DCIT, Central Circle 6 vs M/s. Sahara India (Firm)

PER S.RIFAUR RAHMAN,AM:

The Revenue has filed appeal against the order of the Learned Commissioner of Income-tax (Appeals-I), New Delhi [“Ld. CIT(A)”, for short]dated 31.01.2011 for the Assessment Year 2003-04. The assessee has also filed cross objections against the impugned order dated 31.01.2011.

The Revenue in the appeal and assessee in the cross objections has raised following grounds of appeal :-

At the time of hearing, ld. AR of the assessee with the permission of the Bench, brought to our notice relevant facts on record. He submitted that the assessee is a partnership firm consisting of three partners namely Shri Subroto Roy, Shri J. B. Roy and Shri O. P. Srivastava. The assessee, having an elaborate network of more than 1400 branches, was engaged in the business of mobilizing deposits upto AY 1992-93. He further submitted that because of the restrictions of Reserve Bank of India, assessee stopped mobilizing deposits on its own and now acts as an agent and collects monies/deposits from public under various schemes run by its principal companies, namely, Sahara India Financial Corporation Limited (“SIFCL”),Sahara India Commercial Corporation Ltd. (SICCL), Sahara India Airlines Ltd., and Sahara India International Corporation Ltd. as per agreements entered with respective entities. Mainly, the activities of the assessee are connected with the mobilizing of the deposits, bonds, debentures and shares for these companies only. In terms of the said MOU entered with Principals, the Principal shall reimburse certain expenses incurred by the assessee and pay certain percentage of deposit collected by the assessee on behalf of such Principal. He submitted that in the last few years, it has started its own consumer product division. Its turnover consists of sale of Bakery items and toiletries. The total sale turnover during the year is Rs. 19.23 Crores.

At the outset, it is submitted that the impugned assessment order is bad in law as the assessing officer has abdicated its authority and has proposed additions/disallowances by merely placing reliance upon the opinion of the Special Auditor without any independent application of mind. In the Special Audit Report, the Special Auditor has not found anything incriminating against the assessee but has merely given his opinion regarding admissibility of expenses under various provisions of the Act and the opinion of the Special Auditor, being an outsider/third party cannot, in our respectful submission, be the basis for judging incurrence or reasonableness of any expenditure incurred by the assessee.

He further submitted that the Hon’ble Supreme Court in the assessee’s own case reported in Sahara India (Firm) V. CIT: [2008] 300 ITR 403 (SC) and the decision of the Hon’ble Delhi High Court in the case of Sahara India Financial Corporation Ltd. vs. CIT: [2017] 399 ITR 81 (Del) and in other decisions, held, it is not at all permissible to direct special audit:

Similarly, the Hon’ble Delhi High Court in the case of Delhi Development Authority vs. UOI: 350 ITR 432 (Delhi) held that assessing officer cannot delegate his powers to Special Auditor, by observing as under:

He submitted that the aforesaid action of the AO, in accepting the observations of the Special Auditor as sacrosanct and making additions and disallowances solely on the basis of the recommendations of the Special Auditor, without any independent application of mind, is wholly erroneous and untenable in law inasmuch as the AO has completely abdicated its authority and delegate/ outsource the work of assessment to the Special Auditor, contrary to the mandate of the law.

After the above submissions of the Ld AR, with the consent of both the parties, we proceeded to decide the issue on merit. Accordingly, we proceeded to adjudicate the grounds raised by the revenue as under:

Ground No.1 of Revenue’s appeal is general in nature, hence not adjudicated.

With regard to Ground No.2 of Revenue’s appeal regarding disallowance of Rs.1,36,44,424/- on account of alleged short reimbursement of expenses by Sahara India Financial Corporation Limited (SIFCL), ld. AR submitted that the Assessing Officer has by solely relying upon the Special Audit Report in case of Sahara India Financial Corporation Limited (‘SIFCL’) wherein it was observed that opening deposit liability on the basis of which deposit scheme expenses are being reimbursed to the assessee by the principal was incorrectly taken because of the cancellation entries, made an addition of Rs.1,36,44,424 (being 4.5% of Rs.30,32,09,418/- being opening deposit liability short taken by SIFCL) alleging that the expenses to that extent have not been reimbursed to the assessee by SIFCL which is not in accordance with the Memorandum of Understanding (MOU) entered between the parties. He submitted that in appeal, ld. CIT(A) deleted the disallowance holding that income which has been worked out by the Assessing Officer is on hypothetical basis based on so many ifs, buts and would which lead to the conclusion that the working is based purely on hypothesis.

At the time of hearing, ld. AR submitted that the assessee had entered into a Memorandum of Understanding (MoU) dated 01.04.2021 as amended vide supplementary deed dated 01.07.2002, with Sahara India Financial Corporation Limited (“SIFCL”), under which SIFCL was required to reimburse the assessee for expenses incurred in operating its offices and branches while rendering services as an agent, as per the terms of the MoU. (Refer, MoU at pages 632-639 of Paper Book Vol 1.) He submitted that as per the said agreement, a fixed amount calculated at 4.5% of the opening balance of SIFCL's total deposit liabilities as of April 1st of each financial year, was to be paid to the assessee, towards reimbursement of expenses. The relevant extract of MOU, is as under (relevant @ 638 of Paper Book Vol 1):

He submitted that the assessee operates through more than 1,500 branches across the country and compiling and consolidating financial data takes a considerable amount of time. This has led to delays in finalizing its accounts. In the instant case, the assessee firm’s accounts for the year ending 31.03.2002 were finalized on 20.01.2004, while SIFCL finalized its accounts for the same year earlier, on 07.10.2003.

He further submitted that during the period between 07.10.2002 (accounts finalization date of SIFCL) and 20.01.2004 (accounts finalization date of assessee), while reconciling financial data, the assessee identified some entries relating to FY 2001–02 that were linked to SIFCL. Upon reconciliation, these were reported to SIFCL and were recorded in the SIFCL’s books in FY 2002–03, relevant to AY 2003–04. He submitted that since SIFCL's accounts were finalized earlier, the said entries relating to deposits and depositors’ loans identified by the assessee during its account consolidation were traced only after SIFCL’s accounts were closed. These entries were subsequently recorded by the SIFCL in its accounts for the financial year 2002– 03 corresponding to AY 2003–04.

He submitted that as per the MoU, the assessee was entitled to reimbursement of deposit scheme expenses based on the opening deposit balance recorded in SIFCL’s books for the relevant financial year. He further submitted that since the assessee also works as an agent for other principals, such reconciliations are a regular, ongoing process due to delays in finalizing its own accounts. The impact of these reconciliations usually results in a minor increase or decrease in the deposit liabilities reported to the principals, and this situation has occurred in previous years as well.

He further submitted that additionally, the accounts of the assessee were audited by a special auditor, however, no adverse remarks were made in this regard, the AO has, relying upon the special audit report of SIFCL to make the addition. (Refer, Pages 646 – 648 of Paper book Vol 1.)

Ld. AR further submitted that the Act takes into account two points of time at which liability to tax is attracted, namely - (i) accrual of income or (ii) receipt of income. However, the substance of the matter is “income”, which has to be recognized as per system of accounting followed by the assessee in view of section 145 of the Act.

He submitted that by virtue of the power conferred under section 145(2) of the Act, the Central Board of Direct Taxes (“CBDT”) has notified the following two Accounting Standards vide Notification No. S.O. 69(E) dated 25.01.1996, which are to be followed by all tax payers following mercantile system of accounting, viz:

 AS-1- Disclosure of significant accounting policies  AS-2- Disclosure of Prior Period of Extraordinary items and changes in Accounting estimates. He submitted that Paragraph 6(b) of AS-1 defines “accrual” as under:

He submitted that the term “accrue” is not defined in the Act; however, it is a settled law that income is said to accrue as and when right to receive an amount gets crystallized in favour of the assessee. The concept of “income” and its accrual is judiciously well settled and reference, in this regard, may be made to the following decisions.

He further brought to our notice that Hon’ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT: 26 ITR 27, held that unless and until there is created in favor of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. The relevant observations at pages 51 and 52 of the judgment are extracted as under:

Further he submitted that similarly, the Hon’ble Supreme Court in the case of CIT v. Ashokbhai Chimanbhai: 46 ITR 42 (SC) held as under:

He further placed reliance on the decision of the Supreme Court in the case of CIT v. Excel Industries Ltd.: 358 ITR 295 (SC), wherein the apex Court has laid down three tests in order to determine as to when the income can be said to have accrued:

He further placed reliance on the following decisions wherein it has been held that

He submitted that since in terms of the MOU, the assessee is entitled to a fixed amount calculated at 4.5% of the opening balance of SIFCL's total deposit liabilities as of April 1st of each financial year, no income accrued beyond the same.

He further submitted that without prejudice, the only issue raised by the assessing officer is regarding the increase of income by the amount by which the opening deposit liability of SIFCL which has fallen short because of delay in finalization. It is submitted that there is no question of leakage of any revenue in this regard, since as per the accounting policy regularly followed by the assessee, the debit notes raised by the assessee firm are based on such balances and the income has been accounted for accordingly (Refer, Debit notes raised in year under consideration at pages 640-645 of Paper book Vol 1.). Since reconciliation entries were accounted for by SIFCL in the year under consideration, the debit notes that would have been raised in the next year would be based on the opening amount considering the reconciliation entries.

In this regard, he further placed reliance on the following decisions, wherein it has been held that Revenue should not agitate the issue of allowability of expenditure or recognition of revenue in one year or different years, since such issues are revenue-neutral and do not affect the tax liability of the assessee likely to be collected by the department as a whole:

 CIT v. Excel Industries Ltd.: 358 ITR 295 (SC)

 Shasun Chemicals & Drugs Ltd. vs. CIT: 388 ITR 1 (SC)

 CIT v. Rajasthan Breweries Limited.: ITA 889/2009 (Del.)- Revenue’s SLP dismissed (CC 1379/2014)

 DIT (E) V. Apparel Export Promotion Council: 244 ITR 734 (Del)

 CIT V. Neo Polypack (P) Ltd: 245 ITR 492 (Del.)

 CIT V. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.)

 DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.)

In light of all the above, he submitted that the CIT(A) has rightly deleted the disallowance made by the Assessing Officer. Therefore, the said ground of appeal lacks merit and should be dismissed.

On the other hand, ld. DR of the Revenue brought to our notice para 10 of the assessment order, since the facts in AY 2003-04 and 2004-05 are similar, for the AY 2004-05 and submitted that the assessee had short recognized the income accrued for the year under consideration. He objected to the submissions of the Ld AR that the AO had heavily relied on the findings of special auditor. He submitted that the AO had the authority to take cognizance of the material available before him. Therefore, he relied on the detailed findings of the AO.

Considered the rival submissions and material placed on record. We observed that the assessee was engaged in the business of mobilizing deposit still AY 1992-93 and subsequently, it is engaged only as an agent on behalf of SIFCL and other group entities to collect deposits from public under various schemes run by the group entities on commissions/reimbursement of expenses. Since the assessee is having several branches across the country and it was reimbursed the various expenses by the group entities, the entity SIFCL is the main financial controller, in order to have certainty of revenue and managing the affairs of the assessee company, it entered into MOU with the group entities, particularly with SIFCL to collect the reimbursement of expenses, the formula adopted in the MOU is to reimburse 4.5% of the opening balance of the aggregate deposit liability of SIFCL. The terms were devised in such a way that every quarter, the assessee will get reimbursement of about 1 to 1.25% of the aggregate outstanding liability as per the opening balance on the basis of final balance sheet of SIFCL. It is benchmarked to collect the revenue from SIFCL on the basis of MOU to proceed with the affairs without hindrances. Since the assessee’s revenue is based on the audited balance sheet of SIFCL, which was finalized in advance, the revenue of the assessee depend only upon the finalized balance sheet, in case there is any deviation, the same can be adjusted in the financials of the assessee. In the given case, we noticed that the balance sheet of the assessee was finalized only on 20.01.2004 for the year ending 31.03.2002, the assessee cannot modify the finalized revenue figures on the basis of opening outstanding balance of liability for the year under consideration. As per the terms of MOU, the eligibility to collect revenue only on the basis of opening outstanding balance of aggregate deposit liability. The deviation in the subsequent variation can only be accounted in the subsequent period, in the given case, the final balance sheet of the assessee was finalized only on 20.01.2004, the deviation can only be accounted in the financial year 2004-05.

After considering the detailed submissions, we are inclined to agree with the detailed findings of Ld CIT(A) and the tax liability depends upon the certainty of revenue recognition not on the basis of ‘ifs and buts’ in recognition of the revenue. The special auditor may have ascertained the income on the basis of information available at the time of audit, but the revenue must be recognized on the date of finalization of accounts, in this case, the same was finalized with huge delay. Further, we observed that the deviation was recognized in the subsequent period, as such there is no loss to the revenue, particularly the rate of tax is exactly same in both the financial years. In the given case, the income was accrued to the assessee on the basis of MOU and as per the terms, the assessee had recognized the income. There is no short recognition of income in the year under consideration. We observed that the income for the year under consideration was recognized on the basis of income recognition advocated in the accounting standards as well as in the decision of apex court in the case of Excel Industries Ltd (supra). Therefore, we are inclined to accept the detailed findings of Ld CIT(A) and accordingly, the ground raised by the revenue is dismissed.

With regard to Ground No.3 of Revenue’s appeal and Ground No.1 of cross objections regarding addition on account of prior period expenses, ld. AR of the assessee submitted that the special auditor had identified certain expenses amounting to Rs.9,98,03,509/- which were alleged to be related to earlier year and were debited / credited to P & L account of the year under consideration. He submitted that the AO, solely relying upon the report of special auditors, without examining the point of time of crystallization of expense and without making reference to any particular income/expenditure held that expense are in the nature of prior period expenses and hence not allowed as deduction during the year under consideration. However, considering that an amount of Rs.1,27,45,403 was suo moto disallowed by assessee in computation of Income, the AO made net disallowance of Rs.8,70,58,106/-.

He submitted that in appeal, the ld. CIT(A), after examining the bills, held that the expenditure relates to the relevant year and also in some cases, bills were even received during the relevant year, and thus, was in principle of the view that no disallowance is called for. However, considering that the possibility of some expenses pertaining to earlier year could not be ruled out, the CIT(A), sustained the disallowance to the extent of Rs.43,52,905 (i.e., 0.5% of Rs.8,70,58,106) and deleted the balance disallowance of Rs 8,27,05,201.

In this regard, he submitted that the assessee suo-moto disallowed the prior period expenses of Rs.12,745,403 (after netting off prior period income) while computing the taxable income for the relevant assessment year. The aforesaid prior period expenses and prior period income were duly disclosed & verified by tax auditor in the tax audit report in Form 3CD and also in the P&L account. (Refer Pages 47-48 of Paper book Vol 1.) He submitted that the assessee follows mercantile system of accounting as per which if the liability is in the nature of contractual liability the same has to be accounted for in the year to which it relates. It is in line with the policy consistently followed by assessee and the Accounting Standard 5 issued by the ICAI as per which expenditure relating to prior period is an allowable expenditure provided the same has crystallized during the year.

He further submitted that the expenses which were being treated by the special auditors as prior period expenses were in the nature of expenses which could have only been booked during the year on crystallization basis as it is not feasible for making any provision in respect of the same because of uncertainty. Further, majority of the expenses which have been treated as prior period expenses are expenses which have accrued during the relevant year for which bills were received during the year and all the bills and vouchers were produced before the lower authorities.

He placed reliance in this regard on the decision of the Hon’ble High Court of Gujarat in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT: 80 Taxman 61, where it was held that if the expense has accrued in the prior period but the same was quantified and crystallized in the previous year, it will be allowed as a revenue expenditure in the previous year. The relevant extract of the case is reproduced hereunder:

He further placed reliance on the following decisions wherein it has been held that the expenses pertaining to earlier year shall be allowable business deduction in the year of crystallization:

 Nathumal Tularam: 88 ITR 234 (Gauhati)

 Goetze India Ltd:112 TTJ 1 (Del)

 CIT v. Exxon Mobil Lubricants P. Ltd: 328 ITR 17 (Del.)

 CIT v. Modi Pon Ltd.: 334 ITR 102 (Guj.)

 CIT v. Triveni Engineering & Industries Ltd: 336 ITR 374 (Del.)

 CIT v. Shri Ram Pistons and Rings Ltd.: 174 Taxman 147(Del)

 CIT v. Nagri Mills Co. Ltd.: 33 ITR 681 (Bom.)

 S.P. Jaiswal Estates (P.) Ltd. v. CIT: 216 ITR 145 (Cal.)

 ACIT v. Birla Soft Ltd.: 46 SOT 437 (Del.)

 PCIT v. Balmer Lawrie and Company Ltd.: 149 taxmann.com 286 (Cal)

 Toyo Engg. India Ltd. v. JCIT: 5 SOT 616  Sterlite Industries (India) Ltd. vs ACIT/JCIT: 6 SOT 497 (Mum. Trib)

In light of all the above, he pleaded that the ld. CIT(A) has rightly deleted the disallowance made by the Assessing Officer.

It is respectfully submitted that AO did not challenge the genuineness of expenses.

The sole reason for the impugned addition is that in view of the AO, the assessee should have recognized the said expenses in earlier years and not in the year under consideration. Further, there being no change in the tax rates applicable to partnership firm for AY 2002-03 and 2003-04, the change in year of claim of the expenditure becomes revenue neutral.

In this regard, he made reference to the following decisions wherein the various Courts have repeatedly held that in case of dispute only regarding the year of taxability/ allowability of an income/ expenditure, the entire exercise is revenue neutral in case of uniform rate of taxation.

 CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC)

 CIT v. Realest Builders & Services Ltd.: 307 ITR 202 (SC)

 CIT v. Triveni Engineering & Industries Ltd: 239 CTR 216 (Del)

 CIT vs. Nagri Mills Co. Ltd : 33 ITR 681 (Bom)

 CIT vs. Shri Ram Pistons and Rings Ltd.: 220 CTR 404 (Del)

 CIT vs. Bilahari Investment (P) Ltd.: 299 ITR 1 (SC)

 CIT vs. Triveni Engineering Industries Ltd: 336 ITR 374 (Del.)

 CIT vs. M/s Vishnu Industrial Gases: ITA No. 229/1988 (Del.)

 ACIT vs. Narmada Chematur Petrochemicals Ltd.: 327 ITR 369 (Guj)

Strictly without prejudice to the above and only in the alternative, if the expenses are found to be relating to other years, in such eventuality necessary directions be issued to the assessing officer to allow deduction of such expenses in respective assessment years to which the expenditure relates.

In connection with the above, it is submitted that in the following cases similar directions were given by the Tribunal to the assessing officer, to allow deduction in respect of issues decided in favour of the assessee, in other assessment years:

He submitted that however, despite all information being produced on record and after verification, the CIT(A) has not pointed out any discrepancy in any of the information/document submitted nor raised any issue regarding the same being pertains to prior period and had merely on basis of surmises and conjectures, observed that possibility of some expenditure of earlier years having been debited to accounts of relevant year expenditure cannot be ruled out and thus, confirmed the disallowance of Rs.43,52,905/- on ad-hoc basis without any justification.

In this regard, he placed reliance on the following decisions wherein it has consistently been held that disallowance of any expenditure, without pointing out any specific instance of un-vouched expenditure, is not sustainable He also brought to our notice the decision of Hon’ble Supreme Court in the case of J.J. Enterprises vs. CIT: 254 1TR 216 (SC), wherein it was held by the Court that no reference was called for in respect of the finding of the Tribunal that additions was made partly on the basis of guess work and was unsustainable and there was also no reason to restore the matter back to the assessing officer for re-examining.

He further relied on the decision of Hon’ble Delhi High Court in the case of Friends Clearing Agency P. Ltd. v. CIT: 332 ITR 269 (Del) held as under:

To the same effect, he placed reliance on the following decisions:

 National Industrial Corporation Ltd.258 ITR 575 (Del)  Jay Engg. Works Ltd. : 113 ITR 389 (Del)  Dwarka Prasad Agarwal v. ITO: 52 ITD 239 (Cal).  Mahendra Oil Cake Industries Pvt. Ltd. v ACIT: 55 TTJ 711 (Ahd.)  Rattah Mechanical Works Ltd. v ITO: 87 Taxman 288 (Mag) (Chd Trib.)  Shriram Pistons and Rings Ltd. v IAC: 39 TTJ 132 (Del Trib)

To the same effect, he also relied on the following decisions wherein it has been held that no ad-hoc disallowance could be made by the assessing officer:

 Nodi Exports v. ACIT: 24 SOT 526 (Del.)  ACIT v. Amtek Auto Ltd.: 112 TTJ 455(Del.)  Roger Enterprises Pvt. Ltd. v. ITA : 52 TTJ 198 (Del.)  Ramji Das Modi v. DCIT: 110 Taxman 107 (JP) (Mag)  Continental Seeds & Chemicals Ltd. v. ACIT: (2003) SOT 393(Del.)  Agarwal Trading Co. vs. ITO 108 TTJ 589 (Del.)  Sterling Motors v. Addl. CIT: ITA No. 3217 to 3219/Mum/2009 (Mum.)  Asstt. CIT v. Amrik Singh: ITA No. 987/2010 (Kol.)  Rajni Combustion P. Ltd. v. DCIT: ITA No. 1779/Ahd./2009 (Ahd.)

He submitted that it is also settled law that suspicion, howsoever, strong cannot take place of proof and that assessment under the Act has to be made on the basis of material/evidence and not on the basis of assumptions/presumptions [Refer J.J. Enterprises vs. CIT 254 ITR 216 (SC), Assam Tea Co. vs. ITO: 92 ITD 85 (Asr.) (SB), Faqir Chand Chaman Lal vs. ACIT: (2004) 1 SOT 914 (Asr.) (Appeal dismissed by P&H High Court in 262 ITR 295 and SLP dismissed by SC in 268 ITR), CIT vs. Paras Cotton Co.: 288 ITR 211 (Raj.)]

In view of above, it is submitted the disallowance of Rs.43,52,905/- confirmed by ld. CIT(A) is unjustified and liable to be deleted.

On the other hand, ld. DR of the Revenue submitted that the assessee follows mercantile accounting system and it should have accounted on the relevant period. He objected to the relied granted by the Ld CIT(A) and relied on the detailed finding of AO.

Considered the rival submissions and material placed on record. We observed that the AO had heavily relied on the detailed findings of special audit report and based on that it was noticed that most of the expenses were recognized subsequently instead of following the mercantile system. On careful consideration we noticed that the assessee had recorded the expenses on the basis of relevance and crystallization of expenses. We noticed that Ld CIT(A) had reconciled the expenses and had not passed any reservation or qualification on the genuineness of the expenses. It is also a fact that the assessee had also finalized the accounts with huge delay and recognized the expenses for the relevant period after due recognition. It is fact on record that the assessee recorded most of the expenses on contractual basis and the same had to be recognized relevant to contractual period. After careful consideration, we do not see any reason to disturb the detailed findings of Ld CIT(A) and it has no impact on the revenue as the tax rates are common for both years. There is possibility of short recognition of expenses, the Ld CIT(A) had already compensated for the above short fall by sustaining certain expenses on estimation. Therefore, we are inclined to dismiss the ground raised by the revenue and ground raised in CO also dismissed.

With regard to Ground No.4 of Revenue’s appeal and Cross Objection No.2 filed by the assessee regarding disallowance on account of expenses not related to business, ld. AR submitted that the Special Auditor in Annexure 7 of the Special Audit Report has identified expenses amounting to Rs.26,31,01,591/- debited to Profit & loss accounts which were alleged to be expenses not related to business and accordingly, not allowable as business deduction. The said expenditure was incurred on occasion of Bharat Parv and Silver Jubilee Year Celebration organized by the assessee. He submitted that the AO, without citing a single instance of expenditure that was not related to the business of the assessee, disallowed an amount of Rs. 26,31,01,591 holding that the assessee had failed to discharge the onus of proving the expenses incurred wholly and exclusively for the purpose of business. He submitted that in appeal, the ld. CIT(A) held that assessee has duly explained the commercial expediency behind incurrence of the said expenditure which was duly supported by vouchers, and the AO has not pointed out any expenditure which is not related to the business of the assessee. The ld. CIT(A) further held that the disallowance was made blindly on the basis of the inference drawn in the Special Audit Report, without appreciating that said Report reflects only an opinion of the Special Auditor, and that determining the allowability of an expenditure is a quasi-judicial function of the AO, which cannot be delegated to auditors. However, ld. CIT(A) observed that out of the total expenditure of Rs.26,31,01,591, it cannot be ruled out that a portion of the expenditure may not be directly related to the business of the assessee, accordingly, the ld. CIT(A) upheld the addition of Rs. 26 lakhs without providing any basis therefore and deleted the balance disallowance made of Rs.26,05,01,591.

In this regard, ld. AR submitted that the impugned expenditure was incurred on occasion of Bharat Parv and Silver Jubilee Year Celebration. He submitted that Bharat Parv is an event which is held every year on 15th August and 26th January for celebrating the Independence Day and Republic Day, alongwith the employees, field workers of the assessee. Further, during the year, the firm celebrated its Sahara Silver Jubilee Jamakarta/Field Workers Samman Utsav, on the occasion of completion of 25 years of service by the assessee to their depositors and workers successfully. On the said occasion, a celebration was organised with the depositors and field workers and also the assessee had given various rewards/honour to their depositors/field workers for promoting the business.

It is submitted that the relevant documents were furnished/produced before the special auditor and the AO during the course of assessment proceedings and the AO has failed to appreciate the same and made disallowance, on mere surmises and conjectures, on the ground that the same have not been incurred for the purpose of business of assessee. The various replies filed by the assessee are summarized as under:

 Reply dated 30.06.2005 filed before AO in which copy of voucher with respect to expenses relating to business were submitted. (Refer, Vouchers @ Pages 650 to 712 of Paper book Vol I & Reply dated 30.06.2005 @ Pages 1600-1602 of Paper book Vol II.)

 Reply dated 17.08.2005 (@ Pages 1603-1604 of Paper book Vol II) & 15.03.07 (@ pages 1631-1647 of Paper book Vol II) explaining the nature of expenses and the purpose for which the same were incurred

As regards the allowability of the said expenditure, it is submitted that it is well settled that the expression “for the purpose of business” used in section 37(1) is not limited to earning of profit alone and if the expenditure satisfies the test of business / commercial expediency, the same needs to be allowed as business deduction under the said section. He submitted that in the present case, the expenditure on account of Silver Jubilee celebration and Bharat Parv celebration, was to provide a safe and enjoyable environment for the employees and families of the staff/employees to celebrate the festivities, the said expenditure incurred on account of commercial expediency, would be regarded as being incurred for the purpose of business under section 37(1) of the Act.

He placed reliance on the following decisions, of the Supreme Court, wherein it has been held that the expression " expenditure laid out or expended wholly and exclusively for the purpose of such business” used in section 37(1) includes expenditure voluntarily incurred out of commercial expediency, in order to indirectly facilitate the business; the expression "commercial expediency" is an expression of wide import and includes expenditure a prudent man may incur for the purpose of the business; the reasonableness whereof has to be seen from the point of view of businessman and not that of the Revenue:

 Hero Cycles (P) Ltd. v. CIT: 281 CTR 481  S.A. Builder v. CIT: 288 ITR 1  CIT vs. Walchand & Co.: 65 ITR 381  J.K. Woollen Manufacturers vs. CIT: 72 ITR 612  Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11  CIT vs. Panipat Woollen & General Mills Co. Ltd.: 103 ITR 666  J.J. Enterprises v. CIT: 254 ITR 216  CIT vs. Dhanrajgirji Raja Narasingirji : 91 ITR 544

Further, he placed reliance on the following decisions, wherein while following the ratio emanating from the aforesaid decisions, the expenses incurred towards festival celebrations alongwith employees, etc. have been held to be allowable business deduction:

 CIT vs Usha Sales Ltd: 182 ITR 453 (Del.) - Expenditure incurred on celebration of ‘Shri Ram Jayanti’ allowed  M/s Holtec Consulting Pvt. Ltd. V. DCIT: I.T.A. No. 3878/Del/2010 & 796/DEL/2011 (Del Trib)- Gifts given to directors/employees on birth anniversaries allowable  Vijay Seeds Co. (P.) Ltd. V ACIT: 74 TTJ 120 (PuneTrib.): Expenditure incurred on Ganesh Festival held to boost morale of the employees, thus allowable.

 Mangalam Cement Ltd. V DCIT: 43 ITD 292(Jaipur ITAT) - Expenditure incurred on gifts to employees on occasions like birthdays, anniversaries, marriages, etc allowable.

 Vindhya Telelink Ltd v JCIT(Jabalpur ITAT) 119TTJ(Jab)433 - Festival expenses was necessity for having cordial relationship with the staff, hence allowable.

 Hindustan Construction Co. Ltd. V. JCIT: 140 ITD 642 (Mumbai)[28-09-2012] - Nature of expenses being payment for pooja, donation for local festivals and other benevolent activities held to be for the purpose of business

Further, he submitted that the assessee had purchased gifts for its employees as well as business associates as part of its business promotion activity, the expenditure claimed by the assessee was incurred for legitimate business purposes only and was therefore, should be allowable as business deduction. Reliance, in this regard, is placed on the following decisions wherein it has been held that where sales promotion expenditure incurred by the assessee was genuine and expended for purpose of presentation of articles to employees/ business associates/ dealers/ suppliers and for giving presents/ gifts, it is nothing but an expenditure incurred for the purpose of the assessee’s business and is eligible for deduction under section 37(1) of the Act :-

 CIT vs C.B.K.R. Enterprises: 186 Taxman 14 (Del)

 Andhra Sugars Ltd. v. CIT: 171 ITR 209 (AP)

 CIT vs Avery Cycle Inds. Ltd: 296 ITR 393 (P&H)

 CIT vs Avon Cycles: 303 ITR 345 (P&H)

 Duncans Tea Ltd vs CIT: 344 ITR 442 (Cal.)

 Universal Precision Screws vs. ACIT: 169 TTJ 84 (Del)

 S.B. Reshellers (P) Ltd vs ACIT: 145 Taxman 10 (Pune)(Mag.)

 ACIT vs Amit Kiritbhai Patel: ITA No.2929/Ahd/2011  Punjab Power Packs Ltd. vs. DCIT: 71 ITD 163 (Chd.)

 Jayantilal Jivanlal Soni (HUF) vs ITO: 13 ITR(T) 215 (Ahd)

In view of the above, he submitted that the ld. CIT(A) has rightfully deleted the disallowance amounting to Rs.26,05,01,591. However, despite all information being produced on record and after verification, the CIT(A) has not pointed out any discrepancy in any of the information/document submitted nor raised any issue regarding the same being used not incurred for the purpose of business and had merely on basis of surmises and conjectures, observed that possibility of expenditure not related to business cannot be ruled out and thus, confirmed the disallowance of Rs.26,00,000 on ad-hoc basis without any justification.

The assessee relied on its submission on ad-hoc basis disallowance sustained by the ld. CIT(A) without any justification made in Ground no. 3 of Departmental appeal and Cross Objection No 1 filed by Assessee .

In view of above, it is respectfully submitted the disallowance of Rs.26,00,000/-confirmed by Ld. CIT(A) is unjustified and liable to be deleted.

On the other hand, ld. DR of the Revenue submitted that the expenses claimed by the assessee are not verifiable. He objected to the relief granted by the Ld CIT(A).

Considered the rival submissions and material placed on record. We observed that the assessee had claimed expenses incurred on the occasion of celebration of Bharat Parv and Silver Jubilee Year Celebration organized by the assessee. We also noticed that the special auditor had quantified the total expenses incurred on the above occasion, which included mostly the business promotion and employee’s welfare expenses marking the above occasion. The total expenses incurred during the year are Rs.26,31,01,591/-. The assessee had submitted the relevant vouchers substantiating the expenses mostly relating to gifts and gold coins/ornaments. Since it is in the nature of business promotion, it is directly linked to the nature of business carried out by the assessee. It is fact on record that the expenses incurred by the assessee are almost 20% of the total operational, administrative and other expenses incurred during the year. We noticed that Ld CIT(A) had restricted the disallowance to the extent of about 1% of the total expenses incurred. Since the expenses incurred by the assessee was almost 20% of the total operational, administrative and other expenses, the chances of extravagant and entertainment in nature would be more. Therefore, we are inclined to restrict the disallowance to the extent of 10% of the total expenses incurred by the assessee. Therefore, the ground raised by the revenue is partly allowed and ground raised by the assessee in CO is dismissed.

With regard to Ground No.5 of Revenue’s appeal and Cross objection No.3 filed by the assessee regarding disallowance of expenses on account of capital in nature, ld. AR submitted that the special auditors, in Annexure 14, have identified expenses amounting to Rs.26,46,489 debited to the Profit & Loss account, which were alleged to be capital expenditure not allowable as business deduction (Refer page 713 of Paper book Vol I). The expenditure majorly related to the replacement of batteries in UPS. The AO held that the said expenditure to be capital in nature holding that repair is different from replacement and although expenditure on repairs is allowable deduction but expenditure on replacement would be capital in nature. Accordingly, the AO made disallowance of Rs.26,46,489. He submitted that in appeal, ld. CIT(A) held that the disallowance of Rs 26,46,489 is not warranted holding as under:

 An expense of Rs 10,34,502 relates to printing and stationery, which cannot be said to be of capital in nature  Batteries purchased for replacement in UPS system attached is revenue expenditure as the same does result in creation of an asset or have any enduring benefit However, the ld. CIT(A) has while concluding inadvertently stated that disallowance of Rs.24,46,489/- is deleted instead of Rs.26,46,489/-.

At the time of hearing, ld. AR submitted that in this regard, it is respectfully submitted that the expenses highlighted by the special auditor in its report are as under:

He submitted that these expenses were incurred on the replacement of batteries which were used in the working of the U.P.S system with a computer at the branch level. This expenditure does not bring any new asset into existence. The replacement is undertaken in the working of the UPS system with the computer and as a result of the replacement neither the capacity of· the computer is increased, nor any benefit of enduring nature is provided. (Copy of vouchers are enclosed at pages 714-780 of Paper book Vol I)

It is further submitted that the replacement of batteries in the UPS system is an essential and recurring part of the maintenance activities necessary for the smooth functioning of the business operations. Batteries used in UPS systems have a limited operational lifespan. Once the batteries reach the end of their effective life, they fail to provide the required backup support, thereby jeopardizing critical operations that depend on an uninterrupted power supply.

He submitted that the replacement of these batteries does not enhance the overall capacity of the UPS nor does it bring into existence a new or independent capital asset. It merely restores the system to its original working condition, ensuring business continuity. Therefore, such expenditure is incurred to preserve and maintain the existing asset in an efficient working condition and does not give rise to any enduring benefit.

He further submitted that it is trite law that expenses incurred on account of normal repair and maintenance expenditure, which is required to keep the existing assets in a proper working condition and carry on working more efficiently without enhancing the production apparatus of the assessee is allowable revenue deduction under section 31 and section 37 of the Act.

He placed reliance on the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : 124 ITR 1, wherein, the Apex Court has laid down the test for determining as to what constitutes capital expenditure. The ratio decidendi as laid down in the aforesaid judgment has been reiterated by the Supreme Court in CIT v. Associated Cement Companies Ltd.: 172 ITR 257, and again in the case of Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377.

He submitted that in case of CIT v. Mahalaxmi Textile Mills Ltd.: 66 ITR 710, the apex Court held that a replacement of certain parts which were a modified version of the older parts is an allowable expenditure. To the same effect are the following decisions :-

 CIT v. Shri Rama Sugar Mills: 21 ITR 191 (Mad.)

 CIT v. Indian Woollen Textile Mills Pvt. Ltd.: 112 ITR 441 (P&H)

 CIT v. Shree Hari Industries: 161 ITR 249 (Raj.)

 CIT v. Madras Spinners Ltd.: 177 ITR 498 (Ker.)

 CIT v. Tea Estate Pvt. Ltd.: 198 ITR 535 (Cal.)

 CIT v. Madras Spinners Ltd.: 207 ITR 35 (Ker.)

 CIT v. Sree Bhagvathi Textiles Ltd.: 207 ITR 826 (Ker.)

 CIT v. Co-operative Sugars Limited: 235 ITR 343 (Ker.)

 CIT v. Udaipur Distillary Co. Ltd.: 268 ITR 451 (Raj.)

 CIT. vs. Sagar Talkies : 217 CTR 74 (Kar)

 CIT vs Renu Sagar Power Co. Ltd.: 298 ITR 94 (All.)

He further submitted that there are following direct judicial precedents and brought to our attention to the decision of Madras High Court in the matter of CIT vs Southern Roadways Ltd.: 282 ITR 379, again followed in case of same assessee in 288 ITR 15 and recently in 304 ITR 84, wherein it was held that expenditure on upgradation of computer/ installation of UPS is allowable revenue expenditure. He further relied on the following decisions to the same effect :-

 ACIT v. Ram Kishan Verma: [2013] 30 taxmann.com 86 (Jaipur - Trib.)  Matrix Telecom (P.) Ltd v. ACIT, Circle -4, Baroda 10 ITR(T) 258 (Ahm- ITAT)[08-10-2010]

 DCIT v. Lasik Centre (India) (P.) Ltd. [2013] 22 ITR(T) 462 (Chennai -Trib.)

He submitted that in respect of printing & stationery, the figure of Rs.10,34,502/- has been incorrectly stated against voucher no 10000143 by the auditors whereas the correct figure is Rs. 13,04,502/- (@ Pages 775-776 of PB Vol I). The same was brought to the attention of the assessing officer vide reply dated 15.03.2007 (enclosed at pages 1631-1647 of Paperbook Vol II). Further, the said expenditure represented cost of stationery transferred to Zonal Office, Muzaffarpur and did not tantamount to any item which can be relatable to capital asset. However, the assessing officer without any verification made the aforesaid disallowance. Furthermore, he submitted that the Tax Auditor has in the Tax Audit report has specifically mentioned that there is no expenditure in the nature of Capital expenditure/fixed assets which has been debited to Profit & Loss Account. (Refer Page 46 of paper book Vol I). He further submitted that it is pertinent to note that the CIT(A) had although categorically held that expenditure alleged to be of capital in nature is allowable revenue expenditure, however, the ld. CIT(A) has while concluding inadvertently, stated that disallowance of Rs.24,46,489 is deleted instead of Rs.26,46,489.

He submitted that considering that no detailed justification or rationale has been recorded in the order of the ld. CIT(A), this leads to the inference that the confirmation of disallowance of Rs.2,00,000 is merely attributable to an inadvertent or clerical error and not a restriction of disallowance.

In light of the above facts and circumstances, it is submitted that the entire expense of Rs.26,46,489 is allowable business deduction and not capital in nature. Further, in the absence of any adverse finding or reasoned basis for the disallowance, it is submitted that the confirmation of the disallowance of Rs.2,00,000 by the ld. CIT(A) is arbitrary, unjustified, and liable to be deleted.

On the other hand, ld. DR of the Revenue relied on the findings in the assessment order.

Considered the rival submissions and material placed on record. We observed that the assessee had incurred the expenditure on printing and stationery as well as on replacement of UPS batteries. The Special auditor had identified as capital in nature and the AO had followed the above classification as capital expenses. After considering the material available on record, we are of the view that the printing and stationery expenditure can never be capital expenditure and similarly the replacement of battery will not increase the tenure of the UPS installed, the batteries are meant for replenishable, the same requires replacement periodically. These expenses can be classified as revenue expenditure only. Therefore, we do not see any reason to disturb the findings of Ld CIT(A). In the result, ground raised by the revenue is dismissed.

With regard to Ground No.6 of Revenue’s appeal and Cross Objection No.4 filed by the assessee regarding disallowance on account of expenses being alleged to be personal in nature, ld. AR submitted that the special auditors, in annexure 13 of appendix ‘A’ of the Special Auditor Report, identified expenses amounting to Rs.3,98,33,863 debited to the Profit & Loss account, which were alleged to be personal in nature. (Refer Page781-785 of paper book Vol I) The said expenditure related to various expenses debited under various heads, being incurred in connection with Silver jubilee Jamakarta/Karya Karta Samman Utsav on the occasion of 25th year celebration of the assessee-firm. He further submitted that the AO, in the assessment order, rejecting the evidence and submission made by assessee and solely relying on the report of special auditor, held that holding of celebrations is not incidental to the business of the assessee and accordingly, disallowed expenses amounting to Rs.3,56,44,035/- (after reducing the amounts of Rs.14,023/- and Rs.41,74,805 which were inadvertently considered twice in the Special Audit Report). He submitted that in appeal, the ld. CIT(A) held that out of disallowance of Rs.3,56,44,035/- made by the AO, an amount of Rs.36,74,750 was not charged in the profit and loss account and an amount of Rs.21,79,397 was suo motu disallowed by the assessee, thus, there was no warrant to disallow the said amounts.

Further, he submitted that the ld. CIT(A) held that detailed explanation in respect of each and every item has been given by the assessee in respect of expenditure alleged to be personal expenditure by the special auditor and the AO has not rebutted the same or pointed out any single expense which was incorrect or false or unsubstantiated. However, the CIT(A) still restricted the disallowance to Rs.29,79,000 (being 10% of the balance expenditure) and deleted the disallowance of Rs.3,26,65,035, as under:

Ld. AR submitted that the expenses of Rs.3,98,33,863 are highlighted by special auditors in Annexure 13 to appendix A of Special Auditor Report and alleged to be personal in nature mainly relate to various expenses debited under various heads which were incurred in connection with Silver jubilee jamakarta/Karya Karta Samman Utsav on the occasion of 25th year celebration of the assessee firm, which has direct nexus with business being carried on by assessee firm and is accordingly allowed as business expenditure in hands of the assessee.

He submitted that before the Assessing Officer and the ld. CIT(A), the assessee also submitted a copy of Annexure 13 of Appendix A to special auditor report with the explanations against each expense reported therein which is enclosed at Pages 781-785 of Paper book Vol I). Further, copy of the vouchers and supporting of the items reported by the Special Auditor were duly furnished which are enclosed at pages 786-837 of paper book Vol I.

He submitted that however, the AO, without pointing out even a single defect in the submissions and the explanations given by the assessee, made the disallowance by blindly relying on the report of the special auditors, thereby abdicating his quasi-judicial authority. It is also pertinent to point out that the observation of special auditor is not correct regarding the expenses claimed to be of personal nature and in fact, there were several mistakes in the annexure 7 of appendix A of the special auditor’s report, which were taken cognizance by the ld. CIT(A) listed hereunder:

He submitted that furthermore, the Tax Auditor has in the Tax Audit report (enclosed at pages 34-48 of Paper book Vol I) has specifically noted that there is no expenditure in the nature of personal have been debited to Profit & Loss Account. He submitted that the major portion of the expenses is in respect of Meetings and Conferences and Gifts given to the field workers and employees on the occasion of the Twenty Fifth Year Celebration of the business of the assessee firm and the entire expenses are fully detailed, vouched and are directly relatable to the business of the assessee and thus, there is no warrant for making any disallowance in this regard.

Further, he placed reliance on the following decisions, wherein while following the ratio emanating from the aforesaid decisions, the expenses incurred towards festival celebrations alongwith employees, etc. have been held to be allowable business deduction:

 CIT vs Usha Sales Ltd: 182 ITR 453 (Del.) - Expenditure incurred on celebration of ‘Shri Ram Jayanti’ allowed  M/s Holtec Consulting Pvt. Ltd. V. DCIT: I.T.A. No. 3878/Del/2010 & 796/DEL/2011 (Del Trib)- Gifts given to directors/employees on birth anniversaries allowable  Vijay Seeds Co. (P.) Ltd. V ACIT: 74 TTJ 120 (PuneTrib.):

Expenditure incurred on Ganesh Festival held to boost morale of the employees, thus allowable.

 Mangalam Cement Ltd. V DCIT: 43 ITD 292(Jaipur ITAT) -Expenditure incurred on gifts to employess on occasions like birthdays, anniversaries, marriages, etc allowable.

 Vindhya Telelink Ltd v JCIT(JabalpurITAT) 119TTJ(Jab)433 -Festival expenses was necessity for having cordial relationship with the staff, hence allowable.

 Hindustan Construction Co. Ltd. V. JCIT: 140 ITD 642 (Mumbai)[28-09-2012] - Nature of expenses being payment for pooja, donation for local festivals and other benevolent activities held to be for the purpose of business.

Further, he submitted that the assessee had purchased gifts for its employees as well as business associates as part of its business promotion activity, the expenditure claimed by the assessee was incurred for legitimate business purposes only and was therefore, should be allowable as business deduction. He placed reliance, in this regard, on the following decisions wherein it has been held that where sales promotion expenditure incurred by the assessee was genuine and expended for purpose of presentation of articles to employees/ business associates/ dealers/ suppliers and for giving presents/ gifts, it is nothing but an expenditure incurred for the purpose of the assessee’s business and is eligible for deduction under section 37(1) of the Act :-

 CIT vs C.B.K.R. Enterprises: 186 Taxman 14 (Del)  Andhra Sugars Ltd. v. CIT: 171 ITR 209 (AP)  CIT vs Avery Cycle Inds. Ltd: 296 ITR 393 (P&H)  CIT vs Avon Cycles: 303 ITR 345 (P&H)  Duncans Tea Ltd vs CIT: 344 ITR 442 (Cal.)  Universal Precision Screws vs. ACIT: 169 TTJ 84 (Del)  S.B. Reshellers (P) Ltd vs ACIT: 145 Taxman 10 (Pune)(Mag.)  ACIT vs Amit Kiritbhai Patel: ITA No.2929/Ahd/2011  Punjab Power Packs Ltd. vs. DCIT: 71 ITD 163 (Chd.)  Jayantilal Jivanlal Soni (HUF) vs ITO: 13 ITR(T) 215 (Ahd)

He submitted that apart, there could be no disallowance of any expense as personal expense in the case of a company, reliance in this regard is placed on the following decisions:

In view of the above, he submitted that there is no warrant for making any disallowance in this regard.

He further submitted that the ld. CIT(A) has rightfully deleted the disallowance amounting to Rs.3,26,65,035, however, despite all information being produced on record and after verification, the CIT(A) has not pointed out any discrepancy in any of the information/document submitted nor raised any issue regarding the same being used not incurred for the purpose of business and had merely on basis of surmises and conjecture, observed that possibility of expenditure not related to business cannot be ruled out and thus, confirmed the disallowance of Rs.29,79,000 on ad-hoc basis without any justification.

He further submitted that the assessee relies on its submission on ad-hoc basis disallowance sustained by the CIT(A) without any justification made in Ground no.3 of Departmental appeal and Cross Objection No 1 filed by Assessee.

In view of above, it is submitted the disallowance of Rs.29,79,000 confirmed by the CIT(A) is unjustified and liable to be deleted.

On the other hand, ld. DR of the Revenue heavily relied on the assessment order.

Considered the rival submissions and material placed on record. We observed that the special auditor had classified certain expenditure incurred by the assessee on the occasion of Bharat Parv and Silver Jubilee celebration during the year. The expenses are mostly in the nature of gifts and other promotional items. The same was treated as personal in nature. We noticed that it is in the nature of gifts and not incurred on the partners or relatives of the partners. These expenses were incurred for the promotion of the business and also the auditor had not qualified the above expenses as personal in nature. At the same time, Ld CIT(A) after considering the submissions of the assessee, restricted the disallowance to the extent of 10% of the expenses quantified by the special auditor. Since the disallowance made by the Ld CIT(A) seems to be reasonable, we do not see any reason to disturb the same. In the result, ground raised by the revenue and ground raised by the assessee in CO are dismissed.

With regard to Ground No.7 of Revenue’s appeal regarding disallowance of Rs.3,81,47,427/- alleging the same to be relatable to sister concern, ld. AR submitted that the Special Auditor, in Annexure 8 of appendix ‘A’ of the Special Audit Report, remarked that expenses amounting to Rs.4,01,51,995 being debited in the Profit &loss account of the assessee are the expenses relating to its sister concerns, and thus, not allowable as deduction in hands of the assessee. (Refer Pages 838–842 of the Paper book Vol II). He submitted that during the course of assessment proceedings, the assessee explained the reasons for certain bills being in name of sister concern. Further, the assessee also explained that most of the expenses are incurred while acting as agent of the Principals, which are reimbursed by them. He submitted that the AO did not consider the submission of the assessee and solely relying upon the report of Special Auditor, disallowed expenditure of Rs.3,81,474,27 after reducing the amounts of Rs.2,04,568 and Rs.18,00,000, considered twice in Special Audit Report. He submitted that in appeal, ld. CIT(A) deleted the entire disallowance holding as under:

He submitted that against the above order, assessee is in appeal before us. He submitted that at the outset, prior to the furnishing of the audit report, no enquiry or clarification was sought by the special auditors in respect of the items reported in Annexure 8. As such, there was no opportunity or appropriate forum available to the assessee to furnish its explanation on the matter. He further submitted that before the assessing officer, the Assessee furnished complete reasoning in respect of the expenses highlighted in Annexure 8 of Appendix ‘A’ of the special auditor's report (Refer Pages 838–842 of the Paper book Vol II), which are alleged to be relating to sister concerns of the assessee.

It is further submitted that the expenses highlighted by the Special Auditor form part of the reimbursement of expenses and are embedded within the service charges received by the assessee firm from the principals, on whose behalf it is acting as an agent. The assessee has entered into service agreements with the following sister concerns:-

 Sahara India Commercial Corporation Ltd. (@ 884-899; 907-908; 913-914; 922-927; 930-942 of Paper book Vol II.)

 Sahara India Housing Limited (@901-905 of Paper book Vol II.)

 Sahara Airlines Limited (@ 879-881 of Paper book Vol II.)

 Sahara India International Corporation Ltd (@ 874-876 of Paper book Vol II.)

 Sahara India Financial Corporation Ltd (@ 864-871 of Paper book Vol II.)

He submitted that the Copy of agreement along with supplementary agreement with the aforementioned sister concerned are enclosed at pages 864-942 of Paper book Vol II. He further submitted that a perusal of these agreements clearly establishes that the assessee firm is entitled to receive service charges from the aforesaid concerns, which are in the nature of reimbursement of expenses. The expenses debited by the assessee are therefore net of the reimbursements received from the principals. Details reflecting the expenses debited to the Profit & Loss Account, net of such reimbursements, are enclosed at Pages 843–848 of the Paper book Vol II.

Further, he submitted that the expenses relatable to the aforementioned concerns have been duly allocated to them, and the corresponding receipts for these expenses have already been adjusted under the head "Reimbursement of Expenses." The assessee raises debit notes on these concerns in respect of the amount of expense incurred by the assessee on behalf of the sister concerns along with the service charges for providing services as per the service agreements. The details of the reimbursement of expenses received from sister concerns are enclosed at Pages 849–850 of the Paper book Vol II, and copies of debit notes issued to various principals are enclosed at Pages 851–863 of the Paper book Vol II.

He submitted that further certain bills for certain expenses are in the name of another concern on account of following reasons:

 Rent expenses - Considering that the office of the assessee is in buildings taken on rent by the assessee firm, the electricity bills are in the name of the landlord and not in the name of the assessee. However, as the facilities have been utilized by the assessee, the payments have also been made by the assessee firm, and accordingly, the expenses are rightly claimed. Copies of the rent/lease agreements are enclosed at Pages 943–1138 of the Paper book Vol II, and the ledger for electricity expenses is enclosed at Pages 1139–1142 of the Paper book Vol II.

 Telephone expenses - Similarly, for telephone expenses, the bills were received in the landlord’s name; but considering that the bills pertain to assessee, the same are allowable as business expenses in the hands of the assessee firm.

 Bills raised in wrong name - In certain cases, vendors have raised bills in the name of "Sahara India Pariwar" or "Sahara India Limited." It is submitted that the assessee firm is generally known to the public as "Sahara India Pariwar," and as a result, vendors and suppliers have inadvertently raised invoices in that name instead of in the name of M/s. Sahara India. However, in most cases, the corrections were made before the payments were processed. Hence, such expenses are allowable business expenditures With respect to the travelling expenses, the bills were raised in the name of "Sahara India Limited," the expenses actually pertain to the Corporate Office in Noida of the assessee firm. The vendors have mistakenly issued bills in the name of Sahara India Limited, which has no branch at that location. Therefore, these are purely allowable expenses. Copies of the vouchers related to these travel expenses are enclosed at Pages 1143–1152 of Paper book Vol II, and a summary of the travelling expenses is enclosed at Pages 1153–1155 of Paper book Vol II.

 In the case of Voucher No. 8000809 amounting to Rs.1,64,18,890 under the head "Advertisement & Publicity," the expense relates to the assessee and has been reimbursed by the sister concern. However, the bill was inadvertently raised in the name of "Sahara India." Similarly,

in the case of Voucher No. 11000165 amounting to ₹18,00,000, the bill was initially raised in the name of Sahara India, which was later rectified.

He submitted that these expenses pertain to the printing of diaries, which were distributed to the principals. The said expenses have also been reimbursed by the principals. Since the printing of diaries and similar materials is an in-house expenditure of the assessee firm, the expenses are directly connected to its business. The details of the printing and stationery expenses are enclosed at Pages 1156–1294 of the Paper book Vol II . In view of above, it is therefore, incorrect to state that these expenses relate to the entire group, as they were specifically incurred by the assessee in the normal course of its business operations.

In view of the above, he pleaded that the aforesaid expenses are allowable business deductions in the hands of the assessee and the CIT(A) has rightfully deleted the disallowance amounting to Rs.3,81,47,427.

On the other hand, ld. DR of the Revenue relied on the detailed findings in the assessment order.

Considered the rival submissions and material placed on record. We observed that the assessee was incurring expenditure on behalf of ground entity and assessee itself recovering the most of the expenditure from the group entity, as discussed in the earlier paragraph, the assessee recovered the expenses on the basis of reimbursement. Since the assessee was recovering the expenses by adopting scientific and reasonable methods. The same method was followed by the assessee in the earlier years and the same was accepted by the revenue in earlier years. We noticed that the AO had merely accepted the findings of the special auditor without examining the rationale and past practices. Therefore, we do not see any reason to disturb the detailed findings of the Ld CIT(A). In the result, ground raised by the revenue is dismissed.

With regard to Ground No.8 of Revenue’s appeal and Cross Objection No.5 filed by the assessee regarding disallowance of expenses allegedly not supported by evidence, ld. AR submitted that the special auditor, in Annexure 11 of appendix ‘A’ of the special auditor report, reported certain expenses amounting to Rs. 7,47,43,760, which were debited to profit & loss of assessee and for which no supporting documentary evidence(s) were allegedly furnished. He submitted that the said allegations were made by the Special Auditor without raising any specific query in this regard. During the course of assessment, the supporting documents and vouchers were duly produced for examination before the AO. The AO, without specifically rejecting/rebutting the submissions made by assessee, disregarded the explanation merely holding that the said explanation could have been provided by the assessee at the stage of special audit itself. Accordingly, the AO considered the submission of assessee as an after-thought and disallowed expense amounting to Rs.7,42,03,740 (after reducing the amount of Rs. 5,40,020 reported twice by special auditor).

He submitted that in appeal, ld. CIT(A) held that nearly all the expenses which have been reported to be without supporting are duly supported by proper vouchers/documents, however, the CIT(A) noted that certain small expenses are supported by office memos only. Accordingly, CIT(A) upheld the disallowance to the extent of Rs.50,00,000 and deleted the remaining disallowance of Rs.6,92,03,470.

Ld. AR submitted that the expenses highlighted by special auditors in Annexure 7 to appendix A of Special Audit Report are as under:

In this regard, it is submitted that at no stage of the special audit, the special auditors made any query in this respect to the expenses being considered to be without supporting before furnishing of their report and the assessee had no occasion or forum available to give the supporting of the expenses listed out by the special auditors in Annexure 11.

Ld. AR submitted that during the course of assessment proceedings, the assessee vide reply dated 15.03.2007 (enclosed at pages 1631- 1647 of Paper book Vol II) has submitted the supporting of the items listed out by the special auditors in Annexure 11 and also produced supporting vouchers along with the books of accounts. It was also submitted that the payments were made through account payee cheque after complying with the TDS provisions applicable as per law. Thus, the expenditure is allowable as business deduction under section 37(1) of the Act. (Copy of vouchers &supporting are enclosed at pages 1297-1397 of Paperbook Vol II)

He submitted that the assessing officer made the aforesaid disallowance solely for the reason that according to him the same explanation should have been provided by the assessee at the stage of the special audit without considering the fact the assessee had at no stage of the special audit was asked to provide supporting details in respect of the expenses.

Thus, he submitted that the assessing officer made the disallowance solely on the basis of the comments of the Special Auditor without even considering the reply furnished the assessee and the vouchers/books of accounts produced during the course of assessment. Further, the assessee had duly furnished detailed explanation regarding nature of the said expenditure reported by the Special Auditor in annexure no. 11 of appendix 'A' of Special Audit Report which is enclosed at pages 1295-1297 of Paper book Vol II, which is summarised as under:

With respect to the Sports & Games expenses, it is submitted that Sahara India Commercial Corporation Limited (SICCL) entered into a MoU with the BCCI, under which the amount paid by SICCL to BCCI was to be apportioned among five group entities. During the year under consideration, SICCL incurred a total expenditure of Rs.19,55,49,782/-. He submitted that since the nature of the expense pertains to group-level activities, the amount was proportionately divided among the five group entities. Accordingly, one-fifth of the total expense, i.e., Rs.3,91,09,957/-, has been debited to the assessee firm's books of accounts. Copies of the relevant bills and vouchers are enclosed at pages 1297–1397 of Paper book Vol II. The payment to BCCI was made by SICCL through Account Payee Cheque/Demand Draft.

He further submitted that similarly, Sahara India Financial Corporation Limited (SIFCL) has entered into an MOU with M/s Percept Advertising as per which SIFCL had paid the amount recorded under the head Retainership expenses. He submitted that however as per MOU, the total amount paid by SIFCL was to be apportioned between 5 group concern in the equal ratio as the benefit of advertisement was to be enjoyed by all group entity. Accordingly, one-fifth of the total expense has been debited to the assessee firm's books of accounts. Copies of the relevant bills and vouchers are enclosed at pages 1297–1397 of Paper book Vol II.

He submitted that the said expenses relate to purchase of computer system which is in the nature of capital expenditure. The said expenses were capitalized in the books of accounts to assessee firm, thus the question for allowability of expenses does not arise.

He submitted that the expense amounting to Rs. 43,550 accounted for under the head reimbursement of meal charges pertains to amount paid to the Milkman for purchase of milk for office canteen from dated 01.06.2002 to 15.06.2002 and 01.07.2002 to 31.07.2002. The milkman has raised his bills on plain paper clearly mentioning the date wise supply of milk with their rate.

Further, he submitted that the expenses amounting to Rs.10,17,103 accounted for under the head electricity expenses pertain to the electricity bill payments made to electricity department through account payee cheque on the basis of duplicate bills since the original bills were not received at that point of time. Similarly the amount of Rs.2,21,390 pertaining to telephone expense is the payments against numerous telephone bills made by assessee firm through the banking channels.

In view of the above, he submitted that the ld. CIT(A) has rightfully deleted the disallowance amounting to Rs.6,92,03,470. Further, despite all information being produced on record and after verification, the ld. CIT(A) held that few of small expenses were found to be only supported by internal office memos upheld the disallowance of Rs.50,00,000.

He further relied on its submission on ad-hoc basis disallowance sustained by the ld. CIT(A) without any justification made in Ground no. 3 of Departmental appeal and Cross Objection No 1 filed by Assessee.

In light of the above facts and circumstances, and in the absence of any adverse finding or reasoned basis for the disallowance, it is submitted that the confirmation of the disallowance of Rs.50,00,000 by the CIT(A) is arbitrary, unjustified, and liable to be deleted.

On the other hand, ld. DR of the Revenue relied on the assessment order.

Considered the rival submissions and material placed on record. We observed that the assessee had booked various expenses in their books, the main expenses like sports sponsorship and advertisement expenses are shared expenses between the group entities incurred by SICCL. The assessee had brought the relevant documents proving the payments and relevant TDS compliance before Ld CIT(A). Further observed that the assessee had also paid retainership expenses on shared basis similar to Advertisement expenses. Since the above expenses were incurred by the group entity and shared with the assessee on the basis of group resolutions, the same can only be treated as expended for the purpose of business. With regard to sundry expenses, the assessee had submitted details before Ld CIT(A) still Ld CIT(A) had disallowed on adhoc basis of Rs. 50 lakhs, in our view, it is arbitrary, therefore, the expenses claimed by the assessee has to be allowed.

Further, with regard to booking of communication equipment, it is not clear how the same was booked as expenditure in the books of the assessee. In our view, the above expenses are doubtful and both the special auditor and the AO had verified during the assessment and audit. Since it is in capital in nature, how it can be part of expenses claimed by the assessee. Therefore, we are inclined to disallow the same at this stage. In the result, grounds raised by the revenue is partly allowed and ground raised by the assessee in CO also partly allowed.

With regard to Ground No.9 of Revenue’s appeal and Cross Objection No.7 filed by the assessee, ld. AR submitted that the AO relying upon the assessment order passed in case of SIFCL for AY 1999-00 restricted the expense on commission, collection charges and incentive paid to field force to 2% of the deposits mobilized referring to NBFC(RBI) Guidelines i.e., Rs.177,84,25,518 (2% of Rs.88,92,12,75,884) and accordingly, made an addition of Rs 2,92,72,52,901 [Rs 4,70,56,78,419 -177,84,25,518].

He submitted that in appeal, ld. CIT(A) deleted the disallowance by holding as under:

He submitted that the cross objections filed by the assessee is merely to support the order of the CIT(A).

In this regard, it is submitted that the assessee has furnished complete details with respect to the said expenditure as evident from following and no adverse inference was drawn by the AO qua the same:

He submitted that accordingly, the expenditure being incurred wholly and exclusively for the purpose of business is allowable deduction in entirety. Moreover, it is submitted that the assessing officer cannot stand on the place of a businessman and make decisions on his behalf. The reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down by the Supreme Court repeatedly in the following cases:

 CIT vs. Walchand & Co.: 65 ITR 381 (SC)

 J.K. Woollen Manufacturers vs. CIT: 72 ITR 612 (SC)

 Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11 (SC)

 CIT vs. Panipat Woollen & General Mills Co. Ltd.: 103 ITR 666 (SC)  J.J. Enterprises v. CIT: 254 ITR 216 (SC)

He submitted that the basis adopted by the AO of restricting the disallowance to 2% of deposits is not tenable in law. He further submitted that this is covered by the order passed by the ITAT in own case for AY 1994-95. He further submitted that it is also pertinent to point out that the aforesaid issue is squarely covered by the order passed by the ITAT in assessee’s own case for assessment year 1994-95 (refer pages 1476 to 1513 of Paperbook Vol II) wherein in identical facts and circumstances, the Tribunal had upheld the order of the CIT(A) and held that commission paid by the assessee was reasonable and undisputedly incurred during the course of rendering services as an agent for mobilising savings/deposits for the Principal companies and employing agents to whom the commission was paid. Accordingly, commission paid was allowable as business expenditure in entirety, not warranting any disallowance.

On the other hand, ld. DR of the Revenue relied on the assessment order.

Considered the rival submissions and material placed on record. We observed that the AO had disallowed the commission paid to agents and collection charges/incentives paid to field forces by restricting the same @ 2% of the total deposits mobilized by the assessee by referring to NBFC Guidelines. After considering the material facts on record, we observed that Ld CIT(A) had deleted the above addition on the basis of complete details submitted by the assessee like PAN of the commission agents and with the observation that the NBFC guidelines and Companies (Acceptance of Deposit) Rules, 1975 are not applicable to the assessee being a firm. Further observed that the above payments were made by the assessee to its agents, it is also fact that the assessee also performing the roll of agent for the group entity, that being the case, the same rule of NBFC guidelines and Companies (Acceptance of Deposit) Rules, 1975 to the assessee also, will the revenue reject the income declared by the assessee. Since the above issue was all along decided in favour of the assessee by the ITAT and CIT(A) in the AYs 1994-95 to 2001-12. Therefore, we are inclined to decide this issue in favor of the assessee, accordingly, the ground raised by the revenue is dismissed.

With regard to Ground No.10 of Revenue’s appeal and Cross Objection No.8 filed by the assessee regarding deemed dividend of Rs.15,97,79,675/- u/s 2(22)(e) of the Act being credit balance of Sahara Savings & Investment Corpn. Ltd. With the assessee firm, ld. AR submitted that the assessee, through its 1400 branches across the country, acts as an agent and collects monies/deposits from public under the various schemes run its principal companies namely Sahara India Savings and Investment Corporation Limited, now known as Sahara India Financial Corporation Limited (“SISICOL/SIFCL”), and Sahara India Commercial Corporation Limited. The funds so collected are thereafter remitted/transmitted to the principals. Given the nature of the business, the entire exercise of collection of deposits and transmission thereof to the principal is a long process since the monies pass through various levels such as branch, sector, region zone and head office, it takes around two months for completion of the entire process. (Copy of MOU with SIFCL is enclosed at pages 1514-1548 of Paperbook Vol II).

He submitted that the AO, in the impugned assessment order, held that Shri Subrata Roy Sahara holds 62% share in the assessee firm and holds more than 10% equity in M/s Sahara India Financial Corporation Limited, M/s Sahara Airlines Limited, Sahara India International Corporation Ltd., and M/s Sahara India Commercial Corporation Limited and the fact that these companies are closely held companies and, therefore, the provisions of section 2 (22)( e) are attracted. Thereafter, he submitted that the AO held that the amount collected by assessee on behalf of its principals which were pending remittance was nothing but an advance given to the assessee and hence, taxable as deemed dividend in the hands of the assessee firm, without appreciating that the said amount only represented the amount of deposits collected on behalf of SIFCL which was pending transmission and did not represent a loan or an advance given by SIFCL to the assessee firm. The assessing officer noted that the accumulated profits in the books of SIFCL as on 31.03.2003 was Rs.15,97,79,675, was assessed in the hands of assessee firm as deemed dividend under section 2(22)(e) of the Act. He submitted that in appeal, the ld. CIT(A) deleted the addition made under section 2(22)(e) of the Act by holding as under:

He submitted that the cross objections filed by the assessee are merely to support the order of the ld. CIT(A).

He brought to our attention Section 2(22)(e) of the Act read as under:

He submitted that on perusal of above, it would be noted that said section creates a legal fiction by which any payment by a closely held company to a specified shareholder holding 10% shares and/or to any concern in which the said shareholder have a substantial interest is treated as “dividend”. Accordingly, applicability of section 2(22)(e) depends upon the fulfilment of, inter alia, the following prerequisite conditions:

He submitted that it is pertinent to point out that the provisions of section 2(22)(e) of the Act were introduced to keep a check on distribution of money by companies in which public are not substantially interested, to their shareholders, not as dividend, but in some other modes, to avoid levy of dividend distribution tax, etc. Simply speaking, the said section seeks to bring within the tax net, accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having companies pay or distribute, what would legitimately be dividend in the hands of shareholders, money in the form of advance or loan [CIT vs Raj Kumar: (2009) 181 Taxman 155 (Delhi)].

He submitted that by enacting section 2(22)(e) of the Act, the Legislature has created a fiction by deeming payments referred to therein as “dividend” for the purposes of the Act. But the said fiction, in our opinion, has to be strictly construed and cannot be extended further so as to go beyond the clear language of the section. Therefore, unless the transaction fall foul of the clear language of section 2(22)(e) of the Act, the said section, in our opinion, cannot be applied. It is settled legal position that a deeming fiction must be strictly construed; it is not permissible to extend the fiction beyond the purpose for which it is created, or beyond the language of the section by which it is created [refer: CIT v. Mother India Refrigeration P. Ltd.: 155 ITR 711 (SC)].

He submitted that the provisions of section 2(22)(e) are not applicable for the following reasons:

He submitted that the provisions of section 2(22)(e) of the Act are applicable to the shareholder who is both registered as well as beneficial shareholder. He submitted that the expression ‘shareholder’ has not been defined in the Act. The Supreme Court in the case of CIT v. C.P. Sarathy Mudaliar (supra), in the context of similar provisions of section 2(6A)(e) of the 1922 Act (similar to provisions of section 2(22)(e) of the Act), held that shareholder means and refers to a registered shareholder. Meaning thereby, that a person who is a registered shareholder in the records of investment company, would be regarded as shareholder for the purposes of section 2(6A)(e) of the 1922 Act. The aforesaid decision was followed by the Supreme Court in the case of Rameshwarlal Sanwarmal v. CIT: 122 ITR 1 (SC).

In this regard, he relied on the decision of the Special Bench of the Tribunal in the case of ACIT v. Bhaumik Colour P. Ltd: 313 ITR (AT) 146 (Mumbai). The Special Bench of Tribunal, after taking note of the aforesaid decisions of the Supreme Court in the case of C.P. Sarathy (supra) and Rameshwarlal (supra) and also the difference in the language of section 2(6A)(e) of 1922 Act and 2(22)(e) of the Act, held that the requirement of shareholder being a registered shareholder as laid down in the said two decisions of the Supreme Court, applies equally under section 2(22)(e) of the Act. It was further held that under section 2(22)(e) of the Act, the further condition imposed is that the registered shareholder should also be the beneficial owner of the shares registered in his name.

He submitted that the aforesaid ratio/finding of the Special Bench has been subsequently affirmed by the Hon’ble Delhi High Court in the case of CIT v. Ankitech (P) Ltd: 340 ITR 14 (Del), was concerned with the application of second limb of section 2(22)(e) of the Act and was confronted with the issue as to whether deemed dividend would be taxed as income in the hands of the concern or the shareholder, where the payment is made to “a concern” in which the shareholder is a member or partner and has substantial interest? The High Court held that the provisions of the said section were not applicable to such concern (not being the registered shareholder of the payer company) which had received the payment but to the shareholder, who was a member or a partner in such concern having substantial interest, who was to be taxed in respect of deemed dividend represented by the amount of loan.

Further he submitted the following decisions to the same effect :

 CIT v. Universal Medicare (P.) Ltd. : 324 ITR 263 (Bom)

 CIT vs. Suram Holdings (P.) Ltd.: 220 Taxman 327 (Raj.)

 Rainbow Promoters (P.) Ltd. v. ACIT: [2022] 95 ITR(T) 232 (Delhi -Trib.)

 CIT v. AR Magnetics (P.) Ltd.: 220 Taxman 209 (Delhi)

 CIT v. Gopal Clothing Company (P.) Ltd.: 350 ITR 67 (Delhi)

 CIT v. Checkpoint Apparel Labelling Solutions (India) Ltd.: 276 Taxman 312 (Madras)

He submitted that in the instant case, the assessee firm is not a shareholder in SIFCL, hence the provisions of section 2(22)(e) of the Act would not apply.

He submitted that one of the conditions precedent to the applicability of section 2(22)(e) is that there should be payment by the company and that payment must be by way of “advance” or by way of “loan” to a shareholder. Though the legislature has introduced 'advance' as well as 'loan' which are two different words, the meaning of each of those words have to be understood in the context in which they are used. Further, the term deposit also has different connotation and is not defined under the Act.

He submitted that Section 2(22)(e) of the Act warrants a positive act of granting loan or advance by a company to its shareholders to fall within the rigours of the aforesaid section. To attract the provisions of section 2(22)(e), there must be on actual flow of cash by way of advance or loan from the Company to the assessee. Mere creation of the debtor and creditor relationship is not sufficient to attract the provisions of section 2(22)(e).

He submitted that Black’s Law Dictionary defines the term “loan” as “delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest.” Hence, an essential requirement of a “loan” is the advance of money as a loan upon the understanding that it shall be returned, and it may or may not carry interest. However, it need not be a definitive amount or payable with interest as such, but can be provided on soft terms.

Further he submitted that the Law Lexicon, 2nd Edition (Reprint), 2002, Wadhwa and Company, Nagpur defines “loan” as under:

The expression “advance” has been defined by The Major Law Lexicon, 4th Edition, on page 203, as under :

He brought to our attention the decision of the Karnataka High Court in the case of M/s. Bagmane Constructions Pvt. Ltd vs. CIT in order dated 16.9.2014 in ITA No. 473/2013. Applying the principles of noscitur a sociis and ejusdem generis, the Court restricted the meaning of the term “advance” to be akin to the term “loan” used in the definition of “deemed dividend” under section 2(22)(e) of the Act in the following words:

From the above, he submitted that it can be said that the attribute of loan is a positive act of lending money by the lender coupled with acceptance by the other side (borrower) of the money as loan and generally carries interest with an obligation of repayment. The term “advance” has to be considered as akin to “loan” for the mischief of section 2(22)(e) of the Act to apply.

It is further submitted that in order to attract the provisions of section 2(22)(e) there must be an actual flow of cash by way of advance of loan from the company to the assessee. Mere creation of the debtor and creditor relationship is not sufficient to attract the provisions of section 2(22)(e) of the Act.

He brought to our notice the decision of Hon’ble Supreme Court in the case of Bombay Stream Navigation Co. 56 ITR 52 has clearly held that the mere relationship of a debtor and creditor will not give rise to the relationship of lender and a borrower and observed as under:

He submitted that similar view has been taken by the Madhya Pradesh High Court in the case of Laxmi Chand Mulchal 43 ITR 315 at Page 317 and 318, the Court has held that:

He further relied on the decision of Hon’ble Madras High Court in the case of C.I.T. vs. G. Venkatraman 101 ITR 673 held as under:

He submitted that similar view has been taken by Hon’ble Madras High Court in the case of G.R. Govindarajula Naidu & Another vs. CIT 90 ITR 13 wherein Court held as follows:

He further brought our attention, in this regard, to the following decisions wherein it has been held that advances received in the ordinary course of business are not covered within the scope and mischief of Section 2(22)(e) of the Act:

 CIT Vs. Raj Kumar (2009) 318 ITR 462 - The Delhi High Court held that if the payments are made by a company to even its shareholder having substantial interest but are the result of business transactions between the parties, then such payments cannot be treated as loan or advance and the money so received cannot be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act.

 CIT vs Arvind Kumar Jain (2012) 18 taxmann.com 132 (Delhi)- The Hon’ble Delhi High Court held that “Trade advance which are in the nature of money transacted to give effect to a commercial transactions do not fall within the ambit of Sec. 2(22)(e)”.

 CIT vs Creative Dyeing & Printing Pvt. Ltd. (2009) 184 taxmann.com 483 (Delhi) - advance given for commercial purpose of expansion of business to sister concern cannot be treated as loan or dividend income in the hands of shareholders of the assessee company and does not fall within the ambit of Section 2(22)(e).

He submitted that in the present case, the assessee firm was acting as agent on behalf of the SIFCL and the amount received by the assessee firm was to be remitted to the principal during the course of time. The assessee collects money under the various scheme of deposits run by the principals and after collecting transmits the money to the principals. The amount collected/ received represents the amount due to the principal pending transmission of the money. It does not represent a loan nor advance given by SIFCL. (Copy of MOU with SIFCL is enclosed at pages 1514-1518 of paper book Vol II)

Therefore, the amount received by the assessee in fiduciary capacity and merely in the form of deposits which were payable to SISICOL subsequently, could not under any circumstances, be termed as loans or deposits attracting the rigours of section 2(22)(e) of the Act. In view of the aforesaid, the amounts collected by the assessee firm for and on behalf of SISICOL in the books of account represented deposits which were required to be remitted to the principal, i.e. SISICOL was nothing but amount maintained by the assessee firm in the capacity as agent of SISICOL pending transmission or transfer.

He further placed specific reliance on the decision of the Hon’ble Delhi bench of the Tribunal has in the case of Hero MotoCorp Limited: ITA No.1980/Del/2012, in similar circumstances, wherein the assessee had received money from customers of its subsidiary company because of the convenience of the facility of collection centres of the assessee, for onward remittance to its subsidiary company, the Tribunal held that it was a case where dealers had given funds to the assessee company for the purpose of being remitted to the subsidiary company and such transaction cannot take the colour of either a loan and advance warranting invocation of provisions of section 2(22)(e) of the Act.

In light of the above, he submitted that since there was no borrowing of any money by way of loan or advance from SISICOL, the provisions of section 2(22)(e) of the Act were not applicable at the threshold.

He further submitted that even the ITAT in order passed in the case of SIFCL for assessment years 1989-90, 1991-92 and 1992-93 has held that the debit balance of the Principals (SIFCL) in the books of account of the agent (assessee firm) denotes amount outstanding on account of regular business activities undertaken with them and given the nature of business, a period of two months for realization of the monies collected is reasonable. Accordingly, it cannot be presumed to be in the nature of advance to agent and thus, the Tribunal deleted the notional interest imputed on the outstanding balance and added to the income of the assessee (Refer, pages 1524. to 1527 of the Paper Book Vol II) The aforesaid order was followed by the Tribunal in the case of SIFCL/SISICOL in the order dated passed for AY 1995-96. (Refer, pages 1528 to 1532 of the Paper book Vol II)

In view of the above and in light of the principle laid down in the aforesaid judicial precedents, it is submitted that, since amount was received by the assessee firm (as agent of SIFCL) in the ordinary course of business, the same would fall outside the ambit of the provisions of section 2(22)(e) of the Act. Accordingly, the addition made in the impugned assessment order treating such payables to be as loan from SISICOL as deemed dividend is not tenable in law and was rightly deleted by the ld. CIT(A).

On the other hand, ld. DR of the Revenue relied on the findings in assessment order.

Considered the rival submissions and material placed on record. We observed that the assessee was acting as agent on behalf of the SIFCL and the amount received by the assessee was to be remitted to the principal in due course. The assessee collects money under the various deposit schemes run by the principals and after collecting transmits the money to the principals. The amount collected/ received represents the amount due to the principal pending transmission of the money. It does not represent a loan nor advance given by SIFCL. That being the case, the interpretation of the AO for the amount outstanding for remittance as loan/advance is bad in law. It cannot be imagined as such. Hence, the AO had stretched himself to make addition, which is not proper. Therefore, we are inclined not to disturb the findings of Ld CIT(A) and accordingly, the ground raised by the revenue is dismissed.

With regard to Ground no.11 of Revenue’s appeal and Cross objection No.6 filed by the assessee regarding disallowance of expenses incurred on account of Kartavya Council amounting to Rs.45,73,924/-, ld. AR submitted that the AO, in the impugned order, alleged that the expenses claimed under the head of Kartavya Council, formed with the primary objective of addressing the grievances of depositors, was inherently concerned the principals and not the assessee. Accordingly, the AO relying on assessment orders passed for earlier years viz., AY(s) 1999-00, 2000-01, 2001-02, and 2002-03, disallowed the expense of Rs. 45,73,924 incurred on the Kartavya Council, alleging the same to be not directly related to the business of the assessee.

In appeal, ld. CIT(A) held that given the nature of the assessee’s business of acting as an agent for its Principals, the expenses incurred for the running of the Kartavya Council, which serves as a redressal forum, is directly related to the business of the assessee. However, the ld. CIT(A) alleged that certain portion of expenses may pertain to entities which were not reimbursing to the assessee, accordingly, the CIT(A) restricted the disallowance to Rs. 4,57,392 (10% of Rs.45,73,924) and balance disallowance of Rs.41,16,532 was deleted.

Ld. AR submitted that Kartavya Council is a redressal forum constituted by the assessee to address complaints received from depositors, subscribers to preference shares, debentures, and the field force and staff associated with the firm. The core business activity of the assessee is agency business, wherein it acts on behalf of various principals. In the course of conducting its business, the firm mobilizes deposits, subscriptions to shares and debentures on a private placement basis, manages the maturity of deposits, and handles servicing of interest and principal amounts on both deposits and debentures. These services are rendered by the assessee firm for multiple principals and are directly linked with a large number of depositors, i.e., the general public. The total volume of transactions under these categories is estimated to be in excess of three crores. (Advertisement of Kartavya Council is enclosed at Pages 1546–1547 of the Paper book Vol II.)

He further submitted that the assessee operates through a vast field force comprising over seven lakh individuals, in addition to several thousand employees on its staff. The Kartavya Council has been established specifically to address and resolve grievances of persons interacting with the principals of the assessee. Since the business operations of the principals are carried out through their agent i.e., the assessee, the entire expense incurred in connection with the Kartavya Council is allowable in the hands of the assessee.

He submitted that the Kartavya Council includes eminent members of society who examine complaints received and ensure appropriate grievance redressal. These members are paid honorarium for their services. (List of Council Directors along with ledger details of wages paid to them is enclosed at Pages 1534 and 1535–1545 of the Paper book Vol II) Furthermore, the complete list of expenses incurred in relation to the Kartavya Council is enclosed at Page 1533 of the Paper book Vol II.

He further submitted that Section 37(1) of the Act provides for deduction of revenue expenditure incurred wholly and exclusively for purpose of business. In terms of the aforesaid section, expenditure incurred out of commercial necessity and in order to facilitate, directly or indirectly, carrying on of business, which is, inter alia, not in the nature of capital expenditure, is an allowable business deduction. In CIT vs. Malayalam Plantations Ltd: 53 ITR 140, the Supreme Court has in the context of provisions of erstwhile section 10(2)(xv) of the 1922 Act (corresponding to section 37(1) of the Act), explained that the expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’.

It is submitted that expenditure incurred on account of commercial expediency, wholly and exclusively for the purpose of business, is an allowable business deduction under section 37(1) of the Act. [Refer, CIT vs. Birla Cotton Spinning. & Weaving Mills Ltd.: 82 ITR 166 (SC), and Madhav Prasad Jatia vs. CIT : 118 ITR 200 (SC)]

He further submitted that it is trite law that business expediency of incurring any expenditure is to be seen from the assessee’s point of view and the revenue authority cannot step into the shoes of the businessman. It is not for the revenue to question the commercial expediency of the expenditure. The Courts have repeatedly held that commercial expediency is a matter left entirely to the judgment of the assessee, unless there is a limitation placed by the law on the amount of expenditure. [Refer, CIT vs. Malayalam Plantations Limited: 53 ITR 140 (SC), CIT v. Walchand & Co. etc. (1967) 65 ITR 381 (SC), J K Woollen Manufacturers v. CIT: 72 ITR 612 (SC) and CIT v. Birla Cotton Spg. And Wvg. Mills Ltd.: 82 ITR 166 (SC)]

He further submitted that it is also trite law that once expenditure incurred meets the test of commercial/ business expediency thereby serving the business purpose and hence incurred “wholly and exclusively for the purpose of business”, then, the expenditure is allowable as deduction even if some incidental benefit ensues to third parties [Refer, Sassoon J. David and Co. P. Ltd. v. CIT: 118 ITR 261 (SC), CIT v. Chandulal Keshavlal & Co.: 38 ITR 601 (SC), CIT v. Samsung India Electronics Ltd.: IT Appeal Nos. 98, 113 & 143 of 2010 (Delhi HC), Nestle India Ltd. v. DCIT: 111 TTJ 498 (Del. Trib.), Star India (P) Limited v. ACIT: 103 ITD 73 (Mum.), Adidas India Marketing (P) Ltd. v. AO: (2011) 46 SOT 17 (Del.), DCIT v. Surendra Buildtech (P) Ltd.: 47 SOT 212 (Del.) and Sony India (P) Ltd. v. Addl. CIT: 141 TTJ 432 (Del.)].

In view of above, he submitted that the expenditure in relation to Kartavya Council is directly relatable to the business of the assessee having been incurred in the course of carrying on of its business and for the purposes thereof and, therefore, the same is a fully allowable business deduction, notwithstanding if some benefit enures to the Principals.

He submitted that without prejudice, it is also submitted that these expenses have been reimbursed by the various principals, and no amount has been debited to the Profit & Loss Account of the assessee firm. In fact, these expenses have been fully set off against the reimbursements recovered from the respective principals. Therefore, there is no justification whatsoever for making any disallowance in this regard.

In view of the above, he pleaded that no disallowance is called for in the present case. Thus, the ld. CIT(A) has rightfully deleted the disallowance amounting to Rs.41,16,532.

He submitted that however, despite all information being produced on record and after verification, the CIT(A) has not pointed out any discrepancy in any of the information/document submitted nor raised any issue regarding the same and same but upheld a disallowance of Rs.4,57,392 (being 10% of total disallowance made by AO) holding that certain portion of the expenses may be relatable to concerns which are either not reimbursing the expenses incurred by the Kartavya Council or are not acting as agents of the assessee firm within the Sahara Group.

He submitted that the assessee relied on its submission on ad-hoc basis disallowance sustained by the CIT(A) without any justification made in Ground no. 3 of Departmental appeal and Cross Objection No 1 filed by Assessee supra.

In light of the above facts and circumstances, and in the absence of any specific adverse finding or reasoned basis for such disallowance, it is pleaded that even disallowance sustained to the extent of Rs.4,57,392 is arbitrary, unjustified, and therefore liable to be deleted.

On the other hand, ld. DR of the Revenue relied on the assessment order.

Considered the rival submissions and material placed on record. We observed that Kartavya Council is a redressal forum constituted by the assessee to address complaints received from depositors, subscribers to preference shares, debentures, and the field force and staff associated with the firm. The core business activity of the assessee is agency business, wherein it acts on behalf of various principals. In the course of conducting its business, the firm mobilizes deposits, subscriptions to shares and debentures on a private placement basis, manages the maturity of deposits, and handles servicing of interest and principal amounts on both deposits and debentures. These services are rendered by the assessee firm for multiple principals and are directly linked with a large number of depositors, i.e., the general public. The redressal forum addresses the grievances of the depositors and other stakeholders, since it is directly connected to the business carried on by the assessee, the relevant expenses cannot be disallowed either on gross basis or on adhoc basis. Therefore, we are inclined to allow the claim of the assessee. In the result, ground raised by the revenue is dismissed and Ground raised by the assessee in CO is allowed.

In the result, appeal filed by the revenue is partly allowed and CO filed by the assessee also partly allowed in above terms.