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TMI Blog2018 (5) TMI 1574X X X X Extracts X X X X X X X X Extracts X X X X ..... - Since these fees were not received by the assessee, naturally service tax liability also did not accrue as per the provision of section 6 of the service tax act hence not disallowable under section 43 B of the Act. Even otherwise disallowance under Section 43B was not warranted in this case, as Service Tax was not claimed as an expenditure, neither it stood debited to the P&L Account by the assessee - ITA No. 4458/Mum/2014, ITA No. 2466/Mum/2014, ITA No. 575 /Mum/2016 - - - Dated:- 17-5-2018 - Shri R. C. Sharma, Accountant Member And Shri Amarjit Singh, Judicial Member Assessee by : Shri J.P.Bairgra / Shri S.K.Mutsaddi Revenue by : Shri V.Vidhyadhar ORDER Per R. C. Sharma, A. M. These are the appeals filed by assessee against the order of CIT(A)-12, Mumbai dated 30/05/2014 for A.Y. 2008-09 and A.Y. 2009- 10 in the matter of order passed under Section 143(3) of the Income Tax Act (hereinafter the Act ). In the A.Y. 2010-11, Revenue is in appeal before us with respect to disallowance of similar expenses. 2. Grievance of assessee and revenue in all the three years are common which pertains to disallowance made on account of management training expenses p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o various Hinduja group entities, who had reimbursed the salaries of these graduates. Wherever this was not possible, the services of these MBA graduates was utilised by the assessee company to service the in-house clients from whom fees were received. In AY 2008-09, the AO has treated this expenditure as not incurred for the purposes of business and disallowed the same in the assessment. The AO discusses this proposition at para 5.3 to paragraph 5.4 of the assessment order (page 4 to 8 of the assessment order). While arriving at this conclusion, the AO has relied upon the decision of Ram Bahadur Thakur 261 ITR 390. The decision referred to by the AO is based upon the issue pertaining to disallowance u/s 40 A (2) of the income tax act. First of all it is clarified, that none of the parties to whom the amount has been paid are related to directors /promoters of the assessee company. In these circumstances the question of invoking the provisions of section 40 A(2) of the income tax act does not arise. The central board of direct taxes in its circular dt no 6 -P (LXXVI-66) of 1968 dt 06/07/1968 issued under section 40 A{2) has cautioned the field officers, that while resorting to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates were utilized by the Appellant Company to service the in-house clients from whom fees were received. The salary paid to the Management trainees was much lower than what would have been payable to Senior Professional qualified employees. 4.3 In the profit and loss account it is seen that the Appellant has claimed employee costs of ₹ 6.99 crores in the current year. The salaries paid to Management Trainees of ₹ 94.11 lacs are included under the head employees cost. The management trainees are like what article clerks are to a Chartered Accountancy Firm. From the details called it is seen that the Management Trainees have worked for the Appellant Company for a period of 1 to 2 years. The break-up of employee cost employee- wise was also furnished. It is seen that the payment to Management Trainees is much lower than salary paid to the regular employees. Salaries paid varies from trainee to trainee and generally is less than ₹ 50.000 per month. Comparing the expenditure, it is seen that the consultancy income is to the tune of ₹ 10.92 crores in the current year and the main cost incurred is the employee cost and administrative and another expenses. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,14,287 4 Kholi Kayideni Sourcing of Lubricant for AL-Nissan LCV: A study on Consumer Behavior, Techno Commercial evaluation of supplier evolving global trends in lubricant usage (AL) 1,68,671 5 Mansij Majumdar Campus Strategy with Presentation and selection procedure (HGI) HR/IR with Ashok Leyland - Develop HR architecture for GENMOD organization (AL) 2,14,468 6 Manvendra Pratap Singh Hedging using Steel Futures (AL) Mergers Acquisition - assessment of target opportunities and Due Diligence (HGS) 3,88,130 7 Nitin Gregory Evolving the roadmap for transformation of Strategic Sourcing function to best-in- class (AL) Developing Financial Models for the businesses (Gulf) 9,10,726 8 Pallavi Srivastava Internal Communication for Fleet Business -Creating a Customer Value Proposition through the righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,98,068 18 Shilpa Bawane The objectives for the assignments / projects worked on as a part of the Strategy team are as follows: Education Sector Competitor analysis - Educomp Solutions Ltd. Analysis of the Education Value Chain Analysis of Regulations and Licenses in the Education Sector Corporate Planning Modification to the consolidated Corporate Plans 2009-2011 Financial Services Financial Services - Structure for product offerings for Arthacom Power Sector Power Sector Analysis and handover of the work to the new joinee Analysis of the Nuclear power market 6,62,753 19 Vamsi K Valluri ICV Sales (AL) On Dot Implementation of a daily secondary sales tracking system through mobile phones (Gulf) 9,67,427 Analysis of Diesel engine oil market and recommendation on the possible strategic routes for Gulf Oil for 2010-1 l (Gulf) 20 Vikas Munjal Business Case for 3 JVs; Revenue Model for Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible1 deduction, there must be a direct and intimate connection between the expenditure and the business i.e. between the expenditure and the character of the assesses as a trader, and not as owner of assets, even if they are assets of the business. iv) The apex court in the case of CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SO explaining the meaning of the word for the purpose of business has held that the expression 'for the purpose of business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery: it may include measures for the preservation of the business and for the protection of its assets an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,50,064/- by holding that as the assessee has not furnished any evidence in support of its claim, the expenses for management graduates incurred by the assessee amounting to ₹ 1,71,50,064/- cannot be said to be for the purpose of business. He further relied on the decision of Kerala High Court in the case of Ram Bahadur Thakur Ltd (261 ITR 390) pertaining to disallowance u/s 40A(2) of the Act. 10. The CIT(A) has given his findings in para 4.3 of the appellate order. Learned CIT(A) upheld the addition made by the AO by holding as follows: a) No evidence has been furnished by the Appellant as to services rendered by these Management Graduates either to the Appellant Company or any of its Group concerns. b) No evidence were submitted as regards which employees were sent on deputation and to which companies, what services were rendered, who had reimbursed the salaries of these graduates and the respective amount of reimbursement and the terms and conditions agreed etc. c) No evidence is furnished in respect of new business brought in by the Management graduates. d) On perusal of Profit and Loss Account for the year, it is seen that the appellant has shown t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ield of business, finance, administration etc. to various entities of the Hinduja Group. In this role of a Corporate Management Centre to the Hinduja Group of companies, the assessee undertakes broadly the following activities: a) To identify areas of growth for these entities. b) Scope for improvement reporting for performance. c) Preparation of annual budgets and long range plans of Group companies. d) Performance monitoring of Group companies. e) Identifying companies for future acquisitions. f) Helping group companies to raise finance. g) Identifying senior key personnel and placing them in these group entities. h) Formation of a corporate governance system for these entities and monitor adherence thereto. i) Handling of inter group legal issues. 13. From the record we also find that during A.Y. 2008-09 the assessee company has entered into several service agreement contracts with its Group Companies, (Ashok Leyland, Gulf Oil Corporation, Hinduja Global Solutions, Induslnd International Holdings Ltd., and Hinduja Ventures Ltd.) out of which one of the activities of such service agreement is that business proposals are to be developed directly .on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of retainership agreements, there is no scope to revise the remuneration till the time of renewal even if costs exceed due to various factors, for example, the number of employees are not sufficient or they do not have necessary aptitude. Further this is a common feature in service Industry wherein even if the fees from regular clientele cannot be recovered in full or in part, yet the client has to incur basic costs such as salaries, overheads etc. Accordingly, the assessee has to provide services to such clientele irrespective of recovery made and for this purpose had to hire employees. Precisely all these happened in assessee s case. 14. From the record we also found that the industry was facing a slowdown in the period 2007-08 and hence many of the clients which are also listed entities of assessee including Ashok Leyland were not willing to increase the professional fees. Owing to the slowdown the revenue collection of the assessee suffered. Considering the slowdown in economy and the possibility of recovery of expenses being low, the assessee substantially reduced the expenses wherever possible like administrative costs and marketing, however the cost on employees c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision to hire the 15 Management graduates was a business decision taken by the management out of commercial expediency. It is a well settled principle that expenditure has to be adjudged from the point of view of businessman and not of the Revenue. It is also settled principle in law that expenditure need not immediately result in earning of profits but if wholly and exclusively laid out for business, it is a revenue expenditure. Therefore, the views of the AO for disallowing the employees‟ costs are not warranted on merits of the case, and AO has not taken a holistic view of the facts and ground realities of industry in which assessee operates. 18. In the case of Walchand Co. Pvt. Ltd. 65 ITR 381 the Hon‟ble Supreme Court has held as under: - Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure -Allowability of - Assessment years 1953-54 and 1954-55 - Assessee company was engaged in business of managing agent - It's business was managed by three directors and it had also appointed three executive officers - By a resolution, assessee increased remuneration of above dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and the assesses shall incur it in his capacity as a person carrying on the business. 20. The Hon‟ble Supreme Court in the case Indian Bank Ltd. 56 ITR 77 observed that there is no need to examine, whether the expenditure or allowance, which is permissible must be capable of producing taxable income. 21. The House of Lords in British Insulated Helsby Cables Ltd. (1925) tax cases 155, has held that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test has been approved by this court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC) and CIT v. Chandulal Keshavlal Co. (1960) 38 ITR 601 (SC). 22. The Apex court in Travancore Titanium Products Ltd. vs. CIT 60 ITR 277 has held that The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not come in the way of an expenditure being allowed by way of deduction if it otherwise satisfies the test laid down by law. Once it is found that the expenditure is incurred wholly and exclusively for the purpose of business, the assesses is entitled to the deduction of expenses. One of the grounds of disallowance of the expenditure was that dividend income had been assessed under the head 'Income from other sources' and not 'Income from business'. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure would be deductible only if any income is made or earned. There is, in fact, nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on‟ble Kerala High Court in the case of Ram Bahadur Thakur Ltd. 261 ITR 390, relied by the AO, is distinguishable on facts which is evident from facts stated below and the ratio of this decision cannot be applied to facts in case at hand: - Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1990-91 - Whether in every case it is a question of fact whether expenditure was incurred wholly and exclusively for purpose of trade or business of assessee and it is for assessee to plead and prove before authorities that expenses were incurred wholly and exclusively for purpose of business of company -Held, yes - Whether when a claim for deduction of an expenditure under section 37(1) is made by an assessee, Assessing Officer is bound to conduct an enquiry as to whether assessee satisfies all requirements of section and to afford an opportunity to assessee to establish its claim before either allowing or rejecting claim - Held, yes - Whether in all cases where an assessee makes a claim for deduction of an expenditure under section 37(1), Assessing Officer is bound to consider said claim, be it in respect of expenses for foreign tour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading receipt in the Profit and Loss Account. If service tax component is not included as a trading receipt, no question arises for deduction either on accrual basis or on payment basis. c) Accordingly the disallowance of service tax is warranted and hence upheld. d) The CIT(A) directed the AO to verify the actual amount of service tax claimed by the Appellant and disallow the whole amount of service tax claimed by the Appellant to the extent the service tax component is not included in its trading receipt credited to its Profit and Loss account. 30. We find that the issue is covered by the decision of the Tribunal in assessee s own case for A.Y. 2007-08 dated 09.11.2012 wherein the matter was restored back to the file of the AO after having the following observation: - 10. We have heard both the parties and their contentions have carefully been considered. It is the contention the Ld AR that the disallowed amount has not been debited to P L Account and service tax has also not become payable as the payment for services rendered was not realized . In order to verify all these contentions, we consider it just and proper to restore this issue to the file of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llected and service tax Paid are given at page no 105 to 106 of the paper book volume-I for AY 2008-09. Out of ₹ 43,80,414/- a sum of ₹ 32,98,355/- has been paid in various months of the subsequent accounting year, since collected in the subsequent years, as realization of fees was received in that period. An amount of ₹ 10,27,697/- pertaining to Service Tax still remained unpaid, since the fees were not collected. Since the fees were not collected / realized, the Service Tax liability had not crystallized, hence the amount of ₹ 10,27,697/- being Service Tax on unrealized fees cannot be disallowed under Section 43B of the Income Tax Act. However in Para 4, the AO disallowed a sum of ₹ 10,82,059/- under Section 43B of Act, in respect of fees receivable of ₹ 87,81,217/-, the analysis of the same is found at Page 108 to 109 of the Paper Book volume-I for AY 2008-09. Out of the fees receivable of ₹ 87,81,217/- in the immediately succeeding assessment year, the assessee wrote off fees as bad debts amounting to ₹ 55,07,692/- and of the balance of ₹ 28,33,250/- still remained to be receivable. Since these fees were not received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per material on record, are in consonance with the reasoning given by us in A.Y. 2008-09. Accordingly we do not find any reason to interfere with the finding so recorded by the CIT(A). 35. It is pertinent to mention here that in A.Y. 2010-11 during the course of appellate proceedings, CIT(A) has asked assessee to file the chart giving details of services rendered by the management trainees. As per CIT(A)'s direction same was filed by the assessee vide letter dated 18.8 2015 36. Rule 46A deals with production of additional evidence before the Deputy Commissioner (Appeals) and Commissioner (Appeals). However, it is pertinent to note that the exceptions set out in rule 46A do not deal with the powers of the first appellate authority to make further enquiry or to direct the Assessing Officer to make such enquiry. Sub-rule (4) of rule 46A specifically provides that the restrictions placed on the production of additional evidence by assessee would not affect the powers of the Appellate Authority to call for the production of any document or the examination of any witness to enable him to dispose of the appeal. The first appellate authority is legally empowered to make any enqui ..... X X X X Extracts X X X X X X X X Extracts X X X X
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