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M/S. Deltronix India and Another Vs. Asstt. Commissioner Limited, and Another - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Case NumberI.T.A. Nos. 5498 & 5632 of 2012
Judge
AppellantM/S. Deltronix India and Another
RespondentAsstt. Commissioner Limited, and Another
Excerpt:
.....of the case and in law the ld. cit(a) erred in reducing the disallowances of the rent of guest house to the extent of 50% only of the total claim which being erroneous must be deleted with directions for total relief. 3. the grounds raised in the revenue's appeal read as under:- i) whether the ld. cit(a) under the facts and circumstances of the case and in law was correct in restricting the disallowance of rs. 18,00,000/- out of total disallowance of rs. 36,00,000/- made by the assessing officer on account of rent paid. ii) whether the ld. cit(a) under the facts and circumstances of the case and in law was justified in deleting the addition of rs. 46,90,790/- made by the ao on account of commission paid to m/s keyser india pvt. ltd. iii) whether the ld. cit(a) under the facts.....
Judgment:

Shamim Yahya, AM:

These cross appeals by the Revenue and Assessee emanate out of order of the Ld. CIT(A) and pertain to asstt. year 2008-09.

2. The ground raised in the Assessee's Appeal is that on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in reducing the disallowances of the rent of guest house to the extent of 50% only of the total claim which being erroneous must be deleted with directions for total relief.

3. The grounds raised in the Revenue's appeal read as under:-

i) Whether the Ld. CIT(A) under the facts and circumstances of the case and in law was correct in restricting the disallowance of Rs. 18,00,000/- out of total disallowance of Rs. 36,00,000/- made by the Assessing Officer on account of rent paid.

ii) Whether the Ld. CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 46,90,790/- made by the AO on account of commission paid to M/s Keyser India Pvt. Ltd.

iii) Whether the Ld. CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 33,50,000/- made by the AO on account of deemed income u/s. 2(22)(e) of the I.T. Act, 1961.

iv) The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing.

3. Apropos disallowance of Rs. 36 lacs on account of rent paid

In this case as per the assessment order, the assessee company has paid Rs. 36 lacs for the year under consideration to one M/s Sonia and Co. Pvt. Ltd. for use of its premises at M-66-67, Village Jaunapur, Near Sultanpur, Delhi 11--47 as guest house. It is observed by the AO that the Directors of the assessee company, namely Mr. Kapil Gupta and Ms. Deepali Gupta are holding 24.80% shares in each in the above mentioned M/s Sonia and Co Pvt. Ltd. However, this was not mentioned in the Tax Audit Report in Form 3CD. Further, as per the local enquiry report of the ITI, the said guest house was located in a farm house. The property had the signboard of "Sonia Farm House" and there was no signboard of the appellant company outside the property. The gatekeeper did not open the gate of the property for verification and enquiry with nearby people did not point to the use of the premises for any guest house or conference purpose. Further, it was observed by the AO in the assessment order that there was no guest house register and the salary, electricity and telephone expenses for the premises was meager which does not justify use of the premises as a guest house. The agricultural receipt from the farm house was also shown as income in the PandL A/c of M/s Sonia and Co.

It was explained by the appellant during the assessment proceedings that the said premises consisted of approximately 13 bighas of land and building appurtenant thereto. While the guest house had been taken on rent by the appellant for use as guest house and for in-house training of staff, conferences etc., the natural produce from the adjoining farm belonged to the landlord, M/s Sonia and Co. Pvt. Ltd., and was duly shown by MIs Sonia and Co. as agricultural receipt. It was also submitted that there was no requirement for putting the signboard and maintaining guest register as it was for use of the company's guests and staff and was not meant for being let out as a public guest house. It was also submitted that the matter related to A.Y. 2007-08, while the Inspector visited the property only on 13.12.2010 and had given a report on the basis of hearsay without any evidentiary value. However, the AO has rejected the above contention of the appellant and has disallowed the rent debited at RS.36 lacs.

4. Before the Ld. CIT(A) assessee filed written submissions alongwith application under Rule 46A and paper book. Ld. CIT(A) obtained remand report from the Assessing Officer and further rejoinders from the assessee. Ld. CIT(A) noted that assessee took the guest house on rent vide lease agreement dated 9.3.2006 for a period of three years at a monthly rent of Rs. 3 lacs. That at the time of entering into the agreement, the premises belonged to M/s Sonia and Co. Pvt. Ltd. which had different Directors and that the shares of the above company were acquired by the Directors of the assessee company at a later stage; that the rent was fixed at an arm's length basis and hence should be allowed as business expenditure. It was pointed out that the rent was paid through account payee cheques and has been duly shown by M/s Sonia and Co. Pvt. Ltd. in its accounts and that the above company is regularly assessed to income tax. That identical amount of rent for the above guest house paid in the earlier year has been accepted by the Department. That the report of the Inspector on the basis of a perfunctory visit and anonymous hearsay cannot be the basis for rejecting the appellant's claim. That the caretaker of the guest house was presented before the AO during the assessment proceeding on 20.12.2010, but the AO did not examine him. That the assessee was not given cross examination of the alleged third parties from whom the AO might have made local enquiry.

5. Considering the above, Ld. CIT(A) held that he had found that Assessing Officer has based his finding on the Inspector's report which was quite inadequate since as per the report itself the Inspector was not allowed entry into the premises by the watchman and his impression was based on nearby enquiry of which no details about the persons contacted and there whereabouts etc. are given in the report, as reproduced in the assessment order. Ld. CIT(A) opined that in such a situation, Assessing Officer could have caused a proper enquiry or even a survey or at least could have asked the assessee to assist in a site visit to find out the extent of use of the guest house. Ld. CIT(A) observed that Assessing Officer has failed to do so. Hence, he held that disallowance of entire amount of rent paid of Rs. 36 lacs for the year under consideration cannot be logically sustained.

6. Ld. CIT(A) observed that he found that assessee by own submissions had admitted that such property was not frequently used by the assessee for its business purposes. That in fact, considering that the guest house was located inside a farm house, its use by the Directors for personal purpose cannot be denied. Considering the same Ld. CIT(A) was of the opinion that allowing 50% of the rent claimed as pertaining to the business of the assessee would meet the end of justice. Accordingly, Ld. CIT(A) confirmed the impugned addition to the extent of Rs. 18 lacs and the balance of Rs. 18 lacs was deleted.

7. Against the order the Revenue and Assessee are in cross appeals.

8. Ld. Counsel of the assessee submitted that all the necessary details were filed before the Ld. CIT(A) and also before the Assessing Officer in remand proceedings. He submitted that the rent agreement of rent was executed in prior period when the Director had no interest in M/s Sonia and Co. Pvt. Ltd. Hence, the rent agreement was entered at arm's length. Further the Department had regularly allowed the same. He further submitted that the Report of the Inspector without proper visit and anonymous hearsay cannot be basis after rejecting the assessee's claim. Hence, he claimed that the entire expenditure of rent was genuine and properly explained and should be allowed as such.

9. Ld. Departmental Representative on the other hand relied upon the orders of the Assessing Officer and argued that the amount of rent paid was not allowable on the facts and circumstances of the case.

10. We have carefully considered the submissions and perused the records. We find that the assessee has paid rent of Rs. 3 lacs per month for guest house taken on rent by the assessee for use as guest house, in-house training of the staff and conference etc. Assessing Officer has disallowed the same on the basis of Report of Income Tax Inspector. The said Income Tax Inspector could not get into the campus of the guest house. He obtained information from nearby people and concluded that the premises was not being used for the purpose claimed by the assessee. The Assessing Officer has also noted that the premises was owned by the company in which the Directors are substantial interested. Assessing Officer has also drawn inference by holding that no guest house register was produced and the salary, electricity and telephone for the guest house was meager.

10.1 On the other hand it is the claim of the assessee that assessee has entered into an agreement for the said premises, sometimes ago, when the Directors were not interested in the said premises. Hence, it is the claim of the assessee that the rent agreement is at arm's length price. Further, it has been submitted that addition cannot be made on the basis of the Report of ITI who did not enter into the premises. It is also claimed that the information gathered by the ITI was a mere hearsay without any evidentiary value. It has further been submitted that the assessee has not been given a chance to confront the persons from whom the Income Tax Inspector obtained adverse report for the assessee. It has also been claimed by the assessee that care taker of the guest house was presented before the AO during the assessment proceedings on 20.12.2010, but the AO did not examine him.

10.2 Ld. CIT(A) on the other hand, has accepted the assessee's submission that Assessing Officer has based his finding on the Inspector's Report which was inadequate since as per the Report, the Inspector, who was not allowed to enter into the premises by the Watchman and his impression was based on nearby enquiry for which no details about the persons contacted and their whereabouts etc. are given in the Report. Ld. CIT(A) has opined that in such a situation, Assessing Officer could have caused proper enquiry or even a survey or atleast could have asked the assessee to assist in a site visit to find out the extent of use of the guest house. Hence, Ld. CIT(A) was not fully convinced regarding the disallowance made by the Assessing Officer. However, he has considered that property was not frequently used by the assessee for its business purposes and it was located inside a farm house and its use by the Directors for personal purpose cannot be denied. Hence, Ld. CIT(A) was of the opinion that 50% of the rent claimed should be allowed as pertaining to the business of the assessee.

10.3 Now we find that it is true that Assessing Officer has based his finding on the Inspector's Report which was inadequate as explained above. Ld. CIT(A) has accepted this contention. He was of the opinion that Assessing Officer could have caused proper enquiry in this regard. It is not the case of the Ld. CIT(A) has himself conducted the said enquiry. We find that powers and duties of the Ld. CIT(A) are co- terminus with that of Assessing Officer. In such situation, if the CIT(A) was of the opinion that matter needed proper enquiry or even a survey he should have got the same done. Without getting the same done, Ld. CIT(A) has deleted the part of the disallowance. Assessing Officer has also not examined the watchman who was produced by the assessee for examination. In our considered opinion, the matter has not been properly enquired into. In our considered opinion, interest of justice will be served, if the matter is remitted to the file of the Assessing Officer to consider the issue afresh. We hold and direct accordingly. Needless to add that the assessee should be granted adequate opportunity of being heard.

10.4 In this regard, we place reliance of the Hon'ble Apex Court decision in the case of Kapurchand Shrimal vs. CIT,131 ITR 451 wherein it was that it is the jurisdiction as well as duty of the Appellate Authority to correct the lacuna in the order of the authorities below and issue appropriate direction where needed.

11. Apropos addition of Rs. 46,90,790/- on account of commission paid

In this case as per the assessment order, the assessee has paid commission of Rs. 82,56,692/- and Rs. 20,53,559/- on sale of canisters and HT cords to M/s Kayser Pvt. Ltd. which holds 30.38% shares in the assessee company. The assessee has also paid Rs. 14,16,725/- to the above company on account of other services rendered. The total payments made to M/s Kayser India Pvt. Ltd. during the year under consideration thus works out to Rs. 1,17,26,976/-. On being asked by the AO, it was explained by the assessee that M/s Kayser India Pvt. Ltd. was incorporated on 4.9.1996. This company had technical collaboration with Kayser Automative Group of Company of Germany for manufacture of Canisters of HT cords and supply of the same to various automobile manufactures such as Maruti Suzuki, Hundai and other car manufacturers. Subsequently, the business of M/s Kayser India Pvt. Ltd. was transferred to the assessee company for which the assessee pays commission on sales to M/s Kayser India Pvt. Ltd. M/s Kayser India Pvt. Ltd. also undertakes marketing and customer relationship and maintenance activities. It also provides technical assistance to the assessee company from time to time and hence, the commission paid is a business expenditure. However, it was observed by the AO that out of total receipts of M/s Kayser India Pvt. Ltd. at Rs. 1.33 crores, a sum of Rs. 1.17 crores which is almost 90% came from the assessee company. The AO also observed that there were not much of expenses in the hands of the M/s Kayser India Pvt. Ltd. The AO, accordingly, has disallowed 40% of total payment made to M/s Kayser India Pvt. Ltd. which works out to Rs. 46,90,790/- as being excessive.

12. Before the Ld. CIT(A) assessee produced copy of agreement on Canister business dated 6.10.1999 between appellant company and M/s A. Kayser Automative Systems GmbH, Germany. The same was admitted under Rule 46A by the Ld. CIT(A). Assessee further submitted the written submissions. Ld. CIT(A) obtained the remand report from the Assessing Officer as well as rejoinders from the assessee.

13. Considering the above, Ld. CIT(A) observed that it was a matter of record that commission has been paid by the assessee to M/s Kayser India P Ltd. for more than 10 years after the business of the later company was taken over by the assessee. That the same had been accepted by the Department consistently from year to year; that further as per the tripartite arrangement between M/s Kayser Automative Systems GmbH, Germany, M/s Kayser India Pvt. Ltd. and the assessee company, the above payment has been made on account of technical and commercial facilities taken over and utilized by the assessee from M/s Kayser India Pvt. Ltd. from the year of such takeover. That it is also pointed out that both M/s Kayser India Pvt. Ltd. and the assessee company are private limited companies falling under the same tax bracket and hence there is no case of loss of revenue in the matter. The details of requirements under section 40A(2)(b) were also produced by the assessee during assessment proceeding and the same has not been disputed by the Assessing Officer.

14. Considering the above facts and circumstances of the case, CIT(A) held that the estimated disallowance made by the AO cannot be justified. Accordingly, the impugned addition of Rs. 46,90,790/- was deleted.

15. Against the above order the Revenue is in appeal before us.

16. We have heard both the counsel and perused the records. We find that there is a tripartite arrangement between M/s Kayser Automative Systems GmbH, Germany, M/s Kayser India Pvt. Ltd. and the assessee company. This agreement was duly produced before the authorities below. The impugned payment has been made on account of technical or commercial facilities taken over and utilized by the assessee from M/s Kayser India Pvt. Ltd. from the year of such takeover. The said commission has been paid to M/s Kayser India Pvt Ltd. for more than 10 years after the business of the later company was taken over by the assessee. The inference drawn by the Assessing Officer regarding non submissions of details in the Tax Audit Report and the low expenses incurred by M/s Keyser India Pvt. Ltd. are not cogent.

It is further noted that commission has been paid not only for technical services, but also because of the fact that the entire business of the company has been made transferred to the assessee. We also note that M/s Keysar India P Ltd. was originally in technical collaboration with M/s Kesar Automative Group, Germanay. M/s Keysar India P Ltd. was manufacturing canisters and HT cords and supplied to Maruti Suzuki, Hundai Ltd. and other car manufactures of India. Subsequently the business of M/s Kyeser India Pvt. Ltd. was transferred to the assessee Daltronix India Ltd. At the time a tripartite agreement was entered into between the assessee and the Keyser India P Ltd. and the foreign technical corroborators of M/s Keyser India Pvt. In lieu thereof, M/s Daltronix India Ltd. has paid commission on the sale to Keysar India P Ltd.. Besides the Kesar India P Ltd. also undertook activities and customers relationship and maintenance activities. M/s Keysar India P Ltd. has also transferred its entire orders from customers to the assessee.

Assessee has duly provided all the necessary particulars and details in the appellate proceedings as well as in the remand proceedings. Lack of substantial expenditure by Keysar India Pvt. Ltd. and absence of large number of staff as taken by the Assessing Officer to draw adverse inference are not sustainable. The payment has been made by the assessee on account of technical and commercial facilities taken over and utilised by the assessee from M/s Keysar India P Ltd. from the year of such takenover. The Assessing Officer has also not brought on record any other case of similar standing in an identical situation from whose example he could show that there was an extra consideration attached in the subject case, over and above the commercial consideration as professed. We further note that assessee's submissions that M/s Keysar India P Ltd. and the assessee company are private limited companies falling under the same tax bracket and hence there is no case of loss of revenue in the matter.

17. We further note that AO has held that 40% of the commission payment is excessive and not allowable. We do not find any basis whatsoever in this disallowance percentage. In our considered opinion, ld. CIT(A) has passed the cogent order which does not need any interference on our part. Accordingly, we affirm the same.

18. Apropos deletion of addition of Rs. 33,50,000/- made by the AO on account of deemed income u/s. 2(22)(e) of the I.T. Act.

In this case as per the assessment order, the assessee company has received Rs. 33,50,000/- from M/s Sonia and Co. Pvt. Ltd. during the year under consideration. It is observed by the AO that Sh. Kapil Gupta and Smt. Deepali Gupta, Directors of the assessee company hold substantial shares in the above payor company. It was explained by the assessee during the assessment proceeding that the payor company did not have any accumulated profits to be covered under the provisions of section 2(22)(e) of the Act. The assessee also filed calculation of the accumulated profits as per Annexure A to letter dated 15.10.2010 filed with the AO. It was also submitted that the amount received was in the nature of commercial advance made during the course of business transactions. However, the AO has ignored the above contention and has added the above amount as deemed divided u/s 2(22)(e) in the hands of the assessee company.

19. Against the above order the assessee appealed before the Ld. CIT(A) and submitted elaborate submissions and documents. Ld. CIT(A) obtained the remand report also. Ld. CIT(A) also noted the assessee's submission in the alternative that assessee was not a shareholder of the Payor company, M/s Sonia and Co. P Ltd. and hence, in terms of decision of Bhaumik Color Pvt Ltd. 313 ITR (AT) 146 (Mum) (SB) and M/s MCC Marketing Pvt. Ltd. (2012) 343 ITR 351 (Del.), no addition can be made in the hands of the assessee u/s. 2(22)(e) of the Act. Considering the above, Ld. CIT(A) concluded as under:-

"On careful examination of the matter, I find that as per settled law, commercial advances made as part of business transactions are not exigible to tax as deemed dividend u/s 2(22)(e) of the Act. The AO has also not brought out any material evidence in the assessment order or in the remand report to make a case for invoking the above deeming section. The without prejudice argument of the assessee as mentioned above also holds good. Considering the above, the impugned addition of Rs. 33,50,000/- is deleted."

20. Against the above order the Revenue is in appeal before us.

21. We have heard both the counsel and perused the records. We find that it is undisputed that assessee was not a share holder in the payor company and M/s Sonia and Co. and hence, in terms of the judicial precedents cited above, no addition can be made in the hands of the assessee u/s. 2(22)(e) of the Act. It has been expounded that addition u/s.2(22)(e) can be made only if the assessee is a registered shareholder of the payor company. Under the circumstances, respectfully following the precedent, we do not find any infirmity in the order of the Ld. CIT(A) and hence, we uphold the same.

22. In the result, the appeal of the assessee is allowed for statistical purpose and the Revenue's appeal is partly allowed for statistical purposes.


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