Income Tax Appellate Tribunal - Mumbai
Vijaykumar Kadankot , Mumbai vs Assessee on 27 September, 2012
ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" Bench, Mumbai
Before Shri I.P. Bansal, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA Nos. 1167 & 1168/Mum/2008
(Assessment years: 2003-04 & 2004-05)
Vijaykumar Kadankot, Vs. ACIT 23(3), Bandra Kurla
201/202 Shreenath Plaza, L.T. Complex, Bandra, Mumbai
Road, Near Mulund (East)
Mumbai 400081
PAN: AABPK 9182 A
(Appellant) (Respondent)
Assessee by: Shri Sameer Dalal
Department by: Shri Om Prakash Meena, DR
Date of Hearing: 27/09/2012
Date of Pronouncement: 05/10/2012
ORDER
Per B. Ramakotaiah, A.M.
These two are assessee's appeals against the orders of the CIT (A) XXIII, Mumbai dated 30th November, 2007 and 14th December, 2007 for the resepctive assessment years. Since common issues are involved, these appeals were heard together for the sake of convenience and decided by this common order.
2. We have heard the learned Counsel and the learned DR and perused the paper book placed on record.
ITA No.1167/Mum/20083. In this appeal assessee has raised two grounds. Ground No.2 is with reference to non deduction of `.4,17,473/- i.e. 10% of the export incentive from indirect cost being it not attributable to earn the export profit. In the course of the arguments the ground was withdrawn as this issue was decided in favor of assessee by the CIT (A) by way of an order under section 154 following the decision of Page 1 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
the Hon'ble Supreme Court in the case of CIT vs. Hero Exports, 295 ITR 454 (SC). Therefore, this ground is treated as withdrawn.
4. Ground No.1 is as under:
"The learned CIT (A) erred in law and on facts and in circumstances of case in confirming the apportionment of Expenses `.3,98,781/- to Export Division from Manpower Division to arrive at profit of export division for purpose of section 80HHC of the Act. Your appellant contends allocation is arbitrary and on surmises and therefore, it is prayed that same expenses should not be considered for Export Division".
5. Briefly stated, assessee is in the business as exporter of engineering goods and manpower recruitment in the name and style of M/s Host International. It had two separate Divisions called Export Division and Manpower Division operating from 2 rooms in office at Mumbai. While allocating the expenses on telephone, electricity, mobile expenses, postage and travelling and business, assessee allocated expenditure on the basis of actual incurred in the respective divisions. AO however, as the export division was eligible for deduction under section 80HHC, allocated some of the expenditure of Man power division to Export Division thereby restricting the profits of the export unit. Assessee unsuccessfully contested before the CIT (A).
6. The learned Counsel submitted that AO has unreasonably bifurcated the expenditure when assessee has allocated on the basis of actual telephone bills installed in the separate offices. He has referred to the paper book placed at page 35 to submit that the details of various telephones installed in each unit and the actual expenditure was submitted to AO and submitted that the Manpower Division has `.1,17,208/- expenditure, the export division was allocated `.2,61,727/- on actual basis. However, AO allocated `.12,000/- only to manpower division and Rs.3,66,935/- to export division without any basis. Likewise out of `.1,31,090/- electricity charges, manpower division was allocated only `.6,000/- as against Page 2 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
`.64,354/- incurred even though separate electricity meters were installed in the respective divisions. With reference to mobile expenses also, assessee allocated `.67,618/- to the manpower division, whereas AO restricted to it at `.13,000/- only. He also referred to the postage and courier expenses and submitted that an amount of `.97,752/- was allocated to manpower division, whereas export division expenditure was `.3,12,772/-. AO without any reference to the number of persons working in the respective divisions allocated only `.2,000/- to the Manpower division thereby increasing the expenditure in the export division. Similarly when travel expenses were incurred for local travelling and was allocated to the manpower division, AO allocated the entire expenditure to the export division, even though there is no travelling involved on behalf of the export division locally and Cochin visits of assessees were treated personal expenditure and further disallowed on estimate basis. It was submitted that assessee had a manpower unit in Cochin for which a person requires to travel to Cochin. Likewise business promotion expenditure paid to local telephone database regarding the manpower division was wrongly allocated to export division when export division does not require any local business promotion expenditure, whereas manpower division requires local expenditure. Similarly advertisement expenditure was also wrongly allocated to Export Division when the Export division does not require any local advertisement. It was further submission that in assessment year 2004-05 AO has allocated only telephone and electricity expenses, whereas the balance of the expenditure was accepted as allocated by assessee in that year. It was the contention that assessee has allocated expenditure on actual basis, whereas AO resorted to estimation without understanding the business of assessee or requirement of various expenditure in the respective Divisions. The learned Counsel also placed the orders in earlier years, where no such disallowances were made.
Page 3 of 9ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
7. The learned DR however, relied on the apportionment made by AO as confirmed by the CIT (A).
8. We have considered the issue and examined the record placed before us including the paper book. First of all what we notice is that AO while computing the assessment for assessment year 2004- 05 has apportioned only the expenditure pertaining to telephone and electricity in that year from Manpower Division to Export Division whereas the other expenditure was not considered. Not only that there is no rationale in allocating the expenditure as was done by AO. As far as the telephone and electricity expenses are concerned, these are, as submitted by assessee, based on actual telephone/electricity meters installed in respective divisions. These facts were not countered by the Revenue and there is no basis for allocating meager expenditure to the manpower division when assessee stated that the Manpower Division requires more expenditure locally. There is no comparison of either turnover in respective Division or incomes declared in respective Divisions. Without any basis AO on adhoc basis allocated the expenditure from Manpower Division to Export Division just because assessee is claiming deduction under section 80HHC at 50% of the profit during the year. There is no justification in allocating local business promotion expenses and advertisement expenses to the Export Division whereas the advertisement is required for local manpower division which helps in recruitment of personnel locally on which assessee seems to have received the commission. In fact assessee's own allocation of postage and courier was almost three times to export division than manpower division whereas AO allocated only `.2000/- under postage and courier to the manpower division for the whole year.
9. Likewise the travelling expenses was allocated to manpower division when it was explained that there is no local transportation as far as the export division is concerned and the entire expenses of Page 4 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
Cochin visit is with reference to the manpower division only. Likewise advertisement on business promotion expenditure. Since there is a rationale in assessee's allocation of expenditure, being actuals in respective divisions, we do not see any reason to uphold the order of AO and the CIT (A) which was on estimation. Therefore, we direct AO to accept assessee's allocation as such which in our view is rationale and also reasonable as seen from the details furnished. In view of this we direct AO to allow the expenditure as claimed and rework out the computation accordingly for allowing necessary deduction under section 80HHC on the profits of the Export Division.
10. With these directions, assessee's appeal is treated as allowed.
ITA No.1168/Mum/200811. Assessee has raised the following grounds:
1. "The learned CIT (A) erred in law and on facts and in circumstances of case in confirming the apportionment of Expenses Rs.2,24,279 to Export Division from Manpower Division to arrive at Profit of export Division for purpose of Section 80HHC of the Act. Your appellant contends allocation is arbitrary and on surmises and therefore it is prayed that same expenses should not be considered for Export Division.
2. The learned CIT (A) erred in law and on facts and in circumstances of case in confirming non reduction of Rs.6,12,284/- i.e. 10% of Export incentive from in-direct cost being it not attributable to earn the export profit. It is prayed that 10% of the Export Incentive be reduced from indirect cost for the purpose of calculation of export profit u/s. 80HHC of the Income Tax Act, 1961.
3. The learned CIT (A) erred in law and on facts and in circumstances of case in confirming the disallowance of commission of `1,16,028/-
paid to Shri Mohammed Ismail considering it as prior period expenses. It is prayed that the said Page 5 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
addition be deleted.
4. The learned CIT (A) erred in law and on facts and in circumstances of case in confirming the disallowance of Rs.70,000/- out of Telephone Expenses considering as personal. It is prayed that said addition be deleted.
5. The learned CIT (A) erred in law and on facts and in circumstances of case in confirming the disallowance of Travelling &Conveyance expenses of Rs.1,00,000/- considering as personal. It is prayed that said addition be deleted".
12. Ground No.1 pertains to allocation of expenses from manpower division to export division. This ground is considered in assessment year 2003-04 in ITA No.1167/Mum/2008 in detail. As briefly stated AO has allocated only telephone and electricity expenses which according to assessee are allocated on actual basis with respect to the phones installed or meters installed in the respective offices. As seen from AO's order out of `.2,22,306/- expenditure to manpower division only an amount of `.22,306/- were allocated and balance of `.2 lakhs was apportioned to Export Division. Likewise out of `.88,295/- electricity charges claimed under manpower division, AO allowed only `.30,000/- and the balance was apportioned to the Export Division. Even though these amounts are little better than what was allocated to the Manpower Division in the earlier year, we do not see any rationale in apportioning the amount without any basis. For the reasons stated therein in Ground No.1 above in ITA No.1167/Mum/2008, we direct AO to accept the allocation as made by assessee and rework out the computation accordingly. Ground No.1 is allowed.
13. Ground No.2 pertains to the issue of indirect expenses at 10% attributable to earning export profits. Even though the CIT (A) passed an order under section 154 for assessment year 2003-04 when assessee pointed out that Ground No.2 relating to this issue Page 6 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
was not disposed of by the CIT (A) as the issue was covered by the Hon'ble Supreme Court judgment in the case of CIT vs. Hero Exports 295 ITR 454 (SC), no such order was passed in assessment year 2004-05. It was informed that the application made by assessee to the CIT (A) is still pending. Be that as it may, since the issue is covered by the decision of the Hon'ble Supreme Court (Supra), we hold that assessee was entitled to exclude the cost attributable to export incentive commission etc., in arriving at the expenses attributable to export trade. Therefore, AO is directed to modify the working of export incentive, export profit accordingly in line with the principles laid down by the Hon'ble Supreme Court in the case of CIT vs. Hero Exports (Supra). Ground 2 is allowed.
14. Ground No.3 pertains to the issue of claim of commission paid to one Mr. Mohammed Ismail of `1,16,028/- pertaining to the commission of last year. AO did not allow this expenditure as prior period expenses holding that the liability pertaining to the earlier year cannot be claimed this year. It was also of the opinion that in view of the higher deduction under section 80HHC, assessee postponed the claim of liability this year with a view to claim higher deduction under section 80HHC. The CIT (A) after examining the claim of assessee was of the opinion that assessee did not establish the liability has crystallized during the year. Therefore, he rejected the claim.
15. Before us nothing was brought on record to establish that the claim of the commission has crystallized during the year. As seen from the assessment order AO has recorded the finding that assessee paid commission at 3% to Mohammad Ismail with whom assessee was dealing for a long period on commission at 3%. In financial year 2001-02 commission @ 3% was `.1,20,385/- was paid on other two invoices. However, on nine invoices from September 2001 to February, 2002 commission of `.1,16,028/- was claimed at the same rate of 3%. When AO inquired about how the Page 7 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
liability has crystallized during the year except furnishing copy of the demand draft paid, nothing was placed on record to establish that the commission has crystallized during the financial year relevant to the assessment year 2004-05. Since assessee did not place anything on record to establish that the liability to pay the commission has crystallized during the year under consideration and since AO and the CIT (A) gave a finding that assessee was dealing with the same agent earlier during the financial year 2001- 02, and commission was paid at same rate of 3%, we do not see any reason to differ from the findings of the CIT (A). According the ground 3 raised by assessee is rejected.
16. Ground Nos.4 & 5 pertain to disallowance of `.70,000/- out of the telephone expenses and `.1,00,000/- towards travelling and conveyance expenses out of the total expenditure. AO discussed this issue vide Para 3 & 4 of the assessment order. The CIT (A) confirmed the same on the reason that amounts disallowed are reasonable.
17. After hearing the rival contentions, we are of the opinion that there is no basis for disallowing the amounts on adhoc basis. The entire claim of the mobile expenses is to the tune of `.3,65,654/- and telephone expenses of `.3,97,773/-. AO as discussed in Ground No.1 allocated the telephone expenses between Manpower Division and Export Division while considering the profits of the respective units. Still, he has disallowed another 10% (apportioned as personal expenditure as well). We do not see any rationale for disallowing the expenditure like that. However, since assessee is also not maintaining any other mobile service as mentioned by AO, we are of the opinion that a reasonable amount of `.1000/- p.m. can be considered as personal expenditure out of the telephones installed. Accordingly disallowance is restricted to `.12,000/- as against `.70,000/- disallowed by AO. With reference to the staff welfare expenses, most of the expenses seem to have been incurred on staff Page 8 of 9 ITA Nos.1167 & 1168 of 2008 Vijaykumar Kadankot Mumbai.
and other travelling of assessee. When assessee has visited foreign country participating in trade fair, those expenses will be for the purpose of business. However, considering the business of assessee and the nature of the expenses incurred, we restrict the disallowance to `.25,000/- which meet the ends of justice on the facts of the case. AO is directed to rework out the disallowance accordingly. Ground Nos.4 & 5 are partly allowed.
18. In the result appeal in ITA No.1167/Mum/2008 is fully allowed and appeal in ITA No.1168/Mum2008 is partly allowed.
Order pronounced in the open court on 5th October, 2012.
Sd/- Sd/-
(I.P. Bansal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 5th October, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "F" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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