FIRE STAR DIAMOND P. LTD, MUMBAI V. DCIT CEN CIR- 39, MUMBAI

ITA 7354/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8783 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 17-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 27-10-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K K MAHAJAN
• Keywords: Business expenditure
• Section: 37(1)

Judgement Text

ITA NO.7354 OF 2010 FIRE STAR DIAMOND P LTD MUMBAI PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.7354/MUM/2010 (ASSESSMENT YEAR: 2007-08) FIRE STAR DIAMOND PVT. LTD, C/O KARNAVAT & CO. 2A KOTAB MAHAL, 1 ST FLOOR, 192 DR. N. ROAD, MUMBAI 400001 PAN: AAACF 8041 K VS. DCIT, CENTRAL CIRCLE-39, MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI SUNIL HIRAWAT DEPARTMENT BY: SHRI K.K. MAHAJAN, DR DATE OF HEARING: 20/09/2012 DATE OF PRONOUNCEMENT: 26/09/2012 O R D E R PER B. RAMAKOTAIAH, A.M. THIS IS AN ASSESSEES APPEAL AGAINST THE ORDER OF T HE CIT(A)-41 MUMBAI, DATED 20.08.2010. THE ISSUE IN THE PRESENT APPEAL IS WITH REFERENCE TO RESTRICTING THE EXPENDITURE CLAIMED BY ASSESSEE. ASSESSEE RAISED THE FOLLOWING GROUNDS: 1. ON FACTS AND IN LAW, THE LEARNED COMMISSIONER O F INCOME TAX (APPEALS) HAD ERRED IN RESTRICTING THE DISALLOWNACE OF ` .15,58,323/- OUT OF ` .25,58,323/- MADE BY AO. UNDER THE FACTS AND CIRCUMSTANCES OF TH E MATTER, HE OUGHT TO HAVE DELETED THE ENTIRE ADDITIO N OF ` .25,58,323/- MADE BY AO . 2. IT IS STATED THAT THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF TRADING ROUGH DIAMONDS. DURING THE COUR SE OF ASSESSMENT PROCEEDINGS IT WAS STATED THAT PRIVATE L IMITED COMPANY WAS INCORPORATED WITH CERTIFICATE OF INCORPORATION DATED 18.05.2004. AS SUCH A.Y 2005-06 WAS THE FIRST YEAR OF THE BUSIN ESS AND NORMAL ACTIVITIES WERE CARRIED OUT DURING THE PERIOD RELEV ANT TO A.Y 2005- 06. ITA NO.7354 OF 2010 FIRE STAR DIAMOND P LTD MUMBAI PAGE 2 OF 5 3. AO HAS OBSERVED IN HIS ASSESSMENT ORDER THAT DURING THE YEAR UNDER CONSIDERATION NO BUSINESS ACTIVITY WAS CARRIE D OUT BY ASSESSEE. NO RECEIPT WAS SHOWN IN THE CREDIT SIDE O F THE PROFIT & LOSS A/C, ONLY EXPENSES AMOUNTING TO ` .25,58,323/- HAVE BEEN CLAIMED. THE MAJOR EXPENSES ARE RELATED TO FOREIGN TRAVEL EXPENSES OF ` .3,39,714/-, RENT OF ` .4,00,000/-, TELEPHONE EXPENSES OF ` .4,37,890/-, SALES PROMOTION EXPENSES OF ` .1,08,394/- AND CONVEYANCE AND VEHICLE EXPENSES OF ` .1,13,977/-. AO HAS ALSO OBSERVED THAT EVEN IN THE EARLIER YEAR RELEVANT TO ASSESSMENT YEAR 2006-07, NO BUSINESS ACTIVITY WAS CARRIED OUT. AO I SSUED A SHOW CAUSE NOTICE TO ASSESSEE TO EXPLAIN AS TO WHY EXPEN SES CLAIMED MAY NOT BE DISALLOWED SINCE NO BUSINESS ACTIVITY WAS CA RRIED OUT DURING THE YEAR UNDER CONSIDERATION. IN RESPONSE TO THIS S HOW CAUSE NOTICE ASSESSEE HAS SUBMITTED AS UNDER: THE COMPANY WAS IMPORTING ROUGH DIAMONDS AND SELLIN G IN THE LOCAL MARKET. THE SAID BUSINESS WAS NOT VIAB LE DUE TO LEVY OF CUSTOM DUTY ON IMPORT OF ROUGH DIAMO NDS AND ACCORDINGLY, THERE WAS NO OPPORTUNITY OF IMPORT AND SALES DURING THE FINANCIAL YEAR 2005-06 AND 2006-07 . CONSIDERING THE REPLY OF ASSESSEE, AO HAS HELD THAT SINCE NO BUSINESS ACTIVITY WAS CARRIED OUT, ALL EXPENSES CLA IMED OF ` .25,58,323/- WERE TO BE DISALLOWED. 4. BEFORE THE CIT (A) IT WAS SUBMITTED THAT THE ASSESS EE COMPANY DID NOT FIND IT VIABLE TO IMPORT ROUGH DIAM OND FOR SALE IN THE LOCAL MARKET. ACCORDINGLY THE BUSINESS WAS TEMP ORARILY SUSPENDED. HOWEVER, THE COMPANY CONTINUED TO MAINTA IN ESTABLISHMENTS IN THE HOPE OF REVIVING THE BUSINESS AND WAS IN FACT PURSUING THE RECOVERY OF SUNDRY DEBTORS AND ALSO SA LE OF THE STOCK AMOUNTING TO ` .40.74 LAKHS. IT WAS FURTHER SUBMITTED THAT ASSESSE E ALSO TRIED TO REDUCE THE EXPENSES FROM EARLIER YEAR TO THIS YEAR. IT ALSO RELIED ON VARIOUS CASE LAWS FOR THE PROPOSITIO N THAT THE EXPENDITURE HAS TO BE ALLOWED AS REVENUE EXPENDITUR E. 5. AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, THE CIT (A) PARTLY ALLOWED THE AMOUNT BY STATING AS UNDER: ITA NO.7354 OF 2010 FIRE STAR DIAMOND P LTD MUMBAI PAGE 3 OF 5 1.4 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT, ORDER OF AO AND BRIEF FACTS OF THE CASE ARE THAT TH E APPELLANT IS DEALING IN THE BUSINESS OF IMPORTING R OUGH DIAMONDS AND SELLING THE SAME IN THE LOCAL MARKET. HOWEVER, DURING THE YEAR UNDER CONSIDERATION AND IN THE PREVIOUS YEAR, NO SALE PURCHASE WAS MADE, THEREFORE , AO HAS OBSERVED THAT SINCE THERE IS NO BUSINESS ACTIVI TY CARRIED OUT DURING THE YEAR UNDER CONSIDERATION, NO EXPENDITURE CLAIMED WILL BE ALLOWED. ON THE OTHER H AND THE APPELLANT HAS ARGUED THAT IT IS TRUE THAT NO SA LE PURCHASE WAS CARRIED OUT DURING THE YEAR UNDER CONSIDERATION BUT THE APPELLANT HAS NOT CLOSED HIS BUSINESS NOR THE EXPENDITURE RELATING TO ESTABLISHM ENT I.E. SALARY, ELECTRICITY EXPENSES, AUDIT FEES AND R ENT FOR THE PREMISES ARE MINIMUM EXPENSES, WHICH WERE HAVE TO BE PAID TILL THE BUSINESS IS NOT CLOSED. IN SUPPORT TO THIS CLAIM THE APPELLANT HAS ALSO RELIED ON VARIOUS DECI SIONS OF HON'BLE COURT CITED PARTICULARLY THE DECISION OF HO N'BLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN CHEMICAL S WORKS LTD, SUPRA, WHERE IT IS HELD THAT ASSESSEE ST OPPED HIS BUSINESS OF MANUFACTURING OF CHEMICAL DUE TO AC UTE FINANCE STRINGENCY, THE EXPENDITURE INCURRED THEREA FTER ON OFFICE, SALARIES, MACHINERY, DISMANTLING CHARGES, R ENT, RATES, TAXES AND INSURANCE, POSTAGE, TELEGRAM, TELE PHONE AND OTHER NECESSARY EXPENSES WERE HELD REFERABLE TO ASSESSEES HOLDING ON TO THE BUSINESS ASSETS AND AS SUCH ALLOWABLE DEDUCTIONS. 1.5 KEEPING IN VIEW THE DECISION OF HON'BLE BOMBAY HIGH COURT WHICH IS BINDING FOR LOWER AUTHORITIES, I AM OF THE VIEW THAT MINIMUM EXPENSES RELATING TO THE SALARY, ELECTRICITY, AUDIT FEES, TELEPHONE CHARGES, PRINTIN G AND STATIONERY, RENT AND BANK CHARGES AMOUNT TO ` .10.00 LAKHS IN LUMP SUM IS ALLOWABLE TO ASSESSEE. THUS AO IS DIRECTED TO RESTRICT THE DISALLOWANCE OF ` .15,58,323/- AND BALANCE OF ` .10 LAKHS IS DELETED. 6. BEFORE US THE LEARNED COUNSEL SUBMITTED THAT ASSESS EE WAS IN THE BUSINESS OF IMPORT OF DIAMOND AND BECAUSE OF AD VERSE MARKET CONDITIONS COULD NOT CONTINUE THE BUSINESS, BUT NEC ESSARY EXPENDITURE WAS INCURRED TO MAINTAIN THE CORPORATE STRUCTURE AS WELL AS EFFORTS TO RECOVER THE AMOUNT. HE JUSTIFIED THE EXPENDITURE AS THERE WAS A FOREIGN PARTNER IN THE COMPANY AND FORE IGN TRAVEL WAS UNDERTAKEN WITH REFERENCE TO THE AMOUNTS TO BE RECO VERED. HE ALSO RELIED ON THE DECISION OF ITAT IN THE CASE OF HANSR AJ MATHURADAS IN ITA NO.2397/MUM/2010 WHEREIN DIRECT EXPENSES WERE D ISALLOWED TO THE EXTENT OF 50% AND THE ITAT ALLOWED THE SAME. HE ALSO RELIED ON THE PRINCIPLES LAID DOWN BY THE HON'BLE BOMBAY H IGH COURT IN ITA NO.7354 OF 2010 FIRE STAR DIAMOND P LTD MUMBAI PAGE 4 OF 5 THE CASE OF HINDUSTAN CHEMICAL WORKS LTD (1980) 124 ITR 561 (BOM.). THE LEARNED COUNSEL ALSO PLACED ON RECORD, THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2009-10 WHEREIN ASSESSEE S CLAIM OF EXPENDITURE WAS ALLOWED BY THE JCIT (OSD)-39 MUMBAI . HE FURTHER SUBMITTED THAT ASSESSEE PAID FBT ON SOME OF EXPENDI TURE SO THERE CAN NOT BE A DISALLOWANCE OF SAME EXPENDITURE. IT W AS HIS SUBMISSION THAT THE ENTIRE EXPENSES COULD HAVE BEEN ALLOWED AS BUSINESS EXPENDITURE. 7. THE LEARNED DR, HOWEVER, RELIED ON THE ORDERS OF TH E CIT (A). IT WAS FAIRLY ADMITTED THAT THE REVENUE HAS NOT PREFER RED ANY APPEAL ON ` 10.00 LAKHS ALLOWED BY THE CIT (A). 8. WE HAVE CONSIDERED THE ISSUE AND RIVAL ARGUMENTS. O N CONSIDERATION OF FACTS OF THE CASE AND THE FACT THA T ASSESSEE HAS NOT YET REVIVED THE BUSINESS EVEN AS OF NOW, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT (A) IN ALLOWING THE IMPUGNED A MOUNT OF ` .10.00 LAKHS TO ASSESSEE IS REASONABLE AND CANNOT BE FAULT ED WITH. THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF HINDUSTAN CHEMICAL WORKS LTD (SUPRA) WAS KEPT IN MIND IN ALLO WING THE EXPENSES RELATING TO SALARY, ELECTRICITY & TELEPHON E CHARGES ETC., AS CAN BE SEEN FROM THE ORDER OF THE CIT (A). 9. ASSESSEE RELIED ON THE DECISION OF THE ITAT IN THE CASE OF HANSRAJ MATHURADAS IN ITA NO.2397/MUM/2010 DATED 16 .09.2011 TO CONTEND THAT THERE COULD NOT BE ANY ADHOC DISALL OWANCE. HOWEVER, THE FACT IN THE SAID CASE WAS THAT ASSESSE E WAS IN THE BUSINESS AND THERE IS NO REASON TO JUSTIFY THE ADHO C DISALLOWANCE WHEN ASSESSEE HAD CONTINUED THE BUSINESS AND THERE IS NO DOUBT ABOUT THE GENUINENESS OF THE CONTRACT FEES PAID FOR THE PURPOSE OF BUSINESS. HOWEVER, IN THE PRESENT CASE, ASSESSEE IS NOT IN THE BUSINESS AS STATED BY AO AND THE CIT (A) AND THE BU SINESS WAS IN EXISTENCE ONLY FOR ONE YEAR I.E. FOR THE ASSESSMENT YEAR 2005-06. SUBSEQUENTLY, ASSESSEE DID NOT DO ANY OTHER BUSINES S EXCEPT MAINTAINING THE CORPORATE STRUCTURE AND RECOVERING THE AMOUNTS. AS RIGHTLY POINTED OUT BY THE CIT (A), SOME OF THE EXP ENDITURE COULD NOT BE JUSTIFIED PARTICULARLY FOREIGN TRAVEL ETC., ITA NO.7354 OF 2010 FIRE STAR DIAMOND P LTD MUMBAI PAGE 5 OF 5 10. FURTHER IT IS ALSO NOTICED THAT RELIANCE ON THE ORD ER OF AO FOR ASSESSMENT YEAR 2009-10 BY ASSESSEE IS ALSO NOT COR RECT IN THE SENSE THAT THE EXPENDITURE IN THAT YEAR WAS VERY NO MINAL AND THE CLAIM INCLUDING IMPORT EXCHANGE DIFFERENCE WAS ONLY TO THE EXTENT OF ` .77,155/-. THEREFORE, THE ACTION OF AO IN ACCEPTING THE RETURN IN THAT YEAR FOR THE PROPOSITION THAT THE ENTIRE BUSIN ESS EXPENDITURE WAS ALLOWED CANNOT BE CONSIDERED AS THE EXPENDITURE ITSELF IS VERY NOMINAL IN THAT YEAR AND FOLLOWING THE PRINCIPLES O F HON'BLE BOMBAY HIGH COURT, MINIMUM EXPENDITURE FOR MAINTAINING THE CORPORATE STRUCTURE HAS TO BE ALLOWED AS SUCH. THAT ORDER DOE S NOT SUPPORT THE CASE OF THE CASE. MOREOVER IF ASSESSEE PAYS FRI NGE BENEFIT TAX ON SOME OF THE EXPENDITURES, THAT DOES NOT JUSTIFY CLAIM OF EXPENDITURE UNDER SEC. 37(1) AS BUSINESS EXPENDITUR E. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF THE CIT (A) AND A SSESSEES GROUND IS ACCORDINGLY REJECTED. 11. IN THE RESULT APPEAL FILED BY ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH SEPTEMBER, 2012. SD/- SD/- (I.P. BANSAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 26 TH SEPTEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI