TaxTMI 
TaxTMI 
2019 (8) TMI 751
X X X X Extracts X X X X
X X X X Extracts X X X X
...., central circle - 20, New Delhi for the Assessment Year 2008-09 as per order dated 28/3/2013 of INR 9507003/-. 2. The assessee has raised the following grounds of appeal in ITA No. 6476/Del/2013:- "1. That the learned CIT (A) has erred both in law and on facts in upholding the disallowances made by the learned A0 of the sums of (a) Rs. 2,69.66.400/- (being 1/5th of the aggregate expenditure of Rs. 13.48,31,985/-) and represented the sum paid to M/s Baer Capital Partners International Ltd. as placement fee. (b) Rs. 2,24.72,631/- representing expenditure incurred as upfront fee, paid to M/s WDC Ventures Ltd 2. That the learned CIT(A) has failed to appreciate that the instant appeal from which the appeal was preferred was against the order giving effect to the order of CIT(A) and as such he was duty bound to only carry out the instruction or direction of the CIT(A) in his order. 3. That the learned CIT(A) has overlooked the statutory provisions contained in section 251(2) of the Income Tax Act before concluding the A O could have examined the allowability or otherwise, before the CIT(A) when an appeal was disposed of by him by an order ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n holding that the expenditure incurred of Rs. 13,48,31,985/- represented capital expenditure and had nothing to do with the profit of the company The judgment relied upon by the CIT (A) in the case of Brooke Bond India Ltd. vs. CIT reported in 225 ITR 798 has absolutely no application to the facts of the instant case 11. That, while determining the claim of the assessee that, expenditure incurred was allowable he has brushed aside the assessee s submissions contained in para 10 in the written submissions before the CIT(A). 12. The findings of the CIT (A) in confirming the disallowance that, 1% upfront fee is payable by the existing shareholder and not by the assessee company is on the misreading of clause 16.2 of the agreement. His further finding of the deduction cannot be claimed either section 37 or 35D or is capital expenditure is also erroneous both on facts and in law." 3. Briefly stated the facts of the case show that assessee is a company engaged in the real estate business and running several real estate residential and commercial projects. The assessee filed its return of income on 30/4/2009 declaring total income of INR 905178215/-. This return o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company inadvertently considered disallowance u/s 40 a (ia) of the act of INR 1 40099718/- whereas in the revised return of income the same was revised to INR 1 08382593/- since it was later noticed that, sum of INR 3 1717125/- had not been claimed as an expenditure in the profit and loss account. 31717125/- 2 Expenditure on upfront fee paid to M/s WDC venture for subscription of debentures not claimed in the original return of income as the same was capitalized by debiting to securities premium account 22472631/- 3 Expenditure on placement fee paid to bear capital allowable as deduction u/s 35D of the act but not claimed in the original return of income as the same was capitalized by debiting to securities premium account 26966400/- 4 Non-claim of statutory deduction under section 24 of the act in the original return of income by incorrectly treating rental income of INR 1 36887170/- as income from business instead of income from house property 36224744/- 5 Service tax payable incorrectly added back in the original return of income though the same was not debited to profit and loss account 19177337/- 6 Deduction of donation made of INR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has failed to appreciate the same. 10. He further submitted that order passed by the learned assessing officer is titled as "appeal effect order (part)" which could never have been passed by the assessing officer. He further stated that there can be no two piecemeal orders and as such apparently the impugned order passed by the learned assessing officer giving effect to the appellate order is not an order giving effect in part but it is an order giving appeal effect and is thus an order of assessment, which is independently appealable. He further submitted that till date no other order has either been passed giving effect to the said order dated 4/4/2012. He further submitted that there cannot be two subsisting orders of the assessment and the first order of assessment is merged with the subsequent order, which is made to give effect to an appellate order. Therefore, his submission was that the impugned order passed by the learned assessing officer is a final order of assessment and is thus only effective order of the assessment. Thus, he submitted that against the order of the assessment dated 31/12/2010 the learned CIT - A has passed an order on 4/4/2012 against which the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted that the only option available with the assessing officer is to verify the claim and to allow the same. He further relied upon the decision of the honourable Gujarat High Court in case of Saheli synthetics private limited vs CIT (2008) 302 ITR 126. He therefore submitted that the power of the learned assessing officer are limited and the learned AO does not have any further power to process a new source of income. He therefore submitted that in the instant case the learned assessing officer should not have made the disallowance. In nutshell, the only option available with the learned assessing officer was to verify the claim of incurring of the expenditure and to reduce it from the total income determined as per the past assessment records for the impugned assessment year. 12. On the merit of allowability of the claim of Rs. 26966400/- he submitted that :- i. it is submitted that the findings of the learned CIT (A) that the aforesaid expenditure represents capital expenditure is by overlooking that Rs. 2,69,66,400/- was incurred as placement fee paid to M/s Baer Capital UAE and did not represent expenditure incurred in connection with additional issue of share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y be willing to provide funds to the assessee which it had seriously required. It is submitted that the aforesaid expenditure thus incurred had not been incurred either in connection with the issue of shares or to increase its capital base, instead it represented an expenditure incurred for arranging funds which sum had been contributed by M/s BIPEF Vatika Holdings Ltd. (see Pg. 128) It may kindly be noted that a shareholder agreement between the assessee and M/s BIPEF Vatika Holdings Ltd. (Pg. 129 - 211) had been entered on 22.11.2007; whereas M/s Baer Capital Partners International Ltd. had raised an invoice for the services by it on 21.2.2008 (see Pg. 128) It is thus submitted the aforesaid expenditure has not been incurred in connection with the issue of shares or to enable the assessee to increase its capital base. It is submitted the aforesaid expenditure had been incurred by the assessee to obtain services not in connection with the issue of share subscription. v. The learned CIT(A) in his order in para 3.6 has however observed, the claim is not a straightforward claim. The appellant submits with respect, the aforesaid findings are entirely misconceived and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een claimed fees are being paid" is highly misconceived. In fact, there was no such written agreement as has been assumed by the CIT(A). On the contrary, the assessee had approached M/s Baer Capital Partners International Ltd. and others who were involved in their activities of arranging of loans and other finances when M/s Baer Capital Partners International Ltd. had agreed to arrange finances for it either by loan/debentures. vi. The learned CIT(A) has thus it is submitted failed to comprehend that it was for the services rendered by M/s Baer Capital Partners International Ltd. who had arranged the transaction, it had incurred a liability to pay 2% as placement fee. The finding of the learned CIT(A) that preference shares were being subscribed by BIPEF Vatika Holdings Ltd. and not by any general public does not make any difference since the transaction is between the assessee company and M/s B1PEF Vatika Holdings Ltd. which is a separate and independent company in which assessee has no interest whatsoever. vii. It is submitted that it appears to the appellant that the learned CIT(A) may have suspected that B1PEF Vatika Holdings Ltd. is a related concern of the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r finances. The mere fact the said financer instead of advancing the loan agreed to provide the finances on the terms that it would participate into capital of the company could not lead to a conclusion that the expenditure had been incurred in connection with issue of share capital. The assessee company inspite of the fact had claimed the expenditure by amortizing the same does not per-se means that expenditure incurred was a capital expenditure and was incurred in connection with the issue of share capital. ix. It is submitted that the learned CIT(A) in his order at page 25- 26 has referred to subscription of share holders agreement dated 22.11.2007. The aforesaid agreement has been placed at pages 129-205 of PB. The said agreement is supported by letter agreement) (pages 206-209 of PB) alongwith amended agreement appearing at pages 212-219 of PB. It is submitted that if the agreements are perused, it would be seen that BIPEF Vatika Holdings Ltd. has been identified as investor as is evident from page 206 of PB, i.e. Letter Agreement. It is submitted that if Letter Agreement is carefully read, it would be seen that BIPEF Vatika Holdings Ltd. Had made investment with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as found the expenditure incurred is justifiable expenditure. However in his opinion assessee did not deduct the tax at source as provided u/s 194J of the Act and hence disallowed the same. It is submitted the said sum of expenditure had been incurred towards the payment made as upfront fee paid to M/s WDC Venture, a tax resident of Mauritius. iv. It is the contention of the assessee that on the aforesaid sum paid to M/s WDC Venture, the assessee was not required to deduct tax at source in view of Article 22 of DTAA between India and Mauritius. v. It is further submitted that the amount of Rs. 2,24,72,631/- comprises of service tax @ 12.36% of Rs. 24,72,069/- on which it is obvious no tax was required to be deducted at source in view of the circular No. 275 of Central Board of Direct Taxes dated 13.01.2014. For the sake of convenience, aforesaid circular is reproduced hereunder: "The Board had issued a Circular No.4/2008 dated 28- 04-2008 wherein it was clarified that tax is to be deducted at source under section 194-1 of the Incometax Act, 1961 (hereafter referred to as 'the Act'), on the amount of rent paid/payable without including the service ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of such income being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right of property in respect of which the income is paid is of Article 7 of Article 14, as the case may be, shall apply" viii. It is further submitted that the learned CIT(A) has misconstrued the agreement. He has failed to appreciate that the expenditure had been incurred by way of upfront fee paid to M/s WDC Ventures, Mauritius to whom debentures were issued by the assessee company. In such circumstances, to hold that the liability was not of the assessee company but was of the shareholder is on misreading and misinterpreted the agreement. It is wellsettled rule of law the debentures are loan instruments. Thus, where a loan is obtained by issue of debentures such expenditure incurred is business expenditure. In fact he has mis-construed clause (t) which reads as under: "payment of upfront participating fee by the Existing Shareholders to Wachovia of 1% (net of all applicable taxes) of Wachov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....im of the assessee after proper verification. She submitted that accordingly the learned CIT - A has directed the learned assessing officer that if the expenditure is allowable to the assessee in accordance with the provisions of the income tax act then he should allow it. She submitted that otherwise the learned CIT - A would have allowed the claim of the assessee. She further stated that the learned CIT - A has not examined the claim of the assessee with respect to its allowability within the four corners of the provisions of the income tax act. Therefore, she submitted that there is no error in the action of the learned AO to test the allowability of that expenditure under the various provisions of the income tax act. She submitted that as the assessee has not deducted tax at source on the payment made by it outside India the learned assessing officer was as such duty-bound to examine the claim of the assessee with respect to allowability u/s 37 (1) of the act vis-a-vis deduction of tax at source on such payment u/s 195 of the income tax act. Therefore, she submitted that the claim of the learned senior counsel that order passed by the learned assessing officer is a nullity i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the matter is pending before the coordinate bench. However for assessment year 2000 - 2011 till 2012 - 13 the deduction has been allowed by the learned assessing officer and also not disturbed by the learned CIT - A or any other authority and therefore now same cannot be disputed. He further submitted that that assessee in the alternative had claimed before the learned CIT - A for assessment year 2008 - 09 that the entire expenditure be allowed u/s 37 of the income tax act for the assessment year 2008- 2009 itself. 18. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered all the judicial precedents cited before us by the rival parties. We will deal with them , if found relevant, at the appropriate places. The 3 issues that arises before us is (1) whether the order passed by the learned assessing officer is sustainable in law with respect to examination of the claim of the assessee, (2) whether the expenditure of INR 2 6966400/- being 1/5 of INR 1 34831985/- claimed under section 35D of the income tax act is allowable to the assessee or not (3) whether the revenue is correct in disallowing the claim of Rs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inal return of income and relief of INR 3 750000/- on account of wrong claim u/s 80 G of the income tax act, 1961 which is fact is eligible at the rate of hundred percent u/s 35AC of the income tax act, 1961. In any case, the assessee on the facts and circumstances of the case and on the basis of law applicable is duty-bound to make a correct assessment of the income and admissible expenditures should be allowed. I, therefore direct the assessing officer to allow such claims of INR 1 36933237/- after proper verification." 21. Therefore, it is apparent that the learned CIT Appeal has not verified the claim of the assessee but has merely sent back the claim of the assessee back to the assessing officer to properly verify the same and allow it. Meaning thereby if the claim of the assessee is falling within the four corners of the provisions of the income tax act then after proper verification the learned assessing officer should allow such claims. Therefore , if the claim of the assessee is tenable as per the income tax act then the learned assessing officer should allow it and if the claim of the assessee is not allowable according to the provisions of the income tax act,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee. Therefore, this argument deserves to be rejected at the threshold itself. 24. In view of this, we do not find any infirmity in the order of the learned assessing officer in examining the claim of the assessee and then allow the same is directed by the learned CIT appeal. 25. Now we come to the disallowance of Rs. 26966400/- relating to expenditure on placement fee paid claimed as deduction u/s 35D of the act but not claimed in the original return of income as the same was capitalized by debiting to securities premium account. Alternatively assessee has claimed the whole of the expenditure is deductible u/s 37 (1) of the income tax act. Even otherwise, u/s 35D also this is the first year of claim. The assessee submitted that this deduction is on account of placement fees paid to M/s Baer capital partners International Ltd, Dubai as per the provisions of section 35D of the income tax act. It was further stated that according to the double taxation avoidance agreement with United Arab Emirates the payment of placement fee made to that party is not covered by any specific article but is covered by article 22 of other income. It was further stated that article 22 of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appellant has raised capital through the said transaction. The AR has filed photocopy of letter at page 127 of the paper book, issued by the appellant to M/s Baer Capital Partners International Ltd., UAE wherein it is stated as under:- Baer Capital Partners International Ltd. Dubai International Financing Centre Level-05, Gate Precinct Building 4 P.O. Box 506 508, Dubai, United Arab Emirates Dear Sir, This refers to the Subscription and Shareholders Agreement (the "Agreement") dated_22nd November, 2007 between BIPEF Vatika Limited, Anil Bhalla, Gaurav Bhalla, Gautam Bhalla and Everlast Projects Pvt. Ltd. We confirm that subject to applicable laws we will pay you or your nominees a upfront/placement fee equal to 2% of the Transaction Amount defined in the Agreement within 15 days of the Second Additional Closing Date as per the Agreement, for structuring and arranging the said Transaction Amount. Best Regards, For Vatika Limited (Anil Bhalla) Managing Director 3.10 On the basis of the above letter of 22 November 2007, the appellant has- claimed that 2% of the total amount rai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d out-ofpocket costs and expenses, including closing documentation. The Company undertakes to settle these expenses with the service providers directly up to a limit of USD 170,000. 3.15 Thus I do not consider that the assessee has been able to establish that any amount was payable by way of liability of the company in this regard. Further it is also not known what was the liability of investor company to the Baer Capital Partners International Ltd. To what extent other promoters were required to contribute to such expenditure, if at all payable, is also not known. 3.16 It is further noted that expenditure, if incurred, relates to raising of capital of the appellant company. The same, is a capital expenditure and has nothing to do with the profits of the company. It has been held by Hon'ble Supreme Court, in the case of Brookbond India Ltd. (22.5 ITR 798), that amount paid by the company for raising capital is capital expenditure and not deductable from the profits. 3.17 Hence the above amount of Rs. 2.69 Crores being l/5th of Rs. 13.98 Crores amount paid to M/s Baer Capital Partners International Ltd. cannot be allowed as revenue expenditure. - ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee will pay upfront or placement fee equal to 2% of the transactions amount as defined in the agreement within the 15 days of the 2nd additional closing date as per the agreement for structuring and arranging the said transaction amount. Further at page number 128 the invoice number BCP - 001/2008 is placed before Rs. 119999987/- having the narration that being the placement fee of 2% of the transaction amount of INR 5999999329.10 raised under the share subscription and shareholders agreement dated 22/11/2007. Page number 129 is the shareholders agreement dated 22/11/2007 wherein BIPEF vatika Holdings Ltd invested the above amount of INR 5 999999329.10 in the assessee company. 27. However the learned CIT - A categorically held that that assessee has not produce the agreement between the assessee and the recipient of the above fee to identify that what kind of services provided to the assessee and where. The assessee flatly submitted that there is no such agreement. Therefore, the only evidence that is available is of the recipient, which is placed at page number 128 of the paper book. The narration of the bill has already been extracted by us above. Merely there is a sharehol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red. 28. It is also interesting to load that learned senior counsel submitted that though there is no agreement between the assessee and bear capital partners International Ltd but has submitted that that assessee had approached M/s bear capital partners International Ltd and also others who were involved in their activities of arranging of loans and other finances when bear capital partners International Ltd had agreed to arrange finances for it either by loan or debentures. To substantiate this argument, neither any agreement with any of the others was produced before us. No evidence or details with respect to involvement of any other consultants were also shown. It was also not shown that what is the role and responsibility of the bear capital partners. In view of this, we do not find any force in this argument. 29. The learned CIT - A has held that bear capital partners as stated by the assessee has arranged for the transaction where a company has invested INR 6,000,000,000 in the assessee company. The argument of the learned CIT - A that that the shares were subscribed BIPF vatika Holdings Ltd and not by public, the payment of fee, in absence of evidence of any services ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....putedly, this is the 1st year of the examination whether the expenditure incurred by the assessee is allowable u/s 37 (1) of the income tax act as claimed by the assessee or assessee is entitled to staggered deduction under section 35D of the act. Therefore, not disallowing the above sum in the subsequent year, does not help the case of the assessee. Even otherwise it is an established judicial precedent that claim of deduction u/s 35D is required to be tested in the year in which the expenditure have been incurred fast and not in subsequent 4 years. In subsequent years, the revenue cannot question the validity, justification, or admissibility of such claim. 32. Whether the tax is required to be deducted or not for the allowability of the expenditure would come into picture later on when the expenditure are found to be deductible as a business expenditure as per the normal provisions of the income tax act. The moment the expenditure is found to be allowable according to the normal provisions of the income tax then only it is required to be seen that whether the assessee has deducted tax at source on such payment or not. Therefore, the threshold of the withholding tax will onl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was treated as invalid by the AO as even the original, return was not filed within time permitted u/s 139(1). CIT(A) has directed the AO to allow the claim after proper verification. The AD did not allow the claim on the ground that the appellant has not made TDS on the said payment. As in the case of payment dealt with at 'A' above, even in tire case of present payment, there is no necessity of going into the issue of making TDS on this payment. The AR has provided a copy of the agreement between appellant and M/s WDC Ventures Ltd., Mauritius to claim that the appellant has raised Rs. 200 Crores of Debentures and had paid to that company an upfront fee of Rs. 2.24 Crores and that the same is liable as revenue expenditure. 3.21 I have considered the said agreement submitted at page 245 to 322 of the paper book. The agreement is dated 31.- 10.2007 and is between the following parties:- 1) M/s WDC Ventures Ltd. 2) Vatika Ltd. (the appellant company) 3) The Eve'rlast Projects Pvt. Ltd. (existing shareholder) 4) Anil Bhalla (existing shareholder) 5) Gaurav Bhalla (existing shareholder) 6) Gautam Bhalla (existing sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oning." 35. From the above order of the learned CIT - A it is apparent that the disallowance has been made for the reason that as per the provisions of the agreement the payment of the upfront fee is payable by the existing shareholders and not by the appellant company. Therefore as it is not the liability of the expenditure has not been incurred by the assessee but same is the liability of the existing shareholders, the disallowance was confirmed. The claim of the assessee is that appellant had raised 200,00,00,000 by way of issue of debentures and has paid an upfront fee of Rs. to 24,00,000. According to the assessee the disallowance has been made on misconception and Miss appreciation of the evidences and misapplication of the law. He submitted that the debentures are loan instruments and when the loan is obtained by the issue of debentures such expenditure incurred is business expenditure. He therefore submitted that clause (P) has been misconstrued. He further relied upon the decision of the honourable Supreme Court in case of Madras industrial investment Corp Ltd vs Commissioner of income tax 225 ITR 802. He otherwise also claimed that no tax is required to be deducted on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs. Therefore it is for them only to understand and give the reasons that why it has been agreed so that the upfront fee payment is the liability of the existing shareholders and not the company. Further in the whole of the written submission as extracted above made by assessee, there is no answer that for what reasons the liability agreed by the parties was on the existing shareholders but has been debited in the books of the assessee company. As it is an agreement by the investor, the appellant investee company and the existing shareholder of the appellant company by which all of them have agreed that upfront fee payment is required to be paid by the existing shareholders and not by the assessee company, we do not find any infirmity in the order of the learned CIT - A in holding that that the assessee has not incurred any expenditure as there is no liability devolve in on the appellant and hence same is not deductible in the hands of the assessee. 37. In view of this all the grounds of the appeal which are devolving around the disallowance of Rs. for 9439031/- of the about to expenditure of the consultation placement fees paid as well as of the upfront fee are dismissed. 38....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x (Appeals) has erroneously held in para 4.14 of its order that, page 4 of Annexure A2 shows that, the assessee had bought back the space sold to K. L. Verma at Rs. 17,500/-. The aforesaid finding is highly misconceived There was absolutely no basis or material to hold that the assessee had bought back the space sold @ 17,500/-. 7. That the learned Commissioner of Income Tax (Appeals) has failed to comprehend that the assessee is engaged in the development of Real Estate and is not engaged in the purchase and sale of Real Estate. That the assumption of learned Commissioner of Income Tax (Appeals) that the assessee had allotted the space in the year 2002 and W had bought back is completely misconceived. The mutilated and dumb document (the basis of such a finding) alone could not have been regarded as any material or basis for upholding the levy of penalty. 8. That the learned Commissioner of Income Tax (Appeals) having found that the addition had been made on the basis of mutilated and dumb document ought to have held that there was no valid basis to make the addition and in any case on the basis of such an evidence and without even examining Verma's no penalty u/....