Income Tax Appellate Tribunal - Delhi
Valvoline Cummins Ltd, New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `I' : NEW DELHI
BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT
AND SHRI C.L. SETHI, JUDICIAL MEMBER.
I.T.A.Nos.1026 & 1059/Del/2009
Assessment Years : 2003-04 & 2004-05
Valvoline Cummins Limited, Asstt. Commissioner of Income-tax,
52, Okhla Industrial Estate, Vs. Circle 17(1), New Delhi.
Phase-III, New Delhi.
PAN: AAACW0287A
I.T.A.Nos.1159 & 1451/Del/2009
Assessment Years : 2003-04 & 2004-05
Asstt. Commissioner of Income-tax, M/s. Valvoline Cummins Ltd.,
Circle-17(1), New Delhi. Vs. 52, Okhla Industrial Estate,
Phase-III, New Delhi.
(Appellants) (Respondents)
Appellant by : S/Sh. Ajay Vohra & Gaurav Jain &
Ms. Neha Khemka, Advocate.
Respondent by : Ms. Anusha Khurana, DR.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER.
These are cross appeals, filed by the assessee as well by the revenue against two separate orders dated 05.01.2009 and 16.01.2009 of the learned Commissioner of Income-tax (Appeals) pertaining to the Assessment Years 2003-04 and 2004-05 respectively.
2. We shall first take up the appeals filed by the revenue. 2 ITA Nos.1159 & 1451/Del/2009 Ground No.1 in Assessment Year 2003-04 raised by the revenue is directed against the CIT(A)'s order in deleting the disallowance of Rs.5,04,245/- out of the services charges paid to Cummins Diesel Sales & Services India Ltd. (CDSS). Identical issue has also been raised in Assessment Year 2004-05 vide ground No.1 where the revenue has disputed the CIT(A)'s order in deleting the disallowance of Rs.14,05,175/- out of the service charges paid to CDSS.
3. In the Assessment Year 2003-04, during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has paid service charges of Rs.90,67,708/- to CDSS, in respect of which, the assessee submitted a copy of service agreement to the AO. From the service agreement it was noted by the AO that in consideration of services rendered, CDSS was entitled to receive service charges @ 0.7% of its net sales. The AO was of the view that net sale would mean gross sales as reduced by sales returned during the relevant period. The assessee was then asked to furnish working of amount of Rs.90,67,708/- paid to CDSS which working as submitted by the assessee is as under:-
"Gross Sales 1557840256
Less: Car Care 5599689
Base Oil 2695038
Empty Barrels 799392
3
Other Traded Items 2064424
Export Sales 11377678
FOC provision
(net of last year) (1320221) 21216001
Sale of Lubricants 1536624256
Less: Discount 241237387
Net Sales 1295386868
Service Charges @ 0.7% on net sales 9067708"
From the aforesaid working it was noticed by the AO that the assessee has taken the amount of discount at Rs.24,12,37,387/-, though in the computation of the amount of royalty payable to Valvoline Inc., the value of discount was taken at Rs.31,32,72,366/-. The AO, therefore, taken the amount of discount at Rs.31,32,72,366/- and worked out the net sales on which service charges @ 0.7% was worked out as under:-
"Sale of Lubricants 1536624256
Less: Discount 313272366
Net Sales 1223351890
Service Charges @ 0.7% on net sales 8563463"
In the light of the aforesaid working made by the AO, the AO allowed the service charges to the extent of Rs.85,63,463/- and disallowed the balance amount of Rs.5,04,245/-.
3.1 Similarly in the Assessment Year 2004-05, the AO worked out the service charges at Rs.1,14,13,616/- as against total service charges of Rs.1,28,18,791/- claimed by the assessee. The difference in the service charges was due to the reason that the amount of discount was taken by the 4 AO at Rs.41,19,88,477/- as against Rs.31,25,78,229/- shown by the assessee. Thus the difference of Rs.14,05,175/- was disallowed by the AO out of the total payment of service charges.
4. On appeal, the learned CIT(A) in the Assessment Year 2003-04 deleted the disallowance by observing and holding as under:-
"20. The AR explained that for the purpose of quantifying service charges, net sales was taken and for the purpose of quantifying royalty, net sales was that of net ex factory sales price. These methods were followed consistently and there was no dispute on the same by recipient of commission or royalty. The AR stated that there were different agreements, one with CDSS and other with M/s. Valvoline Inc. and as per these agreements quantifying amounts were worked out. The AO has not verified these facts and also not controverted. The assessee gave the details of working and reasons for doing so. The AO has not given reasons for not accepting the working given by the assessee for quantification of commission/royalty paid. After going through the submissions of the AR, working furnished by him, the disallowance is not called for. Accordingly Ground No.3 is allowed. (Relief: Rs.5,04,245/-)."
4.1 The CIT(A)'s order in Assessment Year 2003-04 has been followed in Assessment Year 2004-05 and the addition of Rs.14,05,175/- made by the Assessing Officer was thus deleted.
5. Hence, in both the years, the revenue has challenged the CIT(A)'s order in deleting the aforesaid addition of disallowance of service charges.
6. We have heard both the parties and have carefully perused the orders of the authorities below. We have perused the various Papers placed in the Paper Book filed by the assessee. The AO has not disputed the fact that the 5 payment of service charges by the assessee to CDSS was as per the service agreement. The AO has also not disputed the services rendered by CDSS to the assessee. The disallowance has been made by the AO only by reducing the sales figure by taking the amount of discount at the amount more than the amount shown by the assessee, because of the fact that according to the AO, the amount of discount shown by the assessee was more while computing the amount of royalty payable to M/s. Valvoline Inc. The AO has not gone into to verify the reason as to why the difference in the amount of discount had occurred. It has been explained by the assessee that for the purpose of quantifying service charges, net sales was taken while for the purpose of quantifying royalty, net sales was that of net ex factory sales price. This distinction was not noticed by the AO. This method has been consistently followed by the assessee. Moreover, in the agreement with CDSS the amount of net sales was to be taken as basis for the purpose of quantifying service charges while for the purpose of computing royalty payable to another concern M/s. Valvoline Inc., the net sales were to be taken equal to the net ex factory sales price. In the light of this clarification which has been rightly accepted by the learned CIT(A) in absence of any evidence or material contrary to the facts so pointed out above, we are in full agreement with the learned CIT(A) in deleting the disallowance of service 6 charges paid by the assessee to CDSS in both the Assessment Years under consideration. The order of the CIT(A) is thus upheld on this count and the ground No.1 in both the assessment years raised by the revenue is rejected.
7. Next ground in assessment year 2003-04 is against the CIT(A)'s order in deleting the disallowance of Rs.17,80,312/- out of travelling and conveyance expenses. During the relevant period the assessee claimed to have incurred travelling and conveyance expenses amounting to Rs.1,92,80,312/-. The assessee was asked by the AO to furnish details thereof along with supporting vouchers/bills. In reply thereto, the assessee had produced only those bills in respect of foreign traveling, which were in excess of Rs.1,00,000/-. As regards domestic travelling, it was submitted by the assessee that expenses on domestic travelling were incurred during the course of carrying out the business activities and for the purpose of business, such as sales promotion activities, conferences and technical seminars. With regard to foreign travelling expenses, it was submitted that these expenses were incurred for business meetings, sales promotion activities, conferences and technical seminars in various countries. It was noticed by the AO that the travelling expenses incurred during the year as compared to the immediate preceding year, were excessive. The AO noticed that the assessee's turnover has increased by almost 40% in the current year as 7 compared to the immediate preceding year. The AO further found that the travelling and conveyance expenses in the immediate preceding year were claimed at Rs.1,25,80,104/-. The AO has taken a view that increase in travelling and conveyance expenses to the extent of 40% of the total expenses incurred in earlier year would only be justified as the assessee's turnover has only increased by 40%. He, therefore, allowed the travelling expenses only to the extent of Rs.1,75,00,000/- as against Rs.1,92,80,312/- claimed by the assessee and disallowed the balance sum of Rs.17,80,312/-.
8. On an appeal, the learned CIT(A) deleted the addition after observing that the working made by the AO though looks attractive but is without any legal basis, and such an approach of the AO cannot be approved. The CIT(A) further observed that no discrepancies or mistakes were pointed out in the details furnished by the assessee. The CIT(A)'s order in this regards reads as under:-
"24. The increase in sales over last year was 40%. The AO worked out the traveling & conveyance expenditure in the same proportion and found that excess amount works out to Rs.17,80,312/- as detailed below which was disallowed.
Expenditure in A.Y. 2002-03 - 1,25,80,104
40% increase - 56,00,000
Probable expenditure 1,75,80,104
Rounded off 1,75,00,000/-
Incurred Expenditure 1,92,80,312/-
Excess expenditure disallowed 17,80,312/-
8
25. The working looks attractive without any legal basis. Such approach cannot be approved. No discrepancy/mistakes were pointed out in the details furnished. The disallowance is totally injustified. I am in agreement with the legal position cited by the AR to the facts of the case. Accordingly, Ground No.4 is allowed. Relief: Rs.17,80,312/-"
9. We have heard both the parties and have carefully gone through the orders of the authorities below. It is not in dispute that the travelling and conveyance expenditure in the immediate preceding year claimed at Rs.1,25,80,104/- was fully allowed. It is also seen that the AO has allowed the travelling and conveyance expenses to the extent of Rs.1,75,00,000/- out of total amount of Rs.1,92,80,312/-. The AO has reduced the claim of the assessee with reference to the turnover shown by the assessee in the current year as compared to immediate preceding year, which, in our considered opinion, cannot be a legal basis to disallow the expenses. From the assessment year it is clear that the assessee had filed the details as required by the AO. The assessee had produced the books of account also before the AO and in the books of account no defect has been pointed out by the AO. It is also seen that the AO has failed to point out any item of travelling and conveyance expenses, which can be said to be of inadmissible in nature. The AO has merely disallowed the assessee's claim on ad hoc basis. In this view of the matter, the disallowance made by the AO has been rightly 9 deleted by the learned CIT(A). We, accordingly, upheld the CIT(A)'s order and reject this ground raised by the revenue.
10. In the Assessment Year 2004-05, the next ground raised by the revenue is against the CIT(A)'s order in deleting the disallowance of Rs.4,50,000/- consisting of the following items:-
(i) Rs.1,50,000/- out of staff welfare;
(ii) Rs.1,00,000/- out of miscellaneous expenses; &
(iii) Rs.2,00,000/- out of advertisement and publicity expenses.
11. Out of the staff welfare expenses of Rs.37,98,439/-, miscellaneous expenses of Rs.34,44,310/ and advertisement & publicity, and sales promotion expenses of Rs.7,71,22,088/-, a sum of Rs.1,50,000/-, Rs.1,00,000/- and Rs.2,00,000/- has been disallowed by the AO by observing that the assessee has not furnished complete details to show that these expenses were incurred wholly and exclusively for the purpose of business.
12. On an appeal, the CIT(A) deleted the addition by observing as under:-
"7.5 The Appellant had incurred the above mentioned expenditure for the purpose of its business and the same is evident from a perusal of the ledgers that were submitted in case of staff welfare expenditure and advertisement publicity and sales promotion expenditure.
7.6 It is respectfully submitted that these ad-hoc disallowances be deleted. Reliance in this regard is placed on the judicial precedents referred in ground no 4 above which 10 have held that ad-hoc disallowance should be deleted. The same are mentioned below for ease of reference:
• Good Year India Ltd. v ITO 73 ITD 189 (Del) • Express Movers (P) Ltd. v DCIT 61 ITD 528 (Del) • Raman and Raman v CIT 46 ITR 400 (Mad) • Sanjeevi and Co. vs. CIT 62 ITR 156 (Mad) • Amarjothi Pictures vs. CIT 69 ITR 755 (Mad)
33. Since the AO has not pointed out any mistake/discrepancies in the details furnished and in absence of detailed reasoning for the said disallowance, the action of AO cannot be approved.
(Relief: Rs.4,50,000/-)"
13. We have heard both the parties and the orders of the authorities below have been perused. In this case the AO has himself allowed major portion of the aforesaid expenses being incurred for the purpose of business. The Assessing Officer has estimated the sum of Rs.1,50,000/-, Rs.1,00,000/- and Rs.2,00,000/- out of the aforesaid three natures of expenses being not incurred wholly and exclusively for the purpose of business but he has failed to point out any item of these expenses, which could be said to have been incurred not for the purpose of business. The AO has disallowed expenses merely on his assumption and surmises, which in our considered view is not tenable. The learned CIT(A) has rightly considered the issue and deleted these additions. Accordingly, this ground raised by the revenue is also rejected.
11ITA Nos.1026 & 1059/Del/2009
14. Now we shall come to the appeals filed by the assessee. One common ground raised in both the assessment years is against the CIT(A)'s order in confirming the disallowance of the service charges paid to M/s. Cummins Auto Services Ltd. (CASL) amounting to Rs.52,00,000/-.
15. In the course of assessment proceedings it was noticed by the AO that the assessee has claimed deduction of payment of Rs.52,00,000/- on account of service charges paid to Cummins Auto Services Ltd. The total service charges paid to different parties was amounting to Rs.1,82,23,148/- as detailed below:-
Name of the Party Amount (Rs.)
C & F Cummins Auto Ser Ltd. (CASL) 5200000
Elgi Equipments Ltd. (Royalty) 3955440
Cummins Diesel Sales & Services (CDSS) 9067708
Total 18223148
In support of the payment of service charges to CASL as well to CDSS, the assessee submitted that both these concerns were having a large infrastructure facilities and also excellent dealers net work, and with a view to take benefit and advantage of their large infrastructure and dealers network to facilitate the assessee's business activities, the assessee had entered into an agreement with them and copies of these agreements were furnished to the AO. The Assessing Officer then specifically asked vide 12 letter dated 10.01.2006 to give the names and addresses of the dealers who were introduced by CASL and the total sales made by the assessee by using the dealers network of CASL. The assessee vide letter dated 23.01.2006, submitted that on perusal of the various Annexures attached to the letter, it was evident that CASL and CDSS had a wide network across the country which had assisted the assessee in promoting its marketing activities. The AO again asked the assessee to give details of the sales made through dealers appointed by CASL. In reply thereto, the assessee submitted that the assessee made the payment to CASL under contractual obligation for availing their facilities and it was very difficult to calculate the amount of total sales made by each dealer appointed by CASL or the amount of sales made by using the dealers network of CASL as no such dealer-wise report was ever prepared or maintained by the assessee. The Assessing Officer then examined the copy of agreement dated 01.01.1001 entered into between the assessee and CASL and stated his findings in that regard as under:-
"From the above it is clear that the assessee will pay service charges/sales commission (the agreement is termed as Sales Commission Agreement) as per the agreed terms of the agreement i.e. if quantum of sales made using dealers network of CASL or through dealers appointed by CASL exceeds a particular/specified limit then over and above the fixed charges of Rs.13,00,000/- a further sum will also be paid to CASL. Thus, in order to enforce the terms and conditions of the alleged agreement in real sense the assessee has to maintain the records of the ales made through CASL. But as per the submissions of 13 the assessee, as discussed in the above paragraphs of this order, it has not maintained any record of the sales made through the dealers of CASL. Under these circumstances it appears that this agreement is nothing but an arrangement to pass on the income of the assessee to another company under the control of the same management thereby reducing its tax liability. This agreement is used as a device to give colour of genuineness to the income so diverted or passed to another company. Under these circumstances the alleged agreement for payment of service charges to CASL has no sanctity as its terms and conditions have not been duly complied with. In view of the above the undersigned is forced to treat the alleged agreement as sham, which has been just used to give colour of genuineness to the payment of service charges. Keeping in view all the above, the transaction of payment of sale commission/service charges of Rs.52,00,000/- to CASL is treated as bogus and added back to the income of the assessee company. The undersigned is also satisfied that to the extent of Rs.52,00,000/-, the assessee has concealed/furnished inaccurate particulars in respect of its income and for that penalty proceedings u/s 27(1)(c) have been initiated separately. (addition of Rs.52,00,000/-)"
The AO thus disallow payment of service charges of Rs.52,00,000/- to CASL, against which the assessee preferred an appeal before the learned CIT(A).
16. Before the CIT(A) the assessee submitted that the assessee made the payment of service charges to CASL to take benefit of the established dealers network of CASL and as a result of the services being rendered by dealers, the assessee's sales revenue were increased by a remarkable 40.68% which goes to prove that the payment was made wholly and exclusively on the principle of commercial expediency. It was further submitted that there 14 was no material brought by the AO to establish that the payment made to CASL was bogus and non-genuine and the agreement was entered into with a view to reduce the tax burden of the assessee. Various decisions were also cited by the assessee in support of the claim.
17. After going through the assessment order and the written submissions of the assessee, the learned CIT(A) confirmed the addition made by the AO. The learned CIT(A) observed that except agreement no other evidence was produced by the assessee. The learned CIT(A) further observed that in the light of the provisions contained in sec. 37(1) of the Act, the assessee had an onus to prove that a particular expenditure was laid out or expended wholly and exclusively for the purpose of business. The CIT(A) further observed that mere filing certain details and making payment by itself would not entitle the assessee to claim deduction of expenditure unless the same was proved to be paid for commercial consideration and commercial expediency. The learned CIT(A) has therefore, taken a view that the assessee has not successfully demonstrated that services were received from CASL warranting any payment and to be claimed as business expenditure. Still aggrieved, the assessee is in appeal before us.
18. The learned counsel for the assessee Shri Ajay Vohra assisted by Shri Gaurav Jain and Ms. Neha Khemka, has submitted that the assessee 15 company was engaged in the business of, inter alia, manufacturing, marketing and trading of lubricants, greases and industrial oils. CASL was a company, which was engaged in the business of distribution of automotive spares and accessories and providing service solutions to customers of commercial vehicles through a chain of excellent dealer network and was vested with up-to-date trade intelligence, trained and competent staff and other infrastructure facilities. He further pointed out that the assessee entered into an agreement dated January 1, 1999 with CASL, in order to avail CASL distribution/marketing network to increase sales of assessee's products and also to utilize other facilities of CASL for marketing of assessee's products i.e. lubricating oils and greases. He further submitted that in consideration of availing CASL distribution and marketing network and other infrastructural facilities, the assessee had agreed to pay a fixed commission of Rs.13,00,000/- for each quarter, aggregating to Rs.52,00,000/- per annum and a further commission, if specified limit is exceeded. During the relevant year no further commission was paid since the sales made through dealer of CASL did not exceed the stipulated limit and therefore, the fixed commission/service charges of Rs.52,00,000/- was paid to CASL.
16
19. During the course of hearing of these appeals, the learned counsel for the assessee pointed out that the assessee by furnishing following documents before the AO, supported the payment of service charges to CASL:-
• Copy of sales commission agreement with CASL.
• Detail of dealer network of CASL including name and addresses of dealers.
• Copy of ledger accounts of dealers of CASL on sample basis. • Details of payment made to CASL on account of service charges. • Details of debit notes issued by CASL.
• Copy of sample invoices of sales made through the dealers of CASL 19.1 He further pointed out that the aforesaid documents were also filed before the CIT(A). It was clarified by the learned counsel for the assessee that the assessee was under bona fide belief that the aforesaid documents, if read as a whole, would be sufficient to prove and establish that the services were actually rendered by CASL, in consideration of which, service charges were paid by the assessee, and in view thereof, no further documents were filed by the assessee either before the AO or before the CIT(A). He, therefore, submitted that the assessee has now placed before the Tribunal further evidences to establish that CASL had rendered certain services to the assessee in lieu of which, the service charges were paid by the assessee to them. Further evidences produced by the assessee before us are as under
and copies of which have been given to the learned DR:-17
• The copy of miscellaneous correspondences between the applicant and CASL placed as additional evidence at pages 22 to 69 establishes that - (i) applicant had negotiated sales price, quantity of sales, mode of transport, etc. of its products, sold through dealer/distribution network of CASL, with CASL only; (ii) complaints with respect to products sent by applicant to dealers of CASL, were negotiated and settled between CASL and applicant only.
• Further, the applicant had initiated training programs for its customers, viz., mechanics, etc. using the automotive products in order to increase the awareness of its products and company's brand image. Pursuant to the aforesaid initiative, the applicant company availed services of CASL, which had the capabilities of providing the aforesaid training. The aforesaid services were rendered by CASL in pursuance of subject agreement entered between the applicant and CASL.
• In relation to the above, the applicant has placed at pages 70 to 91, certain documents in the nature of presentations and brochures for such training programs, certificates issued to participants of training program etc. as additional evidence which clearly substantiate the imparting of training by CASL.
20. In the light of the various documents and evidences already filed before the authorities below together with the further evidences filed before us, it was submitted by the learned counsel for the assessee that all these evidences would establish that CASL's distribution or dealers network and/or services of CASL were actually used by the assessee for the purpose of business, in consideration of which, the service charges/commission were paid by the assessee, and these expenses are thus, allowable as deduction while computing the assessee's income under the Act.
18
21. The learned DR on the other hand, submitted that the assessee has not been able to give details of the dealer-wise sales made by the assessee by using the distribution or dealers network, and has also not given any evidence by which, it could be established that CASL has actually rendered services to the assessee. He, therefore, contended that since the assessee has failed to prove that any services have actually been rendered by CASL to the assessee in connection with the business activity of the assessee company, the payment made to CASL is prima facie disallowable as business expenditure under sec. 37(1) of the Act.
22. We have heard both the parties and have carefully gone through the orders of the authorities below. We have also carefully perused the material placed in the Paper Book filed by the assessee. We have also examined the various evidences filed by the assessee before the authorities below as well as before us.
23. From the perusal of the details filed by the assessee, it is not in dispute that a copy of agreement dated 01.01.2001 entered into between the assessee and CASL, was filed by the assessee before the AO. As per this agreement, it was agreed between the assessee and CASL that the assessee would use the marketing network and other related infrastructural services set up by CASL, in consideration of which, a fixed commission of Rs.13,00,000/- for 19 each calendar quarter was payable subject to a further commission provided the sales exceeds the specified limit. Before the authorities below, the assessee has also submitted the details of the dealers network of CASL including names and addresses of the dealers. Copy of ledger account of dealers of CASL on sample basis was also filed before the AO. It is not in dispute that the payment was actually made to CASL against the debit note issued by CASL to the assessee. The assessee also produced copy of sample invoices of sales made through the dealers of CASL. The specific requirement of the AO was only to submit the details of sales dealer-wise. The Assessing Officer has not made any enquiry either from CASL or its appointed dealers or its overall network to find out as to whether the assessee had used the marketing network and other related infrastructural services of CASL as so agreed by the parties vide agreement dated 01.01.2001. The AO has also not made any enquiry in this regard to disprove the assessee's claim that the assessee used the marketing network and other related infrastructural services of CASL with a view to increase or promote the assessee's sales of various items such as lubricants, greases and industrial oils through the marketing network, and other related infrastructural services already set up by CASL. The AO has taken a view that the agreement dated 01.01.2001 was merely a device to give a colour of 20 genuineness so that the income of the assessee can be diverted or pass over to another company but the AO has failed to bring any iota of evidence to establish that the agreement in question is merely a colourable device to pass over the assessee's income to another company. It is not the case of the Assessing Officer that the CASL is not an income-tax assessee or has not included the amount of service charges received from the assessee in its income declared to the department. The AO has merely drawn assumption and presumption as to the genuineness of the agreement in question without there being any iota of evidence or material to say so. During the course of hearing of these appeals before us, the assessee has successfully been able to demonstrate that various activities in the course of making sales of its product were carried out through the dealers/distribution network of CASL and as a result thereof, the assessee's turnover has also been considerably increased from year to year.
24. For the reasons given above and considering the totality of the facts, and circumstances of the case, including the various evidences filed by the assessee before the authorities below as supported by various additional evidences filed before us, copies of which were given to the learned DR for her comments, and in the absence of any material disputing genuineness of the various materials, and documents, and evidences filed before us, we hold 21 that the assessee's claim of payment of Rs.52,00,000/- in each year on account of service charges paid to CASL is to be allowed as a business expenditure. At this stage, it is pertinent to note that the agreement in question was entered into on 01.01.2001 and it was effective from that date. It is also seen that the quarterly payment was also paid during the Assessment Year 2001-02 for one quarter amounting to Rs.13,00,000/- and the overall annual payment of Rs.52,00,000/- was also paid in the Assessment Year 2002-03 and in the course of assessment made under sec. 143(3) for the Assessment Year 2001-02, the payment of Rs.13,00,000/- claimed by the assessee as deduction was not disallowed by the AO. It is further noticed that in the Assessment Year 2002-03, the assessee also made a claim of Rs.52,00,000/- in the return of income and the return of income for that year was merely processed under sec. 143(1), and was not selected for scrutiny with a view to disallow the assessee's claim on account of service charges paid to CASL and not to reopen the assessment under sec. 263 or sec. 147 of the Act. We find that the identical payment of Rs.52,00,000/- was also paid in the Assessment Year 2005-06, and the amount of Rs.26,00,000/- has been claimed in the Assessment Year 2006- 07, during which year a service agreement stood terminated on and from 30.9.2005. Therefore, from this point of view that the department has 22 accepted the assessee's claim in earlier Assessment Years i.e. 2001-02, 2002-03, and there being no fresh material rebutting the assessee's claim, the claim of the assessee in Assessment Years 2003-04 and 2004-05 is not liable to be rejected. We, therefore, allow this ground raised by the assessee with a direction to the Assessing Officer to modify the assessment order by allowing the claim of the assessee on account of payment of service charges paid to CASL. We order accordingly.
25. Ground No.2 in Assessment Year 2003-04 raised by the assessee is with regard to the disallowance of repair and maintenance expenditure amounting to Rs.8,03,490/- confirmed by the CIT(A) by treating the same as of capital in nature.
26. During the course of assessment proceedings, it was noticed by the AO that out of total expenses of Rs.21,65,171/- incurred under the head "Repair and Maintenance", payment of Rs.8,03,490/- was of capital in nature but claimed as revenue expenditure by the assessee. Date-wise and item-wise detail of total expenditure of Rs.8,03,490/- has been stated in the assessment order. On perusal of the same, it is seen that all these expenditures were incurred under the heads "Plant & M/C Maintenance Expenses", "Computer maintenance expenses", "Office equipment maintenance expenses" and "Office maintenance expenses". The assessee 23 was, therefore, asked by the Assessing Officer to explain as to why these expenditures are not to be capitalized. In reply thereto, the assessee vide letter dated 06.03.2006 stated that all these expenditures were of revenue in nature and in support thereof the assessee filed copies of bills in respect of all the said expenditures. The AO then stated that on perusal of the copies of the bills, it was noticed that all the expenditures were of capital in nature. Out of the total expenses of Rs.8,03,490/-, the AO pointed out the expenses of Rs.1,56,000/- incurred towards purchase of wooden pallets from one Sarvodya Timber Industries which were treated as capital expenditure by the AO. With regard to the balance sum of Rs.6,47,490/-, the AO stated that the bills produced were towards purchase of new computers, furniture and fixture, and building constructions. The AO, therefore, treated the balance amount also to be of capital in nature. The AO then allowed depreciation of Rs.88,129/- on Rs.6,47,490/- and made the addition of the balance amount of Rs.5,59,361/- out of the total expenses of Rs.6,47,490/-. The AO also made the addition of Rs.1,56,000/- on account of purchase of wooden pallets treating the same to be of capital in nature. Thus, total disallowance made by the AO was of Rs.7,15,361/- after allowing depreciation of Rs.88,129/- from total expenses of Rs.8,03,490/-.
24
27. On appeal, the learned CIT(A) confirmed the AO's order. With regard to the addition of Rs.1,56,000/- the learned CIT(A) has stated that the assessee has not been able to explain as to why some expenditures were claimed as capital expenditure and others are as revenue expenditure. With regard to the balance amount of Rs.6,47,490/-, the CIT(A) observed that these expenditures were incurred for purchase of new computers, furniture and fixtures. The assessee's explanation that these expenditures incurred for only to maintain the existing assets, was rejected.
28. Still aggrieved, the assessee is in appeal before us.
29. We have heard both the parties and have carefully gone through the orders of the authorities below. We have perused the material on record. In so far as the expenses of Rs.1,56,000/- towards purchase of wooden pallets (Two way double deck reversal type size 48" x 48" running into 100 numbers), we find that there is no finding that these wooden pallets were utilized in creating any new assets. These were used for the purpose of transportation of barrels of oil from factory to the company owned depot and storing the same till the time the goods are transported to various parties' locations. These wooden pallets in the nature of planks of wood on which the barrels of oil are stored, and they need to be replaced every year as it is not feasible to use them more than a year. The assessee has explained that 25 these pallets were purchased to maintain the existing assets. Having regard to the nature of item purchased, we are of the considered view that the expenses incurred towards purchase of wooden pallets are to be considered to be of revenue in nature inasmuch as the same were spent to maintain the existing assets of the assessee without creating any new asset. With regard to the balance expenses to the extent of Rs.6,47,490/-, we find that these expenses were incurred towards for maintenance of existing computer system or for up-gradation of existing computers. The expenditures were also incurred towards E-net cards ATX Cable, Scroll mouse and monitor etc. These are perishable items, which need to be updated from time to time and no new assets were brought into existence. Some expenses were also incurred towards capital Ethernet, which by any stretch of imagination can be held to be of capital in nature. The assessee has also purchased certain memory card for computers as well as some screen and mouse. We, therefore, hold that all these expenditures are incurred towards day-to-day maintenance and repairing of furniture, fittings and computer maintenance. We, therefore, direct the AO to allow the assessee's claim of expenses amounting to Rs.8,03,490/- as revenue expenditure. However, the depreciation of Rs.88,129/- allowed by the AO shall stand withdrawn. Thus, 26 this issue raised by the assessee in Assessment Year 2003-04 is decided in favour of the assessee.
30. Next ground Nos.3 & 4 raised by the assessee in Assessment Year 2003-04 are directed against the CIT(A)'s order in confirming the disallowance of Rs.1,00,000/- out of the total ad hoc disallowance of Rs.2,27,610/-, and Rs.1,00,000/ out of the total ad hoc disallowance of Rs.2,00,000/- on account of vehicle expenditure and telephone expenditure respectively.
31. The Assessing Officer disallowed the sum of Rs.2,27,610/- being 1/10th of the total expenditure incurred on vehicle repair and maintenance by observing that the personal use of the vehicle cannot be ruled out. Similarly, the AO disallowed the sum of Rs.2,00,000/- out of telephone expenses on the ground that the same were personal in nature.
32. On an appeal, the learned CIT(A) reduced the disallowance to Rs.1,00,000/- under each head. With regard to the vehicle expenditure, the CIT(A) has observed that the assessee already taken car allowance as perquisite in the hands of some of its employees. Still, the CIT(A) considered it fit to restrict the disallowance to Rs.1,00,000/-, which in our considered opinion, is totally based on surmises and presumptions. The CIT(A) has not given any justifiable basis to upheld the disallowance to the 27 extent of Rs.1,00,000/- under the head "Vehicle expenses". Similarly under the head "Telephone expenses", the CIT(A) has reduced the disallowance to Rs.1,00,000/- without there being any material to support the disallowance.
33. After considering the totality of the facts and circumstances of the case and having regard to the admitted position that the disallowance has been made purely on ad hoc basis, without there being any material to support the same, we delete the disallowance of Rs.1,00,000/- each under the head "Transport Expenses" and "Telephone Expenses" respectively as upheld by the CIT(A). In other words, the disallowance of Rs.1,00,000/- under both the heads, upheld by the CIT(A), is deleted.
34. The last ground being Ground No.2 in Assessment Year 2004-05 taken by the assessee is against CIT(A)'s order in confirming the disallowance of travelling and conveyance expenses amounting to Rs.7,16,300/-.
35. In the course of assessment proceedings, the assessee was asked by the AO to furnish details of foreign travelling undertaken by the employees and directors of the assessee company. The assessee company furnished the bills in respect of expenses claimed and also furnished the details of foreign travelling expenses amounting to Rs.28,65,214/-. After examining the details the AO had taken a view that the assessee has not furnished any 28 documentary evidence as to how the foreign travels undertaken by the employees and directors of the assessee company, helped the assessee company in promoting its business. The AO also stated that most of the employees and directors had undertaken the journey on tourist visa. After considering the facts and circumstances of the case, the AO then disallowed 25% of total traveling expenses of Rs.28,65,214/- and thus, disallowed the sum of Rs.7,16,300/-.
36. On an appeal, the CIT(A) confirmed the disallowance by saying that the assessee has not produced any records or minutes of board meetings and has not successfully demonstrated the purpose of foreign visits warranting the allowance of expenditure claimed. The learned CIT(A) further observed that there was no bar to disallow expenditure on estimate basis when there was a ground for disallowance of expenditure.
37. Hence the assessee is in appeal before us.
38. We have heard both the parties and have carefully gone through the orders of the authorities below. We have carefully gone through the material on record. It is not in dispute that the details of foreign travelling expenses including the names of the employees or persons concerned who visited foreign country, period during which the journey was undertaken, the purpose for which the concerned person visited the country and the name of 29 the place or country where visited along with the amount of expenditure incurred, have been furnished before the AO, copies of which are placed at Pages 1 to 2 of the Paper Book filed by the assessee. On perusal of the details, we find that General Manager (F&A), V.P. (Marketing), V.P. (Sales), CEO, V.P. (Technical & Industry), Director, Manager (Technical & Industry), were amongst the persons who had gone to foreign country for the purpose of attending seminars, paying marketing visits and to promote the business of the assessee. Certain visits were also made to attend distributors meeting organized abroad. From the details, it is thus clear that the assessee has furnished the purpose for which the visit was undertaken. The assessee has also produced copy of ledger account of traveling - foreign expenses. All the payments were made through banking channel. The names of the concerned employees or persons are mentioned against the relevant payment. The AO has not been able to point out any item which could be said to have not been incurred by any employee or director of the assessee company for the purpose of assessee's business. The AO has disallowed the part expenses on estimated basis by applying rate of 25% of total expenses. The AO has not given any basis or reason for applying the rate of 25% for the purpose of disallowing part of the foreign traveling expenses. It is not the AO's case that the visit to foreign country was not made for the purpose 30 of assessee's business as would be clear from his order itself, where he has himself allowed 75% of the expenses of foreign traveling. In these circumstances, we therefore, do not find any reason to sustain the order of the CIT(A) in confirming the Assessing Officer's action in disallowing part of the foreign travelling expenses on ad hoc basis. We, therefore, delete the disallowance and direct the Assessing Officer to allow the assessee's claim of foreign travelling expenses in full. The Assessing Officer shall modify the assessment order accordingly.
39. In the result, the appeals filed by the assessee for the Assessment Year 2003-04 and 2004-05, are allowed and that of the revenue are dismissed.
Pronounced in the open court on 23rd July, 2010.
Sd/- Sd/-
(G.E. VEERABHADRAPPA) (C.L. SETHI)
VICE PRESIDENT JUDICIAL MEMBER
Dated: 23rd July, 2010.
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR By order
*mg Deputy Registrar, ITAT.