M/s Alliance Builders & Contractors Ltd., Kanpur V. DY. Commissioner of Income Tax, Kanpur

ITA 460/LKW/2016

AI Insights

The case involves Alliance Builders & Contractors Ltd., which appealed against the order of the CIT(A)-4, Kanpur, sustaining various additions and disallowances made by the Deputy Commissioner of Income-tax under section 143(3) of the Income-tax Act, 1961. The additions included unexplained share capital, disallowances of directors' remuneration, legal expenses, prior period expenses, bank interest, and sponsorships. The Tribunal examined the submissions, audit reports, and judicial precedents cited by the assessee and found merit in the arguments presented, leading to the allowance of the appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 112616 (ITAT-LUCKNOW)
• Duration Of Justice: 6 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-11-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 09-08-2016
• Other Referred Cases: Exiomp Resources (India) Ltd. Vs. CIT, CIT vs. Lovely Exports Ltd., CIT vs. Creative World Telefilms Ltd., Kellogs (India) Pvt. Ltd. vs. ACIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Charitable institution; Question of law; Commercial expediency
• Section: 131; 68; 40A(3); 37(1); 195; 142(2A); 13

Judgement Text

1 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, LUCKNOW BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI GIRISH GRAWAL, ACCOUNTANT MEMBER ITA No. 460/LKW/2016 Assessment Years: 2012-13 Alliance Builders & Contractors Ltd., C/o Anil Jaiswal & Company, 24/4, The Mall, Kanpur- 208001. (PAN: AAECA8217A) Vs. Deputy Commissioner of Income-tax, Central Circle- II, Kanpur. (Appellant) (Respondent) Present for: Appellant by : Shri Shubham Rastogi, CA Respondent by : Smt. Alka Singh, DR Date of Hearing : 30.11.2022 Date of Pronouncement : 20.02.2023 O R D E R PER BENCH: This appeal by the assessee is against the order by Ld. CIT(A)-4, Kanpur in Appeal No. CIT(A)-IV/26/DCIT-CC- II/KNP/2015-16/13 dated 06.06.2016 against assessment order by DCIT, Central Circle-2, Kanpur u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) dated 30.03.2015. 2. Assessee has raised six ground of appeal in respect of various addition and disallowance made by the Ld. AO and sustained by the Ld. 2 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 CIT(A) which are dealt in seriatim. These will be elaborated while adjudication and are, therefore, not reproduce hereunder for the sake of brevity. 3. Brief facts of the case are that assessee is engaged in the business as a builder and coloniser. It owns petrol pump in the name and style of M/s. Leaf Filling Station and dealing in petrol products situated at Bareili. Assessee filed its return of income on 30.09.2012, reporting total income of Rs.1,02,45,450/-. Case of the assessee was selected for scrutiny. Statutory notices were issued and served on the assessee for which part compliance was made, as noted by the Ld. AO. In the course of assessment proceeding, assessee was directed to get its accounts audited u/s. 142(2A) of the Act. On compliance to the said order, M/s. D. S. Sinha & Co., Chartered Accountant submitted their special audit report conducted u/s. 142(2A) of the Act, in Form no. 6B of the Income Tax Rules, 1912. In the course of assessment, Ld. AO after considering the submissions of the assessee made the following additions/disallowances: Sl. No. Nature of Addition Amount 1. Addition u/s. 68 on account of unexplained share capital Rs.7,54,500.00 2. Disallowance of directors remunerations. Rs.7,20,000.00 3. Disallowance u/s. 40A(3) Rs. 1,02,000,00 4. Disallowance of prior period expenses Rs.5,84,704.00 5. Disallowance of bank interest Rs.29,54,329.00 6. Disallowance of amount paid on various occasion as sponsors treating the same as donation Rs. 1,36,000.00 3.1. Aggrieved, assessee went in appeal before the Ld. CIT(A) who sustained the above tabulated additions/disallowance. 4. Before us, Shri Shubham Rastogi, CA represented the assessee and Smt. Alka Singh, DR represented the department. 3 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 5. Ld. Counsel for the assessee had placed on record a written submission in 13 pages along with paper book containing 63 pages and certain citations of judicial precedence which are nine in numbers. Grounds raised by the assessee in the present appeal are dealt herein seriatim: 5.1. Ground no. 1 is in respect of addition of Rs.7,74,500/- on account of share capital raised by the assessee which has been held to be unexplained paid up share capital u/s. 68 of the Act on the premise that assessee failed to submit copy of bank account and income tax return of the share subscriber company. In this respect, it was submitted that assessee allotted 77,450 shares for a consideration of Rs.7,74,500/- to Alliance Nirman Ltd. which is a sister concern of the assessee. In the assessment proceeding, following documents were submitted by the assessee which are – (a) PAN and address of the share subscriber; (b) Confirmation of the share subscriber; (c) Form No. 2 filed with ROC which was duly verified by its special auditor appointed u/s. 142A of the Act; (d) Copy of audited Balance Sheet, P&L Account of the share subscriber for the year ending 31.03.2012. 5.2. Ld. Counsel further submitted that due to disputes amongst the directors of the share subscribing company and that of the assessee, copy of bank statement could not be procured from the share subscriber company. In view of the dispute, a request was made to the Ld. AO in the course of assessment proceeding, to exercise the powers vested in him u/s. 131 of the Act for issuing summons on the share subscriber for verifying this impugned transaction which the Ld. AO did not choose to do so. It was also submitted that in the course of assessment 4 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 proceeding, complete books of account and other relevant documents including cash book, bank statements of the assessee were produced and were examined by the Ld. AO. It was also submitted that the share application money was received in cash and, therefore, there is no entry which can be traced in the bank statement of the assessee for the said transaction. However, the transaction of share capital is duly recorded in the books of account, both of the assessee and the share subscribing companies, verifiable from the audited financial statements of both. It was also submitted that amended provision of section 68 of the Act in respect of furnishing explanation for source of source are effective from AY 2013-14 and is not applicable in the present year under consideration i.e. AY 2012-13. 5.3 On going through the material placed on record and the factual matrix of the case, we find that assessee has discharged its initial onus casted u/s. 68 of the Act, by furnishing necessary details and documents to prove the identity, creditworthiness of the shareholder and genuineness of the transaction. 5.3.1 We find support from the judgment of Hon’ble High Court of Calcutta in the case of Exiomp Resources (India) Ltd. Vs. CIT (2005) 275 ITR 87 (Cal) wherein it was held as follows: “It is incumbent upon the Assessing Authority to examine the explanation of the creditor and arrive at a conclusion as to whether the explanation was satisfactory. The conclusion arrived by the Assessing Authority is to be communicated to the assessee if such explanation is not considered satisfactory. If thereupon the assessee submits any comments or furnishes further information, in that event, the Assessing Authority has to examine the same and arrive at his own conclusion. The inbuilt safeguard provided in section 68 cannot be ignored by the Assessing Authority at his sweet will. The Assessing Authority can add the share capital as undisclosed income if no explanation is offered by the assessee. But since the details/ explanations were offered, it was incumbent on the Assessing Authority to examine the same and arrive at a cogent conclusion. Assessing Officer having failed to discharge such obligation the 5 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 addition is not sustainable in law, case of CIT vs. Lovely Exports Ltd. (2008) 216 CTR 195 (SC) that where share application money.” 5.3.2. Hon'ble Bombay High Court in the case of CIT vs. Creative World Telefilms Ltd. (supra) wherein it was held as follows: "In the case in hand, it is not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the assessing officer to make proper investigation and reach the shareholders. The assessing officer did nothing except issuing summons which were ultimately returned back with an endorsement 'not traceable'. In our considered view, the assessing officer ought to have found out their details through PAN cards, Bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the assessing officer. In the above circumstances, the view taken by the Tribunal cannot be faulted. No substantial question of law is involved in the appeal. In the result, the appeal is dismissed in limini with no order as to costs. " 5.3.3. Hon'ble Bombay High Court in the case of CIT vs. Creative World Telefilms Ltd. (supra) wherein it was held as follows: "Wherein the matter concerns money receipts by way of share application from investors through banking channel, the assessee has to prove the existence of the person in whose name the share application is received. Once the existence of the investor is proved, it is not further the burden of the assessee to prove whether that person itself has invested the said money or some other person has made investment in the name of that person. The burden then shifts on to the department to establish that such investment has come from the assessee company itself. " 5.4. We, therefore, respectfully following the judgments referred hereinabove by the Hon’ble Courts and also considering the facts and circumstances of the case, are of considered view that assessee has sufficiently explained the identity and creditworthiness of the share subscriber it being a sister concern and the genuineness of the transaction for which nothing contrary has been brought on record by the Revenue. We do not find any merit in the finding of Ld. CIT(A). We accordingly, allow ground no. 1 taken by the assessee and direct to 6 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 delete the addition so made of Rs.7,74,500/-. Accordingly, ground no. 1 is allowed. 6. Ground no. 2 is in respect of addition of Rs.7,20,000/- on account of directors’ remuneration being treated as excessive u/s. 40A(2) of the Act. In this respect, Ld. AO had made a disallowance of Rs.14,40,000/- out of which Ld. CIT(A) gave a partial relief and sustained disallowance of Rs.7,20,000/- and the assessee is in appeal before the Tribunal. 6.1. The moot point of contention by the Ld. Counsel is that authorities below have not brought out any contrary material except their own observations which are based on surmises and conjecture, to demonstrate that the remuneration paid to the directors is excessive. Ld. Counsel also referred to the book results of five years which were produced before the Ld. AO, to demonstrate that the allegation of Ld. AO that there is substantial decrease in the turnover and net profit of the company as against substantial increase in the remuneration of directors is factually incorrect. The said book results are tabulated below: 6.2. Ld. Counsel also submitted that remuneration to directors is legitimate business expenditure and has not been held to be bogus. The matter of commercial expediency should be left to the businessman concerned or the board of directors and Revenue cannot put itself in the arm chair of a businessman to assume the role of ascertainment, how it is a reasonable remuneration having regard to all the circumstances. Further, it was submitted that nothing has been brought on record to 7 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 show, why the payment of remuneration to directors is excessive. In this respect, reliance is placed on the decision of Hon’ble High Court of Bombay in the case of CIT Vs. Indo-Saudi Services Travel Pvt. Ltd. 219 CTR 562. Ld. Counsel also submitted that in the similar set of facts and circumstances in the assessee’s own case for AY 2013-14, Ld. CIT(A)-1, Kanpur has deleted the addition made by Ld. AO u/s. 40A(2) of the Act. 6.3. Considering the factual matrix in the present case, we note that directors’ remuneration paid by the assessee against the turnover and net profit of the assessee in past five years demonstrate the legitimacy of the expenses incurred by the assessee and the benefits derived by it from the same. We also note that the payment made to directors is not bogus for which nothing has been brought on record by the Ld. AO. Thus, we are in agreement with the submission of the Ld. Counsel that once it is established that remuneration has been paid to directors then Revenue cannot put itself in the arm chair of a businessman to assume the role of ascertainment, how it is a reasonable remuneration having regard to the facts and circumstances of the case. In such a case, matter of commercial expediency should be left to the businessman concern or the board of directors. Accordingly, we are inclined to find favour with the submission of the Ld. Counsel and direct to delete the disallowance made in this respect of Rs.7,20,000/-. Accordingly, ground no. 2 is allowed. 7. Ground no. 3 is in respect of addition of Rs.1,02,000/- by invoking section 40A(3) of the Act. In this respect, it is submitted that assessee made reimbursement of expenses incurred by the two advocates on behalf of the assessee, who were residing at Kanpur and Bareily. At the request of these consultants, assessee made the payments by depositing cash in their respective bank accounts through HDFC Bank, CBS system. The expenses so paid are solely for the purpose of business of 8 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 the assessee, which are duly recorded in the books of accounts. Ld. Counsel further submitted that identity of the two persons is not doubted by the Ld. AO who are advocates by profession. Also, the source of cash has not been disputed and the payment has been made by way of deposit into their respective bank accounts. These expenses have not been held to be bogus by the Ld. AO. Ld. Counsel thus contended that the said payments are genuine and were necessitated for its business and there is no illegality in the matter. 7.1. In this regard, from the perusal of the order of Ld. CIT(A), we take note of the facts which have been tabulated, giving all the explanations and details for the payment made to the two advocate professionals towards reimbursement of expenses incurred by them on behalf of the assessee. We do find force in the submission made by the Ld. Counsel explaining the case of the assessee as stated above and accordingly, direct for the deletion of disallowance made in this respect. Accordingly, ground no. 3 is allowed. 8. Ground no. 4 relates to addition of Rs.5,48,704/- holding that these belong to prior period expenditure not allowable in the year under consideration. In this respect, Ld. Counsel submitted that though Ld. CIT(A) had admitted the bills for expenditure which were received during the AY 2012-13 but upheld the addition on the basis that it is irrespective of the fact when bill is received or when payment is made, since the assessee follows mercantile system of accounting in this respect. Ld. Counsel submitted that liability for these expenses crystallised in the year under consideration when the bills were supplied by the parties which were received by the assessee in the year under consideration though they relate to the preceding year. It was also contended that there is no loss to the revenue, since by not claiming these expense in the preceding year, the income for that year has been 9 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 reported at a higher amount and that both the current year and the preceding year are subject to the same rate of taxes. 8.1. From the perusal of the order of Ld. CIT(A), we note that details of these expenditure are tabulated which relate to service charges, site maintenance, construction expenses and generator running and maintenance expenses for which claim of these expenses were submitted before the assessee by respective service providers after the close of accounting year and, therefore, the assessee claimed the expenses in the year under consideration. Genuineness of these expenses is not doubted by the Ld. AO. What is in dispute is only the year of claim for these expenses. All these expenses are legitimate business expenses allowable u/s. 37(1) of the Act. Ld. Counsel also placed reliance on the decision of coordinate bench of ITAT, Mumbai in the case of Kellogs (India) Pvt. Ltd. vs. ACIT (2012) (12) TMI 664 – ITAT, Mumbai). Considering the over all factual matrix of the claim of the assessee as submitted by the Ld. Counsel, we are inclined to direct for deletion of the addition made by the authorities below. Accordingly, ground no. 4 is allowed. 9. Ground no. 5 relates to addition of Rs.29,54,329/- u/s. 36(1)(iii) of the Act. In this respect Ld. Counsel submitted that this disallowance has been made without establishing that borrowed fund were utilised in making interest free advances. Ld. Counsel submitted that interest free advances were given out of own funds, details of which were furnished before the Ld. AO. Ld. Counsel also submitted that advances to the directors of the company were not advances but were made under imprest to meet the cost of purchase of material and expenditure for the assessee. It was submitted that when these advances are given to directors for the said purpose, accounts of the directors are debited and corresponding entries are made in cash book. When the directors give details of expenditure incurred by them, corresponding entries are made 10 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 by crediting cash in the name of the directors and debiting corresponding expenditure. Ld. Counsel referred to the details of interest free funds available with the assessee to the tune of Rs.63,85,43,085/- and the advance to directors as on 31.03.2012 at Rs.4,75,71,927/-. He thus, submitted that it is only around 7% of total interest free funds. Ld. Counsel further submitted that during the year, the increase in advance to directors is of Rs.85,34,642/- only. These funds were given from own resources being profit in the year and interest free funds available as reported in the Balance Sheet and, therefore, no disallowance of interest is called for as made by the authorities below. Ld. Counsel also referred to the findings of Ld. CIT(A) for AY 2013-14 to submit that similar addition made in AY 2013-14 has been deleted for the assessee. 9.1. From the factual matrix, we take note of the fact that assessee has its own interest free funds which are substantially more as compared to the interest free advances given by it, which does not have any adverse impact on the claim of interest expenditure made by it in the P&L Account. Considering the over all facts and circumstances of the case and the explanation furnished by the Ld. Counsel, we direct to delete the addition made in this respect. Accordingly, ground no. 5 is allowed. 10. Ground no. 6 is in respect of addition of Rs.1,36,000/- on account of sponsorship expenses by treating the same as donation. Ld. Counsel submitted that assessee has claimed business promotion expenses which have been incurred by the assessee by way of contribution to various association and bodies and temples for festive occasions, details of which are tabulated below: i) 27.08.2011 Donation to District Badminton Association, Bly Rs. 25,000/- ii) 27.09.2011 Donation to Shri Shirdi Sai Raaksha Dham Rs. 5,000/- iii) 04.10.2011 Cash paid to Bareilly Dasahra Ram Lila Samiti Rs. 15,000/- iv) 04.10.2011 Cash paid to Shri Hari Mandir Rs. 15,000/- v) 04.10.2011 Cash paid to Shri Hari Mandir Rs. 10,000/- vi) 24.12.2011 Cash expenditure to Kite festival Rs. 15,000/- 11 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 vii) 05.01.2012 Donation to Daya Drishti Charitable Trust Rs. 51,000/- Total Rs.1,36,000/- 10.1. Ld. Counsel submitted that these payments have been made out of commercial expediency in the form of sponsoring certain supportive activities and festive occasions which supports the assessee to foster conducive environment for the conduct of its business in its surroundings. The expenses incurred by the assessee are not held to be bogus or have been doubted by the authorities below. Accordingly, we are inclined to allow the claim of the expenses by the assessee and thus direct for deletion of addition made in this respect. Accordingly, ground no. 6 is allowed. 11. Ground no. 7 taken by the assessee is general in nature and does not need any adjudication. 12. In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 20 th February, 2023 as per the rules framed under Rule 34(4) of the Income Tax Appellate Tribunal Rules, 1963. Sd/- Sd/- (Mahavir Singh) (Girish Agrawal) Vice President Accountant Member Dated: 20th February, 2023 JD, Sr. P.S. 12 ITA No.460/LKW/2016 Alliance Builders & Contractors Ltd. AY: 2012-13 Copy to: 1. The Appellant: 2. The Respondent: 3. CIT(A)-IV, Kanpur 4. CIT , Kanpur , 5. DR, ITAT, Lucknow Bench, Lucknow 6. Guard file. //True Copy// By Order Assistant Registrar ITAT, Lucknow Benches, Lucknow