If at the time of the assessment AO need any further document than should be mentioned in clear language in the notice otherwise asseessee is not responsible

IN THE INCOME TAX APPELLATE TRIBUNAL

“C” BENCH -MUMBAI

BEFORE SHRI D. MANMOHAN,(V.P.)(MZ) AND

SHRI RAJENDRA SINGH,(A.M.)

ITA No.2713/Mum/2011

Assessment Year : 2007-08

M/s. Optsoe Consultant Private

Limited; 107-8-9, A-Wing

Samarth Aangan II, Off K.L.

Wawalkar Marg, Oshiwara

Andheri West, Mumbai

Pin-400 053.

P.A. No.(AAACO 7298 R)

(Appellant)

Vs.

                                                       Income Tax Officer-9(2)(4);

Room No.255 Aayakar Bhavan,

M.K. Road,

Mumbai-20.

                                                                   (Respondent)

Appellant by: Shri V. Shredharan & Nupoor Agarwal

Respondent by: Shri P.K.B. Menon

Date of hearing : 1.2.2012

Date of pronouncement :3.2.2012

O R D E R

Per RAJENDRA SINGH (AM)

This appeal by the assessee is directed against the order dated 31.1.2011 of CIT(A) for the assessment year 2007-08. The only dispute raised in this appeal is regarding disallowance of claim of deduction of Rs.40,20,822/- on account of payments made to the directors.

2. The facts in brief are that the assessee company was engaged in the business of undertaking contracts for providing various liaison activities in telecommunication strategy had entered into contract dated 5.1.2005 with M/s. ZTE Corporation, a Chinese Company. In terms of the said contract, the assessee was to aid the client by performing technical services in the capacity of an independent contractor in relation to various telecom operators such as Tata, Hutch, Essar and Idea who were customers of the Chinese Company. Soon after entering into said contract, the assessee company had entered into identical sub contracts on 1.4.2005 with each of the two directors i.e., Shri Gautam Balakrishnan and Smt. Kalpana Madan to execute all or portions of the work received from the clients. The AO noted that the assessee during the year had received contract charges of Rs.41,18,669/- from M/s. ZTE Corporation and in turn had paid sub contract charges of Rs.40,20,822/- to its directors. The assessee submitted before the AO that since directors in individual capacity were not in a position to enter into a contract with a Chinese Company, they had incorporated the company Optsoe Consultants Pvt. Ltd. for entering into the said contract. The assessee also submitted that it had deducted tax at source @ 2% on the payments made to the directors under section 194C of the Act. AO however noted that in the contract with the Chinese Company, the assessee had been referred to as a consultant and the Chinese company as client. The agreement also provided for technical services of consultancy by the assessee to assist the Chinese company. The AO, therefore, held that the directors were providing professional services as consultant to the assessee company in India and, therefore, provisions of section 194J as per which tax was required to be deducted @5% in respect of professional services or technical services were applicale. But since the assessee had deducted tax only @ 2%, there was shortfall of tax by 3%. He, therefore, disallowed the claim of expenditure proportionately i.e. @ 60% which came to Rs.24,12,413/- which was disallowed under section 40(a)(ia) of the Act.

3. The assessee disputed the decision of AO and submitted before the CIT(A) that it was engaged in the business of providing liaisoning services in the telecom sector and, as per contract, it was required to provide business development services, establish and maintain business relationships, arrange meetings, encourage communication, providing support services, etc. The assessee made sub-contract payments to the directors on business expediency and in normal course of business. The assessee filed documents such as copies of bills and debit notes, names and addresses of sub-contractors alongwith P.A. Nos., bank statements, TDS certificates etc. in support of the claim of expenditure. It was also submitted that both the directors had declared payments as their income in their respective returns of income. Therefore, there was no loss of tax revenue. CIT(A), however, observed that the provisions of section 40(a)(ia) were applicable only when the expenditure was found deductible under the provisions of section 37. Therefore it was required to be first examined whether payment was allowable as revenue expenditure which had not been done. The assessee had not submitted any proof in support of various services claimed to have been rendered by the directors. Even in the earlier year i.e. 2006-07, the assessee had only given details of service and mentioned that both the directors had expertise in telecom strategy services. The AO in that year had also considered only applicability of provisions of section 40(a)(ia) and had not gone into the rendering of actual services. He, therefore, asked the assessee to justify the admissibility of the expenditure under the provisions of the Act. The assessee replied that the AO had allowed the claim of expenditure as revenue under section 37 after due application of mind and therefore the same issue could not be considered again. The CIT(A) however did not accept the contention raised. It was observed by him that there was no evidence whatsoever for proving of services rendered by the sub-contractors. CIT(A) also observed that the assessee co had been formed only to facilitate the Chinese Company for making the impugned payments to  Shri Gautam Balakrishnan and Smt. Kalpana Madan and there was no apparent commercial or business interest between the assessee and the Chinese company. The so called arrangement was sham arrangement for facilitating the directors to receive money from the Chinese company. There was no business purpose or commercial expediency established. CIT(A) further observed that merely because the payments had been shown as income in the case of directors, the same could not be allowed as deduction in the case of assessee company without establishing the admissibility of the expenditure under the provisions of the Act. Moreover CIT(A) also pointed out that the directors had reduced their income substantially by claiming various expenses and had not paid taxes on the entire amount. He, therefore, directed the AO to disallow the entire claim of expenditure of Rs.40,20.822/-. Aggrieved by the said decision, assessee is in appeal before Tribunal.

4. Before us, the ld. AR for the assessee submitted that the assessee company had made the payments to directors for various services rendered by him as they had necessary expertise in telecommunication strategies, marketing and sales as well as business development. It was also submitted that in assessment year 2006-07 claim had been allowed by the AO as revenue expenditure and disallowance had been only made under the provisions of section 40(a)(ia). Similarly, in assessment year 2008-09, the claim has been allowed by the AO and no action has been taken under section 263 of the IT Act. It was further pointed out that in assessment year 2006- 07, the order of CIT(A) allowing the claim as revenue expenditure has been accepted by the department. It would not therefore be correct to disallow the claim in this year. The ld. AR also argued that CIT(A) had not provided any specific opportunity to the assessee for proving various services rendered by the director. There was therefore violation of principles of natural justice. It was submitted that in case the assessee had been provided opportunity it would have produced necessary evidence. The ld. AR also submitted that the assessee company vide letter dated 30.1.2012 has filed application for admitting additional evidence in the form of various correspondence regarding rendering of service which may be admitted by the Tribunal as no specific opportunity had been provided by the CIT(A). It was accordingly requested that the matter may be sent back to CI(A) for fresh adjudication after considering the additional evidence and after hearing the assessee.

5. The ld. DR on the other hand submitted that the assessee had not produced any evidence regarding actual rendering of the services by the directors. It was pointed out that in assessment year 2006-07 neither the AO nor CIT(A) had examined the actual rendering of the services and treated payments as revenue expenditure without any examination. The case had been examined only from the limited angle of applicability of provisions of section 40(a)(ia). Similarly, it was further pointed out that the assessment order dated 27.9.2010, a copy of which was placed at page-84 of the paper book was a non-speaking order in which issue of rendering actual services had not been examined. It was accordingly urged that the order of CIT(A) should be upheld.

6. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of expenditure amounting to Rs.40,20,822/- on account of payments made to the directors as sub-contract charges. The assessee co had been incorporated for undertaking contracts for providing various liaisoning activities in the telecom sector. It had entered into a contract with Chinese company, M/s. ZTE Corporation for providing such services as per which it had received contract charges of Rs.41,18,969/-. The assessee had sub contracted various services to be provided to its two directors to whom total payments of Rs.40,20,822/- had been made which the assessee claimed as revenue expenditure. The AO in the assessment order did not question the allowability of claim as revenue expenditure. He thus accepted the claim as revenue expenditure without any examination and made  disallowance under the provisions of section 40(a)(ia) on the ground that deduction of tax at source had not been made fully. CIT(A) on detailed examination noted that no evidence had been produced by the assessee regarding rendering of actual services by the directors. He has therefore directed the AO to disallow the entire claim as non revenue expenditure for want of evidence. However, we note from the show cause letter dated 7.10.2010 issued by the CIT(A) to the assessee that CIT(A) had only asked the assessee to justify the admissibility of the expenditure. No specific query had been raised to  produce evidence regarding services rendered. In assessment year 2006-07 on which the ld. Authorised Representative has relied also the actual rendering of the services had not been examined and similar was the position in assessment year 2008-09. Therefore, in our view, the issue regarding rendering of actual services by the directors requires fresh examination as CIT(A) has disallowed the claim without any specific opportunity to the assessee in the matter of rendering of services. The assessee has also filed some additional evidence which in our view will be useful while deciding, the issue of rendering of the services. We, therefore, admit the same, and set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination of additional evidence filed by the assessee and in accordance with law and after providing proper opportunity of hearing to the assessee.

7. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 3.2.2012.

                                                       Sd/-                                      Sd/-

                                          (D. MANMOHAN)           (RAJENDRA SINGH)

                                         VICE PRESIDENT       ACCOUNTANT MEMBER

Mumbai, Dated: 3.2.2012.

Jv.

Copy to: The Appellant

The Respondent

The CIT, Concerned, Mumbai

The CIT(A) Concerned, Mumbai

The DR “ ” Bench

True Copy

                                                                                               By Order

Dy/Asstt. Registrar, ITAT, Mumbai.