Income Tax Appellate Tribunal - Mumbai
Cox And Kings (India) Ltd, Mumbai vs Assessee on 20 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "C",MUMBAI
BEFORE SHRI B.R. MITTAL (JM) & SHRI B. RAMAKOTAIAH (AM)
ITA No. 2560/Mum/2010
(A.Y. 2004-05)
Dy.Commr. of Income-tax-1(1), M/s. Cox & Kings (I) Ltd.,
R.No.579, Aaykar Bhavan, Grindlays Bank Bldg.,
M.K. Road, Mumbai-400 020. 270/272, Dr. D.N. Road,
Vs. Mumbai-400 001.
PAN: AAACC1921B
Appellant Respondent
ITA No. 2600/Mum/2010
(A.Y. 2004-05)
M/s. Cox & Kings (I) Ltd., Asstt.Commr. of Income-tax-1(1),
Grindlays Bank Bldg., Aaykar Bhavan,
270/272, Dr. D.N. Road, M.K. Road, Mumbai-400 020.
Mumbai-400 001. Vs.
PAN: AAACC1921B
Appellant Respondent
Department by Shri Devi Singh.
Assessee by Shri Rajan R.Vora, Ms.Sheetal Shah &
Shri Chetan Noval.
Date of hearing : 20-09-2011
Date of pronouncement : 30 -09-2011
O R D E R
PER B.R. MITTAL (JM) These cross appeals are filed by department and assessee for assessment year 2004-05 against order of Ld. CIT(A) dt. 29.1.2010 disputing the deletion of additions made by AO in the appeal filed by the department and disputing the confirmation of additions made by AO in the appeal filed by the assessee.
2. Firstly, we take up appeal filed by the department being ITA No. 2560/M/2010 for our consideration.
2 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
3. In ground No. 1 of the appeal, department has disputed in deleting the adjustment made u/s. 92CA(3) of the Act amounting to Rs. 29,16,954/- on the basis of order passed by Transfer Pricing Officer.
4. The relevant facts are that assessee is a company engaged in the business of travel and tour and foreign currency exchange business, income from studio etc. The AO made reference u/s. 92CA(1) of Income Tax Act to Transfer Pricing Officer for computation of arms length price in relation to international transactions detailed by assessee in audit report in Form No. 3CEB.
5. The Transfer Pricing Officer stated that assessee is a part of Cox and Kings an established travel company in the world which has offices in U.K., USA and Japan. The principle services offered by company are Destination management, Outbound tourism, Business travel etc. M/s. Cox & King Ltd., UK holds 36% share holding in assessee-company. In the report, the assessee has identified M/s. Cox & Kings (Japan) Ltd., Japan, Cox & Kings Ltd., UK and Cox & Kings, USA as three associated enterprises. The Transfer Pricing Officer has given in his order dt. 4.12.2006, a copy of which is annexed to the assessment order, the details of transactions entered into by assessee with its three associated enterprises. The Transfer Pricing Officer stated that assessee had given extra credit period to its associated enterprises as compared to transaction with unrelated parties (non associated enterprises). The Transfer Pricing Officer considered that average rate of interest paid by assessee to bank for various borrowings is @15% per annum. He stated that non receipt of bills from the Associated Enterprises within the average credit period of 49 days, leads to blockage of funds and correspondingly more interest payment to banks on the borrowings made by assessee for its working capital requirements. However, assessee contended that credit period extended to both related and unrelated parties is purely on the merits of the volume of business given by them, seasonly requirement of fund for services to be rendered and profit margin. The interest cost is factored while quoting to Associated Enterprises. It was also contended that the business volume generated during the year with related parties generated substantial business i.e. 72% compared to the business given to unrelated parties i.e. 28%. It was also 3 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
contended that business given by related parties is more secured as there are no bad debts. The Transfer Pricing Officer after considering the above submission of the assessee and considering the rate of interest of 15% arrived at a sum of Rs.29,16,954/- as interest on account of excess credit period given by assessee to its associated enterprises. Accordingly AO made said addition to the income of the assessee. Being aggrieved, assessee filed appeal before First Appellate authority.
6. Before Ld. CIT(A), assessee filed written submission which have been stated by Ld. CIT(A) at pages 3 & 4 of the impugned order, which is as under:
"At the outset it was submitted that since the rate of commission earned on the transactions with AE is far more than that of non AEs, no adjustment under TP provisions is justified.
Without Prejudice, the TPO has compared the transactions only with two unrelated parties i.e. both in Spain (M/s. Iberogat and M/s.Catai Spain) and decided that the normal credit period available of 49 days is a yardstick for comparing the transactions with AEs.
The action of the TPO in concluding that the appellant should allow identical credit period to all the agents is not justified. TPO should evaluate the decision from the point of view of the businessmen and TPO should have consider several factors before making any decision:
• Volume of business • Regularity of business • Risk of bad debts • Rate of commission earned • Past history It was submitted that the business given by the associate enterprises is' 72% and unrelated enterprise is only 28%. Thus, the business from the AEs is 3 times more than that of the non AEs. Therefore, transaction with two isolated parties with small business cannot be used as a yardstick for comparing the Arms Length price. Therefore, transactions with two parties cannot be treated as held to be comparable.
Further, the rate of commission earned from AEs is 26.71 % as against 18.50% from non AEs. It is submitted that the cost relating to excess credit period is being factored while quoting the tour cost to AEs and this gets reflected in the better margins earned in case of AEs.
The TPO has assumed average credit period of 49 days and applying the rate of interest @ 15% p.a. computed that by not collecting the receivables in 4 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
time, the appellant has ended up paying excess interest to the banks on various borrowings. The statement showing computation of the rate of interest chargeable by the TPO, with reference to the transactions with AE'.s was submitted before me. On perusal of the statement, it could be seen that the highest rate of interest chargeable by the AO would be 7.85%. As already submitted, the appellant earns commission at a rate higher by 8.21% in respect of the AEs than the non AEs. Thus, the appellant already offered to tax more commission (8.21% -- 7.85%) then the interest expenditure.
Without prejudice to the above, it was submitted that while working out the credit period, the advances received from customers or AEs has not been taken into account by the TPO. If the same is considered, the credit period worked out by the TPO gets changed substantially. The working calculation of interest is submitted by appellant. If the advances received from the parties is considered the disallowance should be restricted as below after taking into account the advances received from the AEs.
Cox & Kings,UK Rs. 6,65,570/ -
Cox & Kings USA Rs.2, 92,598/-
Cox & Kings ,Japan Rs. 15,36,774/-
.........................
TOTAL Rs. 24,94,942/-
.
It was submitted that the, Hon'ble CIT(A) for A.Y. 2003-04 has restricted the disallowance to the extent of only the excess of average credit granted beyond 69 days was treated as excessive and proportionate interest was added u/s. 92CA(4).
Further, it was submitted that the disallowance of interest is not justified since the effect of excess credit period granted to the AEs is already considered while arriving at the price of the tour, which is evident from more commission income from AEs than non AEs. It has been also justified by the appellant that even if extra credit period is granted to the AEs, the same is offsetted by the higher profit margin. It has been also submitted that there is no loss to the revenue since the appellant has earned more profit than the payment of interest.
It was further submitted that if the effect of the high volume of business (72% as against 28% by non AEs) provided by the AEs is factored into, the addition made by the AO could not be just fied. As has been held by various Tribunals in several cases, including the recent case of Sony India (P) Ltd. 114 lTD 488 (Del), when the effect of a particular factor could not be quantified on scientific or accurate basis, the same could be estimated on ad hoc basis. So if 5 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
we further consider the impact of the volume of business provided by the AEs, the addition as made by the AO is not justified"
7. The Ld. CIT(A) after considering the above submission of the assessee deleted the said addition made by AO vide Para-6 of the impugned order which reads as under :
"I have considered the order passed by the TPO u/s 92CA(3) as well as Lbove submissions made by the Appellant during the course of hearing. In the year under consideration, the TPO has compared the transactions with Associated Enterprises in UK, USA and Japan with two parties, Catai Spain and Iberojet. The TPO has worked the average credit period in uncontrolled transactions at 49 days and accordingly, he calculated interest and made addition u/s 92CA(3) of the Act.
6.1 As has been held in the Appellant's own case for A.Y 2003-04 to compare the like transactions, the appellant was asked to submit full details of transactions with the two unrelated parties i.e Catai Spain and Iberojet entered into during the year and also the average credit period availed by them. This was compared with the entire transactions with AEs during the year and average credit period availed by these 3 AEs. Further, it is also important to take into account the advances received from the parties while working out the credit period.
6.2. The Appellant has also brought to my notice that the average profit earned on transactions with AEs is 27.71% while that from Non AEs is 18.50%. Thus, the difference the rate of commission earned from AEs and that of non AEs is 8.2 1%. Appellant submitted a statement showing computation of the rate of interest chargeable by the TPO, with reference to the transactions with AEs. On perusal of the statement, it is observed that the highest rate of interest chargeable by the AO on a proportionate basis is 7.85% whereas the extra commission earned by the Appellant in respect of AEs as compared to non AEs is 8.21% which shows that Appellant is already offered more tax on commission (8.21% -- 7.85%) then the interest expenditure 6.3. Further, I am of the considered view that, when we are comparing the profitability of the business, we have to take totality of all the factors and not isolated individual aspect of business, which contributes to profit from activity. Accordingly, the comparison of margins with AEs & others and adjustment if any under TP has to be made after considering the volume of business, regularity of the business, risk of business, rate of commission and the profitability of business.6 ITA Nos.2560-2600/Mum/20
M/s.Cox & Kings (I) Ltd.
Therefore, on careful examination of the material on record, I hold that the weighted average credit period allowed by the TPO of 49 days is correct it is also a fact that the appellant has earned more commission then the interest expenditure calculated on average credit period of 49 days, which means that the appellant has already offered more tax on commission. Thus taking a holistic view, there remains no case for adjustment."
Hence Department is in appeal before us.
8. At the time of hearing, Ld. DR relied on the order of AO and whereas Ld. AR submitted that the same very issue has been considered by Tribunal in assessee's own case for assessment year 2002-03 in ITA No. 982 and 1937/M/2007 vide order dt. 29th August, 2010 and again the same issue was considered by Tribunal for assessment year 2003-04 in ITA No. 3751 & 4165/M/07 vide order dt. 28.1.2011 and referred to pages 24 to 40 of the paper book for the order of assessment year 2002- 03 and pages 41 to 53 of the paper book for assessment year 2003-04 which are the copies of the said orders of the Tribunal. He submitted that in the assessment year under consideration, Ld. CIT(A) has justified the excess credit period granted to Associated Enterprises and thereafter deleted the addition made by AO on the basis of order of TPO. He submitted that order of Ld. CIT(A) be confirmed. In rejoinder, Ld. DR submitted that in the earlier assessment years, Tribunal restored the issue to the file of AO and accordingly the matter could be restored to AO for his fresh adjudication following the earlier orders of Tribunal.
8.1. We have considered the submissions of Ld. Representatives of the parties and orders of the authorities below. We have also considered the earlier orders of Tribunal for A.Y. 2002-03 and 2003-04 (supra) placed at pages 24 to 40 of paper book relating to assessment year 2002-03 and pages 41 to 53 of the paper book relating to assessment year 2003-04 and orders of the authorities below. We observe that in both assessment years the Tribunal remanded back the issue to the file of AO for his fresh adjudication in accordance with law after considering all factual aspects as well as arguments advanced by assessee on the issue involved. In view of above, we restore this issue to the file of AO for his fresh consideration after 7 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
setting aside the orders of authorities below with a direction that he will decide the same after giving due opportunity of hearing to the assessee and considering such evidences as may be placed by the assessee before him. Hence ground No 1 of the appeal taken by department is allowed for statistical purposes.
9. Ground No.2 of the appeal taken by the department is as under :
"Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to treat the entire amount of advertisement expenditure of Rs.2,22,84,651/- as revenue expenditure."
10. This ground of appeal is also connected with ground nos.1 & 2 of the appeal filed by the assessee, which are as under :
"1. erred in confirming disallowance of advertisement expenditure of last quarter of financial year 2003-04 of Rs.2,22,84,651 on the basis of date of release of advertisement by observing that the advertisement expenditure was not pertaining to the year under consideration.
2. failed to appreciate that having accepted that expenditure on advertisement was incurred during the year and the expenditure was of revenue in nature, the same should have been allowed as deduction during the year under consideration.
11. The relevant facts are that the assessee claimed advertisement expenditure of Rs.2,22,84,651/- in the income-tax return as deduction of expenses stating as under:
"Advertisement Expenses incurred during the year but deferred in the books of accounts."
12. During the course of assessment proceedings, the AO asked the assessee to submit details along with relevant bills and to justify the claim how the said amount of Rs.2,22,84,651/- is revenue expenditure, particularly when it is not debited in the P & L account. The assessee filed its explanation vide letter dated 30-11-2006. The contents of their submissions have been stated by the AO at page 3 of the 8 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
assessment order. It is relevant to state that the assessee stated that it had incurred the advertisement expenses to create market for its product/services. During the previous year relevant to the assessment year under consideration, as part of market strategy adopted during earlier year, it created certain special advertisement campaigns and also tried to popularize tours under certain catchy themes like 'Duniya Dekho' and Bharat Dekho. It was stated that at the time of finalizing the accounts, the management decided to treat this expenditure as 'deferred revenue expenses' and to write it off over a period of 5 years and accordingly a proportionate amount was charged to the current year's profit. Since the advertisement expenditure had been incurred by the assessee in the current year, it is claimed as deduction as per provisions of Income-tax Act. By incurring such expenses, it cannot be said that any tangible asset had been created. Hence, the said expenditure cannot be treated as capital expenditure. The AO did not accept the contention of the assessee and considered that the expenditure had been incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business and, therefore, it is properly attributable to capital and is of the nature of capital expenditure. The assessee has created a brand image throughout the country, which is not a tangible asset but certainly it is a kind of intangible asset in the nature of goodwill. In view of above, the AO considered the advertisement expenditure of Rs.2,22,84,651/- as capital expenditure. Being aggrieved, the assessee filed appeal before the ld. CIT(A).
13. The ld. CIT(A), after considering the submissions of the assessee, has stated that this issue is old and had been examined at length in appeal in earlier year. The ld. CIT(A) has stated that in his order for assessment year 2003-04 the test of enduring benefit is not only the criteria to hold the expenses as capital one but the entire facts and circumstances have to be considered. The ld. CIT(A) has stated that in his view the expenditure incurred by the assessee on advertisement is on revenue account for efficiently carrying on the business. The ld. CIT(A) has stated that there is no dispute that the expenditure had been incurred only for publicizing the services rendered by the assessee. Therefore, the AO was not correct to disallow the advertisement expenditure merely on enduring benefit to create goodwill over a period of time. He further observed that there is no provision for amortization of 9 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
revenue expenditure in the Income-tax Act, as the revenue expenditure is to be allowed in toto. The ld. CIT(A), after considering the orders of his predecessor for assessment years 2002-03 and 2003-04 in assessee's own case, held that the expenditure on advertisement and publicity was of revenue nature and was an allowable business expenditure in the facts and circumstances of the case. However, the ld. CIT(A) has stated that as in earlier years, the expenditure allowable has to be computed by allowing expenditure of last quarter of assessment year 2003-04 but disallowing expenditure of the last quarter of assessment year 2004-05 based on the date of the release of the advertisements. The ld. CIT(A) has stated that as per the details provided by the assessee, the expenditure of Rs.2,22,84,651/- has been incurred in the last quarter of assessment year 2004-05 and accordingly he has directed the AO to allow the expenditure of Rs.2,22,84,651/- in succeeding year i.e. assessment year 2005-06, but has held that the assessee is entitled to deduction of Rs.53,65,475/- being the advertisement expenditure incurred in the last quarter for assessment year 2003-04. Hence, the assessee as well as the department are in appeal before the Tribunal.
14. At the time of hearing, the ld. D.R. referred to the write-up given at the time of hearing of the appeal and submitted that this issue is covered by the order of ITAT of the earlier assessment year against the department and, therefore, he relies on the order of AO. However, the ld. A.R. referred to pages 24 to 40 of paper book, which is a copy of ITAT's order dated 20-08-2010 in assessee's own case in ITA No.982/Mum/2007 for assessment year 2002-03 and also referred to pages 41 to 53 of paper book, which is a copy of ITAT's order dated 28-01-2011 in assessee's own case for assessment year 2003-04, and submitted that the said issue was decided in favour of the assessee by the Tribunal.
15. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of the authorities below. We have also gone through the earlier orders of the Tribunal for assessment years 2002-03 and 2003-04 (supra). We observe that the Tribunal, after considering the case of the Hon'ble Apex Court in the case of DCIT vs. Core Health Care Ltd. (298 ITR 194) and the decisions of various High Courts viz., (i) CIT Vs Brilliant Tutorials Pvt. Ltd. 291 ITR 399 (Mad), (ii) Bhor 10 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
Industries Ltd. 264 ITR 180 (Bom) (iii) Silicon Graphics Systems (I) Pvt. Ltd. 106 TTJ 152 (Del) etc. held that advertisement expenditure incurred by assessee to create a brand image with enduring benefit is allowable as revenue expenditure and held that even if assessee was writing off the expenditure over a period of time, the AO was not justified to disallow the claim of the assessee on the ground that the assessee had amortized the said expenditure and claimed deduction to 1/5th of the total amount claimed. The Tribunal held that the expenditure incurred by the assessee is allowable as revenue expenditure as there is nothing on record to show that the said expenditure was incurred for procuring business for the next year. The Tribunal, relying on the decision of Hon'ble Apex Court in the case of Sassoon David vs. CIT (118 ITR 261), held that expenditure may be incurred voluntarily and for promoting the business for earning profits and the assessee can claim deduction even though there was no necessity to incur such expenditure.
16. Since the facts in the years under consideration and the reasons given by the AO to make disallowance and the reasons given by the ld. CIT(A) to delete the addition made by the AO in respect of the expenditure under consideration are similar to assessment years 2002-03 and 2003-04, respectfully following earlier orders of the Tribunal in assessee's own case, we uphold the order of the ld. CIT(A) to hold that the said expenditure of Rs.2,22,84,651/- claimed by the assessee in the assessment year under consideration is revenue expenditure. Therefore, we direct that the said expenditure incurred by the assessee in the assessment year under consideration is allowable as deduction in the assessment year under consideration. However, we modify the order of ld. CIT(A) that the assessee is entitled for deduction of Rs.53,65,475/-, being the advertisement expenditure incurred in the last quarter for assessment year 2003-04 in the assessment year under consideration. We observe that the Tribunal has allowed the advertisement expenditure incurred by the assessee in the respective assessment years as revenue expenditure, the said deduction of Rs.53,65,475/- incurred by the assessee in the preceding assessment year was allowable in the said assessment year and not in the assessment year under consideration. In view of above, we reject ground no.2 of the appeal taken by the department and allow grounds no.1 and 2 taken by the assessee subject to our 11 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
above observation in respect expenditure of Rs.53,65,475/- relating to the expenditure incurred in assessment year 2003-04, which has been allowed by ITAT in the appeal for relevant assessment year 2003-04.
17. Ground no.3 of the appeal taken by the department is as under :
"Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of bad debts to the extent of Rs.82,64,594/- without appreciating the fact that the assessee had failed to furnish the particulars of the claim and justification for write off before the AO."
18. Ground nos.3 & 4 of the appeal taken by the assessee are connected with ground no. 3 of the appeal of the department, which are as under :
"3 erred in confirming the disallowance of sundry debits balance written off of Rs.8,75,505 without appreciating the fact that after the amendment to section 36(1)(vii), write off of irrecoverable debts, is sufficient compliance for allowability of deduction under section 36(1)(vii) r.w.s. 36(2);
4. failed to appreciate the alternate contention of the appellant that sundry debt balance written off should have been allowed as a business loss under section 37(1) or section 28 of the Act."
19. The relevant facts are that the assessee had written off Rs.91,40,099/- as irrecoverable debts and irrecoverable sundry balances and the break-up is as under :
Bad debts on account of business Rs.52,38,227/-
Non receipt of business advance Rs.26,01,000/-
Non receipt of staff advance Rs. 4,25,367/-
Other bad debts Rs. 8,75,505/-
Total Rs.91,40,099/-
12 ITA Nos.2560-2600/Mum/20
M/s.Cox & Kings (I) Ltd.
20. The AO has stated that the assessee has failed to submit details to justify deduction of bad debts. However, the assessee gave a list vide letter dated 30-11- 2006 showing the names of the parties and amounts but failed to give complete addresses, details about the years in which it was credit to P & L account as required u/s. 36(1)(vii), copies of bills, correspondence, etc. The AO has further stated that the said bad debts claimed by the assessee also included the claim for TDS certificates not received of Rs.1,18,542/- + Rs.24,356/- , i.e., aggregate amount of Rs.1,42,898/-. Therefore, the AO disallowed the claim of the assessee and added the same to the total income of the assessee of Rs.91,40,099/-.
21. Being aggrieved, assessee filed appeal before the first appellate authority. The assessee filed its written submissions which has been summarized by the ld. CIT(A) at pages 10 to 12 of the impugned order and we consider it relevant to reproduce the same:
"9.3 The Appellant has submitted details of amounts written off. The appellant's submissions is summarized as under :
"Bad debts of Rs.52,38,227/-:
It was submitted that the amount, which has been written off during the year mainly, pertains to old dues or the dues in respect of which, no receipt is anticipated. Thus, considering the facts of the case, in the opinion of the management, no useful purpose will be achieved by carrying forward these debtors, keeping in mind the cost of litigation and business relation potentials. Accordingly, the Appellant has written off the amount as bad debts.
As has been held by the Courts, if management is of the opinion that debts/advances are irrecoverable and write off in the books, it is sufficient compliance.
Reliance is placed on the following decisions :
• Jethabhai Hirji Vs. CIT 120 ITR 792 (Bom) • Sarangpur Cotton Mfg. Co. Vs. CIT 143 ITR 166 (Guj) • Kamla Cotton Co. Vs. CIT 226 ITR 605 (Guj) • DCIT Vs. Gobind Glass Industries Ltd. 110 Taxman 109(Ahd Trb) (Mag) 13 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
• General Insurance Corporation 254 ITR 204 (Bom) The Hon'ble Mumbai Tribunal in the case of ITO Vs. Anil H. Rastogi 86 ITD 193 (Mum) ™ has held that after the amendment w.e.f. 1.4.89, write off of debts is sufficient to claim debt as bad. Further, reliance is also placed on the Spl. Bench decision of the Mumbai Tribunal in the case of Oman International Bank Saog 100 ITD 285, where it has been held by the Spl. Bench that after amendment to sec. 36(1)(vii) w.e.f. 1.4.2989, it is not obligatory on the part of the Appellant to prove that the debt written off by him is indeed a bad debt for the purpose of allowance u/s. 36(1)(vii).
It was submitted that the Appellant has taken steps to recover the debts. In case of Bharat Heavy Electricals Ltd., the Appellant has filed legal suit and has recovered the amount of bad debt in A.Y. 2005-06. The amount recovered in A.Y. 2005-06 is offered to tax in that year.
Thus, it is respectfully submitted before your Honour that since the amount of debt already offered to tax in A.Y. 2005-06, disallowance on account of bad debt made in the year under consideration would amount to double taxation of the same amount which is against the principle of equality. In view of this, it is respectfully submitted that the amount of bad debts should be allowed to the Appellant.
Non recovery of advances:
As regards the non recovery of advances given are concerned, it was submitted that the advances were given to various parties during the course of business and for the purpose of business hence, non receipt of the advances is a loss incurred during the course of the business and the same should have been allowed as a business loss u/s.28 or u/s.37 of the Act. In this respect reliance is placed on the following decisions :
• Minda HUF Ltd. 101 ITD 191 (Del. Trib.)
• T.J. Lalwani 78 ITR 176 (Bom)
• National Rayon Corporations (1986) 17 ITD
1208 (Bom)
• A.W. Figgis Co.Pvt. Ltd. 254 ITR 63 (Cal)
• Dhanalaxmi Corporation 46 ITR 1031 (Mad)
The Appellant submitted that without appreciating the details filed, the Learned AO disallowed the claim made 14 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
on the ground that it is not possible to consider the claim of the Appellant in respect of bad debts in accordance with the provisions of sec. 36(1)(vii) of the Act. The AO also ignored the fact and the decision of the Mumbai Special Bench in Oman International's case 100 ITD 285.
The appellant placed reliance on the decision of the Delhi High Court in the case of Morgan Securities & Credits Pvt. Ltd. dated December 7, 2007 292 ITR 339 that, after the amendment in sec. 37(1)(vii), once the debts which are irrecoverable as per the management perception are written off, that is sufficient for allowability of claim.
It was also submitted that it has been held in the case of Star Chemicals (Bombay) (P) Ltd. 11 DTR 311, that once the Appellant has written off the debt as bad debt, requirement of section 36(1)(vii) is satisfied and the claim for deduction of bad debt is allowable.
Further, the same view has been confirmed by the Bombay High Court decision in case of CIT - 4 vs. Omprakas B. Salecha IT Appeal No.11 of 2007 that, when it is written in the books as bad debt, the same is in compliance with the requirement of section 36(1)(vii) and the claim for deduction of bad debt is allowable.
Non recovery of staff advances:
As regards advances given to the staff members are concerned, it is submitted that the same are given as per the prevailing norms of the industry. Certain amounts were given to the staff members for payment to various authorities on behalf of clients, which were subsequently recovered from the clients and offer to tax. Thus, the amount claimed as bad debts on account of non receipt of advances given to the staff should be allowed as bad debts because the conditions prescribed u/s. 36(2) are complied with. Without prejudice, it is submitted that even if your Honour is of the view that the claim cannot be allowed u/s.36(1)(vii), the same should be allowed as a business loss u/s. 37(1) or sec. 28. In this respect, we are relying on the decision of the Hon'ble Mumbai Tribunal in the following cases where, the Hon'ble 15 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
Tribunal has held that advances given to staff, which remains unrecoverable, are to be allowed as business loss :
• Madison Communications Pvt. Ltd. [OTA
Mp/1093/M/2005 dated 13.3.2007]
• Cheminova India Ltd. [ITA No.1948/M/2003
dated 31.8.2006]
In view of the above, it was submitted that, as has been held by various Courts and Tribunals, it is management's bona fide belief and decision of a debt becoming bad and accordingly, the deduction should be allowed to the Appellant for claim of bad debts. Thus, the Appellant in this case is fulfilling all the conditions, whether as per the old law or as per the amended law and since the amount written off during the year, same are allowable as deduction u/s. 36(1)(vii) or alternatively u/s.28 of the IT Act.
It was submitted that all these debts and advances were taken into account in earlier years therefore, since these amounts are now not recoverable, the same have been written off as bad debts/irrecoverable advances and accordingly, allowable u/s.36(1)(vii) or alternatively u/s.28 r.w.s. 37 of the IT Act.
It was submitted that in A.Y. 2002-03 and A.Y. 2003-04, the Learned CIT(A) has allowed the ground of the Appellant on bad debts. Thus, in view of the order for the 16 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
preceding year, it is requested before your Honour to kindly allow the bad debts of Rs.91,40,099/-.
Further, during the course of hearing the Appellant has submitted the party wise facts of each party."
22. The ld. CIT(A) considered above submissions of the assessee and vide para 10 of the impugned order gave relief to the assessee of Rs.82,64,594/- and confirmed the disallowance of Rs.8,75,505/-. The relevant part of the order of ld. CIT(A) is as under :
"10.1 To support its propositions for the allowability of bad debts written off, write off of advances non recoverable and write off of staff advances, the Appellant relied upon various decisions including the decision of the Bombay High Court in case of Star Chemicals (Bombay) (P) Ltd. (supra), Mumbai Special Bench decision in case of Oman International's (supra), Delhi High Court in case of Morgan Securities & Credits Pvt. Ltd. (supra), Bombay High Court in case of Omprakash B Salecha (supra).
10.2 On perusal of details and submissions of the Appellant, I agree with the contention of Appellant and allow the bad debts of Rs.52,38,227/- receivable from the customers as the conditions prescribed u/s. 36(1)(vii) r.w.s. 36(2) are complied with.
10.3 As regards the non recovery of business advances also, I agree with the argument of the Appellant that it represents write off of business advances and accordingly loss arising from the business operation & is allowable u/s. 28 of the Act.
Accordingly, I delete the amounts of Rs.26,01,000/-.
10.4 As regards the advances given to staff members are concerned, the Appellant's main arguments were that the advances paid to staff was as per prescribed norms of industry to facilitate the staff member for payment of fees etc. to various authorities & accordingly is a business advance. I agree with the contention of the Appellant that non recovery of advances given to staff under business necessity is an allowable business expenditure. Accordingly, I hold that the amount Rs.4,25,367/- should be allowed as a business loss u/s.28.
17 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
10.5 As regards the other write off of bad debs, since no particulars/details of its nature were placed on record to justify the claim and completion of the conditions prescribed u/s.36(1)(vii) r.w.s. 36(2), I am not agreeable to allow the amount of Rs.8,75,505/- as expenditure. Accordingly, I confirm the order of AO and disallow an amount of Rs.8,75,505/-.
Thus the Appellant gets relief of Rs.82,64,594/-
(Rs.52,38,227 + 26,01,000 + 4,25,367). This ground of appeal is partly allowed."
Hence, the department as well as the assessee are in appeal before the Tribunal.
23. During the course of hearing, the ld. D.R. submitted that the sum of Rs.52,38,227/-, to the extent of bad debts claimed, relates to sales to customers, income of which had been offered for tax in the earlier years. Hence, to that extent, the said order of the ld. CIT(A) is justified. He submitted that for the balance amount of Rs.26,01,000/- claimed as business advance and of Rs.4,25,367/- claimed as staff advance, the AO is justified to disallow the claim of the assessee as bad debts as the said advances had never been offered for tax in earlier years. He further submitted that during the course of assessment proceedings, the assessee was asked to give details in respect of above amounts, which assessee failed to do so. He submitted that the assessee failed to discharge its onus with documentary evidence, hence the order of AO be confirmed by reversing the order of ld. CIT(A) in respect of above amounts. The ld. D.R. further submitted that in respect of disallowance of Rs.8,75,505/-, the ld. CIT(A) is justified to disallow the claim of the assessee as no particulars/details to justify the claim were furnished even before the CIT(A).
12.1 On the other hand, the ld. A.R., in respect of deletion of Rs.82,64,594/-, supported the order of ld. CIT(A). He further referred to page 58 of the paper book and submitted that it contains the names of parties from whom the amount aggregating Rs.8,75,504/- was claimed as bad debt. The ld. A.R. further submitted that at page 57 of the paper book, the assessee has also given the names of parties from whom business advances aggregating Rs.26,01,000/- and also the names of the staff to whom advances were given aggregating Rs.4,25,367/- were not received.
18 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
The ld. A.R. submitted that since the assessee could not recover the amount from said parties, the details of which are given at pages 56 & 57 of the paper book, the said amount became irrecoverable/bad debts and, therefore, is allowable as deduction u/s.36(1)(vii) or, alternatively, u/s.28 read with sec. 37 of the I.T. Act. The ld. A.R. further submitted that advances to staff members was given for payments to various authorities on behalf of clients, which were subsequently recovered from clients and offered to tax. The ld. A.R. further submitted that similar issue was considered by the Tribunal in the assessee's own case for assessment year 2002-03 vide order dated 20-08-2010 (vide paras 25 to 28 of the said order at pages 39 & 40 of paper book) and therefore, the total claim of the assessee is allowable as bad debt.
24. We have carefully considered the orders of authorities below and the submissions of the ld. Representatives of the parties. We have also considered the cases which are cited by the assessee in its chart filed with the paper book.
25. We observe that as far as claim of Rs.52,38,227/- on account of business is concerned, the names of the parties are given at page 57 of the paper book, and at the time of hearing, the ld. D.R. conceded that to that extent the bad debt as claimed by the assessee is allowable because it represents sales to customers and income of which was offered for tax in earlier years.
25.1 Now, coming to Rs.26,01,000/- in respect of non receipt of business advances given to 4 parties, details of which are placed at page 57 of the paper book, we observe that the ld. CIT(A) has stated that it was non-recovery of business advances and, therefore, the claim is allowable u/s.28 of the I.T. Act. During the course of hearing, the ld. D.R. has not brought any material on record that the said claim of the assessee is not genuine, save and except stating that the assessee could not give specific details which were called by the AO. In view of the above, we do not find merit in the contention of the ld. D.R. and confirm the order of ld. CIT(A) in respect of deletion of Rs.26,01,000/- made by the AO. Thus, the said claim of the assessee has rightly been allowed by the ld. CIT(A).
19 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
26. Now, coming to the staff advances of Rs.4,25,367/-, which has been allowed by the ld. CIT(A), we observe that the assessee has given break-up of the said amount at page 57 of the paper book under the heading "Non-receipt of staff advances". Further, in the write-up filed by ld. A.R., at the time of hearing, it is stated that staff advances were given as per prevailing norms of the industry. It is further stated that certain amounts were given to staff members for payment to various authorities on behalf of clients which were subsequently recovered from the clients and offered to tax. We observe that save and except above statement, the assessee has not furnished the details as to how much amount was recovered from the clients and if advances were given to staff members for incurring expenditure on behalf of the clients and the same was recovered from them, how the said amount could be shown under the head "Advance to staff". On the other hand, the assessee should have shown the balance amount under the head "Advance given to staff" and if the same is not recovered, it could be claimed as bad debt and/or expenditure u/s.37 of the Act but no details to that extent have been filed. Therefore, we observe that in the absence of any specific details as to how that amount of advances given to the staff has become bad debt and/or expenditure to be allowed as expenditure, we hold that the action of the AO to disallow the claim of the assessee, i.e., Rs.4,25,367/- is justified. Accordingly, we reverse the order of the ld. CIT(A) to that extent by confirming the action of AO.
27. Now, we take up the balance amount of Rs.8,75,504/- which has been disallowed by the ld. CIT(A) by confirming the action of AO and is being disputed by the assessee in its appeal. We observe that the assessee has merely stated the names of the parties and the amount against each of them by placing the details at page 58 of the paper book but no reasons/explanations have been given by the assessee in the write-up filed before us; and/or before the authorities below. Therefore, we hold that the ld. CIT(A) is justified to disallow the said claim of the assessee on the ground that no particulars/details of its nature have been filed by the assessee on record to justify the claim and to comply with the conditions prescribed u/s.36(1)(vii) read with sec. 36(2) of the Act. Hence, we do not find any reason, in the absence of material on record, to interfere with the order of the ld. CIT(A).
20 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
28. In view of above, we allow ground no.3 of the appeal of the department in part by confirming the disallowance of Rs.4,25,367/- out of Rs.82,64,594/- allowed by the ld. CIT(A). However, we confirm the order of ld. CIT(A) by rejecting ground nos.3 and 4 of the appeal of the assessee by confirming the disallowance of s.8,75,505/-.
29. In ground nos.5 to 8 of the appeal filed by the assessee, the assessee has disputed the interest on advances given to associate companies of Rs.1,46,34,434/-.
30. The relevant facts as stated by the AO are that in respect of advances aggregating Rs.30,65,355/- given to certain parties, mentioned in para 9.1 of assessment order, the assessee was asked to give copies of bills to justify that advances were given for the purpose of business. The AO stated that the assessee had given interest free advances on the one hand and was paying huge interest on certain secured and unsecured loans varying from @12 to 15.5%. He has stated that in the absence of details given by the assessee, the interest @ 15.5% on Rs.30,65,355/- comes to Rs.4,75,130/- and disallowed the same.
30.1. He has further stated that the assessee has given one deposit of Rs.12 lakhs to a party named Ramarest. The assessee stated that it is an old payment and hence address of the party is not traceable. The AO did not accept the said contention of the assessee and treated the said amount as interest free advances and disallowed the interest of Rs.1,86,000/- by calculating @ 15.5% on Rs.12 lakhs.
30.2. The AO has stated that the assessee has given various loans/advances to M/s. Tulip Hotels Pvt. Ltd., a sister concern, the opening balance was Rs.24,95,93,814/- and closing balance was Rs.28,10,47,484/-.The AO has stated that the assessee charged interest @ 11% and that, too, on the balance at the end of the month. He has stated that, on the other hand, the assessee borrowed funds from ICICI @ 15.5% and City Bank @ 14%. The AO, after considering the difference in rate of interest by making calculation as mentioned in paras 10.3 and 10.4 of the assessment order, held that the difference in concessional rate of interest to sister concern comes to Rs.1,39,73,304/-. Hence, the AO disallowed the aggregate amount of interest of Rs.1,46,34,434/-.
21 ITA Nos.2560-2600/Mum/20M/s.Cox & Kings (I) Ltd.
30.3. Being aggrieved, the assessee filed appeal before the ld. CIT(A).
31. On behalf of the assessee, it was contended that it had given interest free advances for the purpose of business and under commercial expediency and, therefore, no disallowance of interest u/s.36(1)(iii) could be made. That assessee placed reliance on the decision of the Hon'ble Apex Court in the case of S.A. Builders Ltd. (288 ITR 01) and also on the decision of the Hon'ble jurisdictional High Court in the case of Reliance Utilities & Power Ltd. (313 ITR 340).
32. The ld. CIT(A), after considering the submissions of the assessee, has held that on similar issue his predecessor for assessment years 2002-03 and 2003-04 upheld the disallowance of interest. Therefore, ld. CIT(A), following the said orders of preceding assessment years, confirmed the action of AO. Hence, assessee is in appeal before the Tribunal.
33. On behalf of assessee, Ld. AR submitted that assessee filed all the details in respect of the advances given to various parties but same were ignored and Ld. CIT(A) by following orders of his predecessors for earlier assessment years confirmed the disallowance made by AO. He submitted that in the earlier years, disallowance of interest was in respect of interest free advances given to another party namely M/s. Ezeego and whereas in the assessment year under consideration the parties are different. To substantiate his submission, Ld. AR referred to pages 148 and 149 of the Paper Book. Ld. AR also referred to pages 117 to 119 of the Paper Book which contain the facts submitted before the Tribunal. It is relevant to state that in the said statement of facts read with page 148 of the Paper book, assessee has stated that advances given to various parties on which disallowance of interest has been made by authorities below are as under:
a) In respect of advances of Rs. 30,65,354/- for which disallowance of interest of Rs. 4,75,130/- has been made by AO and confirmed by Ld. CIT(A), the details are as under:
S. No. Name of party Amount Remarks
22 ITA Nos.2560-2600/Mum/20
M/s.Cox & Kings (I) Ltd.
1. Dilip G. Jhangiani 8,30,138/- He is our legal advisor
rendering professional
services. There was amount
receivable towards services
taken by him from company.
These amounts were to be
adjusted against his fees once
we received the bills.
2. Shamit Kajumdar 8,78,682/- - Do -
Associates
3. Suyog 1,50,000/- Advance to supplier
4. L.P. Singh 12,06,534/- He is chief operating officer of
our IBT division. These were
advances taken by him in the
course of operation till the
time all vouchers and
approvals are submitted to
accounts department the same
are shown advance to staff.
b) In respect of advance of Rs. 12,00,000/- given to Ramarest for which disallowance of interest, the assessee stated that the said advances were given during the course of business for financial consultancy services to be rendered by the firm.
c) In regard to advances given to Tulip Hotel Pvt. Ltd., assessee stated that it charged interest @ 11% amounting to Rs.2,79,46,610/- on monthly closing balance. He further stated that over and above this, interest of Rs.
1,18,19,848/- and Rs. 71,05,004/- was also recovered in respect of unsecured loans obtained from DCB and ICICI bank respectively.
Hence, disallowance of interest has been made without appreciating the facts in correct perspective.
33.1. The Ld. AR further submitted that advances were given from mixed funds therefore disallowance is not in accordance with law. To substantiate his submissions, Ld. AR placed reliance on the decision in the case of S.A Builders Ltd. (supra) and decision in the case of Kandagiri Spinning Mills Ltd. 298 ITR 306 (Mad) etc. 23 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
33.2. On the other hand, Ld. Departmental Representative submitted that the facts as stated by Ld. AR have not been mentioned in the order of the authorities below. He further submitted that the matter could be restored to the AO for his fresh consideration on the basis of the facts as mentioned herein.
34. We have considered the submission of Ld. Representatives of the parties and the orders of the authorities below. We observe that Ld. CIT(A) has confirmed the action of AO to disallow interest aggregating Rs.1,46,34,434/- by following orders of his predecessors for assessment year 2002-03 and 2003-04. We observe that Ld. CIT(A) has not discussed the facts as are applicable to the assessment year under consideration specially in respect of advances aggregating Rs. 30,65,355/- given to various parties and advance of Rs. 12,00,000/- given to Ramarest as to whether the said advances were given by the assessee for business purposes. We also observe that Ld. AR has contended that assessee charged actually more interest from Tulip Hotels Ltd. than what assessee paid on the loans taken from ICICI and/or DCB. Considering the above facts and observing that Ld. CIT(A) has not passed a speaking order while confirming the action of AO, we consider it prudent to restore this issue to the file of Ld. CIT(A) for his fresh adjudication after considering relevant facts as may be placed before him and after giving due opportunity of hearing to the parties. Hence we set aside the order of Ld. CIT(A) on the above issue by allowing grounds No. 5 to 8 of the appeal of the assessee for statistical purposes.
35. In grounds No.9 to 11 of the appeal filed by the assessee, the assessee has disputed the order of Ld. CIT(A) in confirming the disallowance of interest of Rs. 9,47,888/- under section 14A of Income Tax Act by applying Rule 8D of I.T. Rules, 1962, by following the ratio laid down by Special Bench ITAT, Mumbai in the case of Daga Capital Management Ltd. 119 TTJ 289.
36. We have heard the Ld. Representatives of the parties and have perused the orders of authorities below. We observe that AO made adhoc disallowance of Rs. 26,96,012/- u/s. 14A of I.T. Act. However, Ld. CIT(A) made disallowance of Rs. 9,47,888/- by applying Rule 8D of I.T. Rules by following the Special Bench decision in the case of Daga Capital Management Ltd (supra). Since said decision of Special 24 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
Bench of ITAT has been reversed by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81, wherein it has been held that Rule 8D of I.T. Rule is prospective in nature and is applicable from assessment year 2008-09, we hold that action of Ld. CIT(A) was not justified to make aforesaid disallowance u/s. 14A of Income Tax Act by applying Rule 8D of Income Tax Rules as the said Rule 8D is not applicable to assessment year under consideration i.e. assessment year 2004-
05. Hence, we set aside the order of Ld. CIT(A) and restore the same to his file with a direction to decide it afresh as per law after considering such evidences as may be filed by the parties and after giving due opportunity of hearing by a speaking order. Therefore grounds No. 9 to 11 of the appeal of the assessee is allowed for statistical purposes.
37. In grounds No. 12 and 13 of the appeal filed by the assessee, the assessee has disputed the order of Ld. CIT(A) in not accepting the claim of assessee for grant of depreciation in respect of intangible asset of Rs. 95,36,727/- claimed before him.
38. It is relevant to state that claim of depreciation of Rs. 95,36,727/- was not claimed before AO and is taken first time before Ld. CIT(A). The assessee has stated that during the financial year 2002-03, it had taken over the foreign exchange business of Tulip Star Hotels Ltd. at 9 locations w.e.f. 1.10.2002 for the total consideration of Rs. 3.5 crores. This amount included Rs. 95,36,727/- being intangible assets in the form of data base of customers, contracts, approvals, licenses etc. and was recorded under the head "intangible assets" in the books. The assessee stated that it did not claim depreciation earlier but claimed from assessment year 2003-04 onwards. Assessee stated that Ld. CIT(A) asked Remand Report from AO but AO did not submit his Remand Report. Therefore, Ld. CIT(A) by following his order for assessment year 2003-04 did not allow depreciation on intangible assets as claimed by assessee.
39. The Ld. AR submitted that for assessment year 2003-04, assessee filed appeal before the Tribunal being ITA No. 3751/Mum/2007 and the Tribunal vide order dt. 28.1.2011after considering submission of assessee restored the issue to the file of AO 25 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd.
vide para-16 of the said order for his fresh adjudication in accordance with law. Ld. AR referred to pages 41 to 53 of the Paper book (relevant pages 48 to 51 of Paper Book) to substantiate his submission. He submitted that the matter could be restored to AO to decide the issue in accordance with decision of Hon'ble Apex Court in the case of Techno Shares & Stock Ltd. 327 ITR 323 and other decisions of ITAT on the above issue.
40. The Ld. Departmental Representative submitted that he has no objection to restore the issue to the file of AO by following earlier order of ITAT dt. 28.1.2011 (supra).
41. We have considered the submissions of Ld. Representatives of the parties and earlier order of Tribunal in assessee's own case for A.Y. 2003-04 (supra). Respectfully following the earlier order of Tribunal, we set aside the order of Ld. CIT(A) on the above issue and restore it to the AO for his consideration in accordance with law and after considering such material as may be placed before him. Needless to say that AO will give adequate opportunity of being heard to the assessee on the above issue and will pass a speaking order. Hence, Grounds No. 12 & 13 of the appeal of the assessee is allowed for statistical purposes.
42. In respect of grounds No. 14 of the appeal filed by the assessee in respect of levy of interest u/s. 234B of the I.T. Act, it is consequential and does not require any specific adjudication.
45. In the result, appeals of the department as well as assessee for assessment year 2004-05 are allowed in part.
Order pronounced on this 30th day of September, 2011.
Sd/- Sd/- ( B. RAMAKOTAIAH) (B.R. MITTAL ) Accountant Member Judicial Member Mumbai, Dated 30th September, 2011 Rj 26 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd. Copy to : 1. The Appellant 2. The Respondent 3. The CIT-concerned 4. The CIT(A)-concerned 5. The DR ' C' Bench True Copy By Order Asstt. Registrar, I.T.A.T, Mumbai 27 ITA Nos.2560-2600/Mum/20 M/s.Cox & Kings (I) Ltd. Details Date Initials Designation 1 Draft dictated on 23-09-2011 Sr.PS/ 2 Draft Placed before author 28.09.2011 Sr.PS/ 3 Draft proposed & placed JM/AM before the Second Member 4 Draft discussed/approved JM/AM by Second Member 5. Approved Draft comes to Sr.PS/ the Sr.PS/PS 6. Kept for pronouncement Sr.PS/ on 7. File sent to the Bench Sr.PS/ Clerk 8 Date on which the file goes to the Head clerk 9 Date of Dispatch of order