Income Tax Appellate Tribunal - Mumbai
Offshore Infrastructure Ltd, Mumbai vs Assessee on 27 January, 2012
आयकर अपील य अ धकरण,
धकरण मंुबई यायपीठ 'सी' मंुबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, MUMBAI
सव ी संजय अरोड़ा,
अरोड़ा, लेखा सद य एवं ी वजयपाल राव,
राव या.स
या स ।
BEFORE SHRI SANJAY ARORA,
ARORA , AM & SHRI VIJAY PAL RAO, JM
आयकर अपील सं./I.T
I.T.A.
I.T .A. No.1740/Mum/2012
No. 1740/Mum/2012
( नधारण वष / Assessment Year:2009-10)
Offshore Infrastructure Ltd. बनाम/ Addl. CIT RG 10(3)
बनाम
22, Udyog Kshetra, Mulund Aayakar Bhavan,
Vs.
Lin k Road, Mulund M.K. Road,
Mumbai-400080 Mumbai-400020
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. :AAACO1012F
(अपीलाथ /Appellant
Appellant)
Appellant .. ( यथ / Respondent)
Respondent
अपीलाथ ओर से / Appellant by : Shri Deepak H. Padachh
यथ क ओर से/Respondent by : Shri Roumuan Paite
सनवाई
ु क तार ख / D t. o f H e a ri n g : 2nd July 2013
घोषणा क तार ख/D
ख t . O f P ro n o u n c em e n t: 24th July 2013
आदे श / O R D E R
PER : वजयपाल राव, या.स. / VIJAY PAL RAO, JM
This appeal by the assessee is directed against the order dated 27.1.2012 of Commissioner of Income Tax(Appeals) for the assessment year 2009-10.
2. The assessee has raised the following effective grounds:
1 .a) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of 22,60,504/- made by the AO to the income of the Appellant by way of disallowing entrance fees and subscription for club membership of The Bombay Presidency and Golf Club on the plea of non-recurring expenditure.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of ` 79,092/- made by the AO to the income of the Appellant on account of difference 2 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
in closing balance in the account of M/s. Jindal Saw Ltd. due to dispute in respect of quantity and rate difference pending for settlement.
3. On the facts and in the circumstances of the case and in law, the id. AO erred in confirming the addition to the extent of ` 71,750/- to the income of the Appellant by way of disallowing certain advertisement expenses in souvenirs on the plea that there said is in the nature of donation.
4. The id. CIT(A) erred in holding that le of interest u/s. 234B and 234C are consequential. The Appellant denies its liability for such penalty.
5. The ld. CIT(A) erred in holding that the ground raised disputing initiation of penalty proceedings u/s.271(1)(c) is pre-mature. The Appellant denies its liability for such penalty.
3. Ground No. 1 is regarding disallowance of entrance fees and subscription for club membership. The assessee has incurred expenditure being club entrance fees of ` 22,60,504/-. The AO asked the assessee to submit the details of expenditure and also to show cause as to why entrance fees should not be treated as capital expenses. The assessee explained that the assessee company had made payment of entrance fee for club membership for Bombay Presidency and Golf Club in the name of Mr. Vishal Sachdev and Mr. Shailesh Sachdev Directors of the company to promote its business interests and to maintain high profile contacts. It was also contended that the assessee has not acquired any asset and hence, the advantage is in commercial sense and not in the capital field. The AO did not agree with the contention of the assessee and held that it is non- recurring expenditure and has resulted in an enduring benefit to the assessee. Accordingly the AO disallowed the entrance fee for club 3 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
membership fees amounting to ` 22,60,504/- as capital expenditure. On appeal, the CIT(A) has confirmed the disallowance made by the AO.
4. Before us the Ld. Counsel for the assessee has submitted that the expenditure has been incurred to build up better contacts with the clients and customers and thereby to improve business prospects. The club has been used by the assessee for conference and meetings with clients, suppliers business associates etc. Therefore the club provided the directors the place meeting and entertaining clients, suppliers business associates etc. which is in the business interests of the assessee. The assessee has not acquired any asset by making the payment of entrance fee of club. The expenditure is in the nature of an advantage of commercial sense and has been incurred for running the business of the assessee more profitable, therefore, it cannot be treated as capital in nature. He has relied upon the following decisions:
Dy. CIT vs. Bank of America Securities (India) P. Ltd. [2011] 128 lTD 386 (Mum) ACIT vs. Tata Services Ltd. ITA No.19951M12010 dated 14-10- 2011 OTIS Elevators Co. (India) Ltd. vs. CIT [1992] 195 ITR 682 (Born) CIT vs. Samtel Color Ltd. [2010] 326 ITR 425 (Delhi) Gujarat State Export Corp. Ltd. vs. CIT [1994] 209 ITR 649 (Guj)
5. On the other hand, the Ld. DR has relied upon the orders of the authorities below and submitted that the Assessing Officer has relied upon the decision of Hon'ble Kerala High Court in case of Framtone Connector 4 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
Pvt. Ltd. Vs CIT 294 ITR 559 and the CIT(A) has made out a distinction from the decision of Hon'ble Jurisdiction High Court in case of Otis Elevator Co. (India) Ltd. Vs CIT 196 ITR 682 because the membership in the case of the assessee is in the name of the directors and not in the name of the assessee company.
6. We have considered the rival submission as well as relevant material on record. The assessee has made out a case that the club membership has been taken for the purpose of the business of the assessee as the directors of the assessee company conduct meeting/conference with the clients, suppliers and business associates. The authorities below have disallowed the expenditure only on the ground that the same is capital in nature and it has not been disputed that the expenditure has been incurred for the purpose of the business of the assessee. Therefore the question before us is whether the expenditure is revenue in nature or capital. In the case of Otis Elevator Co. (India) Ltd. Vs CIT (supra). The Hon'ble Jurisdiction High Court has held as under:
"Mr. Mistry, learned counsel for the assessee, contended that the question of law raised by the second question was concluded by the decision of this court in CIT v. Indokem Private Ltd. [1981] 132 ITR 125. Dr. Balasubramanian, learned counsel for the Revenue, however, contested this submission and maintained that the memberships of clubs were not intended for the benefit of the assessee company's business but actually were the respective obligations of the employees which had been met by the assessee employer and, consequently, they were perquisites within the meaning of section 40(a)(v) and that they ought to be disallowed as provided thereunder and that the Income-tax Officer was right in disallowing these items of expenditure. As we look at this issue, It appears to us that the factual findings of the Appellate Assistant Commissioner which were clear on the point have not been disturbed by the Tribunal. The Appellate Assistant Commissioner 5 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
categorically found that the payments of club fees were made with a view to enable the assessee to improve its business relations and prospects. The Tribunal, without recording a contrary finding on this crucial aspect of the matter, restored the order of the Income-tax Officer. In our judgment, considering clear finding given by the Appellate Assistant Commissioner, without contrary finding thereto by the Tribunal, we must accept the facts as found by the Appellate Assistant Commissioner. Consequently, the payments must be allowed as business expenditure not falling within mischief of section 40(a)(v). The house rent payment being a cash amount paid would be covered by the ratio of the decision in Indokem [1981] 132 ITR 125 (Born). We, therefore, answer question No. 2 in the negative and in favour of the assessee."
7. A similar view has been taken by the Hon'ble Delhi High Court in the recent decision in the case of CIT Vs Samtel Color Ltd. (supra) as under:
"10. Having heard learned counsel for the Revenue as well as the assessee we are of the view that the impugned judgment of the Tribunal deserves to be upheld for the following reasons:
The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The "business purpose" basis adopted for eligibility of expenditure under section 37 of the Act was the correct approach. This is more so in view of the Tribunal's findings that it was the assessee which nominated the employee who would avail of the benefit of the corporate membership given to the assessee.
11. The other hurdle for qualification of the expenditure under section 37 of the Act is that expenditure incurred should not be on capital account. The Assessing Officer came to the conclusion that the expenditure was of a capital nature based on a fallacious reasoning that the expenditure was of an enduring nature and hence on a capital account. It is well-settled that an expenditure which gives enduring benefit is by itself not conclusive as regards the nature of the expenditure. We may add that even lump sum payment, which was the case in the instant matter, is not decisive as regards the nature of the payment. See observations in Empire Jute Co. Ltd. v. CIT [1980) 124 1TR 1 (SC) as also the judgment of the Division Bench of this court in CIT v. J. K. Synthetics Ltd. [2008) 309 ITR 371; I. T. R. Nos. 139 of 1988 and 202 of 1989. The true test for qualification of expenditure under section 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital 6 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
account. In the instant case, as discussed above, the admission fee paid towards corporate membership is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit- earning apparatus of a business enterprise.
12. To support the Revenue's contention that the impugned expenditure is on capital account learned counsel, Ms. Prem Lata Bansal has cited the judgment of Framatone Connector Oen Ltd. v. Duty CIT [2007] 294 ITR 559 (Ker) ; [2006] 157 Taxman 116. The said judgment is based on the Supreme Court judgment in the case of Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792. The judgment of the Supreme Court on which the Kerala High Court has relied heavily dealt with the issue with regard to the fee paid to the Registrar of Companies for increase of authorised capital, that is, whether such an expense was in the nature of revenue or capital expenditure. The Supreme Court came to the conclusion that since the fee was paid to the Registrar of Companies for increase in the capital base of the assessee it was in the nature of capital expenditure. According to us, the ratio of the aforementioned Supreme Court judgment is not applicable to the expenses incurred on an admission fee for corporate membership. We respectfully disagree with the ratio of the judgment of the Kerala High Court. In turn, we respectfully follow the ratio of the judgment of the Division Bench of this court in CIT v. Nestle India Ltd. [2008] 296 ITR 682 and that of the Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682."
8. The Hon'ble Delhi High Court has considered all the relevant decision on the point and then decided the issue in favour of the assessee. Following the decision of Hon'ble Jurisdiction High Court as well as latest decision of Hon'ble Delhi High Court we decide this issue in favour of the assessee and against the revenue.
9. Ground No. 2 is regarding addition on account of difference in closing balances with M/s Jindal Saw Ltd. During the course of assessment proceedings, the AO noted on the basis of information received u/s 133(6) 7 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
from Jindal Saw Ltd. that there was a difference of ` 79,092/- in the closing balance which could not be reconciled by the assessee and accordingly made an addition of the said amount. On appeal, the CIT(A) has confirmed the addition made by the assessee on the ground that no supporting evidence has been produced before it to show that this amount was not accounted for.
10. Before us the Ld. AR has submitted that the assessee had filed a statement of reconciliation of balances with Jindal Saw Ltd. along with letter dated 16.11.2011 at page No. 74-77 of the paper book. He has further submitted that no excess deduction of expenses has been claimed by the assessee on account of the difference in balances. Thus, the Ld. AR has submitted that the assessee has not claimed any expenses on this account therefore the addition is not justified. On the other hand, the Ld. DR has relied upon the orders of the authorities below.
11. We have considered the rival submission as well as relevant material on record. The AO made the addition on the basis of the information received from Jindal Saw Ltd. which shows a difference in closing balance. The CIT(A) has confirmed the addition on the ground that the assessee has not filed any supporting evidence. We find that the assessee has filed the reconciliation of balance with Jindal Saw Ltd. Further when the assessee has explained that no excess deduction of expenses has been claimed then the disallowance cannot be made without verify this fact that the assessee has not claimed any excess 8 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
.
deduction. In view of the above facts and circumstances we set aside the issue to the record of the Assessing Officer to verify the facts and reconciliation properly and then decide the same after giving an opportunity of hearing to the assessee.
12. Ground No. 3 is regarding advertisement expenses. The assessee has claimed the payment of ` 1,86,989/- under the head advertisement expenses. The AO noted that a payment of ` 81,750/- made on account of donation for religious and social purposes but were claimed as advertisement expenses. The AO further noted that out of the said expenses ` 10,000/- was paid to Maharashtra Navnirman Sena which cannot be said to be donation for business purposes. Accordingly the AO disallow the said amount of ` 81,750/-. On appeal, the CIT(A) has confirmed the disallowance to the extent of ` 71,750/- by taking note of the facts that the assessee itself as suo-motto disallowed a sum of ` 10,000/- in computation of income.
13. Before us the Ld. AR of the assessee has submitted that the AO disallowed these expenses by treating the same as religious donation whereas these expenses were incurred by the assessee on advertisement and not as donation. The Ld. AR has submitted that these expenses were incurred for advertisement through banners, souvenirs, booklets etc. and therefore cannot be considered as donation. He has relied upon the CBDT Circular No.200 dated 28.06.1976 and CBDT Circular No. 203 dated 16.07.1976 as well as decision of Hon'ble Calcutta High Court in case of British Electrical & Pumps (P) Ltd. Vs CIT 106 ITR 620. 9 ITA No.1740/M/2012
Offshore Infrastructures Ltd.
.
14. On the other hand, the Ld. DR has relied upon the order of the authorities below and submitted that the AO has categorically pointed out the expenditure incurred by the assessee on the occasion of Durga Puja, Ganesh Puja and other religious functions which cannot be treated as the expenses on advertisement.
15. We have considered the rival submission as well as the relevant material on record. The AO has given the details of the expenses in para 5 of the assessment order as under:
Expense Date Particulars Amount Reason for
debited disallowance
Under head 11th Apr 08 Maharashtra 10,000 Political donation
Advertisement Navnirman
expenses Sena
5th Jul 08 Sree Narain 1,000 Donation
Mission, Bhopal
29th Jul 08 Bengal 5,000 Donation
Engineering
College,
Alimony
Association
4th Sep 08 Durga Puja 10,000 Religious donations
11th Sep 08 Ganesh Puja 5,000 Religious donations
11th Sep 08 Mahila Mandal 1,000 Donation
17th Sep 08 Durga Puja 20,000 Religious donations
20th Sep 08 Vashi Cultural 3,500 Donation
Association
20th Sep 08 Durga Puja 1,250 Religious donations
3rd Oct 08 Durga Puja 5,000 Religious donations
7th Oct 08 Durga Puja 5,000 Religious donations
7th Oct 08 Durga Puja 5,000 Religious donations
9th Dec 08 Ayappa Bhakt 1,000 Religious donations
Sewa Sangam
6th Jan 09 Navratra 5,000 Religious donations
Mahotsava
31st Mar 09 Sindhi Culture 4,000 Social donation
Society
Total 81,750
10
ITA No.1740/M/2012
Offshore Infrastructures Ltd.
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16. Out of the total amount of ` 81,750/- the payment of ` 10,000/- to Maharashtra Navnirman Sena was found to be suo-motto disallowed by the assessee and accordingly the CIT(A) restricted the disallowance to ` 71,750/-. There is no quarrel on the point that no distinction can be made between the expenditure on advertisement in souvenirs and other type of advertisement including newspaper or magazine. The CBDT has made it clear in its circular No. 200 and 201 (supra). However, in the case in hand the payments were made to the various religious organisation/functions in which the assessee name may be appeared in the booklets and souvenirs issued on those occasions. Thus these so called souvenirs/booklets are not the publication of any institution, industrial organisation or other association or institutions as permanent in nature and related to the business of the assessee. Accordingly, we do not find any merit in the assessee's contention that the expenditure incurred for advertisement in souvenirs of all these parties is an allowable expenditure. The decision relied upon by the assessee are not applicable in the facts of the assessee's case, therefore we do not find any reason to interfere with the orders of the authorities below qua this issue.
17. Ground No. 4 is regarding levy of interest u/s 234B and 234C. The interest u/s 234B and 234C are consequential in nature therefore, no specific findings is required.
18. Ground No. 5 is regarding initiation of penalty proceedings u/s 271(1)(c). This ground of the assessee is pre-mature as it is against the 11 ITA No.1740/M/2012 Offshore Infrastructures Ltd.
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initiation of penalty proceedings. Therefore prior to levy of penalty it cannot be challenged in appeal accordingly dismissed.
19. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 24th day of July 2013 आदे श क घोषणा खले ु यायालय म दनांकः 24th जलाई ु को क गई ।
Sd/- Sd/-
(संजय अरोड़ा) ( वजयपाल राव )
लेखा सद य या यक सद य
(SANJAY ARORA) (VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: 24th July 2013
Subodh
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai