Income Tax Appellate Tribunal - Mumbai
Arthur Andersen & Co., Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'B', MUMBAI.
Before Shri D. Manmohan, Vice President and
Shri J. Sudhakar Reddy, Accountant Member
Sr .
No.
I.T.A.No.
Asstt. Year
Appellant
Vs.
Respondent.
1.
483/Mum/2006
2003-04
M/s Arthur Andersen & Co.
Vs.
Additional Commissioner of Income-tax, Range-11-(2), Mumbai.
2.
484/Mum/2006
2004-05
-do-
-do-
3.
923/Mum/2006
2003-04
Addl. C.I.T., Range-11(2), Mumbai.
Vs.
M/s Arthur Andersen & co., Mumbai.
4.
924/Mum/2006
2004-05
-do-
Vs.
-do-
5.
2886/Mum/2006
2003-04
Asstt.C.I.T.,Range-11(2), Mumbai.
Vs.
-do-
6.
2887/Mum/2006
2004-05
-do-
Vs.
-do-
7.
3028/Mum/2006
2003-04
M/s Arthur Andersen & Co.
Vs.
Addl.C.I.T., Range- 11(2), Mumbai.
8.
3029/Mum/2006
2004-05
-do-
Vs.
-do-
9.
6983/Mum/2006
1998-99
-do-
Vs.
Jt. C.I.T., Range-11(2), Mumbai.
10.
6984/Mum/2006
1999-2000
-do-
Vs.
-do-
11.
6985/Mum/2006
2000-01
-do-
Vs.
-do-
12.
6986/Mum/2006
2001-02
-do-
Vs.
-do-
13.
6987/Mum/2006
2002-03
-do-
Vs.
-do-
PAN : AAACA4230D
Assessee by : Shri Soli E. Dastur and
Shri Madhur Agrawal.
Department by : Shri S.S. Rana.
O R D E R
Per J. Sudhakar Reddy, A.M.
All these appeals pertain to the same assessee, some filed by the Revenue and others filed by the assessee. As the issues in all these appeals are common, for the sake of convenience, they are heard together and disposed of by way of this common order.
2. Shri Soli E. Dastur, Senior Advocate, along with Shri Madhur Agrawal represented the assessee and Shri S.S. Rana, learned DR, represented the Revenue. Both parties submitted that, it would be appropriate if ITA Nos. 483 & 484/Mum/2006 and ITA Nos. 923 & 924/Mum/2006 pertaining to the assessment years 2003-04 and 2004-05, are taken up first, as the decision taken by the Tribunal in these cases would be applicable and are to be followed in all other cases. Thus we first take up the cross appeals for the assessment years 2003-04 and 2004-05.
3. Facts in brief :
Arthur Andersen & Co., is an Indian firm of Chartered Accountants. Arthur Andersen & Co. has signed a Member Firm Interfirm Agreement, with Andersen Worldwide SC (earlier known as Arthur Andersen & Co. SC ("AWSC"), to receive various technical services from AWSC, for its professional use, against an obligation to share the costs incurred by AWSC. Under the agreement with AWSC, Arthur Andersen & Co. is permitted to use the name. Under approval from RBI, Arthur Andersen & Co. is allowed to reimburse the costs incurred by AWSC.
3.1 AWSC is a Cooperative Company, organized and existing under the laws of Switzerland, carrying out co-ordination of the professional practice of the member firms worldwide. The costs incurred by AWSC, operating on a, no profit no loss basis, are shared by all member-firms, on a consistent and arms-length basis, which is audited and certified by reputed Firm of Auditors.
3.2 The services/benefits are largely provided by AWSC, electronically in the form of knowledge and information databases accessible exclusively by the member firms. These knowledge material and information is regularly updated and revised. The member firms are required to follow the uniform standard and methods in providing various Auditing, Taxation and Consulting services to its clients. Accordingly, every member firm has to source the tools and methodologies from AWSC and use the same in providing services to its clients.
4. For the assessment year 2003-04 the assessee filed a return of income on 01-12-2003, declaring a total income of Rs.6,14,46,420/-. The return was accompanied with an audit report in form 3CD as stipulated u/s 44AB. The AO passed an order on 18th Feb., 2005 u/s 143(3) assessing the total income at Rs. 21,92,57,406/-. While doing so, the AO inter alia, disallowed the remedies, made by the assessee to AWSC, claimed as expenditure, adhoc disallowances of various other expenses. He also added an amount of Rs.2 lakhs as income receivable from rendering services to member firms of AWSC. In the assessment order, the AO has recorded that the assessee has not cooperated and has not furnished the details sought for during the course of scrutiny proceedings. The assessee carried the matter in appeal. The first appellate authority granted part relief. On the issues where the assessee did not succeed before the first appellate authority, the assessee filed appeal on the following grounds :
The Commissioner of Income-tax (Appeals)-XI, Mumbai, has erred in confirming disallowance of claim of expenses of Rs.12, 87, 10,987/- paid to Andersen Worldwide SC.
The CIT(A) has also erred in confirming disallowance of repairs and maintenance expenses of Rs.10,82,890/- out of disallowance of Rs.25,00,000/-.
The CIT(A) has also erred in confirming disallowance of Rs.25,00,000/- towards expenses for professional fees and other services out of disallowance of Rs.50,00,000/-.
The CIT(A) has further erred in confirming entire disallowances towards the following :
Travel and Conveyance expenses disallowance of Rs.5,00,000/-
Staff Training expenses disallowance of Rs.2,00,000/-
Motor Car expenses disallowance of Rs.3,00,000/-
Telephone, fax and courier expenses disallowance of R.3,00,000/-
Miscellaneous expenses disallowance of Rs.2,00,000/-.
Wherever the first appellate authority granted relief, the Revenue filed the appeal on the following grounds :
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai, has erred in deleting the addition of Rs.2 crores made by the Assessing Officer on account of income receivable in terms of Para 8.2(A) of Member Interfirm Agreement".
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai has erred in restricting the addition to Rs.10,80,890/- out of total addition of Rs.25,00,000/- made by the Assessing Officer on account of unsupported claim for expenses on repairs and maintenance expenses.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai, has erred in restricting the addition to Rs.25,00,000/- out of total addition of Rs.50,00,000/- made by the Assessing Officer on account of professional fees and other services claimed by the assessee without any supporting evidences.
5. Mr. Soli E. Dastur, learned Senior Advocate, submitted that there are, four grounds of appeal raised by the assessee, for the assessment year 2003-04, the first being against the CIT(Appeals) confirming the disallowance of claim of expenses of Rs.12,87,10,987/- paid to Anderson Worldwide SC. The other three grounds, Mr. Dastur submitted, were regarding part confirmation of disallowance of claim for expenses on account of repairs and maintenance, professional fees and finally disputing the confirmation of the entire disallowance, by the first appellate authority, on account of travelling and conveyance, staff training etc.
6. Mr. Dastur submitted a paper book running into 179 pages. He submitted that the assessee had received an invoice for U.S. $21,52,000 from AWSC, for reimbursement of its shares of establishment cost, for the period from 1st April, 2000 to 31 March, 2001 and that the assessee had remitted the share cost of Rs.10,38,24,586/- for the year 1st April, 2000 to 31st March, 2001, during the year ended 31-3-2003, to AWSC after deduction of income-tax at source, in accordance with the authorization of the Income Tax Department and approval of R.B.I. He submitted that, the assessee had also deposited TDS of Rs.2,48,86,401/-, on its similar share of cost, for the subsequent year ended 31st March, 2002, during the year ended 31st March, 2003. As the assessee was following cash system of accounting, the total expenditure was claimed for the financial year ended 31st March 2003 i.e. for the assessment year 2003-04.
7. Mr. Dastur submitted that, similar payments were being made by the assessee firm to AWSC, from the year 1985 onwards and the claim for expenditure was allowed, between the assessment years 1986-87 and 1996-97. He pointed out that for the first time, during the assessment year 1997-98, the AO disallowed the amount. When the matter travelled to the Tribunal, the assessment was set aside to the file of the AO for fresh adjudication. In the second round of assessment proceedings for the assessment year 1997-98, the AO disallowed 20% of the claim of payment made to AWSC. The balance 80% was allowed by the A.O. The assessee carried the matter in appeal against the disallowance of 20% of the expenditure. The first appellate authority deleted the disallowance. On a Revenue appeal, the order of the first appellate authority was upheld by the Tribunal. In the result the entire payment made to AWSC was allowed for the assessment year 1997-98. When the matter for the assessment year 1998-99 travelled to the Tribunal, the Tribunal followed its order for the assessment year 1997-98 and held that, as the facts and circumstances are the same as in the assessment year 1997-98, the AO was directed to delete the impugned disallowance.
8. Mr. Dastur drew the attention of the Bench to the order of the Tribunal, C-Bench, Mumbai for the assessment years 1997-98 & 1998-99 in ITA No. 6192/Mum/2004 and ITA No. 1785/Mum/2002, dated 31st December, 2004 and submitted that the facts being identical to the facts of the current year, the issue in question is covered in favour of the assessee. He drew the attention of the Bench to pages 10 & 11 of the assessment order to point out that the AO has noted the argument of the assessee, that the expenditure stands fully allowed by the order of the Hon'ble Tribunal for the assessment years 1997-98 and 1998-99 and pointed out that the AO, rejected the claim, on the ground that, the assessee has only furnished a photo copy of the order and not a certified copy, as well as also on the ground that res judicata does not apply in income-tax proceedings. He further referred to page 4 Para 4 of the CIT(Appeals) order, wherein a reference has been made to the ITAT's order for assessment years 1997-98 and 1998-99 and took this Bench through reasoning given by the first appellate authority, for not following the Tribunal's order. He submitted that the Assessee could remit a maximum of 15% of the gross receipts, in foreign exchange, to AWSC, as per the terms and conditions laid down by R.B.I. He submitted that the AO was in error in coming to a conclusion that there were significant discrepancies in foreign inward remittances, specifically wherever the payments were received in Indian currency from the liaison office of a foreign client. The assessee's case is that, there are two types of payments, such as those directly remitted to the assessee as foreign inward remittances and the other, remitted to the liaison office of the concern, where it is originally received foreign exchange and then in turn, sent to the assessee in Indian rupees. Mr. Dastur pointed out that a liaison office is nothing but foreign office in India and the said liaison office had received the amount in foreign exchange and after converting the same into Indian rupees, remitted the fees to the assessee. He pointed out that the main object of the Government of India, i.e. to bring in foreign exchange, has been achieved. He further submitted that there is not even an allegation from RBI, that the conditions on which permission was granted to the assessee, were violated. He strongly disputed the finding of the AO that there is a violation of the terms and conditions imposed in the RBI's permission.
9. Mr. Dastur took this Bench through the order of the Tribunal for the assessment years 1997-98 and 1998-99 and the judgment of the Hon'ble Bombay High Court in Income Tax Appeal No. 177 of 2000 Order dated 11th March wherein the order of the Tribunal dated 31st December, 2004 for the assessment year 1998 was upheld. He further referred to the order of Hon'ble Supreme court in SLP No. CC 17316/2008, order dated 16-01-2009, wherein the Hon'ble Supreme Court dismissed the SLP of the Revenue. He further referred the order of D-Bench of Tribunal, in the assessee's own case, for the assessment years 1999-2000 to 2001-02, and submitted that the Tribunal had followed its earlier orders and allowed the claim of the assessee. He further referred to the orders of the High Court as well as the Hon'ble Supreme Court, wherein the order of the Tribunal had not been disturbed for all these years. He submitted that for assessment year 2002-03, the issue did not arise as there was no remittance. He vehemently contended that, the remittances in question for all these years was based on the same agreement and as the facts were identical and as there are no change in circumstances, the rule of consistency has to be applied. He relied on the decision of the Supreme Court in the case of Radhaswamy Satsang reported in 193 ITR 341. He submitted that at page 71 of the paper book the permission granted by Reserve Bank of India is available and argued that it is not open for the assessment officer, to conduct an enquiry as to whether there is violation of FEMA, when the RBI does not say so. He pointed out that the entire details of the lision office of a foreign company having received foreign exchange and thereafter, remittance of the same to the assessee company as fees, were provided to the AO and under such circumstances, he emphasised that no disallowance is called for.
10. On ground No. 2, the learned counsel for the assessee submitted that the AO disallowed Rs.25 lakhs, on adhoc basis, whereas the CIT(Appeals) has restricted the disallowance to Rs.10,82,890/- that too on adhoc basis. He contended that the Revenue has not pointed out any particular item of expense which is to be disallowed and only on certain general observations, both the AO as well as the CIT(Appeals) made an adhoc disallowance. For the proposition that such adhoc disallowance cannot be made on a general discussion, the learned Senior Advocate relied upon the following decisions :
i)CIT vs. Binny Ltd. 215 ITR 536 (Mad.)
ii) CIT vs. Jafarbhai Akbarlal and Bros. 211 ITR 496 (Bom) He prayed that the adhoc disallowance be deleted.
11. Coming to ground No. 3, he pointed out that the AO disallowed an amount of Rs.50 lakhs form professional fees and other services on adhoc basis and the CIT(Appeals) restricted the disallowance to Rs.25 lakhs. He submitted that as in the earlier year's assessment, in this year also, the assessee had furnished each and every detail, to the lower authorities and the copies of such details were filed at pages 164 and 165 of the assessee's paper book. He submitted that while the AO referred to increase in professional fees, he did not consider decrease, in direct payment of salary. He drew the attention of the Bench to the explanation given by the assessee that, many of their personnel had left the organization, subsequent to the discontinuance of the assessee firm's association with AWSC effectively from 30th May, 2002 and under such circumstances, the assessee had to source loan staff, to complete the client's job, on contract basis. He pointed out that the charges paid for obtaining the loan staff have been debited to the head "Professional fees and other services" resulting net increase in the expenditure under this head. For this reason, he pointed out that the expenditure on salary had reduced. He submitted that the adhoc disallowance cannot be sustained.
12. Coming to ground No.4, he submitted that various expenses were disallowed by the AO on adhoc basis without pointing out any defects. He further argued that all the details regarding the expenses claimed has been furnished before the AO. He submitted that the assessee's claim for similar expenditure was never disallowed in all the assessment years except for the assessment years 2000-01 and 2001-02 which was restored by the Tribunal to the AO for fresh consideration. He further submitted that, for the same arguments as advanced in ground No. 2 and 3, the disallowance in question has to be deleted. Mr. Dastur submitted that the grounds are similar for assessment year 2004-05 in the assessee's appeal and that the same arguments are adopted for the other assessment years also.
13. Mr. S.S. Rana, learned DR, on the other hand, vehemently controverted the arguments of the learned Senior Counsel Mr. Dastur and submitted that Arthur Andrseen USA did not have lision office from 31-8-2002 and was held on criminal charges, as per the information he could gather by browsing the internet. He submitted that the entity was charged for obstruction of justice etc. On a query from the Bench, he agreed that this has no relevance to the case and is a general information.
14. Coming to the issue whether the payment made to AWSC is to be allowed in view of the decision of the Tribunal for the assessment year 1997-98, the learned DR submitted that the assessee had provided substantial evidence to the AO during the assessment proceedings of that assessment year and under those circumstances the Tribunal upheld the claim of the assessee. For the assessment year 1998-99, he read out the order of the AO passed u/s 143(3) on 26-02-2001 and submitted that no proof has been furnished by the assessee for that year. He submitted that the High Court dismissed the case of the Revenue for the assessment year 1997-98 for the reason that, the Revenue has not preferred an appeal for the assessment year 1997-98. He argued that this is a factual matter and submitted that the principles of res judicata does not apply. He relied on the following case law :
Kotak Mahindra Finance Ltd. vs. DCIT, 265 ITR 114 (Bom) The learned DR took this Bench through the order of the AO and submitted that the assessee during the course of assessment proceedings had given many excuses such as the details were being complied, they had no support staff, the assessment is not time barring etc. and submitted that general arguments were advanced by the assessee instead of providing evidence.
15. While submitting that the assessee had not furnished the required evidences, he argued that the assessee was permitted to remit to AWSC the maximum of 15% of gross income and not gross receipt. He submitted that - (a) the assessee has violated RBI instructions, (b) that the assessee has not cooperated the AO despite several opportunities, (c) that AWSC did not exist after 31-05-2002 and it is also not known what are the services that were rendered by AWSC. On these facts and circumstances, Mr. Rana submitted that the judgment of the Hon'ble Bombay High Court in the assessee's own case for the assessment year 1997-98 cannot be applied. He relied on the judgment of the Hon'ble Supreme Court in the case of C.K. Gangadhar and another 304 ITR 61 as well as in the case of Oswal Agro Mills Ltd. (313 ITR 24). The entire thrust of the argument of the DR was that the assessee has never cooperated with the Assessing Officer nor submitted the details before the AO and under such circumstances, relief cannot be granted to the assessee based on the decisions of the Tribunal and Courts in the assessee's own case for the earlier assessment years.
16. Mr. S.E. Dastur, learned Senior Advocate, in his reply, divided his arguments into two parts, the first dealing with the issue whether the fact and circumstances are identical and hence covered by the decision of the Tribunal and the High Court in the assessee's own case and the second part is whether the AO has been fair to the assessee and whether the assessee did his best to cooperate with the AO, despite denial of time and opportunity by the AO. On the first issue whether the Hon'ble High Court has not followed the judgment of Hon'ble Supreme Court in the case of Oswal Woolan Mills Ltd. 289 ITR 261. The learned counsel furnished a list of dates to demonstrate that the decision in the case of Oswal Agro Mills Ltd. (313 ITR 24) as well as in the case of C.K. Gangadhar 304 ITR 61 were decided much before the dismissal of the SLP filed by the Revenue, by the Hon'ble Supreme Court in these cases. He filed a copy of the judgment in the case of C.K. Gangadhar and pointed out that the constitutional Bench had made it clear, that their was no doubt in the correctness of the view taken by the Court in the case of Union of India vs. Kaumudini Narayan Dalal (2001) 10 SCC 231, CIT vs. Narendra Doshi (2004) 2 2SCC 801 etc.. He pointed out that the Hon'ble Court has laid down that unless there is a "just cause" for the Revenue to prefer an appeal, it would not be normally permissible for the Revenue to appeal in a particular case, when on similar facts and law, it has not done so in another case. He referred to the judgment of Jammu & Kashmir Charitable Trust 308 ITR 161 (SC) and submitted that this decision is in favour of the assessee as the Hon'ble Court laid down that, where the facts, the situation in all the assessment years is the same, and the Revenue has not appealed against the decision of the earlier year, its appeal against the decision of a succeeding year, will be dismissed. He vehemently contended that the AO has not urged a new ground nor is there material change in the factual position and hence the principle of consistency has to apply. He pointed out that the assessee was not relying on the judgment in somebody else's cases, but was relying on the judgment of the superior Court in his own case on the very same set of facts.
17. Coming to the submission that there were criminal cases and charges of obstruction of justice etc., he pointed out that no such cases existed against the assessee or against the Swiss concern AWSC. He pointed out that no such allegation is made by the AO or the CIT(Appeals) and in fact the American concern was acquitted of the charges.
18. Coming to the issue of the cooperation by the assessee, the learned Senior Advocate filed a list of dates and demonstrated that the assessment was taken up on 20th December, 2004 and within a span of 60 days the AO hurriedly concluded for the assessment for the years 2003-04 as well as 2004-05, though the time for completion of the assessments was available upto 31-03-2006. He took his Bench through the numerous details, voluminous evidences, clarifications, submissions filed by the assessee before the A.O., within the short time, to demonstrate the bonafide of the assessee and also to demonstrate that the AO was very unfair to the assessee. He pointed out that the AO has not met, any of the submissions made by the assessee nor did he choose to look into any of the papers/documents/evidences submitted by the assessee. He pointed out that AWSC did not cease to exist. He argued that there is no specific detail which was sought by the AO and which was not given by the assessee. He pointed out that the AO has nowhere in his order pointed out that, the facts of this year, are different from those of the earlier years. He also demonstrated that the details filed by the assessee for this year as evidence, are identical to the details filed by the assessee during the assessment proceedings for the assessment year 1997-98. Mr. Dastur read page No. 6 of the order of the AO for the assessment year 1998-99 and pointed out that the AO himself has accepted that the facts of the case are same as of the earlier year. He filed the assessment order for the assessment year 2001-02 to demonstrate that there is no change in the facts and circumstances of the case. He distinguished the decision of the Bombay High court in the case of Kotak Mahindra Finance Ltd. 265 ITR 114. Mr. Dastur gave a chart showing refunds due to the assessee and submitted that the possible reason for not granting time to the assessee, is to raise huge demands, so as to withhold and adjust the refunds.
19. On the issue of foreign exchange, he submitted that the certificate is given by the Bank and for the proposition, that the AO is not authorized to hold that the assessee has violated the provisions of FEMA, he relied on the decision of the Tribunal in the case of ACIT vs. Navdeep Co.Op. Bank Ltd. 43 ITD 697. He reiterated that no commercial activity is permitted for a liaison office of a foreign company and that no disallowance can be made based on such conclusions.
20. The learned DR, Mr. S.S. Rana, on the revenue appeal, submitted that ground No. 1 is on the adhoc addition of Rs.2 crores to income. On ground Nos. 2 and 3, he submitted that the arguments are the same as in the assessee's appeal and he relies on the order of the AO.
21. Mr. S.E. Dastur, learned Senior Advocate, on behalf of the assessee, submitted that no money was received by the assessee from ASWC and assuming that the assessee has received Rs.2 crores and treating the same as income and that too when the assessee follows mercantile system of accounting, is against law. He relied on the order of the CIT(Appeals).
22. On ground Nos. 2 and 3, he reiterated his arguments made in the assessee's appeal.
23. Coming to the other cases, both parties submitted that the grounds are similar and the arguments taken by the parties in this appeal may be adopted in those appeals.
24. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
25. The first issue that we adjudicate is on the contentions raised by the learned DR that the assessee has not cooperated or furnished the required evidence before the AO. For brevity, we do not wish to reproduce the list of dates and events given by Mr. Dastur. Suffice to say that the AO's recording that the assessee has not cooperated and he has not furnished the required documents is perverse. The AO did not give reasonable time to the assessee and on the contrary the A.O. had been very unfair and unjust in his approach and in conducting the assessment proceedings. Less the said, the better, as far as the conduct of the assessment proceedings is concerned. Suffice to say that all the contentions of the learned DR on the issue of the cooperation of the assessee, are contrary to the facts on record and devoid of merit. Mr. Dastur has also demonstrated that the AO might have possibly been under great pressure to raise certain demands of tax against the assessee before 31st March, 2005, so as to enable him to adjust the refunds due to the assessee for those years, against the demands.
In a calculation sheet filed, Mr. Dastur demonstrated that, the refunds that were due to the assessee for the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 along with the refund for the assessment year 1998-99 came to Rs. 26,98,26,132/-. Most of the refunds other than for the assessment year 1998-99 was to be paid on or before 31.03.2005. Thus , the assessment order raising demands were passed on 18.02.2005 and further on 29.03.2005, penalty orders were passed levying penalty of 200%. Further assessment for assessment years 1998-99 to 2002-03 were re-opened. The compulsion of the Assessing Officer can be seen from the "office note" at page 27 para 3 & 4 of the assessment order for the assessment year 2003-04 which reads as follows:
"3) Meanwhile, vide order bearing No.CIT-Mumbai-11/SCR.ASG/1/2004-05 dated 15.12.2004 of CIT.11, Mumbai, undersigned was directed to complete above mentioned assessment proceedings in the case of the assessee for A.Ys. 2003-04 and 2004- 05.
"4) The assessment in this case was concluded in compliance to repeated directions, written and oral, of superior authorities to conclude assessment proceedings in all high revenue yielding cases within the current financial year expeditiously in such a way that sufficient time is available with the AO to collect the demand within the current financial year." (emphasis ours) This explains why the Assessing Officer has not given opportunity to the assessee and as to why, he refused to be just and fair in his approach. If this can happen to a Multi-National firm of Chartered Accountants, who are experts in taxation and accounts and are renowned in this field, we shudder to think, as what would be the fate of lesser mortals, if they are placed in similar situations. Even this assessee could not stand-up to the predetermined and obsessed approach of the Department, forcing the assessee to approach a higher forum to seek justice.
26. We now come to the merits of the matter. On the first ground of reimbursement of expenses paid to AWSC, we are of the opinion that the issue is squarely covered by the decision of the ITAT, C-Bench, Mumbai in assessee's own case for assessment year 1997-98 and at page 5 para 7, the Tribunal held as follows :
" A plain reading of the assessment order indicates that while the Assessing Officer had in effect held the deduction in respect of the reimbursement of expenses is admissible because he had given categorical findings in support of the expenditure being for the purposes of business and commercially expedient, he had also made a 'token disallowance' of 20% of the expenses to cover the possible loss of revenue. 20% of the said expenditure on the ground that "considering the magnitude and complexity of expenditure, it cannot be ruled out that there may be an element of excess expenditure embedded in the reimbursement of cost to AWSC". The Assessing Officer accepts that the accounts were duly audited, that expenses are justified on the grounds of business expediency and in the light of the substantial benefit received from AWSC and yet he makes an adhoc disallowance of 20% of expenses. In our considered view, however, such an approach is entirely unsustainable in law. The very concept of token disallowance is bad in law, because such a disallowance is inherently based on 'surmises and conjectures' and devoid of a legally sustainable foundation. It is a case where one accepts all the contentions but not the consequences flowing from accepting the same. This cannot meet our approval. The CIT(A) was quite justified in deleting the disallowance. We approve and confirm the stand of the CIT(A). His action of deleting the disallowance does not call for any interference by us. Accordingly, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. "
27. The Hon'ble High Court in the Revenue's appeal for the assessment year 1998-99, after taking note of the decision of the Tribunal for the assessment year 1997-98, had held as follows :
" It is thus clear that the Assessing Officer himself for the assessment year 1997-98 allowed the expenditure. However, disallowed 20% of the said expenditure which was set aside by the Commissioner (Appeals). In an appeal preferred by the Revenue, that order was upheld. Relying on the said order for the assessment year 1998-99 the Tribunal observed as under :-
" Following our order for the assessment year 1997-98 and in the light of Assessing Officer's categorical findings in the remand proceedings, we deem it fit and proper to direct the Assessing Officer to delete the impugned disallowance. The assessee gets relief accordingly.
The Revenue did not prefer an appeal for the assessment year 1997-98, but has preferred an Appeal only in respect of assessment year 1998-99. In so far as that question is concerned, it will thus be apparent that the A.O. for the assessment year 1997-98 allowed the expenditure. It is in that context that we have to consider what is the effect of non-filing of Appeal by the Revenue for the assessment year 1997-98 on the first question."
Thereafter the Hon'ble High Court considered the judgment of Hon'ble Supreme Court in the case of Berger Paints India Ltd. vs. CIT 266 ITR 99, CIT vs. Oswal Woollen Mills Ltd. (no.1) 289 ITR 261 (P.&H.). Finally at para 7 it concluded as follows :
" Considering that the very issue was in issue for the assessment year 1997-98 and as Revenue did not prefer an appeal in respect of the said assessment year in our opinion that part of question A and B as framed to the extent of disallowance of the sum of Rs.9,25,82,953/- would not arise. "
The S.L.P. against this order was dismissed by the Hon'ble Supreme Court vide its order dated 16-11-2009.
28. Thereafter the Mumbai D-Bench of the Tribunal in ITA No. 6193, 6194 and 6195/Mum/2004 for the assessment years 1999-2000, 2000-01 and 2001-02 vide order dated 28th Feb., 2007 has held that the learned DR could not distinguish the facts of the case of these years with the facts of the case for the assessment years 1997-98 and 1998-99. On these findings, it dismissed the appeals of the Revenue. On further appeal, the Hon'ble Bombay High Court vide its order dated 11th March, 2008 followed its decision for the assessment year 1998-99 and dismissed the Revenue's appeal. Similar orders were passed by the Hon'ble High court and Hon'ble Supreme Court for the assessment years 2000-01 and 2001-02.
29. On this factual matrix, we are unable to agree with the contentions of the learned DR that the principles of consistency does not apply in these cases. The Hon'ble Supreme Court in the case of C.K. Gangadhar (supra) had considered the principle of consistency as well as the aspect of certainty of law. At page 66 pagenisation 10 and 11, the Hon'ble Supreme Court held as under :
"10. It will be relevant to note that in Karnamchari Union v. Union of India [2001] 243 ITR 143 (SC) and Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219 (SC), this court observed that without a just cause the Revenue cannot file the appeal in one case while deciding not to file an appeal in another case. This position was also noted in CIT v. Shivsagar Estate [2004] 9 SCC 420.
11. The order of refer3nce would go to show that the same was necessary because of certain observations in Berger Paints India Ltd. v. CIT [2004] 12 SCC 42. The decision in Union of India v. Kaumudini Narayan Dalal [2001] 10 SCC 231 was explained in Hemalatha Grgya v. CIT [2003] 9 SCC 510 at paragraph 14. It has been stated in the said case that the fact that different High courts have taken different views and some of the High Courts are in fvour of the Revenue constituted 'just cause' for the Revenue to prefer an appeal. This court took the view that having not assailed the correctness of the order in one case, it would normally not be permissible to do so in another case on the logic that the Revenue cannot pick and choose. There is also another aspect which is the certainty in law."
In this case the Revenue has not even made an attempt to state that it has a "just cause" in not filing an appeal for the assessment year 1997-98. In the case of J.K. Charitable Trust (supra), the Hon'ble Court held that when the facts, situation in all the assessment years is the same and if the Revenue has not appealed from the decision of an earlier year, its appeal from the decision for the succeeding year will be dismissed.
30. Be that as it may, it is not for this Tribunal, to express any opinion on the finding of the Hon'ble High Court, that as the Revenue has not filed an appeal against the same issue for the assessment year 1997-98, it is debarred from agitating the same question in the subsequent assessment year. Thus, in our considered view, the issue is not only covered by the order of the Co-ordinate Bench, but also by the judgments of the jurisdictional High Court.
31. Now we come to the issue whether the facts are identical. The agreement in question with AWSC, in pursuance of which the assessee had made these payments, is the same for all the assessment years, including the impugned assessment year. It is not the case of the AO that there is a change in the terms and conditions or that there is any variation in the operations or services availed in this year, as compared to the earlier years. The assessee had enclosed the description of functions of AWSC along with the break up of cost for various functions. Para 2 of the agreement provides for the services, facilities and assistance provided by AWSC to the assessee and these remain unchanged. Reserve Bank of India has approved the remittance in question and it is not the case of the Reserve Bank of India or any other agency, that the assessee has violated the terms and conditions, under which it was permitted to remit its shares of cost to AWSC. It is not in dispute that the assessee has received an invoice from AWSC of reimbursement of cost and in compliance with the RBI approval and the agreements, the invoice was restricted to 15% of foreign exchange earnings. The assessee has also produced a report of the Auditors of AWSC along with the Schedule of breakdown of expenses shared by various particular firms and basis of allocation. It could be seen from the Schedule that the assessee's share in the total worldwide expenditure pool of AWSC is as small as 0.39%. The assessee has also given reasons for entering into agreement with AWSC. The payment by the assessee is fee for technical services/royalty. The assessee had provided voluminous evidence in support of these contentions. The AO has not dealt with any of the evidence. He has not enquired into, or contradicted with evidence. Nor has he commented upon, any information and documentation given by the assessee. Lame excuses, such as the assessee has only filed a photo-stat copy of the Tribunal order etc. are made. Copy of the Tribunal order is also served on the AO and it is always possible for the A.O. to verify the genuineness of an order. Nothing is done by the A.O. He simply ignores all the evidences and come to the conclusion that the claim of the assessee is not allowable.
32. For the assessment year 1997-98, the AO in his order passed u/s 143(3) read with section 254, on 29th March, 2004 had made the following observations :
" On the basis of the above the discussion are summarized below:
The assessee has filed all the documents required to support the claim for the expenditure as discussed in para 14 above;
The assessee has provided substantial evidence of benefits received from AWSC and utilized in its professional activities as discussed in para 13, 15 and 16 above;
The comments received from the Jt.DIT(IT), Rg 1, Mumbai, International Taxation, states that the said payment by the assessee to AWSC is in the nature of royalty and fees for included services per discussion in para 17 above;
The assessee has also satisfied the issues mentioned in the original assessment order and the CIT(A) order has satisfied the conditions of section 37(1) of the Inccome tax Act, as discussed in para 20 above.
The assessee has satisfied the conditions of section 37(1) of the Income tax Act, as discussed in para 20 above;
The assessee has remitted the said expenditure after deducting the required tax and accordingly, it cannot be disallowed u/s 40(a)(i) of the Act.
In view of the facts and the circumstances discussed above, the payment to AWSC represents reimbursement of establishment costs, royalty for use of name 'Arthur Andersen' and access to knowledge and databases and fees for technical services for provision of various other services. Accordingly, I find that the expenditure is incurred wholly and exclusively for the purposes of business....... "
In our opinion, these observations apply to the issues before us in the current year also. There is no dispute on the fact that the assessee is following cash system of accounting and that the payment has been done this year. In other words, the year of allowability of the expenses in question is not in dispute. In fact the Assessing Officer, in para 5 to 8 of the "office note" attached to the assessment order for the assessment year 2003-04 as well as for the assessment year 2004-05, at paras 5 to 9 recorded as follows:
"5) In the instant case, additions were being made to the total income of the assessee by disallowing remittances paid by it to one M/s. Arthur Andersen Worldwide (AWSC) claimed to be a Swiss based principal company. Thus, in A.Y. 1997-98 for the first time addition on this account were made which were repeated by the AO till A.Y. 2001-02 disallowing in entirety the remittances claimed to have been paid to AWSC. Action of the AO for AYs. 1997-98 and 1998-99 was confirmed by CIT(A). The assessee contested the matter before ITAT, Mumbai for A.Y. 1997-98. The assessee produced before ITAT certain evidences for its consideration which, as per records were not provided to the AO at the time of original assessment proceedings. Admitting these evidences, ITAT directed the AO to pass a fresh order after considering the evidences produced by the AO for A.Y. 1997-98. Order u/s. 143(3) r.w.s.254 was passed by the AO on 29.03.2004 whereby the AO allowed 80% of the remittances and added 20% on the grounds of personal element involved in these expenses. Action of the AO was dismissed by CIT(A) who deleted 20% addition on account of personal element. Department has filed a second appeal before Tribunal Mumbai against this order of CIT(A). Meanwhile, assessee's claim of remittances in A.Ys. 1999-2000, 2000-01 and 2001-02 were also disallowed by the AOs in full, and all such additions were deleted by CIT(A)s. Against the decision of CIT(A) for A.Ys.1999-2000, 2000-01 and 2001-02, Department had filed appeal before the Tribunal contesting relief given by CIT(A) in deleting 100% remittances disallowed to the assessee.
6) Thus, there existed a scenario in which Department was contesting both 100% disallowance of expenses as well as 20% disallowance. Assessment u/s.143(3) for A.Y. 2001-02 and u/s.143(3) r.w.s.254 for A.Y. 1997-98, incidentally, were completed in F.Y. 2003-04. Perusal of office note attached to this order indicated that assessment proceedings u/s.143(3) r.w.s. 254 for A.Y. 1997-98 were concluded vide order dated 29.03.2004, by the AO with prior approval of CIT-11, Mumbai and CCIT, Mumbai.
7) Consequently, letter No.Addl.CIT-11(2)/Asst. Proceedings/2004-05 dated 16.12.2004 was addressed to CIT-11, Mumbai, seeking guidance/clarification on the matter. In response, letter No. CIT/Mumbai-11/143(3)/2004-05 dated 06.01.2005 was received wherein CIT-11, Mumbai, directed to complete the assessment by independently examining all the issues involved in the case for the year and 'ignoring' the contents of office note dated 29.03.2004, mentioned supra.
8) The evidences produced by the assessee as well as arguments forwarded in support of his claim are the same which have been given in earlier years including A.Y. 1997-98. Discussions made in the orders clearly indicate that assessee's claim of remittances, in the light of evidences produced, is patently, incorrect, illegal, unfounded and totally bereft of any legal strength.
9) Having regard to the observations made in point Nos.7 and 9 above, undersigned was left with the only alternative of differing with the stand taken by my predecessor, of allowing 80% expenses and adding 20% only to the assessee's income, and compelled to disallow assessee's claim of remittances in full."
Thus we hold that the AO was in error in not following the order of the Tribunal on the very same issue on identical facts and circumstances and also in deviating, without reasons, from the observation of his predecessor A.O and also we hold that the first appellate authority was in error in confirming the order of the A.O. There is also no violation of RBI Instructions, which were pointed out by the concerned agencies. It is not for the A.O. to adjudicate whether there were violation in FEMA etc. Under FEMA Notification No. FEMA 22/2000-RB dated 3rd May 2000 the Liaison office does not undertake any commercial activity. In the case of Navdeep Co-op. Bank Ltd. (supra), it is held that power of revenue are limited and it could not overlook the fact that neither RBI or the Registrar of Co-operative Societies in that case, have held that the assessee had committed irregularities and have the A.O. cannot come to a contrary conclusion.
33. In the result, we allow this ground of the assessee and direct the AO to allow deduction of payment made to AWSC on cash basis.
34. Coming to ground No.2, the disallowance of repair and maintenance expenditure is made on adhoc basis. No particular information has been called for by the AO nor has the AO pointed out any deficiency in the details furnished by the assessee. At para 8 page 23 of the assessment order, the AO states that a perusal of the details of expenses filed, indicate that they include items of enduring benefit like replacement of hard disk in computers, server upgradation, furniture repairs, painting and masonry jobs, renovation of pantry, plumbing etc. The expenditure on these repairs, as per the AO, are in the capital field. We are unable to endorse such a view. Even the other reasons given in paragraph B and C of page 23 and 24 of the assessment order are devoid of merit. Just because the assessee has to incur expenses of repairs and maintenance, when the premises is given on lease, it cannot be held that the same becomes inadmissible. In any event, adhoc disallowances cannot be upheld. The Hon'ble Madras High Court in the case of CIT vs. Binny Ltd. 215 ITR 536, held as follows :
"Held, that the entire structure of the spinning department was not altered. Replacing of the roof was for the purposing of repairing the existing roof. The expenditure incurred for replacing the roof could not be considered to be for the purpose of obtaining an enduring benefit. The expenditure incurred for re-roofing of the spinning department was allowable as revenue expenditure."
Similarly, the Hon'ble Bombay High Court in the case of CIT vs. Jafarbhai Akbarlal and Bros. 211 ITR 496 (Bom) held as follows :
" If an expenditure was incurred for acquiring and bringing into existence an asset for the enduring benefit of the business it would normally be "capital expenditure" and if the expenditure was made for running the day-to-day business with a view to produce more income, it would be "revenue expenditure'. This is normally a question of fact unless it is demonstrated that there is non-application of basic principles.
The assessee dealt in the business of manufacture and wale of fire crackers. It had an old petrol van which was used for the purposes of business. A sum of Rs.20,908 was spent on the said vehicle. The old petrol engine was replaced by a new diesel engine and the old body by a new body. For the assessment year 1976, deduction of that amount was claimed under the head "Revenue expenditure". The Income-tax Officer disallowed the claim on the ground that the expenditure was of capital nature. The disallowance was maintained by the Commissioner of Income-tax. The Tribunal, however, in second appeal, upheld the deduction as revenue expenditure. On a reference ;
Held, that the truck was old and needed repairs. Judicial notice can be taken of the fact that diesel is much cheaper than petrol. No new asset had come into existence by incurring the expenditure. It was deductible."
Respectfully applying the proposition laid down in those case laws to the facts of this case, we delete the adhoc disallowance as confirmed by the first appellate authority, as none of the expenditure mentioned is in the capital field. Thus, ground No. 2 is allowed.
35. Ground Nos. 3 and 4 are of adhoc disallowance from out of professional fees paid, travel and conveyance expenses, staff training expenses, motor car expenses, telephone, fax and courier expenses and miscellaneous expenditure. In all these cases also the AO has not given any justifiable reasons for making adhoc disallowances. In the case of professional fees, he simply held that the same is excessive. The explanation given by the assessee that the expenditure under the head "Salaries" has been reduced and consequently the professional fees has increased, has not been taken note of. Similarly in the case of other expenses, the disallowance was made on the adhoc basis, without sound basis or reason. This cannot be permitted. The first appellate authority, in our considered opinion, has also not judiciously dealt with the matter. No disallowance can be made just for the sake of disallowance. In view of the lack of proper appreciation of the facts and lack of investigation and proper reasoning, we delete the disallowance and allow ground No. 3 and 4 of the assessee. In the result the appeal of the assessee is allowed.
36. This brings us to the Revenue appeal in ITA No. 923/Mum/2006.
37. Ground No.1 is against the CIT(Appeals) deleting the addition of Rs.2 crores made by the AO on an assumption that certain income may be receivable by the assessee in terms of para 8.2(A) of Member Interfirm Agreement. Admittedly the assessee follows cash system of accounting. When it is not the case of the AO, that the assessee has received money from AWSC, the question of taxing the same does not arise. The addition has been made on a pure surmise. The first appellate authority at para 5.1 page 7 of his order for the assessment year 2003-04 held as follows :
" I have considered the rival contentions. The Assessing Officer has forcefully argued his case in the assessment order. It is, however, seen that the issue was not discussed at the time of assessment. The appellant, therefore, never had a chance of rebuttal. No basis has been given as to how this figure of Rs.2 crore has been arrived at by the Assessing Officer. In a scrutiny assessment of this nature, specific additions should be made and where the estimate is inevitable proper opportunity should be given to the appellant and a proper basis should be determined of the estimated disallowance. This has not been done in this case. This addition is, therefore, not sustainable and is ordered to be deleted. The appellant gets a relief of Rs. 2 crore.
We agree with these findings of the CIT(Appeals) and dismiss ground No. 1 of the Revenue.
38. Coming to ground No.2 and 3 which are on the issue of adhoc disallowances, for the reasons given in the assessee's appeal (ground No. 2, 3 and 4 of the assessee's appeal), as the issue is the same, we dismiss this ground of the Revenue.
39. In the result, the appeal of the Revenue is dismissed.
40. Coming to the assessment year 2004-05, the grounds in assessee's appeal are as follows :
The Commissioner of Income-tax (Appeals)-XI, Mumbai, has erred in confirming disallowance of claim of claim of expenses of Rs.9,36,20,270/- paid to Andersen Worldwide SC.
The CIT(A) has also erred in confirming disallowance of repairs and maintenance expenses of Rs.38,718/- out of disallowance of Rs.1,00,000/-.
The CIT(A) has also erred in confirming disallowance of Rs.15,00,000/-/- towards expenses for professional fees and other services out of disallowance of R.30,00,000/-.
The CIT(A) has further erred in confirming entire disallowance towards the following:
Travel and Conveyance expenses disallowance of Rs.30,000/-
Motor Car expenses disallowance of Rs.5,000/-.
Miscellaneous expenses disallowance of Rs.10,000/-.
The grounds in Revenue's appeal for assessment year 2004-05 are as follows :
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai, has erred in deleting the addition of Rs.2 crores made by the Assessing Officer on account of income receivable in terms of Par 8.2(A) of member Interfirm Agreement.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai has erred in restricting the addition of Rs.38,718/- out of total addition of Rs.1,00,000/- made by the Assessing Officer on account of unsupported claim for expenses on repairs and maintenance expenses.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-XI, Mumbai has erred in restricting the addition to Rs.15,00,000/- out of total addition of Rs.30,00,000/- made by the Assessing Officer on account of professional fees and other services claimed by the assessee without any supporting evidences.
41. As submitted by both the parties, we find that the isisues in both the years are common. Consistent with the view taken for the assessment year 2003-04 and for the reasons given therein, we allow all the grounds of appeal of the assessee and dismiss the grounds of the Revenue for the assessment year 2004-05.
42. Now we take up ITA Nos. 3028/Mum/2006, 3029/Mum/2006, filed by the assessee and ITA Nos. 2886/Mum/2006 and 2887/Mum/2006, filed by the Revenue. The assessee's appeals are against penalties levied by the AO u/s 271(1)(c) and to the extent confirmed by the first appellate authority and the Revenue's appeals are against the penalties to the extent deleted by the first appellate authority for the assessment years 2003-04 and 2004-05.
43. As we have deleted all the additions/disallowances made for both the assessment years in the quantum appeal, the penalties have no legs to stand on. Thus we quash the penalties levied for the assessment years 2003-04 and 2004-05 u/s 271(1)(c) and allow the appeals of the assessee.
44. For the same reasons, the appeals filed by the Revenue for assessment years 2003-04 & 2004-05 against the deletion of penalties u/s 271(1)(c), are dismissed.
45. Now we take up ITA Nos. 6983/Mum/2006, 6984/Mum/2006, 6985/Mum/2006, 6986/Mum/2006, 6987/Mum/2006. These are appeals for the assessment years 1998-99, 1999-2000, 2000-01, 2001-02 and 2002-03. The facts, issues and grounds in all these appeals are identical.
46. All these appeals are, on the issue of reopening of the assessment, as well as on, the issue of disallowance of expenses claimed out of payments made to AWSC. The grounds (in ITA No.6983/Mum/2006) read as follows :
The Commissioner of Income-tax (Appeals)-XI, Mumbai has erred in confirming the validity of the reopening the assessment under section 147 of the Income-tax Act, 1961.
The CIT(A) has also erred in confirming part disallowance of expenses of Rs.55,31,004/- out of the payment made to Andersen Worldwide SC (AWSC).
The CIT(A) has also erred in confirming addition of an amount of Rs.2 crore as income under para 8.2(A) of the agreement with AWSC.
47. Coming to ground No. 2 for all these appeals, for the reasons given while allowing ground No. 1 of the assessee's appeal for the assessment year 2003-04 in ITA No. 483/Mum/2006, we allow this ground of the assessee for all the assessment years 1998-99 to 2002-03.
48. Ground No. 3 is also allowed for the reason given while dismissing the revenue's appeal for the assessment year 2003-04 on the same issue.
49. Though Mr. Dastur has argued on the validity of the reopening, as we have decided the issue on merits in favour of the assessee, going into the validity of reopening of assessments and adjudicating the same, would be an academic exercise. Thus, we do not adjudicate this issue.
50. In the result, we direct the AO to grant deduction to the assessee on all the remittances made to AWSC and claimed as deduction, and also to delete the addition as income under para 8.2(A) of the agreement with AWSC.
51. Accordingly, all the appeals of the assessee are allowed for the assessment years 1998-99 to 2002-03.
52. In the result, the appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.
Order pronounced on this 23rd day of July, 2010.
Sd. Sd.
(D. Manmohan) (J. Sudhakar Reddy)
Vice President Accountant Member.
Mumbai, dated 23rd July, 2010.
Wakode
Copy forwarded to :
Appellant.
Respondent
C.I.T.
CIT(A)
N
\]DR, B-Bench
(True copy)
By Order
Asstt.Registrar,
ITAT, Mumbai Benches, Mumbai.
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