M/S. LA OPALA RG LTD.,KOLKATA V. .D.C.I.T., CIRCLE - 11(1) [FORMERLY JCIT, RANGE-12, KOLKATA ], KOLKATA

ITA 1865/KOL/2024

AI Insights

The case involves M/s LA Opala RG Ltd., which appealed against the order of the CIT(A) confirming the AO's disallowance of certain business expenses. The primary contention was regarding the expenses paid to Mr. Manish Malhotra for styling and designing services, which the AO and CIT(A) viewed as not directly benefiting the business of manufacturing crockery and thus not allowable under section 37 of the Income Tax Act. The Tribunal found that these expenses were indeed for the purpose of business and allowed the appeal on this ground. Additionally, the Tribunal dismissed the appeal regarding prior period expenses and the addition under section 14A, maintaining the CIT(A)'s decision.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 473869 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Other Referred Cases: CIT vs Jet Airways Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RUCHIKA SHARMA
• Assessee Lawyers: ASHOK KUMAR TULSYAN; DEEPAK MUNDHRA; TANMOY KAR
• Keywords: Capital asset; TDS; Permanent establishment
• Section: 195; 133(6); 37; 14A; 5(2); 9(1); 9(1); 9(1)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, KOLKATA BEFORE SHRI RAJESH KUMAR, AM AND SHRI PRADIP KUMAR CHOUBEY, JM ITA No.1865/KOL/2024 (Assessment Year: 2012-13) M/s LA Opala RG Ltd. 8th Floor, Premises No.803 & 804 Eco Centre, EM-4, Sector-V, Kolkata-700091, West Bengal Vs. DCIT, Circle 11(1) Aaykar Bhavan, P-7, Chowringhee Square, Kolkata-700069, West Bengal (Appellant) (Respondent) PAN No. AAACL5569J Assessee by : Shri Ashok Kumar Tulsyan, & Deepak Mundhra, Tanmoy Kar, Ars Revenue by : Shri Ruchika Sharma, DR Date of hearing: 21.11.2024 Date of pronouncement : 16.12.2024 O R D E R Per Rajesh Kumar, AM: This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 31.07.2024 for the AY 2012-13. 02. At the time of hearing, the issue raised in ground no.1 is not pressed, hence, dismissed as not pressed. 03. Ground no.2 is against the confirmation of addition of a sum of ₹25,36,900/- by ld CIT(A) as made by the AO u/s 37 of the Act, in relation to expenses incurred on account of endorsement, styling and designing expenses paid to Mr. Manish Malhotra. Page | 2 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 04. The facts in brief are that the ld. AO during the course of assessment proceedings found that the assessee has paid ₹25,36,900/- on account of styling, advertisement, promotion and endorsement of the products during the impugned assessment year and the payments was made to famous designer Manish Malhotra of the tableware/ crockery sets produced by the company. The assessee furnished before the ld. AO the bills, vouchers issued by Shri Manish Malhotra. The ld. AO issued enquiry letter u/s 133(6) of the Act to Shri Manish Malhotra to verify the payments, which was duly complied with and also confirmedto have provided the services of styling and designing to the assessee company for brand endorsement/ advertisement. According to the ld. AO ,Shri Manish Malhotra is providing styling and designing and not of brand endorsement. According to the ld. AO the expenditure incurred shall be for carrying on of the business whereas the assessee company which is in trade of crockery/ tableware, has paid to a fashion designer an amount towards styling and designing charges. It brings no direct and immediate benefit to the trade and therefore, not allowable u/s 37 of the Act. Consequently, same were added to the total income of the assessee. 05. In the appellate proceedings, the ld. CIT (A) dismissed the appeal of the assessee for the same reason that he is providing styling and designing services and not brand endorsement and therefore, the ld. AO has rightly disallowed the same. 06. After hearing the rival contentions and perusing the materials available on record, we find that the assessee is carrying on the business of manufacturing of Opal & Crystal Glassware and generation and sale of electricity from wind farm. We note that the assessee hired Mr. Manish Malhotra, a leading designer for endorsing its brand of crockery and table ware. We note that the ld. AO has not doubted the Page | 3 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 genuineness of the expenses and even the payment received by Mr. Manish Malhotra was confirmed by him, in reply to notice issued u/s 133(6) of the Act. In our opinion, the expenses are wholly and exclusively for the purpose of business of the assessee and are admissible u/s 37 of he Act. The expenses can not be disallowed merely on the ground that Mr Manish Malhotra is a styler and designer. Accordingly, the ground no.1 is allowed. 07. Ground no.3, the issue raised in this ground is against the confirmation of addition of ₹11,54,885/- as made by the ld. AO on account of prior period of expenses. The facts in brief are that during the course of assessment proceedings, the ld. AO found on the perusal of clause 22(b) of tax audit report that prior to period expenditure amounting to ₹11,54,885/-, were debited to Profit and Loss account which are related to earlier assessment years. Accordingly, the same were added to the return of income of the assessee. 08. In the appellate proceedings, the ld. CIT (A) also dismissed the appeal of the assessee by holding that and observing as under: - “6.1 I have gone through the assessment order and grounds of appeal. The Id. AO has carried out multiple addition to total income. Aggrieved by said assessment order, the appellant has filed appeal with multiple grounds which are adjudicated as under: Ground 1 6.2 that the appellant has entered into an agreement with Shri Manish Malhotra and has acquired the exclusive rights to utilize Manish Malhotra's name and image and to avail his services for the advertisement, promotion and endorsement of the products. the Ld A.O, in order to verify the nature and genuineness of the said transaction has issued notice u/s 133(6) to Shri Manish Malhotra. Against the said notice Mr. Manish Malhotra and his A/R has made the reply, stating that the payments were received towards styling and designing provided by Manish Malhotra. The A.O on the basis of said reply has concluded that the payment of Rs. 25,36,900/- has been made by the appellant towards styling and designing of Clothes and not the tableware /crockery sets produced by the company. Thus, the Ld.AO disallowed amount paid since it was not towards business of the appellant. Page | 4 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 6.3 During the appellate proceedings, the appellant repeated its contention that it had entered into agreement with Manish Malhotra for its products and it also contended that Appellant has not undertaken any such work with the directors of the company or their family members. Therefore, the said expenditure of Rs. 25,36,900/- has been incurred wholly and exclusively for the endorsement of product produced by the appellant. 6.4 The contention of the appellant are considered but not found to be acceptable. The appellant has not filed copy of agreement to the office of CIT(A) neither it filed copy of invoices raised by Mr. Manish Malohtra. Therefore, the adjudication has to be done based on material available on record. 6.5 It is very clear from the confirmation filed by Mr. Manish Malohtra that he had received money towards style and designing. Mr. Manish Malhotra is known for styling and designing cloths for may celebrities and its connection with designing oftable ware (product of the appellant) is not being established by the appellant. The appellant also did not file any documentary evidence to show case that his services were availed towards designing of its products. 6.6 Therefore, the contention of the appellant is not found to be acceptable and thus the addition carried out by the Ld.AO is found to be correct. 6.7 Accordingly, Ground 1 of the appellant is Dismissed. Ground 2 6.8 The appellant has entered into an agreement with Ms Bipasha Basu, Actor for the advertisement and endorsement of appellant's product. As per Clause No. 14 of the said agreement, the appellant will have to pay Rs. 20,00,000/- to Ms Bipasha Basu upon utilization of five days of professional service or 31st December, 2010, whichever is earlier. The shooting was started as per the terms of the agreement, however on the 5th day of shooting period Ms. Bipasha Basu was not able to give time for shooting and therefore appellant refused to make payment to Ms Bipasha Basu. Finally negotiations has been made with Ms. Biapasha Basu and it was agreed that appellant will pay 50% of the initial agreed amount i.e. Rs. 10,00,000/- plus applicable taxes. The A.O on the basis of above facts has alleged that the appellant is following Mercantile system of Accounting and should have claimed the deduction of Rs. 20,00,000/-. Hence, on the basis of said allegation the A.O has concluded that the appellant has only paid Rs. 10,00,000/- to Ms. Bipasha Basu and remaining10,00,000/- is income of the appellant by virtue of section 41(1) of the Act. 6.9 In this regard, the appellant contested that it had never claimed the deduction of Rs. 20,00,000/- in its Profit & loss A/c. The appellant has only recorded the expenditure of Rs. 10,00,000 in its Profit & Loss a/c, he remaining portion of Rs. 10,00,000/- not paid by the appellant, was never claimed in the profit & loss a/c nor recorded as liability in the books of account. Since the appellant has never claimed the said expenditure nor the same was standing as liability in the appellant's books of account, the question of applicability of section 41(1) does not arise at all. Page | 5 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 6.10 The contention of the appellant is considered and found to be correct. When the appellant had not accounted Rs.20 lakhs as expenditure then non payment of balance Rs.10 lakhs does not amount to cessation of trading liability. In fact that was never the liability of the appellant. Its is merely a re-negotiation of any business contract. 6.11 Reliance in this regard could be placed in the decision of Hon'ble High Court of Bombay in the case of CIT vs Jet Airways Ltd in [2016] 66 taxmann.com 166 (Bombay) where it was held as under:- \"Section 41(1) of the Income-tax Act, 1961 Remission or cessation of trading liability (Hire purchase) Assessment year 2006-07 During relevant assessment year, appellant sold five aircrafts which had been taken on hire purchase basis Assessing Officer concluded that balance instalments being not payable by appellant, it resulted in taxability under section 41(1) Whether since instalment payable in future was never claimed as a deduction/expenditure/loss or trading liability by appellant, no occasion arose for purposes of section 41(1) being invoked - Held yes [Para 9] [In favour of appellant] 6.12 In view of the above, the addition carried out by Ld. AO is found to be incorrect and thus being deleted. 6.13 Accordingly, Ground 2 of the appellant is Allowed. Ground 3 6.14 The appellant has incurred selling agency commission to the tune of Rs. 5,90,798/- with respect of exports made in the foreign country. The A.O has contested that such payment of Rs.5,90,798/- made to foreign agents were liable to TDS u/s 195 of the Act. Since the appellant has not deducted TDS on the payments made to foreign agents, the A.O has disallowed the same u/s 40(a)(i) of the Act. 6.15 During the appellate proceedings, the appellant contested that the AO has wrongly invoked the provisions of section 5(2) and Section 9(1)(i) of the Act. It further contested that agent to whom commission was paid, is not having any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Since the Income of foreign agents is not taxable in India by virtue of Section 5(2) read with Section 9(1) of the Act, the assessee was under no obligation to deduct TDS u/s 195 of the Act. 6.16 The contention of appellant are considered and found to be acceptable. Th income of foreign agents is taxable in India only when the have permanent establishment (\"PE\"). The Ld. AO has not proved in the assessment order that the agent to whom commission is paid, has PE in India. Merely, being dependent for business in india does not amount to being PE in India. 6.17 Therefore, the addition carried out by the Ld. AO is not found to be in right sprit of law and thus being deleted. 6.18 Accordingly, Ground 3 of the appellant is Allowed. Ground 4 Page | 6 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 6.19 The appellant had incurred certain revenue expenses which were relating to prior period amounting to Rs. 11,54,885/- and has shown it under the head prior period expenses. The A.O has disallowed the same by holding that prior period expenses are not allowable as per provision of the Act. During the appellate proceedings, the appellant contested that the prior-period expenses were of routine nature in the business carried on by the assessee and the payments were delayed because of procedural delay and due to various administrative reasons. It is quite natural that there would be an amount of overflow of information after close of accounting year. The details of such expenditure were received only after the close of the accounting year. It is continuous process to incur expenditure and to account the same in the books of account. Therefore, even though they were treated technically as prior-period expenses, they related to a continuous flow of expenditure. The break-up of said expenses were as under: SL no. Head of Expenses Amount 1. Electricity Charges 5,67,374/- 2. Salary 42,000/- 3. Cash Discount 85,512/- 4. Legal & Professional Charges 13,780/- 5. Special Discount 86,438/- 6. Trade Scheme 3,59,781/- Total 11,54,885/- 6.20 The contention of the appellant is not found to be acceptable. The prior period expenses do not pertain to current assessment year and thus they reduce taxable income of current year. The prior period expenses may be allowed only if these expenses are crystalized in year under consideration. The appellant has not filed any details as to which year these above expenses pertain to and why they were not claimed in respective year. The appellant has also not explained nature of expenses such as Trade Scheme. 6.21 Merely filing of name of expense is not sufficient for allowability of prior period expenses. Therefore, in absence of any further details, the claim of the appellant was not found to be acceptable and the disallowance carried out by the Ld. AO is being upheld. 6.22 Accordingly, Ground 4 of the appellant is Dismissed.” 09. After hearing the rival contentions and examining the details submitted before us, we find that these expenses were in the nature of electricity charges, salary, cash discount, legal & professional charges, special discount and trade scheme amounting to ₹11,54,885/-. We have examined the nature of these expenses and find that certain type of expenses were in the nature of Electricity charges, salary, Cash discount, legal & Professional Charges, Special discount and trade scheme. The assessee could not prove with cogent Page | 7 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 evidences before us that these expenses were crystalized during the year and accordingly, we uphold the order of ld. CIT (A) by dismissing the ground no. 3. 010. The issue raised in ground no. 4 is against the confirmation of addition of ₹24,624/- as made by the ld. AO u/s 14A read with Rule 8D (2)(ii) of the Rules. 011. After hearing the rival contentions and perused the materials available on record, we find that in this case, the assessee has sufficient owned funds as is apparent from para no.6.23 of the appellate order, wherein the ld. CIT (A) noted that the assessee’s own funds were ₹55,65,29,740/-, whereas total investments in shares were amounting to ₹8,79,983/-. The ld. CIT (A) dismissed the appeal of the assessee on the ground that the assessee has not proved by way of documentary evidences that investments were made out of such interest free funds. In our opinion, apparently on the basis of balance sheet, the interest free funds available with the assessee are more than the investments in shares and securities ,then a presumption has to be drawn that investment in shares and securities were made out of interest free funds available to the assessee. Accordingly, ground no.4 of the appeal is allowed. 012. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 16.12.2024. Sd/- Sd/- (PRADIP KUMAR CHOUBEY) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 16.12.2024 Sudip Sarkar, Sr.PS Page | 8 ITA No.1865/KOL/2024 M/s LA Opala RG Ltd.; A.Y. 2012-13 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Kolkata "