ACIT, New Delhi V. M/s. Hero Management Services Ltd., New Delhi

ITA 5180/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58783 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 23-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RIS GILL
• Assessee Lawyers: R K KAPOOR C AS
• Keywords: Gift; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C DELHI) BEFORE SHRI G.D. AGRAWAL, HONBLE VICE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO. 5179(DEL)2011 ASSESSMENT YEAR: 2007-08 ASSTT.COMMISSIONER OF INCOME TAX, M/S. HERO COR PORATE SERVICES LTD., CIRCLE 12(1), NEW DELHI. V. E-1, QUTUB HOTEL COMPLEX, SAHEED JEET SINGH MARG, NEW DELHI. ITA NO. 5180(DEL)2011 ASSESSMENT YEAR: 2007-08 ASSTT.COMMISSIONER OF INCOME TAX, M/S. HERO MANAG EMENT SERVICES LTD., CIRCLE 12(1), NEW DELHI. V. E-1, QU TUB HOTEL COMPLEX, SAHEED JEET SINGH MARG, NEW DELHI. (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI R.I.S. GILL, CIT/DR ASSESSEE BY: S/SHRI PRADEE P DINODIA & R.K. KAPOOR, CAS ORDER PER A.D. JAIN, J.M. ITA NO. 5179(DEL)2011: THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2007-08 AGAINST THE ORDER DATED 24.8.2011 PASSED BY THE LEARNED CIT (A)XXVII, NEW DELHI, IN THE CASE OF M/S. HERO CORPORATE SERVICES LTD., T AKING THE FOLLOWING GROUNDS:- ITA 5179 & 5180(DEL)2011 2 1. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS.55,40,562/- U/S 14A READ WITH RULE 8D MADE BY THE AO. 2. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE 5. 97,87,370/- MADE BY THE AO ON ACCOUNT OF MARKET DEVELOPMENT EXP ENSES. 3. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIR CUMSTANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 6,88,950/- MADE BY THE AO ON ACCOUNT OF CONSULTANCY CHARGES PA ID TO ARMAN AUTO GROUP FOR FAILURE TO DEDUCT TDS. 2. APROPOS GROUND NO.1, AS PER THE AO, THE PROFIT A ND LOSS ACCOUNT OF THE ASSESSEE COMPANY SHOWED THAT IT HAD MADE INVEST MENTS, WHEREON, DIVIDEND INCOME WAS BEING EARNED; THAT DURING THE Y EAR, THE ASSESSEE HAD SHOWN ` 1,96,57,658/- AS THE AMOUNT OF DIVIDEND INCOME EARN ED ON NON- TRADE INVESTMENTS; THAT THE ASSESSEE WAS QUERIED AS TO WHY EXPENDITURE IN RELATION TO EARN THE SAID EXEMPT INCOME BE NOT DISA LLOWED U/S 14A OF THE I.T. ACT, BY APPLYING RULE 8D OF THE I.T. RULES. 3. THE ASSESSEE CONTENDED THAT AS PER THE PROVISION S OF SECTION 14A OF THE ACT, ONLY EXPENDITURE INCURRED IN RELATION TO T HE INCOME NOT FORMING PART OF THE TOTAL INCOME IS NOT TO BE ALLOWED; THAT THE ASSESSEE COMPANY HAD NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDEND INCOM E FROM THE UNITS; THAT THE DIVIDEND RECEIVED WAS AUTOMATICALLY INVESTED BY THE MUTUAL FUND COMPANY AND THERE WAS NO EXPENDITURE OR CHARGES TAKEN BY TH E MUTUAL FUND COMPANY ITA 5179 & 5180(DEL)2011 3 FOR DISTRIBUTING SUCH DIVIDEND; THAT MOREOVER, NO M ETHOD AS PER THE PROVISIONS OF SECTION 14A(2) OF THE ACT HAD BEEN PR ESCRIBED; THAT THE ASSESSEE COMPANY HAD ITSELF DISALLOWED A SUM OF ` 17,26,027/-. 4. THE AO, HOWEVER, DID NOT AGREE WITH THE STAND TA KEN BY THE ASSESSEE COMPANY. HE HELD THAT THE PROVISIONS OF SECTION 14 A(2) OF THE ACT AND RULE 8D OF THE RULES ARE RETROSPECTIVE IN OPERATION AND WOULD APPLY TO THE YEAR UNDER CONSIDERATION, I.E., ASSESSMENT YEAR 2007-08. FOR THIS, RELIANCE WAS PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD.. ACCORDINGLY, AN AMOUNT OF ` 73,96,192/- WAS DISALLOWED U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES AS FOLLOWS:- CLAUSE PARTICULARS AMOUNT I. EXPENDITURE DIRECTLY RELATED TO EXEMPT INCOME - - - II. DISALLOWANCE OF INTEREST EXPENDITURE A.INTEREST EXPENDITURE INCURRED DURING THE YEAR B. AVERAGE VALUE OF INVESTMENT C. AVERAGE OF TOTAL ASSETS 12394846 164887087 96925334 8297784 ITA 5179 & 5180(DEL)2011 4 DISALLOWANCE= A*B/C III. AGGREGATE OF OPENING AND CLOSING VALUE OF INVESTMENT) AVERAGE VALUE OF INVESTMENT) % OF ABOVE AS PER RULE 8D 824435 TOTAL DISALLOWANCE (AGGREGATE OF (I),(II) & (III) 9122219 5. BEFORE THE LEARNED CIT(A), THE ASSESSEE COMPANY PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE V. DCIT TO CONTEND THAT RULE 8D OF THE RULES IS APPLICABLE ONLY FOR ASSESSMENT YEAR 2008-09 AND NOT FOR ASSESSMENT YEAR 2007-08, THE YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THA T THE AO HAD NOT CORRECTLY WORKED OUT THE DISALLOWANCE; THAT THE AVERAGE COST OF THE TOTAL ASSETS FOR THE PURPOSE OF RULE 8D (2)(II) OF THE RULES HAD BEEN TA KEN AT ` 9,69,25,334/- AS AGAINST THAT OF ` 71,63,31,427/-, WHICH HAD RESULTED IN EXCESS DISALL OWANCE OF ` 54,46,956/-; THAT THE AO HAD NOT POINTED OUT ANY DI RECT EXPENDITURE HAVING BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT IN COME, OTHER THAN THE INTEREST EXPENSES; AND THAT THEREFORE, THE DISALLOW ANCE BE RESTRICTED TO ITA 5179 & 5180(DEL)2011 5 17,26,027/-, WHICH AMOUNT STOOD ALREADY DISALLOWED BY THE ASSESSEE COMPANY ITSELF. 6. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) GRANTED A RELIEF OF ` 55,40,562/- TO THE ASSESSEE AS FOLLOWS:- I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT , THE OBSERVATIONS OF THE AO IN THE ASSESSMENT ORDER AND THE FACTS OF THE CASE. IN VIEW OF THE MUMBAI HIGH COURT DECISION IN THE CASE OF GODRE J & BOYCE (SUPRA), RULE 8D IS APPLICABLE FROM A.Y. 2008-09 AN D NOT RETROSPECTIVELY. IT HAS FURTHER BEEN HELD IN THAT CASE THAT THE A.O. IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS B EEN INCURRED IN RELATION TO SUCH EXEMPT INCOME. FOR THIS PURPOSE A REASONABLE BASIS HAS TO BE ADOPTED FOR DETERMINING THE APPORTIONMENT OF EXPENSES. IN THIS REGARD, IT IS SEEN THAT IN A.Y. 2006-07 IN THE APPELLANTS OWN CASE, % OF THE VALUE OF TOTAL AVERAGE ASSETS WAS HELD BY THE AO AS EXPENSES INCURRED FOR EARNING EXEMPT INCOME. THIS DECISION OF THE A.O. HAS BEEN ACCEPTED BY THE APPELLANT. THE FACT S OF THE CASE DURING THE YEAR UNDER CONSIDERATION BEING THE SAME, IT IS HELD THAT % OF THE TOTAL AVERAGE ASSETS DURING THE YEAR IS THE EXPENSE S WHICH CAN BE REASONABLY ATTRIBUTED TO EARNING OF THE DIVIDEND IN COME. AS PER THE APPELLANTS OWN WORKING, THE AVERAGE VALUE OF TOTAL ASSETS DURING THE YEAR IS 71.63 CRORES. THEREFORE, % OF THE VALUE O F THE AVERAGE ASSETS COMES TO RS.35,81,657/-, WHICH IS HELD AS EX PENSES ATTRIBUTABLE TO EARNING OF THE DIVIDEND INCOME. AS THE APPELLAN T HAS ITSELF DISALLOWED AN AMOUNT OF RS.17,26,027/-, THE BALANCE AMOUNT I.E. RS.18,55,630/- IS ADDED TO THE INCOME OF THE APPELL ANT ON ACCOUNT OF DISALLOWANCE OF EXPENSES INCURRED FOR EARNING OF EX EMPT INCOME U/S 14A OF THE ACT. AS A RESULT, THE APPELLANT GETS A RELIEF OF RS.55,40,562/- (I.E. 7396192 1855630). ITA 5179 & 5180(DEL)2011 6 7. CHALLENGING THE IMPUGNED ORDER IN THIS REGARD, T HE LD. DR HAS ARGUED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISAL LOWANCE CORRECTLY MADE BY THE AO, TO THE EXTENT OF ` 55,40,562/-, OUT OF TOTAL DISALLOWANCE OF ` 73,96,192/-; THAT WHILE DOING SO, THE LD. CIT(A) ER RED IN HOLDING THAT ONE HALF PERCENT OF THE VALUE OF THE TOTAL AVERAGE ASSE TS DURING THE YEAR WAS THE EXPENSES WHICH COULD REASONABLY BE ATTRIBUTED TO TH E EARNING OF THE DIVIDEND INCOME, BASED ON THE ASSESSMENT ORDER FOR THE ASSES SMENT YEAR 2006-07; THAT THE LD. CIT(A) FAILED TO CONSIDER THAT THE AO HAD C ORRECTLY ARRIVED AT THE TOTAL DISALLOWANCE OF ` 91,22,219/- AS PER RULE 8D OF THE RULES AND HAD DEDUCTED THERE-FROM THE AMOUNT OF ` 17,26,027/- DISALLOWED BY THE ASSESSEE COMPANY ITSELF, TO ARRIVE AT THE NET DISALLOWANCE O F ` 73,96,192/-/ 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT THE AO HAD NOT MADE THE DISALLOWANCE CORRECTLY, RULE 8D OF THE RULES NOT BEING APPLICABLE FOR THE ASSESSMENT YEAR 2007-08, AS HELD IN GODREJ & BOYCE (SUPRA); THAT THE AVERAGE COST OF TOTAL ASSETS FOR THE PURPOSE OF RULE 8D(2) (II) OF THE RULES HAD FURTHER BEEN WRONGLY TAKEN AT ` 9,69,25,334/- AS AGAINST ` 71,63.31,427/-; THAT DUE TO THIS, THE EXCESS DISALL OWANCE OF ` 54,46,956/- HAD RESULTED; THAT MOREOVER, THE AO HAD NOT POINTED OUT ANY DIRECT ITA 5179 & 5180(DEL)2011 7 EXPENDITURE HAVING BEEN INCURRED BY THE ASSESSEE, O THER THAN THE INTEREST EXPENSES, FOR EARNING THE EXEMPT INCOME; THAT THE L D. CIT(A) RIGHTLY ADOPTED THE BASIS OF ONE HALF PERCENTAGE OF THE VALUE OF TH E TOTAL AVERAGE ASSETS AS THE EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME; AN D THAT THIS VERY BASIS HAD BEEN ADOPTED BY THE AO FOR THE ASSESSMENT YEAR 2006-07 AND THE SAME HAD BEEN ACCEPTED BY THE ASSESSEE. 9. WE HAVE HEARD THE PARTIES ON THIS ISSUE. TRUE, AS PER GODREJ & BOYCE (SUPRA), RULE 8D OF THE RULES IS APPLICABLE ONLY PROSPECTIVELY WITH EFFECT FROM ASSESSMENT YEAR 2008-09 AND IT IS NOT A PPLICABLE TO ASSESSMENT YEAR 2007-08, I.E., THE YEAR UNDER CONSIDERATION HE RE. HOWEVER, IN GODREJ & BOYCE (SUPRA), IT HAS ALSO BEEN HELD THAT THE AO HAS TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, FOR WHICH DETERMINATION, A REASONABLE BASIS NEEDS BE ADOPTED. THE LD. CIT( A), IT IS SEEN, HAS TAKEN ONE HALF PERCENT OF THE VALUE OF THE TOTAL AVERAGE ASSETS OF THE ASSESSEE AS THE EXPENSES ATTRIBUTABLE TO EARNING THE DIVIDEND INCOM E. THIS WAS ALSO THE BASIS OF THE DETERMINATION OF THE APPORTIONMENT OF EXPENSES FOR ASSESSMENT YEAR 2006-07, AS ARRIVED AT BY THE AO. THE SAME WAS NOT CHALLENGED BY THE ASSESSEE. THE DISALLOWANCE RESTRICTED BY THE LD. CIT(A) FROM ` 73,96,192/-, AS MADE BY THE AO, TO ` 55,40,562/-, AS SUCH, IS FOUND TO BE REASONABLE, CALLING FOR NO INTERFERENCE. THE ASSESSEE IS ALSO NOT IN APPEAL AGAINST THIS ITA 5179 & 5180(DEL)2011 8 DISALLOWANCE. THE DEPARTMENT HAS NOT BEEN ABLE TO SHOW AS TO HOW THE AFORESAID BASIS TAKEN BY THE LD. CIT(A) FOR DETERMI NING THE APPORTIONMENT OF EXPENSES IS NOT REASONABLE. MORE-OVER, THE ASSESSE ES CONTENTION THAT THE AO HAD WRONGLY TAKEN THE AVERAGE COST OF TOTAL ASSE TS AT ` 9,69,25,334/- AS AGAINST THAT OF ` 71,63,31,427/-, RESULTING IN EXCESS DISALLOWANCE OF ` 54,46,956/-, HAS ALSO NOT BEEN SUCCESSFULLY REFUTE D BY THE DEPARTMENT. 10. AS SUCH, FINDING NO ERROR WHATSOEVER IN THE ORD ER OF THE LD. CIT(A) ON THIS ISSUE, WE HEREBY AFFIRM THE SAME, REJECTING GR OUND NO.1 RAISED BY THE DEPARTMENT. 11. COMING TO GROUND NO.2, THE ASSESSEE HAD CLAIMED AN AMOUNT OF ` 7,97,16,494/- IN THE PROFIT AND LOSS ACCOUNT ON ACC OUNT OF MARKET DEVELOPMENT EXPENSES. THE AO HELD THAT THIS EXPEN DITURE WAS OF CAPITAL NATURE. HE MADE A NET ADDITION OF ` 5,97,87,370/- AFTER ALLOWING 25% EXPENSES AS DEPRECIATION. WHILE DOING SO, IT WAS OBSERVED THAT ON QUERY, THE ASSESSEE HAD SUBMITTED A COPY OF ITS AGREEMENT WITH CRMI; THAT AN ANALYSIS OF CLAUSE 3.1(C) AND (D) OF THE SAID AGREE MENT REVEALED THAT AN EXCLUSIVITY RIGHT HAD BEEN PROVIDED TO THE ASSESSE E COMPANY OVER THE CUSTOMERS OF CRMI, WHICH WOULD GIVE AN EDGE TO THE ASSESSEE COMPANY OVER THE OTHER COMPANIES REGARDING THE SERVICES IN THE USA AND CANADA, THE ITA 5179 & 5180(DEL)2011 9 TERRITORY DEFINED IN THE AGREEMENT; AND THAT THIS T YPE OF RIGHT ON AN EXCLUSIVE BASIS AMOUNTED TO AN INTANGIBLE ASSETS TO THE ASSESSEE COMPANY. 12. BEFORE THE LD. CIT(A), THE ASSESSEE COMPANY SUB MITTED THAT NO REPLY AS PARA 4 OF THE ASSESSMENT ORDER HAD BEEN FILED BE FORE THE AO; THAT SINCE DURING THE YEAR, NO AGREEMENT BETWEEN THE ASSESSEE AND CRMI WAS INEXISTENCE AND SO, THERE WAS NO QUESTION OF FILING IT BEFORE THE AO; AND THAT THE DETAILS OF THE MARKET DEVELOPMENT EXPENSES WERE EXPLAINED BEFORE THE AO THROUGH AN ANNEXURE ALONG WITH THE ASSESSEES LE TTER DATED 21.10.09. A COPY THEREOF WAS FILED BEFORE THE LD. CIT(A). 13. THE LD. CIT(A) OBSERVED IN PARA 14 OF THE IMPUG NED ORDER THAT AS PER THE SAID LETTER DATED 21.10.09, THE DETAILS OF SOME OF THE EXPENSES UNDER THE HEAD OF MARKET DEVELOPMENT EXPENSES HAD BEEN FILED BY THE ASSESSEE AS FOLLOWS:- (I) THE AMOUNT OF RS.42,26,356/- WAS INCURRED ON TRADE FAIR EXPENSES AT HANNOVER GERMANY. AGAINST T HIS EXPENDITURE, THE APPELLANT HAD RECEIVED AN AMOUNT O F RS. 60 LAKHS FROM GROUP COMPANIES. THIS AMOUNT OF RS. 60 LAKHS WAS INCLUDED IN THE FIGURE OF RS.6,40,54,9 24/- APPEARING UNDER THE SUB-HEAD STRATEGIC ADVISORY SERVICES, HEAD REVENUE SCHEDULE 9 OF THE AUDITED ACCOUNTS. (II) FRANCHISE EXPENSES OF RS.2,69,24,903/- AGAI NST WHICH THE APPELLANT HAD SHOWN RECEIPTS FROM FRANCHI SE CENTERS UNDER THE SUBHEAD EDUCATION & TRADING RECEIPT, HEAD REVENUE SCH. 9, WHICH FORMS PART OF ITA 5179 & 5180(DEL)2011 10 RS. 13,96,76,553/-. A NOTE ON THE FRANCHISE EXPENS ES WAS ALSO FILED ACCORDING TO WHICH HERO MINDMINE, A BUSINESS UNIT OF THE APPELLANT WAS PRIMARILY ENGAGE D IN THE BUSINESS OF IMPARTING EDUCATION, TRAINING AND CONSULTANCY. THIS UNIT HAD BEEN CONDUCTING ITS BUS INESS THROUGH ITS OWN TRAINING CENTERS AS WELL AS THROUGH FRANCHISEES. HERO MINDMINE HAD ENTERED INTO FRANCHISE AGREEMENT WITH VARIOUS PARTIES TO GRANT A LICENSE FOR DELIVERING VARIOUS SERVICES AS PER THE AGREEMENT. A SAMPLE COPY OF THE AGREEMENT WITH THE FRANCHISEES WAS ALSO FILED. UNDER THE FRANCHISEE AGREEMENT, THE COMPANY EARNS INCOME FROM THE TECHNICAL KNOW-HOW FEE, LICENSE FEE AND COURSE FEE RECEIVED FROM THE STUDENTS. OUT OF THE COURSE FEE RECEIVED, THE COMPANY PAYS 80% OF THE AMOUNT COLLECTED TO THE FRANCHISEES FOR THE VARIOUS SERVIC ES RENDERED AND EXPENSES INCURRED BY THEM AS PER THE TERMS OF CLAUSE 10.3 OF THE FRANCHISEE AGREEMENT. THESE EXPENSES (80% OF THE COURSE FEE) HAVE BEEN BOOKED UNDER THE HEAD FRANCHISEE EXPENSES, WHICH HAVE BEEN SHOWN IN THE SCHEDULE UNDER THE MARKET DEVELOPMENT EXPENSES. ACCORDINGLY, IT WAS SUBMITTE D THAT AS THESE EXPENSES ARE DIRECT EXPENDITURE RELAT ING TO THE APPELLANTS BUSINESS AND REVENUE IN NATURE, THEREFORE , THIS EXPENDITURE SHOULD NOT BE DISALLOW ED. (III) SERVICES CHARGES OF NSURE PLUS AMOUNTING T O RS.3,35,16,410/-. THIS PAYMENT WAS MADE BY THE APPELLANT TO SERVICE PROVIDERS FOR INSURANCE BUSINE SS, AGAINST WHICH THE APPELLANT HAD SHOWN COMMISSION INCOME OF RS.7,16,86,888/- AND ONLINE DATABASE RETRIEVAL SERVICES REVENUE OF RS.3,25,00,000/- UNDE R THE SUB-HEAD INSURANCE COMMISSION, HEAD REVENUE. 14. FROM THE ABOVE DETAILS, THE LD. CIT(A) OBSERVED THAT IN SCHEDULE 11 OF THE AUDITED ACCOUNTS OF THE ASSESSEE COMPANY, AN AM OUNT OF ` ITA 5179 & 5180(DEL)2011 11 7,97,16,494/- HAD BEEN DEBITED TO THE PROFIT AND LO SS ACCOUNT ON ACCOUNT OF MARKET DEVELOPMENT EXPENSES, THE DETAILS WHEREOF WERE AS FOLLOWS:- F.Y. 2006-07 TOTAL JUSTIFICATION OF EXPENSES BUSINESS PROMOTION EXPENSES 1,77,255 SALES PROM OTION EXPENSES ENTERTAINMENT EXPENSES 12,64,145 ENTERTAINMENT EXPENSES GIFT EXPENSES 3,77,157 GIFTS TO CUSTOMERS TRADE FAIR EXPENSES 42,26,356 THE COMPANY INCURRED THE EXPENSES FOR THE PARTICIPATION OF HERO GROUPS COMPANIES IN THE HANNOVER FAIR, GERMANY AND RECEIVED INCOME OF RS.60 LACS FROM VARIOUS GROUP COMPANIES FOR THE SAME. FRANCHISEE EXPENSES 2,69,24,903/- SHARE OF FRANCHISEES IN MINDMINE RETAIL CENTER COLLECTIONS INCOME RECEIVED UNDER THE HEAD EDUCATION AND TRAINING ART WORKS & DESIGN 93,420/- RELATED TO ADVERTISING EXPENSES TO MINDMINE BUSINESS HOARDING KIOSK & BUS SHELTER 10,27,259/- OUTDOOR AD VERTISING EXPENSES RELATED TO MINDMINE BUSINESS INSERTS 1,16,178/- INSERTS IN NEWSPAPER ITA 5179 & 5180(DEL)2011 12 ETC, OUTDOOR ACTIVITIES 15,35,097/- OUTDOOR PROMOTIONAL ACTIVITIES INCLUDING ROADSHOWS. ETC. PAPER ADVERTISEMENTS 1,02,66,258/- NEWSPAPER ADVERTISING RELATING TO CURRENT BUSINESS OF MINDMINE SPONSORSHIP CHARGES 1,00,000/- CO-SPONSORSHIP CHARGES FOR ACMA SUMMIT HELD AT NEW DELHI PROMOTIONAL MATERIAL 92,056/- RELATED TO ADVERTISING SERVICE CHARGES (NSURE PLUS) 3,35,16,410/- SERVICE CHARGES PAID TO SERVICE PROVIDERS IN INSURANCE BUSINESS AGAINST THE INSURANCE COMMISSION INCOME. THE LD. CIT(A) OBSERVED THAT ALL THE AFORESAID EXPE NSES WERE REVENUE EXPENSES; THAT AGAINST THE MAIN EXPENSES, THE CORRE SPONDING INCOME HAD ALSO BEEN SHOWN UNDER DIFFERENT HEADS UNDER THE MAIN HEA D REVENUE IN SCHEDULE 9 OF THE ASSESSEES AUDITED ACCOUNTS; THAT NONE OF THESE PAYMENTS HAD BEEN MADE TO CRMI, AS OBSERVED EVEN BY THE AO IN THE ASS ESSMENT ORDER; THAT FURTHER, IN THE IMMEDIATELY PRECEDING ASSESSMENT YE AR, THE ASSESSEE HAD CLAIMED MARKET DEVELOPMENT EXPENSES OF ` 4,27,85,775/-; THAT THIS CLAIM HAD BEEN ALLOWED; THAT IN THE YEAR UNDER CONSIDERAT ION, NO CHANGE, EITHER IN THE CLASSIFICATION OF THE EXPENSES, OR IN THE NATUR E THEREOF, HAD COME ABOUT; ITA 5179 & 5180(DEL)2011 13 AND THAT THEREFORE, THE MARKET DEVELOPMENT EXPENSES CLAIMED BY THE ASSESSEE WERE ALLOWABLE. IN THIS MANNER, THE LD. C IT(A) DELETED THE ADDITION OF ` 5,97,87,370/-. 15. BEFORE US, THE LD. DR HAS CONTENDED THAT THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION CORRECTLY MADE BY THE AO ON A CCOUNT OF MARKET DEVELOPMENT EXPENSES; THAT WHILE DOING SO, THE LD. CIT(A) HAS FAILED TO MEET THE CATEGORIC OBSERVATIONS MADE BY THE AO IN T HE ASSESSMENT ORDER TO THE EFFECT THAT AN EXCLUSIVITY RIGHT WAS GRANTED TO THE ASSESSEE COMPANY OVER THE CUSTOMERS OF CRMI AND THIS WOULD GIVE AN E DGE TO THE ASSESSEE COMPANY OVER THE OTHER COMPANIES REGARDING THE SERV ICES IN USA AND CANADA, AMOUNTING TO AN INTANGIBLE ASSETS TO THE AS SESSEE COMPANY; THAT THEREFORE, THE EXPENDITURE WAS REVENUE EXPENDITURE AND WAS NOT CAPITAL EXPENDITURE AT ALL, WHICH HAS NOT BEEN CONSIDERED B Y THE LD. CIT(A). 16. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER, CONTENDING T HAT THESE ARE ANNUAL EXPENSES OF THE ASSESSEE COMPANY; THAT IT IS NOT TH E AOS CASE THAT THE EXPENSES WERE NOT NECESSARY FOR THE RUNNING OF THE ASSESSEES BUSINESS; THAT COMPLETE DETAILS WERE FILED; THAT THE AO, HOWEVER, WRONGLY APPLIES RELIANCE ON NON-EXISTENT AGREEMENT; THAT AS SUCH, THE LD. CI T(A) CORRECTLY DELETED THE ADDITION WRONGLY MADE. ITA 5179 & 5180(DEL)2011 14 17. QUA THIS ISSUE, IT IS SEEN THAT NONE OF THE EXP ENSES IS CAPITAL EXPENDITURE, AS AVAILABLE FROM THE TABLE CONTAINED IN PARA 15 AT PAGE 16 OF THE LD. CIT(A)S ORDER. THESE EXPENSES INCLUDE SA LES PROMOTION EXPENSES, ENTERTAINMENT EXPENSES, GIFTS TO CUSTOMERS, EXPENSE S ON PARTICIPATION OF HANNOVER FAIR IN GERMANY OF THE HERO GROUP OF COMPA NIES, FRANCHISEE EXPENSES, CONCERNING THE HERO MINDMINE RETAIL CENT RE, ART WORKS AND DESIGNS, I.E., ADVERTISING EXPENSES TO THE MINDMINE BUSINESS AND OUTDOOR EXPENSES OF THE SAID ADVERTISEMENT EXPENSES, INSERT S IN NEWS PAPER, ETC., OUTDOOR PROMOTIONAL ACTIVITIES INCLUDING ROADSHOWS ETC., NEWS PAPER ADVERTISING RELATING TO CURRENT BUSINESS OF MINDMIN E, CO-SPONSORSHIP CHARGES FOR ACMA SUMMIT HELD AT NEW DELHI, PROMOTIO NAL MATERIAL RELATED TO ADVERTISING AND SERVICE CHARGES PAID TO SERVICE PROVIDERS IN INSURANCE BUSINESS. AS PER THE UNDISPUTED DETAILS FILED BY THE ASSESSEE BEFORE THE AO VIDE LETTER DATED 21.10.09 (SUPRA), AN AMOUNT OF ` 32,26,356/- WAS INCURRED ON TRADE FAIR EXPENSES AT HANNOVER FAIR IN GERMANY AGAINST WHICH EXPENDITURE, AN AMOUNT OF ` 60,00,000/- HAD BEEN RECEIVED BY THE ASSESSEE COMPANY FROM ITS GROUP COMPANIES. THE SAID AMOUNT OF ` 60,00,000/- WAS INCLUDED IN THE FIGURE OF ` 6,40,54,924/-, WHICH APPEARED IN SCHEDULE 9 OF THE ACCOUNTS, UNDER SUB-HEAD STRATEGIC ADVISORY SE RVICES UNDER THE HEAD ITA 5179 & 5180(DEL)2011 15 REVENUE. THEN, THERE WERE FRANCHISEE EXPENSES O F ` 2,69,24,903/-. THERE AGAINST, THE ASSESSEE COMPANY HAD SHOWN RECEI PTS FROM FRANCHISEE CENTRES IN SCHEDULE 9 TO THE ACCOUNTS, UNDER THE SU B-HEAD, EDUCATION AND TRADING RECEIPT, UNDER THE HEAD REVENUE, FORMING PART OF ` 13,96,76,553/-. IT HAD BEEN EXPLAINED BY VIRTUE O F A NOTE ON THE FRANCHISEE EXPENSES, THAT HERO MINDMINE, WHICH WAS A BUSINE SS UNIT OF THE ASSESSEE COMPANY WAS MAINLY ENGAGED IN IMPARTING EDUCATION, TRAINING AND CONSULTANCY AND HAD BEEN CONDUCTING ITS BUSINESS BO TH THROUGH ITS OWN TRAINING CENTRES AND ALSO THROUGH FRANCHISEES; AND THAT HERO MINDMINE WAS ENTERED INTO A FRANCHISEE AGREEMENT WITH DIFFERENT PARTIES FOR GRANT OF LICENCE FOR DELIVERING VARIOUS SERVICES UNDER THE F RANCHISEE AGREEMENT, A COPY WHEREOF HAD BEEN FILED BEFORE THE AO, THE ASSE SSEE COMPANY EARNED INCOME FROM TECHNICAL KNOW-HOW FEE, LICENCE FEE AND COURSE FEE RECEIVED FROM CUSTOMERS. 80% OF THE AMOUNT COLLEC TED AS COURSE FEE WAS DISBURSED TO THE FRANCHISEES FOR VARIOUS SERVICES R ENDERED AND EXPENSES INCURRED AS PER THE TERMS OF CLAUSE 10.3 OF THE AGR EEMENT. SUCH PAYMENT OF 80% OF THE COURSE FEE RECEIVED WERE BOOKED AS FRANC HISE EXPENSES, DEPICTED IN THE SCHEDULE UNDER MARKET DEVELOPMENT E XPENSES. THE AMOUNT OF ` 3,35,16,410/- REPRESENTED SERVICE CHARGES OF NSURE PLUS. THIS REPRESENTED PAYMENT BY THE ASSESSEE TO SERVICE PROV IDERS FOR INSURANCE ITA 5179 & 5180(DEL)2011 16 BUSINESS. ` 7,16,86,888/- HAD BEEN RECEIVED BY THE ASSESSEE AS COMMISSION INCOME THERE AGAINST AND ONLINE DATABASE RETRIEVAL SERVICES REVENUE OF ` 3,25,00,000/- UNDER THE SUB-HEAD INSURANCE COMMISS ION UNDER THE HEAD REVENUE. 18. THESE DETAILS REMAIN UNDISPUTED. NONE OF THESE PAYMENTS WAS MADE BY THE ASSESSEE TO CRMI. MOREOVER, A SIMILAR CLAI M OF MARKET DEVELOPMENT EXPENSES AMOUNTING TO ` 4,27,85,775/- HAD BEEN MADE FOR THE ASSESSMENT YEAR 2006-07. THE SAME HAD BEEN ALLOWE D. IT HAS NOT BEEN SHOWN THAT THERE HAS BEEN ANY CHANGE IN THE FACTS F OR THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) HAS DULY TAKEN INTO CONSIDERATION ALL THESE FACTS WHILE RIGHTLY DELETING THE ADDITION MADE. A CCORDINGLY, FINDING NO MERIT THEREIN, GROUND NO.2 IS REJECTED. 19. SO FAR AS REGARDS GROUND NO.3, THE ASSESSEE CLA IMED AN AMOUNT OF ` 9,78,083/- IN THE PROFIT AND LOSS ACCOUNT TOWARDS C ONSULTANCY EXPENSES, OUT OF WHICH, PAYMENT OF ` 6,88,950/- HAD BEEN STATED TO HAVE BEEN MADE TO THE ARMAN AUTO GROUP OF USA. THIS PAYMENT WAS DIS ALLOWED BY THE AO, OBSERVING THAT NO TDS HAD BEEN MADE THEREON. ON QU ERY, THE ASSESSEE HAD SUBMITTED BEFORE THE AO THAT M/S. ARMAN AUTO GROUP, USA HAD BEEN APPOINTED FOR UNDERTAKING STRATEGIC STUDY OF PROJEC TS FOR AUTO COMPONENTS ITA 5179 & 5180(DEL)2011 17 BUSINESS IN NORTH AMERICA TO EXPLORE THE SCOPE OF D EVELOPING STRATEGY FOR SALES AND MARKETING ANALYSIS AND IDENTIFICATION OF CUSTOMERS IN NORTH AMERICA. THE ASSESSEE MAINTAINED THAT THE SERVICE S WERE RENDERED ABROAD AND NO INCOME OF THE SERVICE PROVIDER EITHER ACCRUE D OR COULD BE DEEMED TO HAVE ACCRUED IN INDIA, IN KEEPING WITH THE PROVISIO NS OF SECTION 9 OF THE I.T. ACT, NOR ANY SUCH INCOME HAD EITHER BEEN RECEIVED O R COULD BE DEEMED TO HAVE BEEN RECEIVED IN INDIA; AND THAT THEREFORE, NO TDS ON THIS AMOUNT WAS DEDUCTIBLE. THIS EXPLANATION OF THE ASSESSEE, HO WEVER, DID NOT FIND FAVOUR WITH THE AO, WHO MADE THE DISALLOWANCE BY JUST OBSE RVING THAT THIS EXPLANATION OF THE ASSESSEE HAS BEEN CONSIDERED AND FOUND UNACCEPTABLE. 20. THE LD. CIT(A) HAVING DELETED THE DISALLOWANCE, GROUND NO.3 HAS BEEN TAKEN BEFORE US BY THE REVENUE. 21. IN THIS REGARD, THE LD. DR CONTENDED BEFORE US THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE CORRECTLY MADE; THAT THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THAT IT DOES NOT MAKE ANY DIFFERENCE IF THE RECIPIENT WAS OR WAS NOT AN NON-RESIDENT IN INDIA; THAT THE L D. CIT(A) HAS ERRONEOUSLY OVER-LOOKED THE FACT THAT THE BUSINESS WAS BEING CONDUCTED IN INDIA AND THAT TDS WAS REQUIRED TO BE MADE ON THE PAYMENT OF ` 6,88,950/- MADE BY THE ASSESSEE TO THE ARMAN AUTO GROUP. ITA 5179 & 5180(DEL)2011 18 22. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, HAS, AGAIN, RELIED ON THE IMPUGNED ORDER. IT HAS BEEN SUBMITTE D THAT THE PAYMENT WAS MADE TO THE ARMAN AUTO GROUP, USA FOR UNDERTAKING S TRATEGIC STUDY OF PROJECTS OF AUTO COMPONENTS BUSINESS IN NORTH AMERI CA TO FIND OUT THE SCOPE OF DEVELOPING STRATEGY FOR SALES AND MARKET ING ANALYSIS AND IDENTIFICATION OF CUSTOMERS IN NORTH AMERICA; THAT THE SERVICES WERE NOT RENDERED IN INDIA AND NO TDS WAS DEDUCTIBLE ON THE PAYMENT, SINCE ACCORDING TO SECTION 9 OF THE ACT, IN SUCH CIRCUMST ANCES, NO INCOME ACCRUED OR COULD BE DEEMED TO HAVE ACCRUED IN INDIA, NOR WA S ANY SUCH INCOME RECEIVED OR CAN BE DEEMED TO HAVE RECEIVED IN INDIA ; AND THAT THE LD. CIT(A) HAS CORRECTLY DELETED THE ADDITION WRONGLY MADE. 23. ON THIS ISSUE, IT IS SEEN THAT THE AO MERELY RE JECTED THE EXPLANATION OFFERED BY THE ASSESSEE, WITHOUT RECORDING ANY FIND ING AS TO WHY IT WAS BEING SO DONE. WHILE DELETING THE ADDITION, THE LD. CIT (A) HAS CORRECTLY OBSERVED THAT IT HAD NOT BEEN POINTED OUT BY THE AO AS TO WH ICH CLAUSE OF SECTION 9 OF THE ACT WAS APPLICABLE TO THE ASSESSEE AND AS TO WH Y TDS WAS REQUIRED TO BE MADE ON THE PAYMENT. THERE HAS BEEN NO CONTRAVEN TION OF THE ASSESSEES STAND TO THE EFFECT THAT THE SERVICES WERE RENDERED OUTSIDE INDIA AND THAT BEING SO, NO INCOME EITHER ACCRUED OR WAS RECEIVED OR COULD BE DEEMED TO HAVE ACCRUED OR BEEN RECEIVED IN INDIA. AS SUCH, THE TDS WAS NOT ITA 5179 & 5180(DEL)2011 19 DEDUCTIBLE ON THE PAYMENT MADE AND THE DISALLOWANCE OF THE EXPENDITURE WAS NOT JUSTIFIED. ACCORDINGLY, FINDING NO ERROR THERE-WITH, THE CIT(A)S CONCLUSION ON THIS ISSUE TOO IS UPHELD, REJECTING G ROUND NO.3. 24. RESULTANTLY, THIS APPEAL FILED BY THE DEPARTMEN T FOR THE ASSESSMENT YEAR 2007-08 IS DISMISSED. ITA NO. 5180(DEL)2011: 25. IN THIS APPEAL FOR THE ASSESSMENT YEAR 2007-08 IN THE CASE OF M/S. HERO MANAGEMENT SERVICES LTD., THE DEPARTMENT HAS T AKEN THE FOLLOWING GROUNDS:- 1. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 69,65,686/- U/S 14A READ WITH RULE 8D MADE BY THE AO. 2. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 93,40,408/- MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN RATE OF INTEREST ON LOAN TO GROUP COMPANY. 3. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 77,15,000/- ON ACCOUNT OF RECRUITMENT AND TRAINING EXPENSES BY TRE ATING THEM AS REVENUE EXPENDITURE. 4. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 2,51,96,577/- ON ACCOUNT OF PROVISION. ITA 5179 & 5180(DEL)2011 20 5. WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW IN DELETING THE DISALLOWANCE OF RS. 1,79,33,349/- MADE BY THE AO IGNORING THE FACT THAT PAYMENTS WERE IN THE NATURE OF RENT AND PROVISIONS OF TDS WERE ATTRACTED. 26. GROUND NO.1 CORRESPONDS TO GROUND NO.1 IN ITA N O. 5179(DEL)2011. THE FACTS IN THE PRESENT CASE ARE, MUTATIS MUTANDIS , EXACTLY THE SAME AS THOSE PRESENT THEREIN. THEREFORE, FOR THE REASONS RECORDED WHILE DEALING WITH ITA NO. 5179(DEL)2011, GROUND NO.1 IN THE PRES ENT APPEAL IS REJECTED. 27. GROUND NO.2 STATES THAT THE LD. CIT(A) HAS ERRE D IN DELETING THE DISALLOWANCE OF ` 93,40,408/- MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN THE RATE OF INTEREST ON LOAN TO THE GROUP COMPANY. THE FACTS ARE THAT THE ASSESSEE COMPANY HAD ADVANCED CERTAIN LOANS TO ITS SISTER CONCERN, NAMELY, M/S. HERO CORPORATE SERVICES LTD., THE ASSESSEE IN ITA NO. 5179(DEL)2011. ON THIS LOAN, THE ASSESSEE HAD RECEIVED INTEREST @ 6%, AMOUNTING TO ` 42,44,627/-. ON THE OTHER HAND, THE ASSESSEE COMP ANY HAD TAKEN INTEREST BEARING LOAN FROM ANOTHER COMPANY, VIZ., M/S. ARROW INFRASTRUCTURE LTD. ON THIS LOAN TAKEN, THE ASSESSEE COMPANY HAD PAID I NTEREST @ 7%, AMOUNTING TO ` 11,14,726/-. THE AO ADDED THE DIFFERENCE OF 1% AMO UNTING TO ` 93,40,408/-. ITA 5179 & 5180(DEL)2011 21 28. WHILE DELETING THE ADDITION, THE LD. CIT(A) OBS ERVED THAT IT WAS NOT CLEAR FROM THE ASSESSMENT ORDER AS TO HOW THE FIGUR E OF ` 93,40,408/- HAD BEEN ARRIVED AT, SINCE THE TOTAL AMOUNT OUTSTANDING IN THE ACCOUNT OF M/S. HERO CORPORATE SERVICES LTD. WAS AT ` 5.60 CRORES, ON WHICH, INTEREST OF ` 42,44,627/- HAD BEEN RECEIVED BY THE ASSESSEE, WHER EAS THE ASSESSEE HAD TAKEN LOAN OF ` 2.5 CRORES FROM M/S. ARROW INFRASTRUCTURE LTD., ON WHICH, INTEREST OF ` 11,14,726/- HAD BEEN PAID; THAT AT THE MOST, DISALL OWANCE OF 1/7 TH OF ` 11,14,726/-, AMOUNTING TO ` 1,59,246/- COULD HAVE BEEN MADE; THAT THE ASSESSEE HAD MAINTAINED THAT THE LOAN GIVEN WAS AN OLD LOAN OUTSTANDING FROM F.Y. 2002-03, WHEREAS THE LOAN TAKEN WAS TAKEN ONLY DURING THE CURRENT YEAR, I.E. F.Y. 2006-07, RELEVANT TO ASSESSMENT YEA R 2007-08; THAT THERE HAD BEEN NO NEXUS BETWEEN 7% INTEREST BEARING LOAN RECE IVED BY THE ASSESSEE AND 6% INTEREST BEARING LOAN GIVEN BY THE ASSESSEE; AND THAT THE AO HAD NOT GIVEN ANY OBSERVATION/FINDING ON THE SAID SUBMISSIO N OF THE ASSESSEE. 29. BEFORE US, THE LD. DR HAS CONTENDED THAT IT IS INDEED CORRECT THAT THE FIGURE OF ` 93,40,408/- WAS AN ERRONEOUS FIGURE; THAT HOWEVER, DISALLOWANCE OF 1% IS CALLED FOR. ITA 5179 & 5180(DEL)2011 22 30. THE LEARNED COUNSEL FOR THE ASSESSEE, PER CONTR A, HAS PLACED RELIANCE ON THE IMPUGNED ORDER, SUBMITTING THAT THE LOAN GIV EN WAS GIVEN IN F.Y. 2003-04, WHEREAS THE LOAN TAKEN WAS TAKEN IN F.Y. 2 006-07. 31. THE FACTS REMAIN UNDISPUTED . THE LOAN GIVE N WAS THE OLD LOAN OUTSTANDING FROM 2003-04. THE LOAN TAKEN , ON THE OTHER HAND, WAS TAKEN DURING THE YEAR UNDER CONSIDERATION, F.Y. 2006-07. AS SUCH, THE AO DID NOT PROVE ANY NEXUS BETWEEN 7% INTEREST BEARING LOAN RE CEIVED AND THE 6% INTEREST BEARING LOAN GIVEN BY THE ASSESSEE COMPANY . IT HAS ALSO NOT BEEN SHOWN THAT FOR GIVING THE LOAN, ANY LOAN WAS TAKEN BY THE ASSESSEE COMPANY. THEREFORE, FINDING NO MERIT THEREIN, GROUND NO.2 IS REJECTED. 32. AS PER GROUND NO.3, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 77,15,000/- ON ACCOUNT OF RECRU ITMENT AND TRAINING EXPENSES. 33. THE ASSESSEE HAD DEBITED AN AMOUNT OF RS. 1,37, 79,797/- UNDER RECRUITMENT AND TRAINING EXPENSES. OUT OF THIS, RS. 77,15,000/- HAD BEEN SHOWN TO HAVE BEEN INCURRED ON TRAINING EXPENSES O F STAFF MEMBERS. DISALLOWING THE EXPENDITURE AS A CAPITAL EXPENDITUR E, THE AO HELD THAT THE TRAINING GIVEN TO THE MEMBERS WAS OF AN ENDURING NA TURE. ITA 5179 & 5180(DEL)2011 23 34. DELETING THE ADDITION, THE LD. CIT(A) OBSERVED THAT WITHOUT THE TRAINING IMPARTED, THE EMPLOYEES OF THE ASSESSEE CO ULD NOT PERFORM THE DESIRED FUNCTIONS OF THE ASSESSEE'S BUSINESS; AND T HAT ON THE SAME FACTS, NO SUCH DISALLOWANCE HAVE BEEN MADE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. 35. THE LD. DR MAINTAINS THAT THE TRAINING IMPARTED WAS OF AN ENDURING NATURE AND SO, THE AO WAS CORRECT IN HOLDING THE EX PENSES TO BE OF CAPITAL NATURE. IT IS THE DR'S CONTENTION THAT THE LD. CI T(A) HAS FAILED TO SEE THAT THE EXPENDITURE WAS AN INVESTMENT ON HUMAN RESOURCES AN D THEREFORE, IT WAS A CAPITAL EXPENDITURE. 36. IT HAS BEEN ARGUED BY THE LEARNED COUNSEL FOR T HE ASSESSEE IN THIS REGARD THAT THE RECRUITED STAFF OF THE ASSESSEE COM PANY REQUIRES TO BE SPECIFICALLY TRAINED FOR VOICE IN THE UK AND US ACC ENTS FOR A PERIOD OF ABOUT 2 WEEKS, FOR OPERATION OF CALL CENTRE AND THE BPO SERVICES. 37. IT REMAINS UNDISPUTED THAT IT IS THE BUSINESS R EQUIREMENT OF THE ASSESSEE COMPANY TO TRAIN THE STAFF RECRUITED FOR VOICE IN UK AND US ACCENTS. THIS IS NECESSARY FOR OPERATING CALL CEN TRE AND BPO SERVICES, IT IS THE BUSINESS OF THE ASSESSEE COMPANY. AS SUCH, TH E EXPENDITURE WAS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEE'S ITA 5179 & 5180(DEL)2011 24 BUSINESS. THAT BEING SO, THE EXPENDITURE INCURRED CANNOT BE SAID TO BE A CAPITAL EXPENDITURE. 38. THE TRIBUNAL IN SHRIRAM PISTON & RINGS LTD., IN ITA NO. 2771(DEL)09, FOR ASSESSMENT YEAR 2006-07,[COPY PLAC ED AT PAGES 13 TO 20 OF THE ASSESSEES PAPER BOOK (APB FOR SHORT)] HOLDS THAT EXPENSES INCURRED TOWARDS ISO-9001, SAFETY EXPENSES ARE PRIMARILY FOR TRAINING OF THE EMPLOYEES AND THAT THEREFORE, THE SAME ARE OF REVE NUE NATURE. IN THE ASSESSEES CASE, AS DISCUSSED, THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES OF THE ASSESS EE. THE EMPLOYEES OF THE ASSESSEE COMPANY, IN ORDER TO RUN THE CALL CENTRE A ND BPO SERVICES DID REQUIRE THE TRAINING OF VOICE AND ASCENT. 39. FORTIES HEALTHCARE LTD. (COPY AT APB 21 TO 25 ), RENDERED IN ITA NO. 1253(DEL)2010. FOR ASSESSMENT YEAR 2006-07, HOL DS A VIEW SIMILAR TO THE ONE TAKEN IN SHRIRAM PISTON & RINGS LTD.(SUPRA). 40. MOREOVER, THOUGH THE FACTS FOR THE YEAR UNDER C ONSIDERATION REMAINING THE SAME AS THOSE FOR ASSESSMENT YEAR 2006-07 AND N O DISALLOWANCE WAS MADE ON THIS ACCOUNT IN THAT YEAR, FOR THE YEAR UND ER CONSIDERATION, THE AO MADE THE DISALLOWANCE. ITA 5179 & 5180(DEL)2011 25 41. CONSIDERING THE ABOVE FACTS, WE HOLD THAT THE L D. CIT(A) CORRECTLY DELETED THE ADDITION. THEREFORE, GROUND NO. 3 IS REJECTED. 42. GROUND NO. 4 HAS BEEN RAISED AGAINST THE ACTION OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF ` 2,51,96,577/ - ON ACCOUNT OF PROVISION. THE AO, HOLDING THAT THE PROVISION MADE BY THE ASSESSEE WAS NOT ALLOWABLE, DISALLOWED AN AMOUNT OF ` 2,51,96,577/- ON ACCOUNT OF PROVISION FOR SALARY. SALARY FOR 2006-07 AMOUNTING TO ` 1,86,651/-, PROVISION ON ACCOUNT OF ELECTRICITY FOR 2006-07, AMOUNTING TO ` 2,39,80,283/- AND PROVISION ON ACCOUNT OF AMC CHARGES AMOUNTING TO ` 10,29,643/-. THE LD. CIT(A) DELETED THE ADDITION, APROPOS THE PROVISION ON ACCO UNT OF ELECTRICITY, IT WAS OBSERVED THAT THE ASSESSEE WAS SOURCING ITS MAINTEN ANCE REQUIREMENTS, INCLUDING ELECTRICITY, FROM M/S. PALM COURT MAINTEN ANCE AGENCY; THAT FOR THIS PURPOSE, THE ASSESSEE PAID ` 15 LAKHS PER MENSUM AFTER DEDUCTION OF TAX ON AN INTERIM BASIS; THAT AT THE YEAR END, THE ASSE SSEE DREW A SETTLEMENT ACCOUNT WITH THE AGENCY, BASED ON ACTUAL CONSUMPTIO N OF ELECTRICITY AND OTHER EXPENSES; THAT THE ASSESSEE HAD FILED DETAILS OF THE SUM REQUIRED TO BE PAID FOR THE YEAR, CONCERNING THE ELECTRICITY EXPEN SES AND OTHER SERVICES OBTAINED FROM THE AGENCY; THAT ACCORDING TO THE SET TLEMENT STATEMENT, THE ASSESSEE HAD PROVIDED AN AMOUNT OF ` 2,40,85,668/- FOR THE WHOLE YEAR AND ITA 5179 & 5180(DEL)2011 26 AFTER DEDUCTING TDS, THE NET AMOUNT OF PROVISION HA D BEEN SHOWN AT ` 2,39,80,283/-; AND THAT THEREFORE, THIS WAS THE AMO UNT THE ASSESSEE HAD TO PAY TO THE AGENCY FOR THE SERVICES UTILIZED DURING THE YEAR, INCLUDING ELECTRICITY EXPENSES. 43. CONCERNING THE AMC CHARGES, THE CONCLUSION OF T HE LD. CIT(A) WAS THAT THE AMOUNT WAS WITH RESPECT TO THE ASCERTAINED LIABILITY OF THE AMC CHARGES PAYABLE FOR THE YEAR. 44. SO FAR AS REGARDS THE SALARY PROVISION, IT WAS OBSERVED THAT THE SAME WAS IN RESPECT OF THE SALARY PAYABLE DURING THE YE AR BUT PAID IN THE FOLLOWING FINANCIAL YEAR. 45. THE LD. CIT(A) CONCLUDED THAT AS SUCH, ALL THE PROVISIONS MADE BY THE ASSESSEE WERE IN RESPECT OF EXPENSES FOR WHICH, THE LIABILITY HAD ALREADY BEEN INCURRED. 46. WHILE CHALLENGING THE AFORESAID DECISION OF THE LD. CIT(A) ON THIS ISSUE, THE LD. DR HAS SOUGHT TO PLACE RELIANCE ON T HE ASSESSMENT ORDER. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND , RELYING ON THE IMPUGNED ORDER, HAS CONTENDED THAT ALL THE THREE PROVISIONS WERE ACTUALLY PAID IN THE NEXT YEAR; THAT THE ASSESSEE IS FOLLOWING THE MERC ANTILE SYSTEM OF ACCOUNTING; AND THAT THEREFORE, THE PROVISIONS WERE NECESSARY PROVISIONS. ITA 5179 & 5180(DEL)2011 27 RELIANCE HAS BEEN PLACED ON CIT V. INSILCO LTD., 179 TAXMANN 55(DEL) AND CIT V. TRIVENI ENGG, 196 TAXMANN 94(DEL). 47. IN THIS REGARD, IT IS SEEN THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IN WHICH, THE EXPENDITURE ITE MS, FOR WHICH, THE LEGAL LIABILITY HAS BEEN INCURRED, ARE IMMEDIATELY DEBITE D EVEN BEFORE THE AMOUNTS ARE ACTUALLY DISBURSED, AS ALSO HELD IN MORVI INDU STRIES LTD. V. CIT, 82 ITR 835(SC). THE PAYMENT TO PALAM COURT MAINTENANCE A GENCY WAS A MONTHLY PAYMENT AFTER TDS, FOR THE MAINTENANCE REQUIREMENTS OF THE ASSESSEE, INCLUDING ELECTRICITY. THE PROVISION IN THIS REGA RD WAS MADE IN ACCORDANCE WITH THE SETTLEMENT STATEMENT BETWEEN THE ASSESSEE AND THE AGENCY, THE DETAILS WHEREOF WERE DULY FILED. THE PAYMENT WAS, IN FACT, FOR THE SERVICES RENDERED BY THE AGENCY FOR THE ASSESSEE. UNDISPUT EDLY, THE PAYMENT WAS MADE IN THE NEXT YEAR. THE PROVISION CANNOT BE SA ID TO BE AN UNASCERTAINED LIABILITY. THE SAME GOES FOR THE AMC CHARGES AS WE LL AS THE SALARY PROVISION. 48. IN INSILCO LTD.(SUPRA), IT HAS BEEN HELD THAT PROVISION FOR THE LIABILITY IS AMENABLE TO DEDUCTION IF THERE IS AN ELEMENT OF CERTAINTY THAT IT SHALL BE INCURRED AND IT IS POSSIBLE TO ESTIMATE THE LIABILI TY WITH REASONABLE CERTAINTY, EVEN THOUGH ACTUAL QUANTIFICATION MAY NOT BE POSSIB LE. IN THE PRESENT CASE, THE DEPARTMENT HAS NOT SHOWN THAT THERE IS NO CERTA INTY ATTACHED TO THE ITA 5179 & 5180(DEL)2011 28 INCURRENCE OF THE LIABILITY, NOR HAS IT BEEN MADE O UT THAT THE LIABILITY HAS BEEN ESTIMATED WITHOUT REASONABLE CERTAINTY. 49. TRIVENI ENGG.(SUPRA), IS ALSO SQUARELY APPLIC ABLE, SIMILARLY. 50. AS SUCH, WE DO NOT FIND ANY FORCE IN GROUND NO. 4 AND THE SAME IS HEREBY REJECTED. 51. COMING TO GROUND NO.5, THE DEPARTMENT CONTENDS THAT THE LD. CIT(A) HAS WRONGLY DELETED THE DISALLOWANCE OF ` 1,79,33,349/- ON ACCOUNT OF PAYMENT MADE TO PALM COURT MAINTENANCE LTD. 52. THE ASSESSEE HAD MADE THE ENTIRE ` 1,79,33,349/- TO M/S. PALM COURT MAINTENANCE LTD. IN RESPECT OF MONTHLY ELECTRICITY/ GENERATOR CHARGES AND MAINTENANCE OF BUILDING. DISALLOWING THE CLAIM, T HE AO HELD THAT THIS AMOUNT WAS IN THE NATURE OF RENT AND TDS SHOULD HAV E BEEN DEDUCTED ON THIS AMOUNT @ 22.2% WHEREAS, TDS HAD IN FACT BEEN DEDUC TED @ 2% ONLY. THE DISALLOWANCE WAS MADE U/S 40 (A)(IA) OF THE ACT. 53. BEFORE THE LD. CIT(A) THE ASSESSEE CONTENDED TH AT THE AO HAD WRONGLY OBSERVED THAT THE AMOUNT PAID WAS RENT ; TH AT IN FACT THE AMOUNT HAD BEEN PAID TO AGENCY ON AN INTERIM BASIS FOR VARIOUS SERVICES UTILIZED BY THE ASSESSEE; THAT ACTUALLY, THE AMOUNT PAID WAS THE B ALANCE SHEET ITEM APPEARING UNDER THE HEAD SUNDRY CREDITORS AND HAD NOT BEEN EITHER DEBITED TO THE PROFIT AND LOSS ACCOUNT, OR CLAIMED AS EXPEN SES; THAT TDS @ 2% HAD ITA 5179 & 5180(DEL)2011 29 DULY BEEN MADE; AND THAT THE ACCOUNT GETS SETTLED A T THE END OF THE YEAR DEPENDING UPON THE EXTENT OF ACTUAL MAINTENANCE SER VICE UTILIZED BY THE ASSESSEE DURING THE YEAR. 54. WHILE DELETING THE ADDITION, THE LD. CIT(A) OBS ERVED THAT IT WAS ON THE BASIS OF THE ADDRESS ON THE LETTER HEADS OF THE ADJ OURNMENT APPLICATIONS FILED BY THE ASSESSEE BEFORE THE AO, I.E., PALM COURT, 3 RD FLOOR, 20/4-SUKHRALI ROAD, GURGAON, THAT THE AO HAD CONCLUDED THAT PALM COURT WAS BUILDING FOR WHICH THE ASSESSEE WAS PAYING RENT, ON WHICH, T DS SHOULD HAVE BEEN DEDUCTED @ 22.2% AND NOT ON THE RATE OF 2%, AS DONE BY THE ASSESSEE; THAT THERE WAS NO EVIDENCE ON RECORD TO SUPPORT THE ASSE SSEES CONCLUSION THAT THE PAYMENT MADE BY THE ASSESSEE TO THE AGENCY WAS AN I NTERIM PAYMENT IN RESPECT OF MAINTENANCE SERVICES PROVIDED TO THE ASS ESSEE BY THE AGENCY; THAT THE ACCOUNT OF THE AGENCY GETS SETTLED AT THE END O F THE YEAR AND THE AMOUNT PAID TO THE AGENCY IS CLAIMED BY THE ASSESSEE UNDER THE RESPECTIVE HEADS, LIKE ELECTRICITY EXPENSES, AMC EXPENSES, ETC.; AND THAT THE AMOUNT PAID HAD NOT BEEN CLAIMED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT AND THAT THEREFORE, THERE WAS NO QUESTION OF DISALLOWANCE TH EREOF. 55. THE LD. DR HAS CONTENDED THAT THOUGH THE ASSESS EE HAD STATED THAT THIS AMOUNT WAS NOT CLAIMED AS EXPENSES IN THE PROFIT AN D LOSS ACCOUNT, THE AO HAS NOT AGREED WITH THIS AVERMENT, OBSERVING THAT THE AMOUNT SPENT ON PALM ITA 5179 & 5180(DEL)2011 30 COURT IS IN THE NATURE OF RENT AS EVIDENT FROM THE LETTER HEADS OF THE ASSESSEE COMPANY, AND THAT TDS ON THE SAID RENT SHOULD HAVE BEEN 22.2% AND NOT @ 2% AS DONE BY THE ASSESSEE COMPANY; AND THAT IT BEI NG A CLEAR CASE OF SHORT DEDUCTION OF TDS, THE DISALLOWANCE MADE BY THE AO WAS PROPER. 56. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, HAS STRONGLY SUPPORTED THE IMPUGNED ORDER. IT HAS BEEN CONTEND ED THAT THE OBSERVATION OF THE AO THAT THE PAYMENT WAS IN THE NATURE OF REN T, WAS FACTUALLY INCORRECT AS RIGHTLY HELD BY THE LD. CIT(A); THAT THE PAYMENT HAD BEEN MADE TO THE AGENCY FOR RENDERING VARIOUS SERVICES AND TDS THERE ON HAD CORRECTLY BEEN MADE @ 2%; THAT THE AMOUNT OF ` 1,79,33,349/- REPRESENTED SUNDRY CREDITORS AND HAD NOT BEEN PROVIDED TO THE PROFIT AND LOSS AC COUNT; AND THAT THE SAID AMOUNT WAS APPEARING IN THE RENT ACCOUNT OF THE PA RTY AND IT WAS FROM THERE THAT IT HAD BEEN PICKED UP BY THE AO AND DISALLOWAN CE MADE. ATTENTION HAS BEEN DRAWN TO THE COPY OF THE BALANCE SHEET AT PAG ES 35 TO 54 OF THE APB. ON A QUERY FROM THE BENCH AS TO WHETHER ANY RENT H AD BEEN SEPARATELY PAID TO THE AGENCY BY THE ASSESSEE OVER AND ABOVE THE MA INTENANCE CHARGES DISALLOWED BY THE AO, THE LEARNED COUNSEL FOR THE A SSESSEE HAS FILED A NOTE, WHEREIN , IT HAS BEEN CONTENDED, INTER ALIA, THAT A PART FROM THE MAINTENANCE CHARGES PAID TO THE AGENCY, WHICH CHARGES HAD BEEN ACCOUNTED FOR IN THE RESPECTIVE HEADS OF ELECTRICITY, REPAIRS AND MAINTE NANCE, ETC., THE ASSESSEE ITA 5179 & 5180(DEL)2011 31 HAD PAID RENT OF ` 2.54 CRORES TO THE AGENCY. ATTENTION IN THIS REGA RD HAS BEEN DRAWN TO SCHEDULE 12 OF THE BALANCE SHEET(SUPR A) (APB 43). 57. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LD . CIT(A) IN THIS REGARD ALSO. AS RIGHTLY OBSERVED BY THE LD. CIT(A), THE AO GOT MISLED BY THE ADDRESS APPEARING ON THE LETTER HEADS OF THE ASSESS EE COMPANY, WHICH WERE FILED BEFORE THE AO BY WAY OF ADJOURNMENT APPLICATI ONS. THE AMOUNT OF ` 1,79,33,349/- IS, AS STATED, A BALANCE SHEET ITEM. IT HAS NOT BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE PAYMENT, IN FACT , REPRESENTED CHARGES ON ACCOUNT OF MONTHLY ELECTRICITY, GENERATOR AND BUILD ING MAINTENANCE AND NOT RENT OF THE BUILDING, AS WRONGLY CONCLUDED BY THE A O. IT IS AVAILABLE FROM SCHEDULE 12 TO THE ASSESSEES BALANCE SHEET (SUPRA) , THAT RENT OF ` 2.54 CRORES HAD SEPARATELY BEEN PAID BY THE ASSESSEE. THE ELECTRICITY EXPENSES AND REPAIR AND MAINTENANCE EXPENSES HAVE ALSO BEEN MENTIONED IN SCHEDULE 12 OF THE BALANCE SHEET, UNDER ADMINISTRATIVE AND O THER OPERATING EXPENSES. 58. HENCE, ONCE THE AMOUNT PAID DID NOT REPRESENT R ENT, THE AO OBVIOUSLY ERRED IN CONCLUDING THAT TDS HAD TO BE MADE THEREON @ 22.2%. THE ASSESSEE, ON THE OTHER HAND, HAD CORRECTLY MADE TDS @2% ON THE PAYMENT. 59. ACCORDINGLY, GROUND NO. 5 ALSO LACKS MERIT AND THE SAME IS REJECTED, UPHOLDING THE FINDINGS RECORDED BY THE LD. CIT(A) W ITH REGARD TO THIS ISSUE. 60. THIS APPEAL OF THE DEPARTMENT IS ALSO DISMISSED . ITA 5179 & 5180(DEL)2011 32 61. IN THE RESULT, BOTH THE APPEALS OF THE DEPARTME NT ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.02.2012. SD/- SD/- (G.D. AGRAWAL) (A.D. JAIN) VICE PRESIDENT JUDICIAL MEMBER DATED: 29.02.2012 *RM COPY FORWARDED TO: 1, APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER ASSISTANT REGISTRAR