Income Tax Appellate Tribunal - Delhi
Airking Charters Pvt. Ltd., New Delhi vs Ito, New Delhi on 18 August, 2017
1 ITA No. 6107/Del/2013
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'A' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 6107/DEL/2013 (A.Y .2010-11)
Airking Charters Pvt. Ltd. Vs ITO
E-22, Masjid Moth, Ward-1(3)
Greater Kailsah Part-3 New Delhi
New Delhi
AAHCA5482A
(APPELLANT)
(RESPONDENT)
Appellant by Sh. V. K. Agarwal, Adv
Respondent by Sh. R. C. Dande, Sr. DR
Date of Hearing 26.07.2017
Date of Pronouncement 18.08.2017
ORDER
PER SUCHITRA KAMBLE, JM
The appeal is filed by the assessee against the order dated 29/8/2013 passed by CIT(A)-IV, New Delhi for Assessment Year 2010-11.
2. The grounds of appeal are as under:-
"1. Under the facts and circumstances of the case, the appellate order passed by the Ld.CIT(A) is illegal and against the principles of natural justice.
2. Under the facts and circumstances of the case, the assessment order passed by the Ld. A.O is illegal and against eh principles of natural 2 ITA No. 6107/Del/2013 justice having being passed without providing proper and effective opportunity of hearing
3. The Ld.CIT(A) has grossly erred on facts as well as in law in confirming the disallowance of Rs.32,65,000/- on account of ground handling charges.
4. The Ld.CIT(A) has grossly erred on facts as well as in law in confirming the disallowance of Rs.2,20,800/- on account of conveyance expenses paid to the two directors."
3. The business of the assessee is chartering of helicopters and Aero planes and thereafter giving them on lease to various clients. During the year under consideration assessee has declared total receipt from chartering hire charges of Rs. 7,35,22,068/- and declared net taxable income of Rs. 47,23,950/- which is better than preceding year in which gross hire charges receipt was Rs. 1,18,71,163/- and net taxable income was of Rs. 4,82,063/-. During the courses of assessment proceedings the assessee submitted details and books of account. The assessee allowed ground handling charges of Rs. 32,65,000/- to two person namely Smt. Rupak Malik of Rs. 16,00,000/- and Smt. Zinnia Singh of Rs.16,25,000/- both the ladies are wives of both directors namely Shri Gorav Malik and Shri Ajay Vir Singh who are holding 100% shares of company 50% each. The Assessing Officer observed that the assessee failed to give any documentary evidences and date wise details of services and payment made by assessee on that basis of ground handling charges and hence disallowed the same. The Assessee had debited conveyance expenses of Rs. 2,40,000/- in P&L A/c which were paid to both the director at Rs. 10,000/- per month to both the directors. The Assessing Officer disallowed the conveyance expenses. The assessment order was passed in this case on 28/12/2012 u/s 143(3) by making following disallowances.
a) Ground Handling charges - Rs.32,25,000/-
3 ITA No. 6107/Del/2013
b) Conveyance expenses - Rs. 2,20,800/-
4. Being aggrieved by the Assessment Order, the Assessee filed appeal before the CIT(A). The CIT(A) confirmed the additions/disallowance made by the Assessing Officer.
5. The Ld. AR submitted that the assessee was not given proper opportunity of hearing. The query regarding ground handling charges was raised by the AO for the first time on 17/12/2012 and the compliance was required on 24/12/2012. The assessment order was passed on 28/12/2012. Therefore, the assessment order was passed within 11 days of raising the query. The AO completely ignored the written submissions filed by the assessee on 24/12/2012. Therefore, the Ld. AR submitted that it is clearly established that proper opportunity of hearing was not provided. The Ld. AR further submitted that the disallowance of the claim on ground handling charges is made on the ground that the payment is made to the two ladies who are wives of the directors and certain details were not filed. The Ld. AR submits that ground handling services were to be provided by the assessee only to the clients to whom Aeroplanes have been given on lease. Since the ground handling service is a very complicated affair and the assessee did not have any infrastructure to provide the same, the services were outsourced. The Ld. AR further submits that ground handling involves general administration, baggage, freight and mail handling, loading and unloading of aircraft and transport of crew, passengers and baggage, fuel handling and catering services which includes the following: -
a) GROUND ADMINISTRATION AND SUPERVISION:
• Representation and liaison services with the Airport Authority or any other entity, disbursements on behalf of the Airport User and provision of office space for its representatives; • Load control, messaging and telecommunication;4 ITA No. 6107/Del/2013
• Handling, storage and administration of unit load devices; • Any other supervision services before, during or after the flight and other administrative services requested by the Airport User.
• Safety measures
• Moving / Towing Aircrafts
b) PASSENGERHANDLING:
• Any kind of assistance to arriving, departing, transfer or
transit passengers, including checking tickets and travel
documents, registering baggage and carrying in to the sorting area.
• Passengers steps
c) FREIGHT AND MAIL HANDLING:
• Handling of related documents, custom procedures and
implementation of any security procedure agreed between the parties or required in the circumstances;
• The physical handling of freight and mail whether incoming, outgoing or being transferred between the terminal and aircraft.
d) AIRCRAFT SERVICES:
• The external and internal cleaning of the aircraft, and the
toilet and water services.
• The rearrangements of the cabin with suitable cabin
equipment, storage of this equipment.
• Repair of faults, fueling, wheel and tyre check.
• Ground power supply.
5 ITA No. 6107/Del/2013
• Routine and non routine maintenance.
e) FLIGHT OPERATION AND CREW ADMINISTRATION:
• Preparation of the flight at the departure airport or at any
other point
• Post flight activities
• Crew administration
• In flight entertainment
• Minor servicing of cabin fittings
f) CATERING SERVICES:
• Liaison with suppliers and administrative management
• Storage of food and beverages and of the equipment needed
for them
• Catering loaders
Thus, the Ld. AR submitted that ground handling management has to deal with very diverse tasks. Preferably, these operations are performed simultaneously to decrease ground time and thus to increase aircraft productivity. Airlines pay at the most part of the delays that their aircrafts experience. Therefore, they strongly emphasize the time-efficiency of ground operations provided either by themselves, or the airport authority or independent companies. It makes the task even tougher for ground handlers whose efficiency relies on technology-advanced equipment, coordination of staff and information support systems. To provide efficient services & to avoid penalty clause or loss of contract or black listing in the field of providing 6 ITA No. 6107/Del/2013 expertise services, the service provider has to take all possible measures including competent, qualified expertise & efficient administrative staff. The Ld. AR submits that directors were not in a position to handle the above mentioned work independently and they had to take the expertise services of outside agencies/persons. They also approached the outside agencies/persons including Ms. Rupam Malik and Ms. Zinnia Singh. The work was allotted on the basis of the lowest quotation. Both said female experts have good experience of this kind of work. It is pertinent to mention here that in the past both were working as air hostess in private airlines having good knowledge, expertise & command over the entire Ground handling work, need of prompt and perfect services. The charges payable to both females to handle the above mentioned work were lesser than the other parties. The Ld. AR submits that impugned claim was rejected during assessment proceedings only because the AO felt that the payments were made to the recipients because they are the wives of the directors and the claim was doubtful because particular details like rendering of services date wise, expenses and fuel charges were not filed. The Ld. AR further stated that the payments were made on 31/3/2010 only. In fact all the details were filed before the AO vide letters dated 21/8/2012 (Page 9- 11, PB) and 24/12/2012 (Page 5-8, PB) and during personal hearing. The Ld. AR submits that the AO completely ignored these letters which clearly indicate that the disallowances have been made on surmises and conjectures and without considering the relevant information / evidences. The assessee received lease money amounting to Rs. 7.35 crores (Page 41,PB). To earn this income, expenditure of Rs. 32,25,000/- on account of ground handling services had to be incurred. Without incurring this expenditure, it was not possible to earn the lease income of Rs. 7.35 crores. In fact both the ladies had filed their confirmation (Page 16-17, PB) as admitted by the AO in the assessment order itself. The Ld. AR submits that the assessee also filed copies of their IT returns where income from ground 7 ITA No. 6107/Del/2013 handling services is duly declared (Page 18-23, PB). The assessee also deducted tax at source on ground handling charges and duly paid the same to the Government account. The ladies also filed the TDS certificates before the AO u/s 133(6) besides confirmations and their IT returns (Page 24-25, PB). The Ld. AR submits that it is also clear from their IT Returns that Mrs. Rupam Malik and Mrs. Zinnia Singh have offered the income of Rs. 4,71,500/-
and Rs. 4,08,540/- against receipt of ground handling charges respectively. The Ld. AR submitted that without the payment of ground handling charges, the assessee would not have been able to earn the lease money. Therefore, payment of ground handling charges is an integral ingredient to earn lease income. Payments of Rs. 16,00,000/- to Mrs. Rupam Malik and Rs. 16,25,000/- to Mrs. Zinnia Singh were made not on 31.03.2010 but on various dates during the year as is evident from their confirmation itself (Page 16-17, PB). The payments to these two ladies are genuine and fully verifiable. Even the AO has not found, during assessment proceedings, that the payments were not made or not verifiable. As regards the recipient being wives of the directors, the Ld. AR submitted that the ladies competed with other service providers in the open market and were engaged on the basis of competitive bids and not relationship. As regards salary to staff, it is not for ground handling services but for the six employees who were looking after the routine office work like secretarial work, liasioning with various Authorities like Airport Authority, DGCA etc., accounts etc. (Page 36, PB). Under section 37(1) of the Act, deduction is admissible for expenditure incurred wholly and exclusively for purposes of business. Expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction. The settled position of law is' that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue. The Ld. AR relied on the following case laws:-
i) CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del) wherein it is held 8 ITA No. 6107/Del/2013 that once it is established that there was a nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case.
(ii) CIT vs. Padmani Packaging (P) Ltd.: 155 Taxmann 268 (Delhi) wherein it is held that once on a question of fact it is found that there was a nexus between the expenditure incurred by the assessee and his business and once it was held that the genuineness of the expenditure was not in dispute or had been established, the assessing authority could not sit in the arm chair of the businessman to determine as to what commission he ought to pay to its agents for doing his business.
iii) S.A. Builders Limited vs. CIT: 288 ITR 1 (SC) wherein it is held that no businessman can be compelled to maximize his profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.
iv) M/s. Ericsson India Pvt. Ltd. vs. DCIT, (2012) 146 TT) 0708 (Del) wherein it is held that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee.
The Ld. AR further submitted that though the AO has not referred to section 40A(2) yet it seems that the disallowance was made under this section because his emphasis for disallowance is only on the fact that the recipients are wives of the directors. Section 40A(2) can be invoked only if the amount paid is excessive or unreasonable w.r.t. the fair market value of the services rendered. Since the AO has not given any such finding, he could not make any 9 ITA No. 6107/Del/2013 disallowance u/s 40A(2). The Ld. AR relied on the latest case law from the jurisdictional 1TAT in case of Nippon Leakless Talbros Pvt. Ltd. vs. ACIT, IT (TP) No 475/Del/2015, order dated 28/08/2015 wherein it is held that the assessing officer is duty bound to bring on record the comparable fare market value of the services rendered to say that the value paid by the assessee is excessive or unreasonable. In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing Officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and
(ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business. The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in CIT Vs. Edward Keventer (P.) Ltd. 115 ITR 149. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shatrunjay Diamonds [2003] 261 ITR 258. Following the ratio laid down in the above cases, the Apex Court held that in the present case also there is no warrant for disallowance of sum of Rs. 1,4-9,76,358/- paid to M/s Talbros Automotive Pvt. Ltd. as the 10 ITA No. 6107/Del/2013 Assessing Officer failed to discharge the onus that was lying upon him as per the mandate of the provisions of Section 40A(2) of the Act.
The Ld. AR submitted that moreover, the AO made the disallowance on the basis of surmises and conjectures and not on the basis of any evidence. He observed that ground handling charges are doubtful. The finding of the AO on page 2 of the assessment order is as under: -
"keeping in view of all the facts the claim of assessee as debited in P & L account of Rs. 32,25,000/- as ground handling charges is doubtful and remained unjustified. Hence, the same is disallowed and added to the income of the assessee."
The Ld. AR further submitted that it is judicially settled that no addition can be made if the adjudicating authority makes an observation by using the words doubtful, appear, possible etc. on the basis of surmises and conjectures and not the relevant evidence. This view is confirmed by the Hon'ble ITAT Mumbai's judgment dated 7/1/2011 in the case of Guruprerna Enterprises vs. ACIT, ITA No. 255,256 & 257/Mum/2010, page 26, para 36, the relevant extract from which is as under: -
"The addition cannot be made by making an observation that the loans do not appear to be genuine"
c) There is a recent judgment from Hon'ble Delhi High Court in the case of Globus Infocom Ltd. vs. CIT, (2014) 108 DTR (Del) 363, wherein it has been held that the use of word "possible" means no finding but only surmises and conjectures. Relevant extract is reproduced hereunder:-
Globus Infocom Ltd. v. CIT, (2014) 108 DTR (Del) 363 "9. Commissioner, instead of commenting upon or giving a final finding whether aforesaid apportionment was acceptable or not, observed that it was 11 ITA No. 6107/Del/2013 possible that there was an attempt to inflate expenses on trading activity and an attempt might have been made to reduce actual expenses of the exempt unit. Use of word "possible" would indicate that there was no finding and adjudication by Commissioner and his observations were based on mere suspicion and certainly uncertain-Commissioner was unsure whether or not bifurcation was right...."
6. As relates to ground no. 4, the Ld. AR submitted that the assessee company reimbursed the conveyance expenses to its directors as per the Board Resolution (Page 34, PB). The assessee company does not own vehicles despite huge turnover, only to avoid various overhead expenses. If the company owns the vehicles, then the expenses on vehicle running including maintenance, depreciation, interest on vehicle finance and petrol will be much higher than the conveyance expenses reimbursed. The AO has made the disallowance on the ground that the amounts are not shown as perquisites. The payments of Conveyance expenses by way of fixed reimbursement cannot be treated as perquisites. Whether it is exempt or taxable has to be examined in the case of directors and not the company. Moreover, there is no dispute about the genuineness of payment or its verifiability. Payments were made by Account payee cheques as it is clearly evident from the bank statement. The CIT (A) has also mentioned that director remuneration has gone up from Rs. 4,00,0007- last year to Rs. 9,60,000/- this year. This is because the company started functioning w.e.f. February, 2009 and last year this salary was only for two months while this year it is for 12 months. The rate of salary during this year to each Director is Rs. 40,000/- p.m. plus Rs. 10,000/- p.m. as reimbursement of conveyance expenses while last year the same was @ 1,00,000/- p.m. including conveyance reimbursement & that is why last year, conveyance charges are not shown separately. In fact, during this year, expenses have increased only 3.36 times as compared to increase in turnover 12 ITA No. 6107/Del/2013 which is 6.20 times. This further confirms that the expenses claimed this year are highly reasonable. Similarly, net profit has increased by 9.66 times as compared to last year though the turnover has increased only by 6.20 times (Page 7 of CIT(A)'s order). Hence, it is very clear that the net profit declared during this year is much better than last year.
6. The Ld. DR submitted that the Assessing Officer has rightly disallowed the ground handling charges and conveyance expenses as there was no documentary evidence given by the assessee during the Assessment Proceedings. The Ld. DR relied upon the orders of the Assessing Officer and the CIT (A). The Ld. DR further submitted that the ground handling charges was not given to the experts as the wives of the directors are not experts in the field. The Ld. DR submitted that the assessee has not proved the first test of services rendered as there is no evidence given by the Assessee. The Ld. DR pointed out that Section 40A(2) was not applied by the Assessing Officer. The Ld. DR also submitted that the case laws referred are not relevant in the present case, but the Ld. DR could not distinguish the ratio.
7. We have heard both the parties and perused the material available on record. All the details were filed before the AO vide letters dated 21/8/2012 (Page 9-11, PB) and 24/12/2012 (Page 5-8, PB) and during personal hearing which the AO ignored and thus, the disallowances was made on surmises and conjectures and without considering the relevant information / evidences. The said evidences and letters were not considered by the CIT(A) as well. Therefore, the case laws referred by the Ld. AR are applicable in the present case and the contentions of the assessee are accepted. Though the AO has not referred to section 40A(2) yet it seems that the disallowance was made under this section because his emphasis for disallowance is only on the fact that the recipients are wives of 13 ITA No. 6107/Del/2013 the directors. Section 40A(2) can be invoked only if the amount paid is excessive or unreasonable w.r.t. the fair market value of the services rendered. Since the AO has not given any such finding, he could not make any disallowance u/s 40A(2). As relates to Ground No. 4, the assessee company reimbursed the conveyance expenses to its directors as per the Board Resolution (Page 34, PB). The explanation given by the Ld. AR that the assessee company does not own vehicles despite huge turnover, only to avoid various overhead expenses was thereon record before the Assessing Officer. The AO has made the disallowance on the ground that the amounts are not shown as perquisites. The Ld. AR's contention that payments of Conveyance expenses by way of fixed reimbursement cannot be treated as perquisites is just and proper and whether the same is exempt or taxable has to be examined in the case of directors and not the company. Moreover, there is no dispute about the genuineness of payment or its verifiability. Thus, the appeal of the assessee on both the issues is allowed.
8. In result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 18th August, 2017.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 18/08/2017 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT 14 ITA No. 6107/Del/2013 ASSISTANT REGISTRAR ITAT NEW DELHI Date 1. Draft dictated on 26/07/2017 PS 2. Draft placed before author 27/07/2017 PS 3. Draft proposed & placed before .2017 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the PS/PS Sr.PS/PS 21.08.2017 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk 21.08.2017 PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order. 15 ITA No. 6107/Del/2013