S.S. Viswanethra Ravi, Judicial Member - The appeal in ITA No. 1390/Kol/2013 by the Revenue and CO No. 100/Kol/2013 by the assessee are arising against the common order dated 25.02.2013 passed by the CIT (A)-IV, Kolkata for the assessment year 2009-10.
2. First we shall take up the Revenues appeal and The Revenue raised the following grounds:
| "1. |
For that the Ld. CIT (A) has erred in deleting the addition of insurance premium of Rs. 45,00,000/- |
2. |
For that the Ld. CIT (A) has erred in deleting the addition of a part of Director's salary amounting to Rs. 10,00,000/-. |
3. |
for that the Ld. CIT (A) has erred in deleting the addition of Rs. 27,168/- as club expense." |
3. The brief facts of the case are that the assessee is a company engaged in the business of tea, plastic & silicon rubber products along with also involved in loans and investments. The return of income was filed disclosing the total income of Rs. 27,82,963/- on 29-09-2009. Notices under section 143(2) and 142(1) of the Act issued and in response to such notices, the Ld.AR appeared filed various relevant details before the AO.
4. During the assessment proceedings, the AO found that the assessee has paid an amount of Rs. 45 lakhs in cash towards insurance premium for its three directors having coverage for five years and the sum assured being 75 lakhs. The assessee submitted that its policy to protect the company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death. AO added Rs. 45 laks to the total income of the assessee for non explanation of how the services of the said directors are being utilized for the benefit of business and thereto earn profits and for not following principle of "key man policy". The CIT-A, in first appeal, was of the view that it is assessee's decision as to who is the key man to be protected against any risk and found satisfied by the educational qualifications of such directors being studied in USA in MS Plastics and PhD thereafter and having several years of experience in marketing and business development. The CIT-A relied on the case law of Bilaspur Bench of Tribunal and Hon'ble Bombay High Court and held that the key man's insurance premium is as an allowable business deduction, thereby, directed the AO to allow the deduction.
5. In support of the ground no-1 raised by the revenue the learned DR relied on A.O.'s order. The learned AR submits that the insurance premium under keyman policy paid for five years and it is taxable on maturity and relied on the CIT-A order.
6. Heard both parties, perused the relevant material on record and carefully considered the judgement of Hon'ble High of Bombay. It is noticed from the order of CIT-A that it has taken into consideration the clarification issued by the CBDT vide its circular No.762 dated 18-2-1998 where in it is categorically explained at paragraph 14.1 that the insurance premium towards directors under key man policy is an allowable deduction. It is observed the Hon'ble Bombay High Court while deciding the similar issue under consideration taken into account a clarification issued by the CBDT.
7. The Hon'ble High Court of Bombay in the case of CIT v. B.N. Exports [2010] 323 ITR 178/190 Taxman 325 where the Revenue therein raised a question of law before the Hon'ble High Court as to Whether on the facts and circumstances of the case and in law, the Tribunal was justified in confirming the order of the CIT (A) deleting the addition of Rs. 31,68,775 being insurance premium paid by the assessee firm on a keyman insurance policy ? The relevant portion of which is reproduced herein below:
'9. The effect of s. 10(10D) is that monies which are received under a life insurance policy are not included in the computation of the total income of a person for a previous year. However, any sum received under a keyman insurance policy is to be reckoned while computing total income. For that purpose, a keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was in employment as well as on a person on who is or was connected in any manner whatsoever with the business of the subscriber. The words "is or was connected in any manner whatsoever with the business" of the subscriber are wider that what would be subsumed under a contract of employment. The latter part makes it clear that a keyman insurance policy for the purposes of cl. (10D) is not confined to a situation where there is a contract of employment. Clause (10D) relates to the treatment for the purpose of taxation of moneys received under an insurance policy. In this appeal, the Court has to determine the question of expenditure incurred towards the payment of insurance premium on a keyman insurance policy. The circular which has been issued by the CBDT clarifies the position by stipulating that the premium paid for a keyman insurance policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure, there is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose of a keyman insurance policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business.'
8. In the present case, the assessee's case is that its policy to protect the company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death. The Hon'ble High Court taken into consideration the clarification issued by the CBDT vide its circular No.762 dated 18-2-1998 that the premium paid for a keyman insurance policy is allowable as business expenditure. We are of the view that the payment of Rs. 45,00,000/- towards insurance premium under keyman policy is for the benefit of assessee's company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death made by the AO and as held by the Hon'ble High Court Bombay it is an expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business. Therefore, the order of the CIT-A is justified in deleting the addition made by the AO. Ground No-1 raised by the Revenue is therefore dismissed.
9. Ground no.2 relates to disallowance of Rs. 10,00,000/- towards excess remuneration paid to one of the directors of the assessee company. The A.O. was of the opinion that the remuneration as paid by the assessee to its director was unreasonable and excessive having regard to the services rendered by the said director. The assessee submitted the said remuneration was paid to director taking into consideration his services in earning of it to its business. Having not satisfied with the explanation offered by the assessee and not producing any corroborative evidence to substantiate the reasonableness of excessive remuneration, the A.O. disallowed Rs. 10,00,000/- u/s 40 A (2)(a) of the Act.
10. In first appeal, the assessee contended that there was no limitation for a private limited company to pay remuneration out of its net profit. The assessee also submitted that said director is based in Pune exclusively dealing with Tata Motors for the benefit of assessee and he raised business with Tata Motors worth Rs. 614.86lakhs and relied on the case laws. The CIT-A examined the details of the said Director Sri Sunil Kumar Jain and found that he studied in U.S.A. and has vast experience of business development with variety of industries. Having found his gross total income of Rs. 73,68,380/- for assessment year 2009-10 and payment of income tax of Rs. 23,84,897/- held that he is a full- time working director does not falls in terms of section 40 A(2)(a) of the Act and deleted the adhoc disallowance of Rs. 10,00,000/-.
11. The learned DR relied on the order of AO. The learned AR relied on the order of CIT-A.
12. Heard both parties and perused the relevant material on record. The question before us is as to whether the CIT-A is justified in holding the disallowance u/s 40A(2)(a) as unsustainable. For the sake of better understanding let us examine the said provision
"(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing Officer] is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."
13. A plain reading of the above provision suggests that any payment made to any person falling under clause (b) of this sub-section, that if the AO opines that such expenditure is excessive or unreasonable having regard to the fair market value of the goods etc shall not be allowed as a deduction. In present case, the assessee states that the said Sunil Kumar is one of the directors of assessee company and is located in Pune dealing with its important client. CIT-A during appellate proceedings found that the said Sunil Kumar was able to sell goods of assessee worth of Rs. 614.86 laks to its important client i.e Tata Motors in Pune. Now, the question before us whether the said disallowance of Rs. 10,00,000/- falls for consideration having regard to the fair market value of the services rendered by the said Sunil Kumar and whether the payment is made for the legitimate needs of the business or profession of the assessee. We find that the said Sunil Kumar being one of the directors of assessee company is directly covered under the persons referred in clause (b) 40A(2) of the Act and hence therefore, whatever may be the payment is in the opinion of AO in excessive or unreasonable shall not be allowed as a deduction. However, keeping in view that the services rendered by Sunil Kumar resulted in the business worth Rs. 614.86 lakhs, we find ourselves in agreement with the ld. CIT (A) that the remuneration paid to him cannot be considered as excessive or unreasonable to attract the provision of section 40A(2)(b). We therefore confirm the order of CIT-A and dismiss ground no.2.
14. Ground no.3 relating to disallowance of expenditure incurred towards club memberships.
15. We may refer to the provision of Section 37 which is reproduced herein below for the benefit of better understanding of the same in the context of case on hand
'37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".'
16. The bare reading of the above suggests that in order to qualify or the true test for qualification of expenditure under s. 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account.
17. The Hon'ble CIT v. Samtel Color Ltd. [2010] 326 ITR 425/[2009] 180 Taxman 82, the facts involved therein was that the assessee has paid corporate membership fee to Indian Habitat Centre and Sports & Cultural Club, Noida amounting to Rs. 5 lakhs and Rs. 1 lakh respectively. The AO disallowed the expenditure as it does not bear any nexus with the business carried on by the assessee and the CIT (A), on appeal, directed the AO to disallow 20% of Rs. 6 lakhs and allow the balance amount as revenue expenditure on the ground that the entire expenditure was not incurred for business purposes. The Tribunal concluded that since membership allowed the employees to interact with its customers and the expenses were for business purposes. The Hon'ble High Court held as follows:
"5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The 'business purpose' basis adopted for eligibility of expenditure under s. 37 of the Act was the correct approach. This is more so in view of the Tribunal's findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee."
18. In the instant case, the expenditure paid to various clubs, thus, in the light of aforesaid decision, is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise. Applying the principle laid down above, we hold that expenditure amount paid to various clubs is an expenditure incurred wholly and exclusively for the purposes of business of the assessee.
19. The MUMBAI 'B' BENCH of ITAT in the case of Dy. CIT v. Bank of America Securities (India) (P.) Ltd.[2011] 128 ITD 386, the facts involved therein was that the assessee has made payment of entrance fee to a club namely Bombay Gymkhana amounting to Rs. 16 lacs. The AO disallowed Rs. 16 lacs as capital outlay and added to the income of the assessee. The CIT (A) deleted the addition of Rs. 16 lacs made by the AO being entrance fee to Bombay Gymkhana Club. The relevant portions of Tribunal's order as follows:
'8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute in as much as it has been rightly observed by the learned CIT (A) the AO has not disputed the fact that the expenditure of club membership fees Rs. 16 lacs has been incurred by the assessee wholly and exclusively for the purpose of business of the assessee. Further we find no merit in the plea of the learned Departmental Representative that the decision in Alembic Chemical Works Co. Ltd. (supra), is not applicable to the facts of the assessee's case. In fact, their Lordships referred to various decisions particularly the decision in the case of City of London Contract Corporation v. Styles (1987) 2 Tax Cases 239 wherein broad area of distinction is pointed out. It is held in that case that the outlay on the 'acquisition of the concern' would be capital while an outlay in 'carrying on the concern' is revenue. The Court further referred to the following observations in the case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 : "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure."
13. Respectfully following the above decisions of the Hon'ble jurisdictional High Court and the Tribunal in the assessee's own case and for the reasons as mentioned in para 5.3 in the case of Samtel Color Ltd.(supra), we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise and accordingly we are inclined to uphold the finding of the learned CIT (A) in deleting the disallowance of Rs. 16 lacs made by the AO. The grounds taken by the Revenue are, therefore, rejected.'
20. In the present case, the assessee contended that the expenditure paid to club and did not bring into existence an asset or advantage for the enduring benefit of the business of assessee to treat the same as capital expenditure. The club expenditure, it only facilitates smooth and efficient running of a business of the assessee. Therefore, we hold that the ratio of the aforesaid case law is applicable to the present case and the club expenditure paid for staff is an allowable expenditure.
21. In the light of above, respectably following the above, we dismiss the ground no-3 raised by the appellant Revenue.
22. Let us take up the cross objection filed by the assessee in CO 100/KOL/2013 where in the learner AR submitted that the assessee is not interested to prosecute ground no.1 and sought to dismiss the same as not-pressed accordingly ground no.1 is dismissed as not-pressed.
23. The assessee raised the following grounds in cross objection:
| "1. |
That on the facts and in the circumstances of the case, Ld. CIT (A) is wrong and unjustified in confirming disallowance of Rs. 1,82,917/- towards prior period expenses. |
2. |
That on the facts and in the circumstances of the case, Ld. CIT (A) is wrong in confirming the action of Assessing Officer who considered liability of Rs. 43,571/- towards Sundry Creditors as deemed income U/s. 41(1) of IT Act, 1961. |
3. |
That the respondent craves leave to add, alter, adduce or amend any ground or grounds on or before the date of hearing of the appeal." |
24. Ground no.2 relating to the addition of amount of Rs. 43,571/- on account of cesstion of the liability u/s 41(1) of the Act. The AO found that the amount as indicated above has remained as unclaimed by creditors for a considerable period of time. For not offering proper explanation the A.O. added the amount to the total income of the assessee. Before the CIT-A the assessee contended that the addition made by the A.O. is not sustainable in the absence of any concrete proof that the suppliers given up their claim. The CIT-A was of the view that the onus is on assessee to establish that the liability is still existing having failed so confirmed the addition by the A.O. Before us, the learned AR submitted that the said issue is covered by order of B bench, Kolkata Tribunal in ITA1345/KOL/2011 for assessment year 2008-09.
"5. We find from the above facts that these are trade creditors admittedly coming from earlier years being opening balance. We also find from the record that the assessee has not written-off the liability or liability has not ceased or remitted. In such circumstances, now we have to go to the provisions of section 41 (l) of the Act and see the legal possession. Section 41 (1) would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year 2007-08 relevant to the assessment year 2008-09 which was the year under consideration. It is undoubtedly a curious Case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that, therefore, the amount in question cannot be added back as a deemed income under section 41(1) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Hence, we have no alternative except to confirm the findings of CIT (A) in respect of deletion but reverse qua the confirmation of addition."
25. In the present case, the contention of the assessee was that the addition made by the A.O. is not sustainable in the absence of any concrete proof that the suppliers given up their claim. The observation of the Tribunal was that in the aforesaid decision Section 41 (1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present the AO noted that the assessee admitted that the amount of Rs. 43,571/- has remained as unclaimed by creditors for a considerable period of time. Therefore the fact remains undisputed that the liability carried forward for many years and there was no cessation or remission in the case on hand. As held by the Tribunal supra there are two conditions are to be fulfilled in order to attract provisions of Section 41 (1) of the Act, i.e cessation or remission and it should be of previous year and that those two conditions were missing in this case under consideration. In our view, the order of Tribunal supra is applicable to the facts and circumstances of the case and we hold that application of Section 41 (1) of the Act is not applicable and addition made thereon is bad under law, accordingly, ground no-2 raised by the assessee is allowed.
26. In the result, the appeal of the Revenue is dismissed and the Cross Objection of the assessee is partly allowed.