IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : "F" NEW DELHI
BEFORE SHRI H.S.SIDHU, J.M. AND
SHRI J.SUDHAKAR REDDY, AM
ITA No: 717/Del/2013
AY : - 2004-05
M/s Rama Associates Ltd. Vs. ITO, Ward 15(4)
B 10, Lawrence Road, New Delhi
Industrial area
Delhi 110 025
PAN: AAACR 5728 B
(Appellant) (Respondent)
Appellant by : Shri TN Chopra, Adv.
Respondent by: Sh. Sameer Sharma, Sr. D.R.
ORDER
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the assessee directed against the order dated
17.12.2012 of Ld.CIT(Appeals)-XVIII, New Delhi pertaining to the AY 2004-
05.
2. Facts in brief:- The assessee is a company and is in the business of
export of tea and trading of other items. It filed its return of income on
1.11.2004 and thereafter a revised return u/s 139(5) was filed on 9.12.2005
declaring total income of Rs.4,91,774/- from long term capital gain and
declaring a loss of Rs.1,13,85,958/-. In the revised computation of income,
loss from business was shown at Rs.70,89,892/-, the income from house
property was shown at Rs.10,21,020/- and income from other sources being
dividend was shown at Rs.1,63,63,336/-, which was claimed exempt u/s
10(34) of the Act.
ITA No. 717/Del/2013
M/s Rama Associates Ltd., Delhi
AY: 2004-05
2.1. An order u/s 143(3) was passed on 30.11.2006 determining the
total loss at Rs.37,96,922/-. Proceedings u/s 147 of the Act were initiated
and notice u/s 148 was issued on 30.3.2011 by the ACIT, Circle-51, New
Delhi. Later on the case was assigned to the ACIT, Range 15, New Delhi.
Reasons recorded for the reopening were provided to the assessee along with
the notice u/s 143(3) of the Act. The assessee filed a letter on 28.4.2011
and requested that the revised return filed by him on 9.12.2005 be treated
as a return filed in response to notice u/s 148 dt. 30.3.2011. The assessee
vide his letter dt. 4.11.2011 objected to the reopening of assessment u/s
148 of the Act. These objections were disposed of vide order dt.
12.12.2011.
2.2. Thereafter the AO, after considering the submissions of the
assessee at para 4 of his order, held as follows.
"4. On examination of the details filed during the assessment proceedings,
it is seen that the assessee has shown dividend income exempt amounting to
Rs.1,63,63,336/- u/s 10(34) of the Income Tax Act, 1961. A company is a
juridical person and it cannot work through itself. In order to manage and
supervise any investment and to account for it and its resulted income in the
books of accounts use of assessee's official man power is required. Therefore,
it cannot be said that expenses are not incurred in relation to supervision and
management of such investment income from which does not form part of total
income. In the assessee's case assessee has not specifically pointed out any
expenditure which is attributable to exempt income. In the instant case, the
dividend income is 16.6% of the total receipts shown. The assessee had
incurred administrative expenses of Rs.22,03,525/- and financial charges at
Rs.7,53,06,437/-. In the absence of any bifurcated details of expenses and
common accounting of receipts, it is reasonable to proportionately allocate the
expenses to the earning of exempt income which works out to
Rs.12,8,66,654/-. Accordingly a disallowance of Rs.1,28,66,654/- is made
u/s 14A of the Act in respect of expenses incurred in relation to income not
forming part of total income. Penalty proceedings u/s 271(1)(c) of the Act have
separately been initiated for furnishing inaccurate particulars of taxable
income.
With the above remarks, total income of the assessee is computed as under:-
Income processed u/s 143(3) dt. 30.11.2006 Rs. 37,96,922/-
Add: Addition as discussed above Rs. 1,28,66,654/-
-------------------------------
Total income : Rs. 90,69,732/-
Rounded Off to: Rs. 90,69,730/-
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M/s Rama Associates Ltd., Delhi
AY: 2004-05
Assessed at Rs.90,69,730/-. Necessary forms issued. Charge interest as per
law and rules. Penalty proceedings u/s 271(1)(c ) of the Act have separately
been initiated."
2.3. Aggrieved the assessee carried the matter in appeal inter alia
challenging the reopening of the assessment as well as the disallowance
made by the AO u/s 14A. The First Appellate Authority dismissed the
appeal. Further aggrieved the assessee is before us on the following
grounds.
"1. On the facts and in the circumstances of the case the learned CIT (A) is
not correct in sustaining the reopening of assessment by the assessing officer
after four years.
2. The learned CIT (A) has totally ignored the basic contention of the
assessee that the question of deduction of expenditure debited to P&L as well
as any disallowance under section 14A of Income tax Act has been
specifically examined by the Assessing Officer during the original assessment
proceedings which is evident from the fact that in response to queries raised
by the AO during the original proceedings (as per order sheet entries) detailed
submissions on the issue have been made by the assessee vide letters dated
20.11.2006, 24.11.2006 and again vide letter dated 28.11.2006. Therefore
reopening is based on change of opinion and hence invalid, void and without
jurisdiction.
3. The learned CIT (A) has erroneously ignored the legal contention of the
assessee that the reopening is based on the opinion of the audit authorities
and the AO has specifically rejected the view of the audit vide letters dated
12.06.2008, 03.03.2008 and 18.02.2008 addressed to the Audit officer. Refer
Cadila Healthcare Ltd v ACIT 2012DTR385 (Guj).
4. The learned CIT (A) has ignored the vital fact that the condition
contained in the proviso to section 147 is not fulfilled in as much as all
primary facts had been disclosed and considered by the AO during original
proceedings and no tangible material has been
brought on record in support of invoking the proviso to section 147.
5. The learned CIT (A) has misdirected herself in upholding the reopening
of assessment by the AO in direct conflict to the various decisions of the High
Courts and Supreme Court including the latest Full Bench decision of Delhi
High Court in CIT v Usha International Ltd. 348 ITR 285 Delhi (FB) cited before
the CIT (A).
6. Without prejudice to the aforementioned grounds ,it is prayed that the
Revenue has erred, on the facts and in the circumstances of the case, in
treating a sum of Rs.7,53,06,437/-which was debited as. financial charges in
profit and loss accounts as management expenses without any basis or
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M/s Rama Associates Ltd., Delhi
AY: 2004-05
justification as financial charges cannot be treated as management expenses
at any cost, particularly when the DCIT, Circle -15(1), New Delhi treated
interest expenses and interest income as single business activity in his
original assessment order dated 30.11.2006 for the same assessment year.
7. Without prejudice to the aforementioned grounds, it is prayed that the
Revenue has erred, on the facts and in the circumstances of the case, by
apportioning administrative expenses Rs.22, 03,525/- on the basis of receipts
without any basis or justification particularly while all the details of the
expenses were available as per schedule -XVII of the profit and loss account
and further details are on the file and such no expenses have direct relation
with the tax free income.
8. The appellant hereby craves its right to take any additional grounds or
amend or withdraw any grounds of appeal."
3. We have heard Shri TN Chopra, the Ld.Counsel for the assessee
and Mr.Sameer Sharma, the Ld.D.R. on behalf of the Revenue.
4. On a careful consideration of the facts and circumstances of the
case, on perusal of orders of lower authorities, material on record and case
laws cited, we hold as follows.
4.1. The reasons of reopening are as follows.
"11. Reasons for the belief that income has escaped assessment: The
assessment of M/s Rama Associates Ltd. For the AY 2004-05 was completed
after scrutiny in November,2006 determining a loss of Rs.37.97 lakhs after
allowing exemption of Rs.163.63 lakhs u/s 10(34). On verifying the records,
it is seen that the proportionate administrative expenses attributable to above
income were not deducted in computing the admissible exemption.
Section 14A of the Act provides that for the purpose of computing the total
income under chapter VI of the Act, no deduction shall be allowed in respect of
the expenditure incurred by the assessee in relation to income which does not
form part of the total income under the Act. It has been held by the Supreme
Court (200 ITR 488) (CIT vs. United Trust Ltd.) that proportionate management
expenses should be deducted from gross dividend for the purpose of
deduction.
After deduction of proportionate administration expenses of Rs.128.35 lakhs,
allowable deduction works out to Rs.35.28 lakhs as against Rs.163.63 lakhs
allowed.
The omission resulted underassessment of income of Rs.128.35 lakhs
involving tax effect of Rs.46.04 lakhs. Thus the assessee has failed to
disclose all material facts truly and fully that were necessary for assessment.
Here it is relevant to mention the explanation 1 in section 147 that states that
"production before the AO of account books or other evidence from which
material evidence would with the diligence have been discovered by the AO
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AY: 2004-05
will not necessarily amount to disclosure with the meaning of the proviso in
sec.147."
In view of the above, facts I have reason to believe that income chargeable to
tax amounting to Rs.128.35 lakhs has escaped assessment in the case and
the same is to be brought to tax u/s 147/148 of the Act. Sanction for issue of
notice u/s 148 as prescribed u/s 151, to reassess such income and also any
other income chargeable to tax which has escaped assessment and which
comes to the notice subsequently during the course of assessment
proceedings, may kindly be accorded."
4.2. During the original assessment proceedings the assessee as per
the copy of the order sheet entry filed before us raised the following query on
22.11.2006.
"Shri SK Jain, the Ld.A.R. filed a letter dt. 22.11.2006. Case partly
examined. The (sic) is requested to file the following details/explanation.
(a) Dividend income details: Name of the company, number of shares held,
amount of dividend received, copy of bank statement showing details;
(b) Explain as to why expenditure incidental to incurring of dividend
income be not disallowed as per provisions of s.14A;
(c) Computation of capital gain on sale of land at Karnal with proof of cost
computation of capital gain on sale of land at Delhi;
(d) Copy or order for AY 1997-98 showing calculation/determination of loss
on sale of capital assets Rs.1,57,245/- and 4,568/- respectively;
(e) Details if interest income of Rs.7,01,14,533/-;
(f) Details of misc. Income;
(g) Details of commission;
(h) Justification of purchase tax of Rs.54,22,532/- copy of account to be
furnished;
(i) Since there had been no business activity, only expenses such as
personnel exp, admn.exp, selling exp, financial charges etc. Paid to
others be disallowed Rs.1,55,818/-." (Emphasis ours)
4.3. In reply to the specific enquiry the assessee vide letter dt.
24.11.2006 explained as follows.
"expenditure incurred on earning the dividend income: The amount of
Dividend has been received by the assessee company by way of the cheques
payable at par at all branches of the Bank for which no collection charges
have been levied by the bank. The details of the Dividend received by the
assessee company and the copies of the bank account in which the said
Dividend cheques have been deposited are being enclosed herewith, which
clearly reflect that the entire amount of credit has been given by the Bank in
respect of the cheques deposited for Dividend without charging any collection
expenses, and accordingly no expenditure have been incurred by the
assessee company for earning the Dividend income."
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AY: 2004-05
4.4. Further vide letter dt. 20th November,2006 the assessee
submitted the following on the issue of allowability of expenditure.
"3. Note on the allowability of expendit.ure: The assessee company has
achieved a turnover of Rs.94,97,118/- during the year by carrying out
exports. Besides the assessee company has also earned a commission of
Rs.5,94,172/- on account of sale of online lottery tickets. Besides the
assessee company has also earned business income from lending the money
at Rs.7,01,14,633/-. The details of the above mentioned transactions have
already been placed on record. Thus the assessee company carried out
different business activities during the year.
The assessee company has claimed an expenditure of Rs.13.46 lacs as
personnel cost and RS.22.03 lacs as administrative expenditure. Besides a
sum of Rs.2,56,829/- has been claimed as selling and distribution expenses.
It is submitted that all the above mentioned expenses have been incurred by
the assessee in respect of the business carried on by the assessee and these
expenses have been laid out wholly and exclusively for the purpose of
business. All the above mentioned expenses are fully vouched and verifiable.
The details of expenditure included under the above mentioned Heads have
been duly reflected in schedules attached with the Profit & Loss account A
perusal of the nature of expenditure included under the above mentioned
heads clearly reveals that all such expenses are fully allowable under the p-r
visions of Section 30 to 37(1) of the Income Tax Act. The only requirement for
allowing the expenditure under Section 37 (1) of the Act that the expenditure
should relate to the previous year the business should be carried on by the
assessee during the previous year and the expenditure should be incurred for
the purpose of the business. It has also been provided that it should not be in
the nature of capital expenditure or personal expenditure of the assessee. It
is submitted that expenditure claimed by the assessee company squarely
falls within the conditions of allowability of expenditure under Section 37(1 )
of the Income Tax Act ..
It is submitted that the personnel expenditure claimed by the assessee
pertains to the salary of the staff members and their P.F., etc. who are on the
rolls of the company. The assessee company is maintaining a staff of 12 No's.
The said staff is required for managing day today activities of the company.
Whenever export orders are received, the staff is required to arrange for the
purchase of goods, their handling and completion of various formalities for
exports, the assessee company has to maintain staff as all the members and
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M/s Rama Associates Ltd., Delhi
AY: 2004-05
staffs are quite experienced and are well versed with the nature of business
activities carried on by the asessee company. The assessee company keeps
on trying to procure orders and has to necessarily keep the said staff in the
expectation that wherever such negotiations/efforts will materialize, the
experienced and skilled manpower will be required to execute these orders.
The, staff is also required for managing the online lottery dealership and
money lending activities, by the assessee company.
The administrative expenses mainly consists of communication charges
which are normal telephone, expenses of Rs.1,78,787/- in respect of
telephone installed at business premises. The travelling and conveyance
expenditure claimed at Rs.2,79,956/- are in respect of the traveling
undertaken by the employees for the, purpose of business of the assessee
and local conveyance charges.
The Legal and Professional charges claimed at Rs.6,29,200/- mainly pertains
to the amount paid to legal counsels and advocates in respect of trade related
litigations which are going on in various courts/judicial firms. The rates &
taxes contain the statutory payments relating to business activities effected to
various departments, Banks, etc.
The Electricity Charges claimed at RS.1,78,787/- are in respect of the
payment to electricity department in respect of electricity bills of the premises.
The selling expenses mainly consists of advertisement expenditure of
Rs.2,46,930/-, which is also for business.
As submitted herein above all the expenses have been incurred for the
purpose of business, of the assessee company and are fully vouched and
verifiable. It is submitted 'that all the above mentioned expenditures are
allowable under Section 37(1) of the Income Tax Act.
The attention is also invited to the following judicial pronouncements:
· "Commercial expediency - In deciding whether a payment of money is
deductible expenditure, one has to take into consideration question of
commercial expediency and the principles of commercial trading. If a
payment or expenditure is incurred for the purpose of the trade 'of the
assessee, it is deductible even if it may bring a benefit to a third party-
CIT Vs Chandulal Keshavlal & Co.(1960) 38.1TR 601(SC) .....
· ....in applying the test of commercial expediency for determining
whether an expenditure is wholly and exclusively laid out for the
purpose of the business, reasonableness of the expenditure has to be
adjudged from the point of view of businessman and not of the revenue
- CIT Vs Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC)."
· ........................in applying test of commercial expediency to
remuneration paid to an employee, the case has to be adjudged from
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M/s Rama Associates Ltd., Delhi
AY: 2004-05
the point of view of a businessman and not of income tax department -
Aluminium Corpn. Qf India Ltd. Vs CIT (1972) 86 ITR 11 (SC), J. K..
WoollenMfrs. Vs. CIT (1969) 721TR 612(SC)."
· Merely because sales during the year in question had come down
compared with sales in earlier years, it cannot be reason for
disallowing a part of remuneration paid by the essessee.to his sons-
Omkar Nath Gupta Vs ITO (2002) 74 TTJ (Agra) 426.
· If the assessee incurs expenses in his character as a trader and the
liability falls on him as a trader, and the transaction in respect of which
proceedings are taken out arises out of and is incidental to the
assessee's business, then litigation expenses are deductible - Modi
Industries Ltd. Vs en (1977) 110lTR 855 (Ali).
· It is not open to the department to prescribe what expenditure an
assessee should incur and in what circumstances he should incur that
expenditure. Every businessman knows his interest best. The fact that
he does not leave the carriage of the case of the case in the heads of the
prosecuting agency of the Government is no ground for disallowing the
expenditure - CIT Vs Dhanrajglrji Raja Narasingi1i (1973) 911TR 544
(SC)"
In view of the above it is humbly submitted that the entire expenditure in the
company is for the purpose of business of the assessee company and is
incurred on account of commercial expediency and being fully vouched such is
fully allowable. It is submitted accordingly."
4.5. A perusal of the above clearly demonstrates that a specific query
was asked on the issue of disallowance required to be made u/s 14A of the
Act, by the AO during the original assessment proceedings. After
considering the reply of the assessee, the Ld.A.O. vide order dt.
30.11.2006, accepted the explanation given by the assessee and did not
make any disallowance. It is clear that the AO who completed the original
assessment has clearly come to a conclusion that the expenditure in
question is not relatable to the earning of dividend income which is not part
of total income. In view of the above it is clear that the reopening in this
case is made on a change of opinion which is not permissible in law.
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4.6. The Jurisdictional High Court in the case of CIT vs. Usha
International Ltd. 77 DTR (Del) (FB) 369 in the judgement at para 39 held
as follows.
"There may be cases where the AO does not and may notarise any written
query but still the AO in the first round/original proceedings may have
examined the subject-matter, claim etc. because the aspect or question may be
too apparent and obvious. To hold that the AO in the first round did not
examine the question or subject-matter and form an opinion, would be
contrary and opposed to normal human conduct. Such cases have to be
examined individually. Some matters may require examination of the
assessment order or queries raised by the AO and answers given by the
assessee but in others cases, a deeper scrutiny or examination may be
necessary. The stand of the Revenue and. the assessee would be relevant.
Several aspects including papers filed and submitted with the return and
during the original proceedings are relevant and material. Sometimes
application of mind and formation of opinion can be ascertained and gathered
even when no specific question or: query in writing had been raised by the
AO. The aspects and questions examined during the course of assessment
proceedings itself may indicate that the AO must have applied his mind on the
entry, claim or deduction etc. It may be apparent and obvious to hold that the
AO would not have gone into the said question or applied his mind. However,
this would depend upon the facts and circumstances of each case."
(Para 39)
4.7. Applying the propositions laid down in the above case, we
uphold the contentions of the assessee that the reopening is bad in law as
the Assessing Officer during the original assessment proceedings examined
the issue and it was only on a change of opinion that the assessment was
reopened.
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M/s Rama Associates Ltd., Delhi
AY: 2004-05
4.8. As we have upheld the assessee's contentions and quashed the
reassessment proceedings, we need not adjudicate the other grounds of
appeal as it would be an academic exercise.
5. In the result the appeal of the assessee is allowed.
Order pronounced in the Open Court on 11th November,2014.
Sd/- Sd/-
(H.S.SIDHU) (J.SUDHAKAR REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: the 11th November, ,2014
*manga
Copy of the Order forwarded to:
1. Appellant;
2.Respondent;
3.CIT;
4.CIT(A);
5.DR;
6.Guard File
By Order
Asst. Registrar
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