Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Hotz Industries Ltd., New Delhi on 21 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
[DELHI BENCHES: "C" New Delhi]
BEFORE SHRI S. K. YADAV, JUDICIAL MEMBER
AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
I. T. Appeal No. 4539 (Del) of 2014
Assessment Year: 2010-11.
M/s. Hotz Industries Ltd., Deputy Commissioner
703-707, Chiranjivi Tower, Vs. of Income Tax,
Nehru Place, Circle : 12 (1),
N e w D e l h i. N e w D e l h i.
PAN : AAACN 0172 F
AND
I. T. Appeal No. 5058 (Del) of 2014
Assessment Year: 2010-11.
Asstt. Commissioner M/s. Hotz Industries Ltd.,
of Income Tax, Vs. 32 - Hanuman Road,
Circle : 12 (1), Connaught Place,
New Delhi N e w D e l h I - 110 001.
PAN : AAACN 0172 F
(Appellants) (Respondents)
Assessee by: Shri Salil Aggarwal, Adv.; &
Shri Shailesh Gupta, C. A.;
Department by: Shri S. L. Anuragi, Sr. D. R.;
Date of Hearing : 16.05.2018;
Date of Pronouncement: 21.05.2018.
O R D E R.
PER PRASHANT MAHARISHI, A.M.:
1. The Revenue and assessee has filed appeals against the order of the learned Commissioner of Income Tax (Appeals)-XV, New Delhi, dated 20.06.2014, for assessment year 2010-11.
2. The Revenue has raised the following grounds of appeal :-
1. On facts and circumstances of the case, the CIT(A) has erred in deleting notional interest of Rs.3,47,58,711/- on interest free loan / advances given to subsidiary companies as the assessee was unable to establish the nexus that its own funds were utilized for interest free advances and therefore the assessee being NPFC should have charged interest.
2. On facts and circumstances of the case, the CIT(A) has erred In restricting the alternative addition of interest paid u/s 36(1)(iii) to Rs. 14,76,678/- only against proposed disallowances of Rs. 99,44,878/- by the Assessing Officer.
3. On facts and circumstances of the case, the CIT (Appeals) has erred in restricting the disallowances of foreign education expenses of Rs.42,89,759/- to Rs.7,32,177/- only without appreciating that this expenditure was personal in nature and should have been disallowed in full.
4. On the facts and circumstances of the case and in law, the Ld. CIT (Appeals) has erred in directing to compute the disallowances u/s 14A Rule 8D by excluding the interest expenses of Rs.50,60,179/- in respect of term loan and car loan.
5. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. "
3. The assessee has raised the following grounds of appeal :-
" 1. The order is passed by the learned Commissioner of Income Tax (Appeals) is against the law and facts of the case.
2. The learned Commissioner of Income Tax (Appeals) has erred in dissolving an amount of Rs 14,76,678/- u/s 36(1) (iii) of the Income Tax Act on account of payment of interest to group Companies.
3. That the learned Commissioner of Income Tax (Appeals) has erred in disallowing the following expenses out of education expenses incurred by the company for MBA study at Singapore 3.1 Disallowing proportionate expenses (i.e. upto 40%) towards the living expenses incurred by its director for the purposes of studying MBA Programme at "INSEAD" Institute, Singapore.
3.2 Disallowing the expenses incurred towards the air tickets amounting to Rs. 1,28,610/- for travel of the Director for its educational purpose.
4. That the appellate order as passed is not sustainable on the facts & circumstances of the case. "
4. The brief facts of the case are that assessee is a company running a textile-processing house and hospitality division. It is also a Non Banking Financial Company engaged in the business of earning interest income on account of loans given to other parties. It is also carrying on the business of dying yarn, knitting, hotel business and export of home furnishing items. The assessee filed its return of income declaring loss of Rs.2,51,08,473/- on 27.09.2010 and assessment under section 143(3) of the Income Tax Act was made on 28.02.2013 at a total income of Rs.1,90,67,002/-. The learned Assessing Officer made 6 disallowances to the total income of the assessee which were contested before the learned CIT (Appeals) and he gave part relief vide order dated 20.06.2014. Therefore, both the parties are in appeal before us.
5. The first ground of appeal of Revenue is against deletion of disallowance of interest of Rs.3,47,58,711/- on interest free loan and advances given to subsidiary companies. Ground No. 2 of the appeal was also related to that wherein the learned CIT (Appeals) has restricted the disallowance alternatively made by the Assessing Officer of Rs.99,44,878/- to Rs.14,76,678/-. The assessee has also raised ground No. 2 of his appeal against the sustaining of disallowance of Rs.14,76,678/-. The learned Assessing Officer has noted that assessee has given interest free loans to 8 companies which are sister concerns and no interest thereon has been charged. Therefore, after calling for the explanation of the assessee he made an addition of Rs.3,47,58,711/- applying the interest rate @ 12%. The reasons given by him for disallowance are in para No. 3 as under :-
" 3. Addition on account of Interest free loans given to its sister concern From the detail and information furnished by the assessee company it is noted that the assessee has given huge interest free loans to its subsidiaries and sister concerns. Party wise detail and loan given is summarized as under :-
S.No. Name of the party Capital Opening Closing balance Interest balance of of loan charge loan 12,45,00,000/-
1. Triumph Property Ltd. 7,47,500/- 12,48,50,000/- Nil
2. Financial Consultant Ltd.
Motive 5,00,000/- 93,00,000 91,00,000/- Nil 1,85,04,722/-
3. Cypriot Consulting Ltd. 5,00,000/- 1,81,04,722/- Nil
4. 5,00,000/- 1,95,70,900/- 1,93,66,500/- Nil Lifeline Pharmacies (India) Ltd 5 RTC Restaurants (India) Ltd. 1,00,00,000/- 7,58,17,499/- 10,69,77,814/- Nil 21,55,584/-
6. Durant India Ltd. 21,66,259/- Nil
7. Sbarro Restaurants (India) Ltd. 1,80,00,000/- 4,48,932/- 4,48,932/- . Nil 2,40,00,000/-
8.TRR Properties (P) Ltd. 5,00,000/- 2,40,00,000/- Nil
Total 27,42,97,637/- 30,50,14,227/-
3.1 From the above, it appears that the assessee has given
huge funds to its subsidiaries and sister concern against which no interest has been charged. It also appears that most of the above companies have very nominal capital and no business accept making investment in shares and properties out of fund taken from the assessee company.
3.2 The assessee company is a Non Banking Financial Company and as per memorandum of article its main object is to earned interest by lending funds on interest in the market. But, in contrary to its main object the assessee has given huge funds to its subsidiaries and sister concerns against which no interest is being charged. The subsidiaries and related parties of the company have invested the funds in shares and properties and they are beneficiary of any income is earned on account of such investment. Considering the facts of the case vide order sheet entry dated 11.02.2013, the assessee was asked as under
:-
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 6 " Assessee Company is a NBFC company and the earning of interest on loans given to the other companies / parties is one of the main business of the company. But the assesse has given loans to its different subsidiary companies at Rs. 25.81 crores (approx.) against which no interest is being charged. On the other land the assessee company paid interest to Banks at Rs. 50,30,180/- and to Others at Rs. 44,14,698/- against the fund taken on loans by the company. A perusal of Balance Sheet of the subsidiaries shows that they have very nominal share capital and reserve & surplus. All the subsidiary companies taken huge interest free unsecured loans' from the assessee company and out of that made investment in properties and shares. At the same time the assessee company is suffering huge loss. Keeping in view all these facts, please show cause as to why the notional interest income be not estimated on interest free loans given and accordingly be added to the total income of the assessee company."
3.3 In response of the above, the assessee vide its reply dated and submitted as under :-
" In this connection, it is submitted that perusal of the balance sheet would show that the own funds of the assessee company which are m the form of share capital and reserve e and surplus are more than 150 crores. Thus, the funds advanced to sister concern i.e. wholly owned subsidiary companies have to be attributed to the own funds. Stand of the assessee company is fully supported by various judgments as under:-
i) Commissioner of Income Tax Vs. Bharti Televenture Ltd.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 7
ii) CITVs. Dalmia Cement Bharat Ltd. (2009) 183 Taxman 422 (Delhi)
iii) CIT Vs. South India is Corpn. (Agencies) Ltd.
209 CTR (Mad) 233.
iv) CIT Vs. Steri Sheets Ltd. (2007)
106 TTJ 460 (Delhi).
Perusal of the above cases show that three of the judgments out of the four judgements pertained to Delhi High Court i.e. jurisdictional High Court. "
3.4 The above submission of the assessee has been gone through and considered carefully, but found unsatisfactory. None of the case laws cited by the assessee is pertaining to the Non Banking Financial Company, thus, facts of the cases quoted by the assessee are quite different from the facts of the case under reference. Hence, the judgments referred by the assessee do not apply in this case. 3.5 The assessee company is suffering huge loss which is due to not charging any interest against the funds given to other parties. As per memorandum of article of the company one of the main objects is lending money in the market on interest, but in contrary of its own object the assessee is not charging any interest and suffering huge losses year by year. Considering the all aspects of the case it would be quite justified to compute interest on prevailing minimum market rate and amount of interest so quantified be added to the total income of the assessee. Opening balance of interest free funds given to the subsidiaries is Rs. 27,42,97,637/- whereas closing balance is Rs.30,50,14,227/-. From the copy of account of above different parties it is noted that there were very few transactions during the ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 8 under assessment. Thus, it would be logical if interest is computed on average amount of investment during the year under reference. Average investment works out at Rs. 28,96,55,932/- and interest thereon @ 12% (which suppose to be minimum prevailing interest during the year under reference) works out Rs. 3,47,58,711/-. Accordingly, a sum of Rs. 3,47,58,711/- is added to the total income of the assessee company. Since, I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(l)(c) are being initiated separately.
[Addition of Rs. 3,47,58,711/-] "
6. Further the learned Assessing Officer in para No. 5 of the assessment order held that if the above disallowance / addition is deleted in the hands of the assessee then additions / disallowances to the extent of Rs.94,44,878/- being interest paid by the assessee on borrowed fund is sustainable as per the provisions of section 36(1)(iii) of the Income Tax Act.
7. The assessee challenged the above before the learned CIT (Appeals) who dealt with the whole issue as per para No. 6 of his order as under :-
" 6 I have carefully considered the facts of the case and in the light of the submissions made by the appellant and the applicable case law in the matter. Accordingly, my decision on various grounds of appeal is as under
:-
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 9 6.2 Regarding the Ground No 2 of the appeal relating to addition on account of notional interest on the interest free loans and advances given to its subsidiary concerns, I find that the appellant had given detailed reply to the AO during the assessment proceedings, the crux of which was that the appellant had used own funds of Rs 156 crores in making interest free advances to its sister concerns. The appellant had also relied upon certain case laws the gist of which was that the funds / advance to wholly owned subsidiary companies have to be attributed to own funds. The Id. AO on examination of the reply of the appellant held that these decisions did not apply to the NBFC. However, no finding was given on the source of funds given to the subsidiary companies. I also find that during the year the appellant had given new loans of Rs.3.08 crores only to its subsidiary companies.
6.3 Under the above circumstances, since the appellant had used its own funds to its 100% subsidiary companies, there was no reasonable ground on the part of the AO of holding that the appellant should have charged interest thereon, it is a settled law that the AO cannot sit it the shoes of the business-man. Moreover, reliance of the appellant on the decision in the case of CIT vs Bharti Televenture Ltd, (spura), CIT vs Dalmia Cement Bharat Ltd.(supra), CIT vs South India Corporation (supra) and CIT vs. Steri Sheets ltd.(supra) was on similar facts and in similar circumstances, based on which the Hon'ble jurisdictional High Court had held that the funds / advance to sister concerns have to be attributed to the own funds of the assessee company. It ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 10 will not make any difference whether the appellant was NBFC or not, as the ratio decidendi is common to all such cases. Moreover, the action of the AO itself lacks the legal basis, as there is no provision under the Act to make a notional addition of income, which has neither been accrued nor received. Under the circumstances, addition made by the Id. AO is being deleted. I also observe that in the subsequent year as well in the earlier years, no such addition, rightly, was made by the Id. AO.
6.4 Regarding the Ground No. 3 of the appeal relating to addition on account of notional interest income on the cash in hand, which was held as excessive by the Id.
AO, in view of the settled legal position that the AO cannot sit in the shoes of the businessmen, the addition made notionally by the appellant lacks legal basis and is held as arbitrary and unreasonable. The AO had no basis, whatsoever to hold that the appellant should logically hold only an amount of Rs.16,88,564/- for the business of the company. Under the circumstance, the disallowance is heid as arbitrary and baseless and is being deleted.
The alternative ground of addition u/s 36(l)(iii) proposed by the AO in respect of the entire amount of interest paid by appellant of Rs 94,44,877/- is also not called for as evidently the appellant had incurred interest on terms loan and interest on vehicle loan of Rs.50.10 lakhs for the purpose of the business of the appellant company. Under no circumstances, such a disallowance could be made. However, on examination ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 11 of the details of the interest expenses incurred by the appellant, I find that the appellant had paid interest to the group companies namely M/s Durant Refrigeration Ltd. (Rs 1,69,869), M/s Triumph Trading Ltd. (Rs 1,78,750) and M/s Coronet Holding Pvt. Ltd (Rs 11,28,000). As the appellant has not been charging any interest on the advances / loans given to the group companies/subsidiary, the action of the Assessing Officer of paying interest to its group company lacks consistency. In view of this, I uphold the disallowance u/s 36(l)(iii) to the extent of interest paid to its group companies of Rs 14,76,678/-. Accordingly, this ground is partly allowed in favour of the appellant."
8. Therefore, the learned CIT (Appeals) sustained the disallowance of Rs.14,76,678/- which was the interest paid by the assessee to the three companies. In nutshell, out of the total interest disallowance of Rs.94,44,877/- the learned CIT (Appeals) sustained the disallowance of Rs.14,76,619/-.
9. The learned authorized representative vehemently contested the sustenance of disallowance raising the following issues :-
i. He submitted that no opportunity was given to the assessee by the learned Assessing Officer while disallowing the sum of Rs.94,44,878/-. He relied on the decision reported in 192 ITR 165 and 176 ITR 179 to buttress his ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 12 claim. He also submitted a detailed note contesting the above addition;
ii. He further stated that no addition on account of notional interest was made in the hands of the assessee from assessment year 2004-05 to assessment year 2012-13 where except the impugned year in which assessee is in appeal. He submitted that all the assessments were passed under section 143(3) of the Act;
iii. He submitted that assessee has surplus fund of Rs.151 crores and, therefore, assessee should be granted benefit of the same;
iv. He further stated that the advances were given in earlier years;
v. He stated that assessee is a NBFC and, therefore, giving of the loan is the business of the assessee.
10. The learned Departmental Representative vehemently supported the order of the Assessing Officer and submitted that when assessee has given interest bearing funds to its sister concern without charging of the interest the same is correctly disallowed by the Assessing Officer.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 13
11. We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case admittedly the assessee has given interest free funds amounting to Rs.30.50 crores to its sister concern. Admittedly no business exigency or business prudence was shown before the Assessing Officer and, therefore, the learned Assessing Officer worked out the disallowance of the interest @ 12% thereon amounting to Rs.3,47,58,711/-. However, as the assessee has paid interest only of Rs. 94.44 lakhs, he has alternatively restricted the disallowance. On hearing of the parties and considering the various arguments it is apparent that assessee is a company, who has the interest free funds available with it of Rs. 151 crores in the form of shareholders' funds. Therefore, the presumption would lie in favour of the assessee; that assessee has diverted non-interest bearing funds to the above parties in giving advances. This view is also supported by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities reported in 313 ITR 340 wherein in para No. 16 the Hon'ble Bombay High Court has held that the principle would be that if there are funds available both interest free and over draft and or loan taken, then a presumption would arise that investment would be out of the interest free funds generated or ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 14 available with the company, if the interest free funds were sufficient to meet the investments. In the present case the interest free funds available with assessee is Rs. 151 crores whereas the amount identified as interest free advances given by the assessee to sister concern is only Rs. 30.50 crores. Therefore, the disallowance of interest cannot be made on that ground only.
12. In the result, we do not find any reason to sustain the disallowance of interest confirmed by the learned CIT (Appeals) of Rs. 14,76,619/- under section 36(1)(iii) of the Act.
13. In the result, ground No. 2 of the appeal of the assessee is allowed and ground Nos. 1 and 2 of the appeal of the Revenue are dismissed.
14. All the other contentions raised by the learned authorized representative become academic in nature in view of our above decision. Therefore, at this moment they do not merit our consideration as assessee has been granted relief on other contentions.
15. The second issue involved in the ground No. 3 of the appeal of the Revenue and ground No. 3 of the appeal of the assessee is with respect to allowance of deduction of foreign education ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 15 expense of Ms. Sheetal Jain amounting to Rs.42,89,759/-. The learned Assessing Officer noted that assessee has debited Rs.42,89,759/- as staff education expense in profit and loss account. The learned Assessing Officer disallowed the above expenditure vide para No. 7 of his order as under :-
" 7. Disallowance of expenses incurred on account of staff education.
7.1 On perusal of profit & loss account, it is noted that the assessee has claimed a sum of Rs. 42,89,759/- on account of staff education. A perusal of copy by the assessee, it is noted that most of the expenses has credit card and no bills and vouchers could be produced in of Rs. 25,91,194/- claimed stating it as prepaid expenses transferred to expenditure account. The assessee has submitted that a sum of Rs. 25,91,914/- was incurred in immediate preceding year which was fee for whole period paid to the University towards and of the previous financial year and as expense was related to this year the same was debited to prepaid expenses in the year under reference. The assessee could not furnish any bills pertaining to the above prepaid expenses also. 7.2 Vide order sheet entry dated 11.02.2013, the assessee was asked to show cause as to why the expenditure incurred on the education of one of the Director on account of his / her MBA Course may not be treated as capital in nature and disallowed accordingly. In response, the assessee vides its reply as under :-
" Your good self have been pleased to require to assessee firm to explain for the expenditure incurred on the ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 16 education of one of the directors namely Miss Sonali Jain be not treated as deferred revenue expenditure / capital expenditure to be disallowed and added back to the income of the assessee firm. In this connection, it may be submitted that there is no provision under the Income Tax Act to treat such expenditure as deferred revenue expenditure. Only the expenses which are time bound for a particular period and are incurred by the assessee can be treated as deferred revenue expenditure or pre-paid expenditure on the time bound basis. Meaning thereby, if an insurance premium is paid for 12 months and 5 months falls in the year under assessment, the proportionate premium for the balance 7 months is deferred to the next year and market as pre-paid expenses. There is no reason to treat the same as capital expenditure also as on tangible asset has been created. Your kind attention is being invited to the following judgment :-
Commissioner of Income Tax, Patiala Vs. M/s Groz Beckert Asia Limited by P & H High Court at Chandigarh Date of order : 29.01.2013.
Perusal of the above judgement would show that the expenses incurred for a membership of a club which improves the atmosphere for better running of the business with a view of produce benefits consequently, it cannot be treated as capital asset and hence not capital expenditure. Thus/ the expenses incurred by the assessee company in providing professional qualification to one of the directors are revenue expenditure duly eligible in the year under assessment.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 17 7.3 The above submission of the assessee has been gone through considered and carefully but found to be not satisfactory. The case laws quoted by the assessee is irrelevant and based on quite different facts. The assessee by any means could not prove the business expediency of expenses incurred in connection to foreign education of its director. The assessee could not establish that how that education of the director is helpful for the business of the company. Moreover, the assessee could not substantiate the expenses incurred in respect of foreign education of the director by furnishing supporting evidences and documents. Further, more and most importantly, the education being provided to the staff/director of the company is not directly related to day to day business of the assessee for the year under reference, hence; it could not be treated as a revenue expenditure incurred for business purposes.
7.4 Expenditure made by the company on foreign education expenses of a director/staff has nothing to do with the business of the assessee and such type of education very much available in the Country. The expenditure incurred is absolutely personal in nature and not for the purpose of business. Reliance placed on the following judgements:-
i) Mac Explotec P. Ltd. Vs. CIT (Kar) 286 ITR 378
ii) Silicon (India) Ltd.Vs. DCIT (Mad) 295 ITR
422
iii) Echjay Forgings Ltd. Vs. ACIT (Bom)
328 ITR 286
iv) Enkay (India) Rubber Co. Pvt. Ltd. Vs. CIT (Del)
263R 521
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 18
7.5 Considering the whole affairs in this regard a sum of
Rs.42,89,759/- is disallowed and added back to the total income of the assessee company. Since, I am satisfied tha't the assessee has furnished inaccurate particulars of proceedings under section 271(l)(c) are being initiated [Addition of Rs. 42,89,759/-] "
16. The assessee aggrieved with the order and preferred an appeal before the learned CIT (Appeals) who dealt with the whole issue vide para Nos. 5.6 to 6.6.5 of his appellate order as under :-
" 6.6 Regarding the Ground No. 5 of the appeal relating to disallowance of education expenses of the Director, Ms Sonali Jain, I find that the Id AO initially questioned these expenses as capital in nature. However, when the appellant gave detailed reply, the Id. AO did not rebut the appellant's contention that such expenses were not capital in nature. Moreover, the AO has taken a different plea that such expenses were not for the purpose of business of the appellant. The Id. AO has also relied upon certain case laws in this regard. On careful consideration of the facts, I find that the said Director, Ms Sonali Jain was actively engaged in the business of the appellant company and was personally responsible for handling export business of the appellant in the name of 'Hotz Essentialz'. The appellant's export business has increased to more than three times since FY 2005- 06 when Ms Sonali Jain joined the business. Ms Sonali Jain had taken admission in INSEAD for MBA program at Singapore campus. The relevant details including admission letter and evidence of payment of application fee and tuition fee were furnished before me. Evidently the program of business ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 19 administration is of direct business relevance to the appellant company, with different lines of business. With the latest development and up-gradation of capacity, understandably, such director would be able to contribute better towards business growth of the appellant company. There is no reason given by the Id. AO as to how the MBA course from an internationally well known Institution did not have any business connection with the appellant's business.
6.6.2 Another alternative ground taken by the AO was absence of bills and vouchers. The debit advices issued by the ABN Amro Bank clearly evidence that foreign remittance was made to INSEAD for the tuition fee of Ms. Sonali Jain. This is a sufficient proof for payment of fees to a foreign institution, for which money is generally paid by wire transfer. Further, the copy of letter by the company to INSEAD confirms that the company was sponsoring the director's education. Similarly declaration for FCRA and bill of INSEAD regarding tuition fee, application fee and a copy of document in support of transfer of money to the bank account of INSEAD also prove the bonafide of the transaction. Based on above, I hold that the evidences furnished by the appellant are strong enough to hold that the payment was actually made to INSEAD for MBA course for Ms. Sonali Jain, which, as I have held, has direct business connection. Under the circumstances, the objections of the AO lack merit.
6.6.3 The appellant furnished break-up of education expenses incurred for this purpose as under :-
Staff Education Expenses
1. 14.05.09 136.50 Pounds Internet 10,682
2. Amex Credit Card 1,28,625 ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 20
3. Citi Bank Card 2,78,814
4. LMP Housing Services 4,91,013
5. ABS Holidays Inc 80,919
6. Travel CDG-MVC-DEL-CDG dt. 53,512 25.07.09
7. Singapore tickets (69610+59000) 1,28,610
8. SP Securities on 28.10.09 1,88,110
9. Singapore Sonali Jain 24.11.09 59,670
10. SP Securities 86,610 5,16,512 Amount transfer from Pre-paid
11.
expenses Boulevard De 29,15,168
Taken in exp. for the year 08-09 3,23,974 25,91,194
12. Paid to Praveen Narayanan 1,92,000
Total 42,89,759
6.6.4 On perusal of the above details given by the appellant,
I find that the amount of Rs 42.58 lakh claimed by the appellant during the year, also included -
(a) Expenses incurred on foreign travel during the vacations, which evidently are personal in nature and cannot be allowed. Accordingly, an amount of Rs 80,919/-
paid to ABS holidays Inc is disallowed.
(b) Further, another amount of Rs 53,512/- for
payment for Travel in CDG- MBC-DED-CDG sector, vide
invoice dated 25/07/2009 is also not allowable, being personal in nature.
(c) Furthermore, there is no basis for claiming the tickets for Singapore of Rs 1,28,610/- when the appellant had already claimed travel expense for Ms Sonali Jain of Rs 59,670/-. Accordingly, an amount of Rs 1,28,610/- is also disallowed.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 21
(d) Lastly, there is no explanation given for the payment for Rs.1,92,000/- to Praveen Naraynan, hence the same is also disallowed.
I find that the appellant has claimed to have transferred the following amounts to Ms. Sonali Jain, towards living expenses (excluding housing expenses of Rs 4,91,013/-) as under :-
Date Narration Amount
14/05/2009 Internet Banking 10,682/-
Different dates Amex Credit card 1,28,625/
Different dates Citi Bank Card 2,78,814/-
28/10/2009 S P Securities 1,88,110/-
-
S P Securities 86,610/-
Total 6,92,841/
-
It was informed that Ms. Sonali Jain, during the MBA course preferred to live in a service apartment, instead of being in the institutional premise, the expenses in which regard are being allowed by me. Moreover, with regard the amounts transferred for meeting living expenses, in the absence of any details, element of personal nature therein cannot be ruled out. Accordingly 40% of such expenses are also disallowed.
6.6.5 In view of this, the appellant is allowed full claim of tuition fee of Rs.25,91,194/-, LMP Housing Services for residence of the said director amounting to Rs. 4,91,013/-, and to & fro air travel expenses of Rs.59,670/- and 60% of living expenses amounting to Rs.4,15,705/-. In view of this, the total claim is allowed to the extent of Rs.35,57,582/- only. "
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 22
17. Therefore, in nut shell out of the total disallowance made by the learned Assessing Officer of Rs.42,89,759/-, the learned CIT (Appeals) allowed the claim of the assessee to the extent of Rs.35,57,582/-. Therefore, the Revenue is in appeal against the deletion of disallowance of Rs.35,57,582/- and the assessee is in appeal against the confirmation of disallowance of 40% of living expenses and air-ticket expenditure of Rs.1,28,610/-.
18. The learned Departmental Representative vehemently submitted that expenditure incurred by the assessee is capital expenditure in nature, it has nothing to do with the business of the assessee, and such education is available in the country. It was further submitted that even otherwise the assessee could not substantiate the expenses incurred in respect of foreign education of the Director by furnishing supporting evidence and documents. He further relied up on the decision of 88 taxmann.com 185.
19. The learned authorized representative vehemently contested the disallowance confirmed by the learned CIT (Appeals). He submitted that Ms. Sonali Jain was looking after the business of textile division of the assessee and the business of the assessee grown under her supervision. She got admission for MBA Programme in Singapore and, therefore, her education was ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 23 approved by the Board of Directors in Meeting dated 15.10.2008. It was stated that her studies will help the business of the assessee and, therefore, company sponsored full education and living expenses. He submitted that all the evidences were furnished before the lower authorities. He further stated that the expenditure incurred were for the purposes of the business. He further stated that the learned CIT (Appeals) without bringing any fact on record has restricted the allowance of certain expenditure such as living expenditure @ 60%. According to him he should have allowed the complete expenditure. He relied on the decision of the Hon'ble Supreme Court in 76 ITR 690. He further referred to the details at page Nos. 391 to 412 of the paper book. Therefore, he submitted that this expenditure is allowable to the assessee in full.
20. The learned Departmental Representative in rejoinder relied upon the decision of the Coordinate Bench reported at 88 taxman.com 183 wherein the Coordinate Bench has confirmed the disallowance of education expenditure in absence of commitment by the student to serve the assessee company post education.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 24
21. The learned authorized representative relied upon the decision of 365 ITR 436 of the Hon'ble jurisdictional High Court where such expenditure is allowed.
22. We have carefully considered the rival contentions as well as perused the orders of the lower authorities. One Ms. Sonali Jain, who was Director of the company since 2006 was looking after the business of the company. She got an opportunity to study MBA Programme in Singapore and, therefore, the Board decided to support her education expenditure vide Resolution dated 15.10.2008. The main purpose was shown by the company that her education would be useful in expanding the export business of the company in long run. The learned CIT (Appeals) has considered the Resolution passed by the company and the business expediency. It is undisputed that the assessee was Director of the company and was working with the company. Therefore, in nutshell this expenditure is in the nature of training expenditure of the Director herself. The learned CIT (Appeals) also noted the details of the programme and held that it has direct business relevance to the assessee. In view of this, we do not find any infirmity in the order of the learned CIT (Appeals) in allowing the claim of the assessee to the extent of full tuition fee of Rs.25,91,194/-.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 25
23. The Reliance Placed up on by the ld DR on the decision of the coordinate bench in case of 88 taxmann.com 185 is misplaced as the facts in that case was quite different. In that case In that case It was not shown by the assessee what are the roles, responsibility and job profile of director being performed for the assessee company and on what terms and conditions he was brought in as Director of the assessee-company. There was no business conducted by the assessee during the year as revenue from operations are 'NIL' while there was other income earned from interest on fixed deposits during the year . In that case the director was also brought on board just prior to the board resolution authorizing him for studies. On these facts the expenses were disallowed. In the present case the assessee has shown that director was working with the company and has, also contributed in the affairs of the company.
24. The learned CIT (Appeals) with respect to the other expenditure such as the housing expenses of Rs.4,91,013/- and back and forth expenditure for travel of Rs.59,670/- is also correctly allowed. The claim of the assessee of Rs.4,15,705/- was for the purpose of living expenses and the learned CIT (Appeals) only allowed 60% thereto. In nut shell, the learned CIT (Appeals) allowed the claim of the assessee of tuition fee, housing services ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 26 and travel expenses and 60% of living expenses. Therefore, it is apparent that out of the living expenditure of Rs.6,92,841/-, 40% of such expenditure are disallowed. The main reason for approximation by the learned CIT (Appeals) is for the simple reason that there is no evidence of the expenditure incurred by the assessee of Rs.6,92,841/-. The learned CIT (Appeals) has generously attributed allowable expenditure to the extent of 60%. During the course of hearing, the learned authorized representative was asked to produce the details of expenditure of Rs.6,92,841/- and to relate it with the education purpose. The learned authorized representative simply referred to page Nos. 391 to 410 of the paper book. We have carefully perused those papers. However, we do not find any vouchers or bills with respect to the above expenditure. All those papers related to the tuition fees and admission fees, which has already been allowed by the learned CIT (Appeals). As the assessee could not provided any itemized details supported with the vouchers and bills of three parties, we find no infirmity in the order of the learned CIT (Appeals) in restricting the allowance of living expenses to the extent of 60%.
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 27
25. In the result, ground No. 3 of the appeal of the Revenue and ground No. 3 of the appeal of the assessee are dismissed.
26. Ground No. 4 of the appeal of the Revenue is with respect to deletion of disallowance under section 14A of Rs.50,60,179/-. The brief facts show that assessee has earned dividend income of Rs.1,24,30,074/- and it has disallowed Rs.35,77,395/- under section 14A of the Act. Assessee also submitted the working of the disallowance. The learned Assessing Officer rejected the same and applied Rule 8D of the Act and made further disallowance of Rs.2,72,535/-. On appeal before the learned CIT (Appeals), he directed the Assessing Officer to exclude Rs.50,60,179/- from the interest expenditure as the interest has been paid for term loan and vehicle loan. The Revenue is contesting the same.
27. The learned Departmental Representative relied upon the order of the Assessing Officer and the learned authorized representative relied upon the order of the learned CIT (Appeals).
28. We have carefully considered the rival contentions. In the present case, the above issue is squarely covered in favour of the assessee for assessment year 2008-09 wherein the interest ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 28 on term loan and car loan was excluded for working out the disallowance under section 14A of the Act. In the present case, the learned Assessing Officer has incorrectly included the interest paid on term loan and vehicle loan under Rule 8D(ii). We do not find any infirmity in the order of the learned CIT (Appeals) as the above interest is specifically related to other purposes, but not for the purposes of investment in exempt income yielding investment.
29. In the result, ground No. 4 of the appeal of the Revenue is dismissed.
30. In the result, appeal of the Revenue in ITA. No. 5058 (Del) of 2014 is dismissed and the appeal of the assessee in ITA. No. 4539 (Del) of 2014 is partly allowed.
The order is pronounced in the Open Court on 21st May 2018.
Sd/- Sd/- ( S. K. YADAV ) (PRASHANT MAHARISHI JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : the 21.05.2018. *MEHTA*
ITAs. 4539 & 5058 (Del) of 2014. Hotz Industries 29 Copy of the Order forwarded to :-
1. Appellants;
2. Respondents;
3. CIT;
4. CIT (Appeals);
5. DR, ITAT, ND.
//True Copy// BY ORDER ASSISTANT REGISTRAR