Muchhala Magic Land P. Ltd, Mumbai vs Assessee

आयकर अपील सं./I.T.A. No. 7202/Mum/2011 ( नधारण वष / Assessment Year: 2008-09) Muchhala Magic Pvt. Ltd. Dy. CIT-8(2), Amar Mahal, Near Chandan Cinema, बनाम/ 209, Ayakar Bhavan, Juhu, Mumbai-400 049 Vs. M. K. Road, Mumbai - 400 020

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AABCM 1017 B (अपीलाथ /Appellant) : ( यथ / Respondent)

अपीलाथ क ओर से / Appellant by : Shri D. C. Jain यथ क ओर से/Respondent by : Shri Love Kumar

सुनवाई क तार ख / : 05.02.2015 Date of Hearing घोषणा क तार ख / : 05.05.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-17, Mumbai ('CIT(A)' for short) dated 17.08.2011, partly allowing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 09.12.2010.

2. The assessee is a company incorporated under the Companies Act, 1956, running an amusement park. Its' appeal raising several grounds, we shall take up the same in seriatim. The first ground is qua the disallowance of cash expenditure u/s. 40A(3) in the 2 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

sum of Rs.47,050/-. The same was explained during the assessment proceedings to be by way of cash gifts to staff, ranging from Rs.100 to Rs.1000/- per employee, on the occasion of the annual day of the park, so that section 40A(3), proscribing allowance of expenditure in the sum of Rs.20,000/- or more, otherwise allowable, where paid otherwise by an account payee cheque or account payee draft, is not attracted. The same did not find favour with the Assessing officer (A.O.) as no bills/vouchers in support of the claim were produced by the assessee. The same found endorsement with the ld. CIT(A) in appeal. The expenditure had been booked by way of a singly entry of Rs.47,050/- on 29.05.2007. No evidence had been produced to exhibit that the purchases were less than Rs.20,000/- each, so that section 40A(3) shall not apply. Aggrieved, the assessee is in appeal.

3. We have heard the parties, and perused the material on record. Without doubt, section 40A(3), a non obstante clause, would apply to an expenditure incurred in a sum in excess of Rs.20,000/-, where it is paid for otherwise than by the stated mode of account payee cheque/bank draft. The disallowance is attracted with reference to the mode of payment, and not for the expenditure per se. In the instant case, however, the assessee claims to have paid directly to the staff on the occasion of the birth date of the water park. There is, therefore, no question of production of any purchase vouchers. The assessee, who has booked the expenditure by way of a single entry in its books of account, ought to have, in our view, led evidence to substantiate its claim of the expenditure being by way of cash paid to staff in sums ranging from Rs.100 to Rs.1000/-, so that each payment, constituting an independent expenditure, is less than Rs.20,000/-, which we observe to be its consistent stand throughout. The matter is, accordingly, restored back to the file of the A.O. to allow the assessee an opportunity to exhibit its claim, and who shall decide the same in accordance with the law per a speaking order. We decide accordingly.

4. Ground 2 concerns the direction by the ld. CIT(A) to treat the business promotion expense, incurred and claimed by the assessee in the sum of Rs.10,33,540/-, as donation 3 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

and, further, allow deduction, where and to the extent exigible, u/s.80-G of the Act. The expenditure, incurred by way of sponsorship to various events, was in the first instance found not allowable by the A.O. in the absence of deduction of tax at source, so that section 40(a)(ia) stood attracted. To illustrate, the assessee had (partly) sponsored a marathon race, conducted by Thane Marathon Trust, paying Rs.5,00,000/- toward the cost of 5000 T-shirts at the rate of Rs.100/- each. Similar payments had been made to students of schools and colleges, participating in the annual functions of their Institutes, which had been clarified by the Board per its Circular No. 715/08.08.1995 to be in essence an agreement for carrying out a work of advertisement, so that section 194C is applicable (refer para 5/pgs.3-5 of the assessment order). In appeal, it was explained that the payment for T-shirts did not attract TDS. The payment of Rs.73,315/- to IAAPI (Indian Association of Amusement Parks and Industries) was for providing space and infrastructure. The balance payments were to school and college students, by way of donation, so as to attract them to the amusement park. The ld. CIT(A) did not agree to the said payments being for business purposes or for advertisement in-as-much as there was nothing on record to show that the assessee was thereby promoting its brand, or the expenditure was by way of hoardings/publicity material, so as to qualify as advertisement expenditure. The same was only in the nature of donation, which could not be allowed as an expense. He, accordingly, directed for the same being treated as such and, further, to be allowed deduction u/s.80-G, where applicable.

5. We have heard the parties, and perused the material on record.

Our first observation is that the payment could be said to be a donation where it is for an altruistic or charitable purpose. In the present case there is no alluding to any public cause, but only toward the promotion of its business by the assessee. Whether the same, i.e., the business purpose, is proved or not, so that, where not, the consequence of disallowance shall follow, is another matter. Further, even where the expenditure is otherwise deductible, i.e., its business purpose is proved, the same, where the expenditure is one to which the provisions of Chapter XVII-B are applicable, its deduction shall be 4 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

subject to deduction and payment of tax at source thereon by the defined period. Breach thereof would defer the allowability to the year where so deducted and paid. The ld. CIT(A) found the business purpose of advertisement, or business advantage in general, as missing. However, we observe no opportunity by him to exhibit so to the assessee, who pleaded its case before him toward the sums as being not exigible to deduction of tax at source. It could, for example, well be that the T-shirts given to the participants of the marathon run bear the assessee's name or insignia or the like, for it to have advertisement value, and which also defines its business purpose. Similarly, payment to IAAPI, which, besides Rs.73,315/-, also includes two other payments of Rs.26,292/- and Rs.25,000/-, as sponsorship, would need to be explained and, therefore, their business purpose shown. This would equally apply to other payments, most of which (tabulated at para 5.1 of the assessment order), are reflected as by way of sponsorship payments. What was the event sponsored; its' nexus with the assessee's business, etc. would need to be explained and shown. Unless, however, the assessee was called upon to show the basis for claiming the same as advertisement expenditure, or even as a business promotion expense, i.e., as claimed, and which had found acceptance by the assessing authority, it would not be correct to dismiss the assessee's claim/s, which though the ld. CIT(A), as the first appellate authority, is well within his power to.

Coming to the second limb of the matter, i.e., of the same being exigible for deduction of tax at source, so that the deduction would only follow the same, in our view, our consideration of the same could only follow an adjudication by the first appellate authority, and which could only be after his definite findings as to the allowability or otherwise of the same on the anvil of section 37(1) after allowance of due opportunity to state its case to the assessee. The matter is, accordingly, restored back to the file of the ld. CIT(A) to determine the nature of the sums paid and, accordingly, decide the issue of allowability in accordance with the law, issuing definite findings of fact, and after hearing the parties. We decide accordingly.

5 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

6. We next take up Ground #4; Grd. 3 being not pressed during hearing. An examination of the income reflected as 'Group Bookings' (forming part of the 'income from operations'/PB pg. 31), revealed it to be at a charge of Rs.200/- per person. A group booking on 16.02.2008 for 108 persons, however, showed a receipt of Rs.1,944/-. The assessee was accordingly show caused for the adoption of the rate of Rs.200/- per person. In explanation, it was submitted that the same was only an advance/part receipt. This did not find acceptance by the A.O., as the same, in that case, ought to have been reflected as a liability. The claim was even otherwise not supported by any details/evidence. The balance sum of Rs.19,656/- was, accordingly, included as the assessee's income. The same found confirmation at the first appellate stage for the same reason/s.

7. We have heard the parties, and perused the material on record. The assessee's explanation of the same being an advance is, firstly, in contradiction to its treatment of the same as a receipt (income). When, if so, was the balance payment of Rs. 19,656/-; the rate of Rs.200/- per person being admitted, received, even as observed by the ld. CIT(A)? In fact, there would be similar instances as well, and which would reflect and exhibit both the validity of the assessee's claims as well as the modus operandi being followed by the assessee in such cases. For which date was the booking? Did it materialize? Were tickets issued and in what number? Such like questions arise as a concomitant to the assessee's explanation, and which we find as totally unanswered/not met. Further, an advance would not be received in an odd, but only in a, round figure. The same in fact works to a sum calculated for 18 persons. The assessee has also not disputed that the booking was for 108 persons. It also does not contend of any discount, which would though work to a huge, incomprehensible rate of 83.33%. The assessee's case is sans any details/evidence. We, accordingly, find no infirmity in the inclusion of the sum of Rs.19,656/- as the assessee's income. The same is, we may clarify, for the reason of our finding it as a case of suppression of revenue, and not in the nature of notional income, which decidedly cannot be subject to tax. We decide accordingly.

6 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

8. Ground # 5 concerns the disallowance of expenditure in the sum of Rs.13,69,000/- , claimed as repair and maintenance expenditure. The same was observed to have been incurred during the month of March, 2008 and, thus, in a sum far in excess of the monthly average that would otherwise obtain, i.e., excluding the same and considering the balance expenditure for the first 11 months of the relevant previous year. The assessee was, accordingly, show caused in the matter. It was explained that the said expenditure was not incurred in the month of March, 2008. The accounting entry in March was for the reason that the expenditure debited under various accounts heads, viz. garden maintenance, transport, octroi, electricity, etc. was transferred to the account 'repair and maintenance'. No evidence in support of the same having been, however, furnished, the A.O. effected the disallowance (refer para 9, pgs. 8-9 of the assessment order). The assessee sought to furnish the relevant details in the appellate proceedings. The same being additional evidence in-as-much as the same were not furnished during the assessment proceedings, would be required to satisfy the mandate of Rule 46A for its admission. The A.O. had vide order sheet entry dated 19.11.2010 (wrongly written as 19.11.2008), specifically called for the relevant details. In the absence of the additional evidence there was no material to support the assessee's claim, so that the disallowance came to be confirmed. Aggrieved, the assessee is in second appeal.

9. We have heard the parties, and perused the material on record. In our considered opinion, the matter should go back to the file of the A.O. for necessary verification and adjudication in accordance with the law. True, the impugned expenditure is abnormally large in relation to the monthly average, which works to Rs.2.92 lacs, i.e., upon excluding the impugned sum from the total claim of Rs.45.84 lacs for the year. However, it is not the case that the assessee has not furnished any explanation, or one which is not plausible. The account heads of garden maintenance, transport, octroi and electricity are in the nature of regular maintenance expenses. It is also not the case that the said expenditure stands incurred under any other account. The total expenditure for the immediately preceding year, for which the assessee had a lower turnover, is at Rs.62.82 7 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

lacs, i.e., as against Rs.45.84 lacs for the current year. Non furnishing of the relevant evidence, thus, should not prove fatal to its case - the sole purpose of procedural law being to promote justice. Reference in this context is made to the case of Smt. Prabhavati S. Shah vs. CIT [1998] 231 ITR 1 (Bom). The matter, therefore, as afore-stated, is restored back to the file of the A.O. for the purpose. We decide accordingly.

10. Ground 6 is in respect of disallowance of Rs.3 lacs out of the claim of Rs.6 lacs by way of director's remuneration to Mrs. Ritika A. Muchhala. The basis of the A.O.'s action was that no evidence with regard to her educational qualification/s or even the services rendered to the assessee-company by her stood adduced. In fact, no explanation in justification of the increase from Rs.3 lacs paid to her for the immediately preceding year had been furnished. In appeal, the ld. CIT(A) observed that though the assessment order spoke of disallowance of the entire salary paid to Ritika A. Muchhala, i.e., Rs.6 lacs, he had effected the disallowance at Rs.9 lacs and, therefore, inferred it to be a typographical error. As regards the balance disallowance of Rs.6 lacs, Ritika A. Muchhala was explained to be an educated lady, attending to managing the park activities. No disallowance for the immediately preceding year had been made. He, accordingly, restricted the disallowance to Rs.3 lacs, i.e., allowing the salary as paid to her for the immediately preceding year. Aggrieved, the assessee is in appeal.

11. We have heard the parties, and perused the material on record. We firstly observe that the disallowance by the A.O. stood made in the absence of any evidence being led by the assessee towards its claim, and which position continues even before us. The Revenue, however, is not in appeal. The allowance for the immediately preceding year, as it appears to us, in-as-much as there is no claim for assessment u/s.143(3) for that year, is per the summary procedure under the Act, and which cannot be said to be either an assessment or an 'acceptance' thereof by the Revenue. The ld. CIT(A) has allowed the assessee's claim to that extent in view of the explanation of she being an educated lady attending to the business activities, even as no evidence toward the same has been 8 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

furnished at any stage, so that there is no proof of the services rendered by her. We, accordingly, have no hesitation in confirming his order. We decide accordingly.

12. Ground 7 is in respect of disallowance in the sum of Rs.6,250/- u/s.14A of the Act. The assessee was observed in the course of assessment proceedings to have made an investment in shares at Rs.25 lacs during the relevant previous year. Investment decisions are complex in nature, requiring time and effort, i.e., in terms of market research and continuing analysis of the developments, so as to enable decision making with regard to the acquisition or retention or sale. The assessee's claim, therefore, that it had not incurred any administrative expenditure, could not be accepted. Section 14A includes within its sweep both direct and indirect expenditure. The latter was thus estimated following the prescription of Rule 8D, following the decisions in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom) and Cheminvest Ltd. vs. ITO [2009] 317 ITR (AT) 86 (Del)(SB). The same found confirmation in appeal for the same reasons.

13. We have heard the parties, and perused the material on record. Rule 8D has to be resorted to where the assessee cannot substantiate its claim with reference to its accounts, as in the present case, of having not incurred any expenditure in relation to the exempt income. Its claim for expenditure would thus stand to be disallowed, i.e., in part, irrespective of whether the income not forming part of the total income has actually ensued or not, even as explained in afore-referred decisions, besides the decision in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), as also discussed at length by the tribunal in the series of decisions, viz. D. H. Securities (P.) Ltd. vs. Dy. CIT [2014] 146 ITD 1 (Mum) (TM); and Dy. CIT vs. Damani Estates & Finance (P.) Ltd. [2013] 25 ITR 683 (Mum)(Trib), to state a couple. We, accordingly, uphold the impugned disallowance.

14. Ground # 8 of the assessee's appeal concerns the disallowance of electricity expenditure, which stands claimed in the sum of Rs.54.22 lacs. Its verification revealed it to comprise of Rs.69,060/-, being in respect of Flat Nos.11, 12 and 8, and Shop Nos. 2 9 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

and 3. Flats 11 and 12 were not owned by the assessee but by Pinky Kiran Thakur and Ritika A. Muchhala respectively. Proportionate disallowance in respect thereof, worked out at 50% of total such expenditure, i.e., Rs.34,530/-, was, accordingly, effected. In appeal, the assessee explained that the Flats, though belonging to the Directors, were used for the assessee's business. The same was found by the ld. CIT(A) to be a contradiction in-as-much as the assessee had vide its letter dated 25.11.2010 clarified that electricity expenses had been claimed in respect of properties belonging to the assessee-company only and not in respect of properties not owned by it. The disallowance was accordingly confirmed. Aggrieved, the assessee is in second appeal.

15. We have heard the parties, and perused the material on record. As evident from the fore-going, no case for allowance of the impugned claim stands made before the authorities below, with, rather, the first appellate authority observing the assessee to have committed a volte face, contradicting itself. The position continues as such, so that no improvement in its case has been made by the assessee, whose case remains wholly unsubstantiated even before us. We, accordingly, have no hesitation in confirming the disallowance. We decide accordingly.

16. The ninth and final ground of the assessee's appeal relates to the disallowance of miscellaneous expenditure in the sum of Rs.5.05 lacs, i.e., out of the total claim for such expenditure at Rs.6.21 lacs. The basis of the disallowance by the A.O. was the absence of the substantiation of its claim, despite repeated requests for the same by the A.O.; the assessee submitting no more than the ledger account of the said expenditure (refer para 15 of the assessment order). In appeal, it was submitted that the said expenditure, again, though apparently incurred in the month of March, was actually not so, being in fact transferred from different account heads to a general account. The same did not find favour with the ld. CIT(A), who following his decision qua ground no. 6 before him, i.e., in respect of repair and maintenance expenditure (disallowed at Rs.13.69 lacs), confirmed the disallowance.

10 ITA No. 7202/Mum/2011 (A.Y. 2008-09) Muchhala Magic Pvt. Ltd. vs. Dy. CIT

17. We have heard the parties, and perused the material on record. The Ground (before us) corresponding to Gd. 6 before the ld. CIT(A), is Gd. 5, and which stands adjudicated by us by restoring the matter back to the file of the A.O. for consideration of the assessee's case on merits, and a decision as per law, after allowing the assessee an opportunity for being heard. We find no reason, on account of parity of facts, to take any different view in the matter, so that our decision vide para 9 of this order shall mutatis mutandis apply to this ground as well. We decide accordingly.

18. In the result, the assessee's appeal is partly allowed for statistical purposes.

Order pronounced in the open court on May 05, 2015

Sd/- Sd/- (D. Manmohan) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; दनांक Dated : 05.05.2015 व. न.स./Roshani, Sr. PS आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आयु त(अपील) / The CIT(A) 4. आयकर आयु त / CIT - concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब ु ई / DR, ITAT, Mumbai 6. गाड फाईल / Guard File आदे शानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai