ITA 3411/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8712 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 17-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 04-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH KUMAR
• Assessee Lawyers: SHRI
• Keywords: Business income; Principle of natural justice; Commercial expediency
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUM BAI , , BEFORE S/SHRI RAJENDRA, A.M. AND RAM LAL NEGI, J.M. ./ ././ ./ ITA NO.3411/MUM/2015 / ASSESSMENT YEAR: 2010-11 M/S.LASTRA NIRAJ PVT LTD., LAXMI MILLS ESTATE,OFF.DR E. MOSES ROAD MAHALAXMI,MUMBAI 400 011 PAN: AAACL2683D VS. DY. COMMISSIONER OF INCOME TAX 7(1)(2), 522, 5 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI 400 020. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAURABH KUMAR- DR ASSESSEE BY: SHRI PANKAJ TOPRANI / // / DATE OF HEARING: 03/08/2017 !' / DATE OF PRONOUNCEMENT: 25.10.2017 , ,, , 1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , ,, , -PER RAJENDRA,AM: CHALLENGING THE ORDER DTD. 02/03/2015 OF CIT(A)-17, MUMBAI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY,ENGAGED IN THE BUSI NESS OF MANUFACTURE OF OFFSET PRINTING PLATES AND PRESS ROOM CHEMICALS FILED ITS RETURN OF INCOME ON 27/09/2010,DECLARING INCOME OF RS.4,00,89,479/-.THE ASSESSING OFFICER(AO)COMPLETED THE ASSESSMENT U/S.143(3)OF THE ACT ON 26/ 03/2013,DETERMINING ITS INCOME AT RS.12.63 C RORES. 2. FIRST GROUND OF APPEAL IS ABOUT ADDITION OF RS.1.55 CRORES UNDER THE HEAD CORPORATE SERVICE CHARGES(CSC).SECOND EFFECTIVE GROUND DEALS WITH PAY MENT OF MARKETING FEES OF RS.90 LAKHS. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD PAID RS.1.55 CRORES AND RS.90 LAKHS UNDER THE HEADS CSC AND MARKETING F EES RESPECTIVELY TO M/S.TECHNOVA IMAGING SYSTEMS (P)LTD.(TISPL)A GROUP COMPANY,PURSU ANT TO AN AGREEMENT ENTERED INTO BETWEEN THE TWO COMPANIES WHICH CLEARLY DEFINED THE SERVICES TO BE RENDERED BY TISPL TO THE ASSESSEE.THE AO HELD THAT THE AGREEMENT BETWEEN THE TWO COMPANIES COULD NOT BE RELIED UPON, SINCE IT WAS NOT LEGALLY ENFORCEABLE AND THAT THERE WAS N EITHER ACCEPTANCE OF OFFER NOR THE AGREEMENT WAS SIGNED AND THEREFORE IT WAS NULL AND VOID, THAT THE AGREEMENT IN CLAUSE 3 CLEARLY PROVIDED THAT COMPENSATION WOULD BE PAID TO TISPL AT 1.5% OF SALE S TURNOVER OF LASTRA NIRAJ FOR THE FY.2009-10,THAT THE AGREEMENT ALSO SPECIFIED TH E AMOUNTS PAYABLE TO THE SAID COMPA NY F O R EACH OF THE THREE YEARS.INVOKING THE PROVISIONS OF SECTION 40A(2)(B)OF THE ACT,HE DISALLOWED AN AMOUNT OF RS.2.45CRORES(1.55 C RORES +RS.90 LAKHS) PAID BY THE ASSESSEE TO ITS SISTER CONCERN. 3411/MUM/2015 OF LASTRA NIRAJ PVT. LTD 2 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA)AND MADE ELABORATE SUBMISSI ONS.AFTER CONSIDERING THE AVAILABLE MATERIAL,HE HELD THAT THE SISTER CONCERN WAS A LEAD ER IN THE MARKET OF OFFSET PRINTING I NDU S TR Y ,THAT T HE ASSESSEE WAS ALSO NOT A NOVICE IN THIS FIELD,THAT I T WAS AFFECTING A SALES TURNOVER OF MORE THAN 60 CRORES AND HAD BEEN IN MARKET SINCE LONG,THAT TH E PRODUCT OF THE ASSESSEE WERE DIFFERENT THAN THE PRODUCT OF ITS SISTER CONCERN,THAT THE NA TURE OF ACTIVITIES UNDERTAKEN BY ASSESSEE,WERE EXACTLY THE SAME WHICH TISPL WAS UNDE RTAKING FOR ITS BUSINESS PURPOSES,THAT TISPL HAD ALLOCATED ONLY 10% OF SUCH EXPENSES TO THE ASSESSEE CONCERN WITHOUT ANY BASIS,THAT THE ACTIVITIES WERE NOT SUCH WITHOUT WHICH IT COULD NOT SURVIVE,THAT THE ASSESSEE HAD DEPLOYED A HUGE MANPOWER TO THE SAME WORK.HE FURTHER HELD THAT THE EXPENDITURE INCURRED BY ASSESSEE WAS TO BE VIEWED FROM THE PERSPECTIVE OF WHETHER SU CH EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ASSESSEE'S BUSINESS OR NOT,THAT IT HAD CLAIMED EMPLOYEE EMOLUMENTS OF RS.4,47,80,770/- WHICH COMPRISED OF SALARIES,WAGES AND BONUS(RS.3,82,12, 118/-),COMPANY'S CONTRIBUTION TO PF AND OTHER FUNDS(RS.24,88,789/-),STAFF EXPENSES (RS.21,4,918/-)AND LEAVE ENCASHMENT AND GRATUITY(RS.19,64,945/-),THAT THOSE EMPLOYEES WERE DOING EXACTLY THE SAME WORK FOR WHICH THE ASSESSEE HAD OBTAINED THE SERVICES OF ITS SISTER CONCERN,THAT SU CH EMPLOYEES WERE EMPLOYED IN THE COMPANY UNDER DIFFERENT CADRES IN D IFFERENT FIELDS,THAT IT WAS PAYING TWICE FOR THE SAME SERVICES,ONCE TO ITS EMPLOYEE AND SECO NDLY TO ITS SISTER CONCERN,THAT THE AO HAD GIVEN A FINDING OF FACT THAT THE EXPENDITURE IN QUESTION WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF ASSESSEES BUSINESS AN D THEREFORE DID NOT QUALIFY AS ADMISSIBLE DEDUCTION AGAINST THE BUSINESS INCOME,THAT THE AO WHILE DISALLOWING THESE EXPENDITURE HAD WRONGLY INVOKED SECTION 40A(2)(B)OF THE ACT,THAT THE PROVISIONS OF THE SAID SECTION WERE NOT APPLICABLE TO THE FACTS OF THE CASE.FINALLY,HE UPHELD THE ADDITION MADE BY THE ASSESSEE. 4 .BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)ARGUED THAT THE ASSESSEE HAD OBTAINED NECESSARY PERMISSION FROM REGIONAL DIRECTOR, WESTER N INDIA, MINISTRY OF CORPORATE AFFAIRS, MUMBAI,UNDER SECTION 297 OF THE COMPANIES ACT, 1956 ,THAT THE SAID PERMISSION GAVE THE AMOUNTS OF TRANSACTIONS FOR THE PERIOD 01/04/2008 T O 31/03/2010 AND 01/04/2010 TO 30/09/2010 FOR RENDERING OF SUPPORT SERVICES,THAT T HE TERMS AND CONDITIONS OF THE AGREEMENT WERE ALSO APPROVED BY THE OTHER DEPARTMENT OF THE CENTRAL GOVERNMENT. ABOUT CSC PAID TO TISPL,ON THE BASIS OF OUTSOURCING OF TECHNICAL PERS ONNEL FROM TISPL, THE AR ARGUED THAT A DETAILED WORKING AS TO HOW THE CSC WERE ARRIVED AT WAS SUBMITTED, THAT TOTAL TURNOVER OF THE ASSESSEE WAS APPROXIMATELY RS.60 CRORES AND THE RAT IO OF EXPENDITURE ON CORPORATE FEES TO 3411/MUM/2015 OF LASTRA NIRAJ PVT. LTD 3 TURNOVER WORKS OUT TO 2.58% WHICH IS VERY INSIGNIFI CANT.HE FURTHER ARGUED THAT B Y INCURRING SUCH EXPENDITURE THE ASSESSEE COULD INCREASE THE PR OFITABILITY AND SALES FOR THE YEAR UNDER APPEAL,THAT IT HAD SUBMITTED A STATEMENT DURING THE ASSESSMENT AND APPELLATE PROCEEDINGS,THAT THE ABOVE EXPENDITURE WAS INCURRED AS PER PRUDENT BUSINESS DECISION AND ON TH E GROUND OF COMMERCIAL EXPEDIENCY.HE RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT V. PANIPAT WOOLLEN & GENERAL MILLS CO. LTD. (103 ITR 66). THE DEPARTMENTAL REPRESENTATIVE(DR)CONTENDED THAT T HERE WAS NO JUSTIFICATION FOR MAKING PAYMENTS TO THE SISTER CONCERN,THAT THE ASSESSEE WA S DOING THE SAME JOB,THAT EXPENDITURE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINES S PURPOSES,THAT PURPOSE OF EXPENDITURE WAS IN DOUBT. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE AO HAD MADE AN ADDITION OF RS.1.55 CRORES UNDER THE HEAD CSC AND RS.90 LAKHS AS MARKETING FEES,THAT HE HAD INVOKED THE PROVISIONS O F SECTION 40A(2)(B)OF THE ACT,THAT THE FAA CONFIRMED HIS ORDER BUT HELD THAT EXPENDITURE I NCURRED BY THE ASSESSEE WAS NOT WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS.THUS,HE MADE DISAL LOWANCE U/S.37 OF THE ACT.BEFORE,DOING SO,HE DID NOT INFORM THE ASSESSEE THAT HE INTENDED TO INVOKE THE PROVISIONS OF SECTION 37 OF THE ACT.THUS,HE DID NOT GIVE ANY OPPORTUNITY TO THE ASSESSEE TO DEFEND ITSELF WHICH IS VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. BUT,WE WOULD LIKE TO DECIDE THE ISSUE ON MERITS.THE ASSESSEE HAD MADE PAYMENTS TO ITS SISTER CONCERN FOR THE SERVICES AVAILED BY IT.BOTH THE ENT ITIES ARE NOT DOING SAME TYPE OF JOB.DETAILS OF WORK DONE BY THE SISTER CONCERN AND THE EMPLOYEE S ENGAGED BY IT CLEARLY PROVE THAT THE ASSEESEE HAD LIMITED RESOURCES AS COMPARED TO THE S ISTER CONCERN,WHO HAD TURNOVER OF RS.700 CRORES(APPROX.).IT HAD RENDERED SERVICES TO THE ASS ESSEE AS AND WHEN REQUIRED.THE AO/FAA HAS NOT DOUBTED THE GENUINENESS OF THE PAYMENT.THE FAA HAS ADMITTED THE CLAIM OF THE ASSESSEE THAT THE TRANSACTION WAS AT ARMS LENGTH.O THERWISE HE WOULD HAVE NOT HELD THAT THE PROVISIONS OF SECTION 40A(2)(B)OF THE ACT WERE NOT APPLICABLE.THOUGH THE FAA HAS HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT WH OLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES,YET HE HAS NOT GIVEN ANY REASON FOR ARRIVI NG AT THE SAID CONCLUSION.HE HAS IGNORED THE WELL RECOGNISED PRINCIPLE OF COMMERCIAL EXPEDIE NCY.COURTS ARE OF THE OPINION THAT THE TEST OF COMMERCIAL EXPEDIENCY MEANS THAT THE COURT WILL PLACE ITSELF IN THE POSITION OF A BUSINESSMAN AND FIND OUT WHETHER THE EXPENSES INCURRED CAN BE SA I D TO HAVE BEEN LAID OUT FOR THE PURPOSE OF BUSINESS.IT HAS BEEN HELD THAT IN ORDER TO DETERMINE THE QUESTION OF REASON 3411/MUM/2015 OF LASTRA NIRAJ PVT. LTD 4 -ABLENESS OF THE EXPENDITURE,THE TEST OF COMMERCIAL EXPEDIENCY HAS TO BE JUDGED FROM THE POINT OF VIEW OF BUSINESSMAN AND NOT OF THE INCOME- TAX AUTHORITIES.IN THE CASE UNDER CONSIDERATION THE ISSUE HAS BEEN DECIDED BY BOTH TH E OFFICERS WITHOUT STEPPING IN TO THE PROVERBIAL SHOES OF THE ASSESSEE.THE EXPENDITURE IN CURRED BY THE ASSESSEE ON ACCOUNT OF CSC IS ABOUT 1.5% OF THE TOTAL TURNOVER OF THE ASSESSEE .BOTH THE ENTITIES-THE ASSESSEE AND THE SISTER CONCERN-ARE PAYING TAXES AT THE HIGHEST RATES AND T HE GROUP CONCERN HAS NOT FILED A LOSS RETURN. THE ASSESSEE HAD ENTERED INTO AN AGREEMENT (PG.25 O F THE PB.)WITH TISPL AND HAD MADE PAYMENT ACCORDINGLY.BEFORE MAKING PAYMENTS TO SISTE R CONCERN IT HAD GOT APPROVAL FROM THE REGIONAL DIRECTOR OF THE CORPORATE AFFAIRS MINISTRY .IT IS ALSO A FACT THE TISPL IS HAVING MARKETING NETWORK ALL OVER INDIA.CONSIDERING THESE FACTS CUMULATIVELY,WE ARE OF THE OPINION THAT THE FAA WAS NOT JUSTIFIED IN CONFIRMING DISALL OWANCES MADE BY THE AO.SO, REVERSING HIS ORDER,WE DECIDE BOTH THE EFFECTIVE GROUNDS OF APPEA L IN FAVOUR OF THE ASSESSEE AND HOLD THAT CSC AND MARKETING FEES,PAID BY IT,WERE FOR BUSINESS PURPOSES ONLY. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS ALL OWED. # $%& ' ( )*+,- . ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH OCTOBER, 2017. ). /* 25 01+2 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED :25.10.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR I BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.