FOURESS ENGG (I) LTD, MUMBAI V. DCIT 5(1), MUMBAI

ITA 754/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9801 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 12-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Keywords: Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Additional evidence
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH F, MU MBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.754/MUM/2016 (ASSESSMENT YEAR- 2011-12) M/S FOURESS ENGG (I) LTD. 22, BHULABHAI DESAI ROAD, MAHALAXMI CHAMBER, MUMBAI-400026 PAN:AAACF5897K VS. DCIT RANGE-5(1) AAYAKAR BHAVAN, MUMBAI-20. (APPELLANT) (RESPONDENT) ASSESSEE BY : DR.K. SHIVRAM WITH MS NILAM JADHAV -ADVOCATES REVENUE BY : MS. POOJA SWAROOP ( SR. DR) DATE OF HEARING : 19.03.2018 DATE OF PRONOUNCEMENT : 23.03.2018 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER: 1. THIS APPEAL BY ASSESSEE UNDER SECTION 253 OF INCOME TAX ACT (THE ACT) IS DIRECTED AGAINST THE ORDER OF LD. COMMISSIONER OF I NCOME-TAX (APPEALS)-10, MUMBAI, [FOR SHORT THE LD. CIT(A)] DATED 20.11.2015 FOR ASSESSMENT YEAR 2011-2012 WHICH IN TURN ARISES FROM THE ASSESSMENT ORDER PASSED BY ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT D ATED 20.03.2014. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : I. DISALLOWANCE OF GUARANTEE COMMISSION OFRS.1.51.5 0.000/- U/S. 37(1) 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF GUARANTEE COMMISSION OF RS. 1.51.50.000/- U/S 137(1) AID TO P ROMOTERS SHARE HOLDER & DIRECTORS AT THE RATE OF 1% OF THE EACH GUARANTEE F OR THE PURPOSE OF BUSINESS. HENCE THE SAME MAY BE ALLOWED U/S. 37(1) OF THE ACT . 2. THE LEARNED CIT(A) ERRED IN NOT FOLLOWING THE EA RLIER YEAR ORDER FOR AY 2010- 2011 PASSED BY THE HON'BLE ITAT IN WHICH THE ISSUE OF DISALLOWANCE OF GUARANTEE COMMISSION WAS DELETED. HENCE, NOT FOLLOW ING ORDER OF THE HIGHER AUTHORITY IS NOT CORRECT AS PER LAW. ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 2 II. ADHOC DISALLOWANCE OF TRAVELLING EXPENDITURE OF RS. 4,06.200/- U/S. 37(1) 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADHOC DISALLOWANCE OF TRAVELLING EXPENSES OF RS.4,06,200/-, WITHOUT APPRE CIATING THAT THE SAID STAY CHARGES AND TRAVELLING EXPENDITURE IS LOWER THAN TH E STAY CHARGES AT OTHER FIVE STAR HOTELS. HENCE THE SAME MAY BE DELETED. III. DISALLOWANCE OF PRIOR PERIOD EXPENDITURE OF RS .6,26,228/-. 4. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF PRIOR PERIOD EXPENDITURE OF RS.6,26,228/- WITHOUT APPRECIATING T HAT THE SAID EXPENDITURE ACCRUED AND CRYSTALIZED IN CURRENT YEARS. HENCE, TH E SAME MAY BE ALLOWED AS BUSINESS EXPENDITURE IN THE SAME YEAR AND NOT AS PR IOR PERIOD EXPENDITURE. IV. DISALLOWANCE OF 14A OF RS.2,33,533/- 5. THE LEARNED CIT(A) ERRED IN CONFIRMING THE 14A D ISALLOWANCE, WITHOUT APPRECIATING THAT THE INVESTMENT IN SBI MUTUAL FUND S WAS MADE OUT OF OWN FUNDS (SURPLUS) AND NO BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF INVESTMENT. THERE IS NO OTHER FRESH INVESTMENT OTHE R THAN SBI MUTUAL FUNDS THEREFORE, DISALLOWANCE CONFIRMED BY THE CIT(A) OF RS.2,33,533/- MAY BE DELETED. V. EXEMPT INCOME OF RS.13,15.327/- IN THE FORM OF D IVIDEND NOT CONSIDERED. 6. THE LEARNED CIT(A) FAILED TO DECIDE THE GROUND R AISED BY THE APPELLANT FOR THE ISSUE OF EXEMPT INCOME OF RS.13,15,327/- AS THE DIVIDEND INCOME WAS WRONGLY TAKEN IN MISCELLANEOUS RECEIPTS. HENCE, THE SAME MAY BE TREATED AS EXEMPT INCOME. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPA NY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, EXPORTING AND TRADING OF INDUSTRIAL VALVES, ERECTION, COMMISSIONING AND CIVIL WORKS, FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 20111-12 ON 30.09.2011 DECLARING TO TAL INCOME OF RS. 10,91,18,660/-. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT. THE ASSESSING OFFICER WHILE PASSING THE ASSESS MENT ORDER DISALLOWED THE COMMISSION PAYMENT OF RS. 1,51,50,000/- PAID TO TH E TWO DIRECTORS FOR EXTENDING PERSONAL GUARANTEE FOR AVAILING THE CREDI T FACILITY FROM BANK, ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 3 DISALLOWED RS. 4,06,200/- ON ACCOUNT OF TRAVELLING EXPENSES, DISALLOWED RS. 6,26,228/- ON ACCOUNT OF PRIOR PERIOD EXPENSES AND RS. 2,33,533/- UNDER SECTION 14A OF THE ACT. ON APPEAL BEFORE THE LD. CI T(A), ALL THE DISALLOWANCES MADE BY ASSESSING OFFICER WAS CONFIRM ED. THUS, FURTHER AGGRIEVED BY THE ORDER OF LD. CIT(A), THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE US. 3. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE (AR ) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENTATIVE (DR) FOR THE REVENU E AND PERUSED THE ORDER OF AUTHORITIES BELOW. GROUND NO. I RELATES DISALLOW ANCE OF COMMISSION PAYMENT. THE LD. AR OF THE ASSESSEE SUBMITS THAT AS SESSEE-COMPANY PAID THE GUARANTEE COMMISSION TO ITS TWO DIRECTOR AS THEY S TOOD PERSONAL GUARANTEE TO THE BANK OF INDIA FOR GETTING LOAN/CREDIT FACILITIE S FOR THE PURPOSE OF BUSINESS. THE ASSESSEE PAID RS. 75,75,000/- EACH TO MS. SOUMY ALATHA S. SHETTY AND SHRI SAMEER SHETTY. THE ASSESSEE FURNISHED ALL THE DETAILS RELATED WITH SANCTION OF CREDIT FACILITY ISSUED BY STATE BANK OF INDIA ON 13.03.2010, CERTIFICATE OF PERSONAL GUARANTEE AND THE GUARANTEE COMMISSION PAID TO THE DIRECTORS. THE ASSESSEE VIDE ITS LETTER DATED 20.03 .2014 FURNISHED THE NOTE OF GUARANTEE COMMISSION. THE ASSESSING OFFICER DISALLO WED THE GUARANTEE COMMISSION ON HIS OBSERVATION THAT NO EXTRAORDINARY WORK HAS BEEN PERFORMED TO PAY SUCH HUGE GUARANTEE COMMISSION. TH E GUARANTEE GIVEN BY THE DIRECTORS IN NORMAL ROUTINE OF BUSINESS. PERFOR MANCE OF DIRECTORS HAS NOT AFFECTED THE SALE OF THE ASSESSEE AND THAT THE MONE Y SIPHONED TO UNDERSTATE THE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 4 INCOME. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT SIMILAR GUARANTEE COMMISSION WAS ALLOWED IN ASSESSEES OWN CASE FOR A SSESSMENT YEAR 2010- 11. THE COPY OF THE DECISION WAS FILED BEFORE LD CI T(A), THE LD. CIT(A) DESPITE HAVING THE KNOWLEDGE OF ORDER OF TRIBUNAL, UPHELD THE ADDITION. THE ORDER OF TRIBUNAL IS A BINDING PRECEDENT ON THE LOW ER AUTHORITY. THE REVENUE HAS NOT CHALLENGED THE SAID ORDER OF TRIBUNAL BEFOR E THE HON'BLE HIGH COURT. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT BY THE PERSONAL GUARANTEE OF THE FOUNDER DIRECTOR, THE ASSESSEE HAS BEEN ABLE TO OBTAIN THE BANK FINANCE OF RS. 75.75 CRORE. EXTENDING THE PERSONAL GUARANTEE W AS PRE-CONDITION OF LENDER/BANK FOR CREDIT FACILITY. THEREFORE, GUARANT EE COMMISSION HAS BEEN PAID FULLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSIN ESS AND IS ALLOWABLE DEDUCTION. 4. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF AUTHORITIES BELOW. THE ASSESSING OFFICER HAS GIVEN A FINDING THAT GUARANTEE GIVEN BY THE DIRECTORS ARE PART OF THEIR COMMITMENT TO MOBILIZE REQUIRED FUND. THE ASSESSEE WAS HAVING HEALTHY BALANCE WHICH CAN IT SHALL BE USED FOR GUARANTEE FOR BANK LOAN. THE DIRECTORS ARE INACTIVE DIRECTORS. 5. WE HAVE CONSIDERED THE RIVAL CONTENTION OF LD. REPR ESENTATIVE OF THE PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDING ASKED THE ASSESSEE TO EXPLAIN THE NATURE OF SERVICES RENDERED BY THE DIRE CTORS AGAINST THE HUGE COMMISSION PAYMENT. THE ASSESSEE FILED ITS REPLY DA TED 27.02.2014. IN THE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 5 REPLY, THE ASSESSEE CONTENDED THAT MS. SOUMYALATHA S. SHETTY IS THE PROMOTER AND SHRI SAMEER SHETTY IS THE DIRECTOR OF THE COMP ANY. BOTH THE DIRECTORS WERE PAID GUARANTEE COMMISSION FOR EXTENDING PERSON AL GUARANTEE FOR CREDIT FACILITY AVAILED BY THE COMPANY FROM STATE BANK OF INDIA, IFB BRANCH FOR RS. 75.75 CRORE. THE DIRECTORS ARE NOT PAID REMUNERATIO N FROM THE COMPANY THEY STAND GUARANTEE IN THEIR PERSONAL CAPACITY AND TAKE THE RISK OF BANKING FACILITY ENJOYED BY THE ASSESSEE IN ORDER TO COMPENSATE THE RISK FACTOR, THE COMPANY PAID COMMISSION @ 1% EACH TO BOTH THE DIRECTORS. TH E ASSESSEE ALSO FURNISHED THE COPY OF SANCTION OF OVER LIMIT DATED 13.03.2010 ISSUED BY LENDER BANK. THE CONTENTION OF ASSESSEE WAS NOT ACC EPTED BY ASSESSING OFFICER. THE ASSESSING OFFICER CONCLUDED THAT THE D IRECTORS HAVE ONLY GIVEN GUARANTEE TO GET THE LOAN SANCTIONED FROM THE BANK, WHICH IS A BASIC NECESSITY TO SANCTION A LOAN. THE DIRECTORS HAVE NOT PERFORME D ANY EXTRAORDINARY WORK, THE WORK DONE BY THE DIRECTORS ARE NORMAL ROUTINE B USINESS. THE ASSESSEE HAS SUFFICIENT ASSET FOR MORTGAGE FOR AVAILING ELIGIBLE LOAN. THE ASSESSEE HAS NO WHERE JUSTIFIED THE COMMISSION IN PROFIT & LOSS A/C . THE LD. CIT(A) CONFIRMED THE ACTION OF ASSESSING OFFICER ON HIS OB SERVATION THAT THE DIRECTORS WERE INACTIVE DIRECTORS. 6. WE HAVE NOTED THAT THE SIMILAR DISALLOWANCE WAS MAD E IN ASSESSMENT YEAR 2010-11. WE HAVE FURTHER NOTED THAT THE ASSESSEE HA S FURNISHED THE COPY OF ORDER OF TRIBUNAL. THE LD. CIT(A) DESPITE THE FACT THAT THE ORDER OF TRIBUNAL DATED 16.09.2015 WAS BROUGHT IN THE NOTICE OF LD. C IT(A). IN THE WRITTEN ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 6 SUBMISSION/STATEMENT OF FACT FURNISHED BEFORE HIM. WE HAVE NOTED THAT THE DISALLOWANCE OF GUARANTEE COMMISSION THE TRIBUNAL ON ALMOST SIMILAR GROUND OF APPEAL AS PASSED THE FOLLOWING ORDER; ( F OR COMPARISON OF FACTS WE ARE EXTRACTING THE MAJOR PART OF THE ORDER) 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, EXPORTING AND TRADING OF INDUSTRIAL VALVES, ERECTION, COMMISSIONING A AND CIVIL WORKS. DURING ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE COMPANY HA S PAID COMMISSION TO TWO DIRECTORS MRS. SOUMYALATHA S SHETTY AND MR. SAMEER S SHETTY. THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICER THAT THESE T WO DIRECTORS HAVE GIVEN PERSONAL GUARANTEE ON BEHALF OF THE COMPANY FOR THE BANK FACILITY OF RS.75.75 CRORES AND 1% COMMISSION ON THE BANK LOAN WAS PAID TO THEM AS COMMISSION ON WHICH TAX DEDUCTED AT SOURCE WHICH IS MATTER OF REC ORDS BEFORE US. THE ASSESSING OFFICER DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE ON THE GROUND THAT THE DIRECTORS HAVE ONLY GIVEN THE GUARA NTEE TO GET THE BANK LOAN WHICH IS BASIC NECESSITY FOR SANCTION OF LOAN. THE PERFORMANCES OF DIRECTORS HAVE NOT AFFECTED THE SALE / BUSINESS OF THE ASSESSEE. T HEREFORE, THE COMMISSION PAID TO THE DIRECTORS IS NOTHING BUT SIPHONING OF FUNDS TO UNDERSTATE TRUE INCOME OF THE ASSESSEE. ACCORDINGLY THE COMMISSION WAS DISALL OWED BY THE ASSESSING OFFICER. ON APPEAL, THE CIT(A) CONFIRMED THE ORDER OF A.O. 4.1 WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORIT IES BELOW AND MATERIAL ON RECORD. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ISSUE BEFORE THE HON 'BLE BOMBAY HIGH COURT IN THE CASE OF INDO SAUDI SERVICES (TRAVELS) P. LTD. (SUPRA) WHEREIN THE ASSE SSEE WAS A GENERAL SALES AGENT OF FOREIGN AIRLINES. IT EARNED COMMISSION AT THE RA TE OF 12 PER CENT FROM S ON THE TICKETS BOOKED / SOLD BY IT. THE ASSESSEE APPOINTED SEVERAL AGENTS INCLUDING ITS SISTER CONCERN AND PAID INCENTIVE MISSION TO SUCH A GENTS BY WAY OF HANDLING CHARGES. FOR THE ASSESSMENT YEARS 1991-92, AND 1992 -93, THE ASSESSING OFFICER HELD THAT THE INCENTIVE COMMISSION PAID TO THE SIST ER CONCERN WAS HALF PER CENT MORE THAN THAT PAID TO OTHER SUB-AGENTS. THE ASSESS ING OFFICER INVOKED SECTION 40A(2) INCOME-TAX ACT, 1961, AND DISALLOWED THE EXC ESS COMMISSION PAID TO THE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 7 CONCERN AT THE RATE OF HALF PER CENT. THIS WAS CONF IRMED BY THE COMMISSIONER (APPEALS). ON APPEAL, THE TRIBUNAL, WHILE DISMISSIN G THE APPEAL HELD THAT THE ASSESSEE APART FROM PAYING HANDLING CHARGES AT THE RATE OF 9.5 PER CENT TO ITS SISTER CONCERNS HAD PAID HANDLING CHARGES AT THE SA ME RATE TO OTHER AGENTS ALSO. FOR THE ASSESSMENT YEARS 1986 -87 AND 1987-88) THE ASSESSEE HAD PAID HANDLING CHARGES AT THE RATE OF 10 PER CENT TO THE SISTER CO NCERN AND SUCH CHARGES WERE CONSIDERED TO BE REASONABLE BY THE REVENUE. FOR THE ASSESSMENT YEAR 1989-90, THE ASSESSEE HAD REDUCED THE PAYMENT OF HANDLING CH ARGES TO 9.5 PER CENT AND HAD BEEN ALLOWED AFTER DUE SCRUTINY. FOR THE ASSESS MENT YEAR 1990-91, CLAIM OF THE ASSESSEE AT THE RATE OF 9.5 PER CENT HAD BEEN A LLOWED THOUGH IT NOT BEEN DEALT WITH BY THE ASSESSING OFFICER SPECIFICALLY IN THE O RDER. FOR THE ASSESSMENT YEAR 1993-94, THE RATE OF 9.5 PER CENT HAD BEEN HELD REA SONABLE AND HAD BEEN ALLOWED. WHEN THE MATTER REACHED BEFORE THE HON 'BLE BOMBAY HIGH COURT, THE COURT OBSERVED THAT THE TRIBUNAL WAS CORRECT IN COMING TO THE CONCLUSION THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS WRONG IN D ISALLOWING HALF PER CENT COMMISSION PAID TO THE SISTER CONCERN OF THE ASSESS EE DURING ASSESSMENT YEARS 1991-92 AND 1992-93 AND ACCORDINGLY DISMISSED THE A PPEAL FILED BY THE REVENUE. SINCE THE FACTS INVOLVED IN THIS APPEAL AR E SIMILAR TO THE FACTS IN THE CASE OF INDO SAUDI SERVICES (TRAVELS) P. LTD., RESP ECTFULLY FOLLOWING THE SAME, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DELETE THE DISALLOWANCE OF RS. 1,52,68,356/-. 7. CONSIDERING THE FACT THAT SIMILAR SET OF FACT THE A DDITION WAS DELETED BY GUARANTEE COMMISSION OF TRIBUNAL. WE DO NOT FIND AN Y JUSTIFICATION IN SUSTAINING THE DISALLOWANCE WHEN THE ORDER OF TRIBU NAL WAS BROUGHT IN THE NOTICE OF LD. CIT(A). EVEN THERE ARE NO VARIATIONS OF FACT RELATED WITH THE ISSUE UNDER CONSIDERATION IN THIS YEAR. THUS, RESPE CTFULLY FOLLOWING THE PRINCIPLE OF CONSISTENCY, THE GROUND NO. I OF THE A PPEAL IS ALLOWED. 8. GROUND NO. II RELATES TO DISALLOWANCE OF TRAVELLING EXPENSES. THE LD. AR OF THE ASSESSEE SUBMITS THAT DURING THE RELEVANT FINAN CIAL YEAR, THE ASSESSEE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 8 INCURRED EXPENDITURE OF RS. 8,12,400/- ON ACCOUNT O F TRAVELLING EXPENDITURE. THE ASSESSING OFFICER DISALLOWED 50% OF THE EXPENSE S ON ADHOC BASIS. NO REASON FOR ADHOC DISALLOWANCE IS RECORDED BY ASSESS ING OFFICER. THE REGISTERED OFFICER OF THE ASSESSEE IS AT MUMBAI; HO WEVER, THE MANUFACTURING UNIT OF INDUSTRIAL VALVES ARE LOCATED AT BANGALORE AND AURANGABAD. THE DIRECTORS OF THE ASSESSEE-COMPANY VISITED THE SITE TO EVALUATE THE PERFORMANCE AND TO MONITOR THE BUSINESS. THE ASSESS ING OFFICER DISALLOWED 50% OF EXPENDITURE DUE TO NON-SUBMISSION OF EVIDENC ES. BEFORE THE LD. CIT(A), THE ASSESSEE FURNISHED ALL DETAILS AND CONF IRMED FROM THE COMPANIES FOR STAY OF GUEST HOUSE BY SUCHITRA HEGDE AND RITVI K HEGDE. THE ASSESSEE ALSO FURNISHED ADDITIONAL EVIDENCE ALONG WITH APPLI CATION UNDER RULE 46A BEFORE LD CIT(A) TO SUBSTANTIATE THE CONTENTION IN THE FORM OF TARIFF CARD OF BANGALORE AND AURANGABAD HOTEL FOR JUSTIFICATION OF HOTELS RATE COMPARED TO GUEST HOUSE RATE. THE LD. AR OF THE ASSESSEE FURTHE R SUBMITS THAT THERE WAS NO PERSONAL ELEMENT IN THE TRAVELLING EXPENDITURE. THE PAYMENT MADE TO GUEST HOUSE IS LESS THAN THE HOTELS RATE. THE DISAL LOWANCE @ 50% ON ADHOC BASIS IS NOT JUSTIFIED. IN SUPPORT OF HIS SUBMISSIO N, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF GUJARAT HIGH COURT IN S AYAJI IRON & ENGINEERING CO. V CIT [2002] 253 ITR 749 (GUJ). 9. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF AUTHORITIES BELOW. THE LD. DR FOR THE REVENUE SUBMI TS THAT THE TAX AUDITOR OF THE ASSESSEE RAISED OBJECTION ON THE EXPENDITURE SH OWN ON TRAVELLING ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 9 EXPENSES. DURING THE ASSESSMENT, THE ASSESSEE HAS N OT FILED ANY EVIDENCE TO SUBSTANTIATE JUSTIFICATION OF THE EXPENDITURE. THE GUEST HOUSE FOR WHICH EXPENSES WAS CLAIMED IS OWNED BY ONE OF THE SHAREHO LDERS. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND PERUSED THE RECORD. THE ASSESSING OFFICER DISALLOWED 50% OF THE EXPENDITURE ON HIS OBSERVATION THAT NO EVIDENCE HAS BEEN FURNISHED BY THE ASSESSEE. THE LD. CIT(A) AFTER CONSIDERING THE COMPARATIVE RATE FURNI SHED BY ASSESSEE FOR GUEST HOUSE CHARGES AND PREVALENT RATE OF FIVE STAR HOTEL CONCLUDED THAT THE RATE OF GUEST HOUSE ARE NOT LESS THAN THE FIVE STAR HOTELS. 11. THE HON'BLE GUJARAT HIGH COURT IN SAYAJI IRON & EN GINEERING CO. V CIT (SUPRA) WHILE CONSIDERING THE GROUNDS RELATED WITH BUSINESS EXPENDITURE FOR USE OF VEHICLE OF ASSESSEE-COMPANY BY ITS DIRECTOR HELD THAT WHEN VEHICLE WERE USED BY DIRECTORS IN A LIMITED COMPANY EVEN I F THEY PROPORTIONATELY USED BY THE DIRECTOR, BECAUSE THE LIMITED COMPANY B Y ITS NATURE CANNOT HAVE PERSONAL USE, THE LIMITED COMPANY IS AN ANY INTIMA TE PERSON AND THERE CANNOT BE ANYTHING PERSON ABOUT SUCH ENTITY. ONCE THE EXPE NDITURE IN QUESTION WAS IN TERM AS PROVIDED IN SECTION 309 AND 198 OF COMPANIE S ACT, THEREFORE, NOT BE ANY NON-BUSINESS PURPOSE SO FAR AS THE ASSESSEE COM PANIES ARE CONCERNED. IT WAS FURTHER HELD THAT IT WAS WRONG IN DISALLOWING 1 /6 OF THE TOTAL CAR EXPENDITURE AND DEPRECIATION CLAIMED BY ASSESSEE-CO MPANY ON ACCOUNT OF PERSONAL USE OF THE CAR WHICH HAS BEEN USED BY THE DIRECTORS. IN OUR VIEW, IT IS SETTLED LAW THAT THE REVENUE AUTHORITY CANNOT ST EP INTO THE SHOES OF ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 10 BUSINESSMEN TO DICTATE THEM HOW TO MAKE THE EXPENDI TURE FOR RUNNING THEIR BUSINESS. THE LOWER AUTHORITIES HAVE NOT BROUGHT AN YTHING ON RECORD THAT VISIT OF THE DIRECTORS NAMELY SUCHITRA HEGDE AND RITVIK H EGDE WAS NOT FOR THE PURPOSE OF BUSINESS. IN ABSENCE OF ANY FINDING OR A NY MATERIAL ON RECORD THAT THE VISIT AND STAY OF DIRECTORS WAS FOR STAY OF PER SONAL USE, THIS AD-HOCK DISALLOWANCE IN NOT JUSTIFIABLE. THUS, WE DO NOT FI ND ANY JUSTIFICATION IN ADHOC DISALLOWANCE ON ACCOUNT OF TRAVELLING EXPENSES. IN THE RESULT, GROUND NO.II OF THE APPEAL IS ALLOWED. 12. GROUND NO.III RELATES TO DISALLOWANCE OF PRIOR PERI OD EXPENDITURE OF RS.6,26,228/-. THE LD. AR OF THE ASSESSEE SUBMITS T HAT DURING THE YEAR, THE ASSESSEE-COMPANY DECLARED BONUS @ 20% INSTEAD OF 8. 33% TO THE EMPLOYEE. THEREFORE, THE LIABILITY OF PAYMENT OF BONUS ACCRUE D IN THE YEAR UNDER CONSIDERATION. BEFORE THE ASSESSING OFFICER, THE AS SESSEE FURNISHED THE DETAILS OF PAYMENT OF BONUS AND EX-GRATIA TO ITS EMPLOYEE V IDE LETTER DATED 27.02.2014. THE ASSESSING OFFICER DISALLOWED THE SA ME ON THE GROUND THAT THE PAYMENT OF BONUS DID NOT PERTAIN TO THE PRESENT ASSESSMENT YEAR AS THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING. THE LD. CIT(A) ALSO CONFIRMED THE ACTION OF ASSESSING OFFICER DESP ITE EXPLAINING THE FACTS AND FURNISHING THE WRITTEN SUBMISSION. THE LD. AR O F THE ASSESSEE FURTHER SUBMITS THAT AS THE LIABILITY FOR PAYMENT ON ACCOUN T OF BONUS WAS CRYSTALLIZED DURING THE YEAR, THE PAYMENT WAS LIABLE TO BE ALLOW ED. IN SUPPORT OF HIS SUBMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF HON'BLE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 11 DELHI HIGH COURT IN CIT VS. EXXON MOBILE LUBRICANTS (P) LTD. [2010] 328 ITR 17 (DEL) AND THE DECISION OF HON'BLE APEX COURT IN NONSUCH TEA STATE LTD. VS. CIT [1975] 98 ITR 189 (SC). ON THE CONTRAR Y, THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF AUTHORITIES BELOW. T HE LD. SUBMITS THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING. THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS NOT RELATED TO THE YEAR UNDER CONSIDERATION. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND PERUSED THE ORDER OF AUTHORITIES BELOW. DURING THE ASSESSMENT, THE AS SESSING OFFICER NOTED THAT ASSESSEE CLAIMED AN EXPENDITURE OF RS. 6,26,228/- A S PRIOR PERIOD EXPENSES. THE ASSESSEE WAS ASKED TO SUBSTANTIATE THE PAYMENT OF PRIOR PERIOD EXPENSES. THE ASSESSEE FILED ITS REPLY DATED 27.02.2014. IN T HE REPLY THE ASSESSEE CONTENDED THAT AS PER BONUS ACT, BONUS WAS PAID @ 8 .33% FOR FINANCIAL YEAR 2009-10. HOWEVER, THE BONUS WAS DECLARED @ 20% AFTE R COMPLETION OF BALANCE-SHEET AND THE PROFIT DECLARED FOR FINANCIAL YEAR 2009-10. THE DIFFERENCE IS DEBITED TO THE CURRENT YEAR ACCOUNT A ND HENCE, THE LIABILITY IS DEBITED TO CURRENT FINANCIAL YEAR 2010-11. THE BONU S WAS DECLARED IN OCTOBER/NOVEMBER 2010; HENCE, DIFFERENCE OF BONUS I S PAID AS EX-GRATIA TO THE EMPLOYEE OF THE COMPANY. THE CONTENTION OF THE ASSESSEE WAS NOT ACCEPTED BY ASSESSING OFFICER AS THE ASSESSEE IS FO LLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. THE LD. CIT(A) CONCURRED WITH THE FINDING OF ASSESSING OFFICER HOLDING THAT THE EXPENSES DO NOT PERTAIN TO THE YEAR. THE ASSESSEE HAS CLEARLY BROUGHT OUT ON RECORD THAT BON US WAS DECLARED IN ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 12 OCTOBER/NOVEMBER 2010 AND THE DIFFERENCE OF BONUS W AS PAID AS EX-GRATIA TO THE EMPLOYEE. THE BONUS WAS DECLARED BY MANAGEMENT OF THE ASSESSEE AFTER COMPLETION OF THE BALANCE-SHEET ON THE PROFIT PREVA ILING FOR FINANCIAL YEAR 2009-10. THUS, THE ASSESSEE WAS ENTITLED TO DEBIT T HE DIFFERENCE FROM THE CURRENT FINANCIAL YEAR I.E. 2010-11. 14. THE HON'BLE DELHI HIGH COURT IN CASE OF CIT VS. EX XON MOBILE LUBRICANTS (P) LTD. (SUPRA) WHILE CONSIDERING THE GROUND RELAT ED WITH PRIOR PERIOD EXPENDITURE HELD THAT WHEN THE LIABILITY OF THE ASS ESSEE UNDER AGREEMENT HAD ARISEN AND ACCRUED IN AUGUST 2002 WHEN AGREEMENT WA S EXECUTED, THEREFORE, THE LIABILITY OF THE ASSESSEE TO PAY FOR THE PERIOD JANUARY 2002 TO MARCH 2002 AROSE AND CRYSTALLIZED IN AUGUST 2002. IF THE ASSES SEE HAD SHOWN THE PRIOR PERIOD EXPENSES AND THE ASSESSING OFFICER HAD NOT E XCLUDED WHILE WORKING OUT THE CURRENT YEAR TAXABLE INCOME THAN THERE WAS NO REASON ON THE PART OF ASSESSING OFFICER TO DISALLOW ONLY ONE PART OF THE PRIOR PERIOD ADJUSTMENT I.E. PRIOR PERIOD EXPENDITURE. IT WAS HELD THAT THE ADDITION BY ASSESSING OFFICER WAS NOT SUSTAINABLE. WE HAVE NOTED THAT THE FACTS OF THE PRESENT CASE IN PRINCIPLE ARE SIMILAR. 15. THE HONBLE SUPREME COURT IN CASE OF NON-SUCH TEA STATE LTD. VS CIT (SUPRA) HELD THAT WHEN THE LIABILITY TO PAY IS CRYS TALLIZED IN THE YEAR OF APPROVAL, THEREFORE, DEDUCTABLE IN COMPUTING THE PR OFIT FROM THE PERIOD ENDING WHEN LIABILITY WAS CRYSTALLIZED. FURTHER, TH E HON'BLE SUPREME COURT IN CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRY VS CI T 213 ITR 523 (GUJ) ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 13 HELD THAT MERELY BECAUSE THE EXPENSES RELATED TO A TRANSACTION OF AN EARLIER YEAR DOES NOT BECOME A LIABILITY PAYABLE IN THE EAR LIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALL IZED IN THE YEAR IN QUESTION. 16. IN VIEW OF THE ABOVE LEGAL POSITION, THE LIABILITY TO MAKE THE EX-GRATIA PAYMENT WAS CRYSTALLIZED DURING THE YEAR UNDER CONS IDERATION. IN OUR VIEW, THE ASSESSEE WAS ENTITLED FOR DEDUCTION OF THE SAID PRIOR PERIOD EXPENSES. IN THE RESULT, THIS GROUND OF APPEAL IS ALLOWED. 17. GROUND NO. IV &V RELATES TO DISALLOWANCE UNDER SECT ION 14A OF THE ACT. THE LD. AR OF THE ASSESSEE SUBMITS THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE EARNED EXEMPT INCOME OF RS. 13,15,327/-. T HE ASSESSEE VOLUNTARY DISALLOWED RS. 4,318/- UNDER SECTION 14A R.W.RULE 8 D. THE ASSESSEE ALSO FURNISHED THE WORKING UNDER SECTION 14A BEFORE THE ASSESSING OFFICER. THE ASSESSING OFFICER DISALLOWED RS. 2,33,533/- BY INVO KING THE PROVISION OF RULE 8D R.W.S. 14A. THE LD. AR OF THE ASSESSEE FURT HER SUBMITS THAT THE ASSESSEE EARNED DIVIDEND INCOME FROM THE INVESTMENT MADE IN MUTUAL FUNDS. THE INVESTMENTS WERE MADE FROM THE SURPLUS FUND AVA ILABLE WITH THE ASSESSEE-COMPANY. THE ASSESSEES CAPITAL, PROFIT RE SERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT MA DE IN THE TAX FREE SECURITIES. THE ASSESSEE MADE AN INVESTMENT FROM IT S OWN FUND. THE ASSESSEE MADE INVESTMENT OF RS. 1,75,54,727/- AGAINST RESERV E AND SURPLUS FUND OF RS. 17,83,07,003/-. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT INTEREST DISALLOWANCE UNDER RULE 8D(2)(II) CANNOT BE MADE IN VIEW OF THE DECISION OF ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 14 JURISDICTIONAL HIGH COURT IN CASE OF CIT VS. HDFC B ANK (366 ITR 505) (BOM). THE LD. AR OF THE ASSESSEE FURTHER SUBMITS T HAT THE ASSESSEE DURING THE ASSESSMENT MADE A CLAIM BEFORE THE ASSESSING OF FICER THAT DIVIDEND OF RS. 13,15,325/- ON SBI MUTUAL FUND NOT CLAIMED AS E XEMPT INCOME AND REQUESTED TO TREAT THE SAME AS EXEMPT INCOME AND RE DUCE THE INCOME TO THAT EXTENT. THE ASSESSING OFFICER FAILED TO CONSIDER TH E SAME. THE ASSESSEE RAISED SPECIFIC GROUND OF APPEAL BEFORE THE LD. CIT(A) VI DE GROUND NO.7. THE LD. CIT(A) FAILED TO DECIDE THE ISSUE. THE LD. AR OF TH E ASSESSEE FINALLY SUBMITS THAT THIS GROUND OF APPEAL MAY BE RESTORED TO THE F ILE OF ASSESSING OFFICER FOR CONSIDERING THE DISALLOWANCE AFRESH. 18. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF AUTHORITIES BELOW. THE LD. DR FOR THE REVENUE FUR THER SUBMITS THAT THE ASSESSING OFFICER HAS RECORDED ITS SATISFACTION ABO UT THE WORKING OF DISALLOWANCE FURNISHED BY ASSESSEE, BEFORE INVOKING THE PROVISIONS OF RULE 8D(2)(II). THE ASSESSEE HAS NOT TAKEN INTO CONSIDER ATION THE INVESTMENT OF RS. 1,73,65,327/- IN SBI MUTUAL FUND. THE LD. DR FOR TH E REVENUE SUBMITS THAT HE HAS NO OBJECTION IF THIS GROUND OF APPEAL IS RES TORED TO THE FILE OF ASSESSING OFFICER FOR CONSIDERING IT AFRESH. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PA RTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. CONSIDERING THE CONTE NTION OF LD. AR OF THE ASSESSEE THAT ASSESSING OFFICER HAS NOT CONSIDERED THE CLAIM OF ASSESSEE REGARDING THE DIVIDEND INCOME OF RS. 13,15,324/- ON SBI MUTUAL FUND. WE ITA N O. 754/MUM/2016 - M/S FOURESS ENGG (I) LTD. 15 HAVE ALSO NOTED THAT THE ASSESSEE RAISED SPECIFIC G ROUND OF APPEAL BEFORE THE LD. CIT(A) VIDE GROUND NO.7. HENCE, CONSIDERING THE TOTALITY OF THE FACTS RELATED WITH THE GROUNDS OF APPEAL UNDER CONSIDERAT ION, THIS GROUND OF APPEAL IS RESTORED TO THE FILE OF ASSESSING OFFICER WITH T HE DIRECTION TO CONSIDER THE CLAIM OF ASSESSEE WITH REGARD TO THE EXEMPT INCOME OF RS. 13,15,325/- EARNED ON SBI MUTUAL FUND. THE ASSESSING OFFICER IS FURTHE R DIRECTED TO RE-COMPUTE THE DISALLOWANCE UNDER SECTION 14A READ WITH UNDER RULE 8D IN ACCORDANCE WITH LAW. THE ASSESSING OFFICER IS ALSO DIRECTED TO CONSIDER THE DECISION OF JURISDICTIONAL HIGH COURT IN CASE OF CIT VS. HDFC B ANK (SUPRA). NEEDLESS TO SAY THE ASSESSING OFFICER SHALL PROVIDE REASONABLE AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE BEFORE PASSING THE ORDER IN ACCORDA NCE WITH LAW. IN THE RESULT THE GROUND NO. IV & V ARE ALLOWED FOR STATISTICAL P URPOSE. 20. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DAY OF MARCH 2018. SD/- SD/- ( RAJESH KUMAR ) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 23/03/2018 S.K.PS COPY OF THE ORDER FORWARDED TO : BY ORDER (ASSTT.REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE C