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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 ..... 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 Rs. 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 Rs. 75,16,99,450/-. Aggrieved by the impugned fair assessment order, the Assessee Company is in appeal before us. 3. Ground No.1 raised by the assessee company reads as follows: " On the facts and in law and in the circumstances of the case, the ld AO erred in not following the Directions of the Hon`ble DRP and making in addition of Rs. 1,17,57,533/- , being provision for bad debts and doubtful debts written back during the year, without appreciating the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting 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 Rs. 1,17,57,533/- in the impugned final assessment order dated 30th October 2018, which is in violation of the Directions of the Ld DRP. 6. We note that judicial discipline demands that once an order has been passed in the assessee's own case, lower authorities are duty bound to act in accordance with the same. The ld Counsel for the assessee submitted before us the following details and informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Rs. 8,20,500/- under section 14A read with Rule 8D(2)(iii) of the Income Tax Rules 1962 as against the disallowance of Rs. 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 section 14A read with rule 8D(iii) of the Rules ought to be restricted with respect to only those investments which yielded exempt income during the year." 8. The facts of the issue which can be stated quite shortly are as follows: During the year under consideration, the assessee earned exempt dividend income amounting to Rs. 21.01 crores from P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . from which no dividend has been received during the year. As such no disallowance is called for u/r 8D(2)(ü) of the Rules. However, the disallowance u/r 8D(2)(iii) of the Rules is mandatory. Therefore, disallowance is upheld to the extent of Rs. 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 disallowance under rule 8D(2) (iii) of the Income Tax Rules. The relevant findings of the Co-ordinate Bench are given below: "8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete 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 Rs. 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 December 2017 (refer page nos. 253 to 259 of the PB) In the draft assessment order, the Ld. AO proposed an ad hoc disallowance of 50% of the total entertainment expense. 13. Aggrieved by the order of the AO, the assessee filed the objections before the Ld DRP. The Hon'ble DRP upheld the disallowance only to the extent of 15% of reimbursement to employees, and observed as under: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 Rs. 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 to submit that disallowance cannot be made on an ad hoc basis. The Ld. AO/ Hon'ble DRP have failed to bring cogent and credible submission/evidence on record to substantiate the ad hoc disallowance. The Ld. AO/Hon'ble DRP have also not been able to point out as to how the expenditure was not incurred wholly for assessee's business purposes. 3.7 It is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Chamber of Commerce in India * Assocham * Association Of Certified Fraud Examiners (Acfe) * Bombay Chamber Of Industry And Commerce * Bombay Chartered Accountants' Society * Confederation Of Indian Industry (CII) * Federation Of Indian Chambers Of Commerce And Industry * The Institute Of Chartered Accountants Of India * The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case of National Industrial Corp. Ltd, 258 ITR 575 (Del-HC) wherein it was held as follows: "26. Regarding the sale promotion expenses, according to the assessee-company it spent Rs. 23,75,170 on giving major gift items. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 Rs. 3,26,200 and of Rs. 83,523 were deductible from determination of profits for the asst. yRs. 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 Rs. 3,36,200 from the determination of profits for the asst. yr. 1962-63 and a deduction of Rs. 83,523 from the determination of the profits for the asst. yr. 1963-64 were claimed by the assessees. The deductions were disallowed by the ITO, but were allowed by the AAC and by the Tribunal. The applications made by the assessees for reference of the above question of law to this Court were also dismissed by the Tribunal. Hence the present applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information as to the expenses which were claimed as deductions for the asst. yRs. 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 account and returns. Under s. 209 of the Companies Act, the assessee-company was required to maintain proper books of account with reference to the receipts and expenditure taking place in the business of the assessees. The account books main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. It may be pertinent to mention here that there was no material on record to show that any part of the these expenditures wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, 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 Rs. 1,71,74,463 in FY 2012- 13 at the time of payment/ credit to the vendor, an amount of only Rs. 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 Rs. 13,90,869/- was correctly charged from prepaid account to the profit and loss account as actual expenses for the year under consideration and the balance was carried over to the next year under the mercantile system of accounting. 5.8. However, the Ld. AO, on a complete misunderstanding of facts and solely observing the TDS certifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove 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 Rs. 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, rejected the claim of the assessee by simply mentioning that the assessee did not make the aforesaid claim of foreign tax credit (FTC) at the time of filing the return of income or during the course of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the ground No. 6 raised by the assessee is allowed. 33. Ground No.7 raised by the assessee company reads as follows: "7. On the facts and in law and in the circumstances of the case, the ld AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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