ITO, New Delhi V. M/s Leading Line Merchant Traders Pvt. Ltd., New Delhi

ITA 4708/DEL/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0019 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 30-03-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 28-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS BANITA DEVI
• Assessee Lawyers: AKHIL MAHAJAN
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI A.K. GARODIA ITA NO. 4708/DEL/10) ASSTT. YR: 2007-08 INCOME-TAX OFFICER, VS. M/S LEADING LINE MERCHAN T TRADERS WARD 4(3), NEW DELHI. PVT. LTD., 608, PADMA TOWE R-I, RAJINDRA PLACE, NEW DELHI. PAN/ GIR NO.AACL9001B ITA NO. 6062/DEL/10) ASSTT. YR: 2007-08 M/S LEADING LINE MERCHANT TRADERS VS INCOME-TAX OF FICER, PVT. LTD., 608, PADMA TOWER-I, WARD 4(3), NEW DEL HI. RAJINDRA PLACE, NEW DELHI. ( APPELLANT ) ( RESPONDENT ) DEPARTMENT BY : MRS. BANITA DEVI SR. DR ASSESSEE BY : SHRI AKHIL MAHAJAN CA O R D E R PER R.P. TOLANI, J.M: : THESE ARE TWO CROSS APPEALS, FILED BY THE REVENUE A S WELL AS THE ASSESSEE AGAINST CIT(A)S ORDER DATED 16-9-2010 R ELATING TO A.Y. 2007-08. RESPECTIVE GROUNDS RAISED ARE AS UNDER: REVENUES APPEAL (ITA 4708/DEL/10) : 1. THE ORDER OF THE LEARNED CIT(APPEALS) IS ERRONE OUS & CONTRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(APPEALS) HAS ERRED IN RESTRICT ING THE ADDITION U/S 14A OF THE ACT TO RS. 57,000/- AS AGAI NST RS. 7,95,290/- MADE BY THE AO. ITA NOS. 4708 & 6062/DEL/10 LEADING LINE MERCHANT TRADERS P. LTD. 2 3. THE LD. CIT(A) IGNORED THE FACT THAT THE DISALLO WANCE U/S 14A WAS MADE BY THE AO IN ACCORDANCE WITH THE PROVI SIONS OF RULE 8D OF I.T. RULES. ASSESSEES APPEAL (ITA NO. 6062/DEL/10) : 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) HAS ERRED IN DISALLOWING EXPENDITURE RS. 57,600/- U /S 14A ON PROPORTIONATE BASIS I.E. 18% OF TOTAL EXPENSES. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) HAS ERRED IN DISALLOWING FOREIGN TRAVELLING EXPENSE S TREATING SUCH EXPENDITURE AS PERSONAL IN NATURE. 2. FACTS, APROPOS THE FIRST ISSUE I.E. DISALLOWANCE U/S 14A ARE THAT THE ASSESSEE HAD DIVIDEND INCOME OF RS. 1,40,30,307/- W HICH IS EXEMPT U/S 10(34) OF THE I.T. ACT. AO RECOURSING TO SEC. 14A A ND APPLYING RULE 8D DISALLOWED AN AMOUNT OF RS. 7,95,290/-. AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL, WHERE CIT(A) CONSIDERED THE COMPONENT OF AS SESSEES INCOME AND EXPENDITURE WHICH ARE REPRODUCED AT PAGE 4 OF HIS O RDER. IT WAS FURTHER HELD THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODR EJ & BOYCE MANUFACTURING CO. LTD. 234 CTR (BOM) 1, HAS HELD T HAT RULE 8D WAS PROSPECTIVE IN NATURE AND THEREBY APPLICABLE FROM A .Y. 2008-09 ONWARDS AND IN THE IMPUGNED ASSESSMENT YEAR THE SAME WAS NO T APPLICABLE. CIT(A) FURTHER WORKED OUT THAT THE DIVIDEND INCOME CONSTIT UTED 18% OF ASSESSED TOTAL INCOME AND ESTIMATED PROPORTIONATE DISALLOWAN CE OF RS. 57,600/- ON ACCOUNT OF INDIRECT EXPENSES ATTRIBUTABLE TO EARNIN G EXEMPT INCOME. PART RELIEF WAS ACCORDINGLY GIVEN BY FOLLOWING OBSERVATI ONS: 3.2. FOR ALL THESE REASONS, THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT HAS TO BE DETERMINED. IT IS OBSERVED THAT THE TOTAL INDIRECT EXPENDITURE HAS BEEN TAKEN AT RS. ITA NOS. 4708 & 6062/DEL/10 LEADING LINE MERCHANT TRADERS P. LTD. 3 10,03,680/- BY THE COUNSEL OF THE APPELLANT IN THE WRITTEN SUBMISSION. AFTER EXCLUDING THE ITEMS OF (A) TRAVEL ING EXPENDITURE OF RS. 4,66,466/- (WHICH HAS BEEN DISAL LOWED BY THE ASSESSING OFFICER) AND (B) AND THE BANK CHARGES OF RS. 2,17,771/- (WHICH IS DIRECTLY RELATED TO TRADING BU SINESS OF THE APPELLANT), THE BALANCE EXPENDITURE WORKS OUT AT RS . 3,19,443/-. AS THE PROPORTION OF DIVIDEND INCOME IS 18% OF THE TOTAL INCOME, THE PROPORTIONATE DISALLOWANCE WOULD THUS B E RS. 57,600/-. AS A RESULT, THE APPELLANT GETS A RELIEF OF RS. 7,37,690/- (RS. 7,95,290 MINUS RS. 57,600/-) AND GROUND OF APP EAL NO. 1 IS PARTLY ALLOWED. 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. AO MADE THE DISALLOWANCE U/S 14A BY HOLDING THAT ME CHANICAL PROVISIONS OF RULE 8D WERE APPLICABLE. IN VIEW OF ABOVE BOMBAY HI GH COURT JUDGMENT, THE YEAR IN QUESTION BEING PRIOR TO AMENDMENT AND T HE RULE BEING PROSPECTIVE IN NATURE, CANNOT BE APPLIED TO THIS AS SESSMENT YEAR. COMING TO THE INDIRECT EXPENSES ATTRIBUTABLE, DEPARTMENT COUL D NOT POINT OUT ANY INFIRMITY IN THE ESTIMATION OF CIT(A) IN HOLDING TH AT THE DISALLOWANCE EXPENDITURE CAME TO RS. 10,03,680/- AND AFTER EXCLU DING THE INDIRECT EXPENSES ATTRIBUTABLE CAME TO RS. 3,19,443/- AND TH E DIVIDEND INCOME BEING 18%, THE PROPORTIONATE DISALLOWANCE CAME TO RS. 57, 600/-. AT THE SAME TIME, LEARNED COUNSEL FOR THE ASSESSEE COULD NOT DEMONSTR ATE THAT CIT(A)S ESTIMATE WAS ARBITRARY OR EXCESSIVE. IN VIEW OF THE SE FACTS, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) ON THE ISSUE IN QUESTION, WHICH IS TO BE UPHELD. THIS GROUND RAISED BY BOTH THE PARTIES IS D ISMISSED. 4. COMING TO ASSESSEES APPEAL, THE REMAINING GROUN D PERTAINS TO DISALLOWANCE OF FOREIGN TRAVELING EXPENSES TO THE E XTENT OF RS. 4,66,466/-. CIT(A) UPHELD THE DISALLOWANCE BY FOLLOWING OBSERVA TIONS: ITA NOS. 4708 & 6062/DEL/10 LEADING LINE MERCHANT TRADERS P. LTD. 4 5.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE ON BEHALF OF THE APPELLANT, THE FINDINGS OF THE ASSESS ING OFFICER IN THE ASSESSMENT ORDER AND THE FACTS ON RECORD. THE F INDINGS OF THE AO ARE THAT THE ASSESSEE HAS FAILED TO FURNISH DETAILS OF FOREIGN TRAVEL EXPENSE AND SATISFACTORY EXPLANATION IN REGARD TO THE ABOVE EXPENSES FROM THE POINT OF COMMERCIAL EXP EDIENCY. THE APPELLANT HAS ALSO NOT BEEN ABLE TO EXPLAIN DUR ING THE APPELLATE PROCEEDINGS ALSO AS TO HOW AND WHY THE FO REIGN TRAVEL EXPENSES WERE HELPFUL IN PROMOTING ITS BUSINESS. TH E APPELLANT HAD NOT FURNISHED ANY REPORT AS TO THE ACHIEVEMENTS AND ACCOMPLISHMENTS IN FOREIGN COUNTRIES AS A RESULT OF THE TOURS UNDERTAKEN BY THEM AND THE BENEFIT THAT THE BUSINES S OF THE COMPANY ACQUIRED THEREFROM. THE APPELLANT HAD NOT L ED ANY EVIDENCE THAT VISIT OF THE DIRECTOR OF M/S BALLARPU R INDUSTRIES LTD. WAS NECESSARY TO FACILITATE NEGOTIATIONS WITH FOREIGN PARTIES. THERE WAS NO EVIDENCE THAT THE DIRECTOR HA D SPECIAL APTITUDE WITH REGARD TO BUSINESS OF THE ASSESSEE N OR THERE WAS ANY EVIDENCE TO SHOW THAT HE WAS REPRESENTATIVE OF THE ASSESSEE. IN ORDER TO CLAIM A DEDUCTION ON ACCOUNT OF EXPENDI TURE FOR PURPOSES OF BUSINESS THE ONUS LIES ON THE ASSESSEE TO PROVE THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSES OF BU SINESS AND WAS NOT OF A CAPITAL NATURE. MERELY BECAUSE A BUSI NESSMAN GOES OUT OF THE FOREIGN COUNTRY DOES NOT NECESSARILY LED TO THE CONCLUSION THAT THE EXPENDITURE WAS OF A REVENUE NA TURE. IN ORDER THAT AN EXPENDITURE SHOULD QUALIFY FOR DEDUCT ION AS CONTEMPLATED BY SECTION 37(1), ONE OF THE REQUIREME NTS OF THE PROVISION IS THAT THE EXPENDITURE MUST HAVE BEEN LA ID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. IT CANNOT BE DISPUTED THAT BEFORE AN ASSESSEE CAN BECOME ENTITLE D TO AN ALLOWANCE UNDER THAT PROVISION, HE MUST SATISFY THE ASSESSING OFFICER OF THE PURPOSE FOR WHICH THE AMOUNT IS SPEN T. IT IS TRUE THAT THE TAXING AUTHORITIES ARE NOT ENTITLED TO GO INTO THE REASONABLENESS OF THE EXPENSES, BUT THEY ARE CERTAI NLY ENTITLED TO BE SATISFIED AS TO THE COMMERCIAL NECESSITY OF EXPE NDING THAT AMOUNT. THE QUESTION WILL ALWAYS BE AS TO THE NATUR E OF THE RELATION BETWEEN THE EXPENDITURE AND THE BUSINESS, WHETHER THE BENEFIT IS REMOTE OR NEAR, PROSPECTIVE OR IMMEDIATE , IMAGINARY OR REAL AND SO FORTH. THE CAPACITY IN WHICH THE ASS ESSEE SPENDS WILL ALSO BE RELEVANT. IN THE INSTANT CASE, THE ASS ESSEE DID NOT FURNISH ANY MATERIAL TO THE ASSESSING OFFICER TO AR RIVE AT THE ITA NOS. 4708 & 6062/DEL/10 LEADING LINE MERCHANT TRADERS P. LTD. 5 CONCLUSION FAVOURING THE ASSESSEE. THE AO, THEREFOR E, EXERCISED HIS JUDGMENT AND DISCRETION WHICH CANNOT BE SAID TO BE ARBITRARY OR UNREASONABLE. IN VIEW OF THE AFORESAID, I HAVE N O HESITATION IN HOLDING THAT THE ACTION OF THE AO IN DISALLOWING RS. 4,66,466/- OUT OF THE FOREIGN TRAVEL EXPENSES IS JU STIFIED. AS A RESULT, THE ADDITION OF RS. 4,66,466/- MADE OUT OF FOREIGN TRAVEL EXPENSES IS CONFIRMED AND GROUND OF APPEAL NO. 2 IS DISMISSED. 5. LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT T HE DISALLOWANCE OUT OF FOREIGN TRAVEL WAS UNJUSTIFIED INASMUCH AS THE EXPE NDITURE WAS INCURRED TO PROMOTE THE BUSINESS INTEREST OF THE ASSESSEE. THE TRAVEL BILLS REPRESENTING THE EXPENDITURE WERE PAID BY A/C PAYEE CHEQUES, DET AILS WHEREOF WERE ALREADY SUBMITTED, EXPENDITURE SHOULD BE ALLOWED. 6. LEARNED DR, ON THE OTHER HAND, VEHEMENTLY ARGUES THAT THE PAYMENT IN QUESTION HAS BEEN MADE BY THE ASSESSEE TO EMPLOY EES OF BALARPUR INDUSTRIES, WHICH WAS OBLIGED TO BEAR THE EXPENDITU RE ON ITS EMPLOYEES ON FOREIGN TRAVEL. ASSESSEE FAILED TO PRODUCE ANY CONC RETE EVIDENCE, LIKE COPY OF AGREEMENT OR ANY CORRESPONDENCE WITH BALARPUR IN DUSTRIES, DEMONSTRATING THAT THE ASSESSEE HAD TO BEAR THE EXPENDITURE AND T HE EMPLOYEES WERE DEPUTED BY BALARPUR INDUSTRIES. THE ASSESSEE HAS ME RELY FILED COPY OF BILLS AND VAGUE STATEMENT. BEFORE CIT(A) ALSO NOTHING WAS PRODUCED TO ESTABLISH THAT THE EXPENDITURE IN FACT WAS FOR BUSINESS PURPO SE. THE ORDER OF CIT(A) WAS RELIED ON. 7. WE HAVE HEARD BOTH THE PARTIES. THE ASSESSEES C ONTENTION CANNOT BE ACCEPTED AS THE AMOUNT WAS PAID TO EMPLOYEES OF BAL ARPUR INDUSTRIES. ASSESSEE FAILED TO DEMONSTRATE ANY OBLIGATION ON I TS PART TO BEAR THOSE EXPENSES. BESIDES, IF THAT WERE TO BE PAID, IF AT A LL, THEY SHOULD HAVE BEEN ITA NOS. 4708 & 6062/DEL/10 LEADING LINE MERCHANT TRADERS P. LTD. 6 PAID TO BALARPUR INDUSTRIES AND NOT TO ITS EMPLOYEE S. BE THAT AS IT MAY, THE ASSESSEE HAS FAILED TO DISCHARGE ITS ONUS OF PROVI NG THE EXPENDITURE TO BE FOR THE PURPOSES OF BUSINESS. IN THE ABSENCE OF SUCH DE TAILS AND DISCHARGE OF ONUS, WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) ON THIS ISSUE ALSO, WHICH IS UPHELD. 8. IN THE RESULT, BOTH THE APPEALS, FILED BY ASSESS EE AS WELL AS THE REVENUE STAND DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30-3-2011. SD/- SD/- ( A.K. GARODIA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30-03-2011. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR