Income Tax Appellate Tribunal - Delhi
Yum! Restaurants (India) Pvt. Ltd., ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
SMT. DIVA SINGH, JUDICIAL MEMBER
and
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA Nos.2678 & 2679/Del./2012
(ASSESSMENT YEARS : 2004-05 & 2005-06)
ITO, Ward 18 (4), vs. Yum! Restaurants (India) Private Ltd.,
New Delhi. 12th Floor, Tower - D,
Global Business Park, M.G. Road,
Gurgaon - 122 002.
(PAN : AAACY4188E)
ITA Nos.2421 & 2422/Del./2012
(ASSESSMENT YEARS : 2004-05 & 2005-06)
Yum! Restaurants (India) Private Ltd., vs. ITO, Ward 18 (4),
12th Floor, Tower - D, New Delhi.
Global Business Park, M.G. Road,
Gurgaon - 122 002.
(PAN : AAACY4188E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Nageshwar Rao, Advocate
REVENUE BY : Shri Peeyush Jain, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
ITA Nos.2678/Del/2012 filed by the revenue and ITA
No.2421/Del/2012 filed by the assessee emanate from the order of the CIT (Appeals)-XXI, New Delhi dated 23.03.2012. ITA No.2679/Del/2012 filed 2 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 by the revenue and ITA No.2422/Del/2012 filed by assessee emanates from the order of the CIT (Appeals)-XXI, New Delhi dated 21.03.2012.
2. The assessee company, Yum! Restaurants (India) Private Ltd. (YRIPL) incorporated as per the provisions of the Companies Act, 1956 is engaged in the business of franchising of 'Pizza Hut' and 'KFC' restaurants in India. The assessee has obtained franchisee rights from KFC International Holdings (KFCIH) and Pizza Hut International LLC (PHILLC) which has been subsequent assigned in favour of Yum! Restaurants Asia Pte Ltd., Singapore (YRAPL) to whom the assessee pays royalty for the use of such rights after taking requisite government approval. Assessee has entered into a service agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities).
3. The grounds of appeal taken in ITA No.2678/Del/2012 read as under :-
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred holding that income from receipt of services fee of Rs.12,77,00,000/- etc. was Income assessable under the head Profits and Gains of Business as against under the head 'Other Sources' held by the Assessing officer".
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting an addition of 3 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 Rs.4,84,21,435/- as royalty paid without appreciating that such payments was not allowed by Ministry of Industry ( Secretariat for industrial Assistance) (SIA) and since constituted infraction of law".
3. "Without prejudice. to the above ground, the learned CIT (A) erred in allowing deduction for this payment of royalty where it was not permissible through automatic route".
4. "On the facts and circumstances of the case and in law the learned CIT(A) erred, in deleting an addition of Rs.5,90,56,874/- out of Administrative expenses, since these related to another company YRMPL, which had apparently no office and had not incurred any expenses".
5. "On the facts and circumstances of the case and in law the learned CIT(A) erred in not interpreting correctly the directions of Hon'ble ITAT in A.Y. 2002-03 and 2003-04 that the depreciation disallowed in A.Y. 1999-2000 would be considered for disallowances in this also, as complete relief to the assessee".
6. "On the facts and circumstances of the case and in law the learned CIT(A) erred in deletion an addition of Rs.1,27,61,225/- on a/c of the claim of depreciation which was entirely disallowed".
7. "On the facts and circumstances of the case and in law the learned CIT(A) erred in deleting an addition of Rs.8,31,082/- on a/c of excess provision without appreciating that a simple provision made is not in respect of a quantified and ascertained liability and therefore should not have been allowed".
8. "The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal."
The grounds of appeal taken in ITA No.2679/Del/2012 read as under :-
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred holding that income from receipt of services fee of Rs.15,71,00,000/- etc. was Income assessable under the 4 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 head Profits and Gains of Business as against under the head 'Other Sources' held by the Assessing officer.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting an addition of Rs.9,28,28,980/- as royalty paid without appreciating that such payments was not allowed by Ministry of Industry (Secretariat for industrial Assistance) (SIA) and since constituted infraction of law.
2.1 Without prejudice to the above ground, the learned CIT (A) erred in allowing deduction for this payment of royalty where it was not permissible through automatic route.
3. On the facts and circumstances of the case and in law the learned CIT(A) erred, in deleting an addition of Rs.6.,04,48,899/- out of Administrative expenses, since these related to another company YRMPL, which had apparently no office and had not incurred any expenses.
4. On the facts and circumstances of the case and in law the learned CIT(A) erred in not interpreting correctly the directions of Hon'ble ITAT in A.Y. 2002-03 and 2003-04 that the depreciation disallowed in A.Y. 1999-2000 would be considered for disallowances in this also, as complete relief to the assessee.
5. On the facts and circumstances of the case and in law the learned CIT(A) erred in deletion an addition of Rs.1,12,54,219/-
on a/c of the claim of depreciation which was entirely disallowed.
6. On the facts and circumstances of the case and in law the learned CIT(A) erred in deleting an addition of Rs.95,400/- by treating Corel Draw & GIS Engine Map S/W as revenue expenses especially when such software did not require any annual purchase and provided creation of an asset which had the life of 4 to 5 years.
7. On the facts and circumstances of the case and in law the learned CIT(A) erred in deleting an addition of Rs.7,21,043/- made out of R&D expenses without appreciating that the expenses for food fasting and trials were incurred to develop 5 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 food items / flavors that would be used by the assessee for a number of years i.e. the expenses were incurred to develop items of enduring nature and should have therefore been capitalized.
8. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal."
Most of the grounds of both appeals filed by the revenue are same except the difference in figure. Therefore, we are adjudicating both the appeals together, however, we are taking the facts from ITA No.2678/Del/2012 for Assessment Year 2004-05 for the sake of convenience.
4. In the ground no.1 in both the revenue's appeal, the issue involved is whether income from receipt of services fee assessable under the head Profits and Gains of Business or to be treated as 'income from other sources' as held by Assessing Officer. Assessee has entered into service agreements with Yum! Restaurants International Inc., USA (YRI) for the period 1.4.2003 to 31.12.2003 and with M/s Yum Restaurants Asia Pte. Ltd. (YRAPL) for the period 1.1.2004 to 31.3.2004, for providing the franchisee support services in area countries, that is, liaison services for obtaining necessary approvals/ licenses, providing assistance to existing and future licensee's in India, Pakistan, Sri Lanka and Mauritius, provision of reports related to India, Sri Lanka, Mauritius, Bangladesh and new markets and market development in existing and new markets. Assessee was remunerated at a fixed fee for providing various franchisee support/market development services to 6 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 YRAPL/ its franchisees in area countries. The Assessing Officer disallowed the amount for the service agreement in respect of neighboring countries of India, but income received is only in respect of costs incurred in India. It was also held that dominant intention of the assessee was not to enter into any business activity but was to pass on the income earned by the group companies in Indian subcontinent without payment of tax and the activity carried out by the assessee is not a systematic or an organized activity so as to be called a business activity.
5. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in favour of the for the Assessment Years 2002-03, 2003-04 and 2006-07 vide order dated 31.05.2011 and submitted that the ITAT has held that providing of services was not an isolated act by assessee but of a continuous nature since Assessment Year 1998-99, with the intentions to earn profits. The assessee has received similar service income in previous and subsequent years which has been consistently held as business income. The different basis for computation of service income is purely a commercial decision between assessee and YRAPL, which ought not to have any impact on characterization of income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as 7 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR 368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out with the intention to earn profits is to be regarded as business income.
6. We have heard both the sides on the issue. The ITAT in its order dated 31.05.2011 vide para 8 has held as under :-
"8. We have duly considered the rival contention and gone through the record carefully. Ld. First Appellate Authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2 (13) provides the definition of expression "business" according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trading, commerce or manufacture. In various authoritative pronouncement of the Hon'ble Supreme Course and Hon'ble High Court, meaning and scope of expression "business" has been propounded. It is not necessary to recite and recapitulate of those decisions, but on the strength of them, it would be suffice to say that word "business" is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income. The case of the assessee is that right from asstt. Year 1998-99, it is providing various types of services to the franchise in India and also to its associate enterprises, because it is collecting fees etc. from the franchise and remitting it to YRI in US. The main object of the assessee company, as discernable from Memorandum of Association is to own, purchase, lease, develop, operate, franchise and manage restaurant etc. Similarly, its next object is to provide consultancy and advisory services in connection with the establishment, organization, 8 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 financing, management and operation of restaurant, café....etc. This business, assessee has been performing right from 1998-99 and the department has accepted this. Assessee has shown additional receipts which means higher taxes would be payable. The assessee has also pointed out at the time of hearing that a reference to the TPO to determine the arms length price u/s 92 (CA) 3, in respect of the international transaction entered into by the assessee was made and the TPO has also accepted that the transaction are at arms length price. With regard to the objection of the AO, on account of authenticity of the agreement by the assessee that agreement has duly been signed by the both the parties. There is no specific defect referred by the AO. According to the assessee under the Indian Tax Act even on oral agreement or an agreement on plain paper entered into by two or more parties is valid and binding upon the contracting parties. With regard to allegation of AO about payment of dividend by the assessee to the parent company is concerned, it was contended by the assessee that AO has observed that possibility of payments being made in lieu of dividend on contribution toward development / business from time to time made by parent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, Ld. First Authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground of appeal it is rejected."
Since facts are same, therefore, respectfully following the decision of ITAT in earlier years, we dismiss ground no.1 of both revenue's appeal. 9 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012
7. In the ground no.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012, the issue involved is disallowing of royalty expenditure. The assessee's primary business operation relates to the operation and development of Pizza Hut and KFC restaurants in India through franchisee. For this purpose, the assessee has entered into a technology license agreement with KFC / Pizza Hut through which assessee has been granted the rights to use the technology and system in operation of restaurants in India. The assessee has also obtained approval from Secretariat SIA, Government of India (GOI) for payment of royalty for the use of technology and systems for operation of KFC/ Pizza Hut restaurants in India. Later, these royalty payments were covered in the automatic route as per the terms notified in the Press Note 9 (2000 series) and Press Note 2 (2003 series). The assessee has also sought specific clarification in this regard and obtained the same from the GOI, Ministry of Finance. The disallowance was made on the reason that the SIA approval i.e. the Government approval used the term 'license fee' whereas the assessee has used the term 'royalty' in its accounts which is not as per the SIA approval, therefore, it was considered as disallowance. The payment of royalty was specifically inapplicable even in the initial agreement by virtue of Conditions 2, 3, 4 of Annexure 1. The payment of license fee was allowed only for a period of initial seven years, so payment was termed as royalty to avoid the said clause. Then the payments 10 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 have been made to parent companies, it cannot be ruled out that the same is in lieu of dividend. Ld. AR submitted that ITAT has allowed the issue in favour of the assessee in assessment years 2002-03, 2003-04 and 2006-07 and he referred to para 20 of the order. It was also submitted that against this expenditure of royalty, the assessee has also earned royalty of Rs.6,32,44,241 from the franchisee's. There is an accrual of direct income from such expenditure and he referred to the decisions of CIT vs. Ciba of India Ltd. (SC) (69 ITR 692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR 746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms "royalty" and "license fee" were interchangeably used by the Government of India in its correspondence with assessee. He submitted that AO has misinterpreted the SIA approval since the clause made inapplicable to the assessee was not relevant to its nature of business. It was further submitted that the Government of India, in its letters dated September 29/30, 2003 and June 16/17, 2004, which is placed at Page 280 and 282 of Paper book 2 for AY 2005-06, has used the term 'royalty' and not 'technology license fee', while mentioning that as per the liberalized policy, assessee may remit royalty under the automatic route within the prescribed limits. He further submitted 11 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 that payment is in accordance with the SIA approval and within the prescribed limits. Additionally, Payment of royalty up to 5% of sales has been allowed by Government of India under automatic route in view of Press Note 2 of 2003 and he submitted that therefore, the royalty was paid in accordance with the policies of the Government. It was submitted that payments have been made through authorized dealer and thus cannot be under violation of any law or exchange control regulations. The TPO has also held the same to be an arm's length payment. Therefore, the payment of royalty cannot be treated as unreasonable or excessive as alleged by the AO.
8. We have heard both the sides on the issue. As mentioned by the ld. AR, the issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07, the relevant para of the said order is reproduced as under :-
"20. With the assistance of Ld. Representative, we have gone through the record carefully. The main reason for disallowing the royalty payment by the assessee to M/s. KFC international holding Inc and M/s. Pizza Hut with whom it had entered into technology licence agreement is that Govt. of India has permitted the assessee to pay technical fees which is restricted to seven years and assessee is paying it as a royalty. Ld. CIT(A) has deleted the disallowance on the ground that assessee has earned an income of ` 3,37,05,801/- as continuing fees from the franchise, because of this technology licence agreement. It has been permitted to collect the fees on behalf of KFC International and Pizza Hut. This permission is in pursuance to the technology licence agreement. The AO failed to bring on record any material that assessee has infringed any law in conducting its business. We have perused the relevant material 12 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 and also the written submissions of the assessee reproduced by the Ld. CIT(A). In our opinion, AO has misread the approvals granted by the Govt of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals. In the approval SIA has used expression "royalty as well as fee for technical services" loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess. The assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance."
Facts are same, therefore, we find no merits in the ground nos.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012 and the same are dismissed.
9. Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 is against the deletion of addition out of administrative expenses. The YRMPL is a wholly owned subsidiary of the assessee operating as a mutual concern for the common benefit of all the franchisees and the assessee. It carries out advertising, marketing and promotion activities. For this purpose, assessee and YRMPL have entered into a tripartite agreement with each franchisee. Each franchisee is required to contribute a fixed percentage of its sales as its contribution towards advertising and marketing activities. As per the tripartite agreement, for the cost effective functioning of YRMPL, assessee provided YRMPL with any or 13 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 all administrative support facilities. In case such facilities are extended by assessee to YRMPL, it would be required to reimburse assessee with such costs. Where on one hand assessee is entitled to receive money for such costs incurred by it, on the other hand it is also obliged to contribute to YRMPL for meeting its advertising, marketing and promotion activities budget deficit. The disallowance was made on the reasoning that the administrative expenses incurred by the assessee, proportionately also belong to YRMPL as the business is carried out from common premises and employees and YRMPL has not paid its share of administrative expenses to assessee for the common facilities used by it which belong to the assessee and also that there is no reduction in the AMP contribution to be made by the assessee to YRMPL in lieu of providing administrative support. Ld. AR submitted that the this issue is cove red in favour of the assessee by the decision of ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07 and referred to Para 22 of the said He submitted that the CIT(A) also for assessment years 2004-05 and 2005-06 has relied upon the said decision of the ITAT and decided. this issue in favor of the assessee. He submitted that YRMPL is a not for profit entity set up with the due approval of SIA with the objective of conducting AMP activities for the assessee and its franchisees. YRMPL is completely funded by the assessee and its franchisees by way of fixed contributions and any additional fund requirements being met by the assessee. 14 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 He further submitted that the ITAT has duly examined the business model of the assessee and YRMPL and held that the assessee was entitled to contribute to the activities of YRMPL as per its business needs and the facts and circumstances of the case remain identical to those before the ITAT in previous years. Ld. AR submitted that the assessee, instead of recovering charges for sharing administrative facilities, reduced its AMP contribution to YRMPL to avoid unnecessary cash flows. He explained that by way of a simple example - if assessee has to fund Rs.100 and recover Rs.20 from YRMPL; it funds only Rs.80 after reducing the amount of recovery. However, the AO has grossly misinterpreted the same as non-reduction of AMP contribution. He submitted that direct contributions paid by the assessee to YRMPL have been allowed by the AO as an expense thereby duly recognizing the commercial interest of assessee in the functioning of YRMPL. He relied on the decisions in the cases of S.A. Builders Ltd vs. CIT (SC) (288 ITR I); Sassoon J. David and Co. (P) Ltd vs. CIT (SC) (118 ITR
261); CIT vs. Sales Magnesite P Ltd (Bombay HC) (214 ITR I); and CIT vs. Panipat Woolen & General Mills (SC) (103 ITR 66) wherein it has been held that merely because some other party has also benefited from the expenditure incurred it cannot be held that it is not allowable. He further submitted that there is no rational basis adopted by the AO for allocating 50% of the expenditure incurred by assessee as being attributable to YRMPL. To clarify 15 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 the same, he submitted that the assessee has a huge employee base for the purposes of operating its equity stores, huge rental and other operating costs being incurred for the operation of equity stores, which has nothing to do with the AMP activities that YRMPL coordinates on behalf of assessee. Therefore, such expenses should not be allocated to YRMPL at all, as its functioning is basically to make payments to third party advertising firms. Finally, he pleaded to dismiss this ground of revenue's appeal.
10. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"22. On appeal, Ld. CIT(A) deleted the disallowance. With the assistance of Ld. Representative, we have gone through the record carefully. It emerges out from the record that YRMPL was incorporated on 8th June, 1999. It is a 100% owned subsidiary of the assessee. It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise. The assessee had entered into a tripartite agreement with its franchise and YRMPL. As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution. In a way, YRMPL was to carry out the activities on no profit no loss basis. The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost. From both the angles, it is the 16 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. Ld. CIT(A) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected."
In view of these facts, we find no merits in the Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 and the same are dismissed.
11. In the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012, the issue involved is disallowance of part depreciation. Brief facts of these grounds are that as part of its emolument policy for employees, the assessee reimburses amounts incurred by its employees on purchase of hard furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade / level as per their appointment letter). As per the perquisite valuation rules, such assets are considered in the personal income of the employees and taxes are duly deducted on the same. Further, such assets are recorded in the books of accounts by the assessee when the claim for reimbursement is submitted by the respective employees and only to the extent of their reimbursement entitlement. Also, the assessee had transferred certain assets belonging to its restaurant outlets in assessment year 1999-00 on itemized basis. However, no sales consideration was received for the same. Accordingly, no deletions were made in the block of 17 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 assets (owing to Nil consideration) on account of this sale in accordance with the provisions of Section 43(6)(c)(i)(B) of the Act. The disallowance was made on the basis that in the earlier assessment years it was observed that certain assets which were purchased during prior period have been entered in the books of accounts of the financial year. It was held that depreciation claimed on assets purchased exclusively for the employees, are not for the use of business and certain assets which were sold by the assessee as part of its undertakings (outlets) to its franchisees continue to remain in its books and depreciation claimed on the same. The ld. AR submitted that CIT(A) placing reliance on the judicial precedents set forth by the assessee has allowed the issue in favour of the assessee for assessment years 2004-05 and 2005-06. Complete depreciation has been allowed including depreciation of assets sold. He submitted that assets used by the employees would also be regarded as used for the purposes of business and hence eligible for claim of depreciation. He submitted that these were also taxed in the hands of the employees as perquisites and relied on the decision of Sayaji Iron and Engg Co vs. CIT (Gujarat HC) (253 ITR 749). He further submitted that under the block of asset concept, individual assets lose their identity when merged in the block and accordingly, actual physical possession and use of assets are not essential. He also relied on the decisions of CIT vs. Yamaha Motor India Pvt Ltd (Delhi HC) (ITA No 203/ 2009 and 601 2009): CIT vs Bharat 18 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 Aluminium Co Ltd (Delhi HC) (ITA No 659/ 2007 and 1484/2006); Xerox India Ltd.. (Delhi ITAT) (ITA No. 680/Del/2006); CIT vs G.R. Shipping Ltd. (Bombay HC) (ITA No. 598 of 2009) and Swati Synthetics (ITA No. 1165/M/2006).
12. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
"25. On due consideration of the facts and circumstances, we are of the view that AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business. In our opinion, AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee's business then he should make out a care for disallowance of depreciation. By making general observation, he cannot deny the total claim of the depreciation of the assessee. Taking into consideration these aspects, we do not find any merit in this ground of appeal. Ld. CIT(A) has already directed the AO to give effect outcome of 1999-2000. The depreciation disallowed in asstt. year 1999- 2000 would be considered for disallowance in this year also. The effect of outcome in asstt. year 1999-200 would be given after giving an opportunity of hearing to the assessee."
In view of these facts, we find no merits in the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012 and the same are dismissed.
19 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012
13. Ground No.7 in ITA No.2678/Del/2012 is against the deletion of addition on account of excess provision amounting to Rs.8,32,082/-. At the year end, the assessee had made a provision for marketing expenses in accordance with the mercantile system (accrual) of accounting. However a part of such expenditure amounting to Rs.8,31,082/- was reversed in the subsequent year. The disallowance was made on the ground that excessive provision in respect of marketing expenses claimed by the assessee. However, the same were reversed in the subsequent financial year. Ld. AR submitted that this issue is covered by the decision of ITAT in its own case in assessment years 2002-03, 2003-04 and 2006-07 and referred to para 31 of the said order. He also relied upon on the decisions of Bharat Earth Movers vs. CIT (Supreme Court) (245 ITR 428); Calcutta Co. Ltd vs. CIT (Supreme Court) (37 ITR 1); and Metal Box Company of India Limited vs. Their Workmen (Supreme Court) (73 ITR 53). He submitted that excess provision made (if any) has been reversed in the next year and offered to tax leading to double taxation of the same.
14. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :-
20 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 "31. On due consideration of the facts and circumstances, we do not see any reason to interfere in the order of Ld. CIT(A).
The assessee has made the provision by keeping in view past experience and the possibility of certain expenses. It has filed the details exhibiting the nature of intending expenses. It is a separate issue that such occasion did not arise to incur those expenses but that does not mean that when provision was made it was not bonafide. If some amount remained unutilized it will be offered for tax in the next asstt. year. Hence, this ground of appeal is rejected."
In view of these facts, we find no merits in the ground no.7 and the same are dismissed.
15. Ground No.6 in ITA No.2679/Del/2012 is against the disallowance of software expenses by treating them as capital expenditure. The details of deletion of software expenses of Rs.95,400/- are as under :-
Particulars Amount (Rs.) Nature
Purchase of Corel 18,000 Software for tackling
Draw Software designs/ graphics jobs
Expenses on GIS 77,400 Expenses incurred on
Engines Map Info purchase of license for
software (single user mapping of
license) spreadsheet, database
sources to analyze
geological information.
95,400
16. Ld. DR relied on the order of the Assessing Officer.
17. Ld. AR submitted that CIT (A) has allowed these software expenses as a revenue expenditure relying upon the decisions referred to by the assessee. It is submitted that the above mentioned softwares are having short term life. 21 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 Accordingly, frequent upgradations made, are on revenue account. Ld. AR submitted that these expenses do not result in the creation of any new asset or benefit of enduring nature and these expenses incurred on purchase of softwares are for the purpose of increasing the operational efficiency of the business. In this regard, reliance is placed on the decision of the Hon'ble Jurisdictional Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd (203 Taxmann 277) and CIT vs. Amway India Enterprises (ITA No. 1344, 1363/2009). Ld. AR submitted that all the functional tests laid down by the Hon'ble Special Bench in the case of Amway India Enterprises are also satisfied in the facts of the present case. Therefore the same is on revenue account and ought to be allowed in favor of the assessee. He also relied on the decisions of Amway India Enterprises vs. DCIT (Delhi Special Bench) (111 ITD 112); Empire Jute Co. Ltd. vs. CIT (SC) (124 ITR 1); GE Capital Services India vs. DCIT (Delhi ITAT) (106 ITJ 65); CIT vs. Voith Paper Fabrics India Ltd (Punjab & Haryana HC) (No. 777 of 2010) and DCIT vs. Rentworks India Pvt Ltd (Mumbai ITAT) (ITA No. 2215/ Mum/ 2010).
18. We have heard both the sides on the issue. In the written submissions, the assessee has submitted that since the assessee is getting 60% depreciation to avoid the more round of litigation they have agreed to treat the expenditure as capital in nature. After hearing, we find that these two expenditure of Rs.18,000/- for purchase of coral draw software and Rs.77,400/- for GIS 22 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 Engine Map Info Software (single user license) were made but it is not clear whether the same was for an upgradation or it was for acquisition of a new software, therefore, we are unable to apply the ratio of decision of ITAT in the case of GE Capital Services India vs. DCIT reported in 106 TTJ 65 for granting the relief to the assessee. In view of these facts, we set aside the issue to the file of Assessing Officer to decide de novo after bringing the correct facts on the record. We allow this ground of revenue's appeal for statistical purposes.
19. In Ground No.7 in ITA No.2679/Del/2012, the issue is regarding the disallowance of R&D expenses amounting to Rs.7,21,043/-. It was pleaded before us that no opportunity was afforded to the assessee to substantiate its claim. The Assessing Officer adjudged the expenditure to be of capital in nature. It was also pleaded that Assessing Officer held so without assigning any reason for the same. Such routine revenue expenses were disallowed by the Assessing Officer holding them to be capital in nature. CIT (A) deleted the disallowance by following the decision of ITAT in the assessee's own case for Assessment Year 2006-07.
20. We have heard both the sides on the issue. We find that this issue is also covered in favour of the assessee by the decision of ITAT in the assessee's own case for assessment year 2006-07 wherein similar expenses 23 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 are held to be revenue in nature. The relevant para 100 of that order is reproduced as under :-
"100. We have duly considered the rival contentions and gone through the record carefully. In its day to day operations, assessee is experimenting new dishes, where it incurred expenses on food items and spices etc. On many of occasions, the flavor may not come to the expectation for commercialized use. Thus, these are the routine research work carried out by the assessee and no capital assets came into existence. Learned DRP has erred in treating this amount as a capital expenditure. We allow this ground of appeal and delete the addition."
In view of these facts, we find no merits in the ground no.7 and the same are dismissed.
21. Ground No.8 in ITA Nos.2678/Del/2012 & 2678/Del/2012 is general in nature and does not require any adjudication, hence dismissed.
22. In the result, ITA No.2678/Del/2012 is dismissed and ITA No.2679/Del/2012 is partly allowed for statistical purposes. ITA No.2421/Del/2012
23. The grounds taken in assessee's appeal in ITA No.2421/Del/2012 read as under :-
"1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) - XXI ['Ld. CIT(A)'] has erred in partly upholding the disallowance of lease rent paid by the appellant amounting to Rs.24,70,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its Managing Director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of lease rent paid by the appellant amounting to Rs.5,22,000 to Mrs. Sheetal and Mrs. Pushpa Bansal on account of rent free accommodation obtained for its director. In doing so, the Ld. 24 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.6,00,000 as notional interest income on account of security deposits placed by the appellant with M/s Mezbaan Hoteliers Pvt. Ltd for obtaining rent free accommodation for its managing director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for previous A Y s where a similar addition has been deleted.
3.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the documentary evidence placed on record by the appellant in support of its contention that the appellant has not incurred any interest expenditure.
4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.55,527 as notional interest income on account of security deposits placed by the appellant with Mrs. Sheetal and Mrs. Pushpa Bansal for obtaining rent free accommodation for its director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for previous A Y s where a similar addition has been deleted.
4.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the documentary evidence placed on record by the appellant in support of its contention that the appellant has not incurred any interest expenditure.
5. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of business expenditure amounting to Rs.59,102, by holding the same to be alleged personal expenditure.
6. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of business expenditure amounting to Rs.42,775, by holding the said expenditure as being of capital nature. In doing so, the Ld. CIT(A) has failed to correctly appreciate the nature of expenses.25 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012
7. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of business expenditure amounting to Rs.52,086, by holding the same to be prior period expenditure."
The grounds taken in assessee's appeal in ITA No.2422/Del/2012 read as under :-
"1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) - XXI ['Ld. CIT(A)'] has erred in partly upholding the disallowance of lease rent paid by the appellant amounting to Rs.27,12,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its Managing Director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of lease rent paid by the appellant amounting to Rs.6,43,800 to Mrs. Sheetal and Mrs. Pushpa Bansal on account of rent free accommodation obtained for its director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.6,00,000 as notional interest income on account of security deposits placed by the appellant with M/s Mezbaan Hoteliers Pvt. Ltd for obtaining rent free accommodation for its managing director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for previous A Y s where a similar addition has been deleted.
3.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the documentary evidence placed on record by the appellant in support of its contention that the appellant has not incurred any interest expenditure.26 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012
4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.55,527 as notional interest income on account of security deposits placed by the appellant with Mrs. Sheetal and Mrs. Pushpa Bansal for obtaining rent free accommodation for its director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for previous A Y s where a similar addition has been deleted.
4.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the documentary evidence placed on record by the appellant in support of its contention that the appellant has not incurred any interest expenditure.
5. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of arbitration award settlement claim amounting to Rs.1,15,74,099/- paid to M/s. Shubhmangal Mercantile Private Limited by falsely alleging the same to be a sham transaction. In doing so, the Ld. CIT (A) has erred in rejecting the additional evidence submitted by the appellant.
6. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the interest income earned by the appellant amounting to Rs.41,85,032 as 'income from other sources."
Ground Nos.1 to 4 in both these appeals are common except the difference in figures. Therefore, we are adjudicating all the four grounds of these appeals together, however, we are taking the figures from ITA No.2421/Del/2012 for the sake of convenience.
24. Ground nos.1 & 2 in both the years, i.e. ITA No.2421/Del/2012 and ITA No.2422/Del/2012 are related to disallowance of lease rent paid for rent 27 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 free accommodation obtaining for Managing Director and Director. Ground Nos.3 and 4 in both the years are against the addition of notional interest income on account of security deposits placed by the assessee with the lessors i.e. M/s Mezbaan Hoteliers Pvt Ltd in case of managing director and Mrs. Sheetal and Mrs. Pushpa Bansal in case of director.
25. Brief facts with regard to the aforesaid grounds are that assessee has obtained a rent free accommodation for its Managing Director, Mr. Sandeep Kohli from M/s Mezbaan Hoteliers Pvt Ltd (MHPL). The directors of MHPL were the father and wife of the Managing Director, who had in turn taken the accommodation on lease from Mrs. Surindra Judge. Assessee paid rent of Rs.27,10,000 per annum. MHPL in turn paid a rent of Rs.20,000 per month for the property. A security deposit of Rs.50 lacs was also provided by assessee to MHPL, a part of which was advanced to the M.D. by MHPL. In the case of Mr. Ajay Bansal (Director), assessee had been paying rent for a property occupied by him to his wife and mother. Rent of the property was Rs.5,22,000/- per annum and security deposit for the same was Rs.4,62,000/-. The Assessing Officer disallowed the claim for the reasons that lease contract was signed by a person on behalf of MHPL (the other contracting party) who at that time was not its director, making the agreement invalid. Excessive security deposits were placed by assessee with MHPL. Security deposits were advanced by MHPL to the M.D., Shri Sandip Kohli. Disallowance was made 28 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 under Section 40A(2)(b) of the Act on account of excessive lease rentals paid to related party. Only part rentals up to Rs.20,000 per month were allowed on the basis of ITAT order for past years.
26. In the case of Director, Mr. Ajay Bansal, lease rentals paid by the assessee were for a property which was already being occupied by the director without payment of any rent. No concession was given in the rentals paid as the property was also being utilized by the mother of the director.
27. Ld. AR submitted that in the case of property provided to Director, Shri Ajay Bansal, the issue was remitted back to the AO by ITAT to determine fair rent of the property in the AY 2002-03, 2003-04 and 2006-07. He submitted that the AO has allowed the rent paid by assessee for director's property as fair rent of the property based on valuation certificates produced by assessee for Assessment Years 2002-03, 2003-04 and also for 2007-08. Ld. AR submitted that for the house provided to MD, Shri Sandip Kohli, ITAT had allowed a payment of Rs.2,40,000 per annum as fair rent of the property and the balance payment of rent was disallowed for Assessment Years 2002-03, 2003-04 and 2006-07. He referred to paras 45 and 46 at page 47 of the ITAT order for Assessment Years 2002-03, 2003-04 and 2006-07. He submitted that the ITAT failed to give cognizance to the valuation certificates obtained from an independent registered valuer which proved adequateness and legitimacy of the payments. He further submitted that for the year under 29 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 consideration, the assessee placed reliance on the valuation certificates produced before the CIT(A) for AY 2005-06 (placed at Pages 211 and 212 of Paperbook filed for Assessment Year 2005-06), however the same were not considered. He submitted that it is important to note that on the basis of such valuation certificates, the AO had allowed the rentals payments made in respect of accommodation provided Director as fair rentals in other years. Accordingly, on the same basis, the rentals paid in respect of the accommodation provided to the MD, being in accordance with the fair market value determined as per the valuation certificates, should be allowed as fair rentals. He submitted that both assessee and MHPL are corporate assessee's, therefore there can be no question of any tax evasion which is a prerequisite for invoking the provisions of Section 40A(2)(b) of the Act. He referred CBDT Circular No.6P (LXXVI-66) dated July 6, 1968. He submitted that with regard to the issue of notional interest on security deposit, ITAT has allowed this in favour of the assessee in Assessment Years 2002-03, 2003-04 and 2006-07 and referred to Paras 45 and 46 of the ITAT order. To conclusively establishing the genuineness of the transaction, he submitted that rent free accommodation has been provided to the M.D. and the director in accordance with their employment contracts; rent was paid by assessee in accordance with contractually binding lease agreements; TDS was duly deducted on such rental payments along with taxing the same as a perquisite 30 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 in the hands of M.D. and the director; and rent received has been duly accounted for as income. He submitted that this finding of fact has been recorded by the CIT(A) in his order for Assessment Year 2002-03 and 2003-
04. He submitted that onus is on tax authorities to establish excessiveness of expenditure on some material and not on conjectures and in this regard, referred to the decisions of S.K. Engineering vs. JCIT (Bangalore ITA T) (286 ITR 210) and CIT vs. Indo Saudi Services (Travel) (P) Ltd. (Bombay HC) (219 CTR 562). For commercial expediency, ld. AR relied on the decision of Shahzada Nand & Sons vs. CIT (SC) (108 ITR 358) and CIT vs. Panipat Woolen & General Mills Co Ltd (SC) (103 ITR 66) where it is held that commercial expediency to be decided from the stand point of assessee and not tax department. He submitted that tax can be imposed only on real income and not on notional income. He submitted that therefore, AO has grossly erred in adding notional interest income and in this regard referred to the decisions of Godhra Electricity Co. Ltd. vs. CIT (SC) (225 ITR 746); CIT vs. Calcutta Discount Company Ltd (SC) (91 ITR 8) and Seth Madan Lal Modi vs. CIT (Delhi HC) (261 ITR 49). The ld. DR relied on the order of the authorities below.
28. We have heard both the sides on the issue. These disallowances have been made by invoking the provisions of section 40A(2)(b) of the Act is on account of excessive rental paid to the related parties. First, we would like to 31 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 put some facts with regard to this disallowance in summary. In the tax audit report, the assessee has disclosed three parties covered under the provisions of section 40A(2)(b) of the Act and these were Shri Sandeep Kohli, Managing Director, Shri Ajay Bansal, Director and the YRMPL which was wholly owned subsidiary. During the investigation carried out by the Assessing Officer, the assessee admitted that M/s. Mezbaan Hoteliers Pvt. Ltd. for which the rent was paid was also covered by the provisions of section 40A(2)(b) of the Act. Further it was also found that Smt. Sheetal and Mrs. Pushpa Bansal who are wife and mother of one of the directors, Shri Ajay Bansal were also covered by the provisions of section 40A(2)(b) of the Act. The assessee entered into lease with M/s. Mezbaan Hoteliers Pvt. Ltd. on 01.06.1997 with regard to the property which has been provided to the Managing Director, Shri Sandeep Kohli and was agreed at Rs.1,25,000/- per month with a security deposit of Rs.50,00,000/-. M/s. Mezbaan Hoteliers Pvt. Ltd. has been also entered into the lease agreement with Mrs. Surenra Judge on the same date (01.06.1997) wherein rent agreed was Rs.20,000/- per month. While the assessee has paid Rs.1,25,000/- per month to M/s. Mezbaan Hoteliers Pvt. Ltd.. The rents paid to Mrs. Bansal and mother of Shri Ajay Bansal was also covered by the provisions of section 40A(2)(b). At this stage, we would also like to state that the provisions of section 40A are overriding provisions and start with non-obstante clause which operates in 32 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head 'Profits and gains of business or profession, thus, the intention of the legislation was very clear that provisions of section 40A(2)(b) shall apply in supersession of other contrary provisions of Act relating to the computation of income under the head 'Profits and gains of business or profession'. The rent paid for the premises occupied by Managing Director is prima facie collusive and excessive. 29A. Some of the issues raises have been considered by ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07. The relevant paras 45 & 46 of the said order is reproduced as under :-
"45. With the assistance of learned representatives, we have gone through the record carefully. It emerges out from the record that assessee has paid Rs. 15 lacs of rent for the residence of Mr. Sandeep Kohli. It has paid a sum of Rs. 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to Rs. 6 lacs. He computed the disallowance of Rs. 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of Rs.4,20,700 on the residence of Shri Ajay Bansal. In this case also, payment was made to Mrs. Pushpa Bansal and Sheetal Bansal who are the wife and mother of Ajay Bansal. Assessing Officer has also found a security deposit paid by the assessee and he estimated the notional rent on such deposit at Rs.50,900. The disallowance has been worked out to Rs.4,71,600.
46. There is no dispute that the payments have been made to the persons who are covered under sec. 40A(2)(b) of the Act. Under this section, if it is established that assessee has paid an amount in excess, then the one available in open market for availing such services from a person or entity falling within the ambit of this section then such excess amount would be 33 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 disallowed to the assessee. We fail to understand how a house property giving a rent of Rs.20,000 to the original land owner would immediately fetch a rent at Rs.1,50,000. This much of rent has been given by the assessee after incurring a huge sum of Rs.22,50,000 on repair which gives an indication that if this sum of Rs.22,50,000 was not incurred then it would not fetch this amount of rent. Apart from this, assessee had paid interest free security deposits of Rs.50 lacs. Assessing Officer has discussed that this payment of rent is associated with the salary of the executive director & house rent allowance is fixed @ 60% of their salary. On the basis of the facts emerging out from the assessment order, we find that assessee has extended extra pecuniar benefit to its managing director. Thus, taking into consideration the over all evidence on record, we set aside the order of the Learned CIT(Appeals). We direct the Assessing Officer to allow payment of rent to the extent of Rs.20,000 per month for the accommodation taken on rent for Shri Sandeep Kohli, the balance has to be disallowed. The estimation of this rent on the basis of the original rent agreement between the landowner and Hotel Mezbaan would take care of all other notional rent computed by the Assessing Officer on the basis of interest free deposits. In brief, against the claim of any rent made by the assessee for the residence provided to Mr. Sandeep Kohli, only a sum of Rs.2,40,000 would be allowed. There will not be any disallowance on account of notional rent worked out on the basis of interest free security. Assessing Officer shall carry out this exercise. As far as the rent claimed in respect of the residence of Shri Ajay Bansal, we remit this issue to the file of the Assessing Officer for re-adjudication because he has not worked out fair rent this property can fetch, which can be allowed to the assessee. As far as the disallowance of Rs.7,50,000 is concerned, we find that this disallowance has been confirmed by the Learned CIT(Appeals) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year. Assessee has raised an alternative plea that in case it is not allowable in this year then a direction be issued to the Assessing Officer to allow in the year of incurrence. In our opinion, assessee will be at liberty to approach the Assessing Officer in accordance with law but in the present year, we do not deem it necessary to give any specific direction. In the result, ground No.3 raised by 34 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 the assessee is allowed for statistical purposes and ground No.4 raised by the assessee is rejected. Ground Nos. 7 to 10 raised by the revenue are allowed for statistical purposes."
At this stage, there is no dispute that the payment has been made to the persons who are covered by section 40A(2)(b) of the Act. In the case of M/s. Mezbaan Hoteliers Pvt. Ltd., it is well established that payments had been made in excess for which such goods and services were available. It is apparent from the rentals paid by M/s. Mezbaan Hoteliers Pvt. Ltd. It is very clear that a property which is fetching Rs.2,40,000/- per annum to the landlord has been further let out for Rs.15,00,000/- per annum which had been further increased to Rs.24,70,000/-. This clearly establishes that the assessee company has extended extra peculiar benefits to its Managing Director who is covered by the provisions of section 40A(2)(b) of the Act. We are of the firm opinion that anything in excess to Rs.2,40,000/- per annum paid to M/s. Mezbaan Hoteliers Pvt. Ltd. by a collusive method is excessive and has to be disallowed. Thus, the rent paid for the residence of the Managing Director, Shri Sandeep Kohli will be allowed only to the extent of Rs.2,40,000/- per annum. However, there is no scope for disallowance of notional rent worked out on the basis of interest free security deposits in view of ITAT decision. As far as the rent paid in respect of residence of Shri Ajay Bansal is concerned, this issue was remanded back to the file of the Assessing Officer in the earlier order of the ITAT. Therefore, in the interest of justice 35 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 and equity, we restore this issue to the file of the Assessing Officer to decide de novo. Therefore, ground no.1 stands dismissed, ground no.3 is allowed and ground nos.2 & 4 are allowed for statistical purposes.
29. Ground No.5 in ITA No.2421/Del/2012 is against the disallowance of expenditure amounting to Rs.59,102/- held as personal expenditure. The assessee incurred certain expenses on house maintenance and computer maintenance of various employees. It claimed that the same have been incurred as per company's policy and have been taxed in the hands of the employees as perquisites. Assessing Officer held that certain expenditure described as 'Employee Perks' by the assessee not incurred for the business, hence the same were disallowed. Ld. AR submitted that similar issue arose in the Assessment Year 2003-04 and was allowed by CIT(A) which has been further upheld by the ITAT (referred to para 68 of the ITAT order, cited supra). He further submitted that these expenses are related to the business of the assessee and hence allowable as a business expenditure. He further submitted that these expenses have been incurred as per company's policy of providing perquisite to the employees as per contractual obligation and the perquisite value of the same has been taxed in the hands of the employees and, therefore, the same cannot be held to be personal in nature. Ld. AR has claimed that the issue is covered in favour of the assessee by the decision of 36 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 ITAT in the case of the assessee for assessment year 2003-04. The relevant para is 68 is reproduced hereunder :-
"68. With the assistance of learned representatives, we have gone through the record carefully. It revealed that a sum of Rs.33,460 was incurred towards the fee of Mr. Rajiv Kumar who pursued MBA Course. The assessee failed to bring any policy decision arrived at by the management for reimbursing the fee incurred on education. The fee was paid because of the personal influence of the employee and it was not incurred for any business purposes. The assessee failed to bring any material on the record to this effect. Learned CIT(Appeals) has rightly confirmed the disallowance. As far as the other amounts are concerned, we find that these relates to medical expenses of Mr. Sandeep Kohli who is a director and the expenses incurred on the uniforms of his driver. These expenses are to be termed as expenses relating to the day to day business of the assessee. Thus, the ground of appeal raised by the assessee as well as of revenue are rejected."
30. We have heard both the sides on this issue. We find that the ld. AR has claimed that this was an expenditure relating to the business and allowable as business expenditure and it was also claimed that this issue was covered by earlier decision of ITAT in the Assessment Year 2003-04. After hearing both the sides, we find that in this year, the issue is not covered by ITAT decision as it was personal expenditure incurred on house maintenance and computer maintenance of the employees. In the earlier decision of ITAT, the issue was with regard to fees paid for Shri Rajiv Kumar for pursuing MBA course and which was treated as personal and not for the purpose of business and other expenditure which was related to medical expenses of Shri Sandeep Kohli, 37 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 MD and uniform of his driver was found to be related to business of the assessee. In our considered view, this issue is not covered by the earlier decision of ITAT. The CIT (A) has confirmed this expenditure by holding as under :-
" In this regard, AO has discussed in the body of the assessment order in the relevant paragraph as under :-
Voucher No. Date Head Description Amount Particulars MJV 99002166 31.5.03 5020- Employees 1836 House Mant. Perks. Maintenance Pankaj Batra MJV 99002232 31.6.03 -do- -do- 2750 -do-
CIT-99005168 12.8.03 -do- -do- 2720 -do-
ClT-99005168 12.8.03 -do- -do- 1250 -do-
MJC-99002417 30.11.03 -do- -do- 5043 -do-
MJV-99002455 31.12.03 -do- -do- 16333 Sanjiv
Mediratta
MJV-99002455 31.12.03 -do- -do- 4833 Pankaj Batra
MJV-99002527 24.2.04 -do- -do- 5200 Pankaj Batra
CIT-99005527 19.3.04 -do- -do- 9749 Sandeep Vyas
CIT-99005527 19.3.04 -do- -do- 1525 Pankaj Batra
CIT-99005527 19.3.04 -do- -do- 6328 Sanjiv
Mediratta
MJV-99002584 31.3.04 -do- -do- 1520 Pankaj Batra
Total 59102
The contention of the assessee is therefore, not acceptable and the expenditure of Rs.59,102/- thus clearly neither belong to the assessee nor incurred for the business or during the normal course of business. The entire amount of Rs.59,102/- is disallowed. The assessee has filed inaccurate particulars of income and try to reduce the tax liability, the provision of section 271(1)(c) are attracted and penalty proceedings u/s. 271(1)(c) are initiated separately."
I do not find any infirmity in the order of AO, wherein, he has pointed out that these are house maintenance expenses of Shri Pankaj Batra, Shri Sandip Vyas and Shri Sanjiv Mediratta, who are employees of the assessee company. So, expenditure incurred in the name of employees cannot be claimed as business expenditure of the assessee company. This is a finding of the fact. In view of the above discussion, ground No.13 of the appellant is dismissed."
38 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 The assessee has failed to bring out any material to establish that this expenditure was incurred for business purposes of the assessee. In our considered view, this expenditure is incurred for the personal benefit of the employees, therefore, it cannot be treated as business expenditure of the assessee. Therefore, this ground of appeal stands dismissed.
31. Ground No.6 in ITA No.2421/Del/2012 is against the disallowance of expenditure amounting to Rs.42.775 held as capital expenditure. The details of the alleged capital expenditure are as follows:
S.No. Amount Particulars
1 11,500 Purchase - Computer Switch
2. 7,500 Purchase - Laptop Battery
3. 23,775 Purchase - Laptop Card
Ld. AR submitted that without any independent application of mind, the Assessing Officer relied on the description of similar disallowances made in the previous years alleging that 'purchase of chairs and fire extinguisher' cannot be of revenue nature. He further submitted that it would be pertinent to observe that such description of purchases made was for Assessment Year 2003-04 and not Assessment Year 2004-05. The Assessing Officer had wrongly held that nature of expenditure is such that its benefit would accrue in the subsequent years as well.
32. Ld. AR further submitted that the expenditure incurred is not in the nature of capital expenditure being routine repair and maintenance of existing 39 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 assets. He submitted that no new assets have been created which would provide enduring benefit to the assessee. He further submitted that the expenditure has been incurred on purchase of computer accessories such as laptop battery, Laptop Card and computer switch which are "revenue in nature. In this regard, referred to CIT vs. K and Co. (181 CTR 378) and CIT vs. Southern Roadways Ltd (288 ITR 15); CIT vs. Sundaram Ciayton Ltd. (321 ITR69). He further placed reliance on the decision in the case of Dalmia Jain & Co. Ltd. vs. CIT (Supreme Court) (81 ITR 754); Empire Jute Co. Ltd. vs. CIT (Supreme Court) (124 ITR 1) and Assam Bengal Cement Co. Ltd. vs. CIT (Supreme Court) (27 ITR 34).
33. We have heard both the sides on the issue. We find that this disallowance has been made by treating the expenditure as capital in nature being integral part of the fixed assets. In our considered view also, the expenditure incurred was towards the components which are forming integral part of the fixed assets, therefore, such expenditure cannot be held to be revenue in nature and we find no merits in this ground of assessee's appeal. The same stands dismissed.
34. Ground No.7 in ITA No.2421/Del/2012 is against the upholding of business expenditure amounting to Rs.52,086/- held as prior period expenditure. The following expenses are held as prior period expenditure :- 40 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 S.No. Amount Particulars 1 8,811 Gift - Customer Mania Award 2 739 Conference expenses 3 8,460 Conference expenses 4 220 Printing & Stationery 5 7,134 Printing & Stationery 6 11,080 Printing & Stationery 7 11,802 Printing & Stationery 8 2,880 Water charges 9 960 Water charges Total 52,086 It was held that since the assessee could not furnish any documentary evidence to establish that liability to pay for the expenses incurred was crystallized during the subject year, such expenses were disallowed
35. Ld. AR submitted that the CIT(A) had directed to allow such expenses in previous Assessment Year 2003-04 which has been allowed by the AO. Accordingly, this ground of appeal is not being pressed. Nevertheless, it is submitted that the invoices raised by vendors in. earlier years were received by the assessee in the year under consideration. He submitted that liability to pay crystallized only when the invoices were received by the assessee i.e. in the current year. He further submitted that the claim of assessee has been supported by the Hon'ble Delhi High Court in the case of CIT vs Vishnu Industrial Gases (ITR No. 229/1988) and Hon'ble Bombay High Court in the case of CIT vs Nagri Mills Co. Ltd (33 ITR 681) wherein it has been held that for an allowable expenditure the year of allowance is not a relevant consideration given the tax rates are constant in case of corporate assessee's. 41 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 He further relied on the decisions of Nonsuch Tea Estate Limited vs. CIT - (Supreme Court) (98 ITR 189); CIT vs Egmore Benefit Society Limited (Madras High Court) (148 CTR 158); CIT vs Gowar Sons Publication (P.) Ltd. (Delhi High Court) (250 ITR 461); Navin Bharat Industries Limited vs DCIT (Mumbai ITAT) (90 ITD 1); and Toyo Engg. India Limited vs CIT (Mumbai ITAT) (5 SOT 616) in support of the aforesaid contention.
36. We have heard both the sides on this issue. This expenditure was disallowed on account of non-furnishing documentary evidence to establish that liability to pay for these expenses incurred and crystallized during the year under consideration. After hearing both the sides, we find that assessee has also made an alternate prayer that this expenditure may be allowed in the preceding Assessment Years 2003-04. The CIT (A) has upheld the disallowance of this expenditure in Assessment Year 2004-05 which is the year under consideration and directed to allow the same in Assessment Year 2003-04. After hearing both the sides, we find that there is no fault in the order of CIT (A) and we dismiss this ground of assessee's appeal as the assessee has failed to establish that liability to pay has been crystallized in the year under consideration.
37. The Ground No.5 in ITA No.2422/Del./2012 is against the upholding the disallowance of arbitration award settlement claim amounting to Rs.1,15,74,099/- paid to M/s. Shubhmangal Mercantile Private Limited by 42 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 alleging the same to be a sham transaction. Assessee had prayed that in doing so, the CIT (A) has erred in rejecting the additional evidence submitted by the assessee. Ld. AR submitted that the assessee had entered into a development agreement with M/s. Shubhmangal dated October 27, 1997, who was assessee's prospective franchisee at that time. The said franchisee had failed to comply with certain conditions prescribed in the development agreement that led to the termination of the aforesaid agreement in year 1998. M/s Shubhmangal Mercantile Pvt. Ltd. in turn proceeded by filing a claim of Rs.36,47,93,201 as compensation from the assessee against which the assessee filed a counter claim of Rs.1,34,04,02,830. The matter was referred to the Arbitral Tribunal that was settled on March 4, 2005 directing the assessee to pay Rs.79,95,683.83 with interest at 8% per annum with effect from October 1, 1999 till realization which works out to Rs.1,15,74,099 as full and final settlement of the dispute. The appellate discharged the interest component of the arbitration award net of taxes deducted at source. The assessee vide its submission dated November 30, 2007 had also placed on record a letter dated May 4, 2005 issued to M/s Shubmangal Mercantile Pvt. Ltd. evidencing the full and final settlement of the compensation adjudged by the Arbitral Tribunal. It had also submitted a tax deduction certificate (in Form 16A) evidencing the deduction of TDS on the interest component of the arbitration award. The aforesaid documents were considered by the assessee 43 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 as enough corroborative evidence to substantiate the genuineness of the transaction. The disallowance was made as the copy of the agreement on the basis of which the liability arises and other relevant documents regarding the grant of compensation have not been produced. On the basis, it is held that the assessee has entered into a sham transaction and a liability has been falsely created.
38. Ld. AR submitted that the Assessing Officer never expressed a view of reviewing any document as alleged in the assessment order. He submitted that the documents submitted by YRIPL (TDS certificate and letter of correspondence) were sufficient enough to corroborate the actual existence of the transaction and its payment along with the fact that the accounts of the assessee were duly audited by a reputed firm of chartered accountants. Ld. AR submitted that however, with regard to such allegation of non-furnishing of documents, assessee has subsequently submitted as additional evidence before ITAT; a certified true copy of the Arbitral Tribunal's order and Development Agreement to substantiate the genuineness of the transaction along with the letter of correspondence and copy of Form 16A issued to M/s Shubhmangal Mercantile Pvt. Ltd.. Ld. AR submitted that the only reason given by the Assessing Officer for rejecting the documents furnished by the assessee is the non-submission of the original copies which does not hold good since the juxtaposed with an affidavit wherein the director had on oath 44 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 submitted that these documents represent the true copies of the originals. He submitted that therefore, the sanctity of the documents cannot be negated unless there is evidence to rebut the facts stated therein. He referred to the decisions of Mehta Parikh & Co vs. CIT, Bombay (30 ITR 181) (SC); CIT vs. Silver Streaking Trading P. Ltd. (Delhi HC); CIT vs. Lunar Diamonds Ltd. (281 ITR 1) (Delhi HC). He submitted that even otherwise assessee had during the course of the assessment proceedings submitted a copy of correspondence/ letter between the parties, cheque details for payment and copy of TDS certificate. Thus the genuineness of the transaction was conclusively established during the course of the assessment proceedings itself. Ld. AR submitted that since M/s Shubhmangal Mercantile Pvt. Ltd. is an independent third party, in no way can it be alleged that the transaction was a sham transaction with the intention to create a liability and evade taxes. He submitted that the arbitration award paid by assessee is a claim arising out of a contractual obligation and is not an amount paid for infringement of any law, thus being fully admissible as business expenditure. He referred to the decisions of CIT vs. Desiccant Rotors International Private Limited (349 ITR
32) (Delhi HC); CIT vs. Airlines Hotel (P.) Ltd (346 ITR 33) (Mumbai HC); Jamna Auto Industries vs. CIT (299 ITR 92) (Punjab & Haryana High Court - Full Bench); CIT vs. National Steel and General Mills (P) Ltd (188 ITR 571) (Delhi High Court); Addl. CIT vs. J. & S. P. Ltd (149 ITR 581) (Delhi High 45 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 Court); M/s Karnataka State Constructions Corpn Ltd (Karnataka High Court) (ITA No. 62 of 2009) and CIT vs. De Luxe Film Distributors Ltd. (114 ITR
434) (Calcutta High Court) wherein on similar facts the expenditure has been allowed to the assessee as a business expenditure. He further submitted that even the Assessing Officer has nowhere in his assessment order rejected the submissions of assessee as regards the allowability of the compensation as a business expense.
39. We have heard both the sides on the issue. The assessee submitted additional evidence before the CIT (A). The CIT (A) did not admit the evidence and confirmed the finding of the Assessing Officer that assessee has entered into a sham transaction and the liability has been falsely created. In our considered view, the CIT (A) was not justified in not admitting the additional evidence when assessee submitted certain documents before Assessing Officer and rest of these documents support the case of assessee. These documents were relevant with regard to the expenditure claimed by the assessee in the return of income wherein even the TDS had been deducted. In our considered view, it shall be appropriate to restore the issue to the file of the Assessing Officer and to decide afresh after considering all relevant documents to be submitted before him. The assessee shall be at liberty to file necessary documents in support of this claim before the Assessing Officer. This ground of assessee's appeal is allowed for statistical purposes. 46 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012
40. In the Ground No.6 in ITA No.2422/Del./2012, the ld. CIT (A) has erred in treating the interest income earned by the assessee amounting to Rs.41,85,032/- as 'income from other sources'. The details of the amount of Rs.41,85,032/- read as under :-
S.No. Party Name Nature Amount
(Rs.)
1 Citi Bank Interest on Fixed deposit 36,77,082
2 ING Bank Interest on Fixed deposit 1,99,821
3 Income tax Interest received on account of 2,32,323
department income tax refund for AY 2001-
02
4 Sanjiv Mediratta Interest on employee loan 50,806
5 Pankaj Batra Interest on employee loan 25,000
Total 41,85,032
Ld. AR submitted that no opportunity was given to the assessee to substantiate its claim and based on surmises and conjectures, Assessing Officer had chosen to treat the same as income from other sources. Ld. AR submitted that investing surplus funds into bank deposits yielding interest income is a normal business practice and should be regarded as business income. He further submitted that extending loans to employees is part and parcel of running a business and meeting the financial needs of the employees. Ld. AR submitted that any interest earned from the above two sources in integrated with the regular business activities of a business and should not be construed as any independent activity being undertaken by the assessee. He submitted that in past assessment years such interest income 47 ITA Nos.2678 & 2679/Del./2012 ITA Nos.2421 & 2422/Del./2012 has been considered as a business income itself. In this regard, he placed reliance on the decisions of CIT vs Punit Commercial Ltd (Bombay HC) (245 ITR 550); CIT vs Paramount Premises (P) Ltd. (Bombay HC) (190 ITR 259); Snam Progetti (Delhi HC) (10 Taxman 86); AP Industrial Infrastructure Corp (Andhra Pradesh HC) (175 ITR 361) and Tirupati Woolens Mills (Calcutta HC) (193 ITR 252) which supports the contention that interest income is to be treated as business income. Ld. DR relied on the orders of the authorities below.
41. We have heard both the sides on the issue. This income of Rs.41,85,032/- which has been assed by Assessing Officer as income from other sources arises on account of fixed deposits with the bank, interest on the refund from income-tax department and interest on the loan extended to the employees of the assessee. None of the source from where the interest has accrued to the assessee is part of the assessee's business. Further similar issue has already been decided in the case of assessee by ITAT for the Assessment Year 2006-07 wherein para 103 of ITAT read as under :-
"103. We have duly considered the rival contentions and gone through the record carefully. The decisions relied upon by the assessee are not applicable on the facts of the present case. The decision of Hon'ble Mumbai High Court in the case of Puneet Commercial was in respect of treatment of interest income while computing the deduction under sec. 80-HHC of the Act and it talks about operational profit. The view of Hon'ble Delhi High Court in the case of Sri Ram Honda Equip reported in 289 ITR 475 is contrary to this decision, wherein Hon'ble Delhi High Court has held that interest income for the purpose of sec.48 ITA Nos.2678 & 2679/Del./2012
ITA Nos.2421 & 2422/Del./2012 80HHC has to be treated as income from other sources. The assessee has nowhere indicated as to how this interest income is linked with its business activity. It has simply surplus fund which has been deposited in the bank giving rise to interest income. Learned DRP has rightly treated this income as income from other sources. This ground of appeal is rejected."
In our considered view, interest earned on FDR is not limited to the business of assessee. Similarly, interest on loan to employees is also not related to assessee's business. In view of these facts, we find no merits in the assessee's appeal on this ground and the same stands dismissed.
42. In the result, ITA No.2421/Del/2012 and 2422/Del/2012 is partly allowed for statistical purposes.
43. To sum up : ITA No.2678/Del/2012 is dismissed, ITA No.2679/Del/2012, ITA No.2421/Del/2012 and 2422/Del/2012 are partly allowed for statistical purposes.
Order pronounced in open court on this 14th day of February, 2014.
Sd/- sd/-
(DIVA SINGH) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 14th day of February, 2014
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XIX, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.