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TMI Blog2015 (6) TMI 599X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted for propagating the business of the assessee is not in doubt. The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance. There is no evidence that in the magazines of the assessee there is a variance in the rates for the assessee as compared to outsiders. There should be some evidence on the basis of which the action of the AO can be held to be justified to show that the expenses are unreasonable or excessive. In the absence of any such evidence, an adhoc disallowance of 5% has rightly been rejected by the CIT(A). Being satisfied by the reasoning and finding, the departmental ground is dismissed.- Decided against revenue. Disallowance of proportionate interest expenditure in respect of the advance made to the sister concern - Held that:- admittedly no loan from any bank has been raised by the assessee for advancing loans to its sister concerns as the funds so advanced are generated from assessee’s own revenues. These facts are not disputed by the Revenue. Accordingly in the face of these admitted facts, we find that there is no legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing paid only on the unpaid amount of consideration for fixed assets. (ii) That the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the interest is paid only on amount borrowed for business purposes and there is a direct nexus between the amount borrowed and interest paid thereon. 4. That the appellant craves leave to add, amend or alter any of the grounds of appeal. 2. The relevant facts of the case are that the assessee who in the year under consideration was engaged in the business of educational activities declared an income of ₹ 2,11,15,617/-. The case was selected for scrutiny after issuance of notice u/s 143(2). In the course of the assessment proceedings, the assessee was required to explain the allowability of interest expenses in view of the fact that the assessee had given interest free advance and loans to its sister concerns. In view of thereof, the assessee was required to explain why expenses on interest on loan be allowed as an expenditure when there is a diversion of funds to Planman Group of Companies by the assessee. Considering the reply of the assessee which has been extracted in page 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent payments to the said companies. The reply of the assessee has been extracted in para 5 by the AO. Rejecting the same, the AO invoking section 40A(2) made a disallowance of 5% of the amount booked for want of commercial expediency and reasonableness of the payments thereby resulting in the additions of ₹ 50,41,892/- and ₹ 82,85,000/- on account of 5% of royalty payment and 5% of advertisement expenses respectively. 3. These additions were challenged in appeal before the CIT(A). The CIT(A) upheld the action of the AO in making disallowance u/s 36(1)(iii) in respect of the interest liability. Aggrieved by which the assessee is in appeal before us. Qua the addition on account of disallowance of royalty expenses and advertisement expenses, considering the explanation of the assessee the additions were deleted. Aggrieved by this the Revenue is in appeal in the present proceedings. 4. In the light of the above facts, Ld. SR. DR relied heavily upon the findings of the AO qua the departmental ground wherein referring to para 5 of the assessment order, it was his submission that in the facts where both the companies were admittedly under the same management, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and is for inserting the advertisements in the dailies and at times in magazines also. The fact that advertisements have been inserted it was submitted is also not in doubt. In this background where is the occasion for the Revenue to consider an adhoc disallowance simply because the booking of advertisements is done by an associate concern. The loans have been advanced for meeting this expenditure and no effort has been made to demonstrate that the payments are excessive or unreasonable. It was argued that as per record there is no allegation that an element of personal nature attached to the said expenditure. No cogent material has been brought in either by the AO or the Sr. DR to justify invoking the provisions of section 40A(2). 6. We have heard the rival submissions and perused the material available on record. It is worthwhile to extract the explanation offered by the assessee to the AO to justify the payment of royalty and advertisement expenses to the associate concerns in the same management from the assessment order itself:- Justification for claiming Royalty expense as revenue expenditure : The assessee company international Institute of Plann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough educational and management institutions, companies and other entities by entering into agreements for the purpose. The company is already engaged in conducting of courses in collaboration of a number of foreign universities such as University of California and others. The company was incorporated in 2006. To run the business more profitably and enlarging the sphere of business it was decided to engage the Planman Consulting India Pvt. Ltd. (PCIPL), a company pioneer in the field of consultancy and on job training. The PCIPL was engaged to provide on job training and consultancy in running our educational and management institutions more effectively and efficiently, so that, our company can earn more profit. The PCIPL is a leading company in imparting knowledge based consultancy. They are considered as an expert in knowledge domain more particularly with their dynamic and intellectual director namely Shri Arindam Choudhary. It was decided that the PCIPL will provide on job training which with make our team more efficient and use their skill in a prudent, competent, efficient and timely manner for education and allied purposes so as to provide the monetary advantage to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertisement. There is no personal nature attached to the said expenses. The assessing officer has made disallowance by invoking the provisions of Section 40A(2) of the Act. The provisions of said section does not permit the Assessing Officer to make disallowance just for the sake of making a disallowance. Nowhere he has been able to bring on record any excess payment made to the said company. The AO has to bring certain cogent material on record to show that the payment made by the assessee is unreasonable. For this, he has to bring certain comparable instances to prove the same. This exercise, the AO somehow choses to skip and just made an adhoc disallowance......... 6.3. It is in the above factual background that the CIT(A) decided the issue in favour of the assessee holding as under in paras 6.3 and 6.4 of the impugned order:- 6.3 Regarding the Ground No.6 relating to payment of Royalty expenses, the appellant furnished before me the copy of the agreement between the appellant and Planman Consulting (P) Ltd.(PClPL}. The details of the agreement show that the said PCIPL was providing job training and consultancy services in running the education institution of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n these magazines from time to time. Relevant vouchers of the same and also the copies of the relevant publications were also shown to me during the appellate proceedings. I find that the Ld. AO has also not raised the issue of genuineness of such expenses. On careful consideration, I find that the appellant has charged the advertisement expenses in respect of publication in the above four magazines published by M/s Planman Media (P) Ltd. at the same rate at which it charged from outside parties. The AO could not make a case that such expenses did not bring any commensurate benefit to the appellant or the rates were excessive compared to the fair market value. In view of the same, the addition made by the AO on adhoc basis is not justified. 6.4. In support of the decision, reliance was placed upon the decisions of the Jurisdictional High Court:- (i) Casio India Ltd. (ITA No.10 of 2011); (ii) CIT vs Citi Financial Consumer Fin. Ltd. (ITA No.-1820 of 2010); (iii) Swatch Group (India) (ITA No.-871/2011); (iv) CIT vs Salora International Ltd. (308 ITR 199) 6.5. In the context of the above facts and circumstances where admittedly in the case of royalty expenses, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and structure thereon. Out of this amount ₹ 33 crore were paid as a down payment and on the balance of amount of ₹ 118 crore, it was submitted payment is settled as per instalments comprising of two components namely principal and interest. The unpaid amount at the year end, it was submitted was reflected as secured loan from M/s Anant Raj Industries Ltd. in the balance sheet. The scheme it was pointed out is similar to what is offered by banks on housing loans where instalments are paid wherein a portion of the same is adjusted towards principal and a portion of it is adjusted towards interest. It was submitted that it has not been doubted by the Revenue that the said property has been used for the purposes of assessee s business, it is a matter of record that the assessee in the year under consideration has functioned from the said premises. It was argued that it was also a matter of record that the assessee has returned an income from the business conducted in the year under consideration from the said premises. The business purposes, it was submitted stands established and has not even been disputed by the AO as he has only made a part disallowance. The loans adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in support of its claim which has been extracted in the earlier part of this order also. For ready-reference, the same is reproduced again from the assessment order:- The assessee company purchased land situated in the revenue estate of village shahoorpur, Tehsil Hauz Khas, New Delhi together with building and structures raised thereon from Anant Raj Industries Ltd. The above property was purchased for ₹ 151 crore in September 2008. Out of the above amount ₹ 33 crore was paid initially as down payment and balance amount of ₹ 118 crore was to be paid in instalments. The instalments were comprising of two components principal and interest. The unpaid amount at the year end was reflected as secured loan from Anant Raj Industries Ltd. in the balance sheet. The scheme was similar to the purchase of an assets on lease/hire where payments are made in monthly instalments termed EMIs. The above premises is being used by our company for running its educational institution which is the prime object of the business of the company. From the above discussion following points emerge: * The company purchased on immovable property/capital assets, which is being us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .... 9.1. On considering the impugned order also it is seen that similar explanation has been reiterated in para 5.2 of the impugned order which is extracted hereunder:- ------Our company purchased land situated in the revenue estate of village Shahoorpur, Tehsil Hauz Khas, New Delhi together with building and structures raised thereon from Anant Raj Industries Ltd. The above property was purchased for ₹ 151 crore in September, 2008. Out of the above amount ₹ 33 crore was paid initially as down payment and balance amount of ₹ 118 crore was to be paid in instalments. The instalments were comprising of two components principle and interest. The unpaid amount at the year end was reflected as secured loan from Anant Raj Industries Ltd. in the balance sheet. The scheme was similar to the purchase of an asset on lease/hire where payments are made in monthly instalments termed EMls. The above premise is being used by our company for running its educational institution which is the prime object of the business of the company-----. ----- The above discussion made it clear that the interest payment was towards the unpaid amount of capital assets and same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of that case there is a borrowing of funds from the bank. On a similar reasoning, the decision in the case of CIT vs V.I. Baby Co. [2002] referred to Kerala High Court is also distinguishable as the assessee firm therein advanced loans to partners and relatives which were admittedly not for business purposes the borrowing from the banks in those facts where the assessee is not a beneficiary of the investments made by the partners the disallowance of interest in proportionate to the advances made has been upheld. The facts, it is seen are entirely distinguishable as not only, no loan has been taken from the bank the loans advanced to the sister concern has been advanced for business considerations. In these circumstances, the decisions relied upon by the AR infact are fully applicable. For ready-reference, relevant finding from the decision of the Apex Court in the case of SA Builders Ltd. (cited supra):- We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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