2016 (10) TMI 44 - AT - Income Tax

Branding Expenses paid to a company established in the United Kingdom - existence of permanent establishment in India - Held that - The assessee is engaged in the business of purchase and sale of foreign currencies and also inward and outward money transfer business. As a large number of Indians are living in United Kingdom, the company has engaged M/s. Muthoot global Transfers Pvt. Ltd., UK for the wide publicity for Muthoot Brand and to create awareness among them the forex and money transfer services provided by them through a large network of branches and franchise all over India. The company has reimbursed to M/s. Muthoot Global Transfers Pvt. Ltd., UK towards expenses incurred by them for the above mentioned activities, as per invoice issued by them. By our order of even date in the case of another group company Muthoot Exchange (P) Ltd., Kochi we have held that the said company is not liable to deduct tax on the payment made under the head branding expenses. Following the findings in the said order in the case of that assessee and also in our considered view the same principles apply. Accordingly, we hereby delete the disallowance. Further we also hold that there is no jurisdiction in disallowing being the provisions made in the accounts especially when the assessee has been consistently adopting mercantile system of accounting. - Decided in favour of assessee. Addition being the F.M. Radio License fee paid by the assessee - Held that - By a scheme of demerger the F.M. Radio License neither to be exploited by the assessee was transferred to another company by name of M/s. Muthoot Broadcasting (P) Ltd. For a period of 9 months, during this financial year the assessee has exploited the license and has included the income thereof. This has been mentioned by the Assessing Officer at page 5, para 5 of assessment order. The reason stated by the assessee for demerger was that the assessee company approached SEBI for public issue and as per their requirement this radio business was to be demerged from the company. Up to a period of 9 months, since the license has been exploited and income thereof taken into account, we are of the considered view that once income of a particular business carried on by the assessee is taken into account the expenses attributable to earn such income should also be taken into account. The fact being so, we hereby delete the addition made - Decided in favour of assessee. Disallowance representing gold loan which has become bad during the year - Held that - Respectfully following the guidelines of RBI, we are of the considered view that the assessee company is entitled to claim the loss in this regard. Thus all the grounds of the assessee are allowed Disallowance of staff welfare expenditure relating to staff welfare scheme - Held that - The staff welfare scheme is a collective name given by the assessee in respect of such contributions, which means that the assessee should be in a position to furnish the name wise break up details of the outstanding balance. In our view, the collective name Staff welfare scheme is akin to the collective name Sundry creditors . Accordingly the Staff welfare scheme can only be taken as a liability (Creditors) account, i.e., the amount payable to each of the employees who have contributed to the said scheme. Instead of keeping the account in each of the employee name, the assessee has aggregated them and shown as under a collective name. The Ld CIT(A) has noted that the assessee pays the accumulated amount outstanding in the name of the retiring employees along with the interest accrued there on at the time of retirement. It is also submitted that the assessee is deducting TDS from such interest payments. It is only possible to identify the accumulated balance in the name of each of the employee and pay the same only if the sub-ledger of the Staff welfare scheme is available. Hence, in our view, the Staff welfare scheme a/c can only be taken as a creditor account and not as welfare scheme account as defined in sec. 2(24)(x) of the Act. Accordingly, we agree with the final decision reached by the Ld CIT(A) on this issue. - Decided in favour of assessee. Amount realized from borrowings on sale of gold in public auction - Held that - It is common knowledge that in any auction the value which would be realized would be much less than the market value. The revenue has not made a case that the assessee has realized interest/arrears of interest on the auction. The Ld. CIT(A) in para 10.3 at page 18 of her appellate order has come to the finding that the gold loans and stagnant advances which were not recoverable for long, the gold was put to auction to recover the value of loan. Since the sale proceeds of such gold ornaments would basically go to reduce the principal amount of loan and any interest realizable on that. Such amount would be basically repayment of loan and hence the same cannot be treated as income of the assessee. In view of this , we uphold the findings of the Ld. CIT(A) on this issue also.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Branding Expenses.
2. Disallowance of Provision for Branding Expenses.
3. Disallowance of F.M. Radio License Fee.
4. Disallowance of Bad Debts Written Off.
5. Disallowance of Staff Welfare Expenses.
6. Treatment of Amount Realized from Sale of Gold Ornaments in Public Auction.

Detailed Analysis:

1. Disallowance of Branding Expenses:
The assessee incurred ?1,02,29,239/- as Branding Expenses paid to a company in the UK without a permanent establishment in India. The officers argued that the payments fall under the purview of section 9(1)(i) of the Income Tax Act, deeming the income to accrue in India due to business connections. However, the Tribunal concluded that since the services were rendered outside India and the recipient company had no establishment in India, the provisions of section 195 for tax deduction at source were not applicable. Consequently, the disallowance of ?1,02,29,239/- was deleted.

2. Disallowance of Provision for Branding Expenses:
The officers disallowed ?36,72,000/- payable to M/s. Muthoot Global Money Transfers Pvt. Ltd., stating it was only a provision and not an actual liability. The Tribunal held that since the assessee followed the mercantile system of accounting, the provision was allowable. Thus, the disallowance of ?36,72,000/- was deleted.

3. Disallowance of F.M. Radio License Fee:
The assessee wrote off ?70,51,200/- as F.M. Radio License Fee for a period of 9 months before demerging the unit. The officers contended that this fee should be claimed by the new entity post-demerger. However, the Tribunal noted that since the income from the F.M. Radio business for the 9 months was included by the assessee, the related expenses should also be allowed. Therefore, the disallowance of ?70,51,200/- was deleted.

4. Disallowance of Bad Debts Written Off:
The assessee claimed ?61,88,642/- as bad debts for gold loans advanced against stolen gold, which was later seized by the police. The Tribunal, considering RBI guidelines that allow writing off loss assets, upheld the assessee's claim. Thus, the disallowance of ?61,88,642/- was deleted.

5. Disallowance of Staff Welfare Expenses:
The Revenue contested the deduction of ?2,62,16,683/- under "staff welfare expenses," arguing it should be considered income under section 36(1)(va). The Tribunal, following its previous decisions for AY 2004-05 and 2006-07, held that the "Staff Welfare Scheme" was akin to a liability account and not an income. Therefore, the disallowance was not upheld, and the relief granted by the CIT(A) was maintained.

6. Treatment of Amount Realized from Sale of Gold Ornaments in Public Auction:
The Revenue argued that the entire sale proceeds from auctioned gold ornaments should be treated as income. The Tribunal observed that the auction proceeds primarily covered the principal loan amount, with no surplus realized. The CIT(A) found that the proceeds went towards loan repayment and could not be treated as income. Thus, the Tribunal upheld the CIT(A)'s findings, dismissing the Revenue's appeal on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, providing relief on all contested issues. The judgments were pronounced in the open court on 26-09-2016.