M/s Jupiter Capital (P) Limited, Bangalore V. ACIT, Bangalore

ITA 961/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60803 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 31-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Assessee Lawyers: C RAMESH
• Keywords: Principle of natural justice; Earning of tax free income; Retrospective amendment; Onus to prove
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BANGALORE BANGALORE BANGALORE BENCH BENCH BENCH BENCH A AA A BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI N. N. N. N. BARAT BARAT BARAT BARATH HH HVAJA SANKAR, VICE VAJA SANKAR, VICE VAJA SANKAR, VICE VAJA SANKAR, VICE- -- -PRESIDENT PRESIDENT PRESIDENT PRESIDENT A AA AND NDND ND SHRI SHRI SHRI SHRI N.V.VASUDEVAN N.V.VASUDEVAN N.V.VASUDEVAN N.V.VASUDEVAN, JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER ITA NO.961/BANG/2011 (ASSESSMENT YEAR: 2007-08) M/S.JUPITER CAPITAL (P) LTD., NO.54, RICHMOND ROAD, BANGALORE-25. APPELLANT PAN: AABCJ 5666 R VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 11(5), BANGALORE. RESPONDENT AND AND AND AND ITA NO.975/BANG/2011 (ASSESSMENT YEAR: 2007-08) ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 11(5), BANGALORE. APPELLANT VS. M/S.JUPITER CAPITAL (P) LTD., BANGALORE. RESPONDENT ASSESSEE BY: SHRI C.RAMESH, C.A. REVENUE BY : SHRI S.K.AMBASTHA, CIT. DATE OF HEARING: 03-07-2012. DATE OF PRONOUNCEMENT: 18 - 07 - 20 12 . O R D E R O R D E R O R D E R O R D E R PER PER PER PER N. BARATHVAJA SANKAR, VP N. BARATHVAJA SANKAR, VP N. BARATHVAJA SANKAR, VP N. BARATHVAJA SANKAR, VP: :: : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE M/S. JUPITER CAPITAL (P) LTD., BANGALORE AND THE REVENUE FOR THE ASSESSMENT YEAR 2007-08 AGAINST THE APPELLATE ORDER DATED 18-8 -2011 OF THE ITA NOS.961 & 975/BANG/2011 PAGE 2 CIT(A)-I, BANGALORE. THERE ARE TWO ISSUES BROUGHT BEFORE US BY THE ASSESSEE AS WELL AS THE REVENUE RELATING TO DISALLO WANCE U/S 14A OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO A S 'THE ACT'] AND 40A(2) RESPECTIVELY. 2. THE BRIEF FACTS ARE THAT THE ASSESSEE M/S.JUPIT ER CAPITAL (P) LTD. IS A PRIVATE LIMITED COMPANY WHICH DERIVES INCOME FROM PORTFOLIO MANAGEMENT, DIVIDEND AND INTEREST. THE A SSESSEE FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 DE CLARING A LOSS OF `44,00,286/-. THE ASSESSMENT WAS COMPLETED U/S 1 43(3) OF THE ACT DETERMINING THE TOTAL INCOME AT `3,90,17,741/-. AMONGST VARIOUS ADDITIONS, THE FOLLOWING WERE ALSO ADDED BA CK TO THE INCOME RETURNED: I) DISALLOWANCE U/S 14A `3,87,95,027/- II) DISALLOWANCE OF PAYMENT OF LICENSE FEE U/S 40A(2) `45,00,000/- 3. LET US FIRST TAKE UP THE ISSUE RELATING TO DISA LLOWANCE U/S 14A. WHILE FRAMING THE ASSESSMENT U/S 143(3) OF TH E ACT, THE AO NOTICED THAT THE ASSESSEES TOTAL INCOME COMPRISED OF INCOME IN THE NATURE OF INTEREST INCOME AND NON-TAXABLE INCOM E IN THE NATURE OF DIVIDEND INCOME. IT WAS ALSO SEEN FROM T HE FINANCIAL STATEMENTS SUBMITTED THAT NO EXPENSE HAD BEEN DISAL LOWED U/S 14A WHICH WAS INCURRED FOR EARNING THE EXEMPT INCOM E. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY NO EXPEN SE HAS BEEN DISALLOWED U/S 14A OF THE ACT. THE ASSESSEE SUBMIT TED THAT SEC.14A WAS INSERTED BY THE FINANCE ACT,2006 W.E.F. 1-4-2007 AND HENCE THEY HAVE NOT CONSIDERED SEC.14A FOR THE CURR ENT YEAR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE ALSO ITA NOS.961 & 975/BANG/2011 PAGE 3 SUBMITTED THAT AS IT IS IN THE BUSINESS OF INVESTME NTS, THE MAIN INTENTION WAS TO TRADE IN INVESTMENTS AND EARNING O F DIVIDEND WAS ONLY INCIDENTAL. HOWEVER, THE AO WAS OF THE VIEW T HAT THE ASSESSEES INCOME FROM PORTFOLIO MANAGEMENT IS NOTH ING BUT INTEREST INCOME FROM FIXED DEPOSIT AND HENCE IT MIG HT BE SEEN THAT THERE WAS MORE ACTIVITY DONE BY THE COMPANY FOR EAR NING DIVIDEND INCOME THAN FOR EARNING INTEREST INCOME FROM FIXED DEPOSITS. THE EARNING OF DIVIDEND INCOME IS ALSO MORE THAN THE IN TEREST INCOME AS WELL AS TRADING IN INVESTMENTS. THEREFORE, THE ARGUMENT OF THE ASSESSEE THAT DIVIDEND INCOME WAS ONLY INCIDENTAL W AS NOT TENABLE, ACCORDING TO THE AO. AFTER QUOTING THE PR OVISIONS OF SEC.14A AND RULE 8D(2), THE AO WAS OF THE VIEW THAT SEC.14A READ WITH RULE 8D GIVES THE METHOD BY WHICH THE EXPENDIT URE FOR EXEMPT INCOME WAS TO BE CALCULATED. AFTER REFERRIN G TO THE DECISION OF MUMBAI SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD., (2008) 119 TTJ (MUMBAI )(SB) 289 THE AO WAS OF THE VIEW THAT RULE 8D WAS RETROSPECTIVE EFFECT. THEREFORE, APPLYING RULE 8D, THE AO DISALLOWED U/S 14A A SUM OF `3,87,95,027/-. 3.1. AGGRIEVED, THE ASSESSEE MOVED THE MATTER IN A PPEAL BEFORE THE FIRST APPELLATE AUTHORITY BEFORE WHOM DE TAILED SUBMISSIONS WERE MADE BY THE ASSESSEE. AFTER CONSI DERING THE SUBMISSIONS OF THE ASSESSEE IN LIGHT OF THE FACTS A ND MATERIALS AND FOR THE DETAILED REASONS RECORDED IN THE APPELLATE ORDER, THE CIT(A) CONFIRMED THE ADDITION TO THE EXTENT OF `3,54,24,59 2/- THUS GIVING RELIEF OF `33,70,435/-. THE SUMMARY OF THE CIT(A) S FINDINGS ARE AS UNDER: ITA NOS.961 & 975/BANG/2011 PAGE 4 7.9 . SUMMARY:- I) SECTION 14A(2) AND 14(3) WERE INTRODUCED TO THE ACT BY F . A. 2006 W.E.F.1-4-2007. RULE 8D WAS INSERTED TO I . T. RULES, 1962 ON 24.03.2008. THESE AMENDMENTS ARE CLARIFICATORY, EXPLANATORY AND CURATIVE IN NATURE A ND ALSO MACHINERY PROVISIONS. IT EXPLAINED THE CIRCUMSTANCE S UNDER WHICH SUB-SECTION 1 OF SECTION 14A OF I. T. ACT COU LD BE MADE APPLICABLE. IT ALSO SETTLED THE DISPUTE REGARD ING THE QUANTUM OF DISALLOWANCE. HENCE , FOLLOWING THE RATIO DECIDENDI OF THE CASE ALLIED MOTORS (P) LIMITED VS . CIT (1997) 224 ITR 67 7 (SC) THE AMENDMENTS, THOUGH HAVE BEEN GIVEN PROSPECTIVE DATES OF OPERATION, HAS TO B E ASCRIBED RETROSPECTIVE EFFECT AND HENCE HELD APPLIC ABLE TO THE A. Y.2007-08 RELEVANT HERE. II) THE TOTAL EFFECT OF SUCH AMENDMENTS IS THAT AO IS EMPOWERED TO TREAT A DEFINITE SUM AS DISALLOWABLE I F A PORTION OF TOTAL INCOME DECLARED BY THE ASSESSEE IN CLUDES EXEMPTED INCOME IRRESPECTIVE OF THE FACT WHETHER SU CH AMOUNT IS CLAIMED AS EXPENDITURE OR NOT IN THE ACCO UNTS OF THE ASSESSEE. IF SUCH A CLAIM HAS BEEN MADE AND IT DOES NOT CONFIRM TO RULE 8, THE A.O. HAS TO RECORD A SATISFA CTION THAT THE CLAIM IS INCORRECT AS PER THE BOOKS OF THE ASSE SSEE VIDE SECTION 14A(2) OF I.T. ACT. IF NO SUCH EXPENDITURE HAS BEEN CLAIMED, THE AO CAN APPLY RULE 8D STRAIGHTWAY VIDE SECTION 14A(3) OF I . T.ACT . IN OTHER WORDS , IT IS NOT REQUIRED TO SHOW ANY NEXUS BETW E EN THE DISALLOWANCE QUANTIFI E D UNDER RULE 8D AND THE EXEMPTED INCOME BECAUSE THAT WOULD BE AGAINST THE LEGISLATIVE PRESUMPTION, OF IN TRODUCING THESE AMENDMENTS, THAT NO INCOME CAN BE EARNED WITH OUT SPENDING SOMETHING FOR EARNING SUCH INCOME . THEREFORE, NO BURDEN OF PROOF LIES ON REVENUE TO ESTABLISH ANY RELATIONSHIP BETWEEN THE DISALLOWANCE MADE UJS.L4A OF I.T. ACT FOR THE EXEMPTED INCOME CLAIMED BY THE ASSESSEE . HOWEVER, IF NO AMOUNT IS CLAIMED AS EXEMPTED INCOME BY THE ASSESSEE , IF RULE 8 D IS NOT MADE APPLICABLE HOLDING ITS PROSPECTIVE OPERATION , THEN THE BEST PRINCIPLE IS TO APPLY TH E PROPORTIONATE THEORY TO MAKE THE DISALLOWANCE WHICH HAS BEEN ADOPTED HERE TO CONFIRM ADDITION TO THE EXTENT OF RS.3 , 54 , 24 , 592/ - AND THUS GIVING RELIEF OF RS.33 ,7 0 , 435/- . 3.2. THE ASSESSEE IS STILL AGGRIEVED AND IS ON APPE AL BEFORE US WITH THE FOLLOWING GROUNDS OF APPEAL: ITA NOS.961 & 975/BANG/2011 PAGE 5 1. THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI R MING DISALLOWANCE TO THE EXTENT OF RS . 1 ,15,06,649/ - MADE INVOKING PROVISIONS OF SECTION 14A OF THE ACT R . W . RULE 8D OF THE RULE. 2. THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT THE PROVISIONS OF SECTION 14A(2) AN D 14A(3) OF THE ACT WHICH WERE INTRODUCED FROM 0 1 .04 . 2007 AS CLAR I F I CATORY , EXPLANATORY AND CURATIVE AND THEREFORE HAVE A RETROSPECTIVE EFFECT . 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN HOLDING THAT RULE 8D OF T HE I , T . RULES NOTIFIED FROM 24 . 03 . 2008 HAS A RETROSPECTIVE EFFECT AND THEREFORE APPLICABLE FOR THE A . Y . 2007 - 08 . 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED I N HOLDING THAT THE ASSESSING OFF I CER IS NOT REQUIRED TO RECORD ANY SATISFACTION FOR I NVOK I NG PROVISIONS OF SECTION 14A OF THE ACT W I THOUT DISPUTING T HE CORRECTNESS OF THE APPELLANT ' S CLA I M . THE F I NDING OF THE CIT(A) IS OPPOSED TO THE WORDINGS IN THE PROVISIONS WHICH MAKE IT MANDAT ORY THAT THE PROVISIONS CAN BE INVOKED ONLY WHEN THE AS SESSING OFFICER IS NOT SAT I SFIED WITH THE CORRECTNESS OF THE CLAIM. 5. THE ORDER OF THE LEARNED COMM I SS I ONER OF INCOME TAX (APPEALS) IS OPPOSED TO THE POSITION OF LAW LAID DO WN BY THE HON . , HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LTD VS . D CIT(2010) 328 ITR 81 (BOM). 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT APPRECIATING THE FACT THAT THE INVESTMENTS I N SUBSID I ARIES ARE IN THE INTEREST OF THE BUS I NESS ACT I VITY OF THE APPELLANT AND SUCH INVESTMENTS CANNOT BE CONSIDERED AS INVESTMENTS RESULTING IN EXEMPT INCOME FOR THE PURP OSE OF COMPUTATION IN RULE 8D R.W.S. 14A OF THE ACT. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT APPRECIATING THE FACT THAT THE INVESTMENT IN PRIVATE LIMITED COMPANIES ARE NOT MADE WITH THE INTENTION O F EARNING DIVIDENDS AND THEREFORE SUCH INVESTMENTS CA NNOT BE CONSIDERED AS FOR THE PURPOSE OF EARNING INCOME EXE MPT UNDER THE PROVISIONS OF THE ACT . 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT APPRECIATING THE FACT THAT ANY GAIN ARIS I NG ON TRANSFER OF INVESTMENTS IN PRIVATE L I MITED COMPANIES ARE ASSESSABLE TO TAX UNDER THE PROVISIONS OF THE ACT A ND ITA NOS.961 & 975/BANG/2011 PAGE 6 THEREFORE SUCH INVESTMENTS CANNOT BE CONSIDERED AS FOR THE PURPOSE OF EARNING INCOME EXEMPT UNDER THE PROVISIO NS OF THE ACT . 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) ERRED IN ALTERNATIVELY CONFIRMING ADDITION TO THE EXTENT OF RS.3,54,24,592/- STATING THAT THIS EXPENDITURE IS PROPORTIONATE TO THE EXEMPT INCOME. 10. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN DETERM I NING A DISALLOWANCE ON PROPORTIONATE BASIS , IGNORING THE FACT THAT AFTER HAVING CONF I RMED THAT THE PROVISIONS OF RULE 80 ARE APPLICABLE , THE LAW DOES NOT ALLOW ANY ESTIMATION ON PROPORTIONATE BASIS . 11. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN IGNORING THE FACT THAT NO EXPENDITURE INCURRED W AS FOR THE PURPOSE OF EARNING THE DIVIDEND INCOME AND THE DIVIDEND INCOME WAS ONLY INCIDENTAL TO THE BUSINESS CARRIED ON AND THE R EFORE NO PROPORTIONATE DISALLOWANCE COULD HAVE BEEN MADE . 12. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN CONFIRMING A PROPORTIONATE DISALLOWANCE IGNORING THE FACT THAT THE ITEMS OF EXPENDITURE CLAIMED ARE SPEC IFIC AND CANNOT BE ATTRIBUTED TO THE EXEMPT INCOME . 13. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT APPRECIATING THE POSITION OF LAW WHICH WAS I N EXISTENCE PRIOR TO THE INTRODUCTION OF PROVISIONS O F SECTION 14A(2) & (3) OF THE ACT DID NOT CONTEMPLATE ANY PROPORTIONATE DISALLOWANCE , BUT ONLY DISALLOWANCE TO THE EXTENT THE NEXUS WAS ESTABLISHED . 14. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT PROVIDING WITH A SPECIFIC OPPORTUNITY OF HEA RING TO THE APPELLANT WHILE DEVIATING FROM THE STAND TAKEN BY THE ASSESSING OFFICER AND CONFIRMING A DISALLOWANCE ON P R OPORTIONATE BASIS WH I CH WAS NOT AN ISSUE EITHER IN THE ASSESSMENT OR IN THE GROUNDS OF APPEAL . 15. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN NOT FOLLOWING THE PRINCIPLES OF NATURAL JUSTICE . 16. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING ADDITION TO THE EXTENT OF RS . 3 , 54 , 24 , 592/- (INCLUDING DISALLOWANCE UNDER 8D OF THE INCOME TAX RULES OF RS.1,15,06 , 649/-) IS AGAINST THE POSITION OF LAW AND FACTS OF THE CASE. ITA NOS.961 & 975/BANG/2011 PAGE 7 3.3. THE REVENUE IS ALSO ON APPEAL BEFORE US AGAIN ST THE RELIEF OF `33,70,435/- GIVEN UNDER SEC.14A BY THE C IT(A). THE RELEVANT GROUNDS READ AS UNDER: 1. THE LEARNED CIT (A) HAS ERRED I N ALLOW I NG A RELIEF OF RS . 33,70 , 435/ - OUT OF THE D I SALLOWANCE MADE U/S 14A OF THE I T ACT, 1961, WITHOUT A PROPER BASIS AND WITHO UT APPRECIAT I NG THE FACTS AND CIRCUMSTANCES OF THE CASE UNDER WHICH THE ADDITION WAS MADE BY THE ASSESSING OFFICE R . 2. THE LEARNED CIT(A) ' HAS ERRED I N ALLOWING THE REL I EF OF RS . 15,00 , 000/ - BY EXCLUDING THE INVESTMENT . I N MUTUAL FUND WITH GROWTH OPTIONS FROM THE AMBIT OF 'INVESTMENT', INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME , W I THOUT APPRECIATING THE FACT THAT THE YEARLY DIVIDENDS ACCRUING TO THE ASSESSEE, WHICH ARE RE-IN VESTED , DO NOT OR SHALL NOT FORM PART OF THE TOTAL I NCOME OF THE ASSESSEE . 3. THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDIT I ON/DISALLOWANCE OF RS. 2 , 57,88 , 378/- BEING THE EXPENDITURE D I RECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME AND THAT THE LEARNED CIT(A) FURTHER ERRED I N SHIFTING THE DISALLOWANCE FROM DIRECT TO I NDIRECT EXPENSES , HOLDING THE SAME TO BE NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AN D THEREBY , ALLOWING A REL I EF OF RS . 18,70 , 435/- TO THE ASSESSEE . 4. THE LEARNED CIT(A) HAS ERRED IN NOT FOLLOW I NG THE PROV I S I ONS OF RULE 8D READ WITH SECTION 14A IN ITS TRUE SENSE AND R I GHT SPIRIT . 3.4 WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIAL ON RECORD. AT THE TIME OF HEARI NG LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE PLACED ON RECORD A COPY OF THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2006-07 WHEREIN SIMILAR ISSUE WAS CONSIDERED B Y THE TRIBUNAL BY ORDER DATED 4-5-2012 IN ITA NOS.1345 & 1361/BANG /2010. ONE OF US VIZ., THE VICE PRESIDENT IS A PARTY TO THAT O RDER. IN THAT ORDER, ITA NOS.961 & 975/BANG/2011 PAGE 8 THE TRIBUNAL SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING AUTHORITY TO RECONSIDER THE SAME IN ACCORDANCE WITH GUIDELINES LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE O F GODREJ AND BOYCE MANUFACTURING CO. LTD., REPORTED IN 328 ITR 8 1. FOLLOWING THE ABOVE DECISION IN THE CASE OF THE SAME ASSESSEE , WE ARE REMITTING THIS ISSUE BACK TO THE FILE OF THE AO WIT H A SIMILAR DIRECTION. THUS, THIS ISSUE IS ALLOWED FOR STATIST ICAL PURPOSES. 4. LET US NOW TURN TO THE NEXT ISSUE RELATING TO DI SALLOWANCE U/S 40A(2) OF THE ACT. THE BRIEF FACTS, AS GATHERE D FROM THE ASSESSMENT ORDER, ARE THAT WHILE FRAMING THE ASSESS MENT U/S 143(3) OF THE ACT THE AO NOTICED THAT THE ASSESSEE- COMPANY HAD, DURING THE YEAR, PAID AN AMOUNT OF `45 LAKHS TO M/S .VECTRA HOLDINGS (P) LTD., [HEREINAFTER REFERRED TO AS VHPL ] WHICH IS ITS HOLDING COMPANY. ON FURTHER QUERIES BY THE AO, THE ASSESSEE SUBMITTED THAT THIS WAS CONSULTANCY FEES PAID TO HO LDING COMPANY FOR LIASONING WITH THE STATUTORY AND GOVERNMENT AUT HORITIES FOR VARIOUS BUSINESS OPPORTUNITIES. THE ASSESSEE WAS A SKED TO SUBMIT THE COPY OF THE AGREEMENT ENTERED INTO WITH VHPL FO R THE SAME. ON A PERUSAL OF THE AGREEMENT, THE AO FOUND THAT IT IS A GOODWILL AGREEMENT WHEREIN VHPL IS GRANTING TO THE ASSESSEE A NON- EXCLUSIVE RIGHT, LICENSE AND PRIVILEGE TO USE THE N AME RAJEEV CHANDRASHEKAR. THE AO FOUND THAT RAJEEV CHANDRASH EKAR IS THE DIRECTOR IN BOTH THE ASSESSEE-COMPANY AS WELL AS VH PL. THE ASSESSEE WAS THEN ASKED TO PROVE THE USE OF THE GOO DWILL ON WHICH MONTHLY LICENSE FEE IS BEING PAID. ACCORDING TO TH E AO, THE ASSESSEE HAS NOT PROVED OR GIVEN EVIDENCE OF ANY BU SINESS ITA NOS.961 & 975/BANG/2011 PAGE 9 TRANSACTION WHICH HAS HAPPENED DUE TO THIS GOODWILL . HENCE, THE AO CONCLUDED THAT THIS IS UNREASONABLE AND EXCESSIV E EXPENDITURE INCURRED BY THE ASSESSEE AND NO BENEFIT IS ACCRUING TO IT FROM THIS TRANSACTION. THEREFORE, THE WHOLE AMOUNT OF `45 LA KHS WAS DISALLOWED U/S 40A(2) OF THE ACT AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 4.1. AGGRIEVED, ASSESSEE MOVED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY BEFORE WHOM THE ASSES SEE SUBMITTED AS UNDER: THE ASSESSING OFFICER HAS INVOKED PROVISIONS OF SECTION 40A(2) OF THE ACT AND HAS HELD THAT THE EXP ENDITURE IS UNREASONABLE AND EXCESSIVE. THE ASSESSING OFFICE R DOES NOT DISPUTE EITHER THE GENUINENESS OF EXPENDITURE OR T HE FACT THAT IT IS HELD FOR THE PURPOSE OF THE BUSINESS ACTIVITY. SINCE THE GENUINENESS AND ALSO THE REQUIREMENT FOR TH E PURPOSE IS NOT UNDER DISPUTE EXPENDITURE CANNOT BE DISALLOWED. THE ASSESSING OFFICER HAS NOT BROUGHT O UT ANY EVIDENCE TO CONCLUDE THAT THE EXPENDITURE IS EXCESSI VE. THE REVENUE CANNOT SIT ON THE JUDGMENT OF THE PRUDEN CE OF A BUSINESSMAN. THE ASSESSING OFFICER COULD NOT HAVE DISALLOWED 100% OF THE EXPENDITURE BY INVOKING PROVIS IONS OF SEC.40A(2). THE CIT(A), CONSIDERED THE ABOVE SUBMISSIONS IN LIG HT OF THE FACTS OF THE CASE. HE HELD THAT HAVING AGREED THAT THE E XPENDITURE IS GENUINE, UNLESS IT IS ESTABLISHED THAT THE PAYMENT IS EXCESSIVE, PROVISIONS OF SEC.40A(2) OF THE ACT CANNOT BE INVOK ED. CONSIDERING THE FACTS OF THE CASE AND ALSO THE ARGUMENTS OF THE ASSESSEE THE CIT(A) DELETED THE ADDITION OF `45 LAKHS MADE BY IN VOKING PROVISIONS OF SEC.40A(2) OF THE ACT. 4.2 NOW, THE REVENUE IS AGGRIEVED AND IS ON APPEAL AGAINST THE ORDER OF THE CIT(A). THE RELEVANT GROUNDS READ AS UNDER: ITA NOS.961 & 975/BANG/2011 PAGE 10 I) THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.45,00,000/- U/S 40A(2) OF ACT, BEING PAYMENT OF LICENSE FEE TO THE DIRECTOR OF THE ASSESSEE COMPANY, WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE UNDER WHICH THE ADDITION WAS MADE BY THE ASSESSING OFFICER. II) THE LEARNED CIT(A) HAS ERRED IN DEL ETING THE ADDITION WITHOUT APPRECIATING THAT THE ABOVE PAYMENT WAS EXCESSIVE AND UNREASONABLE AS THE ASSESSEE HAS NOT GAINED ANY BENEFIT TO ITS BUSINESS BY SUCH A TRANSACTION WITH A RELATED PARTY. 4.3 AT THE TIME OF HEARING, LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE AO AND PL EADED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE AO RESTORED. RAJEEV CHANDRASHEKAR IS A DIRECTOR IN BOTH THE ASSE SSEE-COMPANY AND ITS HOLDING COMPANY AND IN THE NORMAL COURSE, T HE ASSESSEE COMPANY IS NOT BARRED FROM USING THE NAME OF THE DI RECTOR OF THE COMPANY AND THERE IS NO NEED FOR ANY SPECIAL AGREEM ENT FOR SUCH USAGE. THIS PAYMENT IS MADE TO A RELATED PARTY. TH E AO WAS RIGHT IN DISALLOWING BY INVOKING PROVISIONS OF SEC.40A(2) OF THE ACT. 4.4. PER CONTRA, LEARNED COUNSEL FOR THE ASSESSEE R EITERATED THE CONTENTS OF HIS SUBMISSIONS BEFORE THE CIT(A) ( EXTRACTED ELSEWHERE OF THIS ORDER) AND PLEADED THAT THE CIT(A ) WAS RIGHT IN DELETING `45 LAKHS MADE U/S 40A(2). 4.5. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. SEC.40A(2) EMPOWERS THE AO TO MAKE DISALLOWANCE ON PAYMENTS MADE TO RELATIVE, IN CASE IT IS EXCESSIVE OR MORE THAN MARKET PRICE AND IF IT IS NO T RELATED TO BUSINESS. IN THIS CASE, IT IS NOT IN DISPUTE THAT IT IS GENUINE PAYMENT. ON THE OTHER HAND, THE AO FELT THE ENTIRE EXPENDITURE ITA NOS.961 & 975/BANG/2011 PAGE 11 EXCESSIVE BECAUSE IT IS PAID TO A DIRECTOR WHO IS A COMMON IN BOTH THE COMPANIES. APART FROM THIS REASONING, THE AO H AS NEITHER RECORDED AS TO HOW THE PAYMENT WAS EXCESSIVE COMPAR ED TO PREVAILING MARKET RATE FOR SUCH PAYMENT NOR HAS HE BROUGHT OUT A COMPARABLE CASE ON RECORD TO PROVE THAT THE ENTIRE EXPENDITURE IS EXCESSIVE. IN OUR VIEW, THE WORD EXCESSIVE WOULD MEAN SOMETHING BEYOND CERTAIN LIMIT AND NOT ENTIRE THI NG. IN SUCH CIRCUMSTANCES, WE DEEM IT FIT AND PROPER TO RESTORE THIS MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO PASS A SPEAKING ORDER BRINGING NECESSARY MATERIALS ON RECORD FOR MAKING D ISALLOWANCE AS PER LAW, OF COURSE, AFTER GIVING EFFECTIVE OPPOR TUNITY OF HEARING TO THE ASSESSEE TO PUT FORTH ITS CASE BEFORE HIM. THE ASSESSEE IS ALSO DIRECTED TO CO-OPERATE WITH THE AO IN DECIDING THIS ISSUE. THE REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. 5. IN THE RESULT, BOTH THE ASSESSEES APPEAL AS WEL L AS THE REVENUES APPEAL ARE TREATED AS ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JULY, 2012. SD/- SD/- (N. (N. (N. (N.V. V.V. V.VASUDEVAN VASUDEVAN VASUDEVAN VASUDEVAN) )) ) JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER (N.BARATHVAJA SANKAR) (N.BARATHVAJA SANKAR) (N.BARATHVAJA SANKAR) (N.BARATHVAJA SANKAR) VICE VICE VICE VICE- -- -PRESIDENT PRESIDENT PRESIDENT PRESIDENT EKS ITA NOS.961 & 975/BANG/2011 PAGE 12 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE