2021 (1) TMI 780 - AT - Income Tax

Payment of salary to Senior Directo r Mrs. Sonali Nanda - Allowable business expenditure or not? - assessee has filed copies of various documents before the AO as well as the Ld. CIT (A) to demonstrate that Mrs. Sonali Nanda was appointed in terms of appointment letter containing terms and conditions of service and also these documents substantiated that Mrs. Sonali Nanda had vast experience in areas of food and beverage, baking and promotional events - CIT-A deleted the disallowance - HELD THAT - It is seen that the AO has proceeded to disallow the salary paid on the ground that she was employed only by virtue of her being the daughter of Mr. Suresh Nanda and that she had not been selected thorough her open offer. To our mind this cannot be considered a valid ground for making the impugned disallowance in as much as there is no law against employing the relatives or sons or daughters of a shareholder/owner if they are otherwise duly qualified/ experienced to hold the position - AO has not pointed out that the expenditure was not incurred for the purpose of business. In such a situation the disallowance made by the AO has been rightly deleted by the CIT (A). AO cannot decide on the reasonableness and commercial expediency of a particular expenditure incurred by the assessee as has been laid down by the Hon ble Apex Court in case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT . CIT (A), while deleting disallowance in Assessment Year 2011-12, has noted that the payment of salary has not been disputed, it is not disputed that the salary paid has been taxed in the hands of Mrs. Sonali Nanda and there was no evidence to suggest that the payment of salary was without any service rendered. The Ld. CIT (A) also observed that the argument that the salary paid was on account of Mrs. Sonali Nanda being daughter of Mr. Suresh Nanda holds no matter in view of the overwhelming evidence produced and that the Revenue cannot proceed on consideration not based on any evidence. - Decided against revenue. Disallowance u/s 14A - Assessee has made suo moto disallowance - HELD THAT - As per the Hon ble Delhi High Court in Maxopp Investment Ltd. 2011 (11) TMI 267 - DELHI HIGH COURT it is incumbent on the Assessing Officer to indicate cogent reason for rejecting the claim of the assesee with regard to expenditure or no expenditure, as the case may be, while proceeding to compute disallowance u/s 14A r.w. Rule 8D - such satisfaction in precariously absent in the assessment order. In such a situation, the disallowance made by the Assessing Officer cannot be upheld. Similarly, the action of the Ld. CIT (A) in restricting the disallowance to the exempt income also has no basis as there is no recording of satisfaction by the Assessing Officer as aforesaid. Department challenging the deletion of disallowance u/s 14A in Assessment Year 2012-13 and 2013-14, it is seen that, undisputedly, in both these years the assessee has not earned any exempt income. The Ld. CIT (A) has deleted the disallowance by duly noting the same. The issue of disallowance u/s 14A of the Act in absence of exempt income earned is no longer res integra. In the case of Cheminvest Ltd. vs. ACIT 2015 (9) TMI 238 - DELHI HIGH COURT has held that where the assessee does not earn any exempt income during the year, no disallowance u/s 14A of the Act can be made. Depreciation of cars - disallowance by AO on the ground that these cars were found to be parked at the residences of Mr. Suresh Nanda and Mr. Sanjeev Nanda who held majority stake directly or indirectly inthe assessee company - HELD THAT - Similar addition was made in Assessment Yea₹ 2009-10 and 2010-11 2017 (11) TMI 1067 - ITAT DELHI which was subsequently deleted by the ITAT as held mere parking of cars at the premises of these persons, cannot ipso facto lead to an inference that the depreciation has to be disallowed which otherwise are the assets of the assessee company. Assessee had also submitted that these cars were used purely and wholly for the purpose of hotel business and in absence of rebuttal of this explanation, depreciation cannot be disallowed and accordingly, we held Ld. CIT (A) has rightly allowed depreciation. Disallowance of depreciation on Gym Equipment - HELD THAT - As relying on own case 2017 (11) TMI 1067 - ITAT DELHI it is not in dispute that the equipment has been bought by the company and is appearing at the fixed assets in the balance sheet of the assessee company and said assets has been acquired during the running of hotel business. Then simply because it is being used by Managing Director it cannot be held to be for private use so as to warrant disallowance of depreciation. At the most if any equipment has been placed for exclusive use of Managing Director the same should be added as perquisite in the hands of the said Director but cannot be disallowed in the hands of the assessee company when this asset already forms part of the block of the assets and depreciation has been allowed earlier. TDS u/s 195 - Disallowance being payment made to M/s Apex Enterprises - contention of the AO that no tax had been deducted at source while making the payment and that the assessee could not justify the payment - CIT- A deleted the addition - HELD THAT - It is undisputed that no tax was required to be deducted at source on the impugned payment in view of Articles, 14, 7 and 22.1 of the DTAA between India and UAE. CIT (A), while deleting the addition, observed that the agreements were found during the course of search and seizure and that, undisputedly, there was evidence to indicate that efforts were made by M/s Apex Enterprises towards the fulfilment of the terms of the agreement. The Ld. CIT (A) also observed that although the efforts did not result into any concrete proposal materialising, failure to procure business does not lead to the conclusion that the transaction was not genuine. We agree with the observations of the Ld. CIT (A) on the issue. We also negate the allegation of the Assessing Officer that the contract was awarded only by virtue of Mr. Sanjeev Nanda being the Son of Mr. Suresh Nanda. Having perused the records and the evidences as well as assessment order, it is apparent that the Assessing Officer chose to ignore these evidences and proceeded to make the disallowance without any cogent reason. Unexplained cash found during the course of search - assessee s submission that this cash pertained to cash received from sale of scrap generated during the renovation work as well as normal operations of the business - CIT-A deleted the addition - HELD THAT - CIT (A) while deleting the addition, has noted that although no specific explanation was given at the time of search, the seized cash had been separately reflected in the audited balance sheet and has also been included in the income from sale of scrap offered to tax and, thus, the cash found and seized stood duly accounted for. This finding of fact has not been controverted as being perverse by the Ld. Sr. DR. In such a situation, this being a finding of fact by the Ld. CIT (A), we find no reason to interfere with such finding. - Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of salary payment to Ms. Sonali Nanda.
2. Disallowance under Section 14A read with Rule 8D.
3. Disallowance of depreciation on cars and ad hoc addition for car running expenses.
4. Disallowance of depreciation on gym equipment.
5. Disallowance of payment to M/s Apex Enterprises.
6. Addition on account of unexplained cash.

Detailed Analysis:

1. Disallowance of Salary Payment to Ms. Sonali Nanda:
The Department challenged the deletion of disallowance of salary paid to Ms. Sonali Nanda on the grounds that she was employed by virtue of being the daughter of Mr. Suresh Nanda and lacked relevant qualifications. The Tribunal found that Ms. Nanda had substantial experience and qualifications relevant to her role. The salary payment was duly reflected in her income tax returns. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, noting that the Assessing Officer (AO) cannot decide the reasonableness and commercial expediency of the expenditure incurred by the assessee. The Tribunal cited the Supreme Court's decision in S.A. Builders and Delhi High Court's decision in Dalmia Cement to support its conclusion.

2. Disallowance under Section 14A read with Rule 8D:
For Assessment Year (AY) 2011-12, the AO disallowed ?2,90,10,000/- under Section 14A, but the CIT(A) restricted it to the exempt income of ?57,31,722/-. The Tribunal noted that the AO failed to record satisfaction as required under Section 14A(2) before making the disallowance. Citing the Delhi High Court's decision in Maxopp Investment Ltd., the Tribunal held that the AO must record reasons for not being satisfied with the assessee's claim. Consequently, the Tribunal upheld the CIT(A)'s decision to restrict the disallowance to the exempt income but allowed the assessee's cross-objection, reducing the disallowance to the suo moto amount of ?19,88,395/-.

For AYs 2012-13 and 2013-14, the Tribunal noted that the assessee did not earn any exempt income. Citing the Delhi High Court's decision in Cheminvest Ltd., the Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 14A for these years.

3. Disallowance of Depreciation on Cars and Ad Hoc Addition for Car Running Expenses:
The AO disallowed depreciation on cars found at the residences of Mr. Suresh Nanda and Mr. Sanjeev Nanda and made an ad hoc addition for car running expenses. The Tribunal noted that the cars were part of the assessee's fixed assets and used for business purposes. Citing its earlier decision for AYs 2009-10 and 2010-11, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of depreciation and directed the AO to delete the ad hoc addition for car running expenses.

4. Disallowance of Depreciation on Gym Equipment:
The AO disallowed depreciation on gym equipment installed at the Managing Director's premises. The Tribunal noted that the equipment was part of the assessee's fixed assets and used for business purposes. Citing its earlier decision for AYs 2009-10 and 2010-11, the Tribunal directed the deletion of the disallowance.

5. Disallowance of Payment to M/s Apex Enterprises:
The AO disallowed payment to M/s Apex Enterprises, alleging no tax was deducted at source and the payment was unjustified. The Tribunal noted that the payment was made under valid agreements found during the search and that services were rendered by M/s Apex Enterprises. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, noting that no tax was required to be deducted under the DTAA between India and UAE.

6. Addition on Account of Unexplained Cash:
The AO added ?5,50,000/- as unexplained cash found during the search. The Tribunal noted that the cash was accounted for in the books of accounts and reflected in the audited balance sheet. The CIT(A) found that the cash was from the sale of scrap and included in the income from the sale of scrap. The Tribunal upheld the CIT(A)'s decision to delete the addition.

Conclusion:
All three appeals of the Department were dismissed, and both Cross Objections of the assessee were allowed. The Tribunal upheld the CIT(A)'s decisions and directed the AO to make necessary deletions and adjustments as per the findings.