METALLICS & CHEMICALS (I) P. LTD, MUMBAI V. ACIT (OSD) CIR 2(2), MUMBAI

ITA 4065/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49243 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2006-2007
• Appeal Filed On: 19-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIWAS RAO
• Assessee Lawyers: SANJAY B VORA
• Keywords: Business income; Rule 8D; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH BEFORE SHRI N.VASUDEVAN, JUDICIAL MEMBER & SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NOS.4065 & 4066/MUM/2010 A.YRS. 2006-07 & 2007-08 METALLICS & CHEMICALS (INDIA) PVT.LTD., 4 TH FLOOR, DAS CHAMBERS, 25, DALAL STREET, FORT, MUMBAI 400 001- PAN: AABCN 3186 G VS. ASST. COMMISSIONER OF I.T. (OSD), CIRCLE 2(2), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANJAY B. VORA. RESPONDENT BY : SHRI GOLI SRINIWAS RAO [CIT DR] O R D E R PER T.R.SOOD, AM: IN BOTH THESE APPEALS, THE FIRST COMMON ISSUE RAISE D IS AGAINST THE DISALLOWANCE OF EXPENDITURE U/S.14A. 2. AFTER HEARING BOTH THE PARTIES, WE FIND THAT SIN CE ASSESSEE HAD EARNED SOME DIVIDEND INCOME, THEREFORE, AO HAD DISA LLOWED CERTAIN EXPENSES BY INVOKING RULE 8D. THE DISALLOWANCE WAS CONFIRMED BY THE LD. CIT(A) BY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL INVEST MENT LTD. [26 SOT 603] (MUM) (S.B). 3. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO.LTD. VS. DCIT [328 ITR 81] HAS ALREADY HELD THAT RULE 8D WILL NOT HAVE RETROSPECTIVE APPLICATION, THEREFORE, SAME IS NOT A PPLICABLE FOR THE ITA NOS.4065 4066/MUM/10 2 YEARS 2006-07 AND 2007-08 WHICH ARE BEFORE US. HOWE VER, HE FAIRLY ADMITTED THAT THE MATTER HAS TO GO BACK TO THE FILE OF THE AO FOR COMPUTING A REASONABLE DISALLOWANCE U/S.14A IN THE LIGHT OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ & BOYCE MFG. CO.LTD. VS. DCIT [SUPRA]. 4. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED THE ORDERS OF THE AO AND THE CIT(A). 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO.LTD. VS. DCIT [SUPRA] HAS HELD AS UNDER: HELD, THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED W.E.F. 24TH MARCH, 2008 SHALL APPLY W ITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSM ENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSES SING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOU ND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONA BLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND C IRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE AS SESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. THE PROCE EDINGS FOR ASSESSMENT YEAR 2002-03 SHALL STAND REMANDED BACK T O THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETE RMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FRO M MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER S. 14A. THE ASSESSING OFFICER CA N ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. W HILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS, IT IS CLEAR THAT RULE 8D IS APPLICABLE ONLY F ROM A.Y 2008-09 AND IS NOT APPLICABLE FOR A.YRS. 2006-07 AND 2007-08 WHICH ARE BEFORE US. ITA NOS.4065 4066/MUM/10 3 THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF THE AO TO RECOMPUTE THE DISALLOWANCE U/S.14A IN THE LIGHT OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. VS. DCIT [SUPRA]. 6. ONE MORE ISSUE HAS BEEN RAISED IN A.Y 2006-07 RE GARDING DISALLOWANCE OF FOREIGN TRAVEL EXPENDITURE. 7. AFTER HEARING BOTH THE PARTIES, WE FIND THAT ASS ESSEE HAD CLAIMED FOREIGN TRAVEL EXPENSES AMOUNTING TO RS.6,6 1,010/-. THE AO NOTED THAT ASSESSEE HAD SHOWN BUSINESS INCOME OF ON LY RS.42,758/-, THEREFORE, ASSESSEE WAS ASKED TO JUSTIFY THE FOREIG N TRAVEL EXPENSES. THE ASSESSEE FURNISHED THE DETAILS AND EVIDENCE FOR HOTEL EXPENSES, FOOD EXPENSES ETC. ASSESSEE ALSO FILED A COPY OF TH E AGREEMENT BY WHICH THE FOREIGN COMPANY WAS TO PAY ANNUAL MANAGEM ENT SERVICES FEES. HOWEVER, AO NOTED THAT IF INCOME WAS RECEIVED ONLY IN THE MONTH OF JANUARY, 2007, THEREFORE, EXPENSES COULD NOT BE ALLOWED IN A.Y 2006-07. 8. ON APPEAL, THE DISALLOWANCE WAS CONFIRMED BY THE LD. CIT(A). 9. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT ALL THE RELEVANT DETAILS WERE FILED REGARDING THE EXPENSES BEFORE THE AO [COPY OF DETAILS OF EXPENSES AVAILABLE AT PAGES 15 TO 17 OF THE PAPER BOOK]. FURTHER, A LETTER DATED 7-3-2008 WAS ALSO ADDRESSED TO THE AO IN WHICH ALL DETAILS REGARDING FOREIGN TRAVEL EXPENSES AND E VEN THE FACT OF EARNING OF COMMISSION WAS EXPLAINED. HE ALSO REFERR ED TO PAGE 12, WHICH IS A COPY OF PROFIT & LOSS ACCOUNT FOR THE AC COUNTING YEAR 06-07 ITA NOS.4065 4066/MUM/10 4 TO SHOW THAT MANAGEMENT FEES OF RS.7,79,589/- WAS R ECEIVED IN THAT YEAR. HE THEN REFERRED TO PAGE 22, WHICH IS A COPY OF THE AGREEMENT ENTERED INTO WITH THE FOREIGN PARTY IN OCTOBER, 200 6. HE ARGUED THAT DIRECTORS OF THE COMPANY WENT ABROAD TO NEGOTIATE T HE MANAGEMENT SERVICE AGREEMENT FOR THIS YEAR AND FOREIGN TRAVEL EXPENSES WERE INCURRED AGAINST THAT TRIP. IT IS NOT NECESSARY THA T INCOME FROM SUCH CONTRACT SHOULD START ACCRUING TO THE ASSESSEE IMME DIATELY. THE FACT THAT THE MANAGEMENT FEE WAS RECEIVED IN NEXT YEAR C LEARLY SHOWS THAT THE CONTRACT WAS EXECUTED ABROAD WHICH STARTED GENE RATION RESULTS. HE THEN RELIED ON THE DECISION OF THE HON'BLE DELHI HI GH COURT IN THE CASE OF CIT VS. ASPENTECH INDIA (P) LTD. 187 TAXMAN 25 (D EL) WHEREIN IT WAS CLEARLY HELD THAT IT IS NOT NECESSARY THAT EFFO RTS PUT-IN IN A PARTICULAR YEAR HAVE STARTED GENERATING RESULTS IN THE SAME YEAR. HE ALSO REFERRED TO THE VARIOUS TESTS GIVEN BY THE COU RTS REGARDING ALLOWABILITY OF ITEM OF EXPENDITURE U/S.37. 10. ON THE OTHER HAND, LD. DR SUBMITTED THAT DETAIL S REGARDING RECEIPT OF FEES ETC. WERE NOT AVAILABLE BEFORE THE AO, THEREFORE, IF THIS EXPENDITURE IS HELD TO BE ALLOWABLE ON PRINCIPLE, T HEN MATTER SHOULD GO BACK TO THE FILE OF THE AO. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT AN AGREEMENT HAS BEEN ENTERED INTO WITH THE METALLICS & CHEMICALS BV AT BUSSUM, NETHERLANDS. IT WAS MAINLY CLAIMED THAT THE FOREIGN TRAVELING EXPENSES WERE INCURRED FOR A TOUR TO NETHERLANDS AN D RELEVANT DETAILS WERE FILED BEFORE THE AO VIDE LETTER DATED 7-3-2008 . THE EXPENSES ITA NOS.4065 4066/MUM/10 5 HAVE BEEN DISALLOWED MAINLY ON THE BASIS THAT DURIN G THE YEAR NO INCOME HAD BEEN GENERATED. IT IS NOT NECESSARY THAT INCOME MUST START FLOWING IMMEDIATELY AFTER THE CONTRACT OR THE FOREI GN TOUR. THE COPIES OF THE AGREEMENT AS WELL AS DEBIT NOTES FOR THE FEE INCOME RAISED FROM JANUARY, 2007 WERE ALSO ENCLOSED WITH THIS LETTER. THEREFORE, IT CANNOT BE SAID THAT THESE DETAILS WERE NOT AVAILABLE BEFOR E THE AO. FURTHER, WE FIND THAT THE HON'BLE DELHI HIGH COURT IN THE CA SE OF CIT VS. ASPENTECH INDIA (P) LTD. [SUPRA], WHEREIN A SIMILAR ISSUE CAME UP FOR CONSIDERATION IN THE SENSE THAT SOME EXPENDITURE WA S INCURRED ON THE SALARIES AND TRAVELING ON EMPLOYEES WAS NOT ALLOWED BECAUSE THE PROJECT HAD NOT STARTED EARNING INCOME, THE HON'BLE HIGH COURT HELD THAT ASSESSEE HAD ACHIEVED A LARGE TURNOVER IN THE NEXT YEAR WITH THE HELP OF SUCH EMPLOYEES AND, THEIR EFFORTS HAD BROUG HT FRUITS IN THE SUCCEEDING YEAR, THEREFORE, THESE EXPENSES WERE HEL D TO BE ALLOWABLE. A BUSINESS CANNOT RUN ON INSTANT BASIS. SOME EFFORT S ARE REQUIRED TO BE PUT WHICH MAY OR MAY NOT BRING THE FRUITS IMMEDIATE LY. IN THE CASE BEFORE US, THE EXPENDITURE HAS NOT BEEN DENIED BECA USE IT WAS NOT GENUINE OR WAS NOT FOR BUSINESS PURPOSES, BUT IT WA S DISALLOWED BY OBSERVING THAT NO MANAGEMENT FEE WAS RECEIVED IN TH E YEAR UNDER CONSIDERATION, WHICH IS NOT THE CORRECT LEGAL POSIT ION FOR ALLOWING AN EXPENDITURE U/S.37. AN EXPENDITURE WHICH IS OF REVE NUE NATURE AND IS NOT OF PERSONAL NATURE AND IF THE SAME HAS BEEN INC URRED FOR THE PURPOSE OF BUSINESS, THEN SUCH EXPENDITURE HAS TO B E ALLOWED. THEREFORE, WE ARE OF THE VIEW THAT TRAVELING EXPEND ITURE IS ALLOWABLE ITA NOS.4065 4066/MUM/10 6 AND, ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DELETE THE ADDITION MADE ON ACCOUNT OF FOREIGN TRAVELING E XPENDITURE. 12. IN THE RESULT, I.T.A.NO.4065/M/10 IS PARTLY ALLOW ED, AND I.T.A.NO.4066/MUM/10 IS ALLOWED FOR STATISTICAL PURP OSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 3 0/6/2011. SD/- SD/- (N.VASUDEVAN) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30/6/2011. P/-*