I.T.A. No.5069/Mum/2014 IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J , MUMBAI BEFORE SHRI C.N.PRASAD (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) I.T.A. No.5069/Mum/2014 (Assessment Year : 2009-10) M/s Northpoint Centre of Learning vs JT. CIT (OSD)-15(1),Mumbai 15th Floor, Express Towers, Nariman Point, Mumbai-21 PAN : AAAJN0298D (Appellant) (Respondent) Appellant by Mr Mrugakshi K Joshi Respondent by Arju Garodia Date of hearing : 07-09-2016 Date of pronouncement : 21 -09-2016 ORDER Per ASHWANI TANEJA, AM This appeal has been filed by assessee against order of Commissioner of Income-tax (Appeals)[hereinafter called CIT(A)] dt 08-05-2014 passed against assessment order u/s 143(3) dt 28-12-2011 for A.Y. 2009-10 on following grounds: On facts and circumstances of case and in law: 1. Adhoc Disallowance learned CIT(A) erred in confirming adhoc disallowance @ 5% of total expenditure although expenditure was incurred solely for purpose of business. 2 I.T.A. No.5069/Mum/2014 2. Disallowance u/s. 14A - a.The learned CIT(A) erred in confirming adhoc disallowance u/s. 14A of Rs. 2,58,650/- made by AO towards estimated expenses which have not been incurred on earning tax free dividend income. b. learned CIT(A) erred in confirming disallowance u/s. 14A by using formula set out in Rule 8D of Income Tax Rules but failing to take into consideration that AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on objective basis that Appellant is unable to establish correctness of its claim. c. learned CIT(A) failed to establish any nexus between expenditure incurred and exempt income earned and failed to take into consideration Supreme Court decision in case of Rajasthan Warehousing reported in 242 ITR 450 and in case of CIT Vs. Hero Cycles (Punjab and Haryana High Court) which held that no expense can be disallowed if nexus cannot be established for incurring expenditure for earning tax free income and section 14A cannot be merely applied on presumption. 3. Disallowance of Professional Fee of Rs. 4,00,000/- learned CIT(A) erred in confirming disallowance of Professional fees paid to Interior Designing Consultant, on ground that it was not incurred for running of business, although genuineness of transaction can be evidenced by bills/ vouchers and TDS Certificates, which were duly submitted before Assessing Officer and CIT(A). 4. Disallowance of Conducting Fee / Commission Fee of Rs.15,78,624/- a. learned CIT(A) erred in disallowing Commission fee paid to M/s Northpoint Training & Research Pvt. Ltd., on ground of misappropriation of profit with intention to divert income. b. learned CIT(A) erred in not following Order of Hon ble ITAT, in its own case, for Assessment Year 2007-08, having identical facts and circumstances, wherein addition made was deleted, on ground that in current year there is profit and no issue of brought forward loss and these facts were different in previous year. . c. learned CIT(A) erred in holding that Appellant has not substantiated that expense was incurred wholly for purpose of business, although same explanation was given during 3 I.T.A. No.5069/Mum/2014 assessment proceedings as that, which was given before Hon'ble ITAT, who after satisfaction deleted addition in Assessment year 2007-08. 2. Ground 1: In this ground, assessee challenged action of Ld. CIT(A) in confirming disallowance @5% of total expenditure. 3. brief background is that Assessing Officer had made adhoc disallowance of Rs.1,75,267 being 10% of total expenditure as personal expenditure on ground that expenses were made without supporting evidences. assessee contended before CIT(A) that expenses were incurred solely for purpose of business, and there was no personal use involved. Ld. CIT(A) reduced disallowance to 5%. 4. Before us, Ld. Counsel drew our attention on decision of Tribunal in assessee s own case for A.Y. 2010-11 in ITA No. 347/Mum/2015 dt 11-06-2015. We have gone through orders of lower authorities and decision of Tribunal. It is noted that in A.Y. 2010-11, Tribunal has further reduced disallowance from 5% to 2% with following observations:- 2.1 I have considered rival submissions and perused material available on record. facts, in brief, are that assessee is training institute in advertising for post graduate residential students, declared income of Rs.1890/- in its return filed on 07/10/2010. assessee claimed Rs.10,49,800/- to have been incurred for printing and stationary, telephone and travelling expenses for business purposes. Assessing Officer suspected genuineness of these expenditure by holding that there was element of personal use, thus, he made disallowance at rate of 10% of such expenditure. On appeal, before ld. Commissioner of Income Tax (Appeals), disallowance was restricted to 5% of claimed expenses incurred under various heads, thus, part relief was granted to assessee against which, aggrieved assessee is in appeal before this Tribunal. 4 I.T.A. No.5069/Mum/2014 2.2. If observation made in assessment order leading to addition made to total income, conclusion drawn in impugned order, material available on record, assertions made by ld. respective counsel, if kept in juxtaposition and analyzed, I find that ad-hoc disallowance was made by Assessing Officer by suspecting that there is element of personal use. However, ld. Assessing Officer has not pinpointed that which expenses are of personal in nature. assessee also produced copy of statement of account. Assessing Officer was of view that genuineness of expenses was also not proved. Before ld. Commissioner of Income Tax (Appeals) and also before this Tribunal, assessee produced copy of ledger account of various heads of expenses by claiming that such expenses were incurred wholly and exclusively for purposes of business. All expenses were incurred against bills and for commercial expediency; thus, no disallowance is expected to be made u/s 37(1) of Act. assessee is institution, thus, no ad-hoc addition is permitted unless and until it is proved otherwise. There is no recording of satisfaction by Assessing Officer that assessee made bogus claim. There are no borrowed funds also, thus, to put end to litigation, disallowance is restricted to 2% against 5% sustained by ld. Commissioner of Income Tax (Appeals). It is made clear that observation made by Bench is peculiar to facts available to impugned assessment year and may not be quoted for further reference. This ground of assessee is partly allowed. 5. During course of hearing before us, both parties fairly agreed that decision taken by Tribunal for A.Y. 2010-11 can be applied in this year. Under these circumstances, disallowance is restricted to 2% against 5% sustained by Ld. CIT(A). Thus, assessee gets part relief accordingly. 6. Ground 2: This ground is regarding disallowance u/s 14A. It has been contended during course of hearing that for A.Y. 2010-11, Tribunal has reduced disallowance to Rs.1 lakh in place of Rs.3,41,763 as was sustained by Ld.CIT(A) in said order. Both parties fairly agreed that order of Tribunal may be followed in this year also. It is noted that Tribunal had made following observations: 5 I.T.A. No.5069/Mum/2014 3.1. I have considered rival submissions and perused material available on record. If observation made in assessment order, leading to addition made to total income, conclusion drawn in impugned order, material available on record, assertions made by ld. respective counsel, if kept in juxtaposition and analyzed, I am of view that Rule-8D of Rules can be applied, if Assessing Officer is not satisfied with correctness of claim of assessee with respect to expenditure incurred in relation to exempt income. Even if, assessee claims that no expenditure was incurred in respect to exempt income, Assessing Officer is supposed to follow mandate of Rule-8D. Section 14A is called for when Assessing Officer is not satisfied with claim of assessee having incurred no expenditure or some amount expenditure in relation to exempt income. Therefore, following decision of jurisdictional High Court in Godrej & Boyce, 328 ITR 81 (Bom), wherein, it was held that disallowance has to be on reasonable basis, therefore, to put end to litigation, I direct ld. Assessing Officer to reduce disallowance to Rs.1 lakh in place of Rs.3,41,763/- sustained by ld. Commissioner of Income Tax (Appeals). Thus, this ground is partly allowed. 7. Respectfully following order of Tribunal for earlier year, disallowance in this year also reduced to Rs.1 lakh and remaining disallowance is directed to be deleted. 8. Ground 3: In this ground, assessee has challenged action of Ld. CIT(A) in confirming disallowance of professional fee paid to interior designing consultant of Rs.4 lakhs on ground that it was not incurred for running of business. During course of hearing it was submitted by Ld. Counsel that payment was made for availing consultancy to do refurbishing of office building but due to certain reasons, consultancy received could not be implemented. payment was made by account payee cheque against which TDS was deducted. payment has not been doubted by lower authorities. 6 I.T.A. No.5069/Mum/2014 9. Per contra, Ld. DR submitted that since no benefit has been received by assessee, therefore, disallowance has been rightly made by lower authorities. 10. We have gone through orders of lower authorities. It is undisputed fact that payment has been made by cheque on which TDS was deducted. It is also not disputed that services were rendered by Mr. Roshan Bahar, professional interior designing consultant for providing suggestions on refurbishing of rooms. Under these circumstances, undisputedly, services were rendered by consultant. Thus, merely because assessee could not get real benefit out of it, it cannot be said that expenses were not incurred for purposes of business of assessee. Rendering of services and receipt of actual benefit are two different ends. What is important for allowability of expense as business expense is that assessee must receive service from service provider and it should be meant for purpose of business of assessee. Both of these conditions are undisputedly fulfilled here. Thus, in our view, disallowance has been wrongly made by Assessing Officer and same is, therefore, directed to be deleted. 11. Ground 4: In this ground, assessee has challenged action of lower authorities in disallowing commission fee paid to M/s Northpoint Training & Research Pvt Ltd. 12. During course of hearing, assessee brought to our notice that Tribunal had in assessee s own case for A.Y. 2007-08 allowed commission paid to same party. Ld. DR did not bring any distinction in facts or law, in present year and A.Y. 2007-08. We have gone through orders of lower authorities as well as order of Tribunal for A.Y.| 2007-08 dt 07- 12-2012 in ITA No.1206/Mum/2012. observations of Tribunal are reproduced hereunder:- 7 I.T.A. No.5069/Mum/2014 3. During assessment proceeding, Assessing Officer observed that assessee has shown payment of commission at rate of Rs.3% of gross receipt to related company namely, M/s North Point Training & Research Pvt. Ltd.. He observed that no evidence of any kind for work done by related company has been produced. Assessing Officer also noted that three persons, who are Directors of said company, are also member of AOP of assessee company. Accordingly, Assessing Officer observed that without rendering any services, commission fees paid, was not justified. Accordingly, he disallowed. 4. It was submitted before CIT(A) that assessee AOP consists of twelve (12) Lintas Employees Welfare Trust, which is running training centre at Khandala. There are 750 members of this trust. Since assessee AOP was unable to run institution alone, they hired assistance of M/s North Point Training and Research Pvt. Ltd., which was incorporated for purpose of management of training and research activities of assessee AOP. It was further submitted that Directors of said company are prominent management personnel having experience in field of finance and accounts and for their assistance said commission equivalent fee of 3% of gross turnover was paid. It was also submitted that said company has offered commission as income and it paid on that. Therefore, commission amount paid by assessee is allowable otherwise it amounts to double taxation. However, learned CIT(A) was not satisfied with contention of learned AR as no evidence was produced on account of rendering of services. Now, assess is in appeal here before Tribunal. 5. contention raised before lower authorities are reiterated here before Tribunal. attention of Bench was drawn on list of beneficiaries of 12 Trusts, which is 750 numbers, placed in paper book at pages 60 to 63. It was further explained that in fact assessee had acquired certain properties in Khandala for common objective of developing and conducting training and research centre. assessee AOP has constructed 12 buildings fully furnished with air-conditioners, furniture, fixtures, audio-visual, conferences rooms, sport facilities, club house and other equipments. said premises were constructed for purposes of running Training and Research Centre. However, as members of AOP were unable to obtain clients and run entire institution, they hired services of M/s North Point Training and Research Pvt. Ltd. 8 I.T.A. No.5069/Mum/2014 as per terms of conducting agreement entered between parties. agreement was entered on 15-6-2004, copy of agreement is placed in paper book at pages 49 to 57. It was also explained that assessee AOP has paid similar commission for earlier two years and assessment had been completed under Section 143(3). No such disallowance was made for those two years. Accordingly, it was submitted that in view of consistency also, disallowance made by Assessing Officer, which is confirmed by CIT(A), is not justified. 6. On other hand, learned DR strongly placed reliance on order of Assessing Officer as well as CIT(A). 7. After considering orders of authorities below, I found that assessee deserves to succeed in its appeal. I noted that agreement entered on 15-6-2004 pertains to assessment year 2005- 06. In that year also assessee paid commission fee of Rs.10,39,800/-. Conductor i.e. M/s North Point Training and Research Pvt. Ltd. has shown its receipts in its profit and loss account. fee has been offered for taxation by filing regular return under Section 139(1) of Act. Copy of same is placed on record. Accordingly, commission fee was paid for subsequent year i.e. assessment year 2006-07 at Rs.14,49,940/-. same was also offered for taxation. return was filed. Copy of same is also placed on record. It is further seen that assessee AOP filed its return declaring huge losses. assessments were completed under Section 143(3). Copies of same are placed on record for assessment year 2005-06, that declared loss of Rs.2,16,96,919/- was accepted by AO. Similarly for 2006-07, declared loss of Rs.1,79,54,391/- was accepted. Copy of assessment order is placed on record. In similar manner, assessee paid commission fee to Conductor for same services. However, in this year, AO disallowed on ground that assessee could not file any proof of rendering services and CIT(A) also confirmed action of AO. Assessee has explained that same services were rendered by Conductor, however, same was not accepted. I noted that certificate from Conductor M/s North Point Training and Research Pvt. Ltd. is placed on record, by which it has been stated that they have been appointed for following services :- 1. To obtain clients and business for Northpoint Centre of Learning when Centre is not in use by Lintas India Private Limited. 2. To manage properties and facilities of training and research of 9 I.T.A. No.5069/Mum/2014 Centre. 3. To manage training and research activities for development of knowledge and skills through training & research. 4. To obtain licenses/permissions for day to day management of Centre and its activities. 5. To conduct activities of Centre at its optimum utility and in professional manner. These services are as per agreement dated 15-6-2004. For earlier two years, claim of assessee has been accepted. Copy of return filed by Conductor for all years are also placed on record and they have offered receipts in their profit and loss account and due tax has been paid. Therefore, I feel that disallowance made by AO, which is confirmed by CIT(A), is not justified. Assessing Officer has accepted claim of assessee for immediately two years. same services are rendered, therefore, for this reason also, disallowance is not justified. 8. It is also matter of fact that there is huge loss shown by assessee in earlier two years, which has been accepted by department also. If those losses are brought forward then during year under consideration also, there is loss. It shows that assessee is not showing any expenses on account of commission fee for reducing tax liability. 9. In view of aforesaid facts and circumstances of case, I delete disallowance. 13. In year before us, Ld. CIT(A) refused to follow order of Tribunal for A.Y. 2007-08 on ground that Tribunal had allowed relief on ground that huge loss was shown by assessee in earlier two years and, therefore, there was no motive to evade taxes and that is how Tribunal was pleased to allow relief. We find that CIT(A) has not read order of Tribunal completely. Tribunal had analysed complete facts and it was found that payee had rendered services against which payment has been made. It was also found that expenses have been incurred for purpose of business of assessee. Thus, decision was taken by Tribunal keeping in view all factors and incurring of loss was merely one of 10 I.T.A. No.5069/Mum/2014 them. It is further noted by us that in year before us also, factum of payment has not been disputed. It is brought to our notice that complete documentary evidences have been brought on record by assessee evidencing payment and availment of services rendered by payee. In our view, Tribunal has rightly allowed claim of assessee. No different decision can be taken in year before us. payee remains same; all facts and circumstances also remain same. Thus, respectfully following order of Tribunal for A.Y. 2007-08, we allow payment of commission of Rs.15,78,624 paid to M/s Northpoint Training & Research Pvt Ltd. ground is allowed. 14. As result, appeal is partly allowed. Order pronounced in court on this 21st day of September,2016. Sd/- Sd/- (C.N. PRASAD) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER st Mumbai, Dt : 21 September, 2016 Pk/- Copy to : 1. appellant 2. respondent 3. CIT(A) 4. CIT 5. Ld. Departmental Representative for Revenue, J-Bench (True copy) By order ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES M/s Northpoint Centre of Learning v. JT. CIT (OSD)-15(1), Mumbai