N JAMNADAS & CO., MUMBAI v. ACIT CEN CIR-39, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL 'I' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI T.R. SOOD ACCOUNTANT MEMBER ITA NOS. 4321 & 4322/MUM/2008 (ASSESSMENT YEARS: 1997-98 & 1998-99) M/S. N. JAMNADAS & CO. ACIT CENTRAL CIRCLE 39 16 BANK STREET FORT ROOM NO. 32(1) AAYAKAR BHAVA N MUMBAI 40001 VS. M.K. ROAD MUMBAI 400020 PAN - AACFN 8427 G APPELLANT RESPONDENT APPELLANT BY: SHRI Y.P. TRIVEDI & SMT. USHA DALAL RESPONDENT BY: SHRI AMERDEEP O R D E R PER T.R. SOOD A.M. THESE APPEALS ARE BY THE ASSESSEE AGAINST THE ORDER S OF THE CIT(A) CENTRAL VIII MUMBAI DATED 29.04.2008 FOR ASSESSMEN T YEARS 1997-98 AND 1999-99 IN WHICH VARIOUS GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE WHICH ARE IDENTICAL. 2. AT THE TIME OF HEARING THE LEARNED COUNSEL SUBMITTE D THAT THE ONLY DISPUTE INVOLVED IS REGARDING CONFIRMATION OF DISAL LOWANCE OF CERTAIN UNVOUCHED EXPENSES WHICH COULD BE DESCRIBED AS SPEE D MONEY ALSO DESPITE THE DIRECTIONS OF THE TRIBUNAL. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S ENGAGED IN THE BUSINESS OF CLEARING AND FORWARDING OF CARGO. DURIN G THE ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT CERTAIN EXPENSES WE RE UNVOUCHED AND SUCH EXPENSES WERE FURTHER IN CONTRAVENTION TO EXPLANATI ON TO SECTION 37(1) AND THEREFORE THE SAME WERE DISALLOWED. THE MATTER TRAV ELLED TO THE TRIBUNAL AND AFTER EXAMINING THE SUBMISSIONS THE SAME WAS SENT B ACK TO THE FILE OF THE A.O. VIDE PARA 6 WHICH IS AS UNDER: - 6. HEARD BOTH THE PARTIES AND CONSIDERED THEIR RIV AL CONTENTIONS. IT IS SEEN FROM THE CIT(A)S ORDER THAT THE CIT(A) HAS REFERRED TO THE ITA NOS. 4321&4322/MUM/2008 M/S. N. JAMNADAS & CO. 2 OPINION RENDERED BY SHRI S.E. DASTUR WHEREIN SMALL TIPS PAID TO LOWER STAFF OF THE GOVT. DEPARTMENTS FOR EXPEDITING THE M OVEMENTS OF DOCUMENTS WAS HELD TO FALL WITHIN THE SCOPE OF EXPE NDITURE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE AND WHICH IS PR OHIBITED BY LAW AND THAT THEY WOULD FALL TO BE CONSIDERED IN THE CA SE OF THE AGENT UNLESS IT IS APPARENT THAT THE CLIENT WAS AWARE THA T HE WAS REIMBURSING AN ILLEGAL PAYMENT. THE CIT(A) HAD ALSO HELD AT PARA-9 THAT IT CANNOT BE ASSUMED THAT THE APPELLANTS CLIE NTS WERE AWARE THAT THEY WERE REIMBURSING THE ILLEGAL PAYMENTS AND THAT THE PAYMENTS MERELY FALL WITHIN THE PURVIEW OF EXPLANAT ION TO SEC. 37(1) AND THEREFORE NOT ALLOWABLE. THUS IT IS EVIDENT TH AT THE PAYMENT OF THE SAID AMOUNT BY THE ASSESSEES CLIENTS IS NOT IN DISPUTE. THE CIT(A)S DOUBT WAS WHETHER THE ASSESSEES CLIENTS W ERE AWARE THAT THEY WERE REIMBURSING ILLEGAL PAYMENTS. THE ADDITIO NAL EVIDENCE FILED BY THE ASSESSEE PURPORTEDLY PROVES THAT THE ASSESSE ES CLIENTS WERE AWARE THAT THEY WERE REIMBURSING ILLEGAL PAYMENTS. THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE PURPORTEDLY PROVES T HAT THE ASSESSEES CLIENTS WERE AWARE ABOUT THE NATURE OF THESE PAYMEN TS. SINCE THESE DOCUMENTS WERE NEITHER PRODUCED BEFORE THE AO NOR B EFORE THE CIT(A) WE DEEM IT PROPER AND NECESSARY TO REMAND THE ISSUE BACK TO THE AO FOR VERIFICATION OF THESE DOCUMENTS AND ADJUDICATIO N THEREOF ABOUT THE APPLICABILITY OF EXPLANATION TO SEC. 37(1) OF THE A CT THERETO. IT IS NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE GIVEN A FAIR CHANCE OF HEARING. 4. IN THE FRESH SET ASIDE PROCEEDINGS IT WAS MOSTLY CO NTENDED BY THE ASSESSEE THAT SUCH EXPENSES WERE INCURRED ON BEHALF OF VARIOUS CLIENTS/ PRINCIPALS AND WERE BEING REIMBURSED BY SUCH CLIENT S/PRINCIPALS AND ASSESSEE WAS NOT CLAIMING THESE EXPENSES AS SUCH. F URTHER THE ASSESSEE WAS FOLLOWING A PROCEDURE BY WHICH A QUOTATION WAS GIVE N TO THE CLIENTS IN WHICH IT IS CLEARLY STATED THAT UNFORESEEN EXPENSES WOULD BE CHARGED ON ACTUAL BASIS. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE TRIBUNAL IN THE CASE A.L.P. (INDIA) P. LTD. VS. DCIT 96 ITD 227 (MUM). H OWEVER THE A.O. AFTER EXAMINING THE SUBMISSIONS DID NOT FIND ANY FORCE B ECAUSE THE BILLS RAISED BY THE ASSESSEE DID NOT SHOW ANY UNFORESEEN CHARGES HAVE BEEN RAISED. IT WAS ALSO OBSERVED THAT THE DECISION OF THE A.P.L (I NDIA) P. LTD. (SUPRA) WAS NOT APPLICABLE BECAUSE IN THAT CASE THE MONEY WAS M OSTLY PAID TO DOCK WORKERS WHO WERE NOT GOVERNMENT EMPLOYEES. IN APPEA L THE ACTION OF THE A.O. WAS CONFIRMED BY THE CIT(A). 5. BEFORE US THE LEARNED SENIOR ADVOCATE SHRI Y.P. TRI VEDI INVITED OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE FIRST ROUND AND POINTED OUT THAT ITA NOS. 4321&4322/MUM/2008 M/S. N. JAMNADAS & CO. 3 VIDE PARA 6 IT WAS CLEARLY HELD THAT IF THE EXPENSE WAS INCURRED ON BEHALF OF THE CLIENT AND SUCH CLIENTS WERE AWARE THAT THEY WE RE TO REIMBURSE THE ILLEGAL PAYMENTS THEN NO DISALLOWANCE CAN BE MADE. THEREFORE THE A.O. WAS REQUIRED TO EXAMINE THE CLIENTS OF THE ASSESSEE AND FIND OUT WHETHER THEY WERE AWARE ABOUT THE REIMBURSEMENT OF EXPENSES OR N OT. THIS PART OF THE ORDER HAS NOT BEEN COMPLIED WITH. THEREFORE FOR NO N-COMPLIANCE ITSELF THE ADDITION COULD NOT HAVE BEEN REPEATED AND THE SAME DESERVES TO BE DELETED. HE ALSO ARGUED THAT NO PURPOSE WOULD BE SERVED IF T HE MATTER IS AGAIN RESTORED TO THE FILE OF THE A.O. BECAUSE THE ISSUE RELATES TO A.Y. 1997-98 AND A.Y. 1998-99 AND MANY OF THE OLD CLIENTS MAY NOT BE EASILY AVAILABLE HE ALSO REFERRED TO PAGE 1 & 2 OF THE PAPER BOOK WHICH COPY OF THE QUOTATION AND IN COLUMN 10 IT HAS BEEN STATED THAT UNFORESEEN EXPENS ES WOULD BE CHARGED AS PER ACTUAL AND SUCH EXPENSES ARE INCLUDED IN THE IN VOICES. HOWEVER WHEN IT WAS POINTED OUT BY THE BENCH FROM PAGE 3 OF THE PAP ER BOOK WHICH IS COPY OF THE INVOICE RAISED BY THE ASSESSEE THAT THESE C HARGES HAVE BEEN SHOWN AS SERVICES CHARGES TOWARDS OBTAINING AN ATTESTED FREI GHT RECEIPT CONVEYANCE ETC. AT THIS JUNCTURE HE SUBMITTED THAT HE HAS ALRE ADY DISCUSSED THE MATTER WITH HIS CLIENTS I.E. ASSESSEE AND HAS CONVINCED T HEM TO ACCEPT 25% OF THE DISALLOWANCE IN TERMS OF THE DECISION OF THE TRIBUN AL IN THE CASE OF A.P.L. (INDIA) P. LTD. (SUPRA). HE SUBMITTED THAT THE BECA USE EVEN THE REVENUE AUTHORITIES HAVE NOT CLEARLY FOUND THAT WHOLE OF TH E EXPENSES WERE PAID TO THE GOVERNMENT EMPLOYEES AND SOME OF THE MONEY MIGH T HAVE BEEN PAID TO THE GOVERNMENT PEOPLE AND ON THAT BASIS ONLY ESTIMA TE CAN BE MADE. 6. ON THE OTHER HAND THE LEARNED D.R. SUBMITTED THAT THE A.O. AND CIT(A) HAVE ALREADY CONSIDERED THE ORDER OF THE TRI BUNAL IN THE FIRST ROUND AND MADE DETAILED INVESTIGATIONS AND ASSESSEE WAS P ROVIDED ADEQUATE OPPORTUNITIES. ASSESSEE HAS NOT MADE ANY EFFORT TO PROVE THE POINT. IN ANY CASE AS POINTED OUT BY THE BENCH THESE EXPENSES HA VE BEEN INCLUDED AS SERVICE CHARGES THEREFORE WHOLE OF SUCH AMOUNT SH OULD BE DISALLOWED BECAUSE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE EXP ENDITURE OR THE MATTER MAY BE SET ASIDE FOR EXAMINATION. ITA NOS. 4321&4322/MUM/2008 M/S. N. JAMNADAS & CO. 4 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. WE AGREE WITH THE SUBMISSION OF THE LEARNED SENIOR ADVOCATE THAT AFTE R THE LAPSE OF ALMOST 12 YEARS NO USEFUL PURPOSE WOULD BE SERVED IF THE MATT ER IS RESTORED BACK TO THE FILE OF THE A.O. TO MAKE FRESH ENQUIRIES WHETHER TH E CLIENTS OF THE ASSESSEE WERE AWARE THAT THEY WERE REQUIRED TO REIMBURSE THE ILLEGAL EXPENSES. IN FACT IT IS CLEAR THAT AFTER ASSESSEE FILED ITS REPLY NEI THER THE ASSESSEE NOR THE A.O. MADE ANY EFFORT TO PROVE THAT SUCH EXPENDITURE WAS ILLEGAL AND WAS BEING REIMBURSED BY SUCH CLIENTS/PRINCIPALS. THEREFORE I N THE INTEREST OF JUSTICE WE WOULD LIKE TO DECIDE THE ISSUE FINALLY. 8. IN THE CASE OF A.P.L. (INDIA) P. LTD. V.S. DICT 96 ITD 227 (MUM) IT WAS HELD AS UNDER: - 1. SECTION 37(1) OF THE INCOME-TAX ACT 1961 BUSI NESS EXPENDITURE ALLOWABILITY OF BLOCK PERIOD 1-4-1989 TO 16-11-19 99 WHETHER PAYMENT OF SPEED MONEY TO DOCK WORKERS OF PORT TR UST FOR EXPEDITING PROCESS OF LOADING/UNLOADING OF SHIPS IS A LEGITIMA TE BUSINESS EXPENDITURE HELD YES WHETHER SUCH PAYMENT IS N OT AN ILLEGAL PAYMENT OR A PAYMENT OPPOSED TO PUBLIC POLICY AS DO CK WORKERS ARE NOT GOVERNMENT EMPLOYEES HELD YES WHETHER HOW EVER WHERE ASSESSEE FAILED TO ESTABLISH THAT ACTUALLY PAYMENT HAD BEEN MADE TO EXTENT INDICTED IN VOUCHERS 25 PER CENT OF EXPENDI TURE INCURRED BY WAY OF PAYMENT OF SPEED MONEY WAS TO BE DISALLOWED ON ESTIMATE BASIS HELD YES. FROM THE ABOVE IT IS CLEAR THAT IF IT CAN BE FINALL Y FOUND THAT MONEY WAS PAID TO THE GOVERNMENT EMPLOYEES ONLY THEN THIS WOULD BE COVERED BY THE EXPLANATION TO SECTION 37(1) OTHERWISE THE EXPENDIT URE WOULD BE JUSTIFIED. IN THAT CASE ALSO IN THE ABSENCE OF DETAILS IT WAS ASS UMED THAT SPEED MONEY WAS PAID TO THE EXTENT OF 25% TO GOVERNMENT EMPLOYE ES BECAUSE ALL THE DOCK WORKERS MAY NOT BE GOVERNMENT EMPLOYEES AND SOME MO NEY IS REQUIRED TO BE PAID TO UNION LEADERS ETC. AND OTHER ELEMENTS O F THE UNDERWORLD. THEREFORE IT CANNOT BE SAID THAT ALL THE MONEY HAS BEEN PAID TO GOVERNMENT EMPLOYEES. IN THE ABSENCE OF DETAILS WE FOLLOW THE GUIDELINES LAID DOWN IN THE CASE OF A.P.L. (INDIA) P. LTD. (SUPRA) AND HOLD THAT 25% OF THE EXPENDITURE IS HIT BY THE EXPLANATION TO SECTION 37 (1) AND THE SAME IS REQUIRED TO BE DISALLOWED. THIS PROPOSAL WAS GIVEN IN THE OPEN COURT AND ACCEPTED BY THE LEARNED SENIOR ADVOCATE ON BEHALF O F THE ASSESSEE. ITA NOS. 4321&4322/MUM/2008 M/S. N. JAMNADAS & CO. 5 THEREFORE WE SET ASIDE THE ORDER OF THE LEARNED CI T(A) AND DIRECT THE A.O. TO DISALLOW 25% OF ` 18 46 151/- AND ` 13 84 432/- FOR A.Y. 1997-98 AND 1998- 99 RESPECTIVELY BEING ALLEGED ILLEGAL EXPENSES. 9. IN THE RESULT APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH FEBRUARY 2011. SD/- SD/- (D.K. AGARWAL) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 11 TH FEBRUARY 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CENTRAL VIII MUMBAI 4. THE CIT CENTRAL III MUMBAI CITY 5. THE DR I BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.