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TMI Blog2010 (2) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... sits amounting to Rs. 3.65 crores was credited by the assessee company to its P&L account and there was no income whatsoever declared by it corresponding to the expenditure claimed to be incurred on management service fees. He, therefore, required the assessee company to justify its claim for the said expenditure. In reply, the following submissions were made on behalf of the assessee company before the A.O. "(1) ZMPL had submitted a technical proposal of February, 8 which contains under section 3 thereof a detailed Business Plan for PPL outlining the critical success factors for its turn around a time bound programme by achieving certain strategic parameters in key areas of capacity utilization, Efficiencies, Profitability, market share and productivity. (2). ZMPL and PPL have entered into a Memorandum of understanding (MOU) which was entered on 7th of May, 2004 and which is effective from 1st of April, 2003. Article 2.2 of the MOU outlines the purpose and scope of the MOU as under: "Subject to the terms and conditions of this MOU, the strategic Manager expressly agrees to provide the Company (PPL) with concepts and strategies to be adopted to achieve the objective of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the payer to pay it to the tax payer to pay it to the tax payer" H. Liebes & Co. v. CIR CCA 90F 2d. 932,936." 3. The above submissions made on behalf of the assessee before him were not found acceptable by the A.O. According to him, the rendering of managerial services required lot of planning and it could not have been done without proper and timely planning. In this context, he noted that the MOU for rendering the managerial services was entered into by the assessee company with M/s Paradeep Phosphates Ltd. (in short 'PPL') on 7.5.2004 i.e. only after the end of the relevant previous year. He observed that the milestones like capacity utilization, improving efficiencies and productivity, increasing the market share and productivity could have been achieved only if planning in that direction was done well in advance before the year began and it was not possible to achieve such milestones by entering into the MOU only after the end of the relevant year. He also noted in this context that the assessee company had paid advance tax in March, 2004 and even self assessment tax in May, 2004 in respect of interest income earned by it on bank deposit. According to him, had this expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration, the assessee company had invested the surplus funds in the inter-corporate deposits and bank deposits and interest thereon amounting to Rs. 3,64,70,951/-was declared by it as income in the return. From the TDS certificates furnished by the assessee along with its return of income, it was noted by the A.O. that the total interest received by the assessee company during the year under consideration was amounting to Rs. 4,72,85,607/-. While explaining the said difference, it was submitted on behalf of the assessee company before the A.O. that interest rates for the ICDs given to PPL was revised from 6% to 3½% on 5.12.2003. According to the A.O. the said revision, however, was made by the assessee company suo-moto without there being any request made by PPL. He noted that even the rate of interest revised at 3½% was very low. He also noted that the tax at source was deducted by PPL by taking the interest rate of 6% for the entire year and the amount of tax so deducted was remitted on 23.1.2004 i.e. even after the letter dated 5.12.2003 written by the assessee company revising the interest rate. He, therefore, held that the reduction in the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of business. - The tax audit report is silent on the expenditure on management service fees. - The expenditure is claimed with the purpose of set off against interest from fixed deposits earned by the assessee company amounting to Rs. 4.76 crores and thereby reducing tax liability. - The Management service fees are paid to Zuari Industries Ltd. which is a loss making company. As both assessee and ZIL are group concerns, both are benefited by this transaction. Hence, I am satisfied that assessee by booking management service fees the assessee has reduced income of Rs. 18,08,35,360/-. Regarding interest income It was a case of unilateral reduction of rate of interest without the borrower asking for the reduction- - PPL has credited to the account of the assessee the entire interest of Rs. 4,68,23,023/-. - If letter dated 5.12.2003 was issued to PPL, then, PPL would not have credited interest @6% p.a. and deducted tax thereon. - There is no mention of rate of reduction of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day running of PPL's business. The agreement imposed upon ZIL the obligation to provide services to PPL. Pursuant to the agreements referred to above, the appellant made the following payments to ZIL and MPSA and full tax has been deducted at source thereon:- Party Gross Amount Tax deducted at source ZIL 15,06,60,360 77,21,344 MPSA 3,01,75,000 30,17,500 8,08,45,306 1,07,38,844 There is no dispute that the aforesaid facts were fully disclosed in the profit and loss account and the tax audit report. There is no dispute that services have in fact been rendered to PPL on the appellant's behalf by ZIL and MPSA. There is voluminous evidence available on record to show that extensive services were rendered by the appellant to PPL. Actual results of PPL show the effect of the services rendered by the appellant. The turnover has more than doubled from 557.27 crorres in 2001-02 to 1199.88 crores in 2007-08. Even the Assessing Officer has accepted fact of services having been rendered to PPL as evidenced from the following statements of the Assessing Officer made in the assessment order: "The assessee may claim this expenditure in the year in which the corresponding incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed. The CIT(A) however passed the order on 21.8.06 and the appellant's letter dated 23.8.06 was not considered by the CIT(A). Decision to reduce the rate of interest was taken on 5.12.03 which is very much within the year. The Assessing Officer has observed that "If the assessee's claim is to be believed then it should have refunded the excess interest" suggesting thereby that if the interest has been refunded then the claim is acceptable. The appellant should succeed on this point alone because the evidence on record clearly shows that the entire interest of Rs. 1,06,45,890/- was refunded by the appellant to PPL. Barring a small amount of Rs. 2,24,492/- which was paid on 8.4.04, the rest of the amount was paid prior to the end of the year. The order is based on the misconception that the waiver is after the close of the year when the evidence on record clearly shows that the reduction was very much before the close of the year. On the other hand, the law on waiver of interest is very much in favour of the appellant. CIT v. Shoorji Vallabhdas 41 ITR 144 (SC), CIT v. Motor Credit Co. 127 ITR 527 (Mad.), CIT v. Shree Export House 194 ITR 685 (Cal.) and Elchemie Sales Corpn. 27 ITD 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of such a deduction and therefore advance tax and self assessment tax was paid without taking such a deduction into account. However, while filing the return the appellant evidently decided to take a chance with such a claim of deduction which was not only incorrect but also not in consonance with his own pre-return tax calculations. 4.3. The moot point is that if the service rendered are as per MOU then why income has not been similarly accounted. The assessed contention that allowability of expenditure has nothing to do with accrual of income cannot be accepted. Matching principle of accounting is one of the cardinal principle and for every debit there should be a corresponding credit entry. If pre-date income is recognized in the account, then the expenditure which corresponds to the earning of such income can be allowed as an expenditure. The mercantile system can never be stretched to embrace all provisional, notional or contingent payments, which the assessee considers that he might ultimately be called upon to pay (New Victoria Mills Co. v. CIT 61 ITR 395) (All). In the present case whereas the appellant has during the year debited its account with expenditure which he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Both types attempt to reduce the taxable income. Penalty may be imposed for either or both such attempts. This is brought out in the following decisions:- CIT v. India Sea Foods (1976) 105 ITR 708 (Ker.) Nagin Chand Shiv Sahai v. CIT (1938) 61 ITR 534 (Lah.) CIT v. Gates Foam & rubber Co, (1973)91 ITR 467 (Ker.) 5. It is the case of the Assessing Officer that the expenditure of management fees was claimed with a purpose of set off against interest for fixed deposit amounting to Rs. 4.76 crores and thereby reducing tax liability. Although the appellant has dismissed this as a baseless conjuncture but this assertion of the Assessing Officer cannot be so summararily brushed aside. The profit and loss account of the appellant company for the year ending 31.3.2004 showed income from interest on fixed deposits as the only main source of income. The return of income has been filed w.e.f. assessment year 2002-03 and from this to the present assessment year only interest income has been shown. From assessment year 2002-03 to assessment year 2004-05 it has been the stand of revenue that this income is to be assessed under the head 'Other sources' and not 'Business'. This stand, for all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frame work of policy which is announced by the CBDT,New Delhi every year. In view of this, if this case had not been selected scrutiny, the aspect which is the subject matter of addition here would never have seen the light of day. Such suppressive very of the appellant may be indefensible as it is part of a prominent group and debits sufficiently high amount on its accounting and legal charges. 6. Coming to the case laws relied upon by the appellant, it may be mentioned that these are distinguishable on facts and do not apply to the appellant's case. These cases and other similar cases lay down certain well established principles of law regarding burden of proof and appreciation of evidence. There is no dispute about such principles. The question is one of applicability of the principles to the facts in a given case. What is of essence in a decision is its ratio. It is not a profitable task to extract a suitable sentence here and there from a judgment and build upon it (vide Ambica Quarry Works v. State of Gujarat, AIR 1987 Supreme Court 1073). As per this, I am of the considered view that no useful purpose shall be served by discussing each and every case law relied upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the returned and assessed income, there is an inference of concealment as per (Rule of Law contained in Explanation 1 to section 271(1)(c). (2) The responsibility for rebutting such inference is squarely on the tax payer. The presumption can be rebutted by a claim which has substance and is based on cogent material. (3) The assessee is expected to offer an explanation for the difference failure to offer an explanation attracts penalty. Similarly, if the explanation offered is found to be false, penalty would be attracted. (4) Merely because an assessee is not able to substantiate his explanation, penalty may not be imposed if such explanation is bonafide and all the facts relating to the same and material to the computation of total income have been disclosed by him. 6.4 It is notable that the appellant has mentioned a number of aspects in the notes to accounts submitted along with the return of income. There are schedules forming part of accounts. But there is no disclosure of this expenditure on management service fee and its departure from the matching principle of accountancy. Full and true disclosure material to computation of its total income was clearly lacking in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no requirement in law to prove mens rea and as held by the Three judge Bench of the hon'ble Supreme Court in the case of Dharmnebdra Textile processors (overruling the earlier Two bench decision in Dilip N. Shroff case), the object behind enactment of section 271(l)(c) read with Explanation indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provisions is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s. 276C of the Income Tax Act." 10. The ld. CIT(A), however, cancelled the penalty imposed by the A.O. u/s. 271(1)(c) to the extent it was in respect of addition made on account of interest income for the following reasons given in para 7.1. of his impugned order:- "However in regard to penalty, as also held by the Hon'ble Supreme Court in the abovementioned case where penalty u/s. 273(2)(a) was cancelled, other attendant aspects have also to be considered. These are aspects of genuine bonafide belief and reasonable cause. In the present case it cannot be denied that the law permits the contracting parties to lawfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PPL and while performing this role, managerial services were availed by the assessee company on payment of the managerial fees. He pointed out that technical knowhow was also used for this purpose and all these efforts brought positive results for PPL. In this regard, he invited our attention to page Nos. 126 and 127 of the paper book to show that the turnover of PPL was increased from Rs. 317,71 crores in the year 2003-04 to Rs. 1192.86 crores in the year 2006-07 with profit going up to Rs. 109.27 crores in 2006-07 from a loss of Rs. 46.03 crores suffered in 2003-04. 13. The learned counsel for the assessee then invited our attention to the copies of the service agreement placed at page Nos. 62 to 102 of his paper book and took us through the relevant clauses thereof to explain/show the nature of services availed by the assessee company for PPL from the services providers namely ZIL and MPSA. He contended that the said services having been actually rendered by the concerned service providers in the year under consideration, the liability to pay the fees for the said services had accrued in that year. He submitted that after availing the said services, payment was also made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the said disallowance thus was justified as the dispute was only regarding the year of allowability of the relevant expenditure. 15. The learned D.R., on the other hand, relied on the orders of the A.O. as well as the ld. CIT(A) in support of the Revenue's case that it is a fit case to impose the penalty u/s. 271(l)(c) in respect of the addition of Rs. 18,08,35,000 made on account of disallowance of managerial fees. He contended that the penalty has been initiated and imposed for furnishing of inaccurate particulars of its income by the assessee company to the extent of its claim for the said expenditure and the facts brought out by the A.O. in the assessment order as well as in the penalty order are sufficient to show that the assessee was guilty of furnishing of inaccurate particulars of its income. He submitted that the expenditure on account of managerial fees was claimed by the assessee on the basis of MOU which was found to be entered into only after the end of the year under consideration. He contended that enforceability of the said MOU, in any case, was dependent on execution of management agreement and there was nothing brought on record by the assessee to establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 17. We have considered the rival submissions and also perused the relevant material on record. Before we consider the basis adopted by the A.O. as well as by the ld. CIT(A) to disallow the claim of the assessee for managerial fees and to levy penalty in respect of the addition made by way of such disallowance, it would be relevant to appreciate the factual position in which the claim on account of managerial fees came to be made by the assessee company. In this regard, it is observed that the PPL was wholly owned company of Government of India and due to heavy accumulated losses and resultant financial crisis, the Government of India offered to sell a part of its holding in PPL through its disinvestment programme. The assessee company, promoted by Zuari Group as a special purpose vehicle, turned out to be a successful bidder for acquisition of about 80% shares held by the Government in PPL considering that it had all the necessary management and project expertise to revive PPL. Accordingly, the shareholders agreement was entered into on 20.2.2002 between the assessee company, PPL, ZIL, MPSA and the Government under which the assessee was to implement a detailed business plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of its business being revival of PPL. In the assessment completed u/s. 143(3), the deduction claimed by the assessee on account of managerial fees, however, was disallowed by the A.O. and the assessee having accepted the said disallowance, penalty u/s. 271(l)(c) was also imposed by the A.O. and confirmed by the ld. CIT(A) in respect of the said addition holding that there was furnishing of inaccurate particulars of its income by the assessee. 19. The first reason given by the A.O. and ld. CIT(A) for imposing the penalty u/s. 271(l)(c) is that the MOU was entered into by the assessee company with PPL with retrospective effect. According to them, the services for improving capacity utilization, efficiency etc., could have been achieved only if planning was done in advance and it was therefore an afterthought to enter into an MOU after the end of the relevant previous year to claim deduction on account of managerial fees to avoid payment of tax on interest income. It appears that the A.O., however, lost site of the fact that the technical proposal or business plan defining the role of the assessee company was prepared and submitted to the Government in the year 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e service providers as per the said service agreements and not as per the MOU, there was sufficient basis to support and substantiate the stand of the assessee that the said liability had already arisen in the year under consideration when the corresponding services were actually rendered by the said parties. 22. As regards the other objection of the A.O. that the tax audit report was silent on the expenditure on management services fees, the learned counsel for the assessee has pointed out from the copy of the said report placed at page Nos. 15 to 25 of his paper book (relevant pages being page nos. 20 & 25) that the payments made to ZIL and MPSA for rendering of managerial services were duly shown by the auditors while giving the particulars of payments made to persons specified u/s. 40A(2)(b). The disclosure as required by law thus was made by the tax auditors. As regards the allegation of the A.O. that the expenditure on account of managerial fees was paid by the assessee company as an afterthought to avoid payment of tax on interest income, it is observed that the entire tax on interest income was already paid by the assessee company in advance in the previous year itself and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company for deduction on account of managerial fees was a bona fide claim made by it in the year under consideration and the assessee having been able to support and substantiate the same by showing the legitimate basis on which it was claimed, it was not a fit case for imposition of penalty u/s 271(l)(c) in respect of the addition made on account of disallowance of the said claim. In that view of the matter, we cancel the penalty imposed by the A.O. and confirmed by the ld. CIT(A) in respect of the addition made on account of disallowance of managerial fees and allow the appeal of the assessee. 25. In the cross appeal filed by it, the Revenue has challenged the action of the ld. CIT(A) in cancelling the penalty imposed by the A.O. u/s. 271(1)(c) in respect of addition of Rs. 1,08,14,656 made to the total income of the assessee on account of interest income. In this regard, it is observed that the said addition made by the A.O. on account of interest income was confirmed by the ld. CIT(A) by his appellate order dated 21.8.06 passed in the quantum proceedings. He, however, cancelled the penalty imposed by the A.O. u/s. 271(1)(c) in respect of the said addition. Against the o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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