Yum ! Restaurant (India) Pvt. Ltd, V. Addl. CIT Range 18,

ITA 3796/DEL/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3862 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 24-02-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 23-11-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MAHARISH VERMA
• Assessee Lawyers: SSH SALIL KAPOOR V IYER; S KAPOOR ARS
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; International transaction; Proportionate interest; Wholly owned subsidiary; Corroborative evidences; Royalty expenses; Notional interest; Capital expenditure
• Section: 43B; 143(3); 80HHC; 148; 37; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI SHAMIM YAHYA ITA NO. 3796/DEL/2006 ASSESSMENT YEAR: 2002-03 M/S.YUM ! RESTAURANTS (INDIA) PVT. LTD., VS. ADDITI ONAL CIT, 12 TH FLOOR, TOWER D, RANGE-18, GLOBAL BUDINESS PARK, NEW DELHI. GURGAON (HR.) (PAN: AAACY4188E) (APPELLANT) (RESPONDENT) ITA NO. 4154/DEL/2006 ASSESSMENT YEAR: 2002-03 INCOME-TAX OFFICER, VS. YUM ! RESTAURANTS (I NDIA) PVT. LTD., WARD 18(4), 12 TH FLOOR, TOWER D, NEW DELHI. GLOBAL BUDINESS PARK, GURGAON (HR.) (APPELLANT) (RESPONDENT) ITA NO. 142/DEL/2007 ASSESSMENT YEAR: 2003-04 M/S.YUM ! RESTAURANTS (INDIA) PVT. LTD., VS. INCOME -TAX OFFICER, 12 TH FLOOR, TOWER D, WARD-18(1), GLOBAL BUDINESS PARK, NEW DELHI. GURGAON (HR.) (APPELLANT) (RESPONDENT) ITA NO. 480/DEL/2007 ASSESSMENT YEAR: 2003-04 INCOME-TAX OFFICER, VS. YUM ! RESTAURANTS (I NDIA) PVT. LTD., WARD 18(4), 12 TH FLOOR, TOWER D, NEW DELHI. GLOBAL BUDINESS PARK, GURGAON (HR.) (APPELLANT) (RESPONDENT) 2 ITA NO. 5122/DEL/2010 ASSESSMENT YEAR: 2006-07 M/S.YUM ! RESTAURANTS (INDIA) PVT. LTD., VS. ADDITI ONAL CIT, 12 TH FLOOR, TOWER D, RANGE-18, GLOBAL BUDINESS PARK, NEW DELHI. GURGAON (HR.) (APPELLANT) (RESPONDENT) APPELLANT BY: S/SH. SALIL KAPOOR , V. IYER & S. KAPOOR, ARS RESPONDENT BY: SH. MAHARISH VERMA, C IT(DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE ASSESSEE AND REVENUE ARE IN CROSS APPEALS. IN O RDER TO APPRECIATE VARIOUS DETAILS IN MORE SCIENTIFIC WAY, WE DEEM IT APPROPRIATE TO TAKE NOTE OF THE FOLLOWING DETAILS IN THE TABULAR FORM: SR.NO. ITA NOS. APPELLANT A.YS DT. OF CIT(A)S ORDER DATE OF A.O.S ORDER & U/S. 1. 3796/DEL/2006 ASSESSEE 2002- 03 27.9.2006 2.12.2005 U/S. 143(3) 2. 4154/DEL/2006 DEPARTMENT -DO- -DO- -DO- 3. 142/DEL/2007 ASSESSEE 2003- 04 10.11.2006 30.3.2006 U/S. 143(3) 4. 480/DEL/07 DEPARTMENT -DO- -DO- -DO- 5. 5122/DEL/2010 ASSESSEE 2006- 07 DRP 23.09.2010 16.12.2009 U/S 143(3)/144C 3 FIRST WE TAKE APPEAL OF THE REVENUE IN ASSTT, YEAR 2002-03 I.E. ITA NO. 4154/D/2006 2. IN THE FIRST GROUND OF APPEAL, IT HAS BEEN PLEAD ED BY THE REVENUE THAT LD. CIT(A) HAS ERRED IN HOLDING THE SE RVICE INCOME RECEIPT OF ` 12,67,04,206/- AS BUSINESS INCOME. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S FILED ITS RETURN OF INCOME ON 28.10.2002 DECLARING TOTAL INCO ME AT NIL. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSE SSMENT AND A NOTICE U/S 143(2) DATED 17/24-10-2005 WAS SENT THRO UGH REGISTERED POST. THE AO FELT THAT ACCOUNTS OF THE ASSESSEE ARE OF COMPLEX NATURE AFTER TAKING NECESSARY APPROVALS HE SENT FOR SPECIAL AUDIT OF THE ACCOUNTS. SHRI S.C. & ASSOCIATES WAS APPOINTED AS SPECIAL AUDITOR. THIS REFERENCE WAS CHALLENGED BEFORE THE H ONBLE HIGH COURT BUT ULTIMATELY ISSUE WAS DECIDED AGAINST THE ASSESSEE. THE SPECIAL AUDITOR HAS HANDED OVER THE REPORT DATED 5 TH OCTOBER, 2005. BEFORE ADVERTING TO THE ISSUE DISPUTED IN THI S GROUND OF APPEAL, WE DEEM IT NECESSARY TO NOTE BRIEF BACKGROU ND OF THE ASSESSEE AND THE ALLEGED BUSINESS MODULE OF THE ASS ESSEE COMPANY. ACCORDING TO THE ASSESSEE, IT WAS INCORPOR ATED UNDER 4 THE INDIAN COMPANIES ACT AND IS ENGAGED INTO THE BU SINESS OF PIZZA HUT (PHILLC) AND KENTUCKY FRIED CHICKEN (K FCEEC) RESTAURANT IN INDIA. THE ASSESSEE HAS ENTERED INTO A TECHNOLOGY LICENSE AGREEMENT WITH KENTUCKY FRIED CHICKEN INTER NATIONAL HOLDINGS INC. AND PIZZA HUT INTERNATIONAL LLC TO OP ERATE PIZZA HUT AND KFC RESTAURANT IN INDIA. AS PER THESE AGREEMENT S, THE ASSESSEE COULD ENTER INTO VARIOUS FRANCHISE AGREEME NTS WITH ENTITIES IN INDIA TO OPERATE SUCH RESTAURANTS. AS P ER THE AO MAIN SOURCE OF ASSESSEES INCOME IS SERVICE INCOME, ALS O CALLED STEWARDSHIP FEES AND SUPPLY CHAIN MANAGEMENT FEES H EREINAFTER REFERRED TO (SCM). THE SERVICE INCOME IS GOVERNED B Y AN AGREEMENT ENTERED INTO BY THE ASSESSEE WITH M/S. TR ICON RESTAURANT INTERNATIONAL INC. ( RE NAMED AS YUM RE STAURANT INTERNATIONAL SWC AND REFERRED AS YRI HEREINAFTER ) . THIS AGREEMENT WAS ENTERED ON 1 ST APRIL, 2001. AS PER THIS AGREEMENT, ASSESSEE IS UNDER AN OBLIGATION TO PROVIDE FOLLOWIN G SERVICES :- I) PROVIDING ASSISTANCE TO EXISTING AND FUTURE LIC ENSEES IN INDIA, MAURITIUS, PAKISTAN, SRI LANKA AND SUCH OTHE R AREAS UPON WHICH THE PARTIES MAY AGREE FROM TIME TO TIME; II) PROVIDING TRI WITH SUCH REPORTS CONCERNING THE ABOVE MATTERS AS MAY BE REASONABLY REQUIRED BY THEM FROM TIME TO TIME. 5 III) COLLECTION AND ONWARD REMITTANCE OF LICENSE FE E, AND SUCH OTHER FEES AS MAY BE PAYABLE BY THE LICENSEES, TO K FCIH AND PHILLC. IV) ACTING GENERALLY ON BEHALF OF TRI IN A LIAISON CAPACITY IN CONNECTION WITH THE EXISTING AND THE POTENTIAL LICE NSEES AND/OR SUCH OTHER MATTERS. 4. FOR THE SERVICES STATED ABOVE, ASSESSEE IS ENTIT LED TO SERVICE FEE EQUAL TO 110% OF ALL COSTS REASONABLY INCURRED BY IT IN THE PERFORMANCE OF SUCH SERVICE I.E. REFEREED ABOVE. TH E NEXT IMPORTANT SOURCE OF INCOME IS SUPPLY CHAIN MANAGEME NT FEES. THIS IS RECOGNIZED INCOME AS PER AGREEMENT ENTERED INTO WITH SUPPLIER OF MATERIALS TO THE FRANCHISE. THE ASSESSE E HAS EARNED SERVICE INCOME AGGREGATING TO ` 12,67,04,206/-. THE COMPUTATION OF THIS INCOME HAS BEEN NOTICED BY THE LD. CIT(A) ON P AGES 5-6. THE AO TREATED THIS SERVICE INCOME AS INCOME FROM OTHER SOURCES . ACCORDING TO THE AO, IN EARLIER ASSESSMENT YEARS, T HE SERVICE INCOME RECEIVED WAS EQUIVALENT TO THE COST INCURRED . WHEREAS IN THIS ASSTT. YEAR, THE INCOME RECEIVED AS EQUIVALENT TO 110% OF THE EXPENDITURE. THE AO DOUBTED THE AGREEMENT ITSELF. A CCORDING TO HIM, THE AGREEMENT IS NOT DULY SIGNED, WITNESSED NO R EXECUTED ON STAMP PAPER. HE FURTHER OBSERVED THAT THE VERY DOMI NANT INTENTION OF THE ASSESSEE, RIGHT FROM THE BEGINNING WAS NEVER TO ENTER INTO 6 ANY BUSINESS ACTIVITY, BUT TO SECURE AND PASS ON TH E INCOME EARNED BY THE INTERNATIONAL COMPANIES IN INDIAN SUB CONTINENT WITHOUT PAYMENT OF TAX. HE ALSO OBSERVED THAT IN O RDER TO CLAIM THE EXPENDITURE INCURRED IN EXCESS OF ITS RECEIPTS AS I N EARLIER YEARS, THE ASSESSEE THROUGH SOME DEVICE ALLEGED DURING SUC H YEARS CLAIMED SUCH LOSSES AS BUSINESS, CONTRARY TO THE FA CTS AND CIRCUMSTANCES. ACCORDING TO THE AO, THE INCOME ALLE GED TO HAVE BEEN RECEIVED BY THE ASSESSEE I.E. 10% OF THE TOTAL EXPENDITURE REIMBURSED IS NOT ON ACCOUNT OF EXPLOITATION FOR B USINESS OR USE OF COMMERCIAL ASSETS. HE ALSO ALLEGED THAT IN THE SERV ICE AGREEMENT COUNTRIES CONSISTING PAKISTAN, SRI LANKA AND MAURIT IUS, WHEREAS SERVICE INCOME HAS BEEN RECEIVED IN RESPECT OF EXPE NSES INCURRED BY ASSESSEE IN INDIA ONLY. IN THIS WAY, LD. AO HAS HELD THAT IT IS INCOME FROM OTHER SOURCE AND NOT THE BUSINESS INCOM E. 5. DISSATISFIED WITH THE ASSTT. ORDER, ASSESSEE CAR RIED THE MATTER BEFORE THE LD. CIT(A). LD. CIT(A) AFTER A DETAILED DISCUSSION ACCEPTED THE CONTENTION OF ASSESSEE. THE FINDINGS R ECORDED IN PARAGRAPH NO.3.1 ARE WORTH TO NOTE WHICH READ AS UN DER :- 7 3.9 ON COMPARING THE FACTS OF THE APPELLANTS CASE IN THE LIGHT OF THE LEGAL POSITION DISCUSSED ABOVE I AM OF THE VIEW THAT SERV ICES HAVE BEEN PROVIDED TO YUM! RESTAURANTS INTERNATIONAL INC. (FO RMERLY KNOWN AS TRICON RESTAURANTS INTERNATIONAL INC. TRI) FOR DEVELOPME NT OF BUSINESS SYSTEMS (OF THE RESPECTIVE BRAND HOLDERS) OUTSIDE USA, BY T HE APPELLANT. THE SERVICES PROVIDED ARE OF MULTIFARIOUS NATURE VIZ. P ROVISION OF SUPPORT SERVICES TO FRANCHISEES, COLLECTION AND REMITTANCE OF ROYALTY TO BRAND HOLDERS IN THE US, ASSISTANCE PROVIDED FOR R&D ACTI VITY, ETC. AGAINST SUCH SERVICES, SERVICE INCOME EQUIVALENT TO 110% OF ALL COSTS INCURRED HAS BEEN EARNED BY THE APPELLANT. THE ACT AND COURSE OF SER VICES PROVIDED BY THE APPELLANT CONSTITUTE A SYSTEMATIC ORGANIZED ACTIVIT Y CONDUCTED WITH A SPECIAL PURPOSE AS THE PROVISION OF SERVICES IS NOT AN ISOLATED TRANSACTION BUT THE SAME HAS BEEN CONTINUOUSLY PROVIDED SINCE A .Y. 1998-99 AND AS INFORMED THE APPELLANT CONTINUING EVEN IN THE PRESE NT DATE. HENCE, THE EARNING OF SERVICE INCOME CANNOT BE CLASSIFIED UNDE R ANY OTHER HEAD BUT BUSINESS INCOME SINCE ALL THE ESSENTIAL PARAMETERS OF CLASSIFYING THE SAID ACTIVITY AS BUSINESS ARE FULFILLED IN THE FACTS AND CIRCUMSTANCES OF PRESENT CASE. FURTHER, IT NOT IN DISPUTE THAT THE ENTIRE E XPENDITURE DEBITED IN THE P&L ACCOUNT HAS BEEN ACCEPTED BY THE A.O. AS BUSINE SS EXPENDITURE. NOW, IF EXPENDITURE IS HELD TO BE BUSINESS EXPENDIT URE, SERVICE INCOME COMPUTED ON THE BASIS OF 110% OF SUCH EXPENDITURE C ANNOT BE ANYTHING BUT BUSINESS INCOME. ALTHOUGH, THE AO HAS PROPOSIT IONED THAT THE SERVICE INCOME EARNED BY THE APPELLANT IS NOT A BUSINESS IN COME BUT INCOME FROM OTHER SOURCES, HOWEVER, IN COMPLETE CONTRADICTION, THE EXPENDITURE WHICH FORMS THE BASIS FOR COMPUTATION OF THE SERVICE INCO ME HAS BEEN HELD TO BE BUSINESS EXPENDITURE. ALSO THE PERUSAL OF ASSESSMENT ORDER REVEALS THAT T HE A.O. HAS NOT GIVEN ANY CONCRETE REASONS TO SUPPORT THE ACTION OF TREAT ING SERVICE INCOME AS `INCOME FROM OTHER SOURCES. THERE IS A LACK OF RE ASONING TO SUPPORT THE A.O.S CONCLUSION THAT THE APPELLANT WAS NOT CARRYI NG ON ANY BUSINESS, OR THAT THE SERVICE INCOME EARNED BY IT WAS NOT DERIVE D FROM BUSINESS. IN MY VIEW, THE EXISTENCE AND OPERATION OF THE PIZZA HUT RESTAURANTS AND KFC RESTAURANTS IN VARIOUS CITIES ACROSS INDIA CAN BE S EEN BY ANY BODY AND NEEDS NO PROOF. THESE OUTLETS ARE EITHER OPERATED BY THE APPELLANT OR OPERATED THROUGH FRANCHISEES. THESE FRANCHISEES HA VE BEEN PROVIDED WITH SUPPORT SERVICES ON BEHALF OR THE BRAND HOLDER S AS DISCUSSED EARLIER. IN ADDITION TO THE PROVISION OF THESE SERVICES TO T HE FRANCHISEE, THE APPELLANT HAS ALSO PROVIDED SERVICES TO THE BRAND H OLDERS IN USA BY WAY OF COLLECTION AND REMITTANCE OF ROYALTY, PROVIDING THEM SERVICES BY WAY OF RESEARCH AND DEVELOPMENT ETC. ALL SUCH ACTIVITIES VISIBLE AND THERE IS EVIDENCE TO SUBSTANTIATE THESE ACTIVITIES. THERE E XISTS A CONTRACTUAL AGREEMENT UNDER WHICH THE SERVICES HAVE BEEN PROVID ED, AND THE SERVICE INCOME HAS BEEN EARNED, RECEIVED AND ACCOUNTED FOR AS SUCH, ALL OF WHICH REMAINS UNCONTROVERTED. IN MY VIEW IF THE ASSESSIN G OFFICER HAD ANY DOUBT 8 ABOUT THE GENUINENESS OF THE SERVICES RENDERED BY T HE APPELLANT COMPANY, NOTHING PREVENTED HIM FROM CALLING UPON TH E FRANCHISEES OR THE PRINCIPALS TO CONFIRM THE FACTS. NOT ONLY THAT, HE COULD PLAN A VISIT INCOGNITO ON HIS OWN OR THROUGH THE APPELLANT TO AN Y OF THE OUTLETS AND SEE FOR HIMSELF THE SERVICES BEING RENDERED BY THE APPE LLANT UNDER THE SERVICE AGREEMENT. HE COULD NOT HAVE ARRIVED AT A UNILATER AL DECISION BASED ON HIS OWN WHIMS AND FANCIES, WHEN THE FACTS COULD EAS ILY BE ASCERTAINED BY DIRECT INQUIRY FROM THE PARTIES CONCERNED. 3.10 FINALLY THE APPELLANT HAS DRAWN MY ATTENTION T O THE FACT THAT THE SERVICE INCOME EARNED BY THE APPELLANT HAS BEEN CONTINUOUSL Y ASSESSED UNDER THE HEAD `BUSINESS IN THE PAST. ALTHOUGH THE PRIN CIPLE OF RES-JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS BUT IT HAS BEEN REPEATEDLY HELD BY VARIOUS COURTS THAT, FOR THE SAKE OF CONSISTENCY AND IN ORDER TO ACHIEVE FINALITY IN ALL LITIGATIONS, EARLIER TREATMENT ON T HE SAME QUESTION SHOULD NOT BE DISTURBED UNLESS SOME FRESH FACTS ARE FOUND IN T HE SUBSEQUENT YEAR AS HELD IN THE FOLLOWING CASES: RADHASOAMI SATSANG V. CIT (1992) 193 ITR 321 (SC) ASSTT. CIT V. GENERAL HAZARILAL AND CO. (2003) 263 ITR 679 (MP). CIT V. A.R.J. SECURITY PRINTERS (2003) 264 ITR 276 (DEL). CIT V. LAGAN KALA UPVAN (2003) 259 ITR 489 (DEL). CIT V. NEO POLY PACK (P) LTD. (2000) 112 TAXMAN 363 (DELHI). SARDAR KEHAR SINGH V. CIT (1992) 195 ITR 769 (RAJ). CIT V. GIRISH MOHAN GANERIWALA (2003) 260 ITR 417 ( P&H) SONEPAT HINDU EDUCATIONAL AND CHARITABLE SOCIETY V. CIT (2005) 278 ITR 262 (P&H). IN MY VIEW, THE INCLUSION OF SERVICE FEE INCOME AS BUSINESS INCOME IN EARLIER YEARS COULD NOT BE DISTURBED WITHOUT ANY F RESH FACTS BEING BROUGHT ON RECORD. 3.11 THEREFORE, IN VIEW OF THE REASONS DISCUSSED AB OVE THE A.O. IT IS HELD THAT SERVICE INCOME RECEIPTS AGGREGATING RS.12,67,04,206 /- ARE TO BE TREATED AS BUSINESS INCOME ONLY AND THE APPEAL IS ALLOWED O N THIS GROUND. 6. BEFORE US, LD. DR RELIED UPON THE ORDER OF AO AN D POINTED OUT THAT AO HAS OBSERVED THAT INCOME WAS EARNED BY THE ASSESSEE WITHOUT EXPLOITATION OF ANY BUSINESS ASSETS. 9 7. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF LD. CIT(A). HE TOOK US THROUGH THE SUB MISSIONS REPRODUCED BY THE LD. CIT(A) ON PAGES NO. 5 TO 10 O F THE IMPUGNED ORDER. 8. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AND GONE THROUGH THE RECORD CAREFULLY. LD. FIRST APPELLATE A UTHORITY HAS REPRODUCED THE SUBMISSIONS OF THE ASSESSEE. THE ASS ESSEE IN ITS SUBMISSIONS HAS POINTED OUT THAT SECTION 2 (13) PRO VIDES THE DEFINITION OF EXPRESSION BUSINESS ACCORDING TO WH ICH BUSINESS INCLUDES ANY TRADE, COMMERCE, MANUFACTURE OR ANY AD VENTURE OR CONCERN IN THE NATURE OF TRADING, COMMERCE OR MANUF ACTURE. IN VARIOUS AUTHORITATIVE PRONOUNCEMENT OF THE HONBEL SUPREME COURSE AND HONBLE HIGH COURT, MEANING AND SCOPE OF EXPRESSION BUSINESS HAS BEEN PROPOUNDED. IT IS NOT NECESSA RY TO RECITE AND RECAPITULATE OF THOSE DECISIONS, BUT ON THE STRENG TH OF THEM, IT WOULD BE SUFFICE TO SAY THAT WORD BUSINESS IS ONE OF WIDE IMPORT AND WHICH MEANS AN ACTIVITY CARRIED OUT CONTINUOUSL Y AND SYSTEMATICALLY BY A PERSON BY THE APPLICATION OF HI S LABOUR AND SKILL 10 WITH A VIEW TO EARN INCOME. THE CASE OF THE ASSESSE E IS THAT RIGHT FROM ASSTT. YEAR 1998-99, IT IS PROVIDING VARIOUS T YPES OF SERVICES TO THE FRANCHISE IN INDIA AND ALSO TO ITS ASSOCIATE EN TERPRISES, BECAUSE IT IS COLLECTING FEES ETC. FROM THE FRANCHI SE AND REMITTING IT TO YRI IN US. THE MAIN OBJECT OF THE ASSESSEE COMPA NY, AS DISCERNABLE FROM MEMORANDUM OF ASSOCIATION IS TO OW N, PURCHASE, LEASE, DEVELOP, OPERATE, FRANCHISE AND MANAGE REST AURANT ETC. SIMILARLY, ITS NEXT OBJECT IS TO PROVIDE CONSULTANC Y AND ADVISORY SERVICES IN CONNECTION WITH THE ESTABLISHMENT, ORGA NIZATION, FINANCING , MANAGEMENT AND OPERATION OF RESTAURANT, CAF.ETC. THIS BUSINESS, ASSESSEE HAS BEEN PERFORMING RIGHT F ROM 1998-99 AND THE DEPARTMENT HAS ACCEPTED THIS. ASSESSEE HAS SHOWN ADDITIONAL RECEIPTS WHICH MEANS HIGHER TAXES WOULD BE PAYABLE. THE ASSESSEE HAS ALSO POINTED OUT AT THE TIME OF HE ARING THAT A REFERENCE TO THE TPO TO DETERMINE THE ARMS LENGTH P RICE U/S 92 (CA) 3, IN RESPECT OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WAS MADE AND THE TPO HAS ALSO ACCEPTED THAT THE TRANSACTION ARE AT ARMS LENGTH PRICE. WITH REGARD T O THE OBJECTION OF THE AO, ON ACCOUNT OF AUTHENTICITY OF THE AGREEMENT BY THE 11 ASSESSEE THAT AGREEMENT HAS DULY BEEN SIGNED BY THE BOTH THE PARTIES. THERE IS NO SPECIFIC DEFECT REFERRED BY TH E AO. ACCORDING TO THE ASSESSEE UNDER THE INDIAN TAX ACT EVEN ON ORAL AGREEMENT OR AN AGREEMENT ON PLAIN PAPER ENTERED INTO BY TWO OR MORE PARTIES IS VALID AND BINDING UPON THE CONTRACTING PARTIES. WIT H REGARD TO ALLEGATION OF AO ABOUT PAYMENT OF DIVIDEND BY THE A SSESSEE TO THE PARENT COMPANY IS CONCERNED, IT WAS CONTENDED BY TH E ASSESSEE THAT AO HAS OBSERVED THAT POSSIBILITY OF PAYMENTS B EING MADE IN LIEU OF DIVIDEND ON CONTRIBUTION TOWARD DEVELOPMENT / BUSINESS FROM TIME TO TIME MADE BY PARENT COMPANY BY THE ASS ESSEE CANNOT BE RULED OUT. THERE IS NO EVIDENCE WITH THE AO IN T HIS REGARD. THE ASSESSEE IS RECEIVING THE INCOME FROM PARENT COMPAN Y I.E. YRI AND NOT MAKING PAYMENT TO IT. TAKING INTO CONSIDERA TION THE DETAILED SUBMISSION BY THE ASSESSEE, WHICH HAVE DUL Y BEEN REPRODUCED BY THE LD. CIT(A) COUPLED WITH THE FINDI NG RECORDED BY THE LD. CIT(A) (EXTRACTED SUPRA), WE ARE OF THE VIE W THAT AO MISERABLY FAILED TO APPRECIATE THE FACTS AND CIRCUM STANCE. THE ASSESSEE HAS BEEN OFFERING INCOME FROM CONSULTANCY ETC. AS A BUSINESS INCOME. IT HAS DULY BEEN ACCEPTED BY THE D EPARTMENT 12 SINCE 1998-99. THE AO WITHOUT ASSIGNING ANY VALID R EASON CONCLUDED THAT IT IS AN INCOME FROM OTHER SOURCES. ON THE OTHER HAND, LD. FIRST AUTHORITY HAS CONSIDERED THIS ISSUE IN RIGHT PERSPECTIVE. THEREFORE, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL IT IS REJECTED. GROUND NO. 2 : 9. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE REVEN UE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 12,60,21,989/- . THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS IN THE BUSINESS OF FRANCHISING PIZZA HUT AND KENTUCKY FRIED CHICKEN RESTAURANT IN INDIA FOR WHICH IT HAS ENTERED INTO TECHNOLOGY LICE NCE AGREEMENT WITH THE RESPECTIVE BRAND OWNERS I.E. KFC AND PIZZA HUT INTERNATIONAL LLC. IT HAS ENTERED INTO A SERVICE A GREEMENT ON 1 ST APRIL, 2001 WITH M/S. TRICON RESTAURANT INC USA ( N OW KNOWN AS YUM RESTAURANT INTERNATIONAL YRI). THE ASSESSEE HAS RAISED THROUGH SEPARATE INVOICES OF M/S YRI / TRI AMOUNTIN G TO ` 9,39,30,265/-, ` 3,20,91,724/- AND ` 6,82,217/- TOTALLING TO ` 12,67,04,206/- THE AMOUNT WHICH HAS BEEN TREATED BY THE AO AS INCOME FROM OTHER SOURCES. IT EMERGES OUT THAT TWO INVOICES FOR A 13 SUM OF ` 9,39,30,265/- AND ` 3,20,91,724/- ALLEGED TO HAVE BEEN RAISED ON PIZZA HUT INTERNATIONAL AND KFC INTERNA TIONAL WERE AVAILABLE IN THE ACCOUNTS. THE FIRST TWO INVOICES R AISED ON YRI / TRI I.E. FOR A CONSIDERATION OF ` 9,39,30,265/- AND ` 3,20,91,724/- WERE SIGNED BY MR. ROHIT BANSAL, MANAGER FINANCE OF TH E ASSESSEE COMPANY. THE THIRD INVOICE IS UNDER THE SIGNATURE O F MR. AJAY BANSAL, DIRECTOR FINANCE OF THE ASSESSEE. WHEREAS T HE COPIES OF THE ALLEGED TWO INVOICES HAVE BEEN RAISED ON PIZZA HUT LLC AND KFC IH WERE UNDER THE SIGNATURE OF MR. AJAY BANSAL. THE CASE OF THE AO IS THAT ASSESSEE HAS RAISED TWO SEPARATE INV OICES ON PIZZA HUT LLC AND KFC IH TOTALLING TO ` 12,60,21,989/-. IT HAS FILED TO DISCLOSE THESE RECEIPTS. ON THE OTHER HAND, CASE OF THE ASSESSEE IS THAT SERVICE AGREEMENT WHICH WAS ENTERED WITH YRI AND YRIPL FOR THE FIRST TIME ON APRIL 1, 2001. PRIOR TO THIS AGR EEMENT, A SIMILAR AGREEMENT WAS ENTERED INTO BY YRIPL DIRECTLY WITH KFCIH AND PIZZA HUT LLC FOR ASSTT. YEAR 2001 AND EARLIER YEAR S. THIS YEAR NO SUCH AGREEMENT WAS AVAILABLE WITH THESE TWO CONCERN S. INADVERTENTLY ON THE BASIS OF PAST PRACTICE INVOICE S HAVE BEEN PREPARED FOR ASTT. YEAR 2002-03 ALSO. THE INVOICES WERE PREPARED 14 FOR RAISING THEM ON KFCIH , PHLLC AS WELL AS YRI. T HE AMOUNT COULD BE COLLECTED ONLY FROM YRI. THE AMOUNTS MENTI ONED IN THE FIRST TWO INVOICES ALLEGED TO HAVE BEEN RAISED OF Y RI AND KFC PIZZA HUT ARE SIMILAR. THUS, ACCORDING TO THE ASSES SEE IN FACT, NO AMOUNT WAS TO BE RECEIVED FROM KFC AND PIZZA HUT. T HESE INVOICES WERE PREPARED INADVERTENTLY AND LYING IN THE ACCOUNTS. THE AO DID NOT ACCEPT THIS CONTENTION. HE OBSERVED THAT INVOICES ALLEGED TO BE RAISED INADVERTENTLY, WERE ATTACHED WITH ORIGINAL VOUCHER, ADVANCES OTHERS WAS DEBITED INSTEAD OF THE NAME OF THE PARTY IN THE VOUCHER. WHY DIFFERENT INVOICES WE RE SIGNED ON THE SAME DAY BY DIFFERENT PERSONS ETC. LD. CIT(A) HAS D ELETED THE ADDITION BY OBSERVING THAT AO HAS MADE THE ADDITION ONLY ON PRESUMPTION BASIS. THE SAID ASSUMPTION IS PURELY ON TWO PIECES OF PAPER, WHETHER THEY HAVE BEEN ACTED UPON OR NOT? HO W THE MONEY HAS TRAVELLED NOT DISCERNABLE.? 10. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE H AVE GONE THROUGH THE RECORD CAREFULLY. ASSESSEE HAS EXPLAINE D ITS POSITION THAT THESE INVOICES WERE PREPARED INADVERTENTLY. IT HAS FILED THE 15 AFFIDAVIT OF THE DIRECTOR MR. AJAY BANSAL WHO HAS E XPLAINED THE MISTAKE. THE TPO HAD ALSO ACCEPTED THE CASE OF ASSE SSEE ABOUT ARMS LENGTH PRICES. THE INVOICES INVOLVED AN INTER NATIONAL TRANSACTION. HAD THEY PAID BY VIRTUE OF THE ALLEGED INVOICES THEN THERE SHOULD BE ENTRIES IN THE BANK ACCOUNT AND THE RE SHOULD BE TRAIL OF THE MONEY. AO HAS UNNECESSARILY TREATED TW O DOCUMENTS AS SUFFICIENT FOR DEMONSTRATING THE ALLEGED UNDISCLOSE D INCOME. THE ASSESSEE HAS EXPLAINED ITS POSITION PROPERLY AND NO ADDITION DESERVES TO BE MADE. LD. FIRST APPELLATE AUTHORITY HAS CONSIDERED THIS ISSUE ELABORATELY AND HAS RIGHTLY DELETED THE ADDITION. WE DO NOT SEE ANY REASON TO INTERFERE IN HIS FINDING. THI S GROUND OF APPEAL IS REJECTED. GROUND NO. 3 11. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE REVE NUE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 39,50,000/-. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAS A WHOLLY O WNED SUBSIDIARY COMPANY BY THE NAME OF YUM RESTAURANT MARKETING PVT . LTD. (HEREINAFTER REFERRED TO AS YRMPL). THIS COMPANY WA S 16 INCORPORATED ON 8 TH JUNE 1999 AS A PRIVATE LTD. COMPANY AFTER TAKING PRIOR APPROVAL FROM THE COMPETENT AUTHORITIE S. THIS COMPANY WAS FORMED WITH A SOLE OBJECTIVE OF UNDERTAKING ADV ERTISING MEDIA AND PROMOTIONAL ACTIVITIES EXCLUSIVELY FOR THE ASSE SSEE AND ITS FRANCHISE AT THE REGIONAL AND NATIONAL LEVEL. ACCO RDING TO THE ASSESSEE, THE OBJECT OF FORMING THIS COMPANY WAS TO ENSURE THAT FRANCHISE CONCENTRATE ON BUSINESS OF RUNNING RESTA URANT WHILE MARKETING AND PROMOTIONAL ACTIVITIES ARE BEING TAKE N BY OTHER ENTITIES WHICH IS WHOLLY OWNED SUBSIDIARY COMPANY. THE ASSESSEE USED TO CARVE OUT BUDGET FOR ADVERTISEMENT AND PROM OTIONAL ACTIVITIES AT THE COMMENCEMENT OF EVERY YEAR. THIS WAS CARVED OUT AFTER CONSULTATION WITH THE FRANCHISE. EACH FRANCHI SE IS REQUIRED TO CONTRIBUTE CERTAIN FIXED PERCENTAGE OF ITS SALES FO R ADVERTISING, MEDIA AND PROMOTIONAL ACTIVITIES TO YRMPL. ANY DEF ICIT IN THE BUDGET AS COMPARED TO THE CONTRIBUTORY RECEIPT FORM THE FRANCHISE IS BEING MET BY THE ASSESSEE IN THE FORM OF ITS CO NTRIBUTION TOWARDS ADVERTISEMENT, MARKETING , PROMOTIONAL ACTIVITIES. APART FROM ALL THESE PIZZA HUT AND KENTUCKY FRIED CHICKEN RESTAURA NTS, PRODUCTS OF PEPSI FOOD LTD. ARE ALSO SOLD EXCLUSIVELY AS PE R THE JOINT 17 MARKETING AGREEMENT ENTERED INTO BETWEEN YRIPL AND PEPSI FOOD LTD. AS THE PRODUCT OF PEPSI ARE ALSO ADVERTISED IN THE PROMOTIONAL MATERIAL FOR PIZZA HUT AND KENTUCKY FRIED CHICKEN R ESTAURANT, PEPSI IS ALSO REQUIRED TO CONTRIBUTE TOWARDS THE AD VERTISEMENT FOR MEDIA AND PROMOTIONAL ACTIVITIES. THE PEPSI FOOD HA D PAID A SUM OF ` 39,50,000/- TO THE ASSESSEE IN F.Y. 2001-02. FOR T HIS PURPOSE, ASSESSEE HAS RAISED DEBIT NOTE FOR PEPSI FOR RECEIV ING THIS CONTRIBUTION. WHILE MAKING THE PAYMENT TO THE ASSES SEE PEPSI HAD DEDUCTED TAXES AT SOURCE. THE ASSESSEE HAD PASSED O N THIS AMOUNT TO ITS SUBSIDIARY COMPANY I.E. YRIPL TO BE I NCURRED ON ADVERTISING MEDIA AND PROMOTIONAL ACTIVITIES. IT HA D NOT DEDUCTED ANY TAX AT SOURCE WHILE MAKING THIS PAYMENT. THE AO HAS MADE THE ADDITION ON THE GROUND THAT PEPSI HAS MADE THE PAYMENT TO THE ASSESSEE. THE ASSESSEE ON ITS OWN HAS RAISED A DEBIT NOTE. CREDIT FOR TAXES DEDUCTED AT SOURCE BY PEPSI WAS CL AIMED BY THE ASSESSEE IN ITS RETURN OF INCOME. THE ASSESSEE DID NOT CLAIM THE AMOUNT TRANSFERRED TO ITS SUBSIDIARY CONCERN I.E. Y RIPL AS ITS EXPENDITURE. IT HAS NOT DEDUCTED TAXES AT SOURCE AT THE TIME OF TRANSFERRING THE AMOUNT. IN THIS WAY LD. AO HAS MA DE THE ADDITION. 18 12. DISSATISFIED WITH THE ADDITION, ASSESSEE CARRIE D THE MATTER IN APPEAL BEFORE LD. CIT(A) . IT WAS CONTENDED BY THE ASSESSEE THAT EVEN IF THIS AMOUNT WAS TREATED AS INCOME OF THE AS SESSEE THE CORRESPONDING EXPENDITURE HAS BEEN ALLOWED TO IT. T HUS, THERE WILL NOT BE ANY TAX IMPLICATION ON THE ASSESSEE. LD. CIT (A) ACCEPTED THE CONTENTION OF ASSESSEE ON THE GROUND THAT AS FA R AS TRANSMISSION OF THIS AMOUNT TO THE SUBSIDIARY IS C ONCERNED THERE IS NO DISPUTE. THE PAYMENT OF THE AMOUNT TO THE SUBSID IARY IS AN ALLOWABLE EXPENSE BECAUSE IT WAS TO BE INCURRED TOW ARDS ADVERTISING MEDIA AND PROMOTIONAL ACTIVITIES. THE A O HAS ALLEGED THAT ASSESSEE HAS NOT DEDUCTED THE TDS ON THIS REAS ONING LD. FIRST APPELLATE AUTHORITY IS OF THE OPINION THAT SE CTION 40(A)(IA) OF THE ACT WERE NOT APPLICABLE TO THE ASSTT. YEAR UNDE R APPEAL I.E. ASSTT. YEAR 2002-03. IT HAD COME ON THE STATUTE BOO K SUBSEQUENTLY. 13. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE H AVE GONE THROUGH THE RECORD CAREFULLY. THERE IS NO DISPUTE W ITH REGARD TO THE FACT THAT SUM OF ` 39,50,000/- WAS PAID BY PEPSI FOOD TO THE ASSESSEE. IN PURSUANCE OF A DEBIT NOTE RAISED BY T HE ASSESSEE. 19 M/S. PEPSI GOOD HAS DEDUCTED THE TDS ALSO AND ASSES SEE HAS TAKEN CREDIT OF THE TDS DEDUCTED BY PEPSI FOOD. TH US IT SUGGEST THAT AS FAR AS ACCOUNTING TREATMENT IS CONCERNED, I T IS AN INCOME IN THE HANDS OF THE ASSESSEE. THE ASSESSEE FURTHER CON TENDED THAT IT HAS PAID THIS AMOUNT TO ITS SUBSIDIARY I.E. YRIPL F OR INCURRING THESE EXPENSES ON ADVERTISEMENT MEDIA PROMOTIONAL. ACCORD ING TO THE FINDING OF LD. CIT(A), ASSESSEE HAS CLAIMED THE EXP ENDITURE OF THIS AMOUNT BUT THE AO HAS RECORDED A FINDING THAT NO S UCH EXPENDITURE WAS CLAIMED BY THE ASSESSEE. THE ASSESS EE HAS TO RECONCILE THAT THIS AMOUNT HAS BEEN PAID TO THE SUB SIDIARY CONCERN AND IT WAS INCURRED FOR THE PURPOSE OF THE BUSINESS . AT PAGE 8. AO HAS SPECIFICALLY OBSERVED THAT NO SUCH EXPENDITURE WAS CLAIMED BY THE ASSESSEE. DURING THE COURSE OF HEARING, IT WAS CONTENDED BY THE ASSESSEE THAT AMOUNT RECEIVED BY PEPSI WAS NOT IN THE NATURE OF ITS INCOME. THE AMOUNT RECEIVED WAS PURSUANCE TO THE JOINT AGREEMENT BETWEEN THE TWO COMPANIES AND WAS RECEIVE D BY THE ASSESSEE UNDER AN OBLIGATION TO BE PASSED ON TO TH E SUBSIDIARY CONCERN. IT EMPHASISED THAT AMOUNT WAS RECEIVED BY IT NOT ON ITS OWN ACCOUNT BUT WITH AN OVERRIDING OBLIGATION TO P ASS ON TO YRIPL. 20 THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND ALSO, WHEREIN IT PLEADED THAT THIS RECEIPT CAN NOT BE TREATED AS INC OME IN ITS HAND, BECAME IT WAS RECEIVED IN THE CAPACITY OF COLLECTIN G AGENT. IT HAS RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT I N THE CASE OF CIT VS. BIJLI COTTON REPORTED IN 116 ITR 60 SHEETAL DASS TIRTH DASS REPORTED IN 41 ITR 367 AND THE JUDGMENT OF HONBLE ALLAHABD HIGH COURT IN THE CASE OF CIT VS. UPBHOKTA SAHKARI SANGH REPORTED IN 288 ITR 106. 14. WE HAVE CONSIDERED ALL THESE CONTENTIONS BUT WE DO NOT FIND ANY DISCUSSION ON THESE ISSUES IN THE ASSTT. ORDER. SOMEWHAT SIMILAR IS AGAIN BY THE ASSESSEE IN ITS G ROUND NO. 2 WHICH WILL BE DISCUSSING IN THE LATER PART OF THE ORDER.THE AO HAS MADE THE OBSERVATION IN ONE PARAGRAPH ON PAGE 8. THE REASONI NG ASSIGNED BY THE LD. CIT(A) IS THAT ASSESSEE HAS DEBITED A S IMILAR EXPENDITURE OF RS. 51833006/- IN THE P & L ACCOUNT TOWARDS MARKETING CONTRIBUTION TO YRIPL. IT HAS BEEN FULLY ALLOWED BY THE AO. FROM READING OF BOTH THE ORDERS IT IS NOT DISCE RNABLE WHETHER ASSESSEE HAS INCLUDED THIS AMOUNT IN RS. 5,18,00,0 00/- OR NOT. 21 THE CASE OF THE AO IS THAT IT HAS RECEIVED THIS AMO UNT FROM PEPSI FOOD IT OUGHT TO BE ACCOUNTED AN INCOME. HOW ASSES SEE HAS TREATED IT IN THE ACCOUNTS AND WHETHER TRANSMITTED IT TO THE SUBSIDIARY CONCERN IS AN ISSUE WHICH IS TO BE RECON CILED. IT HAS TAKEN A CREDIT OF TAX PAID BY PEPSI FOOD. IT IS A B USINESS RECEIPT BECAUSE IT IS TAKING CARE OF ALL MARKETING AND PROM OTIONAL ACTIVITIES THOUGH IN THIS YEAR THROUGH ITS SUBSIDIARY CONCERN . THEREFORE, WE SET ASIDE THE FINDING OF LD. CIT(A) RESTORE THIS IS SUE TO THE AO FOR VERIFICATION AND READJUDICATION. THIS GROUND OF APP EAL IS ALLOWED. GROUND NO. 4 15. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE REVE NUE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 90 ,000/-. THE BRIEF FACTS OF THE CASE ARE THAT ON PERUSAL OF THE ACCOUN TS IT REVEALED TO THE AO THAT ASSESSEE HAS DRAWN CERTAIN CHEQUES FOR WITHDRAWAL ON A PARTICULAR DATES AND ENTERED THEM ON THE SAME DAT E IN THE CASH ACCOUNT IN ITS LEDGER, WHEREAS ACTUAL CASH WITHDRAW AL FROM THE BANK TAKEN PLACE ON THE SUBSEQUENT DATE. A SUM OF R S. 30,000/- WAS ALLEGED TO HAVE BEEN WITHDRAWN VIDE CHEQUE NO. 580359. THE ENTRY MADE IN THE CASH BOOK IS 10 TH MAY, 2001. THE ACTUAL CASH WITHDRAWN FROM THE BANK HAPPENED ON 11 TH MAY, 2001. THERE 22 ARE THREE TRANSACTIONS OF SIMILAR NATURE IN DIFFERE NT MONTHS. AO HAS MADE THE ADDITION ON ACCOUNT OF UNEXPLAINED CASH. L D. CIT(A) DELETED THE ADDITION ON THE GROUND THAT ASSESSEE HA S EXPLAINED ITS POSITION. THAT ON CERTAIN OCCASIONS, WHEN CHEQUE WA S SIGNED ENTRIES WERE MADE IN THE CASH BOOK . BUT DUE TO CER TAIN PRACTICAL DIFFICULTIES ACTUAL CASH COULD NOT BE TAKEN OUT FRO M THE BANK ACCOUNT. ON DUE CONSIDERATION OF THE FACTS AND CIRC UMSTANCES WE ARE OF THE OPINION THAT AO HAS MADE THE ADDITION IN A THEORETICAL WAY, WITHOUT REALISING THE PRACTICAL ASPECT. THERE IS ONLY ONE DIFFERENCE BETWEEN ACTUAL WITHDRAWAL OF CASH FROM T HE BANK. THE EXPLANATION OF THE ASSESSEE BEFORE THE AO WAS THAT FOR EXAMPLE A PERSON WAS HANDED OVER A CHEQUE FOR MAKING WITHDRAW ALS, HE REACHED THE BANK LATE AND COULD NOT WITHDRAW THE M ONEY, WHEN CHEQUE WAS SIGNED ENTRY WAS PASSED IN THE LEDGER A CCOUNT. THUS A SMALL DISCREPANCY HAS HAPPENED. THE AO HAS NOT BR OUGHT ANY MATERIAL ON THE RECORD THAT THIS MUCH OF CASH WAS I NTRODUCED IN THE BOOKS FROM AN UNEXPLAINED SOURCES AND AFTER WITHDR AWAL TAKING PLACE FROM THE BANK THE SAID CASH WAS RETURNED TO T HAT SOURCE. AFTER TAKING INTO CONSIDERATION THE DETAILED FINDIN G RECORDED BY THE 23 LD. CIT(A) WE DO NOT FIND ANY FORCE IN THIS GROUND OF APPEAL IT IS REJECTED. GROUND NO. 5 16. THE GRIEVANCE OF THE REVENUE IN THIS GROUND IS LD. CIT(A) HAS ERRED IN DELEING THE DISALLOWANCE OF RS. 3,23,01,93 9/- WHICH WAS PAID BY THE ASSESEE ON ACCOUNT OF ROYALTY EXPENSES. 17. AT THE COST OF REPETITION, IT IS OBSERVED THAT PRIMARY BUSINESS ACTIVITY OF THE ASSESSEE RELATES TO THE OPERATION A ND DEVELOPMENT PIZZA HUT AND KENTUCKY FRIED CHICKEN RESTAURANT, IN THE INDIAN SUB CONTINENT, FOR THIS PURPOSE, THE ASSESSEE COMPANY H AD ENTERED INTO A TECHNOLOGY LICENCE AGREEMENT ON 1 ST APRIL, 1995 WITH KENTUCKY FRIED CHICKEN HI. SIMILARLY, ANY TECHNOLOGY LICENCE AGREEMENT HAS BEEN EXECUTED BETWEEN THE ASSESSEE AND THE PIZZA HU T ON 15 TH JANUARY, 1996. AS PER THESE AGREEMENTS, THE ASSESSE E HAS BEEN GRANTED THE RIGHTS TO USE THE TECHNOLOGY AND SYSTEM IN THE BUSINESS OF OPERATING SERVICE RESTAURANT SUCH AS KENTUCKY FRIED CHICKEN RESTAURANT, OUTLETS AND PIZZA HUT. IN BOTH THE AGREEMENTS, IT WAS SETTLED THAT FOR GRANT OF LICENCE AS A TECHNOLOGY, A LICENCE FEE WOULD 24 BE PAYABLE BY THE ASSESSEE WHICH IS EQUIVALENT OF 5 % OF SALES, NET OF TAXES. ACCORDING TO THE ASSESSEE, EFFECTIVE RATE OF TECHNOLOGY LICENCE FEE, THEREFORE, WORKS OUT TO 6.038%. THIS HAS BEEN WORKED OUT BY THE ASSESSEE AS UNDER :- 1) LICENCE FEE 5.00% 2) TDS 0.75% 3) R& D CESS 0.288% _____________ 6.038% 18. THE ASSESSEE HAS BEEN GRANTED APPROVAL BY THE G OVT. OF INDIA, MINISTRY OF INDUSTRY SECRETARIAT FOR INDUSTRIAL ASS ISTANCE (SIA) FOR SETTING UP A WHOLLY OWNED SUBSIDIARY IN INDIA FOR S ETTING UP KFC RESTAURANT. THERE IS NO DISPUTE WITH REGARD TO THE FACTS TO THIS EXTENT. THE ASSESSEE WAS AUTHORIZED TO ENTER INTO DEVELOPME NT AGREEMENT WITH OTHER ENTITIES FOR OPENING UP NEW OUTLETS. DUR ING THE ACCOUNTING PERIOD RELEVANT TO THIS ASSTT. YEAR, IT HAS ENTERED INTO AGREEMENTS WITH NUMBER OF ENTITIES NAMELY DEVYANI INTERNATIONAL P VT. LTD., SPECIALITY RESTAURANTS, DODSAL CORPORATION THESE CONCERNS HAV E SET UP NEW OUTLETS. AS PER THE AGREEMENTS BETWEEN THE ASSESSEE AND THE 25 DEVELOPERS / FRANCHISE , A CONTINUING FEES @ 6.3% ON SALES IS REQUIRED TO BE PAID BY THE FRANCHISEE TO THE ASSESS EE. IT HAD RECEIVED A SUM OF ` 3,37,05,801/- DURING THE ACCOUNTING PERIOD RELEVAN T TO THIS ASSTT. YEAR. FROM THE FRANCHISE AS CONTINUING FEES THE ASSESSEE HAS REMITTED ROYALTY AGGREGATING TO ` 3,23,10,030/- TO THE PRINCIPALS ABROAD. THE AO HAS DISALLOWED THIS PAYMENT OF ROYAL TY TO THE PRINCIPAL. THE AO HAS OBSERVED THAT GOVT. OF INDIA HAS RESTRICTED PAYMENT OF ROYALTY IN ITS INITIAL APPROVAL AND ASSE SSEE WAS PERMITTED TO PAY TECHNICAL SERVICE FEE ONLY. TECHNICAL SERVIC E FEE AND ROYALTY IS DISTINCT AND SEPARATE. THE ASSESSEE HAS TERMED THE PAYMENT FOR TECHNICAL SERVICE FEE AS ROYALTY TO CIRCUMVENT CLAU SE IN THE SIA APPROVAL WHICH RESTRICTED THE PAYMENT OF TECHNICAL SERVICE FEE TO A PERIOD OF 7 YEARS. THE AO FURTHER OBSERVED THAT PAY MENT HAS BEEN MADE TO PARENT COMPANIES. IT CANNOT BE RULED OUT TH AT SAID PAYMENTS HAVE BEEN MADE IN LIEU OF DIVIDEND. 19. DISSATISFIED WITH THE CONCLUSION OF THE AO, ASS ESSEE CARRIED THE DISPUTE BEFORE LD. CIT(A). IT POINTED OUT THAT ADMI SSIBILITY OF EXPENDITURE IN THE NATURE OF LICENCE FEE PAID IS GO VERNED BY THE PROVISIONS OF 37 (1) OF THE INCOME TAX ACT 1961. T HE EXPENDITURE UNDER THIS SECTION CAN BE CLAIMED BY THE ASSESSEE , IF THE ASSESSEE 26 SATISFIED THE CONDITIONS FLOWING OUT FROM THE SECTI ON. THE CONDITIONS ARE THAT EXPENDITURE SHOULD NOT BE OF THE NATURE DE SCRIBED U/S 30 TO 36. IT SHOULD NOT BE OF A CAPITAL NATURE AND IT SH OULD NOT BE OF A PERSONAL EXPENDITURE. THE EXPENDITURE SHOULD HAVE B EEN LAID OUT OR EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS . IT WAS EXPLAINED BEFORE THE LD. FIRST APPELLATE AUTHOR ITY THAT LD. AO HAS FAILED TO CONSTRUE THE APPROVAL LETTERS IN TRUE PERSPECTIVE. IT WAS ALSO POINTED OUT THAT FEE PAID IN TECHNOLOGY TRANSF ER CASE CAN BE SAID TO BE BOTH ROYALTY AND FEE FOR TECHNICAL SERVICES. THE SIA HAS BEEN USING THE TERMS ROYALTY AND TECHNICAL SERVICE FEE L OOSELY AND INTERCHANGEABLY IN ITS VARIOUS APPROVAL LETTERS. TH E ASSESSEE HAS EXPLAINED THAT NOMENCLATURE LICENCE FEE AS ROYALTY ARE IRRELEVANT CONSIDERATION SO LONG AS THE LICENCE FEE PAYMENT IS JUSTIFIED AND INDISPENSABLE TO THE ASSESEES BUSINESS. ACCORDING TO THE ASSESSEE, THERE EXIST A DIRECT NEXUS BETWEEN THE PAYMENT OF L ICENCE FEE AND BUSINESS OF THE ASSESSEE. LD. CIT(A) HAS CONSIDERED ALL THESE ASPECTS ELABORATELY AND HAS DELETED THE DISALLOWANC E. THE RELEVANT OBSERVATION RECORDED BY THE LD. CIT(A) IN PARA NO. 9.13 READ AS UNDER :- 9.13. THE CONTENTS OF THE ASSESSMENT ORDER, MATERI AL ON RECORD AND THE WRITTEN SUBMISSIONS AND ARGUMENTS MADE BY T HE APPELLANT 27 HAVE BEEN CONSIDERED BY ME. THE IMPUGNED PAYMENT OF RS. 3,23,01,939/- HAS BEEN MADE BY THE APPELLANT TOWARD S LICENCE FEE PAID PURSUANT TO THE TECHNICAL LICENSE AGREEMENTS W ITH THE OWNERS OF THE TECHNOLOGY AND SYSTEMS AND CLAIMED AS A BUSI NESS EXPENDITURE. AGAINST THE EXPENDITURE OF RS. 3,23,01 ,939/-, THE APPELLANT HAS DIRECTLY EARNED AN INCOME OF RS. 3,37 ,05,801/- AS CONTINUING FEE FROM THE FRANCHISEES, WHICH IS AN UN DISPUTED FACT. THUS, THERE IS ACCRUAL OF DIRECT INCOME AGAINST IMP UGNED EXPENDITURE CLAIMED AS BUSINESS EXPENDITURE BY THE APPELLANT. THEREFORE, IN MY VIEW, THE EXPENDITURE OF RS. 3,23, 01,939/- PAID AS LICENSE FEE AND SHOWN AS ROYALTY PAYMENT IN THE BAL ANCE SHEET DESERVES TO BE ALLOWED AS A BUSINESS EXPENDITURE. F URTHER, THE MAIN CONTENTION OF THE AO FOR MAKING THE DISALLOWAN CE IS THAT THE APPELLANT WAS PERMITTED TO REMIT TECHNICAL FEES AS PER GOVERNMENT APPROVALS WHEREAS THE APPELLANT REMITTED ROYALTY WH ICH, ACCORDING TO A.OS INTERPRETATION (OF ALL THE RELEVANT DOCUME NTS), THE APPELLANT WAS FORBIDDEN TO DO. HOWEVER, THE AO HAS NOT MADE O UT A CASE THAT THE DISALLOWANCE OF THE IMPUGNED AMOUNT IS ON ACCOUNT INFRACTION OF ANY LAW. THUS, THE WHOLE APPROACH IN THE ASSESSMENT ORDER, ON THIS ISSUE, IS BASED ON MERE TECHNICALITI ES WITHOUT ANY IMPORTANCE BEING ATTACHED TO THE REAL SUM AND SUBS TANCE INVOLVED. IN MY VIEW THE AO HAS GROSSLY ERRED IN MAKING SUCH A HIGH PITCHED DISALLOWANCE SO LIGHTLY WITHOUT ANY REAL APPLICATIO N OF MIND TO THE SUBSTANCE OF THE MATTER. AS REGARDS THE VARIOUS OBS ERVATIONS MADE IN THE ASSESSMENT ORDER, THE APPELLANT HAS BEEN ABL E TO SUCCESSFULLY MEET ALL THESE OBSERVATIONS AS DISCUSS ED IN THE PRECEDING PARAGRAPHS AND, THEREFORE, THE SAME NEED NOT BE REPEATED AGAIN. THE ASSESSMENT ORDER ALSO STRESSES THE OMISSION ON THE PART OF THE APPELLANT TO REPORT THE IMPUGNED PAYMENT OF RS. 3,23,01,939/- UNDER SECTION 40A(2)(B) IN THE TAX AU DIT REPORT. AS CLARIFIED BY THE APPELLANT THE IMPUGNED PAYMENT IS NOT COVERED U/S 40A(2)(B) IRRESPECTIVE OF THIS CLARIFICATION THE IM PUGNED PAYMENT CANNOT BE SAID TO BE EXCESSIVE OR UNREASONABLE TAKI NG INTO ACCOUNT THE FACT THAT THE LICENSE FEE / ROYALTY HAS BEEN PA ID @ 5% (NET OF TAXES) AS PER GOVERNMENT APPROVALS AND ALSO THE AFO RESAID TRANSACTION BEING IN THE NATURE OF AN INTERNATIONAL TRANSACTION, THE TRANSFER PRICING OFFICER VIDE ITS ORDER DATED 18.2. 2005 HAS HELD THE SAME TO BE AT ARMS LENGTH PRICE. THUS, THE DISALLO WANCE OF RS. 3,23,01,939/- BENIGN WITHOUT ANY BASIS, IS DELETED. 9.14 IN VIEW OF THE ABOVE DISCUSSION, THE DISALLOWA NCE OF RS. 3,23,01,939/- MADE BY THE ASSESSING OFFICER BEING W ITHOUT ANY BASIS IS DELETED AND THE APPEAL IS ALLOWED ON THIS GROUND. 28 20. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE H AVE GONE THROUGH THE RECORD CAREFULLY. THE MAIN REASON FOR D ISALLOWING THE ROYALTY PAYMENT BY THE ASSESSEE TO M/S. KFC INTERNA TIONAL HOLDING INC AND M/S. PIZZA HUT WITH WHOM IT HAD ENTERED INT O TECHNOLOGY LICENCE AGREEMENT IS THAT GOVT. OF INDIA HAS PERMIT TED THE ASSESSEE TO PAY TECHNICAL FEES WHICH IS RESTRICTED TO SEVEN YEARS AND ASSESSEE IS PAYING IT AS A ROYALTY. LD. CIT(A) HAS DELETED T HE DISALLOWANCE ON THE GROUND THAT ASSESSEE HAS EARNED AN INCOME OF ` 3,37,05,801/- AS CONTINUING FEES FROM THE FRANCHISE, BECAUSE OF THIS TECHNOLOGY LICENCE AGREEMENT. IT HAS BEEN PERMITTED TO COLLECT THE FEE S ON BEHALF OF KFC INTERNATIONAL AND PIZZA HUT. THIS PERMISSION IS IN PURSUANCE TO THE TECHNOLOGY LICENCE AGREEMENT. THE AO FAILED TO BRIN G ON RECORD ANY MATERIAL THAT ASSESSEE HAS INFRINGED ANY LAW IN CON DUCTING ITS BUSINESS. WE HAVE PERUSED THE RELEVANT MATERIAL AND ALSO THE WRITTEN SUBMISSIONS OF THE ASSESSEE REPRODUCED BY THE LD. C IT(A). IN OUR OPINION, AO HAS MISREAD THE APPROVALS GRANTED BY TH E GOVT OF INDIA WHILE ARRIVING AT A CONCLUSION THAT ASSESSEE HAS N OT BEEN REMITTING THE PAYMENT AS PER THE APPROVALS. IN THE APPROVAL SIA HAS USED EXPRESSION ROYALTY AS WELL AS FEE FOR TECHNICAL SE RVICES LOOSELY AND INTERCHANGEABLY. APART FROM ALL THESE THINGS, THE T AX RATE FOR REMITTING 29 A ROYALTY AS WELL AS FEE FOR TECHNICAL SERVICE IS 15% PLUS THE RESEARCH AND DEVELOPMENT CESS. THE ASSESSEE HAS PAID BOTH TH ESE AMOUNTS WHILE REMITTING THE PAYMENT. THE EXPENSE IS DIRECTL Y RELATED TO ITS BUSINESS. IT HAS BEEN INCURRED WHOLLY AND EXCLUSIVE LY FOR RUNNING THE FRANCHISES WITHIN INDIA. THEREFORE IN OUR OPINION L D. FIRST APPELLATE AUTHORITY HAS APPRECIATED THE FACTS AND CIRCUMSTAN CES IN RIGHT PERSPECTIVE AND HAS RIGHTLY DELETED THE DISALLOWANC E. GROUND NO. 6 21. THE GRIEVANCE OF REVENUE IN THIS GROUND IS LD. CIT(A)HAS ERRED IN DELETING DISALLOWANCE OF ` 3,26,01,574/-. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAS A WHOLLY OWNED SUBSIDIAR Y NAMELY YUM RESTAURANT INDIA PVT. LTD. THE MAIN OBJECT OF THIS COMPANY WAS TO CARRY OUT ADVERTISING, MARKETING AND PROMOTION OF K FC , PIZZA HUT AND OTHER BRANDS CURRENTLY OWNED OR ACQUIRED IN FUT URE BY THE ASSESSEE. THIS COMPANY WAS INCORPORATED ON 8 TH JUNE 1999. THE AO HAS OBSERVED THAT COMPANY HAS BEEN OPERATING FROM T HE PREMISES OF THE ASSESSEE AND , THEREFORE, ALL ADMINISTRATIVE EX PENSES IN CONNECTION WITH ADVERTISEMENT, MARKETING, PROMOTION AL ACTIVITIES OF YRMPL IS TO BE ALLOCATED TO THAT COMPANY. IN OTHER WORDS, ASSESSEE SHOULD NOT BEAR THE OVERHEAD EXPENSES AT THE HEAD O FFICE PERTAINING 30 TO YRMPL. THE AO HAS ALLOCATED THE EXPENSES IN EQUA L I.E, 50% FOR YRMPL AND 50% FOR ASSESSEE. IN THIS WAY, HE WORKED OUT A DISALLOWANCE OF ` 3,26,01,574/-. 22. ON APPEAL, LD. CIT(A) DELETED THE DISALLOWANCE. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE HAVE GONE THRO UGH THE RECORD CAREFULLY. IT EMERGES OUT FROM THE RECORD THAT YRMP L WAS INCORPORATED ON 8 TH JUNE, 1999. IT IS A 100% OWNED SUBSIDIARY OF THE ASSESSEE. IT HAS BEEN INCORPORATED TO CARRY OUT ADV ERTISEMENT, MARKETING AND PROMOTION ACTIVITIES OF THE ASSESSEE AS WELL AS VARIOUS FRANCHISE. THE ASSESSEE HAD ENTERED INTO A TRIPARTI TE AGREEMENT WITH ITS FRANCHISE AND YRMPL. AS PER THIS AGREEMENT, THE FRANCHISE SHALL PAY AMP CONTRIBUTION TO YRMPL AND ASSESSEE MAY NOT PAY A SEPARATE CONTRIBUTION. IN A WAY, YRMPL WAS TO CARRY OUT THE ACTIVITIES ON NO PROFIT NO LOSS BASIS. THE AO HAS DISALLOWED T HE EXPENSES WHICH ARE ATTRIBUTABLE TO YRMPL BUT IN FACT, HE OUG HT TO HAVE NOT DISALLOWED ANY SUCH AMOUNT BECAUSE ULTIMATELY IT IS THE ASSESSEE WHO HAS TO CONTRIBUTE FOR ALL THESE SUMS. THE ASSES SEE CAN BEAR THE COST OF ADMINISTRATIVE EXPENSES ALLEGED TO BE INCUR RED BY YRMPL OR IT CAN SEPARATELY REMITTED THE AMOUNT TO YRMPL TOWARDS SUCH COST. 31 FROM BOTH THE ANGLES, IT IS THE ASSESSEE OR ITS FRA NCHISE WHO HAS TO CONTRIBUTE THIS AMOUNT. THE AO, THEREFORE, HAS ERRE D IN CARVING OUT THE DISALLOWANCE. LD. CIT(A) HAS RIGHTLY DELETED TH IS DISALLOWANCE AND WE DO NOT FIND ANY FORCE IN THIS GROUND OF APPEAL. IT IS REJECTED. GROUND NO. 7 10 23. THESE GROUNDS OF APPEAL SHALL BE TAKEN UP ALONG WITH GROUND NO. 3 AND 4 OF THE ASSESEES APPEAL. GROUND NO. 11 24. IN THIS GROUND, GRIEVANCE OF THE REVENUE IS THA T LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 1,35,67,376/-. THE AO HAS OBSERVED THAT ASSESSEE FAILED TO PRODUCE REGISTER M AINTAINED FOR THE FIXED ASSETS. IN ASSTT. YEAR 1999-2000, IT HAS TRAN SFERRED ITS BUSINESS UNDERTAKING AT BANGALORE AND DELHI AS A GOING CONCE RN WHEREAS SUCH ASSETS CONTINUED TO BE SHOWN AS FIXED ASSETS EVEN T HROUGH IN ASSTT. YEAR 2002-03 AND DEPRECIATION HAS BEEN CLAIMED ON SUCH NON EXISTENT ASSETS. HE ALSO OBSERVED THAT ASSESSMENT I N ASSTT. YEAR 1999-2000 HAS ALREADY STANDS REOPENED U/S 148 OF TH E INCOME TAX ACT. THE AO ALSO FOUND THAT DEPRECIATION WAS CLAIME D IN RESPECT OF ASSETS PURCHASED FOR THE BENEFITS OF EMPLOYEES AND UTILISED BY SUCH 32 EMPLOYEES. THE AO THEREAFTER MADE A REFERENCE THAT EXPENSES WERE FOUND TO BE INCURRED, WHERE ASSETS PURCHASES DURING ASSTT. YEAR 2002-03 WERE NOT FOUND RECORDED IN THE BOOKS. ON T HE BASIS OF THESE DISCREPANCIES THE AO HAS ALLOWED THE ENTIRE D EPRECIATION AGGREGATING TO RS. 13567376/-. DISSATISFIED WITH TH E DISALLOWANCE ASSESSEE CARRIED THE DISPUTE BEFORE THE LD. CIT(A). THE ASSESSEE HAS POINTED OUT THAT AS FAR AS ASSETS USED BY THE E MPLOYEES ARE CONCERNED PREREQUISITE VALUE HAS BEEN INCLUDED AS P ART OF THE SALARY OF RESPECTIVE EMPLOYEES. THE ASSESSEE POINTED OUT H AD THESE ASSETS WERE NOT PROVIDED TO THE EMPLOYEES AS PER THE TERMS AND CONDITIONS OF EMPLOYMENT THEN ASSESSEE WOULD HAVE REIMBURSED T HE COST OF THOSE ASSETS FOR PERSONAL USE UPTO A LIMITED SPECIF IED PURPOSE. LD. CIT(A) HAS CONSIDERED THESE ASPECTS AND OBSERVED TH AT ASSESSEE HAS PRODUCED SCHEDULE OF ASSETS BEFORE THE AO. THER E MAY BE SOME DISCREPANCY BUT THAT DOES NOT MEAN THAT TOTAL DEPRE CIATION WOULD BE DISALLOWED TO THE ASSESSEE. AS FAR AS THE ASSETS SO LD OUT IN ASSTT. YEAR 1999-2000 IS CONCERNED, LD. CIT(A) HAS ALREADY DIRECTED THE AO TO GIVE EFFECT THE OUTCOME OF ASSESSMENT PROCEEDING IN ASSTT. YEAR 1999-2000 IN THIS YEAR ALSO. 33 25. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES, WE ARE OF THE VIEW THAT AO HAS HIGHLIGHTED CERTAIN DISCREPANC IES IN THE MAINTENANCE OF WDV OF THE ASSETS AS WELL AS IDENTIF ICATION OF EACH ASSETS. THERE MAY BE SOME SHORTCOMINGS BUT THAT DOE S NOT MEAN THAT ASSESSEE WAS NOT HAVING ANY ASSETS AND THEY WE RE NOT USED FOR THE PURPOSE OF BUSINESS. IN OUR OPINION, AO OUGHT T O HAVE IDENTIFIED EACH ITEM AND FIND OUT HOW THAT ITEM IS TREATED IN THE BLOCK OF ASSETS, IF IT IS ESTABLISHED THAT THOSE ASSETS WERE NOT USE D FOR THE PURPOSE OF THE ASSESSEES BUSINESS THEN HE SHOULD MAKE OUT A C ARE FOR DISALLOWANCE OF DEPRECIATION. BY MAKING GENERAL OB SERVATION, HE CANNOT DENY THE TOTAL CLAIM OF THE DEPRECIATION OF THE ASSESSEE. TAKING INTO CONSIDERATION THESE ASPECTS, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL. LD. CIT(A) HAS ALREADY DIREC TED THE AO TO GIVE EFFECT OUTCOME OF 1999-2000. THE DEPRECIATION DISA LLOWED IN ASSTT. YEAR 1999-2000 WOULD BE CONSIDERED FOR DISALLOWANCE IN THIS YEAR ALSO. THE EFFECT OF OUTCOME IN ASSTT. YEAR 1999-20 0 WOULD BE GIVEN AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSES SEE. GROUND NO. 12 26. IN THIS GROUND OF APPEAL GRIEVANCE OF THE REVEN UE IS THAT LD. CIT(A) HAS ERRED IN INCLUDING AN INCOME OF ` 31,01,500/- IN ASSTT. YEAR 34 2002-03 WHEREAS IT PERTAINS TO ASSTT. YEAR 2001-02. THE BRIEF FACTS OF THE CASE ARE THAT AO HAS OBSERVED THAT ON PAGES NO. 152 155 PART I OF THE SPECIAL AUDIT REPORT, THE AUDITOR HAS POIN TED OUT THAT THREE RECEIPTS ACCOUNTED BY THE ASSESSEE PERTAINS TO EARL IER ASSTT. YEARS. THESE RECEIPTS ARE :- 1) SCM LOCAL FEES 2) SCM INTERNATIONAL FEES 3) REIMBURSEMENT OF GENERAL AND ADMINISTRATIVE EXPE NSES 1) RS. 4,97,000/- 2) RS. 2,46,000/- 3) RS. 23,62,500/- 27. THE AO HAS OBSERVED THAT THESE ARE TAXABLE IN A SSTT. YEAR 2001-02 AND HE REDUCED THE INCOME OF ASSESSEE IN TH IS ASSTT. YEAR TO THIS EXTENT. THE ASSESSEE HAS CONTENDED BEFORE THE LD. CIT (A) THAT AO HAS SELECTIVELY CONSIDERED PAGE NO. 155 OF THE S PECIAL AUDIT REPORT. IT DREW THE ATTENTION OF THE LD. CIT(A) TOW ARDS PAGE NO. 253 OF THE SPECIAL REPORT AND POINTED OUT THAT BILL FOR GE NERAL AND ADMINISTRATIVE EXPENSES RAISED ON PIZZERIA FAST FOO D RESTAURANT MADRAS LTD. BY DEBIT NOTE NO. DN/003/12 IS ON 24.8. 2001. THIS 35 ACCOUNTING PERIOD FALLS IN THE ASSTT. YEAR UNDER AP PEAL AND THIS IS THE MAJOR AMOUNT. LD. CIT(A) HAS HELD THAT TAX RATE IN BOTH THE ASSTT. YEARS ARE SAME. IT DOES NOT MAKE MUCH DIFFERENCE IF THESE RECEIPTS ARE INCLUDED IN THE PRESENT ASSTT. YEARS. HE DIRECT ED THE AO TO TAX THIS INCOME ALSO IN THIS ASSTT. YEAR. 28. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE HAVE GONE THROUGH THE RECORD CAREFULLY. THE MAJOR ITEM APPEAR S TO BE TAXABLE IN THE PRESENT ASSTT. YEARS. THE OTHER TWO ITEMS HAVE BEEN CONSIDERED BY THE LD. CIT(A) AS TAXABLE IN THIS YEAR ON THE GR OUND THAT TAX RATE ARE SIMILAR. IT WILL CREATE UNNECESSARY COMPLICATIO N BY EXCLUDING THESE RECEIPTS FROM HERE AND INCLUDING THEM IN ASSTT. YEA R 2001-02. CONSIDERING THE FINDING OF LD. CIT(A), WE DO NOT WI SH TO INTERFERE IN IT. THIS GROUND OF APPEAL IS REJECTED. GROUND NO. 13 29. THIS GROUND WILL BE TAKEN ALOGNWITH THE GROUND NO. 6 OF ASSESSEES APPEAL. GROUND NO. 14 36 30. IN THIS GROUND OF APPEAL GRIEVANCE OF REVENUE I S THAT LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 5,56,428/-. THE BRIEF FACTS OF THE CASE ARE THAT AT THE END OF YEAR, ASSESSEE HAS MADE CERTAIN PROVISIONS ON THE BASIS OF MERCANTILE SYSTEM OF ACC OUNTANCY FOLLOWED BY IT. ACCORDING TO THE AO, THIS PROVISION WAS NOT UTILISED BY THE ASSESSEE IN THE NEXT ASSTT. YEAR. THEREFORE, IN HIS OPINION, EXCESS PROVISION DESERVES TO BE DISALLOWED. LD. CIT(A) DEL ETED THE DISALLOWANCE ON THE GROUND THAT PROVISION IS BEING MADE BY KEEPING IN VIEW THE POSSIBILITY OF CERTAIN EXPENSES. IF TH E PROVISION HAS NOT BEEN EXHAUSTED BY THE ASSESSEE, THEN IT DOES NOT ME AN THAT THERE WAS NO POSSIBILITY OF ARISING SUCH TYPE OF EXPENDIT URE WHEN PROVISION WAS MADE. THE AO HAS ERRED IN DISALLOWING THE PROVI SION. 31. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES, WE DO NOT SEE ANY REASON TO INTERFERE IN THE ORDER OF LD. CIT (A). THE ASSESSEE HAS MADE THE PROVISION BY KEEPING IN VIEW PAST EXPE RIENCE AND THE POSSIBILITY OF CERTAIN EXPENSES. IT HAS FILED THE D ETAILS EXHIBITING THE NATURE OF INTENDING EXPENSES. IT IS A SEPARATE ISSU E THAT SUCH OCCASION DID NOT ARISE TO INCUR THOSE EXPENSES BUT THAT DOES NOT MEAN THAT WHEN PROVISION WAS MADE IT WAS NOT BONAFI DE. IF SOME 37 AMOUNT REMAINED UNUTILISED IT WILL BE OFFERED FOR T AX IN THE NEXT ASSTT. YEAR. HENCE, THIS GROUND OF APPEAL IS REJECTED. GROUND NO. 15 32. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE REVE NUE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 2,33,950/-. THE ASSESSEE HAS BEEN SHOWING A LIABILITY OF ` 2,33,950/-. THE AO HAS MADE THE ADDITION ON THE GROUND THAT LIABILITY TO P AY HAS SEIZED. HE FORMED THIS OPINION ON THE GROUND THAT SUCH LIABILI TY HAS BEEN SHOWN AS OUTSTANDING FROM A NUMBER OF YEARS. LD. CIT(A) H AS DELETED THE DISALLOWANCE ON THE GROUND THAT AO CANNOT CLASSIFY A PARTICULAR LIABILITY AS LIABILITY NO LONGER REQUIRED .IT IS THE ASSESSEE WHO HAS TO PROCEED AFTER TAKING INTO ACCOUNT THE REQUIREMENT OF ITS BUSINESS FOR WRITING OF SUCH LIABILITY. IF ASSESSEE IS WILLING T O PAY THE AMOUNT, THEN IT WOULD NOT BE CONSTRUED AS LIABILITY NO LONGER RE QUIRED. ON DUE CONSIDERATION OF THE LD. CIT(A)S ORDER, WE DO FIND ANY MERIT IN THIS GROUND OF APPEAL. IT IS REJECTED. 38 GROUND NO. 16 33. IN THIS GROUND OF APPEAL, REVENUE HAS PLEADED T HAT LD. CIT (A) HAS ERRED IN DIRECTING THE AO TO ALLOW THE SET OFF AND CARRY FORWARD OF THE PAST UNABSORBED LOSSES AND DEPRECIATION. LD. CO UNSEL FOR THE ASSESSEE AT THE VERY OUTSET POINTED OUT THAT THIS I SSUE BECOME INFRUCTUOUS BECAUSE ON AN APPLICATION MOVED BY ASSE SSEE U/S 154 OF THE INCOME TAX ACT, AO HIMSELF HAS RECTIFIED THE OR DER. IN VIEW OF THE ABOVE, THIS GROUND OF APPEAL IS REJECTED. GROUND NO. 17 34. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE REVE NUE IS THAT LD. CIT(A) HAS ERRED IN DELETING THE INTEREST CHARGED BY THE AO U/S 234D OF THE INCOME TAX ACT. LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET SUBMITTED THAT THIS ISSUE IS COVERED IN FAVO UR OF THE ASSESSEE BY THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL I N THE CASE OF ITO VS. EKTA PROMOTERS REPORTED IN 305 ITR (AT) PAGE 1. HE ALSO POINTED OUT HONBLE DELHI HIGH COURT HAS ALSO AFFIRMED THE ORDER OF TRIBUNAL IN ITA NO. 491/2008 RENDERED IN THE CASE OF DIRECT OR INCOME TAX VS. M/S JACABS . HE PLACED ON RECOR D COPY OF THE HONBLE HIGH COURTS DECISION DATED 30 TH AUGUST, 2010. THE SPECIAL BENCH OF 39 THE TRIBUNAL HAS HELD THAT INTEREST U/S 234D CANNOT BE LEVIABLE PRIOR TO THE ASSTT. YEAR 2004-05 BECAUSE OPERATION OF THIS S ECTION WOULD BE PERSPECTIVE IN NATURE. IN VIEW OF THE JUDGMENT OF H ONBLE DELHI HIGH COURT THIS GROUND OF APPEAL IS REJECTED. 35. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 36. NOW WE TAKE THE APPEAL OF ASSESSEE IN ASSESSMEN T YEAR 2002-03 I.E. ITA NO. 3796/DEL/2006. FIRST GROUND OF APPEAL TAKEN BY THE ASSESSEE IS GENERAL IN NATURE, IT DOES NOT REQUIRE ANY SPECIFIC FINDING TO BE RECORD, HENCE IT IS REJECTED. 37. IN GROUND NO.2, GRIEVANCE OF THE ASSESSEE IS TH AT LEARNED CIT(APPEALS) HAS ERRED IN UPHOLDING THE ADDITION OF RS.11,35,994. THE ASSESSEE HAS A WHOLLY OWNED SUBSIDIARY, NAMELY YUM RESTAURANT MARKETING (P) LTD. ( HEREINAFTER REFERRED TO YRMPL) . THE SUBSIDIARY USED TO UNDERTAKE ADVERTISING, MEDIA AND PROMOTIONAL ACTIVI TIES. THE ASSESSEE HAS RECEIVED A SUM OF RS.26,01,700 FROM ONE OF THE FRAN CHISE M/S. DODSALS HOTELS AND RESORTS (P) LTD. TOWARDS ITS CONTRIBUTIO N FOR ADVERTISING, MEDIA 40 AND PROMOTIONAL ACTIVITIES. THIS AMOUNT, ACCORDING TO THE ASSESSEE, WAS PAID BY DODSALS HOTELS FOR ADVERTISING AND PROMOTIONAL A CTIVITIES FOR KFC OUTLETS. ASSESSEE COULD SPENT A SUM OF RS.14,65,706 . THE BALANCE OF RS.11,35,994 WAS SHOWN AS LIABILITY UNDER THE HEAD OF ACCRUED MARKETING. ASSESSING OFFICER HAS MADE THE ADDITION OF THE BALA NCE BY OBSERVING AS UNDER: BUSINESS INCOME UNDERSTATED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ATTENT ION OF THE ASSESSEE WAS DRAWN TOWARDS PAGE NO. 165-166 OF THE SPECIAL A UDIT REPORT PART II AND PAGE 153-154 OF THE SPECIAL AUDIT REPORT PART I , ACCORDING TO WHICH: AS FAR THE EXPENSE OF RS.14.65,706 ON KFC IS CONCERNED, THE EXPENSE RELATES TO THE AMOUNT RECEIV ED FROM ONE OF THE FRANCHISEE NAMELY M/S. DODSEL HOTEL S & RESORTS PVT. LTD. WHO ACTUALLY CONTRIBUTED RS.26,01 ,700 DURING THE RELEVANT ASSESSMENT YEAR OUT OF WHICH RS.14,65,706 WAS ACTUALLY INCURRED AS EXPENSE BY TH E ASSESSEE AND THE BALANCE AMOUNT OF RS.11,35,994 WAS SHOWN AS ACCRUED MARKETING LIABILITIES AS ON 31.03.2002. THUS, IN VIEW OF THE ABOVE WE CAN SAY T HAT THE MOMENT AMOUNT WAS RECEIVED BY THE ASSESSEE, IT WAS ITS INCOME AND THE EXPENDITURE INCURRED COULD HAVE BEEN TREATED SEPARATELY BUT THE ASSESSEE HAS SHOWN AS AM OUNT OF RS.14,65,706 ONLY AS ITS INCOME AS WELL AS EXPEN SE, 41 THUS THE WHOLE EXERCISE HAS RESULTED IN TO UNDER ST ATEMENT OF INCOME TO THE TUNE OF RS.11,35,994. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIVED THE ADVERTISING CONTRIBUTION FROM M/S. DOD SALS CORPORATION TO THE TUNE OF RS.26,01,700 WITHOUT DEDUCTING THE TDS, OUT OF WHICH RS.14,65,706 WAS ACTUALLY SPENT BY THE ASSESSEE DURING THE YEAR. THE AMOUNT OF RS.14,65,706 WAS ACTUALLY SPENT BY THE ASSESSEE DURING THE YEAR. THE AMOUNT OF RS.14,65,70 6 WAS BOOKED AS INCOME AS WELL AS EXPENDITURE AND ALS O SHOWED THE BALANCE AMOUNT OF RS.11,35,994 AS LIABIL ITY UNDER THE HEAD OF ACCRUED MARKETING. IT IS NOTICED THAT THE ASSESSEE DISCLOSED AND SPENT RS.14,65,706 AS ADVERTISING CONTRIBUTION OUT OF A TOTAL OF RS.26,01 ,700 RECEIVED FROM M/S. DODSALS HOTELS & RESORTS (P) LTD. THE BALANCE, RS.11,35,994 WAS SHOWN AS LIABILITY UNDER THE HEAD OF ACCRUED MA RKETING. THE ASSESSEE WAS THUS REQUIRED TO EXPLAIN AS TO WHY A C REDITS OF RS.11,35,994 BE NOT TREATED AS YOUR INCOME. THE ASS ESSEE FAILED TO PLACE ON RECORD ANY REPLY. IT IS THUS PRESUMED THAT THE ASSESSEE HAS NOTHING TO SAY, THUS RS.11,35,994 IS TREATED AS INC OME. (UNDERSTATED INCOME RS.11,35,994/- ) 38. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRIN G ANY RELIEF TO THE ASSESSEE. 42 39. THE ASSESSEE HAS CONTENDED THAT EVERY RECEIPT I S NOT AN INCOME. ASSESSING OFFICER HAS WRONGLY RECORDED THAT ASSESSE E FAILED TO FILE ANY EXPLANATION. THE ASSESSEE HAS SUBMITTED ITS REPLY. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS PAGE NO. 75 4 OF THE PAPER BOOK NO.II , WHEREIN LETTER OF THE ASSESSEE DATED 18.1.2 005 IS AVAILABLE. ON THE STRENGTH OF THIS LETTER, HE POINTED OUT THAT ASSESS EE HAS CONTENDED BEFORE THE ASSESSING OFFICER THAT ADVERTISEMENT CONTRIBUTION W AS COLLECTED BY THE ASSESSEE WITH A OVER RIDING TITLE THAT IT WILL BE S PENT ON ADVERTISEMENT ACTIVITIES. THE ASSESSEE HAD CITED DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SHEETAL DASS TIRATH DASS REPORTED IN 41 ITR 367 AND APPRAISED THE ASSESSING OFFICER ABOUT THE CONCEPT OF OVERRIDI NG TITLE. THE ASSESSEE ALSO RELIED UPON THE DECISION IN THE CASE OF CALCUTTA SU PPLY CO. LTD. VS. CIT REPORTED IN 37 ITR 1. THE THRUST OF ASSESSEES ARGU MENT WAS THAT IT ACTS ONLY AS COLLECTING AGENT. THE AMOUNTS RECEIVED BY THE A SSESSEE IS WITH A PRE- DEFINED OBLIGATION. IF SOMETHING HAS BEEN RECEIVED WITH A PRE-DEFINED OBJECT THEN ASSESSEE WAS UNDER A COMPULSORY OBLIGATION TO SPEND THE AMOUNT RECEIVED AND THE SAME CANNOT BE REGARDED AS INCOME IN ITS HANDS. THE ASSESSEE RELIED UPON THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF CIT VS. BIJLI COTTON MILLS REPORTED IN 116 ITR 6 0. THE LEARNED COUNSEL 43 FOR THE ASSESSEE POINTED OUT THAT CONTRIBUTION WHIC H RECEIVED BY THE ASSESSEE FROM ITS FRANCHISE ARE NOT RECEIVED BY IT AS AN INC OME BUT AS A PREDEFINED OBLIGATION UNDER THE TERMS OF FRANCHISE AGREEMENT. ON THE OTHER HAND, LEARNED DR RELIED UPON THE ORDER OF THE ASSESSING O FFICER. HE POINTED OUT THAT NEITHER THE CLAUSES OF FRANCHISE AGREEMENT WAS BROUGHT TO THE NOTICE OF THE ASSESSING OFFICER NOR IT WAS DEMONSTRATED WHY A SSESSEE HAS ACTED AS A COLLECTING AGENT. FROM THE BUSINESS MODULE OF THE A SSESSEE, IT WAS ASSESSEES OUTLOOK TO LOOK AFTER ALL THESE ASPECTS. IT IS IMMA TERIAL WHETHER ASSESSEE IS CARRYING OUT ITSELF OR IT HAS GOT DONE BY A SUBSIDI ARY. 40. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. IN THE LETTER WRITTEN TO THE ASSE SSING OFFICER AS WELL AS IN THE WRITTEN SUBMISSIONS FILED BEFORE US, THE ASSESS EE HAS TAKEN A PLEA THAT AMOUNTS WERE COLLECTED WITH A PREDEFINED OBLIGATION , THEREFORE, IT CANNOT ATTAIN THE CHARACTER OF INCOME IN THE HANDS OF THE ASSESSEE. WHILE DEALING WITH GROUND NOS.1 AND 2 OF REVENUES APPEAL IN THE PRECEDING PARAGRAPH, WE HAVE CONSIDERED THE NATURE OF BUSINESS CARRIED OUT BY THE ASSESSEE. AS PER ITS MEMORANDUM OF ASSOCIATION, IT IS REQUIRED TO PROVID E CONSULTANCY AND ADVISORY SERVICES IN CONNECTION WITH THE ESTABLISHM ENT, ORGANIZATIONS, FINANCING, MANAGEMENT AND OPERATION OF RESTAURANTS, CAFES AND CAFETERIAS ETC. 44 IN PERFORMANCE OF ACTIVITIES, IT IS ALSO CONDUCTING ADVERTISEMENT MEDIA AND MARKETING OPERATIONS. THE ASSESSEE HAD MADE AN ARRA NGEMENT THAT THIS AMP ACTIVITY WOULD BE CARRIED OUT BY WAY OF ITS 100% SU BSIDIARY I.E. YRMPL . IT MAY BE TRUE THAT THE SUBSIDIARY IS ACTUALLY CARR YING OUT ADVERTISEMENT ACTIVITIES BUT IT IS THE ASSESSEE WHO IS COLLECTING THE MONEY FIRST AND THEN TRANSMITTING TO THE SUBSIDIARY CONCERNED. THE BUSIN ESS LINE OF THE ASSESSEE IS ALSO SIMILAR. ITS ARRANGEMENT WITH THE SUBSIDIARY W OULD NOT MAKE MUCH DIFFERENCES. THE DECISION OF THE HON'BLE SUPREME CO URT RELIED UPON BY THE ASSESSEE IN THE CASE OF BIJLI COTTON IS CONCERNED, IN THAT CASE, ASSESSEE HAS RECEIVED CERTAIN AMOUNTS TOWARDS DHARMARTH CHARGES. THIS NOMINAL AMOUNT WAS COLLECTED FROM THE CUSTOMERS AND IT WAS MEANT F OR DHARAMSTHAL. IN THAT BACKGROUND, HON'BLE SUPREME COURT HAS OBSERVED THAT IT DOES NOT CONTAIN THE CHARACTER OF INCOME IN THE HANDS OF THE ASSESSE E. IN THE CASE OF THE ASSESSEE, IT IS COLLECTING AS A BUSINESS RECEIPTS B UT CONTENDING THAT IT IS MEANT FOR YRMPL, THEREFORE, IT IS NOT THE INCOME IN THE H ANDS OF THE ASSESSEE. THERE IS NO DISTINGUISHING FEATURE OF THESE RECEIPT S AS TO WHY IT CANNOT BE A REVENUE RECEIPTS IN THE HANDS OF THE ASSESSEE. IT M AY BE A DIFFERENT CASE THAT THE MOMENT AMOUNT IS TRANSFERRED TO YRMPL, IT CAN A TTAIN THE CHARACTER OF BUSINESS EXPENDITURE BUT IT CANNOT BE CONCLUDED THA T THIS AMOUNT WAS NOT A REVENUE RECEIPTS IN THE HANDS OF THE ASSESSEE. LEAR NED CIT(APPEALS) HAS 45 RIGHTLY CONFIRMED THE ADDITION AND WE DO NOT FIND A NY ERROR IN IT. THIS GROUND OF APPEAL IS REJECTED. 41. GROUND NOS. 3 AND 4 OF THE ASSESSEES APPEAL AR E INTER CONNECTED WITH GROUNDS 7 TO 10 OF REVENUES APPEAL. IN GROUND NO.3 , GRIEVANCE OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF LEASE RENT AT RS.9 LACS AND IN GROU ND NO.4, IT HAS PLEADED THAT LEARNED CIT(APPEALS) HAS ERRED IN UPHOLDING TH E DISALLOWANCE OF RS.7,50,000 OUT OF HOUSE MAINTENANCE EXPENDITURE. T HE BRIEF FACTS OF THE CASE ARE THAT M/S. MEZBAAN HOTELIERS (P) LTD. HAD E NTERED INTO A LEASE AGREEMENT WITH MRS. SURENDRA JUDGE ON IST OF JUNE 1 997 FOR TAKING A HOUSE PROPERTY ON LEASE. THE ANNUAL LEASE RENTALS WERE SE TTLED AT RS.2,40,000. M/S. MEZBAAN HOTERLIERS (P) LTD. IS A PRIVATE LIMITED CO MPANY IN WHICH THE RELATIVES OF THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY WERE DIRECTORS, NAMELY, THE FATHER AND WIFE OF MR. SANDEEP KOHLI. T HE ASSESSEE TOOK THIS HOUSE PROPERTY ON A SUB-LEASE FROM M/S. MEZBAAN HOT LIERS FOR PROVIDING A RESIDENCE TO ITS DIRECTOR MR. SANDEEP KOHLI. THE AN NUAL LEASE RENT HAS BEEN SETTLED AT RS. 15 LACS PER ANNUM. THE ASSESSEE HAD ALSO PAID A SECURITY OF RS.50 LACS TO THE HOTEL. IT ALSO SPENT HUGE AMOUNT FOR RENOVATION. THE TAX AUDITOR HAD NOT REPORTED THIS TRANSACTION FOR THE P URPOSE OF SECTION 40A(2)(B) 46 OF THE ACT. ASSESSING OFFICER HAS HELD THAT ENTIRE TRANSACTION WAS A SHAM. ASSESSEE HAS PAID EXCESSIVE SECURITY DEPOSIT. ASSES SING OFFICER FURTHER OBSERVED THAT A PROPERTY WHICH FETCH RENT OF RS.20, 000 IN THE HANDS OF THE ORIGINAL LANDOWNER, HOW CAN IT FETCH A RENT OF RS.1 ,25,000 PER MONTH, MORE SO BY WAY OF AGREEMENT OF EVEN DATE. 42. IN GROUND NO.4, ASSESSEE HAS CHALLENGED THE DIS ALLOWANCE OF RS.7,50,000. IT EMERGES OUT FROM THE RECORD THAT AS SESSEE HAS INCURRED A SUM OF RS.22,50,000 FOR REPAIR, RENOVATION AND UP-GRADA TION OF THE FACILITIES IN THE HOUSE PROPERTIES. IT HAS AMORTIZED THE EXPENSES IN THREE YEARS BECAUSE LEASE AGREEMENT WAS FOR A PERIOD OF THREE YEARS AND THEREAFTER IT WAS TO BE RENEWED. IN THIS WAY, IN THE PRESENT ASSESSMENT YEA R, ASSESSEE HAS CLAIMED THE DEDUCTION OF RS.7,50,000. THIS DEDUCTION WAS DI SALLOWED TO THE ASSESSEE BY THE ASSESSING OFFICER ON THE GROUND THAT LEASE A GREEMENT IS A BOGUS ONE. 43. ON APPEAL, LEARNED CIT(APPEALS) HAS OBSERVED TH AT RENT PAID FOR THE RESIDENTIAL ACCOMMODATION OF THE MANAGING DIRECTOR IS AN ALLOWABLE EXPENDITURE. HE ESTIMATED THE REASONABLE RENT AT RS .50,000 AND DISALLOWED THE BALANCE I.E. NINE LACS OF RUPEES HAS BEEN DISAL LOWED. WITH REGARD TO RS.7,50,000, LEARNED CIT(APPEALS) HAS OBSERVED THAT THIS AMOUNT COULD BE ALLOWED IN THE YEAR IN WHICH IT WAS INCURRED. 47 44. THE ASSESSEE IN ITS APPEAL IS CHALLENGING THE D ISALLOWANCE OF RS. 9 LACS. ASSESSING OFFICER HAS MADE A TOTAL DISALLOWAN CE OF RS.25,71,600 OUT OF LEASE RENTALS. LEARNED CIT(APPEALS) HAS ALLOWED THE LEASE RENT PAID BY THE ASSESSEE EXCEPT A SUM OF RS. 9 LACS. 45. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. IT EMERGES OUT FROM THE RECO RD THAT ASSESSEE HAS PAID RS. 15 LACS OF RENT FOR THE RESIDENCE OF MR. SANDEE P KOHLI. IT HAS PAID A SUM OF RS. 50 LACS AS SECURITY DEPOSITS. ASSESSING OFFI CER HAS ESTIMATED NOTIONAL RENT @ 12% OF THE INTEREST FREE DEPOSITS WHICH WORK ED OUT TO RS. 6 LACS. HE COMPUTED THE DISALLOWANCE OF RS. 21 LACS FOR THE RE SIDENCE FOR MR. SANDEEP KOHLI. THE ASSESSEE HAD INCURRED A SUM OF RS.4,20,7 00 ON THE RESIDENCE OF SHRI AJAY BANSAL. IN THIS CASE ALSO, PAYMENT WAS MA DE TO MRS. PUSHPA BANSAL AND SHEETAL BANSAL WHO ARE THE WIFE AND MOTH ER OF AJAY BANSAL. ASSESSING OFFICER HAS ALSO FOUND A SECURITY DEPOSIT PAID BY THE ASSESSEE AND HE ESTIMATED THE NOTIONAL RENT ON SUCH DEPOSIT AT R S.50,900. THE DISALLOWANCE HAS BEEN WORKED OUT TO RS.4,71,600. 46. THERE IS NO DISPUTE THAT THE PAYMENTS HAVE BEEN MADE TO THE PERSONS WHO ARE COVERED UNDER SEC. 40A(2)(B) OF THE ACT. UN DER THIS SECTION, IF IT IS 48 ESTABLISHED THAT ASSESSEE HAS PAID AN AMOUNT IN EXC ESS, THEN THE ONE AVAILABLE IN OPEN MARKET FOR AVAILING SUCH SERVICES FROM A PERSON OR ENTITY FALLING WITHIN THE AMBIT OF THIS SECTION THEN SUCH EXCESS AMOUNT WOULD BE DISALLOWED TO THE ASSESSEE. WE FAIL TO UNDERSTAND H OW A HOUSE PROPERTY GIVING A RENT OF RS.20,000 TO THE ORIGINAL LAND OWN ER WOULD IMMEDIATELY FETCH A RENT AT RS.1,50,000. THIS MUCH OF RENT HAS BEEN GIVEN BY THE ASSESSEE AFTER INCURRING A HUGE SUM OF RS.22,50,000 ON REPAI R WHICH GIVES AN INDICATION THAT IF THIS SUM OF RS.22,50,000 WAS NOT INCURRED THEN IT WOULD NOT FETCH THIS AMOUNT OF RENT. APART FROM THIS, ASSESSE E HAD PAID INTEREST FREE SECURITY DEPOSITS OF RS.50 LACS. ASSESSING OFFICER HAS DISCUSSED THAT THIS PAYMENT OF RENT IS ASSOCIATED WITH THE SALARY OF TH E EXECUTIVE DIRECTOR & HOUSE RENT ALLOWANCE IS FIXED @ 60% OF THEIR SALARY . ON THE BASIS OF THE FACTS EMERGING OUT FROM THE ASSESSMENT ORDER, WE FIND THA T ASSESSEE HAS EXTENDED EXTRA PECUNIAR BENEFIT TO ITS MANAGING DIRECTOR. TH US, TAKING INTO CONSIDERATION THE OVER ALL EVIDENCE ON RECORD, WE S ET ASIDE THE ORDER OF THE LEARNED CIT(APPEALS). WE DIRECT THE ASSESSING OFFIC ER TO ALLOW PAYMENT OF RENT TO THE EXTENT OF RS.20,000 PER MONTH FOR THE A CCOMMODATION TAKEN ON RENT FOR SHRI SANDEEP KOHLI, THE BALANCE HAS TO BE DISALLOWED. THE ESTIMATION OF THIS RENT ON THE BASIS OF THE ORIGINA L RENT AGREEMENT BETWEEN THE LANDOWNER AND HOTEL MEZBAAN WOULD TAKE CARE OF ALL OTHER NOTIONAL RENT 49 COMPUTED BY THE ASSESSING OFFICER ON THE BASIS OF I NTEREST FREE DEPOSITS. IN BRIEF, AGAINST THE CLAIM OF ANY RENT MADE BY THE AS SESSEE FOR THE RESIDENCE PROVIDED TO MR. SANDEEP KOHLI, ONLY A SUM OF RS.2,4 0,000 WOULD BE ALLOWED. THERE WILL NOT BE ANY DISALLOWANCE ON ACCO UNT OF NOTIONAL RENT WORKED OUT ON THE BASIS OF INTEREST FREE SECURITY. ASSESSING OFFICER SHALL CARRY OUT THIS EXERCISE. AS FAR AS THE RENT CLAIMED IN RESPECT OF THE RESIDENCE OF SHRI AJAY BANSAL, WE REMIT THIS ISSUE TO THE FIL E OF THE ASSESSING OFFICER FOR READJUDICATION BECAUSE HE HAS NOT WORKED OUT FA IR RENT THIS PROPERTY CAN FETCH, WHICH CAN BE ALLOWED TO THE ASSESSEE. AS FAR AS THE DISALLOWANCE OF RS.7,50,000 IS CONCERNED, WE FIND THAT THIS DISALLO WANCE HAS BEEN CONFIRMED BY THE LEARNED CIT(APPEALS) ON THE GROUND IT WAS NO T INCURRED IN THE PRESENT YEAR. SINCE THE EXPENSE DOES NOT PERTAIN TO THIS YEAR, ITS ALLOWABILITY CANNOT BE JUDGED IN THE PRESENT YEAR. ASSESSEE HAS RAISED AN ALTERNATIVE PLEA THAT IN CASE IT IS NOT ALLOWABLE IN THIS YEAR THEN A DIRECTION BE ISSUED TO THE ASSESSING OFFICER TO ALLOW IN THE YEAR OF INCURRENC E. IN OUR OPINION, ASSESSEE WILL BE AT LIBERTY TO APPROACH THE ASSESSING OFFICE R IN ACCORDANCE WITH LAW BUT IN THE PRESENT YEAR, WE DO NOT DEEM IT NECESSAR Y TO GIVE ANY SPECIFIC DIRECTION. IN THE RESULT, GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND GROUND NO.4 RAISED BY THE ASSESSEE IS REJECTED. 50 GROUND NOS. 7 TO 10 RAISED BY THE REVENUE ARE ALLOW ED FOR STATISTICAL PURPOSES. GROUND NO.5: 47. IN THIS GROUND OF APPEAL, GRIEVANCE OF ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWAN CE OF RS.7,10,535. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. ASSESSING OFFICER HAS DISCUSSED THIS IS SUE ON PAGE NOS. 24 TO 26 OF THE ASSESSMENT ORDER. ASSESSEE HAS CLAIMED EXPEN SES OF RS.10,62,991. THE NATURE OF THESE EXPENSES ARE DISCERNIBLE AT PAG E NOS. 275 TO 277 OF PART- I OF SPECIAL AUDIT REPORT. ASSESSING OFFICER HAS CO NFRONTED THE ASSESSEE AND THE ASSESSEE HAS FILED ITS SUBMISSIONS. ACCORDING T O THE ASSESSING OFFICER, THE SUBMISSIONS ARE GENERAL IN NATURE. HE WORKED OU T THAT SUM OF RS.7,10,535 DOES NOT RELATE TO THE PRESENT ASSESSME NT YEAR. THEREFORE, HE MADE THE ADDITION. 48. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRIN G ANY RELIEF TO THE ASSESSEE. 51 49. THE ASSESSEE HAS PLEADED THAT LIABILITY TO PAY HAD BEEN CRYSTALLIZED DURING THE CURRENT YEAR AND, THEREFORE, EXPENSES SH OULD BE ALLOWED. TO BUTTRESS THIS CONTENTION, ASSESSEE HAS RELIED UPON A NUMBER OF DECISIONS, NAMELY, NON-SUCH TEA ESTATE LTD. VS. CIT REPORTED I N 98 ITR 189 AND CIT VS. NAGRI MILLS REPORTED IN 33 ITR 681. ALTERNATIVE LY, IT CONTENDED THAT THE EXPENSES BE ALLOWED IN ASSESSMENT YEAR 2001-02 AND A DIRECTION BE ISSUED TO THE ASSESSING OFFICER. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 50. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. OUT OF THE TOTAL EXPENSES, A SUM OF RS.3,52,456, PERTAINS TO GRATUITY WHICH ACCORDING TO THE ASSESSEE WAS ALLOWA BLE AS PER SECTION 43B READ WITH SECTION 40(A)(7) OF THE ACT. ASSESSING OF FICER AFTER VERIFICATION OF THIS ASPECT ALLOWED THIS CLAIM. AS FAR AS THE PROPO SITION OF LAW, CONTENDED BY THE ASSESSEE THAT IF THE LIABILITY TO PAY HAS BEEN CRYSTALLIZED DURING THE ACCOUNTING YEAR RELEVANT TO THIS ASSESSMENT YEAR TH EN THE EXPENSES ARE ALLOWABLE IS CONCERNED, WE DO NOT HAVE ANY DISPUTE. OUR DIFFICULTY IS THAT THE ASSESSEE FAILED TO SHOW CRYSTALLIZATION OF THE LIABILITY TO PAY IN THE PRESENT ACCOUNTING YEAR. ITS ACCOUNTS ARE COMPLICA TED. SPECIAL AUDITOR HAS BEEN APPOINTED WHO RECOMMEND FOR DISALLOWANCE OF TH E EXPENDITURE. 52 ASSESSING OFFICER HAS GIVEN FAIR OPPORTUNITY TO THE ASSESSEE. BEFORE US, IT IS JUST MERELY HARPING UPON THE PROPOSITION OF LAW INS TEAD OF BUTTRESSING IT ON FACTS, THEREFORE, WE DO NOT FIND ANY FORCE IN THIS GROUND OF APPEAL, IT IS REJECTED. 51. IN GROUND NO.6, GRIEVANCE OF THE REVENUE IS THA T LEARNED CIT(APPEALS) HAS ERRED IN UPHOLDING THE DISALLOWANC E OF RS.1,64,999 OUT OF THE TOTAL DISALLOWANCE OF RS.3,36,789. THIS GROUND IS INTER-CONNECTED WITH GROUND NO.13 OF THE REVENUES APPEAL. THE REVENUE I S CHALLENGING DELETION OF DISALLOWANCE IN GROUND NO.13. THE LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT DETAILS OF EXPENDITURE HAVE BEEN PLA CED ON RECORD AT PAGE NOS. 1419 TO 1452 OF PAPER BOOK IIIB. THE DETAILS O F THESE EXPENSES HAVE BEEN COMPILED IN A TABULAR FORM AND ANNEXED IN THE WRITTEN SUBMISSION ALSO. ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE HAS OBSERVED THAT BILLS ARE EITHER IN THE NAME OF TRIM, ON PERSONS, WHO ARE N EITHER DIRECTORS NOR EMPLOYEES OR ALSO IN THE NAME OF SISTER CONCERN. HE MADE A REFERENCE TOWARDS THE PAYMENT OF RS.1 LAC MADE TO M/S. ARTHUR & ANDERSON WHO HAVE GIVEN ADVISE TO M/S. SPECIALTY RESTAURANT (P) LTD. IN HIS OPINION, THE EXPENSES ARE NOT INCURRED FOR THE PURPOSE OF THE AS SESSEES BUSINESS. LEARNED CIT(APPEALS) CONFIRMED THE DISALLOWANCE OF RS.1 LAC AND FURTHER CONFIRMED THE DISALLOWANCE IN RESPECT OF EXPENSES INCURRED FO R SPECIALTY RESTAURANT, J. 53 SAGAR & ASSOCIATES ETC. THE ASSESSEE HAS CONTENDED THAT IF THE NAME OF THE ASSESSEE IS NOT IN THE INVOICE, IT MAY NOT BE SUFFI CIENT GROUND FOR DISALLOWANCE OF EXPENDITURE. IT ALSO CONTENDED THAT ASSESSEE IS A COMPANY WHERE NO PERSONAL EXPENDITURE COULD BE THERE. FOR B UTTRESSING THIS CONTENTION, IT RELIED UPON THE DECISION OF HON'BLE GUJARAT HIGH COURT REPORTED IN 253 ITR 749. LEARNED DR ON THE OTHER HA ND, RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 52. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. ASSESSING OFFICER HAS RECORDED A BRIEF FINDING IN JUST ONE PARAGRAPH. HIS CONCLUSIONS ARE BASED ON SPECIAL AUD IT REPORT AS WELL AS FAILURE OF THE ASSESSEE TO PROVE A NEXUS OF BUSINES S EXPEDIENCY WITH THE EXPENSES. THEY MAY NOT BE A PERSONAL EXPENDITURE BU T THESE WERE NOT INCURRED FOR THE PURPOSE OF THE BUSINESS. THE DECIS ION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAYA JI IRON IS NOT APPLI CABLE ON THESE EXPENSES. LEARNED FIRST APPELLATE AUTHORITY REAPPRECIATED THE EXPENSES AND TREATED SOME OF THEM AS ALLOWABLE. WE HAVE ALSO GONE THROUG H THE CHART SUBMITTED BY THE ASSESSEE AND THE DETAILS OF EXPENDITURE AVAI LABLE ON PAGE NOS. 1420 TO 1452 OF THE PAPER BOOK. AT PAGE NOS. 1420 IS A BIL L IN THE NAME OF TRICON RESTAURANT INDIA (P) LTD. IT HAS SOME LEDGER PRINT. THIS BILL IS FOR A SUM OF 54 RS.7,194. THEY ARE SIMILAR TYPE OF BILLS FOR DIFFER ENT REQUIREMENTS. TAKING INTO CONSIDERATION THE FINDINGS OF LEARNED CIT(APPE ALS), WE DO NOT SEE ANY REASON TO INTERFERE IN IT. THE GROUND OF APPEAL RAI SED BY ASSESSEE AS WELL AS REVENUE IS REJECTED. GROUND NO.7 : 53. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE ASSE SSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE ADDITION O F RS.3,30,474. THE BRIEF FACTS OF THE CASE ARE THAT THE SPECIAL AUDITOR HAS QUANTIFIED CERTAIN EXPENSES WHICH ARE PREPAID IN NATURE. ACCORDING TO THE SPECI AL AUDIT REPORT, ASSESSEE HAD INCURRED CERTAIN EXPENSES WHOSE BENEFIT WILL NO T BE AVAILABLE IN THE PRESENT ASSESSMENT YEAR RATHER IT WILL BE AVAILABLE IN THE NEXT ASSESSMENT YEAR. ASSESSING OFFICER HAS DISALLOWED THOSE EXPENS ES ON THE GROUND THAT THESE ARE PREPAID EXPENSES. 54. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRIN G ANY RELIEF TO THE ASSESSEE. 55. THE ASSESSEE HAS PLEADED THAT AMOUNTS PAID WERE IN PURSUANT TO ANNUAL MAINTENANCE CONTRACTS. ONCE THE AMOUNTS ARE PAID THEY ARE 55 IRRETRIEVABLE AND THESE CANNOT BE CLAIMED BACK. THE ASSESSEE ALSO POINTED OUT THAT CERTAIN PAYMENTS TOWARDS ANNUAL MAINTENANCE CO NTRACTS WERE CLAIMED AS AN EXPENDITURE IN THE PRESENT ASSESSMENT YEAR, THEY CANNOT BE DISALLOWED BY DISTRUSTING THE METHOD OF ACCOUNTING BEING IRREGULA RLY FOLLOWED. THE ASSESSEE HAS CITED NUMBER OF DECISIONS BEFORE THE L EARNED CIT(APPEALS) AS WELL AS IN ITS WRITTEN SUBMISSIONS. LEARNED DR ON T HE OTHER HAND RELIED UPON THE ORDER OF LEARNED CIT(APPEALS). THE DECISIONS RE LIED UPON BY THE ASSESSEE IN THE SUBMISSIONS ARE JUST IN ORDER TO EX PLAIN HOW THE QUASI- JUDICIAL AUTHORITY OUGHT TO HAVE APPRECIATED A CONT ROVERSY. ON THE STRENGTH OF HON'BLE SUPREME COURTS DECISION IN THE CASE OF IND IAN MOLASSES VS. CIT REPORTED IN 37 ITR 66. WE WERE APPRAISED HOW TO CON STRUE THE MEANING OF EXPENDITURE. IN OUR OPINION, ALL THESE DECISIONS AR E NOT OF ANY HELP TO THE ASSESSEE, BECAUSE THE BASIC FACTS FOR DECIDING THE ISSUE IS WHETHER EXPENSES INCURRED BY THE ASSESSEE ARE RELATABLE TO THE ASSES SMENT YEAR OR NOT. THEY MIGHT BE OF REVENUE IN NATURE. THEY CAN BE ALLOWED IN THE NEXT ASSESSMENT YEAR BUT THE EXPENSES WHICH ARE RELATABLE TO THE PR ESENT ASSESSMENT YEAR CAN ONLY BE ALLOWED. THE INCOME AGAINST THOSE EXPENSES IS ASSESSABLE IN THE PRESENT ASSESSMENT YEAR. ASSESSING OFFICER HAS DISA LLOWED THE CLAIM OF ASSESSEE ON THE BASIS OF VARIOUS DEFECTS IN ITS ACC OUNT AND THE OPINION EXPRESSED BY THE SPECIAL AUDITOR. THIS IS PURELY A FACTUAL ISSUE. THERE ARE 56 DISCREPANCIES POINTED OUT BY THE SPECIAL AUDITOR IN THE MAINTENANCE OF ACCOUNTS AND THOSE DISCREPANCIES HAVE BEEN AFFIRMED BY THE LEARNED REVENUE AUTHORITIES BELOW. THUS, LEARNED CIT(APPEALS) HAS R IGHTLY DISALLOWED THE CLAIM. THIS GROUND OF APPEAL IS REJECTED. 56. IN THE NEXT GROUND OF APPEAL, GRIEVANCE OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE ADDITION O F RS.5,53,515 AS CAPITAL EXPENDITURE. 57. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. ASSESSEE HAS PLACED ON RECOR D THE DETAILS OF EXPENSES IN THE TABULAR FORM. IT HAS POINTED OUT THE MAJOR S UM OF RS.4 LACS WERE INCURRED TOWARDS SOFTWARE EXPENSES. THE ASSESSEE HA S GOT DEVELOPED A SOFTWARE FOR PIZA HUT CALL CENTRE. ACCORDING TO THE ASSESSEE, IT HAS PAID INTERNET CHARGES AND OTHER CHARGES FOR REPAIR OF CO MPUTERS. ALL THESE EXPENSES ARE OF REVENUE IN NATURE. ASSESSEE HAS REF ERRED THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF AM WAY IND IA REPORTED IN 111 ITD 112 AND CONTENDED THAT IF FUNCTIONAL TESTS ARE APPL IED TO THE FACTS OF THE PRESENT CASE THEN THESE EXPENSES WOULD BE ALLOWED T O THE ASSESSEE AS REVENUE EXPENSES. ON DUE CONSIDERATION OF THE FACT S AND CIRCUMSTANCES, WE 57 ARE OF THE VIEW THAT LEARNED CIT(APPEALS) HAS ALLOW ED DEPRECIATION TO THE ASSESSEE ON THESE EXPENSES. THE ASSESSMENT YEAR INV OLVED HEREIN IS 2002-03. THE AMOUNT INVOLVED IS NOT A SUBSTANTIAL AMOUNT IN COMPARISON TO THE FINANCIAL STATUS OF THE ASSESSEE. THE DECISION OF T HE SPECIAL BENCH IN THE CASE OF AM WAY INDIA WAS NOT AVAILABLE WITH ASSESSING OF FICER AS WELL AS LEARNED CIT(APPEALS). THE COST INCURRED ON SUCH REP AIRS OR DEVELOPMENT OF SOFTWARE MUST HAVE BEEN RECOUPED BY THE ASSESSEE IN THE SHAPE OF DEPRECIATION. WE DO NOT DEEM IT NECESSARY TO SET AS IDE THIS ISSUE FOR READJUDICATION AT THE LEVEL OF ASSESSING OFFICER IN THE LIGHT OF SPECIAL BENCH DECISION KEEPING IN VIEW THE ABOVE FACTUAL BACKGROU ND. NO FRUITFUL PURPOSE WILL BE SERVED. THE ASSESSEE MIGHT HAVE A GOOD CASE ON MERIT AS FAR AS EXPENSES INCURRED ON SMALL REPAIRS ON SUCH A TRIVIA L ISSUE. BUT IN CASE OF RE- VERIFICATION IS NOT WORTH TO CARRY OUT, IN TERMS OF MONETARY BENEFIT TO ASSESSEE, THEREFORE, WE DO NOT WISH TO INTERFERE IN THE ORDER OF THE LEARNED CIT(APPEALS). THIS GROUND OF APPEAL IS REJECTED. 58. IN THE NEXT GROUND OF APPEAL, GRIEVANCE OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWAN CE OF RS.15,21,680. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD INCURRED A SUM OF RS.28,45,630 ON CONFERENCE AND SEMINARS. IN EARLIER YEARS, IT HAS INCURRED A 58 SUM OF RS.8,49,643. ASSESSING OFFICER ON SCRUTINY O F THE ACCOUNTS FOUND THAT A SUM OF RS.15,21,680 WAS INCURRED ON A CONFERENCE OF YUMS EMPLOYEES AT OFF SITE MEETING AT GOA. ASSESSING OFFICER FOUND TH AT CERTAIN EMPLOYEES WENT TO GOA ALONG WITH THEIR WIVES AND CHILDREN AND THE EXPENSES PERTAINED TO THEM. HE DIRECTED THE ASSESSEE TO INDICATE THE NATU RE OF CONFERENCE AND NECESSITY OF EMPLOYEES TO CARRY THEIR FAMILY MEMBER S BUT IT DID NOT SUBMIT ANY EXPLANATION. ASSESSEE HAS RELIED UPON CERTAIN D ECISIONS WHICH HAVE BEEN NOTICED BY THE ASSESSING OFFICER AND CLAIMED THAT I NVOLVEMENT OF WIVES OF EMPLOYEES OF THE COMPANY WERE ESSENTIAL FOR THE BUS INESS AS PER POLICY REQUIREMENT AND TO UNDERSTAND THE CULTURE. ASSESSIN G OFFICER HAS DISALLOWED THE CLAIM OF THE ASSESSEE BY MAKING FOLLOWING OBSER VATIONS: A) THE SPOUSE IN CASES BEING WIFE OF CHAIRMAN/DIR ECTOR/MANAGING DIRECTOR. B) THE SPOUSES CONTRIBUTED TOWARDS BUSINESS OF T HE ASSESSEE. C) THE PARTICIPATION OF WIVES OF TWO BUSINESS ENTITIES WERE ESSENTIAL FOR BUILDING BUSINESS TIES BETWEEN TWO BU SINESS ORGANIZATIONS. D) THE COURTS UPON MATERIAL PLACED BEFORE THEM HAD OBS ERVED THAT THERE EXISTED NO DOUBT DIRECT NEXUS BETWEEN THE VIS IT OF WIVES AND BUSINESS TO BE CONTRACTED. E) THUS UPON THE NEXUS AS PROVED A COMMERCIAL EXIGENCI ES EXISTED AS SUCH THE EXPENDITURE WAS ALLOWED AS EXCE PTIONAL CIRCUMSTANCES. 59 HOWEVER, CONSIDERING THE REPLY OF THE ASSESSEE, IT IS NOTICED THAT ASSESSEE HAS MADE A GENERAL REPLY WITHOUT PROVING H OW A MEETING OF EMPLOYEES CARRIED OUT ACCOMPANYING WIVES AND RELATI VES BE TREATED AS BUSINESS. THE CASES RELIED UPON BY THE ASSESSEE SINCE FRAMED UPON DIFFERENT CIRCUMSTANCES AND DIFFERENT FACTS THEN TH AT OF THE ASSESSEE, CLEARLY DISTINGUISHABLE THUS CANNOT BE RELIED UPON. THUS FROM THE REPLY FURNISHED BY THE ASSESSEE FOLLO WING AUTOMATICALLY ARISES: (B) THAT NO EVIDENCE REGARDING NATURE OF ACTIVITY CARRI ED OUT AT GOA WAS FURNISHED. (C) NEED AND OUTCOME OF GOA VISIT. (D) OBJECTIVES OF THE PROGRAMMES SO CARRIED OUT. (E) PROOFS TO SHOW THAT THE PROGRAMMES AS ALLEGED AND BUSINESS MEETINGS WERE CARRIED OUT. (F) EXTENT OF AND ACTIVE PARTICIPATION OF FAMILY MEMBERS ACCOMPANIED BY EMPLOYEES IN SUCH MEETINGS. THUS IN VIEW OF THE ABOVE FOLLOWINGS ARE INFERRED: A) THE MEETING WAS NOT HELD FOR THE BUSINESS PURPOSES. B) THE CASES RELIED UPON SINCE REFERRED IN A CONTEXT WHERE BUSINESS MEETINGS WERE HELD THEREFORE NOT APPLICABLE. 60 THE EXPENDITURE THUS INCURRED IS THE PERSONAL EXPEN DITURE OF THE EMPLOYEES. THE EXPENDITURE IS THUS UNCONNECTED AND NOT INCURRED DURING THE NORMAL COURSE OF BUSINESS, THEREFORE, DI SALLOWED. 59. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRIN G ANY RELIEF TO THE ASSESSEE. 60. BEFORE US, ASSESSEE HAS CONTENDED THAT RECREATI ONAL MEETING AT OFF-SITE ARE ORGANIZED FOR THE WELFARE OF EMPLOYEES. SUCH TR IPS ARE FREQUENTLY ARRANGED BY MULTI-NATIONAL COMPANIES TO KEEP THEIR EMPLOYEES MOTIVATED. IT IS A VERY COMMON FEATURE IN TODAYS MODERN BUSINESS AND ENVIRONMENT. THE PURPOSE OF THE OFF SITE MEETING WAS TO DISCUSS THE FUTURE GROWTH STRAIGHTGY FOR THE COMPANY ALONG WITH RECREATIONAL ACTIVITIES FOR ITS EMPLOYEES AND THEIR SPOUSES. IT WAS ALSO CONTENDED THAT VARIOUS TALKS A ND LECTURES AND PROGRAMS WERE CONDUCTED. THERE IS NO PERSONAL EXPENDITURE IN THE CASE OF THE ASSESSEE AS IT IS A CORPORATE ASSESSEE. THE ASSESSEE HAS REL IED UPON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAYA JI I RON & ENGG. CO. VS. CIT (SUPRA). IT HAS ALSO RELIED UPON THE ORDER OF THE I TAT IN THE CASE OF MIDLAND INTERNATIONAL LTD. VS. DCIT REPORTED IN 109 ITD 19 8 AND DCIT VS. HARYANA OXYGEN LTD. REPORTED IN 71 ITD 32. THE MAIN THRUST OF ASSESSEES CONTENTION IS THAT IF EXPENDITURE INCURRED FOR THE WELFARE OF EMPLOYEES AND 61 FOR BUSINESS PURPOSE THEN IT IS AN ALLOWABLE EXPEND ITURE. THE ASSESSEE MADE A REFERENCE TO THE TEN DECISIONS IN ITS WRITTEN SUB MISSIONS, NAMELY, POUNDS INDIA LTD. VS. DCIT REPORTED IN 59 TTJ 560 AND DELH I CLOTH & GENERAL MILLS VS. CIT REPORTED IN 158 ITR 64 ETC. ON THE OTHER HA ND, LEARNED DR RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES BELOW. 61. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS RAISED ELABORATE ARGUMENTS AND MADE A REFERENCE TO LARGE NUMBER OF DECISIONS AND IN SUBST ANCE IT HAS HIGHLIGHTED THE PROPOSITION OF LAW AVAILABLE IN THOSE DECISIONS AND APPRAISED US HOW EXPENSES FOR WELFARE OF STAFF AND BUSINESS NATURE C AN BE ALLOWED. THE MAIN DISPUTE IS HOW THE ASSESSEE IS ABLE TO PROVE THAT E XPENSES INCURRED BY IT WERE FOR THE PURPOSE OF THE BUSINESS. BY MAKING A REFERE NCE TO GENERAL PROPOSITION OR THE PROPOSITION DISCUSSED IN OTHER AUTHORITATIVE PRONOUNCEMENT WOULD NOT BE SUFFICE TO SAY THAT EXPENSES ARE TO BE ALLOWED T O THE ASSESSEE, SUCH EXPENSES ARE TO BE ALLOWED THE MOMENT IT IS PROVED THAT THEY WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS. THIS ASPECT, THE ASSESSEE HAS MISERABLY FAILED TO PROVE. WE HAVE EXT RACTED ABOVE THE FINDINGS OF THE ASSESSING OFFICER AND HOW HE HAS DEMONSTRATE D THAT THESE EXPENSES WERE NOT FOR THE PURPOSES OF THE BUSINESS. THE CASE LAWS CITED BY THE 62 ASSESSEE ARE OF NO HELP UNLESS IT PROVED FACTUALLY THAT EXPENSES WERE INCURRED FOR THE PURPOSE OF THE BUSINESS. TAKING INTO CONSID ERATION THE FINDINGS RECORDED BY THE ASSESSING OFFICER (EXTRACTED SUPRA) , WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL. IT IS REJECTED. 62. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ITA NO. 142/DEL/2006: 63. GROUND NO.1 IS GENERAL IN NATURE, HENCE DOES NO T REQUIRE ANY ADJUDICATION. IT IS REJECTED. 64. GROUND NOS. 2 AND 3 ARE INTER-CONNECTED WITH GR OUND NOS.4 TO 7 OF THE REVENUES APPEAL IN THIS ASSESSMENT YEAR. ALL T HESE GROUNDS READ AS UNDER: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(APPEALS) WAS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF LEASE RENT TO AN EXTENT OF RS. 9 LA CS, PAID ON ACCOUNT OF RENT FREE ACCOMMODATION PROVIDED TO THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY. 3. THAT THE LEARNED CIT(APPEALS) WAS NOT JUSTIFIED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN UPHOLDI NG THE DISALLOWANCE OF AN AMOUNT OF RS.7,50,000 IN RESPECT OF HOUSE 63 MAINTENANCE EXPENDITURE PERTAINING TO RENT FREE ACC OMMODATION PROVIDED TO THE MANAGING DIRECTOR OF THE APPELLANT COMPANY. ITA NO. 480/DEL/2006: 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS.6 ,00,000 ON ACCOUNT OF LEASE RENT. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(APPEALS) ERRED IN DELETING THE DELETING THE ADD ITION OF RS.6,00,000 ON ACCOUNT OF NOTIONAL INTEREST. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS.5 ,05,500 ON ACCOUNT OF LEASE RENT PAID TO SMT. SHEETAL BANSAL A ND SMT. PUSHPA BANSAL RELATIVES OF THE DIRECTOR. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS.5 5,527 ON ACCOUNT OF NOTIONAL INTEREST. 64 65. ALL THESE GROUNDS ARE ANALOGOUS TO GROUND NOS. 3 AND 4 OF ASSESSEES APPEAL FOR ASSESSMENT YEAR 2002-03 AND GROUND NOS. 7 TO 10 IN REVENUES APPEAL. WE HAVE ALREADY ADJUDICATED THESE GROUNDS O F APPEAL WHILE DISPOSING OF THE CROSS-APPEALS OF THE PARTIES IN AS SESSMENT YEAR 2002-03 IN PRECEDING PARAGRAPHS. IN THIS ASSESSMENT YEAR, SAM E EFFECT BE GIVEN. 66. GROUND NO.4: IN THIS GROUND OF APPEAL, GRIEVANC E OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING T HE DISALLOWANCE OF RS.30,891. THIS GROUND IS SIMILAR TO GROUND NO.5 RA ISED BY THE ASSESSEE IN ASSESSMENT YEAR 2002-03 WHEREIN A DISALLOWANCE OF R S.7,10,535 HAS BEEN CONFIRMED BY THE LEARNED CIT(APPEALS) AND WE HAVE U PHELD THE ORDER OF THE LEARNED CIT(APPEALS). CONSIDERING THE FINDINGS OF T HE LEARNED CIT(APPEALS) IN THIS YEAR ALSO, WE DO NOT FIND ANY MERIT IT IS REJECTED. 67. GROUND NO.5: IN THIS GROUND OF APPEAL, GRIEVAN CE OF THE ASSESSEE IS THAT THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMI NG THE DISALLOWANCE OF RS.33,460 OUT OF THE TOTAL DISALLOWANCE OF RS.63,03 3 MADE IN THE ASSESSMENT ORDER UNDER THE HEAD PERSONAL EXPENDITURE. THIS GROUND IS INTER-CONNECTED 65 WITH GROUND NO.9 OF THE REVENUES APPEAL WHEREIN RE VENUE IS IMPUGNING THE PARTIAL DELETION OF THE DISALLOWANCE. 68. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. IT REVEALED THAT A SUM OF RS .33,460 WAS INCURRED TOWARDS THE FEE OF MR. RAJIV KUMAR WHO PURSUED MBA COURSE. THE ASSESSEE FAILED TO BRING ANY POLICY DECISION ARRIVE D AT BY THE MANAGEMENT FOR REIMBURSING THE FEE INCURRED ON EDUCATION. THE FEE WAS PAID BECAUSE OF THE PERSONAL INFLUENCE OF THE EMPLOYEE AND IT WAS NOT I NCURRED FOR ANY BUSINESS PURPOSES. THE ASSESSEE FAILED TO BRING ANY MATERIAL ON THE RECORD TO THIS EFFECT. LEARNED CIT(APPEALS) HAS RIGHTLY CONFIRMED THE DISALLOWANCE. AS FAR AS THE OTHER AMOUNTS ARE CONCERNED, WE FIND THAT TH ESE RELATES TO MEDICAL EXPENSES OF MR. SANDEEP KOHLI WHO IS A DIRECTOR AND THE EXPENSES INCURRED ON THE UNIFORMS OF HIS DRIVER. THESE EXPENSES ARE T O BE TERMED AS EXPENSES RELATING TO THE DAY TO DAY BUSINESS OF THE ASSESSEE . THUS, THE GROUND OF APPEAL RAISED BY THE ASSESSEE AS WELL AS OF REVENUE ARE REJECTED. 69. GROUND NO. 6: IN THIS GROUND, GRIEVANCE OF THE ASSESSEE IS THAT THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE AD DITION OF RS.1498 WHICH HAS BEEN DISALLOWED ON THE GROUND THAT THESE EXPENSES WERE PAID FOR 66 THE BENEFIT REQUIRED TO BE AVAILABLE FOR SUBSEQUENT PERIOD. THIS GROUND IS SIMILAR TO GROUND NO.7 IN ASSESSMENT YEAR 2002-03. ON THE BASIS OF OUR FINDINGS, RECORDED ON THAT GROUND, THIS GROUND IS R EJECTED. 70. GROUND NO.7 : IN THIS GROUND, GRIEVANCE OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING THE DI SALLOWANCE OF RS.33,536 OUT OF THE TOTAL DISALLOWANCE OF RS.64,61 1. THIS GROUND IS INTER- CONNECTED WITH GROUND NO.10 OF REVENUES APPEAL WHE REIN REVENUE IS IMPUGNING THE AMOUNT PARTLY DELETED BY THE LEARNED CIT(APPEALS). THE ASSESSEE HAD INCURRED A SUM OF RS.64,611 ON PURCHAS E OF PROJECTOR LAMP, PURCHASE OF ROOM HEATER, PURCHASE OF IMPORTED CHAIR AND FIRE EXTINGUISHERS ETC. LEARNED CIT(APPEALS) HAS ALLOWED THE DEDUCTION IN RESPECT OF PURCHASE OF PROJECTOR LAMP, ROOM HEATERS AND PURCHASE OF TEN IMPORTED CHAIRS. SHE DISALLOWED REST OF THE EXPENSES. AS FAR AS THE PURC HASE OF PROJECT LAMP IS CONCERNED, IT REQUIRED FREQUENT CHANGES AFTER COMPL ETED NUMBER OF HOURS OF RUNNING, HENCE IT CANNOT BE A CAPITAL EXPENDITURE A ND LEARNED CIT(APPEALS) HAS RIGHTLY ALLOWED IT. SIMILAR IS THE POSITION WIT H REGARD TO OTHER TWO ITEMS. THESE EXPENSES WERE INCURRED FOR REPLACEMENT OF EXI STING ASSETS. AS FAR AS THE PURCHASE OF FIRE EXTINGUISHERS AND PURCHASE OF ELECTRONIC EQUIPMENTS ARE CONCERNED, THESE HAVE RIGHTLY BEEN DISALLOWED BY TH E LEARNED CIT(APPEALS) 67 BECAUSE THESE ARE IN THE CAPITAL FIELD. IN VIEW OF THE ABOVE DISCUSSION, BOTH THE GROUNDS ARE REJECTED. 71. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED. ITA NO.480/DEL/2006: 72. IN GROUND NO.1, REVENUE HAS PLEADED THAT LEARNE D CIT(APPEALS) HAS ERRED IN HOLDING THE SERVICE INCOME RECEIVED OF RS. 12,38,00,000 AS BUSINESS INCOME. THIS GROUND IS SIMILAR TO GROUND NO.1 RAISE D BY THE REVENUE IN ASSESSMENT YEAR 2002-03. WE HAVE UPHELD THE TREATME NT OF THESE RECEIPTS AS A BUSINESS INCOME. IN VIEW OF OUR FINDINGS, IN ASSE SSMENT YEAR 2002-03, THIS GROUND OF APPEAL IS REJECTED. 73. IN GROUND NO.2, REVENUE HAS PLEADED THAT LEARNE D CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.3,25,87,817 WH ICH WAS COMPUTED BY THE ASSESSEE AS ROYALTY TO KFC INTERNATIONAL INC AND PI ZA HUT. THIS GROUND IS ANALOGOUS TO GROUND NO.5 IN ASSESSMENT YEAR 2002-03 . IN THAT ASSESSMENT YEAR, A SIMILAR DISALLOWANCE OF RS.3,23,01,939 WAS MADE BY THE ASSESSING OFFICER. LEARNED CIT(APPEALS) HAS DELETED THE DISAL LOWANCE AND WE HAVE UPHELD THE ORDER OF THE LEARNED CIT(APPEALS). IN VI EW OF OUR FINDINGS ON GROUND NO.5 IN ASSESSMENT YEAR 2002-03, THIS GROUND OF APPEAL IS REJECTED. 68 74. GROUND NO.3: IN THIS GROUND OF APPEAL, GRIEVANC E OF THE REVENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.3,16,08,889. THIS GROUND IS SIMILAR TO GROUND NO .6 RAISED BY THE REVENUE IN ASSESSMENT YEAR 2002-03. IN THIS GROUND, GRIEVAN CE OF THE REVENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN ALLOWING ON ITS S UBSIDIARY CONCERN, NAMELY, YRMPL. THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER HAS BEEN DELETED BY THE LEARNED CIT(APPEALS) FOR ASSESSMENT YEAR 2002-03 AND WE HAVE UPHELD THE DELETION. KEEPING IN VIEW OF OUR FI NDINGS ON GROUND NO.6, THIS GROUND OF APPEAL IS REJECTED. 75. GROUND NO.8: IN THIS GROUND OF APPEAL, GRIEVANC E OF REVENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE DISA LLOWANCE OF RS.1,26,49,203. A SIMILAR ISSUE WAS TAKEN UP BY THE REVENUE IN ASSESSMENT YEAR 2002-03 IN GROUND NO.11 WHEREIN ASSESSING OFFI CER HAS DISALLOWED THE CLAIM ON DEPRECIATION AMOUNTING TO RS.1,35,67,376. LEARNED CIT(APPEALS) DELETED THE DISALLOWANCE. WE HAVE UPHELD THE ORDER OF THE LEARNED CIT(APPEALS) SUBJECT TO CERTAIN DIRECTIONS. SIMILAR DIRECTIONS ARE AVAILABLE IN THIS ASSESSMENT YEAR. IN VIEW OF OUR FINDINGS, THIS GROUND OF APPEAL IS, THEREFORE, REJECTED. 69 76. GROUND NO.11: IN THIS GROUND OF APPEAL, GRIEVAN CE OF THE REVENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.2,86,478. A SIMILAR ISSUE WAS TAKEN UP BY THE RE VENUE IN GROUND NO.14 IN ASSESSMENT YEAR 2002-03. THE ASSESSEE HAS MADE THE PROVISION, WHICH WAS NOT USED IN THE NEXT YEAR, ASSESSING OFFICER ON THE BASIS OF ITS NON-UTILIZATION MADE THE DISALLOWANCE. LEARNED CIT(APPEALS) HAS DEL ETED A SIMILAR DISALLOWANCE OF RS.5,56,482 IN ASSESSMENT YEAR 2002 -03 AND WE HAVE UPHELD THE DISALLOWANCE. IN VIEW OF OUR FINDINGS RECORDED ON GROUND NO.14, THIS GROUND OF APPEAL IS REJECTED. 77. GROUND NO.12: IN THIS GROUND OF APPEAL, GRIEVA NCE OF THE REVENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN DIRECTING TH E ASSESSING OFFICER TO ALLOW THE SET OFF AND CARRY FORWARD OF THE PAST UNA BSORBED LOSSES AND DEPRECIATION. WE HAVE BEEN INFORMED THAT SIMILAR IS SUE AROSE IN ASSESSMENT YEAR 2002-03, ASSESSING OFFICER BY EXERCISING HIS P OWERS UNDER SEC. 154 OF THE ACT HAS RECTIFIED THE ASSESSMENT ORDER AND ALLO WED THE SET OFF AND CARRY FORWARD OF THE PAST UNABSORBED LOSSES AND DEPRECIAT ION. IN VIEW OF THIS FACT, THIS GROUND OF APPEAL IS REJECTED IN THE PRESENT YE AR ALSO. 70 78. GROUND NO.13: IN THIS GROUND, REVENUE HAS CHAL LENGED THE DELETION OF CHARGING OF INTEREST UNDER SEC. 234D. A SIMILAR ISS UE WAS TAKEN UP BY THE REVENUE IN GROUND NO.17 IN ASSESSMENT YEAR 2002-03. WE HAVE UPHELD THE DELETION OF CHARGING OF INTEREST UNDER SEC. 234 ON THE STRENGTH OF HON'BLE DELHI HIGH COURTS DECISION WHEREIN IT HAS BEEN OBS ERVED THAT INTEREST UNDER SECTION 234D CAN BE CHARGED FROM ASSESSMENT YEAR 20 04-05 AND NOT PRIOR TO THAT. CONSIDERING OUR FINDINGS IN ASSESSMENT YEAR 2 002-03, THIS GROUND OF APPEAL IS REJECTED. 79. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 5122/DEL/2010: 80. THE PRESENT APPEAL IS DIRECTED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF LEARNED DISPUTE RESOLUTION PENAL PASS ED UNDER SECTION 144C(5) OF THE INCOME-TAX ACT, 1961 ON 23 RD SEPTEMBER, 2010 IN ASSESSMENT YEAR 2006-07. 81. THE GROUNDS OF APPEALS TAKEN BY THE ASSESSEE AR E NOT IN CONSONANCE WITH RULE 8 OF THE ITAT'S RULES, THEY ARE DESCRIPTI VE AND ARGUMENTATIVE IN NATURE. IN GROUND NO.1, ASSESSEE HAS TAKEN 10 SUB-G ROUNDS. IN ALL THESE 71 GROUNDS, IT HAS PLEADED THAT LEARNED REVENUE AUTHOR ITIES HAVE ERRED IN MAKING ADJUSTMENT IN THE ARMS LENGTH PRICE DISCLOSED BY T HE ASSESSEE WITH REGARD TO ITS INTERNATIONAL TRANSACTION AND THEREBY ERRED IN MAKING AN ADDITION OF RS.2,28,47,737. 82. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER HAD MADE A REFERENCE TO THE LEARNED TRANSFER PRICING OFFICER U NDER SEC. 92CA(3) OF THE ACT IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2005-06. IT EMERGES OUT FROM THE RECORD THAT ASSESSEE M/S. YUM ! RESTAURANTS (INDIA) PVT. LTD. IS A SUBSIDIARY OF GLOBAL RESTAURANTS INC., MAURITIUS THAT HOLDS MORE THAN 99.99% OF SHAR ES OF YRIPL. THE COMPANY OPERATES A WELL KNOWN MULTINATIONAL CHAIN O F FAST FOOD RESTAURANTS UNDER THE BRAND NAMES, PIZZA HUT, KENTUCKY FRIED CH ICKEN GLOBAL BV AND TACO BELL. IT PROVIDES FRANCHISE SUPPORT SERVICES T O KFC AND PIZZA HUT FRANCHISE IN INDIA, SRI LANKA, PAKISTAN AND MAURITI US. IT ADVISES FRANCHISE ON RESTAURANT DESIGN, BUSINESS DEVELOPMENT, HUMAN RESO URCES MANAGEMENT AND FINANCIAL PLANNING. IT ALSO COLLECTS ROYALTY FROM T HE FRANCHISEES AND REMITS THE SAME TO ITS ASSOCIATED ENTERPRISES. LEARNED TPO NOTICED THAT ASSESSEE HAS REPORTED THREE INTERNATIONAL TRANSACTIONS IN FORM N O. 3CEB. THESE 72 TRANSACTIONS HAVE BEEN NOTICED ON PAGE 2 OF HIS ORD ER BY THE LEARNED TPO. THEY READ AS UNDER: S.NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE METHOD PLI VALUE OF TRANSACTION IN RS. 1. PAYMENT OF ROYALTY FOR PROVIDING SCHEMES, TRADEMARKS AND SYSTEM PROPERTY TNMM OP/OR 11,69,76,923 2. PROVISION OF FRANCHISEE SUPPORT SERVICES TNMM OP/OC 20,26,00,000 3. PROVISION OF SUPPLY CHAIN MANAGEMENT SERVICES TNMM OP/OC 35,187 TOTAL 31.96,12,110 83. LEARNED TPO HAS OBSERVED THAT ASSESSEE HAS APPL IED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSAC TIONS AND THE PROFIT LEVEL INDICATOR I.E. (PLI) HAS BEEN WORKED BY DIVIDING OP ERATING PROFIT BY OPERATING COST I.E. OP/OC. THE ASSESSEE HAS REPORTE D A SET OF 9 COMPARABLE CASES AND WORKED OUT THEIR WEIGHTED ARITHMETIC MEAN OF 7.43%. THE ASSESSEES NCP MARGIN IS 5.79%. IT HAD USED MULTIPL E YEAR DATA. LEARNED 73 TPO AFTER A DETAILED ANALYSIS OF THE METHOD APPLIED BY THE ASSESSEE FOR WORKING OUT ITS ARMS LENGTH PRICE AND OTHER DETAIL S ACCEPTED THE METHOD APPLIED BY THE ASSESSEE AS TNMM. THE ASSESSEE HAS I DENTIFIED 9 COMPARABLE CASES. LEARNED TPO REJECTED 5 COMPARABLE. HE HAD DO NE BENCHMARKING BY USING REMAINING 4 COMPARABLE TO ARRIVE AT THE MEAN OF 11.89% AS ARMS LENGTH MARGIN. LEARNED TPO REJECTED THE APPLICATION OF MULTIYEAR DATA. HE USED CURRENT YEAR DATA. IN THIS WAY, AN ADJUSTMENT OF RS.2,28,47,737 HAS BEEN PROPOSED BY THE TPO WHICH HAS BEEN INCORPORATE D IN THE DRAFT ASSESSMENT ORDER BY THE ASSESSING OFFICER. THE DRAF T ASSESSMENT ORDER WAS FORWARDED TO THE ASSESSEE ON 16.12.2009 WHICH WAS R ECEIVED BY THE ASSESSEE ON THE SAME DAY. IT HAS FILED OBJECTION BEFORE THE DISPUTE RESOLUTION PENAL IN TIME. LEARNED DRP HAS CONSIDERED THE OBJECTIONS OF THE ASSESSEE BUT DID NOT CONCUR WITH THEM. 84. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE REI TERATED THE OBJECTIONS OF THE ASSESSEE. HIS MAIN THRUST OF ARGUMENTS WAS THAT LEARNED TPO HAS EXCLUDED THE LOSSES MAKING COMPANY FROM THE COMPARA BLES. HE POINTED OUT THAT ASSESSEE ITSELF HAD APPLIED FILTER OF PERSISTE NT LOSS MAKING COMPANY TO ELIMINATE THOSE COMPANIES FROM THE COMPARABLES BUT ASSESSEE HAS EXCLUDED THOSE COMPANIES WHICH ARE REPORTING LOSS CONTINUOUS LY THREE YEARS. LEARNED 74 TPO HAS REJECTED COMPANIES HAVING LOSS IN FINANCIAL YEAR 2005-06. ON THE STRENGTH OF ORDER IN THE CASE OF SONY INDIA (P) LTD . VS. ACIT REPORTED IN 114 ITD 448, HE POINTED OUT THAT LOSS AND COMPETITION A RE NORMAL INCIDENT OF BUSINESS. MERELY A COMPANY IS SHOWING LOSS, IT DOES NOT MEAN THAT IT WILL LOOSE ITS STATUS OF COMPARABLE AND WOULD DESERVE TO BE EXCLUDED. HE ALSO RELIED UPON THE ORDER OF THE SPECIAL BENCH OF THE I TAT IN THE CASE OF QURK SYSTEM (P) LTD., MOHALI REPORTED IN 210 TIOL PAGE 3 1 (ITAT CHANDIGARH BENCH). HE FURTHER SUBMITTED THAT ASSESSEE IS A RIS K BEARING COMPANY AND IT IS NOT REMUNERATED ON A COST PLUS BASIS AS PER THE PAST PRACTICE. THUS, ACCORDING TO THE LEARNED COUNSEL, ASSESSEE CAN SUFF ER LOSS SHOW LOWER PROFIT LIKE ANY OTHER CONCERN DEPENDING UPON THE INDUSTRY CONDITION. HE ALSO POINTED OUT THAT THERE IS NO PROVISION IN THE IT AC T WHICH CAN INDICATE THAT LOSS MAKING COMPANY WOULD BE REJECTED FROM COMPARAB LE. HE PLACED ON RECORD A CHART IN A TABULAR FORM CONTAINING THE DET AILS OF EACH COMPARABLE, THIS CHART READS AS UNDER: STATUS CHART COMPARABLE COMPANY ACCEPTED/REJECTED BY THE TPO OPERATING MARGINS ON OPERATING COST BUSINESS DESCRIPTION AGRICULTURAL FINANCE CORPORATION LTD. REJECTED -8.21% CONSULTING SERVICES W.R.T. AGRICULTURAL AND RURAL DEVELOPMENT 75 BESANT RAJ INTERNATIONAL LTD. REJECT -14.45% MANAGEMENT CONSULTANCY SERVICES CAPITAL TRUST LTD. REJECT -9.18% CONSULTANCY SERVICES TO FOREIGN BANKS CRISIL LIMITED ACCEPT 10.63% ADVISORY AND INFORMATION SERVICES EDUCATIONAL CONSULTANTS LTD. ACCEPT 12.56% TECHNICAL ASSISTANCE AND HUMAN RESOURCE DEVELOPMENT IDC (INDIA) LTD. ACCEPT 14.05% MARKET RESEARCH AND SURVEY T S R DARASHAW LTD. ACCEPT 10.32% PAYROLL AND TRUST FUND ACTIVITY NTPC ELECTRIC SUPPLY CO. LTD. REJECT 3.29% TECHNICAL CONSULTANCY IN THE AREA OF TURNKEY EXECUTION, PROJECT MONITORING, QUALITY ASSURANCE AND INSPECTION, THIRD PARTY QUALITY INSPECTION INDIA TOURISM DEV. CORPN. LTD. REJECT 3.38% SERVICES IN RELATION TO ORGANIZING INTERNATIONAL EVENTS. SIMILAR TO COORDINATION ACTIVITIES OF THE ASSESSEE. IN HOUSE PRODUCTIONS REJECT -5.62% HEALTHCARE DIVISION WHICH 76 LIMITED PROVIDES ACCESS TO INFORMATION, RELATING TO HEALTHCARE TO HEALTHCARE INSTITUTIONS. 85. HE ALSO APPRAISED US AS TO HOW THE COMPARABLE S HOWN BY THE ASSESSEE ARE COMPARABLES. ON THE OTHER HAND, LEARNED DR RELI ED UPON THE ORDER OF THE LEARNED DRP. HE POINTED OUT THAT FIRST OBJECTION OF THE ASSESSEE BEFORE THE LEARNED DRP WAS THAT LEARNED TPO HAS RECOMMENDED AD JUSTMENT IN THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION BY USING CURRENT YEAR DATA, ACCORDING TO THE ASSESSEE, MULTIPLE YEAR DATA OUGHT TO HAVE BEEN USED. HE POINT4ED OUT THAT LEARNED DRP HAS DEALT WITH THIS P ROPOSITION. LEARNED TPO WHILE MAKING A REFERENCE RULE 10B(4) HAS OBSERVED T HAT CURRENT YEAR DATA HAS TO BE USED. LEARNED TPO HAS MADE A REFERENCE TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF AZTEC SOFT WARE & TECH. SERVICES REPORTED IN 294 ITR 32 AS WELL AS THE DECISION OF T HE ITAT, DELHI IN THE CASE OF MENTORGRAPHIC (P) LTD. REPORTED IN 109 ITD 101 W HEREIN THE ITAT HAS HELD THAT COMPARABLE ANALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. WITH REGARD TO THE OBJECTION OF THE ASSESSEE REGARDING EXCLUSION OF LOSS MAKING COMPANY FROM COMPARABLE CASES, HE POINTED OU T THAT LEARNED TPO HAS ELIMINATED THOSE COMPANIES ON THE BASIS OF ASSE SSEES STAND. ASSESSEE IN 77 ITS TP REPORT, HAS OBSERVED THAT IT HAS APPLIED FIL TER OF PERSISTING OPERATING LOSSES. LEARNED TPO HAS EXCLUDED THE OTHER LOSS MAK ING COMPANY ON THE BASIS OF FAR ANALYSIS. LEARNED DR RELIED UPON THE O RDERS OF THE LEARNED DRP AS WELL AS THE TPO ON THIS ISSUE. 86. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. ON PAGE NOS. 159 TO 205 OF PAPER BOOK AI, ASSESSEE HAS PLACED ON RECORD ITS ANALYSIS ON TRANSFER PRICING. WE HAVE GONE THROUGH THIS REPORT AND OTHER RELEVANT RECORD. BEFORE LEARNED DR P, THE ASSESSEE HAS RAISED A NUMBER OF OBJECTIONS BUT BEFORE US IT DID NOT DISPUTE WITH REGARD TO USE OF CURRENT YEAR DATA FOR EXAMINING ITS ARMS LE NGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION. SIMILARLY, BEFORE LEARNE D DRP, IT HAS RAISED AN OBJECTION THAT ROYALTY EXPENSES SHOULD BE NETTED OF WITH ROYALTY INCOME WHILE CALCULATING OPERATING PROFIT/OPERATING COST A S PROFIT LEVEL INDICATOR. THIS ISSUE WAS ALSO NOT PRESSED BY THE LEARNED COUN SEL FOR THE ASSESSEE BEFORE US. THE METHOD APPLIED FOR DETERMINATION OF THE ARMS LENGTH PRICE AS TNMM HAS BEEN ACCEPTED BY THE LEARNED TPO AND NO DI SPUTE WAS RAISED BY THE ASSESSEE EITHER BEFORE THE LEARNED DRP OR BEFOR E US. IT EMERGES OUT FROM THE RECORD THAT IN ORDER TO IDENTIFY COMPANIES THAT COULD BE CONSIDERED AS COMPARABLE TO YUM! RESTAURANTS (INDIA) PVT. LTD., T HE ASSESSEE HAS USED TWO DATA BASE WHICH CONTAIN COMMERCIAL INFORMATION. THE SE DATA BASE ARE 78 PROWESS & CAPITAL LINE PLUS. THE PROWESS HAS BE EN UP DATED UP TO 9.9.2006 WHEN IT WAS USED BY THE ASSESSEE. IT IS A DATA BASE COMPILED AND MANAGED BY THE CENTRE FOR MONITOR INDIAN ECONOMIC. SIMILARLY, CAPITAL LINE PLUS WAS UPDATED UNTIL SEPTEMBER 8, 2006. THIS DATA BASE HAS BEEN COMPILED AND MANAGED BY CAPITAL MARKET PUBLISHER. BOTH THESE DATA BASE CONTAIN FINANCIAL INFORMATION OF MORE THAN TEN THOUSAND IND IAN COMPANIES. THESE DATA BASE CONTAINS BUSINESS, PROFILE, ANNUAL REPOR TS, SHAREHOLDING PATTERN AND NAMES OF SUBSIDIARIES/JOINT VENTURES OF LISTED AND MAJOR UNLISTED PUBLIC COMPANIES. THE ASSESSEE HAS USED DIFFERENT KEY WORD S FOR CARVING OUT COMPARABLE CASES. AT ANNEXURE 2 OF ITS ANALYSIS, IT HAS IDENTIFIED 342 COMPANIES ON PROWESS, 617 COMPANIES ON CAPITAL LINE . THERE ARE 90 COMPANIES WHICH ARE COMMON AND ASSESSEE HAS IDENTIF IED ONE ADDITIONAL COMPANY. AFTER APPLICATION OF FILTER, IT HAS REJECT ED 861 COMPANIES AND CARVED OUT 9 COMPARABLE AS NOTICED BY US IN PARAGRA PH 84. 87. THE MAIN ARGUMENT OF THE ASSESSEE BEFORE US IS THAT LEARNED TPO HAS EXCLUDED THREE LOSS MAKING COMPANIES. IT HAS HIGHLI GHTED HOW THESE COMPANIES ARE COMPARABLE. THE FIRST COMPARABLE IS A GRICULTURAL FINANCE CORPORATION. THE LEARNED COUNSEL FOR THE ASSESSEE P OINTED OUT THAT THIS CONCERN IS ENGAGED IN PROVIDING CONSULTING SERVICES IN THE FIELD OF 79 AGRICULTURE AND RURAL DEVELOPMENT. THE SERVICES INC LUDES IDENTIFICATION OF PROJECT FOR PROMOTING INVESTMENT, PREPARATION OF DE VELOPMENT OF PROJECTS AND ASSISTANCE IN OBTAINING APPROVAL FROM EXTERNAL AGENCIES AND ASSISTANCE IN PROJECT IMPLEMENTATION, MONITORING AND E-VALUATION. WITH REGARD TO BASANT RAJ INTERNATIONAL, IT WAS SUBMITTED BY THE ASSESSEE THAT THIS COMPANY HAS EARNED ITS INCOME FROM CONSULTANCY SERVICES, SUCH A S MANAGEMENT CONSULTANCY, TRAINING AND RECRUITMENT SERVICES. WIT H REGARD TO CAPITAL TRUST LIMITED, IT WAS SUBMITTED THAT THIS COMPANY OFFERS CONSULTANCY SERVICES TO FOREIGN BANKS, NOT HAVING THEIR BRANCHES OR REPRESE NTATIVE OFFICES IN INDIA. THE NTPC IS ENGAGED IN CONSULTANCY AND OTHER ASSIGN MENT IN THE AREA OF TURNKEY EXECUTIVE, PROJECT MONITORING, QUALITY ASSU RANCE AND INSPECTION. WE FIND THAT LEARNED TPO HAS CONSIDERED ALL THESE CONT ENTIONS OF THE ASSESSEE. SHE HAS NOT EXCLUDED THE LOSS MAKING COMPANY SIMPLY FOR THE REASON THAT THEY ARE MAKING LOSSES. WE HAVE NO HESITATION IN OB SERVING THAT MERELY A COMPANY IS SHOWING LOSSES WOULD NOT LOOSE ITS STATU S OF COMPARABLE IF OTHER CRITERIA DEPICTED STATUS OF COMPARABLES. DECLARATIO N OF LOSS IS AN INCIDENTAL OF BUSINESS WHICH IS AT PAR WITH THE PROFIT. THE ASSES SEE HAS CONSIDERED THESE COMPANIES ON THE BASIS OF THEIR FAR ANALYSIS I.E. ( FUNCTION PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED). LEARNED TPO IS O F THE OPINION THAT FAR OF A COMPANY INDICATES THE AVOWED OBJECTIVE OF THE COMPANY AND THE TOOLS 80 THAT IT SEEKS TO EMPLOY TO ACHIEVE THAT OBJECTIVE. IT IS THE FINANCIAL RESULT WHICH WILL DECIDE WHETHER THAT COMPANY HAS BEEN SUC CESSFULLY IN ACHIEVING THE OBJECTIVE OR NOT. ACCORDING TO THE LEARNED TPO, IF THE ASSESSEES CONTENTION BASED ON FAR ANALYSIS ONLY IS ACCEPTED T HEN PROCESS OF CHOOSING COMPARABLE WILL NOT PROCEED BEYOND THE MATCHING OF FAR. ALL TYPES OF OTHER TESTS I.E. DATA BASE SCREENING, QUALITY AND QUANTIT ATIVE SCREENING OR USE OF DIAGNOSTIC WITH RATIOS WILL BE RENDERED MEANINGLESS AND UNNECESSARY. LEARNED DRP CONCURRED WITH THIS REASONING OF TPO. W E FIND FROM ANNEXURE 2 OF ASSESSEES ANALYSIS AVAILABLE ON PAGE 188 OF THE PAPER BOOK IA FOR ASSESSMENT YEAR 2006-07 THAT ASSESSEE ITSELF HAS APPLIED A FILTER OF PERSISTENT OPERATIVE LOSSES. IT HAS EXCLUDED THREE COMPANIES OUT OF TOTAL 861 ON THE BASIS OF THIS FILTER, THEN WHAT IS THE BASIS FOR INCLUSION THERE LOSS MAKING COMPANY. LEARNED TPO HAS EXAMINED THEIR FINA NCIAL RESULT BY APPLYING OTHER TOOLS, BEFORE EXCLUSION FROM COMPARA BLE. 88. WE HAVE DULY CONSIDERED THE OTHER ISSUES ALSO A GITATED BEFORE THE LEARNED DRP THOUGH THOSE ISSUES HAVE NOT SPECIFICAL LY BEEN AGITATED BEFORE US, BUT WE DO NOT FIND ANY ERROR IN THE ORDER OF TH E LEARNED DRP ON THOSE ISSUES. LEARNED TPO HAS CONSIDERED ALL THE OBJECTIO NS OF THE ASSESSEE IN SELECTING THE COMPARABLE AND THEREAFTER FIND OUT FO UR COMPARABLES. AFTER GOING THROUGH THE ORDER OF THE LEARNED TPO AS WELL AS OF LEARNED DRP, WE 81 DO NOT FIND ANY FORCE IN THE OBJECTIONS OF THE ASSE SSEE. THE LOSS MAKING COMPANIES HAVE NOT BEEN EXCLUDED SIMPLICITOR ON THE GROUND THAT THEY ARE DECLARING LOSS. LEARNED TPO HAS POINTED OUT THAT TH EIR COMPARABLITY HAS BEEN TAKEN INTO CONSIDERATION BY THE ASSESSEE ON TH E BASIS OF FAR ANALYSIS AND OTHER ASPECTS HAVE NOT BEEN CONSIDERED. LEARNED TPO LOOKED INTO OTHER ASPECTS ALSO. THE ASSESSEE HAS PLACED ON RECORD A L ARGE NUMBER OF DOCUMENTS IN THE PAPER BOOK AS WELL AS JUDGMENTS, NAMELY, IN THE CASE OF PHILIPS SOFTWARE CENTRE REPORTED IN 119 TTJ 721 AND ORS. WE HAVE CONSIDERED ALL THOSE ISSUES WHICH WERE ADDRESSED AT THE TIME OF AR GUMENTS. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL, IT IS REJECTED. GROUND NO.2: 89. THE ASSESSEE HAS TAKEN FOUR SUB-GROUNDS ALONG W ITH THIS GROUND. IN BRIEF, IT HAS PLEADED THAT LEARNED DRP HAS ERRED IN AFFIRMING THE OBSERVATIONS OF THE ASSESSING OFFICER THAT SERVICE INCOME EARNED BY THE ASSESSEE AT RS.20,26,00,000 FROM M/S. YUM ! RESTAUR ANTS (INDIA) LTD., SINGAPORE IS TO BE ASSESSED AS INCOME FROM OTHER S OURCES AS AGAINST BUSINESS INCOME. ON DUE CONSIDERATION OF THE FAC TS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT THIS ISSUE IS ANALOGOUS TO THE ISSUE RAISED BY THE REVENUE IN GROUND NO.1 FOR ASSESSMENT YEAR 2002-03. ASSESSI NG OFFICER IN THAT 82 ASSESSMENT YEAR HAS ASSESSED SERVICE INCOME RECEIPT AS INCOME FROM OTHER SOURCES. LEARNED CIT(APPEALS) TREATED SUCH RECEIPTS AS A BUSINESS INCOME AND WE HAVE UPHELD THE ORDER OF THE LEARNED CIT(APP EALS) IN THE FOREGOING PARAGRAPH. TAKING INTO CONSIDERATION OUR FINDINGS, WE ARE OF THE VIEW THAT THIS RECEIPT DESERVES TO BE ASSESSED AS A BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCES. GROUND NO.3: 90. THE ASSESSEE HAS TAKEN FIVE SUB-GROUNDS ALONG W ITH THIS GROUND. GRIEVANCE OF THE ASSESSEE IS THAT LEARNED DRP HAS E RRED IN DISALLOWING THE ROYALTY PAID BY THE ASSESSEE TO YRMPL AMOUNTING TO RS.12,28,75,765. WE FIND THAT THE FACTS ON THIS ISSUE ARE SIMILAR TO TH E FACTS AGITATED IN GROUND NO.5 OF REVENUES APPEAL IN ASSESSMENT YEAR 2002-03 . IN THAT ASSESSMENT YEAR, ASSESSEE HAS CLAIMED DEDUCTION OF RS.3,23,01, 931 ON ACCOUNT OF ROYALTY EXPENSES. THIS WAS DISALLOWED BY THE ASSESS ING OFFICER TO THE ASSESSEE BUT ALLOWED BY THE LEARNED CIT(APPEALS). W E HAVE UPHELD THE ORDER OF THE LEARNED CIT(APPEALS). THERE IS NO DISP ARITY ON FACTS HENCE LEARNED DRP OUGHT TO HAVE NOT UPHELD THE DRAFT PROP OSAL MADE BY THE ASSESSING OFFICER ON THIS ISSUE. LEARNED DRP SHOULD HAVE TAKEN INTO CONSIDERATION THE FINDINGS OF THE LEARNED CIT(APPEA LS) IN ASSESSMENT YEARS 83 2002-03 AND 2003-04. RESPECTFULLY FOLLOWING OUR DIS CUSSION IN THOSE ASSESSMENT YEARS, WE ALLOW THIS GROUND OF APPEAL AN D DELETED THE DISALLOWANCE. GROUND NO.4: 91. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE ASSE SSEE IS THAT LEARNED DRP HAS ERRED IN MAKING A HYPOTHETICAL DISALLOWANCE OF THE ADMINISTRATIVE EXPENSES OF RS.8,97,22,346. THE FACTS AND CIRCUMSTA NCES OF THIS GROUND ARE SIMILAR TO THE ISSUE AGITATED BY THE REVENUE IN GRO UND NO.6 OF ITS APPEAL FOR ASSESSMENT YEAR 2002-03. THE ASSESSEE HAD A 100% SU BSIDIARY, NAMELY, YRMPL WHO WAS TAKING CARE OF ADVERTISEMENT MARKETIN G AND PROMOTIONAL ACTIVITIES. IT IS ALSO FUNCTIONING FROM THE SAME PR EMISES. ASSESSING OFFICER ALLOCATED THE HEAD OFFICE EXPENSES IN THE RATIO OF 50-50% BETWEEN THE ASSESSEE AND ITS SUBSIDIARIES. HE MADE A DISALLOWAN CE OF THE 50% EXPENSES ON THE GROUND THAT THIS MUCH OF EXPENSES ARE ATTRIB UTABLE FOR THE ACTIVITIES OF THE SUBSIDIARIES. WE HAVE CONSIDERED THIS ISSUE IN GROUND NO.6 OF REVENUES APPEAL FOR ASSESSMENT YEAR 2002-03 AND DELETE THE D ISALLOWANCE. CONSIDERING OUR FINDINGS IN THE FOREGOING PARAGRAPH S, WE ALLOW THIS GROUND OF APPEAL AND DELETE THE ADDITION. GROUND NOS. 5 TO 8: 92. THESE GROUNDS OF APPEAL READ AS UNDER: 84 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/LEARNED A.O. HAS ERRED IN DELETING THE LEASE RENT PAID BY THE APPELLANT AMOUNTING TO RS.27,12,000 TO M/S. MEZBAN HOTELIERS PVT. LTD. ON ACCOUNT OF RENT FREE ACCOMMODATION OBT AINED FOR ITS MANAGING DIRECTOR. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/LEARNED A.O. HAS ERRED IN DELETING THE LEASE RENT PAID BY THE APPELLANT AMOUNTING TO RS.4,44,750 TO M/S.SH EETAL AND MRS. PUSHPA BANSAL ON ACCOUNT OF RENT FREE ACCOMMODATION OBTAINED FOR ITS DIRECTOR. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A.O. HAS ERRED IN ADDING A NOTIONAL INTERES T INCOME OF RS.6,00,000 TO THE RETURNED INCOME OF THE APPELLANT , ON ACCOUNT OF SECURITY DEPOSITS PLACED WITH M/S. MEZBAAN HOTELIER S PVT. LTD. FOR OBTAINING RENT FREE ACCOMMODATION FOR ITS MANAGING DIRECTOR, WITHOUT CONSIDERING THE DIRECTIONS OF THE HONBLE DRP. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A.O. HAS ERRED IN ADDING A NOTIONAL INTERES T INCOME OF RS.55,557 TO THE RETURNED INCOME OF THE ASSESSEE, O N ACCOUNT OF SECURITY DEPOSITS PLACED WITH M/S. SHEETAL AND PUSH PA BANSAL FOR OBTAINING RENT FREE ACCOMMODATION FOR ITS DIRECTOR, WITHOUT CONSIDERING THE DIRECTIONS OF THE HONBLE DRP. 85 93. GROUND NOS. 5 & 7 ARE INTER-CONNECTED TO EACH O THER. WE HAD DISCUSSED THESE ISSUES IN ASSESSMENT YEAR 2002-03. M/S. MEZBAAN HOTLIER PVT. LTD. HAS TAKEN A PREMISES ON LEASE FROM MRS. S URENDRA JUDGE FOR AN ANNUAL RENT OF RS.2,40,000. IT GAVE A SECURITY DEPO SIT OF RS.50,000 TO MRS. SURENDRA JUDGE. THE DIRECTORS IN M/S. MEZBAAN HOTEL IERS ARE RELATIVES TO MR. SANDEEP KOHLI WHO IS THE EXECUTIVE DIRECTOR IN THE ASSESSEES COMPANY. IN THIS YEAR, ASSESSEE COMPANY HAS PAID A RENT OF R.27 ,12,000 TO M/S. MEZBAAN HOTELIER. IN ASSESSMENT YEARS 2002-03 AND 2003-04, WE HAVE UPHELD THE GRANT OF DEDUCTION TO THE EXTENT OF RS.2,40,000 WHI CH IS EQUIVALENT TO THE RENT PAID BY M/S. MEZBAAN HOTEL. THIS IS THE ASSESS MENT YEAR 2006-07. THE FACTS, HOW MUCH RENT WAS PAID BY M/S. MEZBAAN HOTEL IER TO ITS LANDLORD IS NOT AVAILABLE ON THE RECORD. IT IS NOT ASCERTAINABL E WHETHER ANY ENHANCEMENT OF RENT WAS MADE BY THE LANDLORD AGAINST M/S. MEZBA AN HOTELIER. LEARNED DRP HAS ALLOWED THE DEDUCTION OF RENT PAID BY THE A SSESSEE IN THE CAPACITY OF A SUB-TENANT AT RS.2,40,000 ONLY. WE HAVE OBSERV ED IN ASSESSMENT YEAR 2002-03 THAT TENANCY AGREEMENT AS WELL AS SUB-TENAN CY AGREEMENT WERE EXECUTED ON THE SAME DAY AND THERE CANNOT BE ANY DI FFERENCE IN RENT VALUE AT THIS MAGNITUDE. KEEPING IN VIEW OUR DISCUSSION, IN ASSESSMENT YEAR 2002-30, WE MODIFY THE ORDER OF LEARNED DRP AND DIRECT THE A SSESSING OFFICER TO GRANT A DEDUCTION OF RENT PAYMENT TO THE ASSESSEE E QUIVALENT TO THE AMOUNT 86 PAID BY M/S. MEZBAAN HOTELIER TO THE ORIGINAL LAND OWNER IN THIS ASSESSMENT YEAR. 94. IN ASSESSMENT YEAR 2002-03, ASSESSING OFFICER H AS ADDED THE NOTIONAL INTEREST IN THE VALUE OF THE RENT. WE HAVE DELETED THAT PART BECAUSE IN OUR UNDERSTANDING THAT DISALLOWANCE OF RENT PAYMENT OVE R AND ABOVE RS.2,40,000 CAN TAKE CARE OF ALL ASPECTS IN HIRING OF THE PREMISES. IN THE PRESENT ASSESSMENT YEAR, LEARNED DRP HAS NOT ASSOCI ATED THIS ISSUE WITH THE RENT FREE ACCOMMODATION, LEARNED DRP CONSTRUED THIS PAYMENT OF TAX FREE SECURITY AS A UTILIZATION OF FUND FOR NON-BUSINESS PURPOSES. WHEN THE TENANT CAN HAD THE ACCOMMODATION BY MAKING A DEPOSIT OF RS .50,000 ONLY FROM THE ORIGINAL LANDOWNER, WE DO NOT SEE ANY JUSTIFICATION FOR THE PAYMENT OF RS.50 LACS BY THE ASSESSEE TO THE TENANT. THE ASSESSEE HA S BEEN PAYING THIS AMOUNT IN THE CAPACITY OF A SUB-TENANT, IN OTHER WORDS, IT IS JUST AN EXTENSION OF BENEFIT TO THE RELATIVES OF THE DIRECTORS, LEARNED DRP HAS RIGHTLY HELD THAT IT IS USER OF BUSINESS FUND FOR NON-BUSINESS PURPOSES. LEARNED DRP HAS RIGHTLY DIRECTED THE ASSESSING OFFICER TO VERIFY IF ANY INT EREST EXPENSE HAS BEEN DEBITED TO THE P & L ACCOUNT AND IF USED, DISALLOW THE PROPORTIONATE INTEREST EXPENSE AS NOT HAVING BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. IN VIEW 87 OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT I N BOTH THESE GROUNDS OF APPEAL. THEY ARE REJECTED. 95. AS FAR AS OTHER TWO GROUNDS ARE CONCERNED, I.E. GROUND NOS. 6 & 8, WE HAVE REMITTED THIS ISSUE TO THE FILE OF THE ASSESSI NG OFFICER IN ASSESSMENT YEAR 2002-03 FOR DETERMINATION OF FARE RENT PAYABLE BY THE ASSESSEE FOR THE PURPOSES OF MAKING DISALLOWANCE UNDER SEC. 40A(2)(B ) OF THE ACT. IN VIEW OF OUR FINDINGS IN ASSESSMENT YEAR 2002-03, THESE GROU NDS ARE ALLOWED FOR STATISTICAL PURPOSES. GROUND NO.9. 96. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE ASSE SSEE RELATES TO DENIAL OF DEPRECIATION. WE FIND THAT ASSESSING OFFICER HAS PR OPOSED THE ORDER ON THE BASIS OF HIS FINDINGS IN ASSESSMENT YEAR 2002-03. T HE DEPRECIATION HAS BEEN ALLOWED TO THE ASSESSEE BY THE LEARNED CIT(APPEALS) AND WE HAVE UPHELD THE ORDER OF THE LEARNED CIT(APPEALS). CONSIDERING OUR FINDINGS ON GROUND NO.11 OF THE REVENUES APPEAL, WE ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE AND DELETE THE DISALLOWANCE. GROUND NO.10: 97. THE GRIEVANCE OF THE ASSESSEE IS THAT LEARNED D RP HAS ERRED IN IN DISALLOWING THE SOFTWARE EXPENSES AMOUNTING TO RS.1 ,33,000 BY HOLDING 88 THEM TO BE OF CAPITAL NATURE. THE ASSESSEE HAS PLEA DED THAT THESE EXPENSES HAVE NOT RESULTED IN THE CREATION OF ANY CAPITAL AS SETS. THESE EXPENSES PERTAIN TO PURCHASE SOFTWARE OF THE SELF CONSULTANCY CHARGE S AND MAINTENANCE CHARGES. ACCORDING TO IT, THE LEARNED DRP OUGHT TO HAVE EXAMINED THE CASE OF THE ASSESSEE WITHIN THE RIGHT OF THE SPECIAL BEN CHS DECISION OF THE ITAT RENDERED IN THE CASE OF AM WAY INDIA ENTERPRISES VS . DCIT REPORTED IN 111 ITD 112. IT HAS ALSO RELIED UPON A NUMBER OF OTHER DECISIONS. 98. ON THE OTHER HAND, LEARNED DR HAS RELIED UPON T HE ORDER OF THE LEARNED DRP. SIMILAR EXPENSES WERE INCURRED BY THE ASSESSEE IN ASSESSMENT YEAR 2002-03. WE WOULD HAVE REMITTED THE ISSUE TO T HE FILE OF THE LEARNED REVENUE AUTHORITIES BELOW FOR READJUDICATION IN THE LIGHT OF SPECIAL BENCHS DECISION, BECAUSE OF THE INVOLVEMENT OF VERY SMALL AMOUNT WE DESIST. THIS YEAR ALSO, THE AMOUNT CLAIMED BY THE ASSESSEE IS RS .1,33,000, DEPRECIATION @ 60% HAS ALREADY BEEN ALLOWED TO THE ASSESSEE, NOW ASSESSEE MIGHT HAVE RECOUPED ITS COST. IN OUR OPINION, ONE MORE ROUND O F LITIGATION IS NOT WORTH, KEEPING IN VIEW THE AMOUNT INVOLVED AND THE RATE OF DEPRECIATION. THE ASSESSEE MIGHT HAVE A VERY GOOD CASE ON THE MERIT O F ITS DETAILS ARE REQUIRED TO BE LOOKED INTO IN THE LIGHT OF SPECIAL BENCHS D ECISION AT THE LEVEL OF ASSESSING OFFICER. THAT EXERCISE WOULD BE A FUTILE EXERCISE. WE PUT IT TO THE 89 LEARNED REPRESENTATIVE ALSO AND THEY HAVE CONCEDED THE PROPOSAL ON THE GROUND THAT IT MAY NOT BE TREATED AS A PRECEDENT IN THE SUBSEQUENT YEAR. IN VIEW OF THE ABOVE DISCUSSION, THIS GROUND IS REJECT ED. GROUND NO.11 : 99. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE ASSE SSEE IS THAT LEARNED DRP HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO TREAT A SUM OF RS.6,40,046 AS CAPITAL IN NATURE. THE BRIEF FACTS O F THE CASE ARE THAT ASSESSEE IS IN THE BUSINESS OF RUNNING RESTAURANTS AND MANAG ING THE FRANCHISE. IT IS REQUIRED TO CONTINUOUSLY DEVELOPMENT NEW FOOD ITEMS /FLAVORS ETC. FOR THIS PURPOSE. IT HAS INCURRED EXPENSES FOR FOOD TASTING AND TRIALS. IT HAS ALSO INCURRED CERTAIN EXPENSES FOR STUDYING DEMOGRAPHIC TRENDS. THE ASSESSEE HAS CLAIMED THESE EXPENSES AS REVENUE IN NATURE. ASSESS ING OFFICER HAS TREATED THESE EXPENSES AS CAPITAL IN NATURE. THE LEARNED CO UNSEL FOR THE ASSESSEE WHILE IMPUGNING THE ORDER OF LEARNED DRP CONTENDED THAT EXPENSES INCURRED BY THE ASSESSEE ONLY ENABLE THE ASSESSEE T O CARRY ON ITS BUSINESS IN MORE EFFICIENT MANNER, PRACTICALLY IT WILL NOT GIVE ANY ENDURING ASSETS. ON THE OTHER HAND, LEARNED DR RELIED UPON THE ORDER OF THE LEARNED DRP. 100. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE RECORD CAREFULLY. IN ITS DAY TO DAY OPERATIONS, ASS ESSEE IS EXPERIMENTING NEW 90 DISHES, WHERE IT INCURRED EXPENSES ON FOOD ITEMS AN D SPICES ETC. ON MANY OF OCCASIONS, THE FLAVOR MAY NOT COME TO THE EXPECTATI ON FOR COMMERCIALIZED USE. THUS, THESE ARE THE ROUTINE RESEARCH WORK CARR IED OUT BY THE ASSESSEE AND NO CAPITAL ASSETS CAME INTO EXISTENCE. LEARNED DRP HAS ERRED IN TREATING THIS AMOUNT AS A CAPITAL EXPENDITURE. WE ALLOW THIS GROU ND OF APPEAL AND DELETE THE ADDITION. GROUND NO.12 : 102. IN THIS GROUND OF APPEAL, GRIEVANCE OF THE ASS ESSEE IS THAT THE LEARNED DRP HAS ERRED IN CONFIRMING THE TREATMENT OF INTERE ST INCOME AS INCOME FROM OTHER SOURCES. IT EMERGES OUT FROM THE RECORD THAT ASSESSEE HAS A SURPLUS FUND WHICH WAS INVESTED BY IT. LEARNED DRP ON THE STRENGTH OF HON'BLE SUPREME COURTS DECISION RENDERED IN THE CA SE OF TUTICORN ALAKALIES & CHEMICALS REPORTED IN 227 ITR 172 HAD HELD THAT S UCH INTEREST INCOME IS TO BE ASSESSED UNDER SEC. 56 OF THE ACT. THE INCOME IS NOT A PART OF ASSESSEES BUSINESS ACTIVITIES. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT INTEREST INCOME HAS TO BE ASSESSED AS A BUSINE SS INCOME BECAUSE IN THE PAST, ASSESSING OFFICER HAS ASSESSED SUCH INCOME AS A BUSINESS INCOME EXCEPT IN ASSESSMENT YEAR 2005-06. HE RELIED UPON T HE DECISION OF HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. PUNNET COM MERCIAL REPORTED IN 91 245 ITR 550 AND CIT VS. PARAMOUNT PREMISES REPORTED IN 190 ITR 259. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 103. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE RECORD CAREFULLY. THE DECISIONS RELIED UPON BY THE ASSESSEE ARE NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. THE DECISION OF H ON'BLE MUMBAI HIGH COURT IN THE CASE OF PUNEET COMMERCIAL WAS IN RESPECT OF TREATMENT OF INTEREST INCOME WHILE COMPUTING THE DEDUCTION UNDER SEC. 80- HHC OF THE ACT AND IT TALKS ABOUT OPERATIONAL PROFIT. THE VIEW OF HON'BLE DELHI HIGH COURT IN THE CASE OF SRI RAM HONDA EQUIP REPORTED IN 289 ITR 475 IS CONTRARY TO THIS DECISION, WHEREIN HON'BLE DELHI HIGH COURT HAS HELD THAT INTEREST INCOME FOR THE PURPOSE OF SEC. 80HHC HAS TO BE TREATED AS INCOME FROM OTHER SOURCES. THE ASSESSEE HAS NOWHERE INDICATED AS TO H OW THIS INTEREST INCOME IS LINKED WITH ITS BUSINESS ACTIVITY. IT HAS SIMPLY SURPLUS FUND WHICH HAS BEEN DEPOSITED IN THE BANK GIVING RISE TO INTEREST INCOM E. LEARNED DRP HAS RIGHTLY TREATED THIS INCOME AS INCOME FROM OTHER SO URCES. THIS GROUND OF APPEAL IS REJECTED. GROUND NO.13: 104. IN THIS GROUND, THE GRIEVANCE OF THE ASSESSEE IS THAT LEARNED DRP HAS ERRED IN UPHOLDING THE DISALLOWANCE OF EXPENSES INC URRED ON FOREIGN TRAVEL. 92 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD INCURRED A SUM OF RS.2,72,57,457 ON TRAVEL AND CONVEYANCE. OUT OF THI S AMOUNT, A SUM OF RS.95,22,664 IS IN RESPECT OF FOREIGN TRAVEL. THE A SSESSEE HAS POINTED OUT THAT RS.8,33,038 WAS INCURRED BY THE ASSESSEE ON TRAVEL OF ITS DIRECTORS/EMPLOYEES TO THE AREA WHERE ITS FRANCHISE ARE WORKING. THE BA LANCE OF RS.86,89,626 WAS INCURRED ON OTHER COUNTRIES. ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF ASSESSEE ON THE GROUND THAT IN CLAUSE NO.4 OF SERVI CE AGREEMENT, IT HAS BEEN STIPULATED THAT THE ASSESSEE WOULD BE ENTITLED TO R ECEIVE A FIX SERVICE FEE ALONG WITH REIMBURSEMENT OF TRAVEL EXPENSES INCURRE D IN PERFORMANCE OF ITS DUTIES. THE CASE OF THE ASSESSEE IS THAT THIS CLAUS E HAS BEEN PUT INADVERTENTLY THE EXPENSES WERE INCURRED BY IT ON ITS DAY TO DAY BUSINESS AND IT IS ALLOWABLE IN NATURE. 105. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE RA ISED AN ALTERNATIVE CONTENTION, WHEREIN HE CONTENDED THAT IF IT IS A GE NUINE BUSINESS EXPENSES INCURRED DURING THE COURSE OF PERFORMANCE OF THE SE RVICES. IF AT ALL, IT WAS LIABLE TO BE REIMBURSEMENT BUT NOT DONE THEN IT SHO ULD BE TREATED AS A COMMERCIAL LOSS AND SHOULD BE ALLOWED TO THE ASSESS EE. HE RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF BA DRIDASS DOGRA VS CIT REPORTED IN 34 ITR 10. HE ALSO SUBMITTED THAT EXPEN SES OF RS.86,89,626 IS NOT COVERED BY THE SERVICE AGREEMENT. THIS WAS INCU RRED AS A PART OF ROUTINE 93 BUSINESS OPERATION, HENCE IT COULD HAVE NOT BEEN DI SALLOWED BY THE ASSESSING OFFICER. HE RELIED UPON THE DECISION OF H ON'BLE SUPREME COURT IN THE CASE OF CIT VS. PANIPAT WOOLEN & GEN. MILLS REP ORTED IN 103 ITR 66. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LEARNED DRP AS WELL AS OF ASSESSING OFFICER. 106. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE RECORD CAREFULLY. ASSESSING OFFICER HAS MADE A REFE RENCE TO CLAUSE 4 OF THE SERVICE AGREEMENT AND OBSERVED THAT ASSESSEE WOULD RECEIVE A FIXED SERVICE FEE ALONG WITH REIMBURSEMENT OF TRAVEL EXPENSES INC URRED IN PERFORMANCE OF ITS DUTIES. THE ASSESSEE IS EARNING ITS INCOME FROM SERVICE AGREEMENT WHICH PROVIDE FIXED FEE PLUS REIMBURSEMENT OF TRAVEL EXPE NSES INCURRED IN PERFORMANCE OF ITS DUTIES. IN SUCH SITUATION, HOW T HE ASSESSEE CAN SAY THAT IT HAS INCURRED EXPENSES ON ITS OWN. AS FAR AS THE ARG UMENTS OF THE ASSESSEE THAT IT SHOULD BE ALLOWED AS LOSS IS CONCERNED, IT HAS NOT RAISED ANY SUCH PLEA BEFORE THE ASSESSING OFFICER AND HAS NOT DEMONSTRAT ED HOW THAT LOSS HAS BEEN CRYSTALLIZED THIS YEAR. IT IS REMITTING ROYALT Y PAYMENT UNDER THE TECHNICAL LICENSE FEE AND IT IS GETTING SERVICE REC EIPT UNDER THE SERVICE AGREEMENT. IT IS HIGHLY IMPROBABLE THAT SUCH TYPE O F LOSS WOULD BE SUFFERED BY THE ASSESSEE IN THIS SITUATION. AS FAR AS THE AG REEMENT THAT RS.86,89,626 WAS INCURRED BY THE ASSESSEE AT ITS OWN IS CONCERNE D, WE FIND THAT NO 94 MATERIAL WAS BROUGHT TO NOTICE THEREFORE, THIS GROU ND OF APPEAL IS WITHOUT ANY MERIT AND ACCORDINGLY REJECTED. HOW THESE EXPEN SES ARE NOT RELATED TO ITS DUTIES CARRIED OUT UNDER THE SERVICE AGREEMENT. THE ASSESSEE HAS ONLY RAISED THIS ARGUMENT BEFORE THE LEARNED DRP ALSO BUT FAILE D TO PRODUCE SUPPORTING EVIDENCE. THERE SHOULD BE THE MATERIAL INDICATING T HE FACT THAT THESE EXPENSES WERE INCURRED BY THE ASSESSEE FOR ITS BUSI NESS AND THESE ARE NOT TO BE REIMBURSED. NO SUCH FACTS WERE BROUGHT TO OUR NO TICE. IN THIS RESPECT, WE HAVE GONE THROUGH PAGE 115 OF THE PAPER BOOK-I WHER E ASSESSEE HAS PLACED WRITTEN OBJECTIONS BEFORE THE LEARNED DRP. 107. IN THE RESULT, ALL THE APPEALS ARE PARTLY ALLO WED. DECISION PRONOUNCED IN THE OPEN COURT ON 31.05.201 1 ( SHAMIM YAHYA ) ( RAJPAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 31/05/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR