Income Tax Appellate Tribunal - Mumbai
J.M Financial Securities P. Ltd, Mumbai vs Assessee on 3 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "I", MUMBAI
Before Shri B.R. Mittal, Judicial Member
and Shri P.M.Jagtap, Accountant Member
I.T.A. No. 2926 /Mum/2010.
Assessment Year : 2006-07.
M/s J.M. Financial Trustee Co. Pvt.Ltd., Dy. Commissioner of
141, Maker Chambers No. III, Vs. Income-tax, Range-3(2),
Nariman Point, Mumbai-400 021. Mumbai.
PAN AAACJ2579E.
Appellant. Respondent.
I.T.A. No. 2927 /Mum/2010.
Assessment Year : 2006-07.
M/s J.M. Securities Pvt. Ltd., The Income-tax Officer,
Mumbai. Vs. 3(2)3, Mumbai.
PAN AAACJ1235F
Appellant. Respondent.
Appellant by : Dr. K. Shivaram.
Respondent by : Shri O.A. Mao.
Date of Hearing : 03-11-2011.
Date of Pronouncement : 18-11-2011.
ORDER
Per P.M. Jagtap, A.M. :
These two appeals filed by the two assessees are directed against two separate orders passed by the learned CIT(Appeals)-7, Mumbai dated 04-01-2010 and 19-01-2010. Since one of the issues involved in these two appeals is common, 2 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. the same have been heard together and are being disposed of by this single consolidated order.
2. First we shall take up the assessee's appeal being ITA No. 2926/Mum/2010 which is directed against the order of learned CIT(Appeals)-7, Mumbai dated 19- 01-2010.
3. The issue raised in ground No. 1 of this appeal relates to the addition of Rs.15,00,000/- made by the AO and confirmed by the learned CIT(Appeals) by way of disallowance of assessee's claim for deduction claimed on account of commission paid to its Directors. The assessee in the present case is a finance and investment company. The return of income for the year under consideration was filed by it on 28-11-2006 declaring total income of Rs.98,17,315/-. In the profit and loss account filed along with the said return, a sum of Rs.15 lakhs was debited by the assessee on account of commission paid to its Directors. During the course of assessment proceedings before the AO, it was submitted by the assessee that its Board of Directors had overall responsibility for the proper and efficient management of the company. It was contended that the Directors were overall responsible for all compliances of SEBI and mutual fund regulations and in order to compensate them for these responsibilities and also for overall conduct of the business, one time payment of commission was made as approved by the shareholders. It was submitted that the Directors were not being paid any remuneration for the services rendered and similar one-time commission paid to them in the earlier years was also allowed. The AO did not dispute the fact that similar commission paid to the Directors by the assessee company in the earlier years was also allowed. He, however, held that the trust deed under which all payments from the mutual funds were regulated by the SEBI did not provide for any payment of commission by the assessee company to its Directors. In the 3 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. absence of such provision in the trust deed, he held that the deduction claimed by the assessee on account of payment of commission made to its Director was not allowable and this was new fact which had not been considered in the earlier years allowing a similar deduction claimed by the assessee. He, therefore, disallowed the commission amount of Rs.15 lakhs claimed by the assessee in the year under consideration and added the same to the total income of the assessee. On appeal, the learned CIT(Appeals) confirmed the disallowance made by the AO on this issue for the same reasons as given by the AO.
4. The learned counsel for the assessee submitted that the assessee is a company which is also acting as a trust for managing the mutual fund. He submitted that the payment of commission to its Directors was made by the assessee company out of its own profits and not from mutual fund. He contended that no approval of SEBI, therefore, was required for making the said payment and there was no requirement of having any provision in the trust deed for making the said payment. He contended that this position has been accepted even by the AO while allowing claim of the assessee for deduction on account of commission paid to Directors in the subsequent years.
5. The learned DR, on the other hand, submitted that besides the reason given by the AO for making disallowance on account of commission paid by the assessee to its Directors, even the factum of services rendered by the said Directors to justify such payment was not proved by the assessee. He contended that the disallowance made on account of commission paid to Directors thus is liable to be sustained on this ground also.
6. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that payment of commission made by the 4 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. assessee company to its Directors is regulated by the Companies Act and the same being not the payment of fees made by a mutual fund to its trustees, it is not governed by the trust deed. In our opinion, the AO and the learned CIT(Appeals), therefore, were not justified in disallowing the payment of commission made by the assessee company to its Directors on the ground that there was no provision in the relevant trust deed allowing such payment. In so far as the commercial expediency of the said payment is concerned, it is observed that the same was duly established by the assessee by explaining the services rendered by the Directors and the responsibilities undertaken by them during the course of overall conduct of its business. Even the AO impliedly accepted the commercial expediency for making the said payment by observing in the assessment order that there was no issue of business expediency involved in this case. We, therefore, find no merit in the contentions raised by the learned DR that the factum of services rendered by the Directors to justify the payment of commission to them was not established by the assessee. Moreover, a similar payment of commission made by the assessee to its Directors was allowed by the AO in the earlier years and even in the subsequent years. As such, considering all the facts of the case, we are of the view that the disallowance made by the AO and confirmed by the learned CIT(Appeals) on account of commission paid by the assessee company to its Directors is not sustainable and deleting the same, we allow ground No. 1 of the assessee's appeal.
7. The issue raised in ground No. 2 relates to the disallowance of Rs.1,27,902/- made by the AO and confirmed by the learned CIT(Appeals) u/s 14A read with Rule 8D of the Income-tax Rules, 1962.
8. During the year under consideration, the assessee company had earned dividend income of Rs.39,71,155/- which was claimed to be exempt from tax. No disallowance on account of any expenditure incurred in relation to the said exempt 5 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. income, however, was made by the assessee as required by the provisions of section 14A. In the assessment completed u/s 143(3), the AO worked out such expenses incurred by the assessee in relation to exempt income at Rs.1,27,907/- by applying Rule 8D of Income-tax Rules, 1962 and made a disallowance to that extent u/s 14A. On appeal, the learned CIT(Appeals) confirmed the said disallowance made by the AO relying on the decision of Special Bench of ITAT in the case of Daga Capital Management P. Ltd. 117 ITD 169 (Mum.)(S.B.) wherein it was held that Rule 8D has a retrospective application.
9 We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, the issue involved in this appeal now stands squarely covered by the decision of Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom) 1, wherein it has been held that Rule 8D of Income-tax Rules, 1962 is applicable only from assessment year 2008-09. As further held by Hon'ble High Court, the disallowance u/s 14A for the years prior to assessment year 2008-09 has to be made by adopting some reasonable method. Respectfully following the said decision of Hon'ble jurisdictional High Court, we set aside the impugned order of the learned CIT(Appeals) on this issue and restore the matter to the file of the AO with a direction to recompute the disallowance of expenses to be made u/s 14A by applying some reasonable method after giving the assessee an opportunity of being heard. Ground No. 2 of the assessee's appeal is thus partly allowed.
10. Now we shall take up the appeal of the assessee being ITA No. 2927/Mum/2010 which is directed against the order of the learned CIT(Appeals)-7, Mumbai dated 04-01-2010.
6 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010.11. The issue raised in ground No. 1 of this appeal relates to the disallowance of Rs.15 lakhs made by the AO out of professional fees which has been sustained by the learned CIT(Appeals) to the extent of Rs.12 lakhs.
12. During the year under consideration, the assessee company got merged with J.M. Financial Ltd. with effect from 01-11-2005. In the profit & loss account prepared for the period 01-04-2005 to 31-10-2005, a sum of Rs.15 lakhs was debited by the assessee under the head "Legal and Professional Fees". The said amount was paid to M/s M.P. Chitle & Co. for making the valuation of the business of the assessee company which was done in the process of reorganization. According to the AO, the expenditure incurred by the assessee on payment of fees for valuation of its business resulted in the advantage of enduring nature to it and the same, therefore, was a capital expenditure. Accordingly the deduction claimed by the assessee for the said amount was disallowed by him in the assessment completed u/s 143(3) vide an order dated 23-12-2008.
13. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals). During the course of appellate proceedings before the learned CIT(Appeals), it was submitted on behalf of the assessee that legal and professional fees was paid for the purpose of valuation of its business in the process of ongoing reorganization and the same, therefore, was expenditure of revenue nature. In the alternative, it was also contended on behalf of the assessee that the said expenditure being part of amalgamation expenses should be allowed at least to the extent of 1/5th as per the provisions of section 35DD. The learned CIT(Appeals) did not find merit in the main contention raised by the assessee but accepted its alternative contention and restricted the disallowance of Rs.15 lakhs made by the AO to the extent of Rs.12 lakhs for the following reasons given in his impugned order :
7 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010." I have considered the submissions of the appellant and the finding of the AO and observe that in the scheme of amalgamation, the legal and professional fees incurred by the appellant for the purpose of valuation of assessee's business are definitely capital in nature and as such cannot be allowed as revenue expenses u/s 37(1) of the Act. The appellant itself has admitted that provisions of section 35DD were inserted after the decision of the Bombay Dyeing and Manufacturing Co. Ltd. to cover such capital expenditure. Hence, as per the provisions of section 35DD, only 1/5th of amalgamation expenses can be claimed by the amalgamating company as deduction u/s 35DD of the Act. No further deduction can be allowed to the appellant company for any succeeding years because as per the scheme of amalgamation, the amalgamating appellant company would cease to exist after amalgamation on 01.11.2005. However, under the scheme of amalgamation the amalgamation parent company i.e. M/s J.M. Financial Ltd. would be allowed to claim 1/5th of the amalgamation expenditure incurred by it u/s 35DD in the current year as well as in the next following four years. Keeping in view the said provisions, the appellant is allowed one-time deduction of Rs.3,00,000/- out of the total expenditure of Rs.15,00,000/- incurred by the appellant for the purpose of valuation of its business under the scheme of amalgamation. Accordingly, the balance disallowance of Rs.12,00,000/- made by the AO being capital in nature is sustained."
14. We have heard the arguments of both the sides and also perused the relevant material on record. The learned counsel for the assessee has contended that the provisions of section 35DD are not applicable in the case of the assessee company being an amalgamating company as the said provisions are applicable in the case of amalgamated company only. He has also contended that the assessee company has ceased to exist with effect from 01-11-2005 on its amalgamation with M/s J.M. Financials Ltd. and it, therefore, cannot claim deduction on account of expenses in question at the rate of 1/5th in the subsequent years as per the provisions of section 35DD. He has contended that the provisions of section 35DD, therefore, cannot be said to have any application in the case of the assessee company being an amalgamating company. The provisions of section 35DD being relevant in the present context are reproduced hereunder :
"35DD (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such 8 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act."
15. A perusal of the provisions of section 35DD clearly shows that the same deal with amortisation of any expenditure incurred by the assessee being an Indian Company, wholly and exclusively for the purposes of amalgamation and there is nothing contained in the said provisions to even indicate that any distinction is made between amalgamated company and amalgamation company so as to say that it is applicable only to the amalgamated and not to the amalgamating company. In our opinion, the said provisions are applicable to any expenditure incurred wholly and exclusively for the purposes of amalgamation or demerger by an undertaking irrespective of whether such expenditure is incurred by an amalgamating company or amalgamated company. In the present case, the expenditure of Rs.15 lakhs on payment of fees for valuation of assessee's business in the process of reorganization was undisputedly for the purposes of its amalgamation with M/s J.M. Financial Ltd. and we, therefore, find ourselves in agreement with the learned CIT(Appeals) that the same was covered by the provisions of section 35DD and the assessee was entitled for deduction for the said expenditure only to the extent of 1/5th in the year under consideration. As regards the contention of the learned counsel for the assessee that the assessee company having been ceased to exist on its amalgamation with M/s J.M. Financial Ltd. during the year under consideration, it is not in a position to claim deduction for the remaining expenditure to the extent of 4/5th in the subsequent years as envisaged in the provision of section 35D, we find that the learned CIT(Appeals) has already observed in his impugned order that the same could be claimed by the amalgamated company in the next following four 9 ITA No.2926/Mum/2010& ITA No. 2927/Mum/2010. years as per the scheme of amalgamation and the assessee, in our opinion, cannot be said to have any grievance on this aspect of matter which has already been addressed by the learned CIT(Appeals). As such, considering all the facts of the case, we find no infirmity in the impugned order of the learned CIT(Appeals) sustaining the disallowance of Rs.15 lakhs made by the AO on account of expenses incurred for amalgamation to the extent of Rs.12 lakhs by relying on the provisions of section 35DD and upholding the same on this issue, we dismiss ground No.1 of the assessee's appeal.
16. Ground No. 2 raised by the assessee in this appeal relating to disallowance of Rs.12,08,130/- made by the AO and confirmed by the learned CIT(Appeals) u/s 14A has not been pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
17. In the result, the assessee's appeal being ITA No. 2926/Mum/2010 is partly allowed whereas the assessee's appeal being ITA No. 2927/Mum/2010 is dismissed.
Order pronounced on this 18th day of Nov., 2011.
Sd/- Sd/-
(B.R. Mittal) (P.M. Jagtap)
Judicial Member Accountant Member
Mumbai,
Dated: 18th Nov., 2011.
Wakode
10
ITA No.2926/Mum/2010&
ITA No. 2927/Mum/2010.
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, I-Bench.
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai Benches,
Mumbai,