2013 (10) TMI 379 - HC - Income Tax

Allowability of expenditure on estimate basis - Agreement between the assessee company and M/s. Sahara India dated 01.01.1991, M/s. Sahara India shall works as agent to the assessee company for collecting money, leading money, supply of receipts and documents and communicating various schemes and proposals launched by the assessee company from time to time. M/s. Sahara India was also authorized to collect the requisite amount from the members for its savings schemes and the so collected amount through its branches shall be send it to the assessee company. M/s. Sahara India shall submit to the assessee company, the statement of account or such other information as the company may require. For this purpose, the expenses were paid Held that - The expenditure are genuine. These expenditure were likely to be incurred by the assessee company, or to be paid to the M/s. Sahara India. The expenses so claimed pertains to the establishment, travelling, stationery and printing, advertisement and publicity and business development and these expenses were related to the business of the assessee. The said expenses were duly supported by the vouchers as observed by the CIT(A) in his order. But since these expenses were incurred by M/s. Sahara India, so the vouchers were in possession of that firm and that the assessee after having satisfied itself about the correctness of these expenses had accepted the debit note of M/s. Sahara India and credited in their account the amount by issuing debit vouchers - No doubt was raised about the genuineness of the said expenditure. When the expenses were incurred wholly and exclusively for the purpose of the business, the same are allowable - AO made the addition on estimate basis. The first appellate authority as well as Tribunal restricted the same on estimate basis. The estimation is a question of law, as per the ratio laid down in the following cases s.a. New Plaza Restaurant vs. ITO, 2008 (7) TMI 260 - HIMACHAL PRADESH HIGH COURT and Sanjay Oil Cake vs. CIT, 2008 (3) TMI 323 - GUJARAT HIGH COURT - Decided against the Revenue. Addition of Notional Interest Held that - M/s. Sahara India is the collecting agent not only of the assessee but also of various other companies. As per MoU, the assessee charges interest from M/s. Sahara India where delay in transmission of funds exceeds two months. From the record, it appears that the assessee has charged interest on the balance of Rs.13,80,08,484/- and no interest was paid on the balance of Rs.6,49,86,400/-, as the same did not exceed two months. When the parties have agreed not to charge the interest, as per the condition laid down in the MoU i.e. if the remittance is within the less than two months , then the AO cannot compel to do so Decided against the Revenue.

Summary

Issues Involved:
1. Addition on Expenditure
2. Interest

Detailed Analysis:

1. Addition on Expenditure:
The core issue pertains to whether the transfer of investors' deposits to the tune of 18 to 20% by the respondent-Assessee as agent's money amounts to a colourable exercise of power. The Assessing Officer (AO) restricted the allowable expenditure to 3% of the total deposits, questioning the legitimacy of the expenditure claimed by the respondent. The appellate authorities, however, allowed the expenditure up to 4.5%. The AO's decision was based on the lack of sufficient evidence to prove that the payments were made to M/s. Sahara India. The Tribunal and appellate authorities found the expenses to be genuine, supported by vouchers, and incurred wholly and exclusively for business purposes. The Tribunal's decision was upheld, concluding that the estimation of expenditure is a question of law and no material illegality was found in the Tribunal's order.

2. Interest:
The second issue revolves around the non-charging of interest on loans given to sister concerns and agents. The AO added notional interest to the taxable income, arguing that interest-bearing funds were utilized for non-business purposes. The appellate authorities deleted the addition, noting that the transactions were purely business-related and the conditions of the Memorandum of Understanding (MoU) between the assessee and M/s. Sahara India were adhered to. The Tribunal and appellate authorities concluded that the AO cannot compel the assessee to charge interest if the business agreement did not require it. The decision was supported by several case laws, emphasizing that the businessman's perspective should prevail over the AO's viewpoint.

Conclusion:
The High Court upheld the Tribunal's orders, finding no reason to interfere with the appellate decisions. The substantial questions of law were answered in favor of the assessee and against the department. All appeals filed by the department were dismissed.