Income Tax Appellate Tribunal - Pune
Mahaveer Steel Industries Ltd.,, Pune vs Assessee on 18 September, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " B", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
I.T.A. No. 1512/PN/08 & 1222/PN/10
(Asstt. Years: 2005-06 & 2006-07)
Mahavir Steel Industries, .. Appellant
E-24, MIDC, Bhosari
Pune.
PAN AABCM 1744K
Vs.
Asstt. Commissioner of Income-tax
Range-9, Pune .. Respondent
Appellant by: Shri R G Nahar
Respondent by: Shri H.C. Leuva
ORDER
PER G.S. PANNU, AM
Both the captioned appeals relate to the same assessee involving common issues, therefore, we find it expedient to pass a common order for the sake of convenience and brevity.
2. W e shall first take up assessee's appeal in ITA No 1512/PN/08 pertaining to the assessment year 2005-06. This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-III, Pune dated 18.9.2008 which, in turn, has arisen from an order dated 27.12.2007 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short "the Act")
3. The Ground No. 1 raised in this appeal relates to the disallowance of Rs 5,00,000/- made by the Assessing Officer out of software improvement expenses. The facts, in brief, are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed an amount of Rs 5,00,0000/- as revenue expenditure under the head software 2 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune improvement expenses for software purchased from M/s Global Ware Systems & Software Solutions. Before the Assessing Officer it was stated the impugned expenditure was claimed as revenue expenditure because the software became obsolete very soon due to rapid changes in technology, and the advantages derived from software, therefore, could not be said to be giving an enduring benefit. The Assessing Officer rejected the above explanation of the assessee as according to him as per the provisions of the Act read with relevant Income-tax Rules 'computer including computer software' was classified as an 'asset' which was entitled to claim depreciation @ 60%. In this view of the matter, the Assessing Officer treated the impugned expenditure of Rs 5,00,000/- incurred by the assessee for acquisition of software as capital in nature and accordingly disallowed the same, simultaneously allowing depreciation @ 60%. Aggrieved by this, assessee took up the matter in appeal before the Commissioner of Income- tax (Appeals).
4. Before the Commissioner of Income-tax (Appeals), the assessee submitted that the software obtained was related to streamline all the areas of day to day operations of the assessee, viz. Accounts, Purchase, Sales and production operations and therefore the advantages derived cannot be called as an enduring benefit in any capital field and that is the reason why the same has been claimed as revenue expenditure. It was contended that it did not bring into existence any new asset. Reliance was placed on the following decisions:
a. Madras Auto Services P. Ltd. 233 ITR 469, b. Good Year India Ltd v ITO 73 ITD 189, c. Business Information Processing Services v ACIT 73 ITD 304, d. Indian Ginning & Pressing Co. Ltd. V. CIT 252 ITR 577.
After considering the submissions of the assessee, the Commissioner of Income-
tax (Appeals) justified the order of the Assessing Officer observing thus:
"The submission is considered. It is evident from the submission of the appellant that the amount of Rs 5,00,000/- has not been spent in respect of minor modification of the existing software, rather the expenditure has been spent for complete replacement of the existing software by a new software and the expenditure so incurred is going to give the assessee not only extra benefits but the benefits so obtained are also of enduring nature. Further, the inclusion of the software in the list of items on which depreciation is allowable as per I.T Rules shows that expenditure on purchase of software has to be treated as capital expenditure. Accordingly, the AO is held to be justified in treating the amount of 3 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune Rs 5,00,000/- as capital expenditure and making net addition of Rs 2,00,000/- after allowing depreciation. His action in doing so is upheld."
Still aggrieved, the assessee is in further appeal before us.
5. Before us, learned Counsel for the assessee, at the outset, submitted that the impugned expenditure was not allowed as a revenue expenditure, but the assessee has been allowed depreciation at the prescribed rate and ultimately assessee would be entitled to write-off the expenditure over a period of time. Therefore, without conceding on the issue of legal proposition, the said Ground was not seriously pressed for prosecution. As a result thereof, we have deemed it fit and proper to uphold the action of the Commissioner of Income-tax (Appeals) and accordingly, assessee fails on this Ground.
6. The next Ground relates to disallowance of Rs 4,01,890/- under section 14A of the Act. On a scrutiny of Profit & Loss account, the Assessing Officer noticed that assessee had claimed expenditure on account of interest for an amount of Rs1,6,34,509/-. The Assessing Officer further observed that assessee had made long term investment in shares for Rs 98,04,444/- with the intention of earning exempt dividend income. On being required by the Assessing Officer as to why the interest attributable to earning of the exempt dividend income be not disallowed in proportion to the long term investments made, it was submitted by assessee that the additional long term investment in shares made during the relevant year was of only Rs 25,00,000/- and the funds for this were generated from the dividend, profit on sales of investment and also out of its business profits. Referring to section 14A of the Act, the Assessing Officer observed that the expenditure incurred for the purpose of earning an income which is exempt is not to be allowed. The Assessing Officer was of the view that since assessee had not maintained separate pool of funds for its activity related to long term investment in shares on which it was earning exempt dividend income, it could not be said that the borrowed funds have not been utilized for making the investments. He worked out the average of interest per annum on the total funds 4 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune at the disposal of the assessee at 3.59% and applying this rate to the amount of total long term investment of Rs 98,04,444/-, interest attributable to long term investment was estimated at Rs 3,51,980/-. Further, the administrative expenses incurred by assessee in earning the above mentioned exempt dividend income was estimated by the Assessing Officer at Rs 50,000/-. Accordingly, a total of Rs 4,01,980/- was disallowed by the Assessing Officer by invoking the provisions of section 14A of the Act.
7. In appeal before the Commissioner of Income-tax (Appeals) it was contended that the total investment by way of long term investment in shares was Rs 98,04,444/-; that total interest free funds available was Rs 22,72,39,937/- (comprised of share capital of Rs 1,46,25,000/-, Reserves and surplus of Rs 21,26,14,931/-; and the profits earned of Rs 17,56,67,037/-) which showed that enough interest free funds were available for investment in shares. After considering the submissions of the assessee, the Commissioner of Income-tax (Appeals) confirmed the disallowance of Rs 4,01,980/- made by the Assessing Officer under section 14A of the Act, observing thus:
" After careful consideration, I am not inclined to accept the contention of the appellant. Although the appellant has contended that no borrowed funds have been utilised for making investments in the shares the fact that all the funds of the appellant are kept in a common hotch-potch goes against the claim of the appellant. In absence of any segregation of the funds and on account of appellant's failure to bring any material on record in order to substantiate its claim, I hold that the AO is justified in working out interest expenditure attributable to the earning of dividends by applying the average rate of interest and disallowing the same u/s 14A of the I T Act. As regards estimation of administrative expenses of Rs 50,000/- incurred for the purpose of earning dividends, I find that the estimation is in tune with the investments made and therefore, the same is held to be reasonable.
In view of the aforesaid, I see no reason to make any interference in the action of the AO in making disallowance of Rs 4,01,980/- u/s 14A. His action in doing so is upheld and the disallowance is confirmed."
Not being satisfied with this order of the Commissioner of Income-tax (Appeals), assessee is in appeal before us.
8. Before us, the learned Counsel for the assessee has submitted that the lower authorities have erred in making the disallowance since there is no material to suggest that any interest bearing funds have been utilized for the purposes of making long term investment in shares. It is further pointed out that similar disallowance made by the Assessing Officer in the assessment year 2006-07 has 5 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune been deleted by the Commissioner of Income-tax (Appeals) following the ratio of a judgment of the Hon'ble Bombay High Court in the case of CIT v Reliance Utilities & Power Ltd. 313 ITR 340 (Bom). It had been contended that the material on record shows that there are sufficient interest-free funds available and in any case, assessee has both interest-free and interest bearing funds, but since the interest-free funds are enough to cover the long-term investment in shares, as per the Hon'ble High Court, a presumption would arise that such long term investment in shares has been made out of interest-free funds available with the assessee. Following such reasoning laid down by the Hon'ble jurisdictional High Court, the impugned addition sustained by the Commissioner of Income-tax (Appeals) is unsustainable, as it cannot be deduced that any interest bearing funds have been utilized for the investment in shares.
9. On the other hand, the ld Departmental Representative, appearing for the Revenue, defended the orders of the authorities below by placing reliance on the same in support of the case of the Revenue.
10. We have carefully considered the rival submissions. In this case, both the authorities below have concluded that the entire funds of the assessee are in a common hotchpotch and there is no segregation of funds of the assessee for its activity related to the long term investments. The assessee does not maintain a separate pool of funds for its activities related to long term investments and its normal business activities. Under these circumstances, the point that is required to be ascertained is as to whether it can be said that the assessee has incurred any expenditure on account of interest for the purpose of earning exempt income represented by the dividend on the long term investment in shares, so as to invite the disallowance under section 14A of the Act. The Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) held that if there were funds available both interest-free and interest bearing, then a presumption would arise that the investments made are out of interest-free funds generated or available with the assessee, provided interest-free funds were sufficient to cover the 6 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune investments. In the present case, it is clearly established that the total investment by way of long term investment in shares of Rs 98,04,444/- is covered within the level of interest-free funds available with the assessee comprising of the share capital of Rs 1,46,25,000/-, Reserves and Surplus of Rs 21,26,14,931/- as also profits generated for the year of Rs 17,56,67,037/-. Under these circumstances, the assessee is justified in claiming a presumption that the investments in question are out of interest-free funds generated or available with it and, therefore, no part of interest expenditure can be said to have been incurred for the purposes of earning exempt dividend income, following the reasoning laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra). As a result thereof, we find no justification for upholding the disallowance of Rs 4,01,890/- made by the Assessing Officer invoking the provisions of section 14A of the Act. As a result thereof, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the addition of Rs 4,01,890/-. Thus, on this Ground the assessee succeeds.
11. The next ground relates to disallowance of Rs 14,92,750/- out of brokerage expenses. The assessee had claimed expenditure of Rs 78,14,622/- on account of brokerage which included an amount of Rs 14,92,750/- claimed to have been paid to Shri B. D. Gavi in connection with the contract of MSEB. Enquiries made by the Assessing Officer revealed that Shri B D Gavi was rendering some general nature of liasioning services for its business with MSEB etc. and the expenses incurred by Mr B D Gavi were of the nature of speed money which, as per the Assessing Officer, was prohibited by law and therefore disallowable as per Explanation to section 37(1) of the Act. It was submitted by the assessee that there was a direct nexus between the business of the assessee company and the amount paid for the services being rendered by Mr B D Gavi and therefore the amount paid to him as brokerage qualified as business expenditure. After considering the submissions of the assessee, the Assessing 7 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune Officer observed that there was no written agreement entered into by the assessee with Shri B D Gavi and therefore, it was not clear as to what was the exact nature of services Shri Gavi was required to render to the assessee; that Shri Gavi failed to furnish evidence in support of his claim that he hired employees from time to time as per the requirement; that Shri Gavi claimed expenses on consultancy charges of Rs 6,60,220/- out of gross commission receipts of Rs 14,92,750/- and credited only net commission receipts of Rs 8,32,530/- to his Profit & Loss account for which Shri Gavi could not furnish any detail or evidence; that Shri Gavi was not in possession of any supporting evidence for his claim of expenses, rather in his statement recorded on oath, he stated that considering the cut-throat competition in liasoning business, he was required to incur the expense for which it was not possible to maintain bills/vouchers. Based on these factual aspects, the Assessing Officer held that as per provisions of Explanation to section 37(1) of the Act, expenses incurred in connection with services prohibited by law cannot be allowed as deduction and accordingly, he disallowed the amount of Rs 14,92,790/- being brokerage charges paid to Shri B D Gavi and added to the income of the assessee.
12. In appeal before the Commissioner of Income-tax (Appeals), the assessee reiterated the submissions as made before the Assessing Officer in support of its claim of brokerage expenses of Rs 14,92,790/-. After considering the submissions of the assessee, the Commissioner of Income-tax (Appeals) perused the list of commission payments made to 98 commission agents totaling to Rs 78,14,622/-, and noted that in most of the cases, commission was paid at the rate of Rs 100 / MT while in respect of Shri B D Gavi such commission was paid at the rate of Rs 700 / MT. On being required to explain this disparity in commission payment to Shri G D Gavi assessee explained that the rate of brokerage and commission depended upon the nature of services availed from a particular broker. However, the assessee was not able to explain as to what distinct service was obtained from Shri Gavi so as to justify higher payment of 8 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune brokerage to him. As per the Commissioner of Income-tax (Appeals), it was also admitted by the assessee that the terms and conditions for payment of commission were not supported by any written agreement. On the basis of these facts, the Commissioner of Income-tax (Appeals) held that the assessee has not been able to establish the reasonableness and genuineness of the payment of Rs 14,92,750/- made to Shri B D Gavi as brokerage. The Commissioner of Income-tax (Appeals) further held that the failure of the assessee to establish the reasonableness of payment of brokerage at higher rate to Shri B. D Gavi coupled with the failure of Shri Gavi to substantiate the expenses incurredfor earning consultancy charges as well as his admission that in liasoning business, he is required to incur certain expenses for which it is not possible to maintain bills/vouchers, justified the action of the Assessing Officer in disallowing the expenditure. However, looking to the fact that assessee has obtained services of Shri B D Gavi, the Commissioner of Income-tax (Appeals) finally held that it would be reasonable to allow brokerage at the rate at which commission was paid by assessee to other brokers. Accordingly, brokerage of Rs 2,13,250/- was directed to be allowed at the rate of Rs 100 /MT which resulted in sustenance of disallowance at Rs 12,79,500/- against which assessee is in appeal before us.
13. Before us, the learned Counsel for the assessee vehemently argued that there was no justification on the part of the Commissioner of Income-tax (Appeals) to have partly sustained the disallowance out of brokerage/commission. It has been pointed out that part allowance of the claim by the Commissioner of Income-tax (Appeals) itself shows that he was satisfied that services have been rendered by the recipient and, therefore, part disallowance is unsustainable. It has also been pointed out that the assessee has paid brokerage to as many as 98 different parties as per the details placed at pages 46 to 48 of the Paper Book and to some of the parties the rate of brokerage is even higher than that paid to the disputed party, namely, Shri B D Gavi. It was also contended that in the immediately past assessment year 2004- 9 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune 05 the assessee has paid brokerage/commission to Shri B D Gavi as per details placed at page 46 of the Paper Book and the same has been allowed as such by the Assessing Officer in the assessment finalized under section 143(3) of the Act. Therefore, for the year under consideration, the Assessing Officer is not justified in hold that the claim was not allowable. The learned Counsel referred to invoking of Explanation to section 37(1) of the Act by the Assessing Officer and submitted that there was no material to hold that the expenses claimed to have been incurred by B D Gavi in discharge of services to the assessee was in any manner prohibited by law. It was pointed out that Shri B D Gavi was examined by the Department and merely because he could not explain certain details of the expenses in relation to the job entrusted by the assessee, it cannot be inferred that he incurred expenditure on an activity not permissible in law. The gross commission paid by the assessee to Shri B D Gavi was Rs 14,13,754/- and the examination of the said person revealed that he had claimed expenses against such income of Rs 6,60,220/- while computing his total income. The factum of Shri B D Gavi not properly explaining some of the expenses claimed by him, cannot be interpreted to mean that any expenditure has been incurred by the assessee which is impermissible in law so as to invite the disallowance as per Explanation to section 37(1) of the Act.
14. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the order of the Commissioner of Income-tax (Appeals) in support of the case of the Revenue. According to the learned Departmental Representative, the Assessing Officer rightly disallowed the expenditure since the assessee could not establish the reasonableness and genuineness of the payment of brokerage to Shri B D Gavi at a higher rate. Moreover, the failure of Shri B D Gavi to explain the nature of expenditure incurred while performing the services to the assessee, creates a doubt that the said person has spent money an activity prohibited in law so as to justify the disallowance in terms of Explanation to section 37(1) of the Act.
10 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune
15. We have carefully considered the rival submissions. In this case, the assessee is stated to be in the business of manufacture of rolled structural steel products etc. For the purposes of effecting sales, the assessee has incurred expenditure by way of brokerage/commission to various parties. The claim made out by the assessee is that such parties have rendered services for effectuating sales of the assessee. The total expenditure claimed on account of brokerage was Rs 78,14,622/- which included an amount of Rs 14,92,750/- paid to one Shri B D Gavi. The expenditure by way of payment to Shri B D Gavi has been disallowed on the ground that recipient has incurred expenses and/or rendered services to the assessee, which are prohibited by law and thus, invoking the provisions of Explanation to section 37(1) of the Act, an amount of Rs 14,92,750/- has been disallowed. As per the Assessing Officer, there was no written agreement with Shri B D Gavi and in absence of the same, it was not clear as to what nature of services were rendered. However, we find that the said Shri B D Gavi has been examined by the Department and he has explained the services rendered. The Asassessing Officer was not satisfied with his explanation on the ground that Shri B D Gavi could not produce evidence of certain expenses claimed to have been incurred by him for the purpose of rendering services to the assessee. It was explained that Shri B D Gavi has rendered services in relation to the sales effected to MSEB. The said Shri B D Gavi also confirmed rendering of service to the assessee in this regard and in fact as per the written submissions of the assessee which have been reproduced in para 6.2 of the assessment order, it was explained that Shri B D Gavi was liasoning with MSEB on behalf of the assessee and the said party, i.e. MSEB had issued an identity card as the authorized person of the assessee company for entering the MSEB premises from time to time. On consideration of the aforesaid factors as also the ultimate conclusion of the Commissioner of Income-tax (Appeals) that there was "no denial of the fact that the appellant has obtained services of Shri B D Gavi", we find it fair and proper to infer that indeed services 11 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune were rendered by Shri B D Gavi to the assessee. In fact the payment to Shri B D Gavi in the immediately preceding assessment year 2004-05 was also a subject matter of scrutiny assessment under section 143(3) of the Act without any adverse comments. Under these circumstances, the plea of the Assessing Officer that no services had been rendered by Shri B D Gavi is untenable. In so far as the argument that Shri B D Gavi has incurred expenses/rendered services which are prohibited by law is concerned, we find that the same is based on mere surmises and conjectures. In fact, said argument of the Assessing Officer has been negatived by the Commissioner of Income-tax (Appeals), because he has partly allowed the expenditure at a rate which has been normally paid by the assessee to other brokers. In any case, the case made out by the Assessing Officer to invoke Explanation to section 37(1) of the Act, in our view, is devoid of any factual support and is therefore untenable.
16. In so far as the part sustenance of addition by the Commissioner of Income-tax (Appeals) is concerned, on this aspect also we find no justification for his action. We have perused the detail of brokerage/commission paid to other parties placed at pages 43 to 45 of the Paper Book and find that in certain cases the rate of brokerage is even higher than that paid to Shri B D Gavi. The part disallowance sustained by the Commissioner of Income-tax (Appeals), in our view, is misconceived and is on mere surmises and is, therefore, unsustainable. In this view of the matter, we set aside the order of the Commissioner of Income- tax (Appeals) and direct the Assessing Officer to allow the entire claim of Rs 14,92,750/-. Thus, assessee succeeds on this Ground.
17. In this manner, appeal of the assessee for assessment year 2005-06 is partly allowed.
18. We now take up ITA No 1222/PN/2010 pertaining to the assessment year 2006-07. Ground No. 1 raised in this appeal also relates to the disallowance of Rs 63,500/- made by the Assessing Officer out of software improvement expense. We have dealt with similar Ground in the assessee's appeal for the 12 ITA Nos 1512/PN/08, 1222/PN/10 Mahavir Steel Inds.Ltd., Pune assessment year 2005-06, where the assessee has not seriously disputed the said Ground. Accordingly on the parity of reasoning given in this order, we dismiss this Ground of the assessee.
19. The next issue agitated by the assessee in this appeal relates to the disallowance out of brokerage expenses. We find that similar Ground has been raised by the assessee for the assessment year 2005-06 where we have discussed this issue in detail. On similar parity of reasoning, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the disallowance of Rs10,80,000/-. The assessee succeeds on the Ground.
20. In the result, both the appeals of the assessee are partly allowed.
Decision pronounced in the open court on this 31st day of May 2011.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune: Dated: 31st May, 2011
B
Copy of the order is forwarded to :
1. Mahavir Steel Industries Ltd., Pune
2. The ACIT R-9, Pune
3. The CIT(A)-III, Pune
4. The CIT-V Pune
5. The D.R, 'B' Bench, Pune
"True copy"
By order
Assistant Registrar
ITAT, Pune Benches, Pune
Pune