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TMI Blog2020 (6) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... T in the case of REI Agro Ltd. vs. DCIT [ 2013 (9) TMI 156 - ITAT KOLKATA ] has held that only dividend bearing securities should be considered for the purpose of disallowance under rule 8D(2) (iii) of the Income Tax Rules. Only dividend bearing securities should be considered for disallowance under rule 8D(2)(iii) of the I.T. Rules. Therefore, we direct the assessing officer to compute the disallowance under Rule 8D(2)(iii) of the Rules by taking into account dividend bearing securities only. For statistical purposes, the grounds raised by the assessee are allowed. Ad hoc additions on account of entertainment expenses and on account of Seminars/conferences made by ld DRP/AO are directed to be deleted - HELD THAT:- There is no material on record to show that any part of these expenses were incurred for non-business purposes.We note that assessee`s books of accounts are audited by Chartered Accountant. The reports of the auditors could be said to be material on which reliance could be placed by the IT authorities. The IT authorities not only to accept the auditors' report, but also to draw the proper inference from the same. Here in assessee`s case, the DRP/ AO has not passed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... house Coopers Private Limited (hereinafter referred to as 'PWCPL') is in the business of providing, inter alia, management consultancy services and also accounting and business advisory services. The Company's operations are segregated into different line of services like advisory, taxation services. The assessee provides both onshore as well as offshore services in the wide areas of Consulting, Deals, Forensic Services, Government Reforms and Infrastructure Developments (GRID), Accounting Advisory, Risk Advisory Services, Tax and Regulatory Services. The Company filed revised return of income on 31 March 2016 determining total income of ₹ 69,83,53,700/-. During the AY under consideration, the Learned Assessing Officer ('Ld. AO'), pursuant to the Directions of the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') issued in September 2018, passed the final assessment order dated 30 October 2018 under section 143(3) r.w.s 144C/144C(5) of the Income-tax Act, 1961 ('the Act') wherein adjustments/variations were made, thereby computing the total assessed income at ₹ 75,16,99,450/-. Aggrieved by the impugned fair assessment order, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. We note that ld DRP had given the directions to the assessing officer as follows: 2.5.3 The AO has apparently completely misunderstood the accounting principles in this regard. It was sufficient to examine whether the provisions reversed during this year had been offered to tax in the preceding year, the amount actually written off as bad debt out of the provisions of preceding year, and how much of the provisions created during the year has been included in the amount claimed, if any, and whether the provisions created during the year are ascertained and related to the business transactions of the assessee. On facts available it is apparent that the amount of provision claimed in this year is allowable. The AO is directed to verify the above observations (in this para) and allow the claim accordingly. (emphasis supplied) We note that Ld. AO, without taking into account, the above directions of ld DRP, made an addition of ₹ 1,17,57, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed vide letters dated 23 July 2018, it is clear that the provision reversed during the year have been claimed out of the ascertained provisions created and offered to tax in the preceding year and hence should not be disallowed again. The Hon'ble DRP has also observed that the claim of the assessee should be allowed. We note ld DRP is higher authority, therefore AO ought to follow the direction of ld DRP. We note that AO had neither follow the directions of ld DRP nor he had examined the submissions, documents and details filed by the assessee in right perspective, as noted above. Therefore, we direct the AO to examine the assessee`s claim in respect of provisions for bad and doubtful debts and adjudicate the issue in accordance to law. 7. Ground Nos. 2 2.1 raised by the assessee reads as follows: 2.On the facts and in law and in the circumstances of the case, the Hon`ble DRP/Ld AO erred in making a disallowance of ₹ 8,20,500/- under section 14A read with Rule 8D(2)(iii) of the Income Tax Rules 1962 as against the disallowance of ₹ 30,000/-made by the appellant in the Return of Income. 2.1 That the ld AO/DRP erred in not appreciating that the disallowance under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D. On perusal of the audited financials it is observed that the assessee's investment are either in its subsidiaries (₹ 10.99 Cr., being opening balance in this year) or in PricewaterhouseCoopers Service Delivery Centre (Kolkata) Put. Ltd. (₹ 1.00 lakh, being opening balance in this year) beside fresh investment of ₹ 12.02 Cr. in Hercules Merger Parent Ltd. from which no dividend has been received during the year. As such no disallowance is called for u/r 8D(2)( ) of the Rules. However, the disallowance u/r 8D(2)(iii) of the Rules is mandatory. Therefore, disallowance is upheld to the extent of ₹ 8.505 lakh. 10. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. We note that issue raised by the assessee is no linger res integra. The Coordinate Bench of Kolkata ITAT in the case of REI Agro Ltd. vs. DCIT [(2013) (144 ITD 141)] has held that only dividend bearing securities should be considered for the purpose of disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP/ld AO erred in making in ad hoc addition of ₹ 53,00,938/- being 10% of ₹ 5,30,09,377/- ( i.e. total amount of expenditure of ₹ 8,09,86,625/- less ₹ 2,79,77,248/- suo moto disallowed by the assessee) incurred on account of Seminar Conferences, without appreciating that the said expenses were incurred wholly and exclusively for the purpose of business and the complete details of the expenditure were furnished during the course of assessment proceedings. 12. Brief facts qua the issue are that during the assessment year under consideration, the assessee has debited an amount of ₹ 54,22,452/- in the profit and loss account on account of entertainment expenses. During the course of assessment proceedings, the assessee submitted details of entertainment expense, along with sample supporting documents, in the format requisitioned by the Ld. AO, including name of the parties, PAN and address, nature, amount, TDS details, etc., as under: Details of entertainment expenses (sl. nos. 1 to 259) submitted vide letter dated 22 November 2017 (refer page nos. 186 to 196 of the PB) Sample supporting documents (bills, vouchers, etc.) submitted vide letter dated 8 Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .11.1 These expenses are similar to those considered in ground no. 17 herein above and the reply of the assessee is also similar. The AO is directed to restrict the disallowance to 10% of the expenses other than already disallowed by the assessee. 16. Aggrieved by the order of the ld DRP/AO the assessee is in appeal before us. 17. Learned Counsel for the assessee submitted before us written submissions, the relevant portion of the written submissions are reproduced below: Written submissions for ground No. 3 3.5 On perusal of the details of entertainment expense (at page nos. 186 to 196 of the PB), Your Honours would observe that expenses in the nature of reimbursement to employees (amounting to ₹ 39,41,940) included under the entertainment expense, have been incurred towards various client and team meetings and are not at all personal in nature. These expenses play a pivotal role in building good relationship with the clients/team and are exclusively incurred for the purpose of business. Hence, no disallowance should be made on account of reimbursement to employees for expenses incurred by them in connection with the business of the assessee. 3.6. The assessee further wishes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any basis and hence deserves to be deleted. Accordingly, we delete the disallowance. This issue of assessee's appeal is allowed. Written submissions for ground No. 4 4.5. The assessee relies on the legal submission made in Ground No. 3 above with respect to ad hoc disallowance made by the Ld. AO/ Hon'ble DRP. 4.6. The assessee further wishes to submit that the expense incurred towards seminar and conferences were wholly and exclusively incurred for the purpose of the business of the assessee. Your Honours may please appreciate the assessee is engaged in consultancy profession and appoints large number of employees across various cities in India (around 4000 employees working across 8 locations). The profession entails participation in various seminars and conferences and other incidental expenses (such as dinner, lunch, travel and stay expenses, training program, etc.) have been incurred wholly and exclusively for the purpose of business of the assessee. 4.7. Your Honours would observe from the details furnished (refer page nos. 197 to 233 of the PB) that most of the payments have been made by the assessee to renowned institutions/associations/chambers such as: American Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the findings of the ld DRP/AO and other materials brought on record. We note that the ld DRP/ AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the DRP/ AO has not passed any order u/s 144 of the Act. The DRP/ AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the DRP/ AO; and item-wise the DRP/ AO could have disallowed the expenditure rather than going for adhoc disallowance of percentage basis of the expenses claimed by the assessee which action of the DRP/ AO is arbitrary in nature and cannot be sustained. For that we rely on the judgment of the Hon`ble Delhi High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the order. On the basis of our aforesaid findings, the appeal is accordingly allowed and disposed of. In the facts and circumstances of this case we direct the parties to bear their own costs. 20. Our view is also fortified by the judgment of the Hon`ble Delhi High Court in the case of Jay Engineering works Ltd, 113 ITR 389 (Del-HC), wherein it was held as follows: Whether, on the facts and in the circumstances of the case, the Tribunal in the absence of any evidence was legally correct in holding that the amounts of ₹ 3,26,200 and of ₹ 83,523 were deductible from determination of profits for the asst. y₹ 1962- 63 and 1963-64 respectively ? The applicant-assessees carry on business of manufacturing of fans, etc., on a large scale. The relevant account books for the accounting years 1961-62 and 1962-63 was destroyed in fire in November, 1962. In the returns filed by the assessees along with the statements of profit and loss accounts and balance-sheets a deduction of ₹ 3,36,200 from the determination of profits for the asst. yr. 1962-63 and a deduction of ₹ 83,523 from the determination of the profits for the asst. yr. 1963-64 were claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to deal with such numerous cases of assessment that they can accept as correct books of account maintained in regular course of business without such a formal proof. In the present case, the relevant books of account in which detailed information as to the expenses which were claimed as deductions for the asst. y₹ 1962-63 and 1963-64 are destroyed by fire in November, 1962. Under the Indian Evidence Act secondary evidence of the contents of these account books would have to be adduced if they were to be used to prove any fact. The external auditors of the assessee-companies had, however, made their annual reports under s. 227(2) of the Companies Act, 1956, to the members of the company on the accounts examined by them and on the balance-sheets and profit and loss accounts for these two years. These reports do not doubt the correctness of the expenses, deductions of which were claimed by the assessees. Under s. 227(3)(b) and (c) the auditor's report had to state whether in their opinion proper books of account as required by law have been kept by the company and whether the company's balance-sheets and profit and loss accounts were in agreement with the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper inference from the same. Since the evidence in income-tax proceedings need not consist necessarily of evidence admissible under the Evidence Act but may consist of other material which has a probative value, the Tribunal was justified in taking such material into account. It cannot, therefore, be said that the decision of the Tribunal was not based on any evidence. On the contrary, it was based on evidence meaning thereby that it was based on relevant material which can be considered in the income-tax proceedings. The applications are, therefore, dismissed. There will be no order as to costs. 21. We note that there is no material on record to show that any part of these expenses were incurred for non-business purposes.We note that assessee`s books of accounts are audited by Chartered Accountant. The reports of the auditors could be said to be material on which reliance could be placed by the IT authorities. The IT authorities not only to accept the auditors' report, but also to draw the proper inference from the same. Here in assessee`s case, the DRP/ AO has not passed any order u/s 144 of the Act. The DRP/ AO thus without rejecting the books of account of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hholding taxes. However, as the assessee follows mercantile system of accounting, the actual expenses have been booked during AY 2014-15 on account of the fact that they relate to the current financial year. 5.6. In connection with the same, the assessee has submitted the following details along with the TDS certificate before the Hon'ble DRP and the Ld. AO (refer page nos. 535 to 537 of the PB): Total Amount of Transaction Deducted Rate Amount charged to P L a/c in FY 2012-13 Amount charged to P L a/c in FY 2013-14 Outstanding in prepaid 1,71,74,463 17,17,446 10% 18,09,552 13,90,869 1,39,74,042 5-7.From perusal of the above details and the TDS certificate, Your Honours would appreciate that though TDS was deducted on the full value of the transaction of ₹ 1,71,74,463 in FY 2012- 13 at the time of payment/ credit to the vendor, an amount of only ₹ 18,09,552 was booked as an expense during FY 2012-13 and the rest was carried to the prepaid account. Thereafter, in the succeeding financial year 2013-14 i.e. the year under consideration, an amount of ₹ 13,90,869/- was correctly charged from prepaid account to the profit and loss account as actual expenses for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was required to pay taxes in USA. Accordingly, the assessee filed its tax return in USA for FY 2013-14 in May 2018, computing a total income of USD 11,59,173 and determining a tax liability of USD 4,59,032. The above tax liability has been accepted by the Internal Revenue Service (IRS) vide Form 4549 dated 7 June 2018 and the tax liability was paid by the assessee on 11 September 2018. As mentioned above, income thus taxed in USA is also included in the total income in the return of income filed in India and tax on the same is paid in India under the provisions of the Act. Hence, income is doubly taxed, once in USA as a source country and again in India as a resident country. Hence, the assesseee is eligible to claim foreign tax credit of taxes paid in USA against the tax liability determined in India. Therefore, the assessee after payment of taxes in USA raised the aforesaid claim of foreign tax credit (FTC) amounting to ₹ 3,22,24,046/- (USD 4,59,032) before the Ld. AO by way of application dated 15 October 2018 (refer page nos. 538 to 555 of the PB). However, the Ld. AO, without assigning any cogent reason and without appreciating the facts and circumstances of the case, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the claim of credit for taxes paid in USA with respect to tax liability finalized in June 2018 is in accordance with the law. The ld Counsel also relied on the judgment of Coordinate Bench of Kolkata Tribunal in the case of TCG Lifesciences Put. Ltd. vs. DCIT [ITA No. 121/Kol/2016] wherein, on similar facts, the Hon'ble Tribunal directed the Assessing Officer to consider the claim of the assessee in accordance with law after due verification. Findings of the Coordinate Bench is given below: 32. As far as the question of giving credit to taxes paid in Japan is concerned, it requires verification by the AO and therefore the AO is directed to consider the plea of the Assessee raised in the additional ground in accordance with law after due verification. 32. We have gone through the submission of the assessee, as noted above. The ld DR for the Revenue also fairly agreed that foreign tax credit (FTC) may be allowed to the assessee in accordance to law. Therefore, we direct the assessing officer to examine the correctness of the assessee`s claim for foreign tax credit (FTC), as per India USA-Treaty, and allow the claim of the assessee in accordance to law. For statistical purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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