2010-VIL-412-ITAT-MUM

Equivalent Citation: [2010] 42 SOT 30 (Mum.) (URO)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 4311 (MUM.) OF 2010

Date: 30.09.2010

JP MORGAN CHASE BANK NA

Vs

ASSISTANT DIRECTOR OF INCOME-TAX, (INTERNATIONAL TAXATION) RANGE-1(2) /3(1) , MUMBAI

BENCH

T.R. SOOD AND R.S. PADVEKAR, JJ.

JUDGMENT

R.S. Padvekar, Judicial Member. - In this appeal, the assessee had challenged the impugned order of the Ld. CIT (A) Mumbai dated 31-3-2005 for the assessment year 1999-2000. The assessee has taken the following three effective grounds :—

"1. In disallowing the expenditure incurred during the period between the date on which the Appellant received the in principal approval and final approval from the Reserve Bank of India.

2. In disallowing the consultancy fees amounting to Rs. 1,510,000 paid to the Royal House Agency.

3. In confirming the income determined by the learned Assessing Officer under rule 10 of the Income-tax Rules, 1962."

2. The assessee is a non-resident company incorporated in the USA. The assessee established a branch for its business operation in India to carry on banking business. The principal approval of Reserve Bank of India (RBI) obtained on 12-5-1998 and the final approval was granted by the RBI on 2-6-1998. The assessee filed the return of income for the assessment year 1999-2000 declaring the loss of Rs. 12,02,72,663. The return filed by the assessee was selected for scrutiny and assessment was completed under section143(3) of the Act. On the examination of the statement of accounts, the Assessing Officer was of the opinion that the expenses incurred from 12-5-1998 to 2-6-1998 cannot be allowed as a revenue expenses as the expenses incurred in the above period are only capital expenditure. The assessee contended that the expenditure incurred between 12-5-1998 to 2-6-1998 was mainly on salaries, professional fees, travelling etc. It was noticed by the Assessing Officer that the assessee has worked out the proportionate expenditure for the period from 12-5-1998 to 1-6-1998, which was base on the ratio of the number of days. The Assessing Officer rejected the claim of the assessee that the expenditure between 12-5-1998 to 1-6-1998 is allowable as revenue expenditure. Alternatively, the assessee pleaded that if the said expenditure is held to be a capital expenditure then the assessee be allowed to capitalise the same and depreciation thereon be allowed. The assessee carried the said issue before the Ld. CIT (A) but without success. The Ld. CIT (A) confirmed the finding of the Assessing Officer Now, the assessee is in appeal before us.

3. The Ld. Sr. Counsel Mr. Pardiwalla vehemently argued that opening of the new branch in India was not the new business of the assessee but it was extension of existing business. It is argued that the assessee has already started the business operation during the said period and assessee’s business was set-up in all respect and hence the entire expenditure was allowable as revenue expenditure. The Ld. Counsel relied on the following precedent:—

CIT v. Franco Tosi Ingegneria [2000] 241 ITR 268 (Mad.)

We have also heard the Ld. D.R.

4. The facts pertaining to ground No. 1 are in narrow compass. Admittedly, in this case, the final approval for commencement of the banking business was given by the RBI on 2-6-1998. As per the facts on record, a certificate of establishment of place of business in India had been issued by the Registrar of Company (ROC) with effect from 21-5-1998 and initial fund of US 9,00,000 was remitted in India on 22-5-1998. There is no dispute about the legal proposition that if the business set-up in all respect and even if the business is not commenced but set-up to commence, then the period between the business set-up and business commence, the expenditure is to be allowed as a revenue expenditure. In the present case, the ROC issued a certificate of establishment of place of business on 21-5-1998. The RBI gave final approval on 2-6-1998. Nothing has been filed before us to show the break-up of the expenditure from 12-5-1998 to 1-1-1998. Onus is on the assessee to establish that even if the business was not commenced but the business was set-up in all respect, nothing is there on record to support the plea of the assessee. We do not find any reason to interfere with the order of the Ld. CIT (A). Accordingly, ground No. 1 is dismissed.

5. Next issue is disallowance of the consultancy fees of Rs. 15,10,000. The facts, which reveal from the record, are as under. The assessee claimed that an amount of Rs. 15,10,000 was paid to M/s. Royal House Agency for negotiation of Leave & License deal for acquiring an office premises situated at Ballard Estate, Mumbai. It was contended before the Assessing Officer that the amount was paid towards services rendered by M/s. Royal House Agency for identification of premises, negotiation and finalisation of MOU and other legal documentation of the premises at Ballard Estate at Mumbai. The deal could not be finalised. The Assessing Officer rejected the claim of the assessee on the reason that the said expenditure was incurred in connection with some property deal, which was never materialised. The Ld. CIT (A) confirmed the disallowance made by the Assessing Officer Now, the assessee is in appeal before us.

6. We have heard the rival submissions of the parties and also perused the paper book filed. The Ld. Counsel vehemently argued that the broker / agent were engaged by the assessee for identifying and acquiring a suitable premise. But, subsequently, the deal could not be materialised. It is argued that assessee has committed to the said agent and hence assessee made the payment. The Ld. Counsel referred to the letter issued by the RBI dated 2-6-1998 (P.92 of the paper book) in which the reference is made in respect of the premises for which M/s. Royal House Agency was appointed. The Ld. Counsel relied on the following precedent :

Richardson Hindustan Ltd. v. CIT [1988] 169 ITR 516 (Bom.)

7. We have also heard the Ld. D.R. The short issue in controversy is in respect of the brokerage/commission paid to M/s. Royal House Agency. In this case, nowhere it is disputed that claim of the expenditure is bogus. We find that the only reason on which the claim is disallowed is that finally the deed was not materialised. In the case of Richardson Hindustan Ltd. (supra), the assessee company had obtained portion of premises on lease, which was for the period of ten years. The issue was in respect of the commission paid to the estate agent. The Assessing Officer disallowed the assessee’s claim on the reason that expenditure was incurred in connection with the acquisition of the capital asset. In the matter reached before the Hon’ble High Court, the assessee succeeded. In the present case, finally, the deed was never materialised. The only reason is that the expenditure was not incurred for the purpose of the business. As per the evidence on record, it is seen that while applying to the RBI, the assessee has given the address of the said premises even if subsequently the deed was not materialised. In our opinion, the expenditure is allowable. We, accordingly, direct the Assessing Officer to allow the expenditure.

8. The next issue is determining the income of the assessee by invoking Rule 10 of the Income-tax Rules, 1962. This issue is arising from ground No. 3 taken by the assessee. During the course of the assessment proceedings, on the examination of the Audit report, it was noticed by the Assessing Officer that under the head "interest" the assessee has disclosed a sum of Rs. 4,07,63,000 and further sum of Rs. 1,13,14,000 under the head "other income". The Assessing Officer asked the assessee to produce the books of accounts along with the bills, vouchers, invoices etc. As noted by the Assessing Officer, the assessee produced the vouchers, which were checked by the Assessing Officer The Assessing Officer also raised certain queries in respect of the allowability of the certain items of expenditure. The Assessing Officer also sought the explanation of the assessee on the Data Processing/Hub charges of Rs. 34,39,036. The assessee explained that the said expenditure incurred by Singapore regional office. It was also explained that those expenses were not debited in the Indian books of the assessee-company. The assessee also contended that as the expenditure was incurred by the Singapore Hub and was related to the business of the Indian office and hence in view of the Article 7(3) of DTAA the same was allowable. The Assessing Officer also sought the explanation in respect of the some other expenditure. The Assessing Officer invoked Rule 10 of the Income-tax Rules, 1962 by giving the following reason:—

"10. I am of the opinion that in the absence of production before me for verification audited accounts, bills, vouchers, invoices, etc., that the actual amount of the income in case of the non-resident assessee company cannot be definitely ascertained. The assessee has also not provided all the documentary evidences in respect of the expenses claimed. Therefore, I consider it necessary to invoke the provisions of Rule 10 of the Income-tax Rules, 1962 and to determine the income of the non-resident assessee company during the year under consideration.

11. Therefore, after considering the facts of the case, submissions of the assessee company and the materials on record, the business profit of the assessee company is arrived at the net profit rate of 2.5 per cent in respect of the interest earned of Rs. 4,07,63,000 and at the net profit rate 10 per cent of other income of Rs. 1,13,14,000 for the year under consideration, which comes to Rs. 10,19,075 and Rs. 16,97,100 respectively; both aggregating to Rs. 27,16,175. Therefore, the business income of the assessee is assessed at Rs. 27,16,175 for the year under consideration, i.e. assessment year 1999-2000."

9. The assessee challenged the action of the Assessing Officer for invoking the Rule 10 and determining the income of the assessee on estimation. The Ld. CIT (A) was not impressed with the objection of the assessee that all the audited books of accounts were produced and hence there was no reason to determine income under Rule 10 of the Income-tax Rules, 1962. Now, the assessee is in appeal before us.

10. The Ld. Counsel vehemently argued that if the assessee could not produce some of the vouchers or bills and merely produce the photo-copies to that extent, the Assessing Officer could have determined the allowability of expenditure. It is argued that nowhere it is the case of the Assessing Officer that the books of accounts of the assessee were not in conformity with the Accounting Standards. It is argued that Rule 10 does not give un-fettered powers to the Assessing Officer to determine the income when the books of accounts are maintained as per the standard norms of the accounting principles. He, therefore, pleaded that the Assessing Officer may be directed to work out the income as per the books of account maintained by the assessee. We have also heard the Ld. D.R.

11. On the perusal of the assessment order, it is seen that the Assessing Officer has finally computed total income of the assessee under Rule 10 of the Income-tax Rules, 1962. Income-tax Rule 10 reads as under:—

"10. Determining of income in the case of non-residents.—In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to Income-tax may be calculated:—

( i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or

( ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or

( iii) in such other manner as the Assessing Officer may deem suitable."

As per the said Rule, the Assessing Officer is authorised to compute or determine income of the non-resident in the following situation.

(i)The Assessee should be non-resident person.

(ii)The Assessing Officer cannot definitely ascertain the actual amount of income accruing or arising to such non-resident, directly or indirectly from any business connection or any property or any asset or source of income in India.

(iii)The said situation pre-supposes that the material or accounts available before the Assessing Officer are of such nature that it is difficult for the Assessing Officer to determine the actual income of the non-resident. From the scheme of the said rule, it appears that the said Rule has the application when the income is accruing or arising and the said phraseology is used in section 9(1) of Income-tax Act.

12. In the present case, the assessee has Permanent Establishment (PE) in India; hence, the extended meaning of the business connection is not required. It is seen from the observation of the Assessing Officer in respect of certain expenditure claimed by the assessee that, there was no sufficient evidence to support the claim. In our opinion, such situation may not justify the Assessing Officer to invoke Rule 10 for determining the income of the assessee. If the Assessing Officer is not satisfied with the evidences produced to support the claim of any expenditure or allowance, then he can independently decide whether the same is to be allowed or not, as in the present case. In our opinion, for the reasons given above, there is no justification on the part of the Assessing Officer to invoke Rule 10 for determining the income of the assessee. We, accordingly, allow ground No. 3 taken by the assessee.

13. We have already adjudicated the issues arising in this appeal on merit. At the same time, though we have held that Assessing Officer was not justified in determining the assessee’s income by invoking Rule 10 of Income-tax Rules, 1962, in our opinion, this matter has to go back to the Assessing Officer for determination of the income as per the books of account and the relevant record maintained by the assessee. We, accordingly, remand the entire matter to the file of the Assessing Officer for determination of income/loss of the assessee after considering the books of account which will be produced by the assessee. The assessee is also directed to produce the books of account before the Assessing Officer

14. In the result, assessee’s appeal is allowed in the above terms.

 

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