ITO 6(1)(3), MUMBAI V. INDREP AGENCIES P. LTD, MUMBAI

ITA 6029/MUM/2010

• Counselvise Citation: 602919914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 05-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 04-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR SINGH
• Assessee Lawyers: DE VEN PATIL
• Keywords: Business income; Business expenditure; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I : MUMBAI BEFORE SHRI D. K. AGARWAL, (JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.6029/MUM/2010 ASSESSMENT YEAR : 2006-07 INCOME TAX OFFICER 6(1)(3), AAYKAR BHAVAN, MUMBAI-400020. ..( APPELLANT ) VS. M/S. INDREP AGENCIES PVT. LTD. A-1/3, SAMRUDHI CHS LTD., B. PRULEKAR MARG, DADAR (W), MUMBAI-400 028. P.A. NO. (AAACI 1394 M) ..( RESPONDENT ) APPELLANT BY : SHRI SUNIL KUMAR SINGH RESPONDENT BY : SHRI DE VEN PATIL DATE OF HEARING : 05.10.2011 DATE OF PRONOUNCEMENT : 14 TH OCTOBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORD ER OF CIT(A) DATED 21.5.2010 FOR THE ASSESSMENT YEAR 2006-07 . THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARD ING DELETION OF ADDITION OF RS.15,92,189/- MADE BY THE AO ON ACCOUNT O F DISALLOWANCE OF EXPENSES. ITA NO.6029/M/10 AY :06-07 2 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AO DUR ING THE ASSESSMENT PROCEEDINGS NOTICED THAT THE TOTAL BUSINESS RECEIPT S OF THE ASSESSEE WERE ONLY RS.4,98,686/- WHICH INCLUDED INCOME FROM COMMISSION OF RS.3,55,808/-, RENTAL INCOME OF RS.60,000/ - AND INCOME FROM DIVIDEND (RS.79,112/-), EXCHANGE FLUCTUATI ON (1,599/-) AND OTHER INCOME OF (RS.2,166/-). THE ASSESSEE HAD HOWEV ER CLAIMED HUGE EXPENSES OF RS.16,22,189/- ON ACCOUNT OF RENT, SALAR Y AND WAGES, TRAVEL AND CONVEYANCE; VEHICLE MAINTENANCE; TELEP HONE AND TAX; CAR HIRE CHARGES ETC. THE AO THEREFORE, ASKED THE ASSESSEE TO SUBSTANTIATE THE CLAIM OF EXPENSES BY SUPPORTING EVIDENCE. THE ASSESSEE SUBMITTED THAT IT WAS IN THE AGENCY BUSINESS AND NAT URE OF WORK WAS IDENTIFYING THE INDIAN SUPPLIER OF VARIOUS PR ODUCTS REQUIRED BY THE FOREIGN CLIENTS. THE ACTUAL PROCUREMENT OF GOOD S FROM INDIA PARTIES AND EXPORT OF THE SAME TO FOREIGN CLIENTS WAS DO NE BY SISTER CONCERN I.E. CREATIVE SYNERGY INDIA PRIVATE LIMITED W HICH WAS UNDER THE SAME MANAGEMENT. THE ASSESSEE WAS RECEIVING ONLY COMMI SSION FROM FOREIGN PARTIES AND ACTUAL SALES AND PURCHASE WERE D ONE BY SISTER CONCERN. THE ASSESSEE FURTHER SUBMITTED THAT FROM ASSESSMENT YEAR 2007-08 AND 2008-09, 100% OF VEHICLE EXPENSES, 75% OF TELEPHONE EXPENSES AND 25% OF ENTERTAINMENT AND BUSINESS PROMOTION EXPENSES WERE BEING ALLOCATED BY THE ASSESSEE TO SISTER CONCERN. IT WAS SUBMITTED THAT THE SISTER CONCERN WAS USING THE PREMISES TAK EN BY THE ITA NO.6029/M/10 AY :06-07 3 ASSESSEE ON RENT FOR WHICH A SUM OF RS.60,000/- WAS RECEIVED BY THE ASSESSEE. 2.1 THE ASSESSEE ALSO SUBMITTED THAT NO ALLOCATION OF OTH ER EXPENSES HAS BEEN MADE TOWARDS SISTER CONCERN AS THESE WERE EXCLUSIVEL Y FOR THE BUSINESS OF THE ASSESSEE OF COMMISSION AGENCY. THE AO WA S HOWEVER NOT SATISFIED BY THE EXPLANATION GIVEN BY THE ASSESSEE. IT WAS OBSERVED BY HIM THAT CONSIDERING THE ACTIVITIES OF THE A SSESSEE, SUCH HUGE EXPENSES WERE NOT REQUIRED AS THE MAIN ACTIVITIES WERE BEING CARRIED OUT BY THE SISTER CONCERN. THE AO ALSO NOTED TH AT MOST OF THE TELEPHONE BILLS WERE IN THE NAME OF FAMILY MEMBERS OF DIRECTORS AND OTHER PERSONS AND ONLY FEW BILLS WERE IN THE NAME OF THE ASSESSEE COMPANY. SIMILARLY, THOUGH THE VEHICLES WERE IN THE N AME OF DIRECTORS AND ALSO IN THE NAME OF SISTER CONCERN, THE ASSESSEE HAD CLAI MED HUGE EXPENSES INCLUDING REPAIR AND MAINTENANCE. THE ASSESSEE HA D NOT GIVEN ANY BIFURCATION WITH RESPECT TO SISTER CONCERN WHO W AS CARRYING OUT THE ENTIRE ACTIVITY. THE ASSESSEE HAD ALSO NOT FURNI SHED SUPPORTING EVIDENCE IN RESPECT OF VEHICLE MAINTENANCE, BUSINESS PROM OTION EXPENSES, ENTERTAINMENT ETC.. THE AO THEREFORE ALLOWE D ONLY THE AUDIT FEES OF RS.30,000/- AND DISALLOWED THE BALANCE EXPENSES O F RS.15,92,189/- ON THE GROUND THAT THE SAME WERE NOT I NCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE. ITA NO.6029/M/10 AY :06-07 4 3. THE ASSESSEE DISPUTED THE DECISION OF THE AO AND SUBMITT ED BEFORE THE CIT(A) THAT THE ASSESSEE HAD TAKEN THE PREMI SES ON RENT FOR ITS BUSINESS AND SO FAR AS THE USER OF THE PREMISES BY TH E SISTER CONCERN WAS CONCERNED THE ASSESSEE HAD BEEN COMPENSATED BY RS.60,000/-. THE SALARY PAYMENT WAS MAINLY TO THE MA NAGER PINTO AMOUNTING TO RS.2,70,000/- WHICH HAD NOT INCREASED SINCE THE LAST THREE YEARS. TELEPHONE AND VEHICLE EXPENSES WERE ALSO INCURRED FOR THE PURPOSE OF BUSINESS. SIMILARLY TRAVEL AND CONVEYANC E AND OTHER EXPENSES WERE ALSO FOR THE BUSINESS OF THE ASSESSEE. AS REGA RDS SUPPORTING VOUCHERS, THE ASSESSEE SUBMITTED THAT AO HAD N EVER CALLED FOR THE SAME AND THEREFORE, THESE WERE NOT PRODUCED. IT WAS ACCORDINGLY URGED THAT THE EXPENSES SHOULD BE ALLOWED B EING INCURRED FOR THE PURPOSE OF BUSINESS. ON PERUSAL OF RECORDS, C IT(A) NOTED THAT THE ASSESSEE WAS IN THE SAME BUSINESS SINCE 1998 AND THE ENTIR E ACTIVITIES WERE EARLIER CARRIED ON BY THE ASSESSEE ITSELF. HOWEVER, LATER WHEN THE ASSESSEE COULD NOT MANAGE THE ENTIRE BUSINESS, T HE JOB WAS ALLOCATED TO SISTER CONCERN. THE TELEPHONE AND MOTOR CAR S WERE USED FOR CONFIRMING OVERSEAS ENQUIRY. CIT(A) ALSO OBSERVED T HAT THE ASSESSEE HAD SUBMITTED MOST OF THE VOUCHERS AND OTHER EVIDE NCES AND BOOKS OF ACCOUNT WERE AUDITED. HE THEREFORE, DELETED T HE ADDITION ITA NO.6029/M/10 AY :06-07 5 MADE BY AO ON ACCOUNT OF DISALLOWANCE OF EXPENSES AGGRIEV ED BY WHICH THE REVENUE IS IN APPEAL. 4. BEFORE US THE LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW THAT THE EXPENSES WE RE INCURRED FOR THE PURPOSES OF BUSINESS. IT WAS ALSO SUBMITTED THAT IN T HE YEARS PRECEDING ASSESSMENT YEAR 2003-04, THE ASSESSEE HAD RECEIVED SUBSTANTIAL INCOME WHICH WAS RS.29,64,470/- IN ASSESSMENT YEA R 2003-04. THE INCOME HAD BEEN SUBSTANTIALLY REDUCED IN ASSESSMENT YEARS 2004-05 TO 2006-07. THE COMMISSION INCOME AGAIN STARTED INCREASING FROM 2007-08 WHEN IT WAS RS.19,18,907/-. IT WAS ALSO SUBMITTED THAT THE SISTER CONCERN HAD TWO ASSISTANTS AND O NE DIRECTOR IN RESPECT OF WHOM SALARY EXPENDITURE OF RS.1,51,000/- HAD BEEN SHOWN BY THE SISTER CONCERN WHO WAS ALSO PAYING FOR THE USA GE OF OFFICE PREMISES. THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS IN RESPECT OF ITS OWN BUSINESS OF IDENTIFYING LOCAL SUPPLIERS O F GOODS TO THE FOREIGN CLIENTS. HOWEVER, THE LD. AR SUBMITTED THAT H E WAS NOT PRESSING THE EXPENDITURE IN RESPECT OF VEHICLE EXPENSES WH ICH FROM ASSESSMENT YEAR 2007-08 HAD BEEN FULLY ALLOCATED TO SISTE R CONCERN. IN REGARD TO BALANCE EXPENSES, IT WAS SUBMITTED THAT T HE CLAIM SHOULD BE ALLOWED. THE LD. DR ON THE OTHER HAND STRONGLY A SSAILED THE ORDER OF CIT(A) AND SUBMITTED THAT THE ORDER OF CIT(A) ALL OWING THE CLAIM ITA NO.6029/M/10 AY :06-07 6 HAD NO REASONABLE BASIS. IT WAS ACCORDINGLY SUBMITTED THA T THE ORDER SHOULD BE SET ASIDE AND THE ADDITIONS SHOULD BE CONFIRME D. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF VARIOUS EXPENSES CLAIMED BY THE ASSESSEE AMOUNTING TO RS.15,92,189/ - UNDER VARIOUS HEADS. THE AO DISALLOWED THE ENTIRE EXPENSES EXCEPT AMOUNT FOR ON THE GROUND THAT ALL ACTIVITIES WERE BEI NG CARRIED ON BY THE SISTER CONCERN WHICH WAS FUNCTIONING FROM THE SAME PREM ISES AND THEREFORE, NO EXPENDITURE WAS TO BE INCURRED BY THE A SSESSEE. HE, THEREFORE, DISALLOWED THE ENTIRE EXPENDITURE EXCEPT A UDIT FEES OF RS.30,000/-. IN APPEAL CIT(A) ALLOWED THE ENTIRE EX PENSES TREATING THE SAME AS GENUINE BUSINESS EXPENSES. ON CAREFUL CONSIDERA TION OF THE ENTIRE MATERIAL ON RECORD, WE ARE UNABLE TO SUSTAI N THE ORDER OF CIT(A). 5.1 THE ASSESSEE EARLIER WAS CARRYING OUT THE ENTIRE BUSIN ESS ACTIVITIES WHICH CONSISTED OF IDENTIFYING THE VARIOUS BUYE RS, PROCUREMENT OF GOODS FROM LOCAL MARKET AND EXPORTING T HE SAME TO THE FOREIGN BUYERS. HOWEVER, SUBSEQUENTLY THE ASSESSEE HA D TRANSFERRED THE MAJOR PART OF THE ACTIVITIES I.E., PR OCUREMENT OF MATERIAL FROM THE MARKET AND ITS EXPORT TO VARIOUS BU YERS TO THE SISTER CONCERN, CREATIVE SYNERGY PRIVATE LIMITED AND THE ASSE SSEE IS ONLY ITA NO.6029/M/10 AY :06-07 7 DOING THE JOB OF IDENTIFYING THE LOCAL SUPPLIERS FOR E XPORT OF GOODS TO THE FOREIGN CLIENTS WHICH THE ASSESSEE IS EARNING COMMISSI ON. BOTH THE ASSESSEE AND THE SISTER CONCERN ARE OPERATING FROM SAME PREM ISES. THE WORK OF THE ASSESSEE IS BEING MANAGED BY ONE MANAGE R WHEREAS THE SISTER CONCERN HAS TWO ASSISTANTS IN ADDITION TO DIRECTOR WHO ARE COMMON. THE SISTER CONCERN IS ACTUALLY CARRYING OUT OPERA TIONAL ACTIVITIES. THE ASSESSEE IS PAYING RENT FOR THE PREMISES AM OUNTING TO RS.3,74,897/-. IT HAS ALSO SPENT RS.1,12,603/- ON REPAI R OF OFFICE PREMISES. CONSIDERING THE ACTIVITIES OF BOTH THE CONCER NS IT CANNOT BE ACCEPTED THAT THE USER OF THE SPACE BY THE SISTER CONCERN WO ULD BE LESS THAN THAT OF THE ASSESSEE AND, THEREFORE, CHARGING ONLY RS.60,000/- PER ANNUM FROM THE SISTER CONCERN IS NOT JUSTIFIED. IN O UR VIEW, CONSIDERING THE BUSINESS REQUIREMENTS AND USER OF SPACE AT LEAST 50% OF RENT AND REPAIR EXPENSES SHOULD BE ALLOCATED TO SISTE R CONCERN AND ANY EXPENDITURE SHOWN BY THE ASSESSEE IN EXCESS OF 50% CANN OT BE CONSIDERED AS INCURRED WHOLLY AND EXCLUSIVELY FOR ITS BUSI NESS. IN FACT, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT FROM ASSESSMENT Y EAR 2007-08 ONWARDS, ENTIRE VEHICLE EXPENSES ARE 75% OF TE LEPHONE EXPENSES HAVE BEEN ALLOCATED TO THE SISTER CONCERN. SIMIL ARLY, 25% OF ENTERTAINMENT AND BUSINESS PROMOTION EXPENSES HAVE BEEN ALLOCATED TOWARDS SISTER CONCERN. THE ACTIVITIES OF THE ASSESSEE AND SISTER CONCERN REMAIN THE SAME AND THEREFORE, IN OUR VIEW, EN TIRE VEHICLE ITA NO.6029/M/10 AY :06-07 8 MAINTENANCE EXPENSES, 75% OF TELEPHONE EXPENSES AND 25% OF BUSINESS PROMOTION AND ENTERTAINMENT EXPENSES HAVE TO BE ALLOCATED TOWARDS THE SISTER CONCERN AND THE SAME WILL BE DISALLOWED WHILE COMPUTING INCOME OF THE ASSESSEE, AND AS HELD EARLIER 50% OF RENT AND EXPENSES ON REPAIR OF OFFICE PREMISES WILL ALSO BE AL LOCATED TO THE SISTER CONCERN AND DISALLOWED IN CASE OF THE ASSESSEE. AS REGA RDS THE TRAVELLING AND CONVEYANCE EXPENSES, ASSESSEE HAS SHOWN EXPEND ITURE OF RS.1,38,204/- WHICH INCLUDES EXPENDITURE OF RS.65,058 /- ON FOREIGN TRAVEL TO MAURITIUS TO WHICH SOME EXPORTS HAVE BEEN MAD E. THE JOB OF THE ASSESSEE WHICH IS ASSESSING THE REQUIREMENTS OF FOREIGN CLI ENTS AND IDENTIFYING LOCAL SUPPLIERS IS TRAVEL ORIENTED. THE EX PENSES SHOWN ON TRAVEL AND CONVEYANCE WHICH ARE LOWER COMPARED TO IMME DIATE PRECEDING YEAR ARE CONSIDERED AS REASONABLE. OTHER EXP ENSES WHICH ARE ALSO LOWER COMPARED TO EARLIER YEAR HAVE TO BE AL SO ALLOWED. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DIR ECT THE AO TO RECOMPUTED THE FULL INCOME IN THE MANNER INDICATED ABO VE. 6. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.10.2011. SD/- SD/- (D. K. AGARWAL) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 14.10.2011. JV. ITA NO.6029/M/10 AY :06-07 9 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.