Income Tax Appellate Tribunal - Mumbai
Mega Management Services (P) Ltd. vs Income Tax Officer on 12 November, 2003
Equivalent citations: (2004)82TTJ(MUM)1027
ORDER
R.P. Tolani, J.M.
1. This is assessee's appeal raising two issues by five grounds, out of which ground Nos. 1 to 4 raise the same issue. In effect, the issues raised are as under:
"(1) That the learned CIT gravely erred to uphold the disallowance of Rs. 1.32 crores claimed as deduction on account of project expenses on the pretext that such payments to assignees of the project were yet payable. Such delay in payment could not convert a genuine business deal into a non-genuine one culminating in arbitrary disallowance, particularly when the assignee confirmed undertaking of the projects.
(2) That without proving the nexus between amounts advanced interest-free and the amounts raised as interest bearing loans, disallowance of Rs. 35,99,656 by the AO and upholding of such disallowance in the sum of Rs. 22,66,010 by the CIT(A) was highly unwarranted and unjustified."
2. Brief facts are during the year in question the assessee had. undertaken the project study for manufacturing of saw pipes for the concern Visa Petrochemicals, with which the deal could not take place. Thereafter, the assessee sold the whole project report to another company named as Welspun (India) Ltd./Stahl Rohen Ltd. for a consideration of Rs. 2 crores, which has been credited to the P&L a/c. Qua this income from project consultancy report, the assessee claimed project expenses given to following parties:
Mega Safe Deposit 17 lakhs Sidharth Traders 64 lakhs Sumo Traders 68 lakhs 149 lakhs It was claimed that the amount was payable to Sidharth Traders for techno commercial feasibility study and to Sumo Sales Corporation for costing, financial viability and tying up means of financing. Regarding above project expenses, the AO asked the assessee to furnish the details like name and address, voucher and confirmation in this behalf. The assessee filed confirmation only in respect of Mega Safe Deposit and in respect of Sidharth Traders and Sumo Traders the same were not filed despite several opportunities. Therefore the expenses in respect of these two parties are disallowed, which is the subject-matter of first ground. Aggrieved, the assessee preferred first appeal where it was contended that the assessee had obtained these confirmations and filed them on 13th March, 2000. The assessment proceedings were closed by the AO prior to this date. However, the assessment order was passed on 21st March, 2000, i.e., after the assessee had filed these confirmations with the AO. It was pleaded that the required confirmations having been filed by the assessee before the assessment order was passed, the AO should have considered the same. The copies of confirmations were also produced before CIT(A), which were accepted by him as evidence and the matter was remanded back to the AO to examine the same and to also see whether both the recipients of the monies were income-tax assessees and whether the receipts were shown by them as their income.
3. The AO submitted his remand report dt. 31st July, 2002 reporting that the assessee produced Shri Shantilal S. Jain, proprietor of Sumo Sales Corporation and Smt. Sukhidevi S. Jain, proprietor of Sidharth Traders. Smt. Sukhidevi deposed that business of Sidharth Traders was looked after by her husband, Shri Shantilal, and she was not aware of the business of the assessee as her husband looked after these affairs, Shri Shantilal S. Jain in his deposition confirmed that he was assessed to tax and he had prepared project report in question for a consideration of Rs. 68 lakhs. Though he had not prepared any other project report, for this purpose he had taken the help of CA. Valuer, Engineers, Advocate, Lawyer, etc. Besides, the payment in question was not made to him. On question as to why he had not taken legal steps for recovery of the said amount, it was replied that he did not want to fight with the management of the assessee. In effect, he deposed that both the concerns had supplied respective project reports for the consideration mentioned above. The AO in the remand report held that both these concerns have no experience on project report. People take such professional services after examining past experience and reputation in the line. Entire amount of Rs. 132 lakhs was not paid by the assessee for more than seven years, for which no legal proceedings were taken for recovery of the dues. The assessee has sold the project report and realised the consideration of Rs. 2 crores in asst. yr. 1997-98 itself. Both these concerns, though have claimed engaging professionals for preparing the project reports, they have not made any payment to their professionals. Both these parties have declared small amounts of income on such big volume of transaction. The AO on these facts held that the project expenses of Rs. 1.32 crores were not genuine. The remand report was accordingly submitted. The remand report was provided to the assessee, for which following submissions were made :
"Not only during the appellate proceedings the confirmations from the proprietors of the two concerns were filed, both of them were also produced in the remand proceedings before the AO. They are existing assessees having PAN and assessed at Ahmedabad. Shri Shantilal S. Jain on his own and on behalf of his wife has deposed before the AO that he had prepared the project report. He had also deposed that he had taken the services of chartered accountants, valuers, engineers, etc. for preparing the report. The appellant company had discharged its onus by producing not only the two confirmations but also the persons concerned. These two were at the relevant point existing assessees and the amounts earned by them have been accounted for by each of them in their P&L a/c. It was submitted that in the light of these facts it was not proper on the part of the AO to have commented upon in the remand report that the project expenses claimed as deductions are not genuine, on the ground that such payment to be made to the two concerns are still outstanding. It was submitted that there was a valid reason for non-payment. The appellate company had received additional works in connection with the project 'saw pipes' which were also assigned to Sidharth Traders against a consideration of Rs. 12,00,000 and to Sumo Sales Corporation for Rs. 10,00,000 which finally though undertaken was not done by the two concerns. The appellant company had desired therein to complete the additional assignments given and only thereafter the outstandings were to be paid. Since such additional assignments were not honoured, payments were held back. It was submitted that under the circumstances the AO had travelled too far by making the comments Which was not the purpose of the remand report.
In the subsequent submissions as well, it was claimed that the delay in making the payments does not in any manner militate against the genuineness of the expenditure claimed on getting the two project reports made. Income whatever from the said project has been duly assessed under the head business income. Mere non-resort to any litigation in a Court of law by Shri Shantilal S. Jain on his own and on behalf of his wife did not and could not turn otherwise a genuine business deal into a non-genuine one. It is for the concerned parties to conduct their business in a manner they may decide and mere delay in payment cannot convert a genuine business deal into a non-genuine one culminating in arbitrary disallowance."
The CIT(A) however held that the transactions resulting in claim of deduction as project expenses payable to two concerns do not appear to have been carried out as commercial transactions for the following reasons:
"(i) Apart from the appointment, there is no evidence of any interaction in respect of the progress of the project during the entire period between the appellant and the two assignees Sidharth Traders and Sumo Sales Corporation.
(ii) That while the appellant company is based at Mumbai the two concerns at the relevant point of time were stationed at Ahmedabad. There is no dearth of genuine consultancy firms at Mumbai with adequate and competent manpower to carry out the assignment and hence there was no reason for approaching some one in Ahmedabad if the transaction was clear and above board and for the purpose it was claimed.
(iii) The two persons claimed to be the assignees of the project were totally inexperienced in the filed of assignment--one being a house wife and other a full time salaried director in a company in a business nowhere connected with the work assigned. The assignees had no manpower or other resources to carryout the assignment.
(iv) The assignees Sumo Sales Corporation and Sidharth Traders failed to provide any evidence through whom the work assigned to them were carried out, what was the remuneration to be paid, their individual reports, etc.
(v) No payment of the consideration totalling to Rs. 1.32 crores payable was made even after a considerable period of time till date. The reason for non-payment was rather flimsy. There is no reason for a person not making effort to claim larger amounts due to them for a completed assignment, for the reason of incompleted assignment of much smaller remuneration--more so when there is no evidence produced to show that the subsequent assignment remained incomplete on their account. It is as if the two concerns had never any legitimate right to make claim of the amounts.
(vi) Though it was claimed by the assignees that the project was got done through qualified persons--no evidences to the effect of their appointment work done were produced. The entire work was claimed as got done on credit and the whole amount was claimed as outstanding.
(vii) The assignees failed to produce their accounts and supporting documents from which it could have been verified if the receipts were offered for tax or not. The reasons cited being totally in-convincing. In the circumstances, their affidavits which are self-serving in nature cannot be accepted. In the case of Shri Krishen v. CIT (1983) 142 ITR 612 (All), it has been held that self-serving affidavits have very little evidentiary value. It is neither a rule of prudence nor a rule of law that statements made in an affidavit which remained uncontroverted be most invariably be accepted as true and reliable. Ordinarily in the absence of denial, the statement may be accepted as true but if there are circumstances which suggest that the statements in the affidavits should not be accepted as true, the absence of denial by the other side would not by itself be sufficient to claim the statement in the affidavit with truthfulness and reliability."
4. It was held that the transaction was not above board and the claim cannot be allowed based on mere affidavits and confirmation letters that the amounts were due to them. Reliance was placed on CIT v. Indian Express Newspapers (Madurai) (P) Ltd. (1999) 238 ITR 70 (Mad) that the corporate veil can be lifted and the Revenue authorities had a right to penetrate the veil to ascertain the truth. Further reliance was placed on CIT v. L.M. Dalmiya (1994) 207 ITR 89 (Cal). It was further held that since neither there is any outgoing nor any subsisting claim without any profit and satisfactory reason, the above amount as project expenses cannot be held to be an expenditure in terms of Section 37 of the Act. The disallowance was upheld.
5. Facts regarding the second ground are, the AO observed that in respect of payment and receipt of interest, the facts of the assessee's case were as under:
"(1) Interest to others 16,19,915 (2) Interest to banks 7,35,265 (3) Interest to directors 31,02,585 54,56,765 Whereas the assesses has received interest on loans and advances a sum of Rs. 18,58,200. It is seen that assessee company has not charged interest calculated as under:
Loans and Advances:
Opening balance as on 1-4-1996 6,98,30,899 Closing balance 7,74,33,779 Loan raised during the year 76,02,880
It is quite clear that opening balance remains the same even at the closing date. Apart from this during the year assessee has made additional advance of Rs. 76,02,880. If interest @ 18 per cent is charged on full years advance which is 6,98,30,899 interest comes to Rs. 1,74,29,561. Since the assessee has paid interest only of Rs. 54,57,765, the difference between interest received (18,58,200) and interest payment (54,57,765) which comes to Rs. 35,99,565 is added back to assessee's total income as interest-free advances made by the assessee or otherwise it can be disallowed on the basis that this interest is paid for non-business purpose."
This issue was also raised in first appeal where the assessee made following submissions:
"That opening balance of loans taken by the company and outstanding as on 1st April, 1996 was Rs. 7,90,91,153.64 p. out of which loans to the tune of Rs. 7,56,94,654.08 p. were paid out during the year under appeal, thereby balance amount of loans payable remained at Rs. 33,96,499.56 p. appellant company raised loans during the year to the tune of Rs. 10,01,23,782.39 p. out of which loans aggregating to Rs. 5,36,00,000 were such on which appellant company was not to pay interest (interest-free) loans raised) and that only balance loans amounting to Rs. 4,65,23,782.39 p. were such on which appellant company was under an obligation to pay interest. Now coming to the loans given/advanced by the appellant company, opening balance of loans given as on 1st April, 1996 was Rs. 6,98,30,899.31 p. out of which sums aggregating to Rs. 38,68,493 could be realised during this year, thus, leaving the balance outstandings due at Rs. 6,59,62,406.31 p. Appellant company advanced interest free fresh loans during the year to the tune of Rs. 1,14,71,373 thus, bringing the total of loans outstanding at Rs. 7,74,33,779 (Rs. 6,59,62,406.31 + Rs. 1,14,71,373).
In brief, the position boils down to this that appellant company had raised during the previous year interest-free loans aggregating to Rs. 5,36,00,000 out of which interest-free loans were advanced in the sum of Rs. 1,14,71,373 only.
In brief, appellant company had more interest-free funds available than it advanced interest-free loans amounting to Rs. 1,14,71,373. I am enclosing a chart prepared for the purpose, perusal whereof will make the position abundantly clear. I will also like to draw Your Honour's kind attention to Annex. "C" in the paper book filed by N.A. Shah & Associates, Chartered Accountants, detailing therein funds, which had been deployed for the purpose of business during the previous year. As per the said chart funds aggregating to Rs. 5,37,00,354.08 p. were deployed during the previous year for the purpose of business, i.e., either for investment in shares or addition to fixed assets or repayment of loans or advancing of interest bearing loans."
Reliance was placed on CIT v. Hotel Savera (1999) 239 ITR 795 (Mad), Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 (Guj) and D.H. Secheron Electrodes (P) Ltd. v. CIT (1984) 149 ITR 400 (MP). The CIT(A) however held as under:
"In the year under consideration, there is no dispute that a part of the old interest bearing loan has been substituted by interest free loans and some new loans, but with the outstanding brought forward more or less remaining unchanged, these get merged with the cash flow being one. Under the circumstances the claim of the appellant that some interest free advance has been made out of interest free borrowings also cannot be accepted. The reliance of the appellant to the decision in the case of Hotel Savera (supra) is rather misplaced, for in the said case, the assessee had own capital and reserve, while in the instant case there is only borrowings. Since the appellant's representative has not made available the cash flow statement, to show categorically that interest free advance has been utilised for advancing interest free advances, following the decision in the case of CIT v. V.I. Baby & Co. (2002) 254 ITR 248 (Ker), it is held that prorate disallowance of interest is called for.
Coming to the quantification of the amount of interest disallowable, in the absence of cash flow statement identifying the source of each specific advances, and investments, it is to be held that in the absence of any self capital, borrowings are invested in shares, advances made etc. Considering the total borrowings of Rs. 10,35,20,281 (including interest free) and the interest payment of Rs. 54,22,500, the interest rate comes to Rs. 5.23 per cent. Applying the same percentage, the total advance should have given a receipt of Rs. 40,49,786 as against the actual receipt of Rs. 17,83,776. Hence out of the interest payment the balance amount of Rs. 22,66,010 is liable for disallowance under Section 36(1)(iii) of the Act. In the working since the entire amount of borrowings and advances including that interest free have been taken into account no separate credit for the interest free components are required to be given separately. Hence the disallowance made on that account by the AO of Rs. 35,99,565 will have to be restricted to Rs. 22,66,010. The appellant accordingly gets a relief of Rs. 13,33,555 on that account."
Consequently, the assessee's ground was partly allowed.
6. The learned counsel for the assessee reiterated the facts and contended that the assessee is following mercantile system of accounting, which has been accepted by the Department and the assessee is entitled to claim expenditure on the incurring of the liability. The expenditure is allowable on incurring of the liability and not the factum of the payment. In the original assessment, the disallowance was made on the ground that the assessee did not file confirmations. The fact is the confirmations were filed, though after the assessment proceedings were closed but on 13th March, 2000, i.e., before the completion of assessment by AO on 21st March, 2000. Observing this, the matter was remanded by the CIT(A). Therefore the infirmity in the assessment order stands corrected to this effect. The learned counsel stressed that the assessee had already offered an amount of Rs. 2 crores by way of income from the project consultancy reports. It is not the case of the. Department that the assessee is claiming expenditure without showing any income in this behalf. Attention was drawn towards the remand report and the statement of Shri Shantilal Jain to highlight that both the parties have confirmed the supply of project reports and they have confirmed the amount of consideration, which correctly tallies with the claim of the assessee. They are regular income-tax assessees and they have filed their confirmations giving full particulars. Therefore the identity of the parties, rendering of services and the amount of consideration are established by the assessee. Therefore no inference can be drawn that the transactions were not genuine. The onus cast on the assessee has been discharged in this behalf. It is abundantly clear that both these persons are not related to the assessee. Besides, the Welspun (India) Ltd., to which the project report for saw pipes was provided by the assessee for Rs. 2 crores, is also not a related concern. It clearly emerges from the record that the party from whom the assessee received project consultancy charges as well as the above two concerns, to whom project expenses were paid, were not related at all. With all these above facts, it is clear that the transaction cannot be held as non-genuine or sham. These transactions were made to both these concerns by written contracts, copies whereof are placed on paper book pp. 1 to 7. It stands confirmed on behalf of both the parties that they supplied the relevant project reports and the relevant amounts were raised by them by debit note dt, 12th Aug., 1996 in the case of Sidharth Traders and dt. 10th Aug., 1996 in the case of Sumo Sales Corporation. Shri Jain has confirmed that his sources of income include from business of Sumo Sales Corporation. Though initially the AO's objection was about confirmation and the matter was remanded by CIT(A) to verify whether the recipients were income-tax assessees and the receipts were shown by them as their income, the scope of remand report by AO was limited to these points. Looking at the terms of remand, the AO has verified that both the recipients were income-tax assessees and they accepted that the receipts were shown by them as their income. The CIT(A) however had disallowed the amount on various other considerations. As far as the nonpayment of amount to Sidharth Traders and Sumo Sales Corporation is concerned, the learned counsel contended that after supply of these project reports, the assessee gave further contracts to both these concerns; the correspondence in this behalf is placed on pp. 55 and 56 of the paper book for Rs. 12 lakhs and Rs. 10 lakhs respectively. In respect of these two works, both the parties did not comply with the terms of the contract and there was dispute going on, due to which their payments were withheld. Due to non-compliance of these agreements, the assessee had to suffer damages, which were sought to be recovered from both these parties. The payments were withheld because of these reasons.
7. The learned counsel then requested to admit additional evidence under Rule 29 in the form of paper book with 13 pages containing the paper relating to these disputes besides the details of cheques, which were ultimately given to both these concerns after the arbitration. This was proposed to be added to highlight that the payments have ultimately been made to both the parties. It was contended that these documents were obtained by the assessee subsequent to the CIT(A)'s order. Therefore they may be admitted. The learned counsel contended that the seven points, on which the CIT(A) has disallowed the expenditure, stand explained satisfactorily by the assessee in following manner:
(i) The assessee has produced the correspondence in paper book pp. 1 to 7.
(ii) Availability of professionals at Mumbai cannot be held as a ban to procure professional help from Ahmedabad. The assessee has to take a decision as a businessman and the Revenue authorities cannot step in its shoes.
(iii) Shri Shantilal Jain had explained the deployment of various professionals in this behalf. A person can prepare the report himself or can have various agencies in this behalf.
(iv) Shri Shantilal Jain has explained in detail about professional charges paid in answer to question No. 23 of his statement placed at paper book p. 21 giving particulars of professional charges payable at Rs. 67,71,800. Therefore, the observation of CIT(A) is not borne out from the record.
(v) The payments have ultimately been made, the same were withheld pending dispute for non-performance of the additional contract, which caused damages to the assessee and which was ultimately accepted and settled by both these concerns.
(vi) The reply is same as in (iv).
(vii) The observation is not correct. The accounts/records of Sidharth Traders and Sumo Sales Corporation were produced before AO along with assessment records, which are verified by the AO in his remand report.
The learned counsel contended that all the seven objections raised by the CIT(A) stand answered from the record. Besides, the AO has carried out the terms of remand report, i.e., the AO examined the confirmations, verified that both the recipients were income-tax assessees and the respective amounts were shown by them as their income. Further reliance was placed on the case of WP Industries v. IAC (1991) 36 ITD 70 (Bom)(TM).
8. In fine, the learned counsel argued that the assessee has discharged its onus and fully complied with the terms on which remand was made. The transactions were entered into by way of written contracts. The parties accepted the terms of the agreement and amount of consideration. The assessee cannot earn an amount of Rs. 2 crores without supplying the project reports, the existence of project reports is proved by the fact that the assessee sold the same and received an amount of Rs. 2 crores. The parties accepted the same. The fact of additional work having been given to them has not been disputed. The payment was withheld for non-performance of additional work entailing damages suffered by the assessee. The payments have ultimately been made after the resolution of dispute. In view of these facts, there is no scope to hold a view that the transactions with these parties were sham or/not genuine.
9. Regarding disallowance of interest (ground No. 5), the learned counsel reiterated the arguments raised before CIT(A), which in brief, are reproduced above. It was contended that the AO had not proved any nexus to establish that any interest-bearing loan was advanced as interest-free loan and in the absence of such nexus the disallowance is uncalled for. Reliance was placed on case law relied on before CIT(A) (cited supra).
10. The learned Departmental Representative, on the other hand, contended that both the parties had no experience in the field of project consultancy, which is a technical line. Consequently, these parties were not capable of drawing such project reports. Besides, the objections raised by the CIT(A) were well in order. In fine, the learned Departmental Representative relied on the orders of AO and CIT(A).
11. Regarding disallowance of interest (ground No. 5), the learned Departmental Representative relied on the orders of AO and CIT(A). Besides, reliance was placed on following authorities.
(1) CIT v. V.I. Baby & Co. (supra) (2) CIT v. Motor General Finance Ltd. (2002) 254 ITR 449 (Del).
(3) K. Somasundaram & Bros. v. CIT (1999) 238 ITR 939 (Mad).
12. We have heard the rival submissions and perused the material available on record. As far as the project expenses are concerned, it is clear that in pursuance to the directions of the CIT(A) in remand proceeding, the confirmations filed by the assessee were examined. The confirmations contained various details. The AO summoned the parties in response to which both the parties, i.e., Shri Shantilal Jain and Smt. Sukhidevi appeared. It is undisputed that the assessee has earned Rs. 2 crores by way of project report from Welspun. The assessee is following mercantile system of accounting. The assessee produced the above parties, who were examined on oath under Section 131. They confirmed having supplied the project report for the agreed consideration. The details of expenditure incurred by them have been given in response to question No. 23. Shri Shantilal Jain confirmed having deployed various professionals. In effect, it emerges from the record that the recipients of the project expenses confirmed having rendered services, i.e., supply of project reports and raised the debit notes. Both of them are assessed to tax. Their details about permanent account number, filing of return, etc. have been answered in the above statement. It shall be pertinent here to mention that there is no adverse inference or discrepancy, which has been reported by the AO in these statements. Coming to the objections of CIT(A) the learned counsel has laid arguments on the seven points in this behalf. According to us, these arguments are sufficient to meet the objections raised by the learned CIT(A). Coming to the additional evidence filed by the assessee, we are not inclined to accept the same regarding the subsequent payments to these parties. The same is therefore not considered. However, the assessee before CIT(A), while responding to the remand report, gave the reason for non-payment, which are reproduced above. This was to the effect that Sidharth Traders and Sumo Sales Corporation were given additional assignments for Rs. 12 lakhs and Rs. 10 lakhs respectively, which were not honoured by them. Therefore the payments were held back. Consequently, the assessee had given the reasons for withholding the payments before CIT(A). There is no adverse comment on this issue. Under these circumstances, it emerges from record that the assessee's non-payment to these parties was on the basis of proper reasons. In fine, the identity of the parties, the amount of consideration and genuineness of the transaction stand proved by the assessee. The parties have confirmed the same in remand proceedings in statement under Section 131. The seven objections raised by the CIT(A) have been met out by the assessee. Besides, the assessee has also explained the reason for withholding of the payment as the subsequent obligations were not honoured by these two parties. The assessee was following mercantile system of accounting, which is accepted by the Department and the expenses have been incurred in the previous year. Under these circumstances, the expenses have to be allowed in this year. In view of all the above facts, we hold that the expenses incurred by the assessee were genuine and for the purposes of its business and the same are allowable expenditure. Therefore the same should be allowed to the assessee. Ground No. 1 of the assessee succeeds.
13. Regarding ground No. 2, it is clear from the record that the assessee had a very nominal share capital and there were no reserves. The allowability of interest on borrowings has to be seen in view of Sections 36(1)(iii) and 57(iii) of the IT Act. During the year, a substantial portion of the old borrowings was paid by raising new loans, which were partly interest bearing and partly without interest. Certain new advances were also given again on the same basis, i.e., partly interest-bearing and partly without interest. In the entirety of circumstances, the claim of the assessee that some interest-free advances have been made out of interest-free borrowings cannot be accepted. There is no dispute that part of the old interest-bearing loan has been substituted by interest-free loans and some new loans. However, with the outstandings brought forward more or less remaining unchanged, these get merged with the regular cash flow of the assessee. The fact that there existed no reserves of the assessee and the share capital of the company being nominal, give a fair indication that interest-bearing loans were utilised for all purposes, which include investment in shares, advancing loans both with interest or interest-free and carrying out the own business. Therefore it cannot be held that the borrowed capital was used for the purposes of business of the assessee in entirety as well as the interest was not paid for the purposes of earning of the interest. The assessee's plea of considering only the point of utilisation cannot be held to be an act of commercial expediency and therefore interest-bearing loans cannot be said to be utilised fully for the business purposes. The reliance by the assessee on Hotel Savera's case (supra) is also not applicable to assessee's case as in that case the assessee had capital and reserves, while in assessee's case there are only borrowings. We are of the view that the facts of the assessee's case are similar to Kerala High Court judgment in the case of V.I. Baby & Co. cited supra, wherein similar disallowance has been upheld. We uphold the order of CIT(A) retaining the disallowance of Rs. 22,66,010 under s. 36(1)(iii). This ground of the assessee is dismissed.
14. Assessee's appeal is partly allowed.