M/s Agarwal Indotex Ltd., V. The ACIT, 2(1),

ITA 705/IND/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1497 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 21-10-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 15-11-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: G B AGRAWAL
• Keywords: Commercial expediency; Revenue expenditure; Capital expenditure

Judgement Text

PAGE 1 OF 7 IN THE INCOME TAX APPELATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JM AND SHRI V.K. GUPTA, AM ITA NO.705/IND/2007 AY: 2004-05 AGRAWAL INDOTEX LTD. (PAN AABCA 6944 P) C/O G.B. AGRAWAL & CO., 252, VIKRAM TOWER, SAPNA SANGEETA ROAD, INDORE ..APPELLANT V/S. ACIT-2(1), INDORE ..RESPONDENT ASSESSEE BY : SHRI G.B. AGRAWAL, CA DEPARTMENT BY : SMT. APARNA KARAN, SR. DR ORDER PER JOGINDER SINGH, JM THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A)-I, INDORE, DATED 7.9.2007 FOR THE AY 2004-05. THE FIRST GROUND RAISE D IS THAT THE LD. FIRST APPELLATE AUTHORITY ERRED IN CONFIRMING THE ADDITIO N ON ACCOUNT OF CLUB MEMBERSHIP FEE WITHOUT APPRECIATING THE TRUE FACTS AND CIRCUMSTANCES, EVIDENCE ON RECORD AND THE MATERIAL AVAILABLE ON TH E FILE. 2. DURING HEARING OF THIS APPEAL, WE HAVE HEARD LD. REPRESENTATIVES OF BOTH SIDES AND CONSIDERED THE ARGUMENTS ADVANCED BY THEM . THE CRUX OF PAGE 2 OF 7 ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE REG ISTERED OFFICE OF THE ASSESSEE IS IN INDORE AND THE CLUB MEMBERSHIP IS IN THE NAME OF THE ASSESSEE FOR ITS BUSINESS INTEREST. RELIANCE WAS PLACED UPON THE DECISION IN 19 DTR 295 (DEL). ON THE OTHER HAND, THE LD. DR DEFENDED THE I MPUGNED ORDER BY CONTENDING THAT NONE OF THE DIRECTORS ARE STAYING I N INDORE AND THE ASSESSEE SHIFTED ITS BUSINESS ACTIVITY TO MUMBAI AND THE DIR ECTORS ARE RESIDING AT JALGAON, CONSEQUENTLY, NO BUSINESS INTEREST INVOLVE D BY THE CLUB MEMBERSHIP. IN RESPONSE, IT WAS CONTENDED THAT THE CLUB MEMBERS HIP AT INDORE IS CHEAPER AND IN TERM ON RECIPROCAL BASIS SUCH FACILITIES CAN BE AVAILED AT DIFFERENT PLACES. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON THE FILE. BRIEF FACTS ARE THAT THE ASS ESSEE PAID RS.2,00,000/- TO YESHWANT CLUB, INDORE. THERE IS NO DISPUTE TO THE F ACT THAT THE REGISTERED OFFICE OF THE ASSESSEE IS AT INDORE ITSELF WHEREAS THE HEAD OFFICE IS IN MUMBAI. THE IMPUGNED AMOUNT WAS DISALLOWED ONLY ON THE GROU ND THAT THE ASSESSEE COULD NOT ESTABLISH THE UTILITY OF THE IMPUGNED AMO UNT FOR BUSINESS PURPOSES. ON APPEAL, THE STAND OF THE LD. ASSESSING OFFICER W AS AFFIRMED BY THE LD. CIT(A) WHICH IS UNDER CHALLENGE BEFORE THIS TRIBUNA L. THE ASSERTION OF THE ASSESSEE THAT THE MEMBERSHIP FEE OF YESHWANT CLUB I S CHEAPER THAN OTHER CLUBS IN MUMBAI WAS NOT CONTROVERTED BY THE REVENUE . EVEN OTHERWISE, THE MEMBERSHIP IS IN THE NAME OF THE ASSESSEE COMPANY A ND NOT FOR ANY PARTICULAR DIRECTOR. NOTHING CONTRARY HAS BEEN BROU GHT ON RECORD BY REVENUE PAGE 3 OF 7 THAT THE FACILITY WAS MISUSED IN ANY MANNER. SINCE THE REGISTERED OFFICE OF THE ASSESSEE IS IN INDORE AND THE EXPENDITURE WAS INCUR RED FOR BUSINESS PURPOSES, THEREFORE, THERE IS NO REASON TO DISALLOW THE SAME. OUR VIEW IS FORTIFIED BY THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. SAM TEL COLOUR LTD. (2009) 19 DTR (DEL) 295; (2009) 180 TAXMAN 82, WHEREIN, IT WA S HELD THAT THE EXPENDITURE INCURRED TOWARDS CORPORATE MEMBERSHIP F EE TO THE CLUB IS AN ALLOWABLE EXPENDITURE. WHILE COMING TO THIS CONCLUS ION, THE HONBLE COURT CONSIDERED FOLLOWING JUDICIAL PRONOUNCEMENTS: CIT VS. NESTLE INDIA LTD. (2008)(296 ITR 682)(DEL) ; OTIS ELEVATOR CO. (INDIA) LTD. VS. CIT (1991) (96 CTR (BOM) 14); EMPIRE JUTE CO. LTD. VS. CIT (17 CTR 113) (SC); THE HONBLE COURT DISSENTED FROM PSIDC VS. CIT (140 CTR 594) (SC). IN THE PRESENT FACTS, SINCE THE EXPENDITURE WAS INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT TOW ARDS CAPITAL ACCOUNT AS IT FACILITATES SMOOTH AND EFFICIENT RUNNING OF THE BUS INESS OF THE ASSESSEE, IT IS AN ALLOWABLE EXPENDITURE. OUR VIEW IS FURTHER FORTI FIED BY THE DECISION IN JINDAL DYE INTERMEDIATE P. LTD. VS. DCIT (2004) (1 SOT 243 ) (MUM) AND THE DECISION FROM HONBLE GUJARAT HIGH COURT IN GUJARAT STATE EXPORT CORPORATION LTD. VS. CIT (209 ITR 649) (GUJ), WHEREIN, IT WAS H ELD THAT THE EXPENDITURE INCURRED IN PAYMENT OF ENTRANCE FEE FOR BECOMING ME MBER OF THE SPORTS CLUB IS IN THE NATURE OF ADVANTAGE IN COMMERCIAL SENSE, THEREFORE, IT WAS HELD TO BE PAGE 4 OF 7 AN REVENUE EXPENDITURE. EVEN OTHERWISE, IT CANNOT B E SAID TO BE IN THE NATURE OF CAPITAL EXPENDITURE AS THE SAME IS FOR SMOOTH RU NNING OF BUSINESS AND IT HAS NOT BROUGHT INTO EXISTENCE ANY ASSET OF ENDURIN G NATURE. THE AIM AND OBJECT OF THE EXPENDITURE WILL DETERMINE THE CHARAC TER OF EXPENDITURE RATHER THE IMPUGNED EXPENDITURE WAS FOR THE SMOOTH CONDUCT OF THE BUSINESS. THEREFORE, WE HAVE NO HESITATION TO ALLOW THIS GROU ND OF ASSESSEE. 4. THE NEXT GROUND RAISED IS THAT THE LD. FIRST APP ELLATE AUTHORITY ERRED IN CONFIRMING THE ADDITION OF RS.1 LAKH ON ACCOUNT OF LEGAL EXPENSES WITHOUT PROPERLY APPRECIATING THE FACTS, EVIDENCE AND THE M ATERIAL PRODUCED BY THE ASSESSEE. THE CONTENTION RAISED BY THE ASSESSEE IS THAT MINIMUM CHARGES WERE PAID TO THE DIRECTOR WHO IS ALSO A CHARTERED A CCOUNTANT. IT WAS PLEADED THAT NO DIRECTORS REMUNERATION WAS PAID TO HIM FOR WHICH OUR ATTENTION WAS INVITED TO PAGE 2 PARA 4 OF THE PAPER BOOK. PLEA WA S ALSO RAISED THAT THERE WAS NO BAR TO RENDER PROFESSIONAL SERVICE IN THE CA PACITY OF A DIRECTOR. ON THE OTHER HAND, THE LD. SR. DR CONTENDED THAT ASSESSEE HAS NOT ESTABLISHED THE REASONABLENESS OF THE PAYMENT AND THE RECIPIENT HIM SELF IS ONE OF THE DIRECTORS. THE IMPUGNED ORDER WAS STRONGLY DEFENDED . 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON THE FILE. BRIEF FACTS ARE THAT THE ASS ESSEE COMPANY PAID RS.2.25 LAKHS TO SHRI R.K. SINGHLA, ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY FOR ARRANGING CASH FROM THE STATE BANK OF INDIA TO THE TUNE OF RS.4.25 CRORES AND PAGE 5 OF 7 RS.4.5 CRORES FROM STATE BANK OF INDIA IN SEPTEMBER , 2003. AS PER THE REVENUE, NO PECUNIARY BENEFIT CAN BE CLAIMED BY THE DIRECTOR OF THE COMPANY AS IT WAS PART OF DUTIES TO ACT FOR THE PROMOTION O F BUSINESS OF THE ASSESSEE. AN AMOUNT OF RS.1 LAKH WAS DISALLOWED U/S 40A(2)(B) BY THE LD. ASSESSING OFFICER. ON APPEAL, THE STAND OF THE ASSESSING OFFI CER WAS AFFIRMED WHICH IS UNDER CHALLENGE BEFORE THIS TRIBUNAL. IF THE TOTALI TY OF THE FACTS AND THE ARGUMENTS ADVANCED BY THE RESPECTIVE PARTIES ARE AN ALYSED, IT IS SEEN THAT THE CLAIMED AMOUNT HAS BEEN RESTRICTED TO RS.1 LAKH AGA INST THE CLAIM OF RS.2.25 LAKHS MEANING THEREBY THE STAND OF THE REVENUE IS T HAT THE PAYMENT IS EXCESSIVE/UNREASONABLE. UNDER THE AFOREMENTIONED FA CTS, THE ONLY QUESTION ARISES IS WHETHER THE PAYMENT IS EXCESSIVE OR UNREA SONABLE. WE ARE OF THE VIEW THAT THE EXTENT OF SERVICES OR FACILITIES PROV IDED TO THE ASSESSEE, HAS TO BE KEPT IN MIND BEFORE MAKING PAYMENT. IT IS ALSO T O BE DETERMINED WHETHER THE PAYMENT WAS INCURRED FOR THE LEGITIMATE BUSINES S NEEDS OF THE ASSESSEE. IT IS ALSO TO BE ANALYSED WHETHER THE ASSESSEE DERI VED BENEFIT IN CONSONANCE WITH THE PAYMENTS MADE BY IT. IF ALL THESE CONDITIO NS ARE NOT SATISFIED THEN THE PROVISION OF SEC. 40A(2) ATTRACTS. HOWEVER, WE ARE OF THE VIEW THAT THE CRITERIA LAID DOWN BY THE SEC. DETERMINING EXCESSIVENESS/REA SONABLENESS HAS TO BE SEEN OBJECTIVELY. ONE VIEW MAY BE THAT IT IS THE AS SESSEE WHO IS TO SEE OR DETERMINE THE REASONABLENESS OF PAYMENT UNLESS AND UNTIL CONTRARY FACTS ARE BROUGHT ON RECORD BY THE REVENUE. ANOTHER VIEW IS T HAT THE REVENUE HAS TO ESTABLISH THAT THE PAYMENTS SO MADE IS EXCESSIVE AN D UNREASONABLE HAVING PAGE 6 OF 7 REGARD TO THE SERVICES EXTENDED BY THE RECIPIENT. A DMITTEDLY, MR. SINGHLA IS A QUALIFIED CHARTERED ACCOUNTANT AND USED HIS SKILL/R ESOURCES IN GETTING THE HUGE AMOUNT OF LOAN OF RS.8.75 CRORES (RS.4.25 & RS .4.5 CRORES) SANCTIONED FOR THE ASSESSEE, THEREFORE, KEEPING IN VIEW THE NA TURE AND EXTENT OF LOAN, THE IMPUGNED AMOUNT CANNOT BE SAID TO BE UNREASONABLE. OUR VIEW IS FORTIFIED BY THE DECISIONS IN ITO VS. BRIGHT SPINNERS P. LTD. (8 TTJ (MAD) 589) (ITAT), MAHAVIR IRON FOUNDRY VS. ITO (40 TTJ (DEL) 180), BA KEMENS HOME PRODUCTS VS. ITO (7 ITD (CHD) 371), CIT VS. GIRNAR CONSTRUCT ION CO. (261 ITR 463) (RAJ) AND RECON MACHINE TOOLS P. LTD. VS. CIT (204 CTR 184) (KAR), RATIO LAID DOWN IN CIT VS. PRINT SYSTEMS & PRODUCTS (203 CTR ( MAD) 247), CIT VS. INDO SAUDI SERVICES (TRAVEL) (P) LTD. (219 CTR (BOM) 562 ). SEC. 40A(2)(A) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST ESTABLISHED THAT THE EXPENDITURE WAS EXCESSIVE AND UNREASONABLE BECAUSE THE EXPRESSION SERVICES USED IN SEC. 40A(2)(A) IS AN EXPRESSION OF WIDE IMPORT. THE SEC. HAS TO BE READ BY KEEPING THE PAYMENT IN JUXTAPOSITION WITH THE COMME RCIAL UTILITY OF THE SERVICE/PAYMENT. OUR VIEW IS FORTIFIED BY THE DECIS ION IN UPPER INDIA PUBLISHING HOUSE VS. CIT (117 ITR 569) (SC) AND T.T . (P) LTD. VS. ITO (121 ITR 551) (KAR). IT IS NOT THE CASE THAT COMMISSION HAS BEEN PAID TO THE WIFE OR SON OF PARTNERS WHO WERE UNEDUCATED/UNTRAINED IN THE BUSINESS AND HAS NOT RENDERED ANY SERVICE FOR THE INTEREST OF BUSINE SS. IT CAN BE SAID THAT THE TEST OF COMMERCIAL EXPEDIENCY HAS TO BE KEPT IN MIN D. FURTHER RELIANCE CAN BE PLACED UPON GANESH SOAP WORKS VS. CIT (161 ITR 876) (MP) AND CIT VS. PAGE 7 OF 7 ADWARD KEVENTER P. LTD. (115 ITR 149) (SC). EVEN OT HERWISE, IT IS NOT THE CASE THAT WHOLE AMOUNT HAS BEEN DISALLOWED MEANING THEREBY THE UTILITY OF THE DIRECTOR IN GETTING THE IMPUGNED LOAN SANCTIONE D HAS BEEN PARTLY RECOGNISED BY THE REVENUE. THE ONLY DOUBT WAS OF UN REASONABLENESS. IN VIEW OF THESE FACTS AND JUDICIAL PRONOUNCEMENTS, SINCE S UBSTANTIAL SERVICES WERE EXTENDED BY THE RECIPIENT OF AMOUNT, THEREFORE, THI S GROUND OF APPEAL OF THE ASSESSEE IS ALSO ALLOWED. IN THE RESULT, THIS APPEAL OF THE ASSESSEE IS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 .10.200 9. SD/- SD/- (V.K. GUPTA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23 .10.2009 !VYAS! COPY TO: APPELLANT/RESPONDENT/CIT/CIT(A)/DR