9911796707
TMI Blog2014 (4) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... ingapore (YRAPL) to whom the assessee pays royalty for the use of such rights after taking requisite government approval. Assessee has entered into a service agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities). 3. The grounds of appeal taken in ITA No.2678/Del/2012 read as under :- "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred holding that income from receipt of services fee of Rs.12,77,00,000/- etc. was Income assessable under the head Profits and Gains of Business as against under the head 'Other Sources' held by the Assessing officer". 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting an addition of Rs.4,84,21,435/- as royalty paid without appreciating that such payments was not allowed by Ministry of Industry ( Secretariat for industrial Assistance) (SIA) and since constituted infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g an addition of Rs.6.,04,48,899/- out of Administrative expenses, since these related to another company YRMPL, which had apparently no office and had not incurred any expenses. 4. On the facts and circumstances of the case and in law the learned CIT(A) erred in not interpreting correctly the directions of Hon'ble ITAT in A.Y. 2002-03 and 2003-04 that the depreciation disallowed in A.Y. 1999-2000 would be considered for disallowances in this also, as complete relief to the assessee. 5. On the facts and circumstances of the case and in law the learned CIT(A) erred in deletion an addition of Rs.1,12,54,219/- on a/c of the claim of depreciation which was entirely disallowed. 6. On the facts and circumstances of the case and in law the learned CIT(A) erred in deleting an addition of Rs.95,400/- by treating Corel Draw & GIS Engine Map S/W as revenue expenses especially when such software did not require any annual purchase and provided creation of an asset which had the life of 4 to 5 years. 7. On the facts and circumstances of the case and in law the learned CIT(A) erred in deleting an addition of Rs.7,21,043/- made out of R&D expenses without appreciating that the expenses for fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011 and submitted that the ITAT has held that providing of services was not an isolated act by assessee but of a continuous nature since Assessment Year 1998-99, with the intentions to earn profits. The assessee has received similar service income in previous and subsequent years which has been consistently held as business income. The different basis for computation of service income is purely a commercial decision between assessee and YRAPL, which ought not to have any impact on characterization of income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR 368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the AO. According to the assessee under the Indian Tax Act even on oral agreement or an agreement on plain paper entered into by two or more parties is valid and binding upon the contracting parties. With regard to allegation of AO about payment of dividend by the assessee to the parent company is concerned, it was contended by the assessee that AO has observed that possibility of payments being made in lieu of dividend on contribution toward development / business from time to time made by parent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (SC) (69 ITR 692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR 746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms "royalty" and "license fee" were interchangeably used by the Government of India in its correspondence with assessee. He submitted that AO has misinterpreted the SIA approval since the clause made inapplicable to the assessee was not relevant to its nature of business. It was further submitted that the Government of India, in its letters dated September 29/30, 2003 and June 16/17, 2004, which is placed at Page 280 and 282 of Paper book 2 for AY 2005-06, has used the term 'royalty' and not 'technology license fee', while mentioning that as per the liberalized policy, assessee may remit royalty under the automatic route within the prescribed limits. He further submitted that payment is in accordance with the SIA approval and within the prescribed limits. Additionally, Payment of royalty up to 5% of sales has been allowed by Government o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance." Facts are same, therefore, we find no merits in the ground nos.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012 and the same are dismissed. 9. Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 is against the deletion of addition out of administrative expenses. The YRMPL is a wholly owned subsidiary of the assessee operating as a mutual concern for the common benefit of all the franchisees and the assessee. It carries out advertising, marketing and promotion activities. For this purpose, assessee and YRMPL have entered into a tripartite agreement with each franchisee. Each franchisee is required to contribute a fixed percentage of its sales as its contribution towards advertising and marketing activities. As per the tripartite agreement, for the cost effective functioning of YRMPL, assessee provided YRMPL with any or all administrative support facilities. In case such facilities are extended by assessee to YRMPL, it would be required to reimburse as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions in the cases of S.A. Builders Ltd vs. CIT (SC) (288 ITR I); Sassoon J. David and Co. (P) Ltd vs. CIT (SC) (118 ITR 261); CIT vs. Sales Magnesite P Ltd (Bombay HC) (214 ITR I); and CIT vs. Panipat Woolen & General Mills (SC) (103 ITR 66) wherein it has been held that merely because some other party has also benefited from the expenditure incurred it cannot be held that it is not allowable. He further submitted that there is no rational basis adopted by the AO for allocating 50% of the expenditure incurred by assessee as being attributable to YRMPL. To clarify the same, he submitted that the assessee has a huge employee base for the purposes of operating its equity stores, huge rental and other operating costs being incurred for the operation of equity stores, which has nothing to do with the AMP activities that YRMPL coordinates on behalf of assessee. Therefore, such expenses should not be allocated to YRMPL at all, as its functioning is basically to make payments to third party advertising firms. Finally, he pleaded to dismiss this ground of revenue's appeal. 10. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eimbursement is submitted by the respective employees and only to the extent of their reimbursement entitlement. Also, the assessee had transferred certain assets belonging to its restaurant outlets in assessment year 1999-00 on itemized basis. However, no sales consideration was received for the same. Accordingly, no deletions were made in the block of assets (owing to Nil consideration) on account of this sale in accordance with the provisions of Section 43(6)(c)(i)(B) of the Act. The disallowance was made on the basis that in the earlier assessment years it was observed that certain assets which were purchased during prior period have been entered in the books of accounts of the financial year. It was held that depreciation claimed on assets purchased exclusively for the employees, are not for the use of business and certain assets which were sold by the assessee as part of its undertakings (outlets) to its franchisees continue to remain in its books and depreciation claimed on the same. The ld. AR submitted that CIT(A) placing reliance on the judicial precedents set forth by the assessee has allowed the issue in favour of the assessee for assessment years 2004-05 and 2005-06. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.4 & 5 in ITA No.2679/Del/2012 and the same are dismissed. 13. Ground No.7 in ITA No.2678/Del/2012 is against the deletion of addition on account of excess provision amounting to Rs.8,32,082/-. At the year end, the assessee had made a provision for marketing expenses in accordance with the mercantile system (accrual) of accounting. However a part of such expenditure amounting to Rs.8,31,082/- was reversed in the subsequent year. The disallowance was made on the ground that excessive provision in respect of marketing expenses claimed by the assessee. However, the same were reversed in the subsequent financial year. Ld. AR submitted that this issue is covered by the decision of ITAT in its own case in assessment years 2002-03, 2003-04 and 2006-07 and referred to para 31 of the said order. He also relied upon on the decisions of Bharat Earth Movers vs. CIT (Supreme Court) (245 ITR 428); Calcutta Co. Ltd vs. CIT (Supreme Court) (37 ITR 1); and Metal Box Company of India Limited vs. Their Workmen (Supreme Court) (73 ITR 53). He submitted that excess provision made (if any) has been reversed in the next year and offered to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional tests laid down by the Hon'ble Special Bench in the case of Amway India Enterprises are also satisfied in the facts of the present case. Therefore the same is on revenue account and ought to be allowed in favor of the assessee. He also relied on the decisions of Amway India Enterprises vs. DCIT (Delhi Special Bench) (111 ITD 112); Empire Jute Co. Ltd. vs. CIT (SC) (124 ITR 1); GE Capital Services India vs. DCIT (Delhi ITAT) (106 ITJ 65); CIT vs. Voith Paper Fabrics India Ltd (Punjab & Haryana HC) (No. 777 of 2010) and DCIT vs. Rentworks India Pvt Ltd (Mumbai ITAT) (ITA No. 2215/ Mum/ 2010). 18. We have heard both the sides on the issue. In the written submissions, the assessee has submitted that since the assessee is getting 60% depreciation to avoid the more round of litigation they have agreed to treat the expenditure as capital in nature. After hearing, we find that these two expenditure of Rs.18,000/- for purchase of coral draw software and Rs.77,400/- for GIS Engine Map Info Software (single user license) were made but it is not clear whether the same was for an upgradation or it was for acquisition of a new software, therefore, we are unable to apply the ratio of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ['Ld. CIT(A)'] has erred in partly upholding the disallowance of lease rent paid by the appellant amounting to Rs.24,70,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its Managing Director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of lease rent paid by the appellant amounting to Rs.5,22,000 to Mrs. Sheetal and Mrs. Pushpa Bansal on account of rent free accommodation obtained for its director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.6,00,000 as notional interest income on account of security deposits placed by the appellant with M/s Mezbaan Hoteliers Pvt. Ltd for obtaining rent free accommodation for its managing director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) has erred in upholding the disallowance of lease rent paid by the appellant amounting to Rs.6,43,800 to Mrs. Sheetal and Mrs. Pushpa Bansal on account of rent free accommodation obtained for its director. In doing so, the Ld. CIT(A) has erred in rejecting the valuation certificates submitted by the appellant in the form of additional evidence. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.6,00,000 as notional interest income on account of security deposits placed by the appellant with M/s Mezbaan Hoteliers Pvt. Ltd for obtaining rent free accommodation for its managing director. In doing so, the Ld. CIT(A) has failed to correctly appreciate order of the ITAT for previous A Y s where a similar addition has been deleted. 3.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the documentary evidence placed on record by the appellant in support of its contention that the appellant has not incurred any interest expenditure. 4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs.55,527 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deposit of Rs.50 lacs was also provided by assessee to MHPL, a part of which was advanced to the M.D. by MHPL. In the case of Mr. Ajay Bansal (Director), assessee had been paying rent for a property occupied by him to his wife and mother. Rent of the property was Rs.5,22,000/- per annum and security deposit for the same was Rs.4,62,000/-. The Assessing Officer disallowed the claim for the reasons that lease contract was signed by a person on behalf of MHPL (the other contracting party) who at that time was not its director, making the agreement invalid. Excessive security deposits were placed by assessee with MHPL. Security deposits were advanced by MHPL to the M.D., Shri Sandip Kohli. Disallowance was made under Section 40A(2)(b) of the Act on account of excessive lease rentals paid to related party. Only part rentals up to Rs.20,000 per month were allowed on the basis of ITAT order for past years. 26. In the case of Director, Mr. Ajay Bansal, lease rentals paid by the assessee were for a property which was already being occupied by the director without payment of any rent. No concession was given in the rentals paid as the property was also being utilized by the mother of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their employment contracts; rent was paid by assessee in accordance with contractually binding lease agreements; TDS was duly deducted on such rental payments along with taxing the same as a perquisite in the hands of M.D. and the director; and rent received has been duly accounted for as income. He submitted that this finding of fact has been recorded by the CIT(A) in his order for Assessment Year 2002-03 and 2003- 04. He submitted that onus is on tax authorities to establish excessiveness of expenditure on some material and not on conjectures and in this regard, referred to the decisions of S.K. Engineering vs. JCIT (Bangalore ITA T) (286 ITR 210) and CIT vs. Indo Saudi Services (Travel) (P) Ltd. (Bombay HC) (219 CTR 562). For commercial expediency, ld. AR relied on the decision of Shahzada Nand & Sons vs. CIT (SC) (108 ITR 358) and CIT vs. Panipat Woolen & General Mills Co Ltd (SC) (103 ITR 66) where it is held that commercial expediency to be decided from the stand point of assessee and not tax department. He submitted that tax can be imposed only on real income and not on notional income. He submitted that therefore, AO has grossly erred in adding notional interest income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of income under the head 'Profits and gains of business or profession'. The rent paid for the premises occupied by Managing Director is prima facie collusive and excessive. 29A. Some of the issues raises have been considered by ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07. The relevant paras 45 & 46 of the said order is reproduced as under :- "45. With the assistance of learned representatives, we have gone through the record carefully. It emerges out from the record that assessee has paid Rs. 15 lacs of rent for the residence of Mr. Sandeep Kohli. It has paid a sum of Rs. 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to Rs. 6 lacs. He computed the disallowance of Rs. 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of Rs.4,20,700 on the residence of Shri Ajay Bansal. In this case also, payment was made to Mrs. Pushpa Bansal and Sheetal Bansal who are the wife and mother of Ajay Bansal. Assessing Officer has also found a security deposit paid by the assessee and he estimated the notional rent on such deposit at Rs.50,900. The dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance has been confirmed by the Learned CIT(Appeals) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year. Assessee has raised an alternative plea that in case it is not allowable in this year then a direction be issued to the Assessing Officer to allow in the year of incurrence. In our opinion, assessee will be at liberty to approach the Assessing Officer in accordance with law but in the present year, we do not deem it necessary to give any specific direction. In the result, ground No.3 raised by the assessee is allowed for statistical purposes and ground No.4 raised by the assessee is rejected. Ground Nos. 7 to 10 raised by the revenue are allowed for statistical purposes." At this stage, there is no dispute that the payment has been made to the persons who are covered by section 40A(2)(b) of the Act. In the case of M/s. Mezbaan Hoteliers Pvt. Ltd., it is well established that payments had been made in excess for which such goods and services were available. It is apparent from the rentals paid by M/s. Mezbaan Hoteliers Pvt. Ltd. It is very clear that a property which is fetc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ld. AR has claimed that the issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment year 2003-04. The relevant para is 68 is reproduced hereunder :- "68. With the assistance of learned representatives, we have gone through the record carefully. It revealed that a sum of Rs.33,460 was incurred towards the fee of Mr. Rajiv Kumar who pursued MBA Course. The assessee failed to bring any policy decision arrived at by the management for reimbursing the fee incurred on education. The fee was paid because of the personal influence of the employee and it was not incurred for any business purposes. The assessee failed to bring any material on the record to this effect. Learned CIT(Appeals) has rightly confirmed the disallowance. As far as the other amounts are concerned, we find that these relates to medical expenses of Mr. Sandeep Kohli who is a director and the expenses incurred on the uniforms of his driver. These expenses are to be termed as expenses relating to the day to day business of the assessee. Thus, the ground of appeal raised by the assessee as well as of revenue are rejected." 30. We have heard both the sides on this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratta, who are employees of the assessee company. So, expenditure incurred in the name of employees cannot be claimed as business expenditure of the assessee company. This is a finding of the fact. In view of the above discussion, ground No.13 of the appellant is dismissed." The assessee has failed to bring out any material to establish that this expenditure was incurred for business purposes of the assessee. In our considered view, this expenditure is incurred for the personal benefit of the employees, therefore, it cannot be treated as business expenditure of the assessee. Therefore, this ground of appeal stands dismissed. 31. Ground No.6 in ITA No.2421/Del/2012 is against the disallowance of expenditure amounting to Rs.42.775 held as capital expenditure. The details of the alleged capital expenditure are as follows: S.No. Amount Particulars 1 11,500 Purchase - Computer Switch 2. 7,500 Purchase - Laptop Battery 3. 23,775 Purchase - Laptop Card Ld. AR submitted that without any independent application of mind, the Assessing Officer relied on the description of similar disallowances made in the previous years alleging that 'purchase of chairs and fire extinguisher' canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the CIT(A) had directed to allow such expenses in previous Assessment Year 2003-04 which has been allowed by the AO. Accordingly, this ground of appeal is not being pressed. Nevertheless, it is submitted that the invoices raised by vendors in. earlier years were received by the assessee in the year under consideration. He submitted that liability to pay crystallized only when the invoices were received by the assessee i.e. in the current year. He further submitted that the claim of assessee has been supported by the Hon'ble Delhi High Court in the case of CIT vs Vishnu Industrial Gases (ITR No. 229/1988) and Hon'ble Bombay High Court in the case of CIT vs Nagri Mills Co. Ltd (33 ITR 681) wherein it has been held that for an allowable expenditure the year of allowance is not a relevant consideration given the tax rates are constant in case of corporate assessee's. He further relied on the decisions of Nonsuch Tea Estate Limited vs. CIT - (Supreme Court) (98 ITR 189); CIT vs Egmore Benefit Society Limited (Madras High Court) (148 CTR 158); CIT vs Gowar Sons Publication (P.) Ltd. (Delhi High Court) (250 ITR 461); Navin Bharat Industries Limited vs DCIT (Mumbai ITAT) (90 ITD 1); and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal Mercantile Pvt. Ltd. evidencing the full and final settlement of the compensation adjudged by the Arbitral Tribunal. It had also submitted a tax deduction certificate (in Form 16A) evidencing the deduction of TDS on the interest component of the arbitration award. The aforesaid documents were considered by the assessee as enough corroborative evidence to substantiate the genuineness of the transaction. The disallowance was made as the copy of the agreement on the basis of which the liability arises and other relevant documents regarding the grant of compensation have not been produced. On the basis, it is held that the assessee has entered into a sham transaction and a liability has been falsely created. 38. Ld. AR submitted that the Assessing Officer never expressed a view of reviewing any document as alleged in the assessment order. He submitted that the documents submitted by YRIPL (TDS certificate and letter of correspondence) were sufficient enough to corroborate the actual existence of the transaction and its payment along with the fact that the accounts of the assessee were duly audited by a reputed firm of chartered accountants. Ld. AR submitted that however, with rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar facts the expenditure has been allowed to the assessee as a business expenditure. He further submitted that even the Assessing Officer has nowhere in his assessment order rejected the submissions of assessee as regards the allowability of the compensation as a business expense. 39. We have heard both the sides on the issue. The assessee submitted additional evidence before the CIT (A). The CIT (A) did not admit the evidence and confirmed the finding of the Assessing Officer that assessee has entered into a sham transaction and the liability has been falsely created. In our considered view, the CIT (A) was not justified in not admitting the additional evidence when assessee submitted certain documents before Assessing Officer and rest of these documents support the case of assessee. These documents were relevant with regard to the expenditure claimed by the assessee in the return of income wherein even the TDS had been deducted. In our considered view, it shall be appropriate to restore the issue to the file of the Assessing Officer and to decide afresh after considering all relevant documents to be submitted before him. The assessee shall be at liberty to file necessary docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource from where the interest has accrued to the assessee is part of the assessee's business. Further similar issue has already been decided in the case of assessee by ITAT for the Assessment Year 2006-07 wherein para 103 of ITAT read as under :- "103. We have duly considered the rival contentions and gone through the record carefully. The decisions relied upon by the assessee are not applicable on the facts of the present case. The decision of Hon'ble Mumbai High Court in the case of Puneet Commercial was in respect of treatment of interest income while computing the deduction under sec. 80-HHC of the Act and it talks about operational profit. The view of Hon'ble Delhi High Court in the case of Sri Ram Honda Equip reported in 289 ITR 475 is contrary to this decision, wherein Hon'ble Delhi High Court has held that interest income for the purpose of sec. 80HHC has to be treated as income from other sources. The assessee has nowhere indicated as to how this interest income is linked with its business activity. It has simply surplus fund which has been deposited in the bank giving rise to interest income. Learned DRP has rightly treated this income as income from other sources. This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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