Itkts Interactive Technolgies Pvt. ... vs Department Of Income Tax

BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No. 1465/Del/2013 Assessment year : 2009-10 ITO, Ward 11(4), Vs. ITKTS Interactive New Delhi Technologies Pvt. Ltd., 13, Institutional Area, Near AIMA Building, Lodhi Road, New Delhi. GIR / PAN:AABCI5926R (Appellant) (Respondent)

Appellant by : Shri T. Vasanthan, Sr. DR Respondent by : Shri Ankit Agarwal, CA

Date of hearing : 08.04.2015 Date of pronouncement : 16.04.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal filed by Revenue against the order of Ld. CIT(A) dated 24.01.2013. The grounds of appeal taken by Revenue are reproduced as under:

"1. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.50,00,000/- made on account of excessive salary paid to Directors.

2. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.2,67,453/- made on account of penalty/ fine imposed by ICICI Bank.

2 ITA No.1465/Del/2013 3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.62, 10,336/- made on account of capital expenditure.

4. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs.2,70,000/- made on account of rent paid by Mrs. Shobna Bhatia in her individual capacity."

2. Ld. D.R. at the outset submitted that there were 4 grounds of appeal. The first ground of appeal relates to excessive salary paid by assessee to its director and therefore, the A.O. has rightly made the addition u/s 40A(2)(b) of the Act. In support of his arguments, the Ld. A.R. submitted that the assessee was not able to demonstrate as to how the salary paid to directors was not excessive. He submitted that Assessee Company was already having competent and able staff to run its day to day operations and, therefore, huge amount of salary paid to directors was excessive and unreasonable.

2.1 Regarding 2nd ground of appeal Ld. D.R. submitted that the assessee was imposed a penalty by ICICI Bank amounting to Rs.2,67,453/-, which had not been added back to its income. Ld. D.R. submitted that Form 3CD issued by auditors of company has clearly mentioned that penalty was imposed by ICICI Bank and, therefore, the A.O. had rightly made the addition.

2.2 Arguing upon 3rd ground of appeal, Ld. D.R. submitted that huge expenditure amounting to Rs.62,10,336/- was incurred on account of advertisement and publicity and the copies of bills raised by the suppliers show that the expenses incurred by assessee were with regard to display charges for hoarding sites in Delhi, Kolkata, Mumbai and Bangalore etc. and 3 ITA No.1465/Del/2013

since the hoardings put up at these places remained for several years which yielding incomes for long periods, therefore the expenses were going to give the assessee benefit of enduring nature, therefore, the A.O. has rightly disallowed the same holding those to be of capital in nature. 2.3 As regards the 4th ground of appeal, Ld. D.R. submitted that the assessee had claimed the expense under the head rent and utility amounting to Rs.10,83,990/- and form the copies of rent agreement filed by assessee it was clear that the director had entered into the agreement with the land lord in her individual capacity. There was no authorization made by Assessee Company in favour of Smt. Shobhna Bhatia, director and moreover, the rented apartment was to be used for residential purposes and not for business purposes and, therefore, the A.O. has rightly made the disallowance.

3. Ld. A.R. on the other hand filed a synopsis whereby he submitted brief arguments in support of deletion made by Ld. CIT(A). Regarding the 1st addition made by A.O. on account of excessive salary, the Ld. A.R. submitted that the salary was paid to two directors who were brother and sister and promoter directors of the company. Both were highly qualified and regarding their qualification, Ld. A.R. invited our attention to paper book pages 36-43 where details of their qualification and experience earned by these directors were placed. He submitted that the directors of the assessee company were earlier working in USA and remuneration received from the assessee company was much lower than salary earned by them in USA. He submitted that these promoter directors got the contacts after making elaborate communication with the customers and therefore, their salary was not excessive as compared to their services provided to the company. He submitted that A.O. cannot dictate as to what the business 4 ITA No.1465/Del/2013

needs of the company should be and he has to judge business priorities from the point of view of a prudent businessman. For this proposition, he relied upon the case laws as listed in his synopsis. Without prejudice the Ld. A.R. submitted that it was incumbent on the part of A.O. to make disallowance u/s 40A(2)(b) for payments made to them after comparing with the fair market value of the services obtained from the directors. In this regard, reliance was placed on the case law of CIT Vs Modi Revelon Pvt. Ltd. 210 Taxman 161. He further submitted that no disallowance u/s 40A(2)(b) can be made if the remuneration is as per the provisions of Companies Act, 1956. He submitted that the assessee company being a private limited company cap as provided by Section 309 is not applicable as sub-section (9) to Section 309 clearly states that capping on remuneration does not apply to private limited companies. Moreover, he submitted that there was no tax avoidance as the assessee was taxed at an effective rate of 30.90% whereas the Directors were taxed at a higher rate of tax i.e. @ 33.99%. In this respect, he invited our attention to paper book pages 49-51 where computation of salary of both the directors was placed. 3.1 Regarding 2nd ground of appeal, Ld. A.R. submitted that the assessee company was engaged in the business of providing support services to entertainment and media business and the amounts charged by ICICI bank was in fact in the nature of recovery of administrative changes which the bank had charged to handle the refund of duplicate charges collected on master card and visa card of various customers. He submitted that assessee had designed a portal which allows purchase of tickets of IPL and other events and for this purpose, the payments were made through ICICI bank and sometimes due to technical faults, the purchase of tickets made by 5 ITA No.1465/Del/2013

clients through this portal lead to debit in account for more than once and accordingly excess amount charged due to above technical fault, was to be refunded to the customers and ICICI bank which had to provide additional administrative services and bear the cost due to the said portal failure of the assessee and therefore, the assessee was charged for such incidents, which was termed by the bank as penalty even though it was just a recovery of administrative charges which was incurred in normal course of business and, therefore, Ld. CIT(A) has rightly deleted the same.

3.2 Arguing upon 3rd ground of appeal, Ld. A.R. submitted that the expenses incurred by the assessee were revenue in nature as the allegation made by A.O. that these expenses are of enduring nature, is not correct as the assessee required publicity only for a very short period for a particular event. It was submitted that specific invoice of suppliers to whom such payments were made, clearly show that such hoardings were made for a limited period of 5-7 days only, therefore, he submitted hat Ld. CIT(A) has rightly appreciated the facts and has rightly deleted the addition. 3.3 As regards the 4th ground of appeal, Ld. A.R. submitted that there was no doubt that the accommodation was residential accommodation but it was being used for the business purposes as one of the directors had to stay in that premises for the purpose of business of the company. He submitted that the agreements entered into by Mrs. Shobhna Bhatia, who was the director of the assessee company, is deemed to have been entered into on behalf of the company as the director is the agent of the company and all the actions taken by directors on behalf of the company are ratifiable.

4. Ld. D.R. in his rejoinder regarding 1st ground of appeal submitted hat the issue can be remanded back to A.O. for making comparison of fair 6 ITA No.1465/Del/2013

market value of the services rendered by the Directors as compared to payments of salary made to them so as to make disallowance u/s 40A(2)(b) of the Act. Regarding the issue of rent, Ld. D.R. submitted that copy of license agreement placed at paper book 111 clearly mentions that the property rented is residential accommodation and there is no mention of fact that the accommodation was taken by Assessee Company. He submitted that everywhere in the agreement it is noted that Smt. Shobhna Bhatia has taken the property on rent and therefore there was no question of agreement having been made by Smt. Shobhna Bhatia as agent of the company.

5. We have heard rival parties and have gone through the material placed on record. As regards the 1st issue of disallowance u/s 40A(2)(b) of the Act, we find that the assessee company had just started the business in an earlier year and during the current year only the appellant could secure success by obtaining contracts for ticketing for IPL matches at Mumbai and Delhi etc. It is also observed that the promoter directors were highly qualified and experienced professionals and the professional work done by these two directors cannot be measured by record of day to day affairs of the company. Moreover, we observe that the Directors were charged to tax at a maximum marginal rates and therefore, rates of tax applicable on their personal income was more than the assessee company, therefore, there is no tax evasion at all. Ld. CIT(A) has deleted the disallowance by holding as under:

"5.2 Regarding Ground No.1 of the appeal, the disallowance of Director's remuneration under section 40A(2)(b), the appellant submitted that comparison with immediate preceding years was unreasonable since in that year the company had just stated business and it was during the current year only that the appellant could secure success by getting contracts for ticketing for event like IPL matches at Mumbai and Delhi and the Commonwealth Youth Games 7 ITA No.1465/Del/2013

in Pune. It was pleaded that considering the nature of the company i.e. Entertainment and Media, the professional expertise and qualifications of both the directors played a vital role in the performance of the company. The Ld. AR also argued that the appellant could achieve success by begging important contracts through professional work done by the two directors, which cannot be measured by the record of day-to-day affairs of the company. It was also submitted that both directors are chargeable to tax at the maximum marginal rate and had paid tax on the above income. Therefore no tax avoidance was ever intended by the appellant company. Regarding the disallowance under section 40 A (2), the Ld. Counsel drew my attention to the following cases:

(i) Hive Communication P Ltd vs. CIT (2011) 201 Tax man 99 (Delhi);

(ii) CIT vs. Edwar Keventer (P) Ltd (1978) 115 ITR 149 (Calcutta); and

(iii) Abbas Wazir(P) Ltd. vs. CIT (2004) 265 ITR 77 (Allahabad)."

5.1 We find that Ld. CIT(A) has made a finding of fact and has rightly held that the tax avoidance was never intended by assessee company and, therefore, we are in agreement with his finding. In view of above, 1sts ground of appeal of Revenue is dismissed.

5.2 The 2nd ground of appeal relates to alleged penalty charged by ICICI bank. We find that the assessee company had created a new portal regarding payments made by clients through ICICI bank and the bank recovered additional administrative charges for making refund of double charges debited to clients account sometimes due to failure of portal. The nature of expenses cannot be classified as penalty charges and rather these expenses were incurred in the normal course of business. Ld. CIT(A) has allowed relief to the assessee by holding as under:

8 ITA No.1465/Del/2013 "5.3 Regarding disallowance of Rs.2,67,453/ on account of penalty charges levied by the ICICI Bank, the appellant submitted that such charges were in the normal course of the business and hence were allowable business expenses under section 37. The Ld. Counsel informed that for the purpose of E-ticketing for the IPL events, the appellant had designed a portal titled "KAYZOONGA.COM" which allowed online purchase of tickets of IPL and other events. For this purpose, the payments were made through the ICICI Bank. It was informed that being a relative new portal, the same was not free from technical faults and therefore, in the current year sometimes the purchase of tickets made by a client through the portal led to making debits in their bank accounts for more than one occasion. Accordingly, the excess amount, which were charged due to the above technical fault was to be re-paid to the customers. However the ICICI Bank, which had to bear additional administrative cost due to the said portal fault, used to charge for such instances. This was termed by the bank as penalty, even though it was just recovery of administrative costs due to technical faults in KAYZOONGA. It was informed that later on, the appellant company made improvement in its portal in order to avoid recurrence of such inconvenience to its customers and Bank. The Ld. AR submitted that though the bank may term such charges as "penalty", in fact there was no breach of any law and therefore, such term should not be interpreted to mean that appellant had breached any law and in respect of which the payments made were penal in nature and not allowable.

In this regard, the Ld. AR relied upon the decision of the Kerala High Court in the case of CIT vs. Catholic Syrian Bank Ld. (2003) 130 Taxman 447/(2004) 265 ITR 177, in which it was held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1}, the Assessing Officer is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature."

9 ITA No.1465/Del/2013 5.3 We find from the above findings of Ld. CIT(A) that the nature of expenses is not in the nature of penalty but are expenses in the normal cause of business and we are in agreement with the findings of Ld. CIT(A) and, therefore ground No.2 of Revenue's appeal is also dismissed. 5.4 Coming to ground No.3 regarding disallowance of advertisement expenses, we find that the purpose of advertisement expense incurred by assessee was to make people aware regarding the fact that tickets were available for sales for a particular match through company's portal and the validity of advertisement was only for the time of ticketing for a particular event being allowed and certainly not beyond the day the event was completed and therefore, such publicity was for a short period and cannot be said to be of enduring benefit. From the copies of advertisement bills placed at paper book 78-84, we find that the display sites were hired for hoarding for periods for 5-10 days and, therefore, it cannot be said that the expenses were of enduring nature. Ld. CIT(A) has recorded this fact in his order which is apparent from para 5.4 of his order which is reproduced below:

"5.4 Regarding the disallowance out of Advertisement expenses of Rs.62,10,336/- the Ld. Counsel informed that the aforesaid expenses were incurred towards advertisement and publicity expenses for hoarding cites in New Delhi, Calcutta, Mumbai and Bangaluru for the purpose of making publicity for sale of tickets for specific events for which the appellant had company begged the contracts. The Ld. Counsel vehemently contested observation of the Ld. AD that such hoardings will remain in place for several years and thereby the appellant will get benefit of enduring nature. It was informed that the purpose of such advertisements was to make people aware that tickets are available for sale for a particular match on the companies' portal and thus the validity of the advertisement was only till the time the tickets of the events were being sold and in any case certainly not beyond the date of the event and thus such publicity was for short time. The Ld. Counsel furnished before me a copy of the invoices for 10 ITA No.1465/Del/2013

M/s Alakh advertisement to whom the payment of advertisement was made, which shows that the said advertising agency had issued invoices in respect of advertisement in respect of particular hoarding sites for the appellant for limited days, 5 to 7 in most cases. In this regard, the Ld. AR placed reliance on the decision of the Punjab and Haryana High Court in the case of CIT vs. liberty Group Marketing Division 2008(173 Taxman 439), in which it was held that the expenditure of glow sign board did not bring into existence any assets and enduring benefit for the business. Similarly, reliance was placed on Delhi Tribunal in the case of ITO vs. Spice Communications ltd. (2010) 35 SOT 78, in which it was held that by incurring expenditure on advertisement and sales promotion, assessee does not acquire any fixed capital assets.

5.5 We are in agreement with the findings of Ld. CIT(A) and, therefore, ground No.3 of revenue's appeal is also dismissed.

5.6 As regards ground nO.4 of appeal, we find that assessee had incurred expenses of Rs.27,000/- per month for making payment of rent for a flat at A/40, 1st floor of building known as Ganga Bhawan Cooperative Housing Society, Mumbai in view of lease and license agreement entered on 01.02.2008 which is placed at paper book pages 111-117. The said agreement has been entered into for a period of 11 months by Mrs. Shobhna Bhatia and the accommodation no doubt is a residential accommodation and the period of lease agreement is from 01.03.2008 to 31.01.2009. In the agreement, there is no mention about the fact that the said premises was taken on rent by Assessee Company and Mrs. Shobhna Bhatia was acting as agent of above said assessee company. Since the above said agreement expired on 31.01.2009, therefore on 1st Feb 2009 vide agreement dated 01.02.2009 which is placed at paper book pages 105 - 110 again agreement was made for a further period of 11 months. This agreement is also for a 11 ITA No.1465/Del/2013

period of 11 months starting from 01.02.2009 to 31.12.2009 and monthly lease fee fixed in this agreement is Rs.20,500/- per month. In this renewed agreement, the same director has signed as director of the assessee company, therefore it can be safely presumed that the earlier agreement dated 01.02.2008 placed at paper book pages 111 onwards was also on behalf of assessee company though the accommodation was a residential accommodation yet the A.O. could not bring any adverse material to demonstrate that the premises was not being used for the business purposes. Ld. CIT(A) has decide this issue in favour of assessee by holding as under:

"6.5 Regarding the Ground No.4 relating disallowance of rent of Rs.2,70,000/-, find that the only ground of which the Ld. AO has made this disallowance, is the finding that rent agreement with the flat owner was signed by the director of the company in her personal capacity and that no evidence regarding her authorization by the company was furnished. The Ld. AO has made no adverse observation regarding the allowability of such expenses under section 37 of the Act, otherwise. I find that the insistence of the Ld. AO to get authorization from the company for the purpose of its day to day business to its directors, was too stringent and impracticable and not required in law. As submitted by the appellant, section 291 of the Act, 1956 provides for general powers of the board to its directors and directors serve as agents of the company and therefore, any transaction carried out by the directors on behalf of the company is a valid transaction. Keeping in view the fact that the company had used this premises for carrying out its business in Mumbai, which was undisputed by the Ld. AO, I hold that the disallowance made by the Ld. A.O. on this ground was unjustified. The addition on this ground is therefore deleted and the appellant gets full relief on this ground also."

12 ITA No.1465/Del/2013 5.7 We find from the above findings of Ld. CIT(A) that the same are based on facts of the case and therefore, we do not find any infirmity in the same. Therefore ground No.4 of Revenue's appeal is also dismissed.

6. In view of above, appeal filed by Revenue is dismissed.

7. Order pronounced in the open court on 16th April, 2015.

Sd./- Sd./-

( DIVA SINGH) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER th Date: 16 April, 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 8/4 Sr. PS/PS 2 Draft placed before author 9/4,15, Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 16/4 Sr. PS/PS 6 Kept for pronouncement 16/4 Sr. PS/PS 7 File sent to Bench Clerk 16/4 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order