Income Tax Appellate Tribunal - Delhi
Mr. Bhawan Mohan Garg, New Delhi vs Dcit, New Delhi on 7 August, 2017
1 ITA No. 3918/Del/2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'A' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 3918/DEL/2014 (A.Y .2008-09)
Bhawan Mohan Garg Vs DCIT
C-16, Green park Extension Circle-24(1)
New Delhi New Delhi
AAHPG2084K
(APPELLANT) (RESPONDENT)
Appellant by Sh. Vinod Kumar Bindal,
CA & Smt. Sweety Kothari.
Respondent by Sh. R.C. Danday, Sr. DR
Date of Hearing 12.06.2017
Date of Pronouncement 07.08.2017
ORDER
PER SUCHITRA KAMBLE, JM
The appeal is filed by the assessee against the order dated 23/05/2014 passed by the CIT(A)-XXVIII, New Delhi.
2. The grounds of appeal are as under:-
"1. The CIT(A) erred in law and on facts in confirming the estimated disallowance of interest on the negative balance of the capital account of the assessee in the books of M/s Garg Industries, a 2 ITA No. 3918/Del/2014 proprietary concern of the assessee ignoring the facts and submissions placed on record to prove that
(a) interest bearing funds were used for the purpose of business
(b) that various real estate advances were given through personal statement of affairs.
Thus the addition so made should be deleted.
2. The CIT(A) erred in law and on facts in confirming the disallowance of Rs.17,29,436/- out of foreign travel expenses ignoring the facts and evidences placed on record to show that the assessee is engaged in the business of export and the said foreign travel were undertaken for the purpose of business. Thus the addition so confirmed should be deleted.
3. The CIT(A) erred in law and on facts in confirming the disallowance of Rs. 78,075/- u/s 40(a)(ia) being amount paid towards trade fair expenses ignoring that the said amount was not liable to tax deduction at source. Thus the disallowance should be deleted.
4. The CIT(A) erred in law and on facts in confirming the disallowance of Rs. 10,56,025/- paid towards the certification fees over a period of 5 years by holding that the benefit of the same spreads over a period of five years ignoring the facts, evidences and submissions placed on record that the same is a revenue expense which has to be allowed in the year of incurrence i.e. this year. Thus the addition so made should be deleted."
3. The assessee is an individual and carrying on manufacturing and export business of building hardware & trading of door hinges under the name and style of proprietorship concerns namely M/s. Garg Industries and M/s D.P. 3 ITA No. 3918/Del/2014 Garg & sons respectively. During the year the assessee has declared taxable income under the head 'Profit & Gains from Business and Profession' and 'income from other sources.' On going through the balance sheet and profit & loss account for the assessment year under reference and for immediate preceding year it is noticed that the total turnover of M/s. Garg Industries was shown for Assessment Year 2007-08 at Rs.18,26,26,453/- which has been increased in Assessment Year 2008-09 to Rs.19,71,50,240/-. The increase, shown in turnover as compared to the immediate preceding Assessment Year is 7.95% whereas a perusal of P & L a/c shows that the assessee has paid interest at Rs.19,49,889/- in Assessment Year 2007-08 which has increased to Rs.86,09,999/- in Assessment Year 2008-09. Total increase in interest expenditure as compared to immediate preceding year works out at 341.56%. It is noted that the Proprietor's capital account as on 31/3/2008 was negative by Rs.(-) 1,36,21,274/-, whereas it was at Rs.69,32,998/- as on 31st March 2007. Similarly, secured loan was shown at Rs.9,38,87,705/- as on 31/3/2007 which has increased to Rs.12,38,66,891/- as on 31/3/2008. The Assessing Officer observed that the funds owned by the assessee were interest bearing funds. The Assessing Officer observed that the assessee tried to establish that interest paid at Rs. 86,09,999/- is justified as the assessee himself disallowed the interest of Rs. 36,45,862/-. The assessee was categorically required to explain the basis of arriving at the figure of disallowance of Rs. 36,45,862/- on account of interest pertaining to the interest bearing funds diverted towards the sister concerns. In response, vide reply dated 15.12.2010, the assessee furnished party-wise details about the interest disallowed. The Assessing Officer observed that the assessee did not furnish any explanation regarding the basis of such disallowance. Thus, the AO did not accept the same. The Assessing Officer further observed that since the assessee failed to establish the business expediency of interest paid abnormally in excess during the year, the same cannot be allowed as business expenditure. The abnormal increase in interest expenditure is not on account of increase in business turnover but it is as a result of diversion of huge 4 ITA No. 3918/Del/2014 interest bearing funds during the year and in preceding years. However, the Assessing Officer further held that for the sake of natural justice increase in payment of interest in proportion to the increase in turnover of the business was allowable and the balance of interest paid was disallowed. In the immediate preceding year interest expenditure was shown at Rs. 19,49,889/- against the turnover of Rs.18,26,26,453/-. In the year under reference, total turnover of the business was increased to Rs. 19,71,50,240/-. Accordingly, interest allowable in proportion to the increase in turnover of the business was worked out by the Assessing Officer as under:-
Rs.19,49,889 X 19,71,50,240 / 18,26,26,453 = Rs. 21,04,905/- Balance of interest of Rs. 65,05,094 was added back to the total income by the Assessing Officer.
4. The assessee debited traveling expenditure of Rs. 42,72,862/-. The Assessing Officer disallowed the foreign tour expenses to the extent of Rs.
33,50,176/-. As relates to TDS the Assessing Officer disallowed Rs. 78,075/- and as relates to assessee's claim under the head 'Trademark expenses', the Assessing Officer disallowed Rs. 9,24,810/-.
5. Being aggrieved by the order of the Assessing Officer, the Assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
6. The Ld. AR submitted that Ground No. 1 is not pressed. As relates to Ground No. 2, the Ld. AR submitted that the Assessing Officer disallowed an amount of Rs. 33,50,716 by holding that business purpose of some travels was not proved and CIT(A) sustained the disallowance of Rs. 17,29,436/- for the expenses incurred towards the foreign travel to UK by Arshia Garg, Rama Garg, Varun Garg and Adiya Singh as well as Rs. 6,57,593/- for foreign travel to USA by the assessee and Mr. Rakesh Jindal to USA stating that the assessee failed to prove the business relation with USA. The Ld. AR submitted that the CIT(A) has allowed the foreign travel expenses incurred in case of Mr. Varun Garg 5 ITA No. 3918/Del/2014 (travel 1, 2 and 5 as stated in CIT(A) order) and Rama Garg (travel 5) for their other visits to UK when they accompanied the assessee which shows that this is accepted that they were looking after the business of the assessee. All these were qualified to look after the business. Evidences regarding educational qualification placed on pages 199, 200-201 and 202. Following the same corollary the expenses incurred by them to travel UK (travel 3) should be allowed. The Ld. AR further submitted that Arshiya Garg has a postgraduate diploma in Business Management and was also looking after the business of the assessee. She has to carry her child Adhya Singh with her to fulfill her responsibilities. Confirmation from all the three members was placed on record to show that they were looking after the business of the assessee during the year. (Pages 184 -186). Thus the expenses should be allowed in full. As relates to travel expenses of Rs. 6,57,593/- to USA the assessee is engaged in the business of manufacturing and export of hinges. The assessee did not export any goods to USA during the year. The assessee is an exporter and therefore has to explore new markets (Details of exports given on page 187). The assessee visited USA to explore the market and prospective buyers. Copy of email from John Abernethie regarding meeting for new business opportunities at Abbey Trading USA on 08-09/10/2007 is enclosed at page 190 of the PB. Other emails to show participation of Rakesh Jindal in business with USA are enclosed at pages 197-198 of the PB. These evidences clearly prove that the assessee visited USA with Mr. Rakesh Jindal to explore new business and prospective clients. It is not necessary for allowance of foreign travel expenses that it should result in business. Sometimes the business meetings are fruitful and sometimes not. However, in this case, the assessee exported goods to USA in FY 2011-12 onwards as per details given on page 24 of CIT(A) order which shows that the meeting with prospective buyers in USA resulted into business though in subsequent years. Thus foreign travel expenses to visit USA were incurred for the purpose of business and therefore the same should be allowed in full. As relates to Ground no. 3 Disallowance of Rs. 78,075/- u/s 40(a)(ia) for amount paid towards Trade fair expenses, the Ld. AR submitted that an 6 ITA No. 3918/Del/2014 amount of Rs. 78,075/- was paid to M/s R.E. Rogers India (P) Ltd. without deduction of TDS. The assessing officer held that the same was liable to TDS and disallowed the same u/s 40(a)(ia). (Para 5 Page 8 of Asstt. Order). The CIT(A) ignored the submissions of the assessee and held that all the expenses are covered under the definition of handling expenses and therefore liable to TDS. (Para 7.1 page 31 of CIT(A) order) These expenses were incurred towards cargo expenses for sending samples for an exhibition 'Practical World' 2008 in Cologne Germany. This amount included reimbursement of air freight charges and other expenses incurred in clearing the goods in Germany which does not constitute part of his handling charges. Copies of bills are at pages 207 and 211 in PB. Copy of Airway bill for Rs. 37,968/- is on page 208 which proves that the said amount was paid by R.E.Rogers on behalf of the assessee and included the said amount in its bill for reimbursement of the same. Page 209 is the bill for terminal charges. Similarly, bill at page 211 shows that the amount of Rs. 37,475/- is towards reimbursement of expenses in foreign currency. No TDS is required to be deducted on reimbursement of expenses. Reliance is placed on the judgment in the case of CIT Vs. DLF Commercial Project Corporation 12015-TIQL-1609-HC-DEL-IT1 DoD; 15/07/15 wherein it has been held that the obligation to deduct TDS is only with respect to "income". As amounts paid as "reimbursement of expenses" do not have the character of income, there is no obligation to deduct TDS. Thus the effective amount paid towards handling charges is Rs. 4,477/- including taxes which are much below the threshold limit of TDS specified in section 194C. Therefore this amount was not liable to TDS and no 'disallowance u/s 40(a)(ia) can be made. As relates to Ground no. 4 Disallowance of Rs. 8,45,540/ (80% of Rs. 10,56,925/-) by allowing the certification fees over a period of 5 years, the Ld. AR submitted that the assessee claimed Rs. 10,56,925/- under the head 'Trademark expenses'. The assessing officer held that trademark expenses are capital in nature being tangible asset without appreciating the nature of expenses. Therefore he held the same as capital asset and allowed depreciation @ 25% thereon. The CIT(A) held that this 7 ITA No. 3918/Del/2014 amount paid for CE Certification which is valid five years. This expense has long term benefit and therefore directed to allow 20% of the said expense in each of the five years for which the certificate is valid. This shows that CIT(A) accepted the said expense to be revenue in nature. Any expense can be either capital or revenue. If it is a capital expenditure then depreciation has to be allowed thereon. However, if it is revenue expenditure then the same should be allowed in full in the year of incurrence even though it provides long term benefit. There is no provision of deferred revenue expenditure under the Income-tax Act. The assessee exported goods to UK. As per UK standard requirements, the products required CE certification. (Refer pages 215-216 for emails from buyers) The assessee got its products CE certified from Bodycote Testing Ltd. and paid this amount towards CE certification charges. (Refer pages 217, 219-220 for bills of the said party). Photocopies of CE certificates are placed on pages 222-223 which shows the certificate issued on 03/03/08 is valid upto 03/03/13 i.e. for five years. These evidences prove beyond doubt that it is not a capital expenditure in any manner. This is a revenue expense for certification of its finished goods to enable it to sell in the UK market. Therefore, the Ld. AR submitted that the same is allowable in full in this year even though certification has been provided for 5 years. Thus, the Ld. AR prayed that the disallowance of Rs. 8,45,540/- being 80% of Rs. 10,56,925/- as sustained by the CIT(A) should be deleted and the entire expense of Rs.10,56,925 should be allowed in this year.
7. The Ld. DR submitted that the CIT(A) has rightly made an addition on account of travel expenses incurred towards two foreign travel. The CIT(A) also has analyzed while disallowing the said expenses. The CIT(A) has analyzed those foreign trips of those particular persons and found that there is no direct connection/nexus with the business of the assessee. In-fact, the assessee has also not given any documentary proof as related to the said foreign travels in respect of business activities. The Ld. DR further submitted that the CIT(A) has rightly held that disallowance of Rs.8,45,540/- which is 8 ITA No. 3918/Del/2014 80% of Rs.10,56,925/- by allowing as the certification was valid only for 5 years. Thus, the CIT(A) has rightly directed to allow 20% of the said expense in each of the 5 years for which the certificate is valid. Thus, the CIT(A) has accepted the said expense to be revenue in nature. The Ld. DR further submitted that disallowance of 78,075/- u/s 40(a) (ia) for amount paid towards Trade Fair Expenses has also been properly determine that all the expenses are covered under the definition of handling expenses and, therefore, liable to TDS.
8. We have heard both the parties and perused all the relevant documents/records. As Ground No. 1 is not pressed by the assessee, therefore, the same is dismissed. As related to Ground No.2, the CIT(A) after verifying all the evidences has disallowed Rs.70,29,436/- for the expenses incurred towards the two foreign travels (a) Rs.10,71,843/- for foreign travel to UK by Arshiya Garg, Rama Garg, Varun Garg & Adhya Singh (b) Rs.6,57,593/- for foreign travel to USA by the assessee and Mr. Rakesh Jindal to USA. The said travels took place during the period of 21/7/2007 to 12/8/2007 (UK) and 9/10/2007 to 15/10/2007 (USA) respectively. As related to the visit in UK by Arshiya Garg, Rama Garg, Varun Garg & Adhya Singh, the Ld. AR submitted that the documents which were produced by the assessee were qualifications who were competent to do business and look after the profitability of the business. The said persons are the relatives of the assessee and being a family concern the said persons were not given remunerations. But it is established by the assessee in Page No. 187 of the paper book that the country vise export for three Financial Years 2005-06, 2006-07 & 2007-08 which were constantly increasing. Therefore, this expenses has to be allowed. The submissions made by the Ld. AR that the assessee has shown the evidence by way of copy of e- mail from John Abernethie regarding meeting to new business opportunities at Abernethie Trading, USA on 8-9/10/2007 which was enclosed at Page 190 of the paper book and the other e-mails shows the participation of Rakesh Jindal in respect of future/prospective business with USA which was enclosed at 9 ITA No. 3918/Del/2014 Pages 197 to 198 of the paper book. The said evidence was produced before the Assessing Officer as well as before the CIT(A). The said e-mail was addressed to B M Garg by stating initial B M. At Page 197 & 198 of the paper book it is clearly mentioned that the parties in the US was communicating for the new business and for new products and range development with Shri Rakesh Jindal who was representing Garg Industries. These documents were though on record not taken into cognizance by both the Revenue authorities. Thus, the travel expenses as related to Rakesh Jindal amounting to Rs.6,56,593/- has to be considered as the expenses towers the business expansion.
9. As related to Trade Fair Expenses, no TDS is required to be deducted on reimbursement of expenses for which the Ld. AR relied upon the judgment of the Hon'ble Delhi High Court in case of CIT Vs. DLF Commercial Project Corporation (2015-TIOL-1609-HC-DEL-IT order dated 15.07.2015) wherein it has been held that obligation to deduct TDS is only with respect to income as amounts paid as reimbursement of expenses do not have the character of income. In-fact, the effective amount paid towards handling charges was only Rs.4,477/- including taxes which is much below the threshold limit of TDS specified in Section 194C of the Act. Therefore, the Ld. AR's contention that this amount was not liable to TDS and no disallowance under Section 40(a)(ia) can be made is accepted.
10. As relates to disallowance of Rs.8,45,540/- for allowing the certification fees over a period of 5 years, the CIT(A)'s finding that the CC Certification was valid for 5 years but in the manner which the CIT(A) has directed to allow 20% of the said expenses in each of the 5 years by stating that the expenses are revenue in nature is not proper. If it is Revenue expense then the same should be allowed in full in the year of incurrence even though it provides long term benefit. Once, it is stated that it is a Revenue expenditure the assessee is 10 ITA No. 3918/Del/2014 entitled for the said claim. Therefore, the same is allowable in full in this year even though certification has been provided for 5 years.
11. In result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 07th August, 2017.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 07/08/2017
R. Naheed *
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date
1. Draft dictated on 12/06/2017 PS
&
02/08/2017
2. Draft placed before author 12/06/2017 PS
3. Draft proposed & placed before .2017 JM/AM
11 ITA No. 3918/Del/2014
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 07.08.2017
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 07.08.2017 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.