Income Tax Appellate Tribunal - Delhi
Yum! Restaurants (India) Pvt. Ltd., ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.5292/Del./2011
(ASSESSMENT YEAR : 2007-08)
Yum! Restaurants (India) Private Ltd., vs. ITO, Ward 18 (1),
2nd Floor, Tower - D, New Delhi.
Global Business Park, M.G. Road,
Gurgaon - 122 002.
(PAN : AAACY4188E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Nageshwar Rao &
Shailesh Kumar, Advocates
REVENUE BY : Shri Peeyush Jain, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the assessee emanates from the order of Assessing Officer u/s 143 (3) read with section 144C (4) of the Income-tax Act, 1961 dated 27.10.2011 for the Assessment Year 2007-08.
2. The assessee company, Yum! Restaurants (India) Private Ltd. (YRIPL) incorporated as per the provisions of the Companies Act, 1956 is engaged in the business of franchising of 'Pizza Hut' and 'KFC' restaurants in India. The assessee has obtained franchisee rights from KFC International Holdings (KFCIH) and Pizza Hut International LLC (PHILLC) which has been subsequent assigned in favour of Yum! Restaurants Asia Pte Ltd., Singapore (YRAPL) to whom the assessee pays 2 ITA No.5292/Del/2011 royalty for the use of such rights after taking requisite government approval. Assessee has entered into a service agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities).
3. The assessee has taken the following grounds of appeal :-
"1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in concluding that the service income earned by the appellant amounting to Rs.7,61,32,000 from M/s Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL"), as "income from other sources" as against "business income".
2. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in restricting the deduction of royalty expenditure paid by the appellant to YRAPL from Rs.6,99,35,274 to Rs.3,19,27,801 and thereby disallowing royalty amounting to Rs.3,80,07,473 2.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO erred in contending that there is no technology transfer to the appellant under the Technology License Agreement with YRAPL.
3. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in making a hypothetical disallowance of the administrative expenses of Rs.16,33,46,030 incurred by the appellant as being attributable to its subsidiary company, Yum! Restaurants Marketing Private Limited ("YRMPL").
4. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in disallowing the lease rent paid by the appellant amounting to Rs.4,52,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its managing director.
5. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in disallowing the tax depreciation claim to the extent of Rs.28,85,143 made by the appellant under Section 32 of the Act.
3 ITA No.5292/Del/20115.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in failing to appreciate that under the block of assets concept, actual physical possession of the fixed assets is not relevant for the claim of tax depreciation, particularly with respect to the fixed assets sold in past years relating to the Delhi restaurant outlets.
6. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in disallowing the software expenses amounting to Rs.11,16,000 by holding them to be of capital nature. 6.1 Without prejudice to the above, the Ld. AO has on the facts and circumstances of the case and in law, erred in not allowing depreciation on the alleged capital expenditure in accordance with the directions of the Hon'ble DRP."
4. In the ground no.1, the issue involved is regarding service income earned by the assessee amounting to Rs.7,61,32,000/- from M/s. Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL") as "income from other sources" as against business income.
5. This issue has been decided by the ITAT in the assessee's own case in ITA Nos.2678 & 2679/Del/2012 for Assessment Years 2004-05 and 2005-06 dated 14.02.2014 and also in earlier years. The relevant para of the aforesaid order is reproduced as under :-
"4. In the ground no.1 in both the revenue's appeal, the issue involved is whether income from receipt of services fee assessable under the head Profits and Gains of Business or to be treated as 'income from other sources' as held by Assessing Officer. Assessee has entered into service agreements with Yum! Restaurants International Inc., USA (YRI) for the period 1.4.2003 to 31.12.2003 and with M/s Yum Restaurants Asia Pte. Ltd. (YRAPL) for the period 1.1.2004 to 31.3.2004, for providing the franchisee support services in area countries, that is, liaison services for obtaining necessary approvals/ licenses, providing assistance to existing and future licensee's in India, Pakistan, Sri Lanka and Mauritius, provision of reports related to India, Sri Lanka, Mauritius, Bangladesh and new markets and market development in existing and new markets. Assessee was remunerated at a fixed fee for providing various franchisee support/market development services to YRAPL/ its franchisees in area 4 ITA No.5292/Del/2011 countries. The Assessing Officer disallowed the amount for the service agreement in respect of neighboring countries of India, but income received is only in respect of costs incurred in India. It was also held that dominant intention of the assessee was not to enter into any business activity but was to pass on the income earned by the group companies in Indian subcontinent without payment of tax and the activity carried out by the assessee is not a systematic or an organized activity so as to be called a business activity.
5. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in favour of the for the Assessment Years 2002- 03, 2003-04 and 2006-07 vide order dated 31.05.2011 and submitted that the ITAT has held that providing of services was not an isolated act by assessee but of a continuous nature since Assessment Year 1998-99, with the intentions to earn profits. The assessee has received similar service income in previous and subsequent years which has been consistently held as business income. The different basis for computation of service income is purely a commercial decision between assessee and YRAPL, which ought not to have any impact on characterization of income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR
368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out with the intention to earn profits is to be regarded as business income.
6. We have heard both the sides on the issue. The ITAT in its order dated 31.05.2011 vide para 8 has held as under :-
"8. We have duly considered the rival contention and gone through the record carefully. Ld. First Appellate Authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2 (13) provides the definition of expression "business" according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trading, commerce or manufacture. In various authoritative pronouncement of the Hon'ble Supreme Course and Hon'ble High Court, meaning and scope of expression "business" has been propounded. It is not necessary to recite and recapitulate of those decisions, but on the strength of them, it would be suffice to say that word "business" is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income. The case of the assessee is that right from asstt. Year 5 ITA No.5292/Del/2011 1998-99, it is providing various types of services to the franchise in India and also to its associate enterprises, because it is collecting fees etc. from the franchise and remitting it to YRI in US. The main object of the assessee company, as discernable from Memorandum of Association is to own, purchase, lease, develop, operate, franchise and manage restaurant etc. Similarly, its next object is to provide consultancy and advisory services in connection with the establishment, organization, financing, management and operation of restaurant, café....etc. This business, assessee has been performing right from 1998-99 and the department has accepted this. Assessee has shown additional receipts which means higher taxes would be payable. The assessee has also pointed out at the time of hearing that a reference to the TPO to determine the arms length price u/s 92 (CA) 3, in respect of the international transaction entered into by the assessee was made and the TPO has also accepted that the transaction are at arms length price. With regard to the objection of the AO, on account of authenticity of the agreement by the assessee that agreement has duly been signed by the both the parties. There is no specific defect referred by the AO. According to the assessee under the Indian Tax Act even on oral agreement or an agreement on plain paper entered into by two or more parties is valid and binding upon the contracting parties. With regard to allegation of AO about payment of dividend by the assessee to the parent company is concerned, it was contended by the assessee that AO has observed that possibility of payments being made in lieu of dividend on contribution toward development / business from time to time made by parent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, Ld. First Authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground of appeal it is rejected."
Since facts are same, therefore, respectfully following the decision of ITAT in earlier years, we dismiss ground no.1 of both revenue's appeal." The facts of the issue in this year and pleadings of both the sides remain the same, respectfully following the aforesaid decision of the ITAT, this issue is being taken 6 ITA No.5292/Del/2011 as covered in favour of the assessee. Therefore, we allow this ground of assessee's appeal.
6. In the ground nos.2 & 2.1, the issue involved is restricting the royalty expenditure paid by the assessee to YRAPL from Rs.6,99,35,274/- to Rs.3,19,27,801/- and thereby disallowing royalty amounting to Rs.3,80,07,473/-.
7. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 of ITAT.
8. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"7. In the ground no.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012, the issue involved is disallowing of royalty expenditure. The assessee's primary business operation relates to the operation and development of Pizza Hut and KFC restaurants in India through franchisee. For this purpose, the assessee has entered into a technology license agreement with KFC / Pizza Hut through which assessee has been granted the rights to use the technology and system in operation of restaurants in India. The assessee has also obtained approval from Secretariat SIA, Government of India (GOI) for payment of royalty for the use of technology and systems for operation of KFC/ Pizza Hut restaurants in India. Later, these royalty payments were covered in the automatic route as per the terms notified in the Press Note 9 (2000 series) and Press Note 2 (2003 series). The assessee has also sought specific clarification in this regard and obtained the same from the GOI, Ministry of Finance. The disallowance was made on the reason that the SIA approval i.e. the Government approval used the term 'license fee' whereas the assessee has used the term 'royalty' in its accounts which is not as per the SIA approval, therefore, it was considered as disallowance. The payment of royalty was specifically inapplicable even in the initial agreement by virtue of Conditions 2, 3, 4 of Annexure 1. The payment of license fee was 7 ITA No.5292/Del/2011 allowed only for a period of initial seven years, so payment was termed as royalty to avoid the said clause. Then the payments have been made to parent companies, it cannot be ruled out that the same is in lieu of dividend. Ld. AR submitted that ITAT has allowed the issue in favour of the assessee in assessment years 2002-03, 2003-04 and 2006-07 and he referred to para 20 of the order. It was also submitted that against this expenditure of royalty, the assessee has also earned royalty of Rs.6,32,44,241 from the franchisee's. There is an accrual of direct income from such expenditure and he referred to the decisions of CIT vs. Ciba of India Ltd. (SC) (69 ITR
692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR
746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms "royalty" and "license fee" were interchangeably used by the Government of India in its correspondence with assessee. He submitted that AO has misinterpreted the SIA approval since the clause made inapplicable to the assessee was not relevant to its nature of business. It was further submitted that the Government of India, in its letters dated September 29/30, 2003 and June 16/17, 2004, which is placed at Page 280 and 282 of Paper book 2 for AY 2005-06, has used the term 'royalty' and not 'technology license fee', while mentioning that as per the liberalized policy, assessee may remit royalty under the automatic route within the prescribed limits. He further submitted that payment is in accordance with the SIA approval and within the prescribed limits. Additionally, Payment of royalty up to 5% of sales has been allowed by Government of India under automatic route in view of Press Note 2 of 2003 and he submitted that therefore, the royalty was paid in accordance with the policies of the Government. It was submitted that payments have been made through authorized dealer and thus cannot be under violation of any law or exchange control regulations. The TPO has also held the same to be an arm's length payment. Therefore, the payment of royalty cannot be treated as unreasonable or excessive as alleged by the AO.
8. We have heard both the sides on the issue. As mentioned by the ld. AR, the issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07, the relevant para of the said order is reproduced as under :-
"20. With the assistance of Ld. Representative, we have gone through the record carefully. The main reason for disallowing the royalty payment by the assessee to M/s. KFC international holding Inc and M/s. Pizza Hut with whom it had entered into technology licence agreement is that Govt. of India has permitted the assessee to pay technical fees which is restricted to seven years and assessee is paying it as a royalty. Ld. CIT(A) has deleted the disallowance on the ground that assessee has earned an income of ` 3,37,05,801/- as continuing fees from the franchise, because of this technology licence agreement. It has been permitted to collect the fees on behalf 8 ITA No.5292/Del/2011 of KFC International and Pizza Hut. This permission is in pursuance to the technology licence agreement. The AO failed to bring on record any material that assessee has infringed any law in conducting its business. We have perused the relevant material and also the written submissions of the assessee reproduced by the Ld. CIT(A). In our opinion, AO has misread the approvals granted by the Govt of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals. In the approval SIA has used expression "royalty as well as fee for technical services" loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess. The assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance."
Facts are same, therefore, we find no merits in the ground nos.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012 and the same are dismissed.
Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
9. In the ground no.3, the issue involved is hypothetical disallowance of the administrative expenses of Rs.16,33,46,030 incurred by the assessee as being attributable to its subsidiary company, YRMPL.
10. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 of ITAT.
11. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid 9 ITA No.5292/Del/2011 order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"9. Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 is against the deletion of addition out of administrative expenses. The YRMPL is a wholly owned subsidiary of the assessee operating as a mutual concern for the common benefit of all the franchisees and the assessee. It carries out advertising, marketing and promotion activities. For this purpose, assessee and YRMPL have entered into a tripartite agreement with each franchisee. Each franchisee is required to contribute a fixed percentage of its sales as its contribution towards advertising and marketing activities. As per the tripartite agreement, for the cost effective functioning of YRMPL, assessee provided YRMPL with any or all administrative support facilities. In case such facilities are extended by assessee to YRMPL, it would be required to reimburse assessee with such costs. Where on one hand assessee is entitled to receive money for such costs incurred by it, on the other hand it is also obliged to contribute to YRMPL for meeting its advertising, marketing and promotion activities budget deficit. The disallowance was made on the reasoning that the administrative expenses incurred by the assessee, proportionately also belong to YRMPL as the business is carried out from common premises and employees and YRMPL has not paid its share of administrative expenses to assessee for the common facilities used by it which belong to the assessee and also that there is no reduction in the AMP contribution to be made by the assessee to YRMPL in lieu of providing administrative support. Ld. AR submitted that the this issue is cove red in favour of the assessee by the decision of ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07 and referred to Para 22 of the said He submitted that the CIT(A) also for assessment years 2004-05 and 2005- 06 has relied upon the said decision of the ITAT and decided. this issue in favor of the assessee. He submitted that YRMPL is a not for profit entity set up with the due approval of SIA with the objective of conducting AMP activities for the assessee and its franchisees. YRMPL is completely funded by the assessee and its franchisees by way of fixed contributions and any additional fund requirements being met by the assessee. He further submitted that the ITAT has duly examined the business model of the assessee and YRMPL and held that the assessee was entitled to contribute to the activities of YRMPL as per its business needs and the facts and circumstances of the case remain identical to those before the ITAT in previous years. Ld. AR submitted that the assessee, instead of recovering charges for sharing administrative facilities, reduced its AMP contribution to YRMPL to avoid unnecessary cash flows. He explained that by way of a simple example - if assessee has to fund Rs.100 and recover Rs.20 from YRMPL; it funds only Rs.80 after reducing the amount of recovery. However, the AO has grossly misinterpreted the same as non-reduction of AMP contribution. He submitted that direct contributions paid by the assessee to YRMPL have been allowed by the AO as an expense thereby 10 ITA No.5292/Del/2011 duly recognizing the commercial interest of assessee in the functioning of YRMPL. He relied on the decisions in the cases of S.A. Builders Ltd vs. CIT (SC) (288 ITR I); Sassoon J. David and Co. (P) Ltd vs. CIT (SC) (118 ITR 261); CIT vs. Sales Magnesite P Ltd (Bombay HC) (214 ITR I); and CIT vs. Panipat Woolen & General Mills (SC) (103 ITR 66) wherein it has been held that merely because some other party has also benefited from the expenditure incurred it cannot be held that it is not allowable. He further submitted that there is no rational basis adopted by the AO for allocating 50% of the expenditure incurred by assessee as being attributable to YRMPL. To clarify the same, he submitted that the assessee has a huge employee base for the purposes of operating its equity stores, huge rental and other operating costs being incurred for the operation of equity stores, which has nothing to do with the AMP activities that YRMPL coordinates on behalf of assessee. Therefore, such expenses should not be allocated to YRMPL at all, as its functioning is basically to make payments to third party advertising firms. Finally, he pleaded to dismiss this ground of revenue's appeal.
10. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"22. On appeal, Ld. CIT(A) deleted the disallowance. With the assistance of Ld. Representative, we have gone through the record carefully. It emerges out from the record that YRMPL was incorporated on 8th June, 1999. It is a 100% owned subsidiary of the assessee. It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise. The assessee had entered into a tripartite agreement with its franchise and YRMPL. As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution. In a way, YRMPL was to carry out the activities on no profit no loss basis. The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost. From both the angles, it is the assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. Ld. CIT(A) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected."
In view of these facts, we find no merits in the Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 and the same are dismissed.
11 ITA No.5292/Del/2011Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
12. In the ground 4, the issue involved is disallowing the lease rent paid by the assessee amounting to Rs.4,52,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its managing director.
13. At the outset of the hearing, ld. AR submitted that this issue is covered against the assessee by the aforesaid order dated 14.02.2014 in ITA No.2421/Del/2012 of ITAT.
14. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"25. Brief facts with regard to the aforesaid grounds are that assessee has obtained a rent free accommodation for its Managing Director, Mr. Sandeep Kohli from M/s Mezbaan Hoteliers Pvt Ltd (MHPL). The directors of MHPL were the father and wife of the Managing Director, who had in turn taken the accommodation on lease from Mrs. Surindra Judge. Assessee paid rent of Rs.27,10,000 per annum. MHPL in turn paid a rent of Rs.20,000 per month for the property. A security deposit of Rs.50 lacs was also provided by assessee to MHPL, a part of which was advanced to the M.D. by MHPL. In the case of Mr. Ajay Bansal (Director), assessee had been paying rent for a property occupied by him to his wife and mother. Rent of the property was Rs.5,22,000/- per annum and security deposit for the same was Rs.4,62,000/-. The Assessing Officer disallowed the claim for the reasons that lease contract was signed by a person on behalf of MHPL (the other contracting party) who at that time was not its director, making the agreement invalid. Excessive security deposits were placed by assessee with MHPL. Security deposits were advanced by MHPL to the M.D., Shri Sandip Kohli. Disallowance was made under Section 40A(2)(b) of the Act on account of excessive lease rentals paid to related party. Only part 12 ITA No.5292/Del/2011 rentals up to Rs.20,000 per month were allowed on the basis of ITAT order for past years.
26. In the case of Director, Mr. Ajay Bansal, lease rentals paid by the assessee were for a property which was already being occupied by the director without payment of any rent. No concession was given in the rentals paid as the property was also being utilized by the mother of the director.
27. Ld. AR submitted that in the case of property provided to Director, Shri Ajay Bansal, the issue was remitted back to the AO by ITAT to determine fair rent of the property in the AY 2002-03, 2003-04 and 2006-
07. He submitted that the AO has allowed the rent paid by assessee for director's property as fair rent of the property based on valuation certificates produced by assessee for Assessment Years 2002-03, 2003-04 and also for 2007-08. Ld. AR submitted that for the house provided to MD, Shri Sandip Kohli, ITAT had allowed a payment of Rs.2,40,000 per annum as fair rent of the property and the balance payment of rent was disallowed for Assessment Years 2002-03, 2003-04 and 2006-07. He referred to paras 45 and 46 at page 47 of the ITAT order for Assessment Years 2002-03, 2003-04 and 2006-07. He submitted that the ITAT failed to give cognizance to the valuation certificates obtained from an independent registered valuer which proved adequateness and legitimacy of the payments. He further submitted that for the year under consideration, the assessee placed reliance on the valuation certificates produced before the CIT(A) for AY 2005-06 (placed at Pages 211 and 212 of Paperbook filed for Assessment Year 2005-06), however the same were not considered. He submitted that it is important to note that on the basis of such valuation certificates, the AO had allowed the rentals payments made in respect of accommodation provided Director as fair rentals in other years. Accordingly, on the same basis, the rentals paid in respect of the accommodation provided to the MD, being in accordance with the fair market value determined as per the valuation certificates, should be allowed as fair rentals. He submitted that both assessee and MHPL are corporate assessee's, therefore there can be no question of any tax evasion which is a prerequisite for invoking the provisions of Section 40A(2)(b) of the Act. He referred CBDT Circular No.6P (LXXVI-66) dated July 6, 1968. He submitted that with regard to the issue of notional interest on security deposit, ITAT has allowed this in favour of the assessee in Assessment Years 2002-03, 2003-04 and 2006-07 and referred to Paras 45 and 46 of the ITAT order. To conclusively establishing the genuineness of the transaction, he submitted that rent free accommodation has been provided to the M.D. and the director in accordance with their employment contracts; rent was paid by assessee in accordance with contractually binding lease agreements; TDS was duly deducted on such rental payments along with taxing the same as a perquisite in the hands of M.D. and the director; and rent received has been duly accounted for as income. He submitted that this finding of fact has been recorded by the CIT(A) in his order for Assessment Year 2002-03 and 2003-04. He submitted that onus 13 ITA No.5292/Del/2011 is on tax authorities to establish excessiveness of expenditure on some material and not on conjectures and in this regard, referred to the decisions of S.K. Engineering vs. JCIT (Bangalore ITA T) (286 ITR 210) and CIT vs. Indo Saudi Services (Travel) (P) Ltd. (Bombay HC) (219 CTR 562). For commercial expediency, ld. AR relied on the decision of Shahzada Nand & Sons vs. CIT (SC) (108 ITR 358) and CIT vs. Panipat Woolen & General Mills Co Ltd (SC) (103 ITR 66) where it is held that commercial expediency to be decided from the stand point of assessee and not tax department. He submitted that tax can be imposed only on real income and not on notional income. He submitted that therefore, AO has grossly erred in adding notional interest income and in this regard referred to the decisions of Godhra Electricity Co. Ltd. vs. CIT (SC) (225 ITR 746); CIT vs. Calcutta Discount Company Ltd (SC) (91 ITR 8) and Seth Madan Lal Modi vs. CIT (Delhi HC) (261 ITR 49). The ld. DR relied on the order of the authorities below.
28. We have heard both the sides on the issue. These disallowances have been made by invoking the provisions of section 40A(2)(b) of the Act is on account of excessive rental paid to the related parties. First, we would like to put some facts with regard to this disallowance in summary. In the tax audit report, the assessee has disclosed three parties covered under the provisions of section 40A(2)(b) of the Act and these were Shri Sandeep Kohli, Managing Director, Shri Ajay Bansal, Director and the YRMPL which was wholly owned subsidiary. During the investigation carried out by the Assessing Officer, the assessee admitted that M/s. Mezbaan Hoteliers Pvt. Ltd. for which the rent was paid was also covered by the provisions of section 40A(2)(b) of the Act. Further it was also found that Smt. Sheetal and Mrs. Pushpa Bansal who are wife and mother of one of the directors, Shri Ajay Bansal were also covered by the provisions of section 40A(2)(b) of the Act. The assessee entered into lease with M/s. Mezbaan Hoteliers Pvt. Ltd. on 01.06.1997 with regard to the property which has been provided to the Managing Director, Shri Sandeep Kohli and was agreed at Rs.1,25,000/- per month with a security deposit of Rs.50,00,000/-. M/s. Mezbaan Hoteliers Pvt. Ltd. has been also entered into the lease agreement with Mrs. Surenra Judge on the same date (01.06.1997) wherein rent agreed was Rs.20,000/- per month. While the assessee has paid Rs.1,25,000/- per month to M/s. Mezbaan Hoteliers Pvt. Ltd.. The rents paid to Mrs. Bansal and mother of Shri Ajay Bansal was also covered by the provisions of section 40A(2)(b). At this stage, we would also like to state that the provisions of section 40A are overriding provisions and start with non-obstante clause which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head 'Profits and gains of business or profession, thus, the intention of the legislation was very clear that provisions of section 40A(2)(b) shall apply in supersession of other contrary provisions of Act relating to the computation of income under the head 'Profits and gains of business or profession'. The rent paid for the premises occupied by Managing Director is prima facie collusive and excessive.14 ITA No.5292/Del/2011
29A. Some of the issues raises have been considered by ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07. The relevant paras 45 & 46 of the said order is reproduced as under :-
"45. With the assistance of learned representatives, we have gone through the record carefully. It emerges out from the record that assessee has paid Rs. 15 lacs of rent for the residence of Mr. Sandeep Kohli. It has paid a sum of Rs. 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to Rs. 6 lacs. He computed the disallowance of Rs. 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of Rs.4,20,700 on the residence of Shri Ajay Bansal. In this case also, payment was made to Mrs. Pushpa Bansal and Sheetal Bansal who are the wife and mother of Ajay Bansal. Assessing Officer has also found a security deposit paid by the assessee and he estimated the notional rent on such deposit at Rs.50,900. The disallowance has been worked out to Rs.4,71,600.
46. There is no dispute that the payments have been made to the persons who are covered under sec. 40A(2)(b) of the Act. Under this section, if it is established that assessee has paid an amount in excess, then the one available in open market for availing such services from a person or entity falling within the ambit of this section then such excess amount would be disallowed to the assessee. We fail to understand how a house property giving a rent of Rs.20,000 to the original land owner would immediately fetch a rent at Rs.1,50,000. This much of rent has been given by the assessee after incurring a huge sum of Rs.22,50,000 on repair which gives an indication that if this sum of Rs.22,50,000 was not incurred then it would not fetch this amount of rent. Apart from this, assessee had paid interest free security deposits of Rs.50 lacs. Assessing Officer has discussed that this payment of rent is associated with the salary of the executive director & house rent allowance is fixed @ 60% of their salary. On the basis of the facts emerging out from the assessment order, we find that assessee has extended extra pecuniar benefit to its managing director. Thus, taking into consideration the over all evidence on record, we set aside the order of the Learned CIT(Appeals). We direct the Assessing Officer to allow payment of rent to the extent of Rs.20,000 per month for the accommodation taken on rent for Shri Sandeep Kohli, the balance has to be disallowed. The estimation of this rent on the basis of the original rent agreement between the landowner and Hotel Mezbaan would take care of all other notional rent computed by the Assessing Officer on the basis of interest free deposits. In brief, against the claim of any rent made by the assessee for the residence provided to Mr. Sandeep Kohli, only a sum of Rs.2,40,000 would be allowed. There will not be any disallowance on account of notional rent worked out on the basis of interest free security. Assessing Officer 15 ITA No.5292/Del/2011 shall carry out this exercise. As far as the rent claimed in respect of the residence of Shri Ajay Bansal, we remit this issue to the file of the Assessing Officer for re-adjudication because he has not worked out fair rent this property can fetch, which can be allowed to the assessee. As far as the disallowance of Rs.7,50,000 is concerned, we find that this disallowance has been confirmed by the Learned CIT(Appeals) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year. Assessee has raised an alternative plea that in case it is not allowable in this year then a direction be issued to the Assessing Officer to allow in the year of incurrence. In our opinion, assessee will be at liberty to approach the Assessing Officer in accordance with law but in the present year, we do not deem it necessary to give any specific direction. In the result, ground No.3 raised by the assessee is allowed for statistical purposes and ground No.4 raised by the assessee is rejected. Ground Nos. 7 to 10 raised by the revenue are allowed for statistical purposes."
At this stage, there is no dispute that the payment has been made to the persons who are covered by section 40A(2)(b) of the Act. In the case of M/s. Mezbaan Hoteliers Pvt. Ltd., it is well established that payments had been made in excess for which such goods and services were available. It is apparent from the rentals paid by M/s. Mezbaan Hoteliers Pvt. Ltd. It is very clear that a property which is fetching Rs.2,40,000/- per annum to the landlord has been further let out for Rs.15,00,000/- per annum which had been further increased to Rs.24,70,000/-. This clearly establishes that the assessee company has extended extra peculiar benefits to its Managing Director who is covered by the provisions of section 40A(2)(b) of the Act. We are of the firm opinion that anything in excess to Rs.2,40,000/- per annum paid to M/s. Mezbaan Hoteliers Pvt. Ltd. by a collusive method is excessive and has to be disallowed. Thus, the rent paid for the residence of the Managing Director, Shri Sandeep Kohli will be allowed only to the extent of Rs.2,40,000/- per annum. However, there is no scope for disallowance of notional rent worked out on the basis of interest free security deposits in view of ITAT decision. As far as the rent paid in respect of residence of Shri Ajay Bansal is concerned, this issue was remanded back to the file of the Assessing Officer in the earlier order of the ITAT. Therefore, in the interest of justice and equity, we restore this issue to the file of the Assessing Officer to decide de novo. Therefore, ground no.1 stands dismissed, ground no.3 is allowed and ground nos.2 & 4 are allowed for statistical purposes."
Facts remain same. Ld. AR has not brought out any thing which could reverse the findings of the ITAT. Respectfully following the aforesaid decision of the ITAT, we dismiss this ground of assessee's appeal.
16 ITA No.5292/Del/2011
15. In the ground nos.5 & 5.1, the issue involved is not allowing the tax depreciation claim to the extent of Rs.28,85,143/- made by the assessee under Section 32 of the Act.
16. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 in ITA Nos.2678 & 2679/Del/2012 of ITAT.
17. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :-
"11. In the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012, the issue involved is disallowance of part depreciation. Brief facts of these grounds are that as part of its emolument policy for employees, the assessee reimburses amounts incurred by its employees on purchase of hard furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade / level as per their appointment letter). As per the perquisite valuation rules, such assets are considered in the personal income of the employees and taxes are duly deducted on the same. Further, such assets are recorded in the books of accounts by the assessee when the claim for reimbursement is submitted by the respective employees and only to the extent of their reimbursement entitlement. Also, the assessee had transferred certain assets belonging to its restaurant outlets in assessment year 1999-00 on itemized basis. However, no sales consideration was received for the same. Accordingly, no deletions were made in the block of assets (owing to Nil consideration) on account of this sale in accordance with the provisions of Section 43(6)(c)(i)(B) of the Act. The disallowance was made on the basis that in the earlier assessment years it was observed that certain assets which were purchased during prior period have been entered in the books of accounts of the financial year. It was held that depreciation claimed on assets purchased exclusively for the employees, are not for the use of business and certain assets which were sold by the assessee as part of its undertakings (outlets) to its franchisees continue to remain in its books and 17 ITA No.5292/Del/2011 depreciation claimed on the same. The ld. AR submitted that CIT(A) placing reliance on the judicial precedents set forth by the assessee has allowed the issue in favour of the assessee for assessment years 2004-05 and 2005-06. Complete depreciation has been allowed including depreciation of assets sold. He submitted that assets used by the employees would also be regarded as used for the purposes of business and hence eligible for claim of depreciation. He submitted that these were also taxed in the hands of the employees as perquisites and relied on the decision of Sayaji Iron and Engg Co vs. CIT (Gujarat HC) (253 ITR 749). He further submitted that under the block of asset concept, individual assets lose their identity when merged in the block and accordingly, actual physical possession and use of assets are not essential. He also relied on the decisions of CIT vs. Yamaha Motor India Pvt Ltd (Delhi HC) (ITA No 203/ 2009 and 601 2009): CIT vs Bharat Aluminium Co Ltd (Delhi HC) (ITA No 659/ 2007 and 1484/2006); Xerox India Ltd.. (Delhi ITAT) (ITA No. 680/Del/2006); CIT vs G.R. Shipping Ltd. (Bombay HC) (ITA No. 598 of 2009) and Swati Synthetics (ITA No. 1165/M/2006).
12. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"25. On due consideration of the facts and circumstances, we are of the view that AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business. In our opinion, AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee's business then he should make out a care for disallowance of depreciation. By making general observation, he cannot deny the total claim of the depreciation of the assessee. Taking into consideration these aspects, we do not find any merit in this ground of appeal. Ld. CIT(A) has already directed the AO to give effect outcome of 1999-2000. The depreciation disallowed in asstt. year 1999-2000 would be considered for disallowance in this year also. The effect of outcome in asstt. year 1999-200 would be given after giving an opportunity of hearing to the assessee."
In view of these facts, we find no merits in the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012 and the same are dismissed.
18 ITA No.5292/Del/2011Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal.
18. In the ground nos.6 & 6.1, the issue is related to disallowance of software expenses by holding them to be of capital in nature.
19. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in the aforesaid order dated 14.02.2012 in ITA No.2679/Del./2012 and the ITAT, while treating the disallowance of software expenses as capital expenditure, has set aside the issue to the file of the Assessing Officer to decide whether the expenses were for upgradation or it was for acquisition of new software. Ld. AR also pleaded that once it has been taken as a capital expenditure then depreciation should have been allowed for which the DRP has issued the directions.
20. We have heard both the sides on the issue. The DRP has directed the Assessing Officer to verify the details of the software expenses and allow the expenses which are annual nature as revenue and the balance is to be taken as capital expenditure and also directed that such capital expenditure will be eligible for depreciation @ 60% for the period of user is more or less than 180 days in the previous year.
21. We have heard both the sides on the issue. The Assessing Officer has allowed annual maintenance charges as revenue expenditure and the expenditure on MIS Project and payment for cheque printing facility has been taken as capital in 19 ITA No.5292/Del/2011 nature. This nature of expenditure has to be ascertained whether it has been made on the new acquisition of software or on the upgradation of the software. For the same, the issue is restored to the file of the Assessing Officer.
22. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in open court on this 24th day of April, 2014.
Sd/- sd/-
(DIVA SINGH) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 24th day of April, 2014
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.