TaxTMI 
TaxTMI 
2018 (5) TMI 1574
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....nagement consultancy services to the Hinduja Group. In the A.Y.2010-11, the assessee company e-filed its return of income on 29.09.2010, declaring a gross total income of Rs. NIL, however, it had declared income u/s.115-JB(l) at Rs. 16,19,200/-. The assessee had computed its business income at Rs. 56,29,324/- & income from other sources at Rs. 10,93,793/-, which it had set off against unabsorbed business loss & depreciation of AYs 2008-09 & 2009-10 respectively. During the course of assessment he AO has made the following disallowances. Sr. No. Particulars Amount (Rs. ) a Disallowance of remuneration paid to Management Graduates on the grounds that the expenditure is capital in nature 94,11,607 b Foreign exchange for foreign travel 81,841 Total 94,93,448 5. Similarly in assessment years 2008-09 and 2009-10 the assessee's claim for management fee was disallowed by the AO. By the impugned order the CIT(A) confirmed the action of the AO in assessment years 2008-09 and 2009-10, however for A.Y. 2010-11 the CIT(A) allowed assessee's appeal. Against the order of the CIT(A) assessee is in appeal for A.Y. 2008-09 & 2009-10, whereas Revenue is in further a....
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....nterest of business, it should be allowed without being too meticulous, as to whether such visits results immediately in earning of profits. The Gujarat High Court in Voltamp Transformers P Ltd 129 ITR 105, has held, the benefit derived by or accruing to the assessee from goods services or facilities etc. are to be judged from the viewpoint of a businessman and not from the viewpoint of a revenue officer. This cardinal principle has not been accepted by the AO and while considering the allowability of the expenditure he has looked into the proposition in a micro manner rather than a macro manner. With reference to the proposition of allowability of this expenditure on the ground of business expediency, we draw your attention to our submission dtd.09.01.2013, on which we seek to rely. It may not be out of place to mention that the appeal for AY 2008-09 is still pending before CIT(A) on all the issues, which has been disallowed in the assessment. 7. However, AO did not convince with the assessee's reply and disallowed the remuneration paid to Management Graduates. 8. By the impugned order, CIT(A) deleted the same in A.Y. 2010-11 after observing as under:- 4.1 The first ground o....
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....m Indian Institute of Management (IIM) - Ahmedabad, Bangalore, Kolkata and Lucknow, XLRI - Jamshedpur and ISB - Hyderabad. These are premier institutes and the Graduates are with Engineering background with work experience before the MBA Degree. Copies of the employment agreements entered into by the appellant with these 22 trainees was also submitted. As per these agreements, the Trainees were designated as Asst. Manager. The payments to the employees were in the nature of salaries on which appropriate taxes was deducted. Copies of Form 16 were submitted. The Appellant Company has entered into several service agreement contracts with its Group Companies such as Ashok Leyland. Gulf Oil Corporation, Hinduja Global Solutions, Induslnd International Holdings Ltd. and Hinduja Ventures Ltd. Copies of these agreements were also produced. Details of the remuneration paid to the 22 Management Trainees were submitted as also the details of the project handled by them, which is tabulated as under :- Sr.No. Name of the Management Graduate Nature of work handled Amount paid in Rs. 1 Abhikesh Dabash Structure for product offering of Arthacom Portal (HGI) Implementing the Model Deve....
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....nbsp; Of HFL Ennore - Project "Operation 6 Star" - Phase 1 (HF) 2,25,117 14 Rahul Raj Jain Contribution Variance Analysis of inbound voice based process queue-wise (HGS) Cost efficacy and effectiveness (AL) 7,88,179 15 Rahul Sharma Mergers & Acquisition and Corporate Strategy (HGS) International Operations - Process Improvement (AL) 1,91,939 16 Ralph Drago Develop a Marketing Strategy to increase AL market share in the ICV segment (AL) Business Planning & Strategy - working on the strategy of HTMT globally i.e USD 500 mn revenue by 2010 (HGS) 2,34,578 17 Saurabh Kumar Jain Project Sunrise - Role in Budgeting & MIS; Business Case for 3 JVs, Scenario Analysis; delegation of Power (AL) 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 Secto....
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....ed with the trade may not necessarily be treated as a permissible deduction. A fairly reliable approach for determining what may be regarded normally as expenditure laid out or expended wholly and exclusively for the purpose of the business has to be looked into. 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 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....
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....nt year 2008-09 the AO declined assessee's claim after having observation in para 5.4. The AO has given his decision in para 5.3 to 5.5 of the assessment order. The AO made disallowance of payment made to 15 Management Graduates amounting to Rs. 1,71,50,064/- 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 Rs. 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 ....
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....essee acts as Corporate Management Centre basically rendering centralized corporate services such as managerial, technical, legal and other general consultancy services in the field 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 Holdi....
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....aid, as per provision of law. The assessee is a retainer with various group entities and is dependent on these entities for earning its business income. In the 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 exp....
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....d on management trainees in subsequent assessment years 2011-12. Copy of the assessment order passed for AY 2011-12 is also placed on record. The 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 m....
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....are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the 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 acce....
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.... be compelling necessity to incur such an expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should 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(i....
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....as allowable. Therefore, the assessee was entitled to deduction of salary expenses in question. 25. We observe that the decision of the Hon‟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....
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....R of the appellant could not furnish any evidence to establish that service tax component was included as a 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....
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....om the client group companies. Details of the Service tax collected and service tax Paid are given at page no 105 to 106 of the paper book volume-I for AY 2008-09. Out of Rs. 43,80,414/- a sum of Rs. 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 Rs. 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 Rs. 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 Rs. 10,82,059/- under Section 43B of Act, in respect of fees receivable of Rs. 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 Rs. 87,81,217/- in the immediately succeeding assessment year, the assessee wrote off fees as bad debts amounting to Rs. 55,07,692/- and of the balance of Rs. 28,33,250/- still remained to be receivable. Since these fees w....
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.... as 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....