M/s.Vertex Commodities & Finpro P. Ltd, Cochin V. The ITO, Kochi

ITA 438/COCH/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 2335 (ITAT-COCHIN)
• Duration Of Justice: 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 07-03-2019
• Assessment Year: 2011-2012
• Appeal Filed On: 24-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Assessee Lawyers: JAMESKUTTY ANTONY
• Section: 143(3)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., J M I .T . A. NO . 438 / COCH/ 20 1 8 ASSESSMENT YEAR : 2 0 11 - 12 M/S. VERTEX COMMODITIES & FINPRO (P) LTD. , THOTTATHIL TOWERS, IIND FLOOR, MARKET ROAD, ERNAKULAM, KOCHI - 682 018. [PAN:AABCV 4863C] VS. THE INCOME TAX OFFICER, WARD - 4(1), KOCHI (ASSESSEE - APPELLANT) (R EVENUE - RESPONDENT) A SSESSEE BY SHRI JAMESKUTTY ANTONY, FCA REVENUE BY SMT. A.S. BINDHU, SR. DR D ATE OF HEARING 0 7 / 0 3 / 201 9 DATE OF PRONOUNCEMENT 07 / 0 3 /201 9 O R D E R PER CHANDRA POOJARI, AM: TH IS APPE AL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT (A) - II, KOCHI DATED 05/06/2018 AND PERTAIN S TO THE A SSESSMENT YEAR 2011 - 12 . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE APPELLANT AND ITS HOLDING COMPANY M/S VERTEX SECURITIES LIMITED ARE HAVING COMMON DIRECTORS AND IS SHARING COMMON INFRASTRUCTURE, INCLUDING OFFICE, TELEPHONE, INTERNET ETC. THE MANAGING COMMITTEE OF THE BOTH THE COMPANIES (COMPRISING OF DIRECTORS AND OTHER TOP MANAGEMENT OFFICERS) DECIDED TO APPORTION A PART OF THE COMMON EXPENSES TO THE APPELLANT AND AN INTER - OFFICE NOTE WAS ISSUED BASED ON THAT. COPY OF THE INTER OFFICE NOTE IS ATTACHED AS ANNEXURE 1. I.T.A. NO . 438 /COCH/ 201 8 2 1.1. THE APPELLANT WAS FORMED AS A SEPARATE COM PANY ONLY BECAUSE OF STATUTORY COMPULSION. AS PER THE SEBI REGULATIONS, A COMPANY WHO IS INTO EQUITY BROKING CANNOT DO COMMODITY BROKING. HENCE THE APPELLANT WAS FORMED AS SUBSIDIARY OF VERTEX SECURITIES LIMITED (WHICH IS INTO EQUITY BROKING) 1.2. T HE APP ELLANT HAS BROUGHT IN SPECIALISED MANAGERIAL PERSONS TO THE COMMODITY BUSINESS AS THE NEW MARKET NEEDED TO BE PENETRATED. THEY WERE DEDICATED PROFESSIONALS SPECIALISED IN THIS SEGMENT. 1. 3. A CONSIDERABLE AMOUNT OF STUDY AND A FAIR ANALYSIS OF EXPENSES WERE MADE AND SHARING WAS FIXED BASED ON THE CONSIDERATION OF ALL ASPECTS. 1 .4. THE APPELLANT HAS CLAIMED THE MANAGERIAL REMUNERATION OF THOSE PERSONS WHO ARE ENTRUSTED WITH THE BUSINESS OF THE APPELLANT EXCLUSIVELY. SIMILARLY, CONNECTIVITY CHARGES, RENT, TELEPHONE, ELECTRICITY AND TRAVELLING ARE ALSO ALLOCATED BASED ON THE PROPORTIONATE USAGE OF SUCH FACILITIES/INFRASTRUCTURE. 1.5. THE ALLOCATION OF EXPENDITURE IS BASED ON A FAIR ESTIMATE OF SUCH USAGE ARRIVED BY THE MANAGEMENT DEPENDING ON THE FACTUAL S ITUATIONS. 2 . THE APPELLANT CONTINUED THIS PRACTICE OF SHARING OF EXPENSES TILL SUCH TIME, THE APPELLANT WAS ABLE TO DO ITS BUSINESS ON ITS OWN, WITHOUT THE SUPPORT OF THE HOLDING COMPANY. ACCORDINGLY, THE APPELLANT HAD DEBITED SHARES EXPENSES IN FUTURE ALSO AS BELOW: ASSESSMENT YEAR AMOUNT OF SHARED EXPENSES REMARKS 2012 - 13 89,62,755.00 ASSESSMENT COMPLETED U/S 143(3) 2013 - 14 86,50,520.00 ASSESSMENT COMPLETED U/S 143(3) 2014 - 15 48,99,790.00 ASSESSMENT COMPLETED U/S 143(3) IT MAY BE NO TED THAT THE SHARING OF EXPENSES FOR ALL SUBSEQUENT YEARS W AS ACCEPTED BY THE DEPARTMENT AND COMPLETED THE ASSESSMENT WITHOUT ANY ADDITION ON THIS ACCOUNT DURING THE SCRUTINY. I.T.A. NO . 438 /COCH/ 201 8 3 2 .1. FR O M THE ABOVE, IT MAY BE NOTED THAT THE APPELLANT IS CONSISTENTLY FOLLOWI NG THIS ACCOUNTING POLICY WHICH IS ACCEPTED BY THE DEPARTMENT ALSO. 3. ON THE BASIS OF THE ABOVE GROUNDS, IT IS HUMBLY PRAYED THAT THE ADDITION OF RS. 19, 00 ,8 00 / - ON ACCOUNT OF SHARED EXPENSES BE DELETED. 3. THE FACTS OF THE CASE ARE THAT I N THE PR OFIT AND LOSS ACCOUNT, THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.95,04, 000 / - UNDER THE HEAD 'EXPEN SES ON SHARED SERVICES'. THE ASSESSEE STATED THAT IT HAD REIMBURSED SOME COMMON EXPENSES INCURRED BY ITS HOLDING COMPANY OF THE ASSESSEE, M/S. VERTEX SECU RITIES LTD. WHICH WAS INTO BROKING SERVICES. THE COMMON EXPENDITURE MET BY THE HOLDING COMPANY INCLUDED (I) MANAGERIAL REMUNERATION, (II) COMMUNICATION EXPENSES, (I II ) TRAVELLING & CONVEYANCE EXPENSES, (IV) CONNECTIVITY CHARGES AND (V) RENT. THE ASSESSEE H A D REIMBURSED 50% OF ALL THESE EXPENSES TO THE HOLDING COMPANY. THE PROFI T AND LOSS ACCOUNT OF THE HOLDING COMPANY, M/S. VERTEX SECURITIES LTD. AND THE ASSESSEE COMPANY ARE SUMMARIZED BELOW: DESCRIPTION HOLDING COMPANY , ASSESSEE COMPANY BROKERAGE INCO ME 6,84,05,554 2,09,96.506 OTHER DIRECT INCOME 24, 31, 676 0 OTHER INCOME (EXCLUDING INCOME SHARED) 1,22,96,93 1 27,06,354 TOTAL RECEIPTS 8,47 , 40,558 2,37,02,860 TOTAL EXPENDITURE (EXCLUDING EXPENSES SHARED ) 9,35,85,783 1 , 92,79,478 I.T.A. NO . 438 /COCH/ 201 8 4 NET I NCOME (BEFORE INCLUDING EXPENSES SHARED) - 88,45 , 225 44,23,382 EXPENSES SHARED - 95 ,04,000 - 95.04 , 000 NET INCOME (AFTER INCLUDING EXPENSES SHARED) 6 , 58,775 - 50,80,618 3.1 FROM THE ABOVE , THE ASSESSING OFFICER NOTICED THAT THE HOLDING COMPANY WAS DOING MORE THAN THREE TIMES THE BUSINESS OF THE SUBSIDIARY COMPANY(ASSESSEE). THE EXPENDITURE WHICH WAS SHARED @ 50% WAS RS.95,04,000/ - . ACCORDING TO THE ASSESSING OFFICER, THE TOTAL TURNOVER OF BOTH THE COMPANIES TAKEN TOGETHER WAS RS. 9,34,40,133 / - ( EXCLUDING OTHER INCOME) WHICH MEANT THAT THE ASSESSEES PERCENTAGE OF TURN OVER TO THE TOTAL TURNOVER OF BOTH THE ASSESSEES TAKEN TOGETHER WAS 22.47%. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PERCENTAGE OF EXPENDITURE THAT CAN BE ATTRIBUTE D TO THE ASSESSES FROM THE COMMON EXPENDITURE CANNOT BE MORE THAN THE PERCENTAGE OF TURNOVER OF THE ASSESSEE. THE TOTAL SHARED EXPENDITURE OF BOTH THE ASSESSEES TAKEN TOGETHER WAS RS. L,90,0 8 ,000 / - ( RS.95.04,000 X 2). THE ASSESSING OFFICER REJECTED THE EX PLANATION OF THE ASSESSEE THAT THIS BEING THE INITIAL YEARS OF THE FORMATION OF THE COMPANY, THE HOLDING COMPANY HAD TO GIVE MORE MANAGERIAL ATTENTION TO THE COMPANY TO GET BUSINESS ON THE REASON THAT ALL THE ABOVE MENTIONED EXPENSES HA D BEEN SHARED EQUALL Y WHEREAS THE SHARE OF BUSINESS OF THE ASSESSEE COMPANY WAS LESS THAN 23%. CONSIDERING ALL THE CIRCUMSTANCES, THE ASSESSING OFFICER ALLOWED THE SHARED EXPENDITURE @ 30% OF THE TOTAL EXPENDITURE OF I.T.A. NO . 438 /COCH/ 201 8 5 RS. 1,90 ,08,000 / - WHICH COMES TO RS.57 , 02,400/ - TH US, THE A SSESSING OFFICER MADE THE DISALLOWANCE ON THIS ACCOUNT AT R S. 38 ,01, 600/ - ( RS. 95 , 08,000 - RS . 57,02,400). 4 . AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) OBSERVED THAT THE SIZE OF THE ASSESSEE AND ITS HOLDING COMPANY ARE NOT S AME AND TH E TURNOVER OF THE HOLDING COMPANY WAS A PPROXIMATELY THREE TIMES HIGHER THAN THE ASSESSEE COMPANY. THE CIT(A) OBSERVED THAT NEITHER DURING THE COURSE OF ASSESSMENT NOR DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE HAD EXP L AINED THE METH OD ON WHICH THESE EXPENSES WERE APPORTIONED. THE CIT(A) FOUND THAT 30% OF THE RENT WAS APPORTIONED TO THE ASSESSEE AND AL L OTHER EXPENSES LIKE SERVICE CHARGE, CONNECTIVITY CHARGES, TELEPHONE & ELECTRICITY HAD BEEN APPORTIONED AT 50% EACH. FROM THE PAYMENT OF R ENT , THE CIT(A) FOUND THAT THE HOLDING COMPANY WAS O CCUPYING AT L E AST 3 TIMES THE SPACE OCCUPIED BY THE ASSESSEE. IN VIEW OF THIS FACT, THE CIT(A) OPINED THAT SHARING OF E LECTRICITY AND T ELEPHONE CANNOT BE AT THE RATE OF 50% EACH. THE CIT(A) REJECTED THE ASSESSEES S CONTENTION THAT NO SUCH DISALLOWANCE WAS MADE IN SUBSEQUENT YEARS AS EVERY YEAR IS A DIFFERENT YEAR. HOWEVER, TA KING INTO CONSIDERATION THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE , THE CIT(A) WAS OF THE OPINION THAT , IF 40% OF THE EXPENSES WERE APPORTIONED TO THE ASSESSEE, IT SHALL MEET THE ENDS OF JUSTICE. THE CIT(A) OBSERVED THAT THE A SSESSEE'S RELIANCE ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS . E H TP INDIA PVT. LTD. (350 ITR 41) (DELHI) WAS MISPLACED, AS I N THE INSTANT CASE, THERE WAS NO METHOD OF APPORTIONMENT, THERE IS NO BASIS, IT IS SIMPLY 50 50 AND T HE SIZE OF TWO CONCERNS WAS DI FFERENT AND THE TURNOVER WAS ALSO I.T.A. NO . 438 /COCH/ 201 8 6 D IFFERENT. ACCORDING TO THE CIT(A), A N ARBITRARY METHOD, WHICH IS CAPABLE OF DISTORTING T HE PROFITS CANNOT BE SAID TO BE A METHOD OF ACCOUNTING WHICH WOULD LEAD TO S UBSTANTIAL VARIATION IN THE INCOME. THUS, IN VIEW OF ABOVE DISCUSSION, THE CIT(A) ALLOWED 40% OF THE EXPENSES CLAIMED IN PLACE OF 30% ALLOWED BY THE ASSESSING OFFICER AND DIRECTED THE AO TO RECALCULATE THE DISALLOWANCE. 5. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IN THIS CASE, THE ASSESSEE HAD APPORTIONED COMMON EXPENSES AT 50% IN RESPECT OF SERVICE CHARGE S , CONNECTIVITY CHARGES, T ELEPHONE & E LECTRICITY . HOWEVER, THE ASSESSING OFFICER APPORTIONED THE EXPENSES ONLY AT 30% OF THE SHARE OF THE ASSESSEE. THE CIT(A) CONSIDERED IT AT 40% OF THE SHARE OF THE ASSESSEE. THE ALLOCATION OF EXPENSES WAS MADE BY THE ASSESSEE ON ESTIMATE BASIS. THE APPORTION OF THE EXPENSES AT 50% WAS CONSISTENTLY MADE BY THE ASSESSEE ON CONTINUOUS BASIS IN SUBSEQUENT YEARS, I.E., A.YS 2012 - 13 TO 2014 - 15. THIS WAS NOT DISTURBED BY THE ASSESSING OFFICER IN THE SUBSEQUENT YEARS. I N THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER DISTURBED THE ALLOCATION OF SHARED EXPENSES , HOWEVER, THERE WAS NO RE - ALLOCATION OF SUCH SHARED EXPENSES IN THE HANDS OF THE HOLDING COMPANY , M /S. VERTEX SECURITIES LIMITED . THE ASSESSING O FFICER DISTURBED THE ALLOCATION OF SHARED EXPENSES ONLY IN THE HANDS OF THE ASSESSEE WHICH, IN OUR OPINION, WOULD AMOUNT TO DOUBLE TAXATION. IN OTHER WORDS, IF THE ASSESSING OFFICER WANTS TO REDUCE THE ALLOCATION OF THE SHARED EXPENSES IN THE HANDS OF THE ASSESSEE, CONSEQUENTLY, THE I.T.A. NO . 438 /COCH/ 201 8 7 BALANCE AMOUNT OF THE SHARED EXPENSES IS TO BE ALLOWED IN THE HANDS OF THE HOLDING COMPANY, M/S. VERTEX SECURITIES LIMITED WHICH WAS NOT DONE BY THE ASSESSING OFFICER WHICH IS INAPPROPRIATE. IN OUR OPINION, THE ALLOCATION OF E XPENSES WAS MADE BY THE ASSESSEE ON FAIR AND REASONABLE BASIS AND THERE IS NO BASIS FOR RE - ALLOCATION BY THE ASSESSING OFFICER. HENCE, WE ARE NOT IN A POSITION TO AGREE WITH THE ORDER OF THE CIT(A). ACCORDINGLY, WE ALLOW THIS GROUND OF APPEAL TAKEN BY THE ASSESSEE AND ALLOW THE SHARED EXPENDITURE AS CLAIMED BY THE ASSESSEE . 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 7 TH MARCH , 2019 S D/ - SD/ - (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 7 TH MARCH , 2019 GJ COPY TO: 1 . M/S. VERTEX COMMODITIES & FINPRO (P) L TD. , THOTTATHIL TOWERS, IIND FLOOR, MARKET ROAD, ERNAKULAM, KOCHI - 682 018. 2. INCOME TAX OFFICER, WARD - 4(1), KOCHI. 3 . THE COMMISSIONER OF INCOME - TAX (AP P EALS) - II , KO CHI. 4 . THE PR. COMMISSIONER OF INCOME - TAX, KO CHI. 5 . D. R., I.T.A.T., COCHIN BENCH, COCHIN . 6 . GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN I.T.A. NO . 438 /COCH/ 201 8 8