TaxTMI 
TaxTMI 
2018 (5) TMI 1574
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee is engaged in the profession of rendering management 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for traveling is revenue in nature and incurred wholly and exclusively in the interest 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, C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of recruitment of management graduate was explained by the A.R. It was submitted that graduates were hired from 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 Amou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....loping & initializing strategies to enhance sales in key channels (Gulf) 13 Praveen Rajurkar Screening of Potential Targets - 10 companies anlaysed and ADES Delegation of Power (AL) Re- Engineering 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. Anal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on's case (supra) has been approved by this court in several decisions e.g. Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 (SO, CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) iii) The apex court in Travancore Titanium Products Ltd. v. CIT - 60 ITR 277 has held that "but every item of expenditure merely because it is connected 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 asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd incurs expenditure cannot be questioned. Here there is no positive proof that such expense are bogus or that these trainees were not carrying out the business of the appellant. Thus, the summary disallowance of the expenses is not justified. The disallowance of Rs. 94,11,607/- on this count is deleted. Ground of appeal No.1 is allowed. 9. However, in the assessment 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 be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6th July, 1993. The object clause No. 1 as per the Memorandum of Association of the company is as under: - "To act as consultants, retainers and advisers on all matters and problems including administration, finance, management, production, purchase, sales, marketing, advertisement, publicity material, cost control, law and consultancy to Hinduja group of companies." From the record we find that in pursuance of its main object as stated above, since 1993, the assessee 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 compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of TDS were filed before the lower authorities. A perusal of these employment agreements will reveal that these are regular employees of the assessee company and are designated as Asst. Managers. They act as management trainees and assist other senior professionals of the assessee and are not independent consultants. Since these are employees of the assessee company, the professional tax etc., are deducted from their salary and taxes under Section 192 of the Income Tax Act are deducted and paid, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee company and these are not bogus expenses. However, the AO has made disallowance only in respect of A.Y. 2008-09 only because taxable income has reduced in this year and assessee has net loss of Rs. 1.76 crores as per audited financials. 17. Further in A.Y. 2010-11, similar addition made by the AO was deleted by the CIT(A) after having detailed observation and findings in para 4.5 of his appellate order as reproduced hereinabove. Similarly no disallowance has been made for similar expenses incurred 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lization 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 and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commerce or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an assessee should incur and in what circumstances it should incur that expenditure. The expression 'wholly and exclusively' used in section 37(1) does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such an expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee is entitled to deduction, even though there might not 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 mu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Supreme Court in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 held that the business income is broken up under different heads only for the purpose of computation of the total income; by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Act for computation of income. The genuineness of impugned expenditure was not in doubt. The expenditure incurred wholly and exclusively for the purpose of business was 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 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e' in the Audited Balance Sheet as at 31.3.2008, the assessee has paid an amount of Rs. 98,355/- in various months of subsequent year and disallowed the balance of Rs. 10,82,059/- under Section 43B of the Act. By the impugned order the CIT(A) confirmed the order of the AO after having discussion in paras 6.1 to 6.3 of his order as under: - "a) As fairly informed by the learned AR that the AO's action on this issue in the Appellant's case for AY 2007-08 has been confirmed by the learned predecessor CIT(A). b) The learned AR 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 cre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elevant extracts of this provision are reproduced as under: "Payment of Service Tax 6. [1] The service tax shall be paid to the credit of the Central Government, - (i) By the 6th day of the month, if the duty is deposited electronically through internet banking; and (ii) By the 5th day of the month, in any other case, Immediately following the calendar month in which the payments are received, towards the value of taxable services." Accordingly the liability as reflected on 31.03.2008 in the Balance Sheet has been paid over the subsequent months as and when the fees were received from 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 crystal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es. Thus the assessee is charging less from the group company vis-à-vis the cost incurred by it. The AO in para 4.3 gave his contentions on why he does not agree with the assessee's submissions. In para 4.5 the AO disallowed 30% of employee cost of Rs. 11,60,98,208/- amounting to Rs. 3,48,29,462/-. By the impugned order the CIT(A) confirmed the action of the AO. 34. Following the reasons given for A.Y. 2008-09, we do not find any justification for the disallowance so made. Disallowance made in A.Y. 2010-11 was deleted by the CIT(A) after having detailed observation in paras 4.2 to 4.4. The findings recorded by the CIT(A), are 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....