Agfa India P. Ltd, Mumbai vs Assessee

"A"

IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER

I.T.A. No.3426 to 3428 /Mum/2008 ( Assessment Year : 2002-2003 to 2004-05)

Agfa India Private Ltd., The Asstt. Commissioner Technosoft Knowledge of Income Tax - Rg. 1, Vs. Gateway, Vardaan Building, 2 n d floor, B-14, Lower Ground Flo or, Road No. 1, M.I.D.C., Wagle Estate, Wagle Industrial Estate, Thane (West) - 400 604. Thane (West). PAN : AABCB2567 K ( Appellant) .. ( Respondent)

Appellant by Shri F.V. Irani Respondent by : Shri Rudlop N. D'Souza Date of Hearing : 03-12-2014 /Date of Pronouncement : 23-01-2015

ORDER PER R.C. SHARMA, A.M. :

These are the appeals filed by the assessee directed against the order of ld. CIT(A) -II, Thane for the A.Y. 2002-03, 2003-04 & 2004-05. Common grounds are involved in all these appeals, therefore, all the appeals were heard together and disposed by this consolidated order for the sake of convenience.

Grounds taken in the A.Y.2002-03 reads as under :-

―Ground No. 1 - Disallowance of Sales & Promotional expenses of Rs. 4,46,000.

Ground No. 2 - Ad-hoc disallowance of Rs. 7,22,445 being 1/4 t h 2 ITA Nos.3426to 3428/M/08

of aggregate of reimbursement of residential telephone and mobile expenses of the employees .

Ground No. 3 - Ad-hoc disallowance of Rs. 1,49,875 being 1/3rd of the aggregate entertainment expenses.

Ground No. 4 - Ad-hoc disallowance of Rs. 1,64,792 being 1/3rd of the aggregate promotional expense.

Ground No. 5- Ad-hoc disallowance of Rs. 6,99,284 being 1/5th of the foreign travel expenses of employees other than Managing Director

Ground No. 6 - Disallowance of foreign exchange loss of Rs. 4,66,018 arising on account of revaluation of forward contract. Ground No. 7 --Commission expenses of Rs. 10,72,801 disallowed in financial year 2000-01 and reversed (luring the previous year not reduced from taxable income.

Ground No. - 8 Interest of Rs. 1,12,24,491/- on delayed payment of purchase consideration disallowed on the contention that it is a capital expenditure.‖

2. Rival contentions have been heard and record perused. Facts in brief are that assessee company is engaged in the marketing & third party manufacturing of System Imaging Products, Graphic system products, Medical Diagnostic Imaging Products and Nondestructive Imaging Products. During the course of scrutiny assessment for the A.Y.2002-03, the A.O. disallowed sales promotion expenses of Rs. 4,46,000/- incurred on ―Photonika Fair‖ on the plea that documentary evidence could not be produced. By the impugned order, the ld. CIT(A) confirmed the disallowance. It was contended by the ld. A.R. that the assessee has participated in various Trade Exhibitions and Fairs related to its business, many of which are held annually. During the year, the assessee has participated in ―Photonika Fair. As per the ld. A.R., the expenses incurred for the purpose of assessee's business and the A.O. is not justified in disallowing the same.

3. We have considered the rival contention and found that the assessee has not furnished any documentary evidence for the expenses incurred on fair etc neither during the assessment proceeding nor during the appellate 3 ITA Nos.3426to 3428/M/08

proceeding. Even before the Tribunal, no evidence was furnished by the assessee to substantiate the claim of actually incurring of expenses. We do not find any reason to infer in the action of the lower authorities disallowing the promotional expenses of Rs. 4,46,000/- made by the A.O.

4. The A.O. also disallowed 1/4th of telephone expenses reimbursed to employees. The A.O. concluded that Rs. 7,22,445/- being 1/4th of the aggregate mobile and telephone expenses reimbursed to employees (Rs. 26,60,611/-) and residential telephone expenses of Managing Director (MD) (Rs. 2,29,169/-) were attributable towards personal use and thereby liable for disallowance in computing the taxable income. By the impugned order, the ld. CIT(A) confirmed the disallowance.

5. It was contended by the ld. A.R. that the AO has failed to appreciate that a Company, being a body corporate, there cannot be any disallowance of any expenditure on the ground that it is personal in nature. Such disallowances are generally applicable in case of proprietary and partnership firms where the owners may extract personal benefit under the garb of business expenses. Hence no question of any personal expenses arises in its case. It was further submitted that the A.O. has made the said disallowance on ad-hoc basis on presumption that there has to be some personal element. He has, however, not brought to record any evidence to this effect to justify his contention. The disallowance is based totally on surmises and conjectures ignoring the bonafide nature of expenses and ignoring the audited financial statements of the assessee.

6. We have considered the rival contention and found that the assessee has furnished details in respect of reimbursement of telephone and mobile expenses of its employees vide letter dated 22-3-2005. The genuineness of the expenses incurred was not in doubt and as per the terms of employment, the assessee has reimbursed 1/3rd of expenses incurred by the employees on 4 ITA Nos.3426to 3428/M/08

telephone and mobile. Even if there are any personal expenses, they can be treated as perquisite in the hands of the employees. As per Rule 3(8) of Income Tax Rules, 1962, reimbursement of telephone expenses are not to be treated as perquisites in the hands of the employees with effect from A.Y. 2002-03. The Hon'ble Gujarat High Court in the case of Sayaji Iron & Engg. Co. vs. CIT [2002] 253 ITR 749 (Guj) held that in a case of corporate entity, no disallowance can be made on account of personal use by the Director/employees. Respectfully following the proposition laid down by the Hon'ble Gujarat High Court, we do not find any merit in the disallowance made in respect of reimbursement of telephone and mobile expenses.

7. Similarly, an adhoc disallowance of Rs. 1,49,875/- being 1/3rd of the entertainment expenses was confirmed by the ld. CIT(A) by observing that it is attributable to personal use therefore liable to be disallowed. An adhoc disallowance of Rs. 1,64,792/- being 1/3rd promotional expenses were also made on the ground that no third party evidence has been obtained and produced by the assessee.

8. We have considered the rival contention and found that incurring of expenditure on promotion of business was not in dispute. Actual payment was also not disputed by the A.O. merely because the confirmation from third party to whom such services were rendered, could not be furnished, the A.O. has made the disallowance. We found that in normal business parlance on Diwali and other festive occasions, gifts are distributed to various customers and clients, however, no receipt for such gifts are taken. The A.O. declined the claim of deduction merely on the plea that no third party evidence had been obtained, is not a valid reason for disallowance. Keeping in view the fact that assessee had furnished full details of expenses along with supporting bills, vouchers, there is no reason for making such adhoc disallowance. The A.O. is directed to allow the expenses of Rs. 1,64,792/-.

5 ITA Nos.3426to 3428/M/08 9. The A.O. concluded that Rs. 1,49,875/- being 1/3rd of the entertainment expenses of Rs. 4,49,364/- were attributable towards personal use and thereby liable for disallowance. The assessee has incurred entertainment expenses mainly on account of hospitality provided to its business associates. The said expenses have been incurred by the assessee during he course of carrying of its business on the principle of commercial expediency. Keeping in view the reasoning given in para 8, A.O. is directed to delete the disallowance of Rs. 1,49,875/-.

10. The A.O. has made adhoc disallowance of s. 6,99,284/- being 1/5th of the foreign travel expenses of employees other than MD on the contention that it is personal in nature. We found that the A.O. concluded Rs. 6,99,284/- being 1/5th of the foreign travel expenses of employees (other than MD) of Rs. 34,96,174/- were attributable towards personal purposes and thereby liable for disallowance in computing the taxable income of the assessee.

11. Reliance was placed by the ld. A.R. on the decision of Hon'ble Delhi High Court in the case of Continental Seeds & Chemicals Ltd. vs. ACIT (2003) SOT 393 (Delhi), in the case of Mahendra Oil Cake Industries (P.) Ltd. v. ACIT (1996) 55 TTJ 711 (Ahd.) and in the case of Raymon Glues & Chemicals v. IAC (1993) 46 TTJ 63 (Ahd.)

12. The Hon'ble Delhi High Court in the case of Continental Seeds & Chemicals Ltd. (supra) held as under:-

"The Income Tax Appellate Tribunal in this case has held that where the assessee provided all details in respect of foreign travel showing that the saine was for business purposes and, the Commissioner (Appeals), without placing any material or evidence or cogent reason, disallowed a part of such expenditure based on ad hoc and estimated basis, such addition could not be sustained.‖

13. We have considered the rival contention and found that the assessee had incurred an amount of Rs. 34,96,174/- on account of foreign travel by its 6 ITA Nos.3426to 3428/M/08

employees other than MD on business tours undertaken by them during the course of their employment with the assessee. The assessee during the course of assessment proceedings had furnished all the details as requested by the AO including the name of the employee, place visited, purpose of the visit etc. in respect of the foreign travel. The purpose of visit of employees was to attend business meetings, fairs and exhibitions, training etc. It was further clarified that the expenses incurred were only on its employees and did not include any expenses incurred on the relatives of the employees. -As the travel expenses are genuine expenses incurred wholly and exclusively for the purpose of business and are revenue in nature and hence should be allowed as deductible expenses under section 37(1) of the Act.

14. In view of the above discussion, we do not find any merit for the adhoc disallocance made by the A.O. in respect of foreign travel expenses.

15. In the Ground No. 6 of its appeal, the assessee has disputed the disallowance of foreign exchange loss of Rs. 4,66,018 on forward exchange contracts entered by assessee. The AO concluded that foreign exchange loss of Rs. 4,66,018/- arising on account of revaluation of forward contract at the year end is in the nature of contingent liability and therefore not allowable as deduction under section 37(1) of the Act until the year when it crystallizes.

16. We have considered the rival contention and found that the transaction entered by the assessee is on revenue account i.e. to safeguard itself from potential risks arising from foreign currency fluctuations in respect of payments for the imported raw materials. Since the payment was on revenue account, the A.O. is directed to allow the loss incurred on revenue account u/s 37(1) of the Act.

17. Ground No. 7 & 8 was not pressed by the ld. Counsel for the assessee and accordingly the same are dismissed as not pressed.

7 ITA Nos.3426to 3428/M/08 18. The ground taken with regard to the disallowance of foreign exchange loss, reimbursement residential telephone, mobile phone expenses of employees, disallowance of 1/6th of foreign travel expenses of employees, non allowance of claim of exchange loss are common in A.Ys. 2003-04 and 2004-

05. We have discussed all these issues while disposing appeal for A.Y. 2002- 03 and accordingly we direct the A.O. to follow the same reasoning given hereinabove for A.Y. 2002-03.

19. In A.Y. 2003-04, the assessee has also aggrieved for the disallowance of commission expenses of Rs.13,38,363/-. In the course of assessment proceedings, the A.O. observed that the assessee had debited Rs. 2.38 crores towards commission. The assessee's representative was requested to file the details of this commission payments giving the specific details of name and addresses of the recipient, purpose for which the commission was paid, the nature of services rendered and~ also to file confirmation from the recipient. The assessee's representative during the course of assessment proceedings filed the various details called for but could file confirmation letters in respect of payment aggregating to Rs.2,25,17,597 confirmation only and in respect of the balance payments they could not file confirmation to the tune of Rs. 13,38,36/-. Since no confirmation was filed in respect of commission payment of Rs.13,38,363/- the A.O. disallowed the same. Vide the impugned order, the ld. CIT(A) confirmed the disallowance.

20. Ld. AR placed on record the order of Tribunal in assessee's own case for the A.Y.2001-02 dated 18.1.2008, wherein claim of commission expenses was allowed.

21. We have considered the rival contention and found that the assessee could not file even confirmation regarding the receipt of commission by the recipient. Thus the assessee has failed to discharge the primary onus of proving that commission so paid was received by the person rendering the 8 ITA Nos.3426to 3428/M/08

services. Such confirmation not only establishes fact of services having been actually rendered but also confirmation by the person receiving payment for such services. In the absence of confirmation by the person rendering services the AO even cannot enquire regarding ... of person rendering services. The detailed finding recorded by the lower authorities for disallowing the claim of commission has not been controverted by bringing any positive material on record. However, in the A.Y.2001-02, Tribunal has allowed commission expenses by observing that assessee had discharged its primary onus. However, confirmation for rendering services and receipt of payment by the persons, who rendered services was not be filed before lower authorities nor even before us. Had the assessee filed such confirmation before the Tribunal, we would have restored the matter back to the file of AO for taking cognizance of such confirmation. In the absence of such confirmation for rendering services and receipt of commission income, expenses claimed on account of commission cannot be allowed. As the facts during the assessment year 2003-04 and 2004-05 are different, conclusion drawn by Tribunal in A.Y.2001-02 cannot be applied to these years. We accordingly confirm the disallowance of commission of Rs.13,38,363/- in A.Y. 2003-04.

22. In A.Y. 2004-05 also the assessee is aggrieved for disallowance of the commission expenditure amounting to Rs.36,32,400/-. The contention of assessee was that the assessee has filed 3rd party confirmations obtained from the agents/service providers with detailed reconciliation of sales made and commission paid. The A.O. found that out of eight parties, seven parties have denied the involvement of any 3rd party in the transaction. Other parties also denied the involvement of any 3rd party. Thus the assessee could not establish the genuineness of the expenditure so claimed. The findings recorded by the lower authorities have not been controverted. Accordingly we confirm the action of the lower authorities for disallowance of commission of Rs. 36,32,400/-. As discussed in para 20, the order of Tribunal in A.Y.2001- 9 ITA Nos.3426to 3428/M/08

02 will not apply to facts of A.Y.2004-05 which are different.

23. In the result, appeals of the assessee are allowed in part in terms indicated above.

Order pronounced in the open court on 23/01/2015.

23/01/2015

Sd/- Sd/- (SANJAY GARG) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated RK , Sr. PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A) -II, Thane 4. / CIT -II, Thane 5. / DR, ITAT, Mumbai A Bench

6. Guard file. / BY ORDER, //True Copy// (Dy./Asstt. Registrar) / ITAT, Mumbai