Income Tax Appellate Tribunal - Mumbai
Mahindra & Mahindra Financial Services ... vs Assessee on 11 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'I' MUMBAI
BEFORE SHRI D.MANMOHAN (VICE PRESIDENT) AND
SHRI N.K. BILLAIYA (ACCOUNTANT MEMBER)
ITA No. 2846/Mum/2007- A. Y- 2003-04
ITA No. 405/Mum/2008- A. Y- 2004-05
ITA No. 2969/Mum/2009- A. Y- 2003-04
M/s. Mahindra & Mahindra Financial The DCIT, Cir 6(3),
Services Ltd., Aayakar Bhavan,
Sadhana House, 2nd Floor, Mumbai-400 020
Behind Mahindra Towers, Vs.
570, P.B. Marg, Worli,
Mumbai-400 018
PAN-AAACM 2931R
(Appellant) (Respondent)
Appellant by: Shri S.R. Bhandari
Respondent by: Mrs. Sasmita Misra
Date of Hearing :11.07.2012
Date of pronouncement: 31.7.2012
ORDER
PER N.K. BILLAIYA (AM):
These three appeals are filed by the assessee against the separate orders of Ld. CIT(A) for assessment years 2003-04 & 2004-05. As these appeals involve almost connected issues, all these appeals are being disposed off through this consolidated order.
Firstly we will take ITA No. 2846/Mum/2007 - A.Y. 2003-04
2. The assessee has challenged the decision of the Ld. CIT(A) by raising following grounds of appeal:
"Being aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - XXVI, Mumbai, [CIT(A) for short] your 2 Mahindra & Mahindra Financial Services Ltd.
appellant submits the following grounds of appeal for Your Honours sympathetic consideration:
1. The learned CIT(A) erred in upholding the action of Assessing Officer of disallowing depreciation on leased assets to the tune of Rs.10,41,63,512/-.
The learned CIT(A) ought to have allowed the depreciation entirely based on the orders passed by the Honourable Income Tax Appellate Tribunal, Mumbai (ITAT)for Assessment Years 1999-2000 & 2000-01 in the assessee's own case.
Without prejudice to the above, the learned CIT(A) further erred in confirming the action of AO of disallowing Lease depreciation, disallowed depreciation for opening block as well, where as per the orders passed by the Honourable ITAT, lease assets capitalized till 31st March 2000 are allowed for depreciation claim. The depreciation claim on Lease assets capitalized till 31st March 2000 is Rs. 7,55,31,921/- and Principal component on same is Rs. 3,62,27,781/-.
Further, without prejudice to the above, since there are no distinguishable facts in the assets capitalized after 31st March 2000 (it being the date upto which the Honourable ITAT has allowed depreciation), the CIT(A) ought to have allowed the depreciation on the leased assets capitalized after the aforesaid date.
2. The learned CIT(A) further erred in confirming the treatment of UPS as electrical installation and not as an integral part of computer. Thereby allowing depreciation by applying rate of 25% instead of the rate of 60% and restricting the claim to Rs. 54,933 instead of Rs.2,19,744, u/s 32 of the Income Tax Act, 1961.
3. The learned CIT(A) further erred in confirming the treatment of software license as intangible assets and not as an integral part of computer. Thereby allowing depreciation by applying rate of 25% instead of the rate of 60% and restricting the claim to Rs. 2,55,000 instead of Rs.6,12,000, u/s 32 of the Income Tax Act, 1961.
4. The learned CIT(A) has further erred in confirming the treatment of creditors outstanding more than 3 years as income to the tune of Rs. 3,47,081/-, which were not approved by the management for write back for statutory and other reasons. In any case the claim of the parties still subsist and have to be honored at any time.
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5. The learned CIT(A) has further erred in confirming the disallowance of bad debts written off to the tune of Rs.1,29,86,013 without considering the fact that these debts were indeed bad and hence were allowable under Sec.36(2) of the Income Tax Act. Further, he ought to have accepted the fact that the aforesaid amount was part of the total amount of Rs.8,45,61,277 which was written off as bad and irrecoverable in the books of accounts and hence was entirely allowable.
5. The learned CIT(A) has erred in enhancing the income by disallowing the expenses incurred on commission and brokerage amounting to Rs.5,46,37,628, alleging that the said expenditure is not incurred wholly and exclusively for the purpose of business. On the basis of the facts and circumstances of the case, such enhancement of income is entirely unwarranted and hence needs to be quashed.
7. The learned CIT(A) further erred in initiating the penalty proceedings under Sec.271(l)(c) with respect the enhancement of income as referred in Ground No.7. He ought to have appreciated the facts that the assessee had neither concealed any income nor had it furnished any inaccurate particulars of income and hence there was no cause to initiate any penal proceedings.
3. Ground No. 1 relates to the decision of Ld. CIT(A) to confirm the findings of AO for disallowing depreciation on leased assets to the tune of Rs. 10,41,63,512/-.
4. The main contention raised by the assessee is entirely based on the orders passed by ITAT, Mumbai for assessment year 1999-2000 and 2000-01 in assessee's own case. During the course of assessment proceedings, while going through the depreciation chart enclosed alongwith Tax Audit report, the Assessing Officer found that the assessee had claimed depreciation to the tune of Rs. 10,41,63,512/- on leased assets. The AO sought explanation from the assessee as to why the entire depreciation claimed should not be disallowed as the leased transaction is a mere financing activity. For this preposisiton the AO relied upon the decision of Hon'ble Apex Court in the case of Sundaram Finance Ltd. Vs State of Kerala reported in 1966 AIR 1178 and also the decision of Apex Court in the case of Damodar Valley Corpn. Vs State of Bihar reported in 12 STC 101.
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5. In response to this query, the assessee replied that the claim of depreciation is as per the provisions of Sec. 32 of the Act as the assessee company is the legal and rightful owner of the leased assets and therefore entitled to depreciation on the basis of being the owner of the assets in the business of leasing. It was further submitted that the transactions cannot be treated as merely finance/loan transactions as the assets are purchased by the assessee company and are in the name of the assessee company. The assessee pointed out that the lease agreements entered by the assessee company with various parties which are in line with the model lease agreement circulated by the Association of Leasing and Financial Services Companies. The assessee highlighted that the concept of leasing involves a basic change in the financial attitude from that of a moneylender to that of an asset investor. In fact, the lessor deploys an asset and not merely money to generate income. The assessee relied upon the fact that it is a lease transaction and is brought out by all the documents and the lease agreements relevant to the transactions and therefore, the same has to be accepted as a genuine leasing transaction. The assessee further relied upon its own previous assessment wherein depreciation has been allowed by Ld. CIT(A). The assessee concluded that whether the lease is a financial lease or otherwise the eligibility for depreciation is to be adjudged on the basis of the relevant provisions of Sec. 32 of the Act. The twin-fall conditions laid down in Sec. 32 has been substantially complied with i.e. ownership and the assets being used for the purpose of business (leasing business) and therefore depreciation cannot be denied on the plea that the transaction is merely financing without taking into account the owner in law is the only person who is eligible to get depreciation under the provisions of the Income Tax Act.
6. After considering the submissions of the assessee, the AO relying upon various judgements exhibited in assessment order treated the lease 5 Mahindra & Mahindra Financial Services Ltd.
transaction as finance transaction and disallowed the depreciation of Rs. 10,41,63,512/-.
7. Before the Ld. CIT(A) the assessee reiterated its submission as made before the AO. After considering the submissions of the assessee, the Ld. CIT(A) observed that the vehicles stands registered in the name of the lessee and not in the name of lessor. It is the lessee who on its own cost insures the assets against all risks. In view of the above finding, the Ld. CIT(A) upheld the disallowance of depreciation. The Ld. CIT(A) further observed that the assessee has stated that the Tribunal has for the assessment year 1999-2000 has allowed the depreciation on leased assets to the assessee. Ld. CIT(A) pointed out that the ITAT has allowed depreciation on the ground that in A.Y. 1996-97 and 1997-98, the department has accepted the orders of Ld. CIT(A) wherein it was held that assessee is entitled to depreciation on leased assets. The Ld. CIT(A) concluded that the issue has not been examined on merits by the ITAT. Ld. CIT(A) further pointed out that similar issue came up for consideration in assessee's own case for A.Y. 2002-03 wherein the Ld. CIT(A) upheld the disallowance of depreciation on leased assets. Since issue was identical, the Ld. CIT(A) followed the findings of his predecessor in the appeal order for assessment year 2002-03.
8. Before us, the Ld. Counsel for the assessee argued that assessee is entitled for depreciation u/s. 32 and the decisions of lower authorities are on wrong facts. The Ld. Counsel further relied upon the decision of Tribunal in assessee's own case for assessment year 1999-2000 in ITA No. 4053/M/03, ITA No. 2325/M/04 for assessment year 2000-01 and ITA No. 7418/M/05 for assessment year 2002-03 and concluded that the same should be followed for the year under consideration as the facts in issue are identical with the facts in issue in the earlier assessment years cited hereinabove.
9. We have heard the rival submissions and perused the orders of the lower authorities and also the orders of Tribunal cited hereinabove and the Paper Book submitted by the assessee. Let us first consider a sample copy 6 Mahindra & Mahindra Financial Services Ltd.
of the Lease Agreement alongwith invoice , insurance and registration certificate submitted by the assessee , counsel submitted that all agreements are similar to this agreement , exhibited at page 20 to 36 of the Paper book. The invoice is in the name of Bhasker Balaji More and it relates to cost of one Mahindra Marshal vehicle fitted with Diesel Engine and the invoice value is Rs. 3,59,154/- dt. 21.5.1998. Exhibit-21 is the Insurance cover of United India Insurance Co. Ltd. , name and address of the insured is Mr. Bhaskar Balaji More. Exhibit-22 is the certificate of Registration of vehicle and the name of the registered owner is Mr. Bhasker Balaji More. However, there is a specific mention that the motor vehicle is subject to hire purchase agreement with Mahindra & Mahindra Financial Services Ltd. i.e. assessee.
After going through the agreement, we find that Clause-7 which relates to Insurance, the agreement provides that the lessee shall at its cost have the equipment insured under a comprehensive insurance policy for an amount equal to its full insurable value with an insurance company approved by the lessor and in the name of the lessor and shall keep such insurance in full force and effect during the term of this Lease Agreement.
In Clause-8 it is mentioned that the lessee shall at its own cost and expense at all times dutifully and faithfully follow the equipment manufacturer's recommendations as to use service and maintenance thereof.
Clause 12 relates to inspection and it is mentioned that the lessor and the banks/financial institutions to whom the assets covered by this agreement are hypothecated by the lessor shall have the rights at all reasonable times to enter upon any premises where the equipment covered under each schedule is believed to be and inspect and/or test the equipment and/or observe its use.
Most importantly clause -15 relates to Warrantees & Exclusions. At clause (b), the lessee acknowledges and agrees with the lessor 7 Mahindra & Mahindra Financial Services Ltd.
(i) That the equipment is of a size, design, capacity and manufacture selected by the lessee.
(ii) That the lessee is satisfied that the goods are suitable for its purposes.
(iii) That the lessor is not the manufacturer/dealer of the equipment
(iv) That having selected the equipment, the lessee has signed this agreement relying entirely on its own judgement and not on any statements made by the lessor or the agents or servants of the lessor or the supplier.
10. On perusal of the terms and conditions of the agreement highlighted herein above, we have no hesitation to hold that it is an agreement of finance lease and not operating lease. The question which is now to be decided is whether any depreciation can be allowed to lessor in case of the genuine finance lease. Allowability of depreciation is governed by Sec. 32. The twin conditions of ownership and user of asset for the purpose of business are required to be cumulatively satisfied so as to allow depreciation. The question is whether lessor satisfies the preliminary condition of being an owner of the asset in a case of finance lease. As highlighted by us that under clause-15 of the agreement it is the lessee who has chosen the type of equipment, the model and other special feature required and which are suitable for lessees' purposes. The role of the lessor is only to provide finance. The cost of insurances were borne by the lessee and also the cost of repairs and maintenance all risks and rewards incidental to the ownership, vests with the lessee alone. The title of the lessor in the asset is only symbolic. We also find that the facts of the present case are identical with the facts of the case decided by the Special Bench in the case of Indus Ind Vs ACIT reported in 135 ITD 165 wherein on identical facts, the Special Bench of ITAT, Mumbai has held that the transaction is simple advancing of loan , the authorities below were justified in rejecting assessee's claim for depreciation. The findings of the tribunal can be summarized in this paragraph, " In view of the above discussion, we answer question no.l in negative by holding that the agreement in question cannot be called as a financial lease agreement. It is so for the reasons discussed above that it is a simple case of 8 Mahindra & Mahindra Financial Services Ltd.
advancing of loan by the assessee to the lessee and the so called lease agreement, in the facts and circumstances of the present case, has been attempted to be used as a device to reduce tax liability of the assessee." The special bench finally concluded :
" We, therefore, sum up our conclusion as under- (et) If the conditions as laid down in the judgments of Asea Brown Boveri Ltd. (supra) and Association of Leasing & Financial Services Companies (supra) are satisfied in a lease agreement, it will be a case of finance lease and not operating lease.
(it) Only the lessee can be treated as owner of the asset in case of a finance lease. It is he who is entitled to claim depreciation as per law. No depreciation can be allowed to the lessor in such a case of a genuine finance lease.
(Hi) The facts and circumstances of the present case show that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers. There was, in fact, no genuine leasing of boiler, neither operating nor finance. In that view of the matter also no depreciation is admissible to the assessee-lessor"
Respectfully following the decision of the Special Bench (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A), the claim of the depreciation is accordingly rejected. Ground No. 1 with all its variants is accordingly dismissed.
11. Before parting, we have also gone through the decision of the Tribunal in assessee's own case for A.Yrs 1999-2000, 2000-01 and 2002-03. We find that in all these three appeals, the Tribunal has allowed the depreciation only on the ground that the Ld. CIT(A) has allowed depreciation in assessee's own case for A.Y. 1996-97 and 1997-98. We find that in none of these three appeals, the Tribunal has gone into the merits of the case. Further all these decisions of the tribunal were delivered prior to the decision of the special Bench of the Tribunal . Since we have discussed the facts in detail and we have also the benefit of the Special Bench decision of ITAT Mumbai (supra), 9 Mahindra & Mahindra Financial Services Ltd.
in our humble opinion, the decision of the Special Bench deserves to be followed and is accordingly followed.
12. Ground No. 2 relates to the depreciation claimed on UPS at the rate of 60% but allowed by the lower authorities at the rate of 25% treating UPS as electrical installation and not as an integral part of the computer.
13. During the course of assessment proceedings, the AO sought details on the claim of depreciation on electrical hardware and software license. The assessee filed detailed chart in respect of depreciation claimed on UPS. The assessee substantiated its claim of depreciation at the rate of 60% by stating that UPS is a device which is part of the computer system therefore eligible for depreciation as per the rate applicable for computer system. However, the claim of the assessee was rejected by the AO who was of the opinion that UPS is nothing but an electrical installation and not an integral part of the computer and therefore it is not eligible for depreciation as per the rates specified for electrical installations.
14. The matter was agitated before the Ld. CIT(A) but without any success.
15. Before us, the Ld. Counsel for the assessee strongly opposed the findings of the lower authorities and argued that computer cannot run without UPS and as such UPS are almost an integral part of the computer like printer, modem or scanner and therefore it is eligible for depreciation as per the rate prescribed for the computer.
16. The Ld. Departmental Representative strongly relied on the orders of lower authorities.
17. We have heard the rival submissions and perused the orders of lower authorities. We do not agree with the submissions of the Ld. Counsel that computer cannot run without UPS and UPS is almost an integral part of the computer. UPS have other uses also. UPS can be used with any electronic 10 Mahindra & Mahindra Financial Services Ltd.
device such as television set, DVD players etc. It cannot be said that UPS are only for computers whereas printers do not have any other use other than with the computer. However it is for the assessee to establish that the UPS have been purchased as part of the computer systems . Therefore , in the interest of justice and fair play we restore this issue back to the files of the AO .The AO is directed to verify that the UPS have been purchased only for the purposes of the computer systems and the assessee is directed to bring cogent material evidence on records to substantiate its claim that the UPS have been purchased only for the computer systems . The AO is directed to allow a reasonable opportunity of being heard to the assessee . Accordingly ground No. 2 is allowed for statistical purposes.
18. Ground No. 3 relates to treatment of software license as intangible assets and not as an integral part of computer. Thereby allowing depreciation at the rate of 25% instead of the claim of 60%.
19. While scrutinizing the details filed by the assessee, the AO found that the software licence is in the nature of right to use licence and hence form part of intangible assets qualifying for the depreciation at the rate of 25%.
20. Before the Ld. CIT(A) the assessee submitted that with effect from assessment year 2003-04 in Appendix 1 (Rule 5 of the I.T. Rules) "Table of rates at which depreciation is admissible: at Part A (III)(5) has been changed from "Computer" to "computer" including computer software". Note 7 to the table defines computer software as any computer programme recorded on any disc, tape, perforated media or other information storage device. The software used by the assessee falls within the aforesaid definition of computer and hence will form part of computer.
21. The Ld. CIT(A) did not agree with the submissions of the assessee and held that the AO has discussed the issue in details and therefore upheld the disallowance of excess depreciation claimed by the assessee.
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22. Before us, the Ld. Counsel reiterated what was submitted before the lower authorities. The Ld. Departmental Representative supported the orders of lower authorities.
23. On going through the observations on this issue by the AO, we find that the AO has not gone into details of the software purchased by the assessee. The assessee has exhibited the copy of invoice for the purchase of software at page-37 of the paper book. On going through the items mentioned in the invoice, in our opinion, the AO should have examined each and every item mentioned in the invoice vis-à-vis the business of the assessee. We therefore deem it fit to restore this issue back to the files of the AO with a direction that each and every item should be verified with the business of the assessee in the light of the finding of the Special Bench decision in the case of Amway India Enterprises Vs DCIT 111 ITD 112 (SB). Wherein the Tribunal thus held "The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field :
(i) Nature of Business of the assessee: It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment."............
" It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assessee would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An element of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital."
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This ground is allowed for statistical purposes.
24. Ground No. 4 relates to treatment of creditors outstanding more than 3 years as income to the tune of Rs. 3,47,081/-.
25. The facts at the time of the assessment proceedings show that there were certain creditors which were outstanding more than 3 years. The AO sought explanation from the assessee in respect of outstanding creditors and why they should not be taxed u/s. 41(1) of the Act, considering the same as cessation of liability. The assessee's submission was that the outstanding creditors more than three years were relatable to the customers who were paid the respective amounts by cheques. However, as the cheques were not presented to the bank within the time limit, cheques became stale and invalid. The assessee further submitted that as and when the customers will come for revalidation of cheque, the same would be done and therefore the liability still exists and therefore no addition can be made u/s. 41(1) of the Act. The assessee further elaborated his submission by stating that under provisions of Sec. 205C of the Companies Act, 1956 every company had to transfer amount outstanding for a period of more than 7 years to a fund called investor Education & Protection Fund. In other words, if the assessee did not pay these outstanding and the customer never approached, the assessee any way , had to pay this amount to the Government's investor fund. This explanation by the assessee did not find any favour from the AO. The AO relied upon the decision of the Hon'ble Bombay High Court in the case of CIT Vs Benett Coleman and Co. Ltd. 201 ITR 1021,1993 wherein the Hon'ble Court held that "where the assessee wants to contend that despite his own action of the nature indicated above the liability still survives, the onus will be on him to bring sufficient materials on record to satisfy the authorities concerned in that regard. The recovery of the amount was barred by limitation and hence, the claim was no more enforceable. Once this legal position was reached coupled with the intention of the debtor not to pay the amount, it amounted to a cessation liability."
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In view of the above, the AO added the unpaid liability of Rs. 3,47,081/- u/s. 41(1) of the I.T. Act, 1961.
26. When the matter was agitated before the Ld. CIT(A), the assessee reiterated its submission made before the AO. The Ld. CIT(A) after considering the facts of the case observed that a similar issue came up for consideration in assessee's own case for assessment year 2002-03 wherein the Ld. CIT(A) has upheld the action of AO. The Ld. CIT(A) further observed that the assessee has not produced any confirmation to substantiate it claim and confirmed the addition made by AO.
27. Before us, the Ld. Counsel for the assessee argued in the same line as was done before the lower authorities. He submitted that the liability still persists therefore, provisions of Sec. 41(1) of the Act are not applicable on the facts of the case.
28. The Ld. Departmental Representative strongly relied on the findings of lower authorities.
29. We have heard the rival submissions and perused the orders of lower authorities. On going through the chart submitted by the assessee in its paper book exhibited at page 39 & 40, we find that the total outstanding liability of Rs. 3,47,081/- relate to expenses which are in the nature of courier charges, FD interest, brokerage, NCD interest and other expenses. On perusal of this chart shows that the assessee has claimed these expenses and charged to its profits and loss account in F.Y. 1999-2000, The contention of the assessee was that as and when these customers come for revalidation of cheques, it will be done in the due course of time. We do not find any force in the statement because , since the order of the Ld. CIT(A) dt. 9.2.2007 more than 5 years has been elapsed , and even today , before us the Ld. Counsel has not brought a single material evidence to show that the cheques have been revalidated subsequently and the liability has been discharged , as the assessee has taken the benefit of claiming these expenses 14 Mahindra & Mahindra Financial Services Ltd.
in F.Y. 1999-2000 and now that the liability has been found not to be discharged. We do not find any reason to interfere with the findings of the Ld. CIT(A) accordingly ground No. 4 is dismissed and addition of Rs. 3,47,081/- is confirmed.
30. Ground No. 5 relates to the disallowance of bad debts written off to the tune of Rs. 1,29,86,013/-.
31. During the course of assessment proceedings, the AO found that the assessee has debited bad debts to the tune of Rs. 8,45,61,276.69. The assessee was asked to submit the details of bad debts written off and the nature of these debts alongwith the efforts made to recover of such debts with documentary evidences. In its reply, the assessee explained the nature of transaction. It was the contention of the assessee that since it operates in Rural and Semi-urban area in India where public domain information regarding credit worthiness of the customer is not available. Many of these are of agriculture background and do not have banking culture. Hence, the appraisal of the loan is based on personal discussions and not on documentation. This results into shortfall in repayments from the borrower. When the customer fails to deposit money on due date or fails to pay outstanding dues on receipt of cheque return advice, the Executives of the company follow up with the customers for recovery of outstanding dues. Sometimes, they fail to recover the outstanding amount. If the company executives do not find it proper to grant extension of time for repayment to the customers, they seek repossession of the asset financed. However, repossession is however, not the remedy for recovery in all cases because many a time's repossession of vehicles actually increases the cost to the company. The fact of writing off the outstanding amount is a common practice in the industry. As per the industry experience writing off and termination losses is inevitable for finance business. The AO considered the submissions of the assessee. The AO observed that on perusal of the details filed, the debts written off of the following parties are found to be pre- mature:
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1) M/s. V.K. Industries Rs. 51,20,596/-
2) M/s. V&C Tourist Company Rs. 24,02,050/-
3) M/s. Reunion Tractors Rs. 54,63,367/-
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Total Rs.1,29,86,013/-
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32. The AO sought explanation in respect of the aforesaid 3 parties. After considering the submission of the assessee, the AO observed that the assessee has not produced any details of efforts made to recover the above debts. Further the assessee has not submitted any details about the financial position of the debtor to say that the debtor is genuinely not in a position to pay debt. Thereafter, the AO relied upon the decisions of Kerala High Court in the case of Travancore Tea Estates Co. Ltd. Vs CIT (1192) 198 ITR 528 and the Hon'ble Calcutta High Court in the case of CIT Vs Coats of India Ltd.
(1998) 232 ITR 324 disallowed the debts written off all these three parties amounting to Rs. 1,29,86,013/-.
33. Before the Ld. CIT(A), the assessee relied upon the decision in the case of DCIT Vs Oman International Bank SAOG 100 ITD 285 (Bom)(SB) in which it is held that after the amendment w.e.f. 1.4.1989 to Sec. 36(1)(vii), it is not obligatory on the part of the assessee to prove that debt written off by him is indeed a bad debt for the purpose of allowance u/s. 36(1)(vii). The Tribunal held that the AO has to allow the claim in the year in which it has been claimed on the basis of the writing off the debt in the books of account." The Ld. CIT(A) after considering the facts and submissions observed that since the assessee has claimed the above bad debts, the onus is on the assessee to prove with evidence that the above bad debts have been claimed in accordance with the provisions of Sec. 36(1)(vii) r.w.s. 36(2) of the Act and as the assessee has not produced any such details, the Ld. CIT(A) confirmed the additions made by AO.
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34. Before us, the Ld. Counsel for the assessee reiterated that after the amendment w.e.f. 1.4.1989, the only obligation upon the assessee is to show that it actually written off the debts in the books of account.
35. We have heard the rival submissions and perused the orders of lower authorities and the paper book submitted by the assessee. We find that the contention of the Ld. Counsel for the assessee that post amendment to Sec. 36(1)(vii) is partly correct. However, Sec. 36(1)(vii) has to be r.w.s 36(2). Section 36(2)(i) provides that " no such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee". Reading both these sections together, we find that the assessee has not brought any material evidence on record to substantiate its claim in the light of the provisions of Sec. 36(2)(i). In the interest of justice and fair play, we deem it fit to restore this issue back to the file of AO. The assessee is directed to substantiate its claim in the light of the provisions of Sec. 36(2)(i). The AO is directed to verify and examine any such submissions/clarification submitted by the assessee after giving reasonable opportunity of being heard. Ground No. 5 is allowed for statistical purposes.
36. Ground No. 6 relates to enhancement done by the Ld. CIT(A) by disallowing the expenses incurred on commission and brokerage amounting to Rs. 5,46,37,628/- alleging that the said expenditure is not incurred wholly and exclusively for the purpose of business.
37. During the course of appellate proceedings, the Ld. CIT(A) noticed from the profit and loss account that the assessee has claimed commission and brokerage of Rs. 1032.92 lakhs on income from operations of Rs. 24654.79 lakhs as against commission and brokerage of Rs. 274.27 lakhs on income from operation of Rs. 18878.47 lakhs in the immediately preceding year. Since commission and brokerage increased substantially, the Ld. CIT(A) 17 Mahindra & Mahindra Financial Services Ltd.
asked the assessee to file the details of commission and brokerage alongwith copy of contract/agreement in respect of commission paid, rate of commission paid, percentage and partywise, evidence of services obtained and purpose for which commission was paid with confirmation, complete address of the parties with PAN. The Ld. CIT(A) further sought explanation from the assessee asking why commission and brokerage should not be disallowed in excess of which has been claimed last year in the ratio of sales which will result to enhancement of income.
The assessee submitted a detailed reply explaining the nature of business. The main contention of the assessee was that during the year under consideration, the percentage of brokerage and commission to the total disbursement of business of during the year is at 0.64% as against 0.24% in the immediately preceding year. The assessee further submitted that number of contracts have increased from 11327 to 161079 and the loan business disbursement increased from 116675 lakhs to 160985. The assessee further contended that all these details have been considered by the AO while completing the assessment for the year under consideration. The assessee claimed that all the payments have been made through cheques and are genuine expenditure incurred for the purpose of business and hence allowable u/s. 36 of the Act.
38. After considering the submissions of the assessee, the Ld. CIT(A) observed that the commission and brokerage during the year has increased by 376.61% whereas income from operations has increased only by 130.60%. The Ld. CIT(A) further observed that though the percentage of commission and brokerage vis-à-vis operational income or business disbursement comes to below 1% but when the expenditure by itself is compared the same is increased from 0.24% to 0.64% which means the expenditure of commission and brokerage during the year has increased by over 150% on the disbursement. The Ld. CIT(A) further analysed the details submitted by the assessee and observed that the assessee has failed to furnish the confirmations in respect of payments of commission at Rs. 4,41,56,021/-.
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The Ld. CIT(A) further found that in respect of parties from whom confirmations have been received, there is a difference of Rs. 38,88,596/- and in respect of Rs. 65,93,011/-, there are no PA Nos. of the parties. The Ld. CIT(A) went on to make the above disallowances from the total payment of commission and brokerage resulting into an addition of Rs. 5,46,37,628/-.
39. The assessee is aggrieved by this disallowance/enhancement made by the Ld. CIT(A). Before us, the Ld. Counsel for the assessee argued that each and every payment has been made through account payee cheque, wherever there was a liability to deduct tax, TDS has been made and deposited with the government. The Ld. Counsel further submitted that in the preceding 5 assessment years, there has been no addition made in respect of the claim of commission and brokerage. He further contended that the Ld. CIT(A) has not made enquiry in respect of the parties to whom commission and brokerage have been made.
40. The Ld. Departmental Representative strongly supported the findings of Ld. CIT(A).
41. We have considered the rival submissions and perused the orders of Ld. CIT(A) and also the paper book submitted by the assessee. From the chart exhibited at page-46 of the paper book, we find that the assessee has given details of payment of commission and brokerage from financial year 1997-98 till F.Y. 2008-09. We find that no addition had been made under this head upto financial year 2001-02 which means that this is the first year where additions have been made and that too in the appellate proceedings. On perusal of the order of the Ld. CIT(A) show that the assessee was not given a reasonable opportunity to explain its case. So much so that the assessee was not even given an opportunity to reconcile the difference in the amount of confirmation received from the parties which has resulted into an addition of Rs. 38,88,596/-. Further we find that the Ld. CIT(A) has simply disallowed Rs. 4,41,56,021/- in respect of parties from whom confirmations have not been received and Rs. 65,93,011/- in respect of parties whose PA Nos were 19 Mahindra & Mahindra Financial Services Ltd.
not available. Considering the facts and the circumstances in totality and also the year-wise chart filed by the assessee, in our humble opinion, this issue needs further verification . Therefore, in the interest of justice and fair play, we restore this issue back to the files of AO . Considering the nature of business and the volume of transaction and the total number of contracts entered during the year under consideration , it is suggested that the AO may restrict its verificaiton to the payment of brokerage and commission only of those parties where payment is made for more than one lakh , after giving a reasonable opportunity of being heard to the assessee . The assessee is directed to establish the identity of the payees with necessary details/evidences. The AO is further directed to verify the TDS details wherever it has been made. Ground No. 6 is allowed for statistical purposes.
42. Ground No. 7 relates to the initiation of penalty proceedings u/s. 271(1)(c) with respect to the enhancement of income as contested by ground No. 6. We find that this ground is pre-mature and deserves no adjudication accordingly it is dismissed.
43. In the result, the appeal filed by the assessee in ITA No. 2846/M/2007 is partly allowed for statistical purposes.
ITA No. 405/Mum/2008- A.Y. 2004-0544. Ground No. 1 relates to the decision of Ld. CIT(A) to confirm the findings of AO for disallowing depreciation on leased assets to the tune of Rs. 7,47,77,658/-. This ground is identical with the issue raised in ground No. 1 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 3 to 11. While deciding this issue in ITA No. 2846/M/07, we have taken the decision of Special Bench in the case of Indus Ind Vs ACIT reported in 135 ITD 165 wherein on identical facts, the Special Bench of ITAT, Mumbai. Respectfully following the decision of the Special Bench (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A), the claim of the depreciation is accordingly rejected. Ground No. 1 with all its variants is accordingly dismissed.
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45. Ground No. 2 relates to disallowance of Rs. 2,192/- towards earning of exempt income u/s. 14A of the Act.
46. During the course of assessment proceedings, the AO found that the assessee has invested in shares an amount of Rs. 4.60 lakhs. The assessee was asked why disallowance u/s. 14A should not be made. After receiving the reply of the assessee, the AO disallowed a sum of Rs. 2,192/- and added back to the income of the assessee.
47. Before the Ld. CIT(A), the assessee argued that the investments are brought forward from earlier year and the assessee has net owned funds to the tune of Rs. 25173.18 lakhs and the assessee has made the above investments from its internal accrual and therefore no disallowance is called for u/s. 14A of the Act. However, this contention of the assessee did not find favour from the Ld. CIT(A).
48. Before us, the Ld. Counsel reiterated the submissions made before the lower authorities. The Ld. DR supported the findings of the AO and Ld. CIT(A).
49. We have considered the submissions and perused the assessment as well as appellate order. It is not disputed that the investments are made in earlier years. The assessee has also not claimed any income exempt from tax as the investments pertains to earlier year. We do not find any reason for making any disallowance during the year under consideration. We accordingly reverse the finding of the lower authorities and direct the AO to delete the addition of Rs. 2,192/-. Ground No. 2 is accordingly allowed.
50. Ground No. 3 relates to treatment of renovation expenditure at the corporate office to the tune of Rs. 92,12,679.- and disallowing the same as capital expenditure.
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51. Ground No. 4 relates to treatment of Architect fees of Rs. 5,50,000/- which is related to renovation at the corporate office which is disallowed as capital expenditure.
52. As issues involved in both these grounds are same, therefore we take both these grounds together. While going through the balance sheet of the assessee for the year under consideration, the AO noticed that in the notes to accounts, it is mentioned that repairs and maintenance includes amount of Rs.92.12 lakhs incurred towards furnishing of new corporate office premises taken on lease. The AO sought explanation from the assessee asking it why amount of Rs. 92.12 lakhs not capitalized. In response, the assessee furnished the details of expenses on corporate office. The assessee explained that the expenditure was incurred for the purpose of renovation of newly leased corporate office. The renovation was completed by the end of December 2003 and it was occupied from January 1, 2004. The assessee further explained that the expenditure has been incurred for renovation and does not contain any capital cost therein. The cost of furniture and fixtures alongwith capital electrical has been duly capitalized. Only those expenses which are purely in the nature of renovation has been considered as revenue. However, rejecting the submissions made by the assessee, the AO concluded that the benefit derived out of these expenses are enduring in nature and these expenses are not merely current repairs. They have been incurred for the purpose of getting the premises ready for occupation. Further, a perusal of legal and professional charges incurred by the assessee shows that a sum of Rs. 5,50,000/- has been incurred as Architect fees. These expenses have also been incurred for the purpose of the new corporate office and require capitalization. Accordingly, the AO went on to disallow a sum of Rs. 92,12,679/- and Rs. 5,50,000/- as capital expenditure. The AO agreed to the oral submissions made during the course of assessment proceedings by the assessee to allow depreciation. Therefore, the AO allowed depreciation on the amounts treated as capital expenditure.
22 Mahindra & Mahindra Financial Services Ltd.
53. Before the Ld. CIT(A), the assessee reiterated its submission that the expenses have been incurred only for renovation and therefore should be treated as revenue expenditure. The submissions of the assessee was rejected by the Ld. CIT(A) who confirmed the finding of the AO.
54. Before us, the Ld. Counsel did not bring any new evidence to substantiate its claim other than what has been stated and considered by the lower authorities. The Ld. DR supported the findings of AO and CIT(A).
55. We have considered the rival submissions and perused the orders of lower authorities and the Paper Book submitted by the assessee. The assessee has filed a statement showing item-wise details of renovation expenses which are item-wised as under:
S. No. Particulars Ref. Amount Amount
No. in (in Rs. (in Rs.)
Bill
1. Sample work A 765,122.00
2. Civil work B 1,880,059.00
3. Gypsum Ceiling C 643,717.00
4. Painting D 586,013.73
5. Carpentry E 3,864,592.00
7,739,503.73
6. Electrical Fittings F 1,473,174.93
Total 9,212,678.66
56. The assessee has also filed item-wise detail under each of the aforementioned heads. After carefully considering the items on which expenses have been incurred, we have no hesitation to hold that all the items of expenses give a benefits which are of enduring in nature to the assessee more so when the assessee himself states that the leased premises were occupied from 1.1.2004 and all the renovation expenses claimed by the assessee were incurred upto December, 2003. This itself shows that the 23 Mahindra & Mahindra Financial Services Ltd.
expenses cannot be termed as "current repairs". Considering the nature of expenses and the items on which they have been incurred, we do not find any reason to interfere with the findings of lower authorities. The expenses are in the nature of capital and as the AO has already allowed deprecation, no further interference is called for. Ground No. 3 & 4 are accordingly dismissed.
57. Ground No. 5 relates to the depreciation claimed on UPS at the rate of 60% but allowed by the lower authorities at the rate of 15% treating UPS as electrical installation and not as an integral part of the computer. This ground is identical with the issue raised in ground No. 2 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 12 to 17. While deciding this issue in ITA No. 2846/M/07, we restore this issue back to the files of the AO. This ground is allowed for statistical purposes.
58. Ground No. 6 relates to disallowance of software expenses to the tune of Rs. 4,29,875/- as capital expenditure. This ground is identical with the issued raised in ground No. 3 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 18 to 23. While deciding this issue in ITA No. 2846/M/07 we restore this issue back to the files of the AO with a direction that each and every item should be verified with the business of the assessee in the light of the finding of the Special Bench decision in the case of Amway India Enterprises Vs DCIT 111 ITD 112 (SB). This ground of the assessee is allowed for statistical purposes.
59. Ground No. 7 relates to disallowance of bad debts written off to the tune of Rs. 1,50,55,073/-. This ground is identical with the issue raised in ground No. 5 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 30 to 35. While deciding this issue in ITA No. 2846/M/07, we restore this issue back to the file of AO. The assessee is directed to substantiate its claim in the light of the provisions of Sec. 36(2)(i). The AO is directed to verify and examine any such submissions/clarification submitted by the assessee after giving reasonable opportunity of being heard. This ground of the assessee is allowed for statistical purposes.
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60. Ground No. 8 relates to claim of deduction u/s. 80G to the tune of Rs. 28,92,500/- which has been allowed to the tune of Rs. 17,500/-. It is the contention of the assessee that donation given to M/s. K.C.Mahindra Trust are eligible for deduction u/s. 80G and the AO has disallowed the same only because the receipt issued to donor does not bear the number and date of the order of the DIT (Exemption) whereas as per the forwarding letter of DIT(Exem) M/s. K.C. Mahindra Trust is eligible for deduction of donation u/s. 80G of the Act.
61. We have considered the submissions and also gone through the letter of DIT (Exem.). We find force in the submission of the Ld. Counsel. However, it appears that the AO has not considered the certificate issued by DIT (Exem) Mumbai. We therefore restore this issue back to the file of AO. The AO is directed to consider the certificates issued by DIT (Exem) u/s. 80G of the Act and if satisfied, allow the claim of the assessee as per law after giving a reasonable opportunity of being heard to the assessee. This ground of the assessee is allowed for statistical purposes.
62. Ground No. 9 relates to enhancement done by the Ld. CIT(A) by disallowing the expenses incurred on commission and brokerage amounting to Rs. 4,93,56,527/- alleging that the said expenditure is not incurred wholly and exclusively for the purpose of business. This ground is identical with the issue raised in ground No. 6 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 36 to 41. While deciding this issue in ITA No. 2846/M/07, we restore this issue back to the file of AO and AO may restrict its verificaiton to the payment of brokerage and commission only of those parties where payment is made for more than one lakh , after giving a reasonable opportunity of being heard to the assessee. The assessee is also directed to establish the identity of the payees with necessary details/evidences. The AO is further directed to verify the TDS details wherever it has been made. This ground of the assessee is allowed for statistical purposes.
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63. In the result, the appeal filed by the assessee in ITA No. 405/M/08 is partly allowed for statistical purposes.
ITA No. 2969/Mum/2009- A.Y. 2003-0464. This appeal by the assessee is directed against the order of Ld. CIT(A)- VI dt. 23.12.2008 pertaining to A.Y. 2003-04. The only grievance of the assessee relates to levy of penalty of Rs. 6,40,81,546/- under section 271(1)(c) of the Act.
65. After considering the penalty order, we find that the penalty has been levied on quantum additions made in the assessment proceedings for assessment year 2003-04 and also to the enhancement made by the Ld. CIT(A) during the course of appellate proceedings.
66. We have decided the quantum appeal in ITA No. 2846/M/07 for A.Y. 2003-04. We accordingly restore this issue back to the file of AO. The AO is directed to pass a fresh order in the light of the decision in ITA No. 2846/M/07 , after giving a reasonable opportunity of being heard to the assessee . The ground raised by the assessee is allowed for statistical purposes.
67. In the result, the appeals filed by the assessee in ITA No. 2846/M/07 for A.Y. 2003-04 & ITA No. 405/M/08 for A.Y. 2004-05 is partly allowed for statistical purposes and ITA No. 2969/M/09 for A.Y. 2003-04 is allowed for statistical purposes.
Order pronounced on this 31st day of July, 2012
Sd/- Sd/
(D.MANMOHAN) (N.K. BILLAIYA )
Vice President Accountant Member
Mumbai, Dated 31st July, 2012
Rj
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Copy to :
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-concerned
5. The DR 'I' Bench
True Copy
By Order
Asstt. Registrar, I.T.A.T, Mumbai