2018 (8) TMI 2090 - AT - Income Tax

Disallowance of relocation expenses - addition made by the AO considering the same to be personal expenses - CIT-A deleted addition - HELD THAT - Revenue has not brought anything on record to demonstrate the facts of the issue for the year under consideration are anyway different as compared to earlier AY wherein held that no enduring benefit had accrued to the assessee either in the capital field and there was no creation of any capital asset nor it affected the fixed capital of the assessee. The experts who came for the period of 2 to 3 years returned after the contract period was over. Therefore, it is not correct to say that any enduring benefit accrued to the assessee which could be held as disallowable as capital expenditure. The services of such experts were undertaken only for the contact and improvement of the business. we are of the opinion that the order of CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, Ground No.1 raised by the Revenue is dismissed. Adhoc disallowance on account of Travel expenses - HELD THAT - After hearing both the sides and on perusal of the order of Tribunal in assessee s own case for the A.Y. 2009-10we find the Tribunal has not approved the system of making adhoc disallowance adopting the flat rate of 10%.Revenue has not brought anything on record to demonstrate the facts of the issue for the year under consideration are anyway different. Considering the above, we are of the opinion that the assessee s claim for allowing the travelling and conveyance expenses is allowed in favour of the assessee Adhoc disallowance on account of telephone expenses - Considering the above of the Tribunal against the adhoc disallowance in assessee s own case and the decision of CIT(A) on this issue, we are of the opinion that the disallowance made by the AO on this telephone expenses cannot be sustained. Accordingly, Ground raised by the Revenue is dismissed. Denial of Claim of deduction u/s.35AB - scope of expression paid used in the sub-section (1) of section 35AB - HELD THAT - We proceed to explain if the expression paid used in the sub-section (1) of section 35AB covers this arrangement of assessee in not paying the money at all to the supplier MBAG and allotting of shares equivalent of Rs.100.32 crores to the DBAG, the flagship company of the assessee. Meaning Paid , Actually paid Etc . - Expressions used in section 35AB and the expression actually paid in section 35ABA has to be interpreted after considering the definition specifying the said expression paid in section 43(2) of the Act. If the same is considered, in our view, the shares so allotted by the assessee cannot be considered as allotted towards the liability to the MBAG, the supplier of the company. Ld. Counsel for the assessee could not demonstrate as to why the shares were allotted to the DBAG and if the said allotment was done for squaring up of any liabilities between MBAG to DBAG. On this issue, it is a failure to discharge the onus from the assessee s side. Notwithstanding the same, we also find if the allotment of shares constitute exchange of shares against acquisition of know-how. Normally, the exchange occurs between the parties with reference to the goods. It may involve money worth and certainly not the money alone. In effect, the payment becomes relevant issue only with reference to the money wherever the squaring up of the entries are involved on accrual basis, the expression incurred was used in the provisions of section 43(2) relating to definition paid . In the instant case, the assessee has neither paid nor allotted shares to the supplier of the know-how. Therefore, we are of the opinion that the arguments raised by the Ld. Counsel for the assessee are not legally sustainable on this issue. Accordingly, the same are dismissed. Any Lump sum consideration - Coming to the meaning of the expression any lump sum consideration used in the provisions of section 35AB of the Act, the assessee relies on the provisions of section 269A relating to the definition of apparent consideration - Counsel referred to the definition consideration vide the Contract Act, (supra) and we find the same is different qua the expression expenditure within the meaning of any lump sum consideration if it covers the impugned transaction of allotment of shares to the DBAG, who is the sister concern. It is a case where assessee never paid money directly to the supplier of the technical know-how or allotted equivalent value of shares to the supplier. In our view, it is not a straight case of making payment/allotting shares to the supplier of the technical know-how. The expression consideration is not synonymous with the word expression expenditure used in section 37(1) of the Act despite the fact the title of section 35AB refers to the word expression expenditure . Liberal Interpretation - The onus is on the assessee to demonstrate the facts leading to the applicability of the said section. As detailed in the preceding paragraphs of this order the information relating to the relationship between the DBAG and MBAG are not coming forth from across the borders. It is an admitted fact that the reasons are absent as to why the shares were allotted to the non supplier of the technical know-how. We understand had the assessee eventually allotted the shares directly to the supplier, our inference could have been different. The payment by way of allotment of shares is never to the supplier of the technical know-how in this case which makes inapplicability of the principle of liberal interpretation to the facts of the present case. The transactions between the assessee on one side and the MBAG and DBAG on other side are not transparent so far as the transactions between the MBAG and DBAG are concerned. Judgment in the case of EIMCO K.C.P. Ltd . 2000 (2) TMI 7 - SUPREME COURT - The facts of this case are not applicable to the case on hand where the distinguishable facts include (1) the applicability of provisions of section 35AB of the Act; (2) the shares were allotted to the other group concern (DBAG) of the supplier (MBAG) and not to the supplier of the technical know-how; (3) absence of facts/information leading the supplier of the know-how to allot the shares by the assessee company to the DBAG etc. In any case, this decision was relied upon by the AO out of context. Therefore, it is our categorical finding that the AO and the CIT(A) erred in relying on this judgment which is delivered in connection with the expenditure or otherwise and the Revenue expenditure or otherwise. Further, on the application of ratio of Judgment of Hon ble Karnataka High Court in the case of Amco Power Systems Ltd. 2015 (10) TMI 2385 - KARNATAKA HIGH COURT , Judgment of Hon ble Bombay High Court in the case of Raymond Ltd. 2012 (4) TMI 129 - BOMBAY HIGH COURT and the order of the Tribunal in the case of Kalyani Steels Ltd. 1997 (3) TMI 611 - ITAT PUNE we find these decisions were delivered in the context of payments to the supplier of the technical know-how whereas the facts of the present case differ in principle as the shares were allotted not to the supplier of the company but to group concern of the supplier. Further, there is no information on the reasons which led the assessee to make allotment of shares to DBAG and not to the supplier MBAG. From the above analysis from various angles, i.e. (a) the provisions of section 35AB of the Act; (b) the meaning paid and actually paid ; (c) any lump sum consideration; (d) liberal interpretation; (e) judgment in the case of EIMCO K.C.P. Ltd.; and (f) linking the issue to the Tribunal orders for A.Y. 1996-97 and others, we find the facts relating to not squaring up the liability directly with the supplier-MBAG and allotment of shares to the DBAG are peculiar to the factual matrix of this case. In effect, the supplier did not receive any payment literally to its account either in the form of cash or in the form of kind from the assessee. As such, it is the admitted position that there is no direct case law on any one of the issues discussed in (a) to (f) above. Therefore, we are of the opinion that despite the laborious arguments made by the Ld. Counsel for the assessee, the ground No.1 raised by the assessee need to be dismissed. Accordingly, the Ground No.1 of the assessee s appeal is dismissed. Write off of the Capital Work-in-progress - HELD THAT - We find the decision of CIT(A) given is not complete in all respect which includes that the CIT(A)/AO never discussed the details of the said expenditure on one side and applicability of the relevant legal propositions on the other while deciding the issue by the CIT(A). It is understood that every case has its peculiar facts but the philosophy relating to the decision to describe particular expenditure as capital or revenue is already discussed by the Hon ble jurisdictional High Court as well as Hon ble Apex Court. The legal propositions described by other High Courts also contribute to the evolution of thought on this issue. Therefore, in our view, there is requirement of remanding this issue to the file of AO for want of a decision on facts as well as application of legal propositions. As such, we never had the benefit of knowing the details of expenditure amounting to Rs.9,79,25,979/- aggregated under the head capital work in progress . It is relevant to know what are the details of break-up of the expenditure on one side and the genuineness of the same on the other. Neither the AO nor the CIT(A) has examined this angle of the claim of the assessee. Therefore, in the set-aside proceedings, AO is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Accordingly, relevant ground raised by the assessee is allowed for statistical purposes. Allowability of Club Expenditure - membership fee for Poona Golf Club and Hyatt Regency New Delhi, for the Managing Director, AO disallowed the same as non-business expenses and made addition - HELD THAT - On perusal of the note given by the Ld. Counsel for the assessee which is extracted above, we find the facts of the decisions cited by the Ld. Counsel for the assessee are distinguishable. It is not the case of the assessee that the employees were not benefitted and the expenditure is wholly and exclusively for the business purposes of the assessee - we find the order of the CIT(A) is fair and reasonable. Accordingly, this part of ground raised by the assessee is dismissed

Summary

Issues Involved:
1. Deletion of disallowance of relocation expenses.
2. Deletion of adhoc disallowance of traveling expenses.
3. Deletion of adhoc disallowance of telephone expenses.
4. Denial of deduction under section 35AB of the Income Tax Act for technical know-how fees paid in kind.
5. Disallowance of expenditure related to write-off of capital work in progress (CWIP) due to discontinuation of a car model.
6. Disallowance of payment towards membership fees for clubs and hotels for executives.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Relocation Expenses
The assessee employed specialists from Daimler Chrysler Project Consultant and was contractually obligated to pay their relocation expenses. The AO disallowed these expenses for lack of evidence, considering them personal. However, the CIT(A) allowed the expenses, relying on the decision for the subsequent A.Y. 1999-2000, which was affirmed by the ITAT. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were for business purposes and constituted revenue expenditure.

2. Deletion of Adhoc Disallowance of Traveling Expenses
The AO disallowed 10% of the traveling expenses due to the absence of third-party vouchers. The CIT(A) granted relief based on the decision for A.Y. 1999-2000. The Tribunal found that the expenses were incurred for business purposes and disapproved of the adhoc disallowance, noting that the AO had not identified any specific instance of non-business expenditure.

3. Deletion of Adhoc Disallowance of Telephone Expenses
The AO made an adhoc disallowance of Rs.10 lakhs out of the total telephone expenses. The CIT(A) deleted the disallowance, following the decision for A.Y. 1999-2000. The Tribunal upheld the CIT(A)'s decision, noting that the adhoc disallowance was arbitrary and unsupported by any material evidence.

4. Denial of Deduction under Section 35AB for Technical Know-how Fees Paid in Kind
The assessee claimed a deduction for technical know-how fees paid by allotting shares to Daimler Benz AG instead of cash. The AO disallowed the claim, stating that the allotment of shares did not constitute "paid" or "lump sum consideration" under section 35AB. The CIT(A) upheld the disallowance. The Tribunal examined the provisions of section 35AB, the meaning of "paid," and relevant case laws. It concluded that the allotment of shares to a non-supplier (Daimler Benz AG) did not meet the requirements of section 35AB, as the supplier (MBAG) did not receive any payment. The Tribunal dismissed the assessee's ground.

5. Disallowance of Expenditure Related to Write-off of CWIP Due to Discontinuation of Car Model
The assessee wrote off Rs.9,79,25,979/- related to the discontinued car model W-124 as a business loss. The AO and CIT(A) disallowed the claim, considering it capital expenditure. The Tribunal remanded the issue to the AO to examine the details of the expenditure and its genuineness, directing the AO to decide afresh after providing an opportunity for a hearing.

6. Disallowance of Payment Towards Membership Fees for Clubs and Hotels for Executives
The AO disallowed Rs.25,600/- out of the total club expenses, considering them personal. The CIT(A) upheld the disallowance. The Tribunal found the CIT(A)'s decision reasonable, noting that the expenses were personal and not wholly for business purposes.

Conclusion:
- The appeal of the Revenue (ITA No.1325/PUN/2003) is dismissed.
- The appeal of the assessee (ITA No.1381/PUN/2003) is partly allowed for statistical purposes.
- The cross-objection of the assessee (C.O. No.50/PUN/2004) is dismissed as academic.