ACIT Vs Mitsui & Co. India Pvt Ltd (ITAT Delhi)
ITAT Delhi held that disallowance of staff welfare expenditure on the adhoc basis unsustainable as AO failed to establish as to who the expenses are not incurred for business purpose.
Facts- The assessee company is engaged in the business of general trading of materials & equipment required for industrial projects; commission agent acting as an intermediary between buyers and sellers who want to import, export or engaged in off-shore or domestic trading activities; and provides services i.e. information about the Indian market in general and for specific sectors which fall under the various verticals of Mitsui group.
The case was selected for scrutiny assessment. During the course of assessment proceedings, the Assessing Authority noticed that the assessee company carried out certain international transaction which was referred to Transfer Pricing Officer (“TPO”) for the purpose of transfer pricing adjustment. The TPO passed order dated 23.10.2017 wherein no adverse inference was drawn by the TPO in respect of international transaction.
AO while framing the assessment, noticed that in respect of exempt income, the assessee did not make suo moto disallowance u/s 14A of the Act as it had made in the last year. AO by invoking the provision of Rule 8D(ii) of the Income tax Rules, 1962 made disallowance amounting to INR 1,45,94,554/-. Further, the AO made disallowance on adhoc basis amounting to INR 63,11,221/- out of staff welfare expenses. The AO also made addition of INR 5,12,23,226/- in respect of remuneration paid to Mitsui & Co. India Pvt. Ltd. on the basis that the assessee could not substantiate rendition of any service for which remuneration was paid. The AO further made disallowance by invoking the provision of section 40(a)(i) of the Act on the ground that the assessee was liable to deduct tax of INR 12,60,84,939/- at the payment made to Mitsui Japan of INR 51,27,74,699/-. Thus, he assessed the income of the assessee company at INR 89,14,27,020/- against the disclosed income at INR 30,65,23,320/-.
CIT(A) partly allowed the appeal. CIT(A) confirmed the addition in part out of staff welfare expenses. Rest of the additions were deleted. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- It is contended that the bills and invoices of staff welfare expenses were duly submitted to lower authorities. The AO has not pointed out any defect or discrepancy in respect of the expenditure claimed for staff welfare. The expenditure is otherwise, 1% of total Revenue which is not excessive. The expenditure is related to staff welfare measures to and instill of feeling of team work.
CIT(A) merely affirmed the action of AO without pointing out as to how the remaining expenses are not for business purpose. It is well settled that the AO should not resort to adhoc disallowance. If the expenditure is not incurred for business purpose, there has to be a specific finding in this regard unless expenditure for personal use and business purpose are mixed and cannot be segregated. In the case in hand, this is not the case, we therefore, direct the AO to delete the impugned addition.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. These two cross-appeals filed by the Revenue and the assessee are directed against the order of Ld.CIT(A)-37, New Delhi passed u/s 143(3) of the Income Tax Act, 1961 (“the Act”) dated 25.11.2019 for the assessment year 2014-15. The appeals are taken up together for hearing and are being disposed off by way of consolidated order for the sake of brevity.
ITA No.765/Del/2020 [Assessment Year : 2014-15]
2. First, we take Revenue’s appeal wherein Revenue has raised following grounds of appeal:-
1. “Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs. 1,45,94,554/- on account of disallowance u/s 14A of the Income Tax Act 1961 (the Act) by ignoring finding of facts recorded by the Assessing Officer (the AO) that the assessee company has earned some exempt income during the year?
2. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs. 63,11,221/- on account of disallowances of staff welfare expenses by ignoring finding of facts recorded by the Assessing Officer (the AO) that the assessee company has incurred expense of non-business nature in lieu of staff welfare expense during the year?
3. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs. 5,12,23,226/- on account of disallowance of service fee paid to AE by ignoring finding of facts recorded by the Assessing Officer (the AO) that the assessee company the nature of services being offered by M/s Mitsui & Co (Asia Pacific) pte Ltd., Singapore, to the assessee is quite vague, Assessee has not furnished any detail regarding the actual service being provided to the assessee?
4. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 51,27,74,699/-on account of non-deduction of TDS, u/s 40(a)(i) of the Income Tax Act 1961 (the Act) by ignoring finding of facts recorded by the Assessing Officer (the AO) that the AO of Mitsui Japan attributed 50% of the gross profit i.e. Rs. 31,52,12,348/-(50% of Rs. 63,04,24,697/-) as income attributable to Indian PE?
5. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 51,27,74,699/-on account of non-deduction of TDS, u/s 40(a)(i) of the Income Tax Act 1961 (the Act) by ignoring findings of the fact recorded by the AO that Mitsui Japan being a non-resident, tax is payable by it in India on income attributable to Indian PE. Mitsui India should have deducted an amount of Rs. 12,60,84,939/-(40% of Rs. 31,52,12,348/-) as final tax payment of non-resident by way of TDS on its receipts, out of the payments of Rs.51,27,74,699/- it made to Mitsui Japan.
6. That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”
3. Facts giving rise to the present appeal are that the assessee company is engaged in the business of general trading of materials & equipment required for industrial projects; commission agent acting as an intermediary between buyers and sellers who want to import, export or engaged in off-shore or domestic trading activities; and provides services i.e. information about the Indian market in general and for specific sectors which fall under the various verticals of Mitsui group. The return declaring income of INR 30,65,23,320/-was filed electronically on 28.11.2014. The case was selected for scrutiny assessment. In response to the statutory notices, Ld. Authorized Representative of the assessee attended the assessment proceedings. During the course of assessment proceedings, the Assessing Authority noticed that the assessee company carried out certain international transaction which was referred to Transfer Pricing Officer (“TPO”) for the purpose of transfer pricing adjustment. The TPO passed order dated 23.10.2017 wherein no adverse inference was drawn by the TPO in respect of international transaction. The AO while framing the assessment, noticed that in respect of exempt income, the assessee did not make suo moto disallowance u/s 14A of the Act as it had made in the last year. Therefore, the assessee was asked to show cause as to why disallowance u/s 14A of the Act should not be made. In response thereto, the assessee made an exhaustive reply. However, the AO did not accept the contention of the assessee and proceeded to make disallowance u/s 14A of the Act. The AO by invoking the provision of Rule 8D(ii) of the Income tax Rules, 1962 made disallowance amounting to INR 1,45,94,554/-. Further, the AO made disallowance on adhoc basis amounting to INR 63,11,221/- out of staff welfare expenses. The AO also made addition of INR 5,12,23,226/- in respect of remuneration paid to Mitsui & Co. India Pvt. Ltd. on the basis that the assessee could not substantiate rendition of any service for which remuneration was paid. The AO further made disallowance by invoking the provision of section 40(a)(i) of the Act on the ground that the assessee was liable to deduct tax of INR 12,60,84,939/- at the payment made to Mitsui Japan of INR 51,27,74,699/-. Thus, he assessed the income of the assessee company at INR 89,14,27,020/- against the disclosed income at INR 30,65,23,320/-.
4. Aggrieved against the assessment order, the assessee carried matter in appeal before Ld.CIT(A), who partly allowed the appeal. Thereby, the Ld.CIT(A) confirmed the addition in part out of staff welfare expenses. Rest of the additions were deleted.
5. Aggrieved against this, both the assessee and the Revenue have filed separate appeals before this Tribunal.
6. Apropos to Ground No.1, Sr.DR supported the orders of the authorities below.
7. On the other hand, Ld. Counsel for the assessee submitted that there has not been any exempt income during the year as is evident from schedule of other income placed at Paper Book, Volume 1 at page 42. He drew our attention to the schedule of other income. He submitted that on this issue, no disallowance is called for since there is no exempt income and this issue is squarely covered in favour of the assessee by the judgement of Hon’ble Jurisdictional High Court rendered in the case of PCIT vs M/s. Era Infrastructure (India) Ltd. 2023 (7) TMI 1093 dated 20.07.2022.
8. We have heard Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. The issue in question is regarding disallowance made by the AO by invoking the provision of section 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962. It is pointed out by the Ld. Counsel for the assessee that no exempt income has been earned during the year under consideration. Reliance is placed on the various case laws including the judgmenet of Hon’ble Delhi High Court rendered in the case of CIT, Central-2 vs M/s ERA Infrastructure (India) Ltd. (supra). It is further contended that issue is also covered by the order of the Co-ordinate Bench of the Tribunal in assessee’ own case for AYs 2009-10 and 2010-11 in ITA No.813/Del/2014 and 1795/Del/2015 respectively dated 04.2016. He further pointed out that this fact is duly recorded by Ld.CIT(A) in paras 5.2.1 and 5.2.2 of the impugned order. We find that the Ld.CIT(A) in paras 5.2.1 and 5.2.2 of the impugned order, has decided the issue by observing as under:-
5.2.1. “In this case, disallowance u/s 14A of the act r.w.r 8D of Rs. 1,45,944/- has been contested by the appellant before me. The A.O. had made the disallowance u/s 14A of the act read with rule 8D on the basis of CBDT Circular no. 5/2014 dated 11.02.2014. The A.O has worked out disallowance under 8D (ii) and 8D (iii) of the Rules. Total disallowance made by the AO is Rs. 1,45,94,554/-. Admittedly, the appellant do not have any exempt income during the year under consideration. The appellant has relied on the following judgments of various High Courts wherein it has been held that no disallowance can be made in the absence of any exempt income:-
∗ Principal Commissioner of Income-tax-04 v. IL & FS Energy Development Company Ltd [2017] 399 ITR 483 (Delhi);
∗ CHEMINVEST LIMITED VERSUS COMMISSIONER OF INCOME TAX-VI [2015] 378 ITR 33DELHI HIGH COURT;
∗ PR COMMISSIONER OF INCOME TAX 18 VERSUS OIL INDUSTRIES DEVELOPMENT BOARD 2018 (2) TMI 1861-DELHI HIGH COURT;
∗ CIT v. Holcim India Pvt. Ltd. in ITA No. 486/2014 and 299/2014 dated 05.09.2014;
∗ Commissioner of Income Tax (li) Kanpur Versus M/s. Shivam Motors (P) Ltd., 88 of 2014-ALLAHABAD HIGH COURT
∗ Commissioner of Income Tax -I Versus Corrtech Energy Pvt. Ltd., 2014 (3) TMI 856 GUJARAT HIGH COURT.
5.2.2. The above judgments are squarely applicable in case of the appellant since it has not earned any exempt income in the year under consideration. Therefore, the addition made u/s 14A of the Act is directed to be deleted. Ground No. 3 and 4 are allowed.”
9. The Revenue has not brought any adverse material contradicting the findings of Ld.CIT(A). We therefore, do not see any reason to disturb the finding of Ld.CIT(A), the same is hereby, affirmed. Thus, Ground No.1 raised by the Revenue is dismissed.
10. Ground No.2 raised by the Revenue is against the deletion of disallowance of INR 63,11,221/- in respect of staff welfare expenses.
11. Ld. Sr. DR supported the assessment order and submitted that the AO has rightly made the addition. He drew our attention to the assessment order where the AO has recorded the fact that the assessee failed to prove the expenses incurred for business purposes. He submitted that it is incumbent upon the assessee to prove that expenses in question were incurred wholly and exclusively for business purpose. If the assessee fails to do so, the AO would be justified for making disallowance of such expenditure.
12. On the other hand, Ld. Authorized Representative of the assessee opposed these submissions and submitted that during the year under consideration, the assessee has incurred expenses on medical insurance of INR 34,73,227/-; company function of INR 15,43,007/-; health care etc. of INR 13,94,377/-; shifting expenses of INR 63,11,267/-; social security expenditure of INR 1,71,73,766/-; and Japanese food of INR 41,60,465/-. Ld. Counsel for the assessee further submitted that the expenditure was incurred for the welfare of employees as a measure of commercial expediency. He submitted that the supporting evidences were submitted however, the AO without pointing out any defect or discrepancy in the evidence so filed, disallowed 20% of such expenditure on adhoc basis amounting to INR 63,11,221/-. However, Ld.CIT(A) out of the total expenditure of INR 3,40,56,108/- held that INR 2,20,41,370/- was for the business purpose and rest of the expenditure was treated as for non-business purposes. Out of this, he restricted the disallowance to the extent of INR 24,02,948/- i.e. 20% of INR 1,20,14,739/-. Against the deletion, Revenue is in appeal and against the confirmation, the assessee is in appeal. He submitted that both the authorities below have not doubted the incurrence of the expenses. The expense has been duly recorded in the books. However, the AO proceeded to disallow 20% of the total staff welfare expenses incurred by the assessee company without pointing out any defect in evidences, submitted by the assessee and by holding the expense incurred by the assessee company are of non-business nature. He submitted that both the authorities below have made and confirmed the addition purely on adhoc basis based on surmises which is clearly unwarranted. In support of this, he relied upon various case laws. Further, it is contended that the assessee had submitted the relevant evidences. The lower authorities have not brought any material to prove that the expenses were incurred for non-business purposes. Moreover, the total expenditure incurred by the assessee in this regard merely constitute only 1% of the total revenue which cannot be treated as excessive or higher. The expenses are made to maintain a healthy relationship between the company and its staff and therefore, incurred on account of business expediency thus, the allowable expenditure. He further relied upon following case laws:-
∗ Hon’ble Supreme Court in the case of Lalchand Bhagat Ambica Ram Vs CIT 37 ITR 288 (SC);
* Hon’ble Delhi High Court in the case of CIT Vs Ms. Shehnaz Hussain 267 ITR 572 (Del.);
* ACIT Vs M/s. Modi Rubber Limited, ITA No.1952/Del/2014 (ITAT Delhi);
* ACIT versus Precision Pipes & Profiles Co. Ltd., No.- ITA No.4257 & 4258/D/2012 [ITAT Delhi];
* Sonic Biochem Extractions P. Ltd. v. ITO (2013) 23 ITR 447/59 SOT 4(URO)(Mum.)(Trib.); and
* Seasons Catering Services P. Ltd. Vs. DCIT [2010] 127 ITD 50 (Delhi)/43 DTR 397 (Del).”
13. Ld. Counsel for the assessee further reiterated the submissions as made in the synopsis. He submitted that the assessee is a Private Limited Company which is a distinct assessable entity as per the definition of “person” u/s 2(31) of the Act. The limited company is an inanimate person and there cannot be anything personal about such an entity. Hence, Ld.CIT(A) has rightly deleted the disallowance made on account of staff welfare expenses.
14. On the other hand, Ld.Sr.DR opposed these submissions and supported the assessment order. He contended that the assessee has claimed expenses incurred for business purposes. Therefore, Ld.DRP has rightly confirmed the proposal of the AO for making disallowance @ 20% of the amount.
15. We have heard Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. Ld.CIT(A) has decided the issue by observing as under:-
5.3.3. “I have examined the facts of the case, finding of the AO, submission the appellant and the case laws relied upon by the appellant. On perusal of facts of the case, it is noticed that the appellant has incurred expenses in the nature of premium paid for social insurance, restaurant & dinner expenses, hotel functions and medical reimbursement etc.. The bifurcation of the staff welfare expenses are as follows:-
