Income Tax Appellate Tribunal – Delhi
Vatika Ltd., New Delhi vs Dcit, New Delhi on 14 August, 2019 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A”: NEW DELHI BEFORE SMT BEENA A PILLAI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 6476/Del/2013 & 1512/Del/2014 (Assessment Year: 2008-09) Vatika Ltd, Vs. DCIT, 621-A, Devika Towers, 6, Central Circle-20, Nehru Place, New Delhi New Delhi PAN: AABCV5647G (Appellant) (Respondent) Assessee by : Shri C.S. Aggarwal, Sr. Adv Shri Ravi Pratap Mall, Adv Revenue by: Smt Naina Soin Kapil, Sr. DR Date of Hearing 15/05/2019 Date of pronouncement 14/08/2019 ORDER

PER PRASHANT MAHARISHI, A. M.

1. These are the two appeals filed by the same assessee for AY 2008-09.
a. ITA number 6476/Del/2013 is filed by the assessee against the order of the ld CIT (A)-XXXI, New Delhi dated 15.10.2013 dismissing the appeal of the assessee filed against the order of the learned Deputy Commissioner Of Income Tax, central circle
– 20, New Delhi passed u/s 250/143 (3) of The Income Tax Act 1961 on 29/1/2013 for assessment year 2008 – 09. b. ITA number 1512/Del/2014 filed by the assessee for assessment year 2008 – 09 against the order of learned CIT – A
-XXXI, New Delhi confirming the penalty levied u/s 271 (1) (C) of the income tax act, 1961 by the learned Deputy Commissioner Of Income Tax, central circle – 20, New Delhi for the Assessment Year 2008-09 as per order dated 28/3/2013 of INR 9507003/-.
2. The assessee has raised the following grounds of appeal in ITA No. 6476/Del/2013:-
Page | 1 “1. That the learned CIT (A) has erred both in law and on facts in upholding the disallowances made by the learned A0 of the sums of
(a) Rs 2,69.66.400/- (being 1/5th of the aggregate expenditure of Rs 13.48,31,985/-) and represented the sum paid to M/s Baer Capital Partners International Ltd. as placement fee.
(b) Rs 2,24.72,631/- representing expenditure incurred as upfront fee, paid to M/s WDC Ventures Ltd
2. That the learned CIT(A) has failed to appreciate that the instant appeal from which the appeal was preferred was against the order giving effect to the order of CIT(A) and as such he was duty bound to only carry out the instruction or direction of the CIT(A) in his order.
3. That the learned CIT(A) has overlooked the statutory provisions contained in section 251(2) of the Income Tax Act before concluding the A O could have examined the allowability or otherwise, before the CIT(A) when an appeal was disposed of by him by an order dated 04.04.2012.
4 That under the statutory provisions contained in section 251(1)(a) of the Act since the CIT(A) disposing off the appeal by an order dated 04 04.2012. could have either confirm, reduce, enhance or annul the assessment, he had set aside the disallowance made by the A O by his order dated 31 12 2010 but had merely directed him to allowed the claim after proper verification and proper verification cannot and does not mean to allow the claim of deduction in accordance with law
5 That the CIT(A) has failed to appreciate that, while giving effect to the order of CIT(A) he had to only comply with the direction of the CIT(A) and that he could not have proceeded to examine the claim a fresh but only required to verify the claim of the expenditure whether was it incurred or not.
6. Without prejudice to the aforesaid, the learned CIT (A) has failed to appreciate that the learned A.O. was not legally justified in making a disallowance of Rs 2.69.66.400/-. claimed as placement fee and also of Rs. 2.24.72.631/- claimed as upfront fee. as both the sums were not chargeable to lax In India. Thus in view of the provisions of section 40a(la) of the Act, the aforesaid expenditure could not have been held to be sums chargeable to tax in India, in view of the Double Taxation Avoidance Agreement between United Arab Emirates (UAE) and with Mauritius
7. That the learned CIT(A) has failed to comprehend that the learned AO had incorrectly invoked the provisions of section 195 of the Income Tax Act, overlooking the provisions of section 40a(ia) of the Act.
8. That the learned CIT(A) has overlooked that the assessee had not entered into any agreement with M/s Baer Capital Page | 2 Partners International Ltd in Dubai In respect of the services provided by them and that the payment has been incurred, as a result of the services provided by the aforesaid company in respect of invoices were raised of payments were made against the invoices The facts stated in the order of CIT(A) in para 3.7 and 3 8. are based on misconception of facts and ignoring the material on record.
9. That, likewise the learned CIT(A) has failed to appreciate that the expenditure incurred as upfront fee paid to M/s WDC Venture Limited could not be said to the sum chargeable to tax in India.
10. That otherwise too, the learned CIT (A) has erred in holding that the expenditure incurred of Rs. 13,48,31,985/- represented capital expenditure and had nothing to do with the profit of the company The judgment relied upon by the CIT (A) in the case of Brooke Bond India Ltd. vs. CIT reported in 225 ITR 798 has absolutely no application to the facts of the instant case
11. That, while determining the claim of the assessee that, expenditure incurred was allowable he has brushed aside the assessee s submissions contained in para 10 in the written submissions before the CIT(A).
12. The findings of the CIT (A) in confirming the disallowance that, 1% upfront fee is payable by the existing shareholder and not by the assessee company is on the misreading of clause 16.2 of the agreement. His further finding of the deduction cannot be claimed either section 37 or 35D or is capital expenditure is also erroneous both on facts and in law.”
3. Briefly stated the facts of the case show that assessee is a company engaged in the real estate business and running several real estate residential and commercial projects. The assessee filed its return of income on 30/4/2009 declaring total income of INR 905178215/-. This return of income was filed in response to notice u/s 142 (1) of the income tax act 1961 issued on 18/2/2009. The due date of the filing of the return was 30/9/2008. Subsequently on 20/8/2009 the assessee filed a revised return of income declaring an income of INR 7 68244979/- against the original return of INR 9 05178215/-. Thus the assessee reduced its return of income or originally declared by INR 136935236/-. The learned assessing officer passed an assessment order u/s 143 (3) of the income tax act as per order dated 31/12/2010 determining the total income of the assessee considering the original return of income at INR 9 05178215/- determining the Page | 3 total income at INR 1 199139848/-. Ld AO did not consider the
revised return as original return of income was a belated return.
Subsequently by passing an order u/s 154 of the income tax act the
income of the assessee was assessed on 27/4/2011 at INR 1
176667217/-. The assessee preferred an appeal before the learned
Commissioner Of Income Tax (Appeals) who passed an order dated
4/4/2012 wherein he directed the learned assessing officer to delete
the addition of Rs. 243520002/- and confirmed the addition of INR 2
7969000/-. The assessee disputed the above addition confirmed by
the learned CIT – A before the income tax appellate tribunal.
Meanwhile on 30/10/2012 in appeal effect order was passed and the
assessed income was determined at INR 9 33147220/-. Such order
was passed u/s 154/154/143 (1) dated 14/3/2011, under section
154 read with section 143 (3) dated 27/4/2011 and u/s 250 read
with section 143 (3) of the income tax act. Further as the assessee
has filed the revised return of income which was considered originally
by the assessing officer as non-est, wherein the claim of the assessee
was with respect to INR 1 36933237/-, the learned CIT – A directed
the assessing Officer to allow the claim after proper verification.
Therefore, in order to give the appeal effect of the direction of the
learned Commissioner of income tax appeal the learned assessing
officer started examining the following claims made by the assessee in
the revised return of income.

Serial Particulars of claim made in the revised Amount in Rs.
number return of income 1 Excessive disallowance under section 40 31717125/-
(i.e. a) of the act in the original return of income. In other words, in the original return of income, the assessee company inadvertently considered disallowance u/s 40 a (ia) of the act of INR 1 40099718/- whereas in the revised return of income the same was revised to Page | 4 INR 1 08382593/- since it was later noticed that, sum of INR 3 1717125/-
had not been claimed as an expenditure in the profit and loss account.

2 Expenditure on upfront fee paid to M/s 22472631/-
WDC venture for subscription of debentures not claimed in the original return of income as the same was capitalized by debiting to securities premium account 3 Expenditure on placement fee paid to 26966400/-
bear capital allowable as deduction u/s 35D of the act but not claimed in the original return of income as the same was capitalized by debiting to securities premium account 4 Non-claim of statutory deduction under 36224744/-
section 24 of the act in the original return of income by incorrectly treating rental income of INR 1 36887170/- as income from business instead of income from house property 5 Service tax payable incorrectly added 19177337/-
back in the original return of income though the same was not debited to profit and loss account 6 Deduction of donation made of INR 7 375000/-
50000/- claimed under section 80 C of the act instead of section 35AC of the act Total 136933237/-
Page | 5
4. After the verification of the claim of the assessee by the learned AO he allowed item number 1 of INR 3 1717125/-, item number 4 of INR 3 6224744/- item number 5 of INR 1 9177337/- and item number 6 of deduction of donation of INR 3 75000/-. Accordingly he allowed the claim of INR 8 7494206/- out of the total claim of the assessee of INR 136933237/-.
5. The learned assessing officer did not agree to the claim of the assessee at serial number 2 of INR 2 2472631 and at serial number 3 of INR 2 6966400/-. He therefore confirmed the disallowance of the above sum. These two additions/ disallowances are matter of dispute before us in this appeal too.
6. Accordingly appeal effect order u/s 250/143 (3) of the income tax act was passed on 29/1/2013 determining the total taxable income of the assessee at INR 8 45653014/-. Thus the assessee from the total income computed as per order dated 27/8/2012 of INR 9 33147220/- allowed the claim of INR 8 7494206/- and determined the final total taxable income of INR 8 45653014/-.
7. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A -XXXI, New Delhi. He passed an order dated 15/10/2013 dismissing the appeal of the assessee. Therefore, the assessee is aggrieved with the order of the learned CIT – A has preferred an appeal before us as per the grounds of appeal stated above.
8. The main grievance of the assessee is that the learned CIT – A as per his order, wherein he has directed the learned assessing officer “to allow such claim of INR 1 36933237/- after proper verification” but the learned assessing officer has only allowed the sum of INR 8 7494206/- and disallowed the balance sum.
9. The learned senior counsel Shri CS Agarwal vehemently contested that when learned CIT – A has directed the learned assessing officer to allow the claim of the assessee, the only option available with the learned assessing officer was to allow the claim, but he disallowed. In other words according to him the learned AO in examining the claim of the allowability of the expenditure has went against the direction of Page | 6 the learned CIT – A. He further submitted that the learned CIT – A in its order dated 15/10/2013, which is under challenge, has failed to appreciate the same.
10. He further submitted that order passed by the learned assessing officer is titled as “appeal effect order (part)” which could never have been passed by the assessing officer. He further stated that there can be no two piecemeal orders and as such apparently the impugned order passed by the learned assessing officer giving effect to the appellate order is not an order giving effect in part but it is an order giving appeal effect and is thus an order of assessment, which is independently appealable. He further submitted that till date no other order has either been passed giving effect to the said order dated 4/4/2012. He further submitted that there cannot be two subsisting orders of the assessment and the first order of assessment is merged with the subsequent order, which is made to give effect to an appellate order. Therefore, his submission was that the impugned order passed by the learned assessing officer is a final order of assessment and is thus only effective order of the assessment. Thus, he submitted that against the order of the assessment dated 31/12/2010 the learned CIT – A has passed an order on 4/4/2012 against which the assessee as well as the learned assessing officer filed appeals before the coordinate bench, which was disposed off on 20/7/2018.
11. He further submitted that the learned CIT – A has directed the learned assessing officer to allow a sum of INR 1 36933237/- after verification. Under he submitted that the learned assessing officer has examined the details but has disallowed the claim of the assessee on the ground that assessee ought to have deducted the tax at source u/s 195 of the income tax act on these expenditure and therefore such expenditure is not allowable u/s 40 (a) (i) of the act and same may have been paid outside India. Thus, it could not have been allowed for the reason of non-deduction of tax at source thereon. He further submitted that the direction of the learned CIT was to allow the expenditure after verification and it was not to allow the same Page | 7 after verification and after further satisfying whether or not the same
is allowable. Therefore according to him it is obvious that the
verification was limited to enable the learned assessing officer to verify
the incurring of the expenditure which verification had not been made
by the learned assessing officer and thus in order to enable the
learned assessing officer to verify the incurring of those expenditure
the learned CIT – A had directed the learned AO to allow the claim
after verification. He further stated that there are no further
directions given by the learned assessing officer; therefore, the learned
AO had no other option but to allow the expenditure, which was
disallowed earlier while computing the total income. He further
submitted that if the revenue is aggrieved with the order of the
learned CIT – A with a direction to the learned assessing officer “to
allow the claim after verification.” The revenue could have filed appeal
before the higher forum but it has not been filed. Therefore it is
apparent that the learned AO has only to reduce the income from the
assessed income to give the appeal effect of the order of the learned
CIT – A. He further stated that if the CIT would have considered
appropriate then he could have called for the remand report, which in
the present case has not been called for. Therefore, he was of the
view that the CIT – A has not remanded the matter back to the file of
the learned assessing officer but to allow the claim after verification.
He therefore submitted that the only option available with the
assessing officer is to verify the claim and to allow the same. He
further relied upon the decision of the honourable Gujarat High Court
in case of Saheli synthetics private limited vs CIT (2008) 302 ITR 126.
He therefore submitted that the power of the learned assessing officer
are limited and the learned AO does not have any further power to
process a new source of income. He therefore submitted that in the
instant case the learned assessing officer should not have made the
disallowance. In nutshell, the only option available with the learned
assessing officer was to verify the claim of incurring of the
expenditure and to reduce it from the total income determined as per
the past assessment records for the impugned assessment year.

Page | 8
12. On the merit of allowability of the claim of Rs 26966400/- he submitted that :-
i. it is submitted that the findings of the learned CIT (A) that the aforesaid expenditure represents capital expenditure is by overlooking that Rs. 2,69,66,400/- was incurred as placement fee paid to M/s Baer Capital UAE and did not represent expenditure incurred in connection with additional issue of shares nor was it incurred which directly related to expansion of capital base. At the outset it is submitted that Rs. 2,69,66,400/- represents 1 /5th of Rs. 13,48,31,985/- and that Rs. 13,48,31,985/- is inclusive of service tax @ 12.36% i.e. Rs. 1,48,31,998/- Thus in any case while disallowing the aforesaid amount the service tax of Rs. 29,66,399.96 i.e. l/5th of Rs. 1,48,31,998/- could in no case be held as disallowable. It is submitted that Rs. 1,48,31,998/- is the service tax and is a business expenditure and is to be allowed.
ii. Apart from the aforesaid it is submitted that a sum of expenditure represented „placement fee’ paid to M/s Baer Capital Partner International Ltd., Dubai. It is submitted that as per Double Taxation Avoidance Agreement entered with United Arab Emirates (UAE), the amount of placement fee represents „other income‟. Article 22 of DTAA is a residual Article and as per the aforesaid Article any item of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of the agreement, shall be taxable only in that Contracting State. It is submitted that since the said sum is not chargeable to tax in India there was no obligation of the assessee company to deduct tax at source on the said sum.
iii. It is submitted that on the perusal of the Double Taxation Avoidance Agreement between India and UAE (Pg. 219 – 227) it would be noted that Article 6 provides for taxability of income from immovable property. Article 7 provides taxability of business profits. Article 8 is in respect of shipping. Article 9 is in respect of Associated Enterprise. Article 10 is in respect of dividend. Article 11 is in respect of interest. Article 12 is in respect of royalty. Article 13 is in respect of capital gains. Article 14 is in respect of personal services and so on. It is thus submitted that the absence of any other Article being applicable, the amount paid to M/s Baer Capital Partner International Ltd. represents other income of the payee and is to be governed by the aforesaid Article.
iv. Under Article 22 of DTAA, as is evident it has been provided that „other income‟ is taxable only in the Contracting State i.e. Page | 9 in the hands of resident (see Pg. 232 of Paper Book) who had rendered services to the assessee in UAE for assisting the assessee to identify investors who may be willing to provide funds to the assessee which it had seriously required. It is submitted that the aforesaid expenditure thus incurred had not been incurred either in connection with the issue of shares or to increase its capital base, instead it represented an expenditure incurred for arranging funds which sum had been contributed by M/s BIPEF Vatika Holdings Ltd. (see Pg. 128) It may kindly be noted that a shareholder agreement between the assessee and M/s BIPEF Vatika Holdings Ltd. (Pg. 129 – 211) had been entered on 22.11.2007; whereas M/s Baer Capital Partners International Ltd. had raised an invoice for the services by it on 21.2.2008 (see Pg. 128) It is thus submitted the aforesaid expenditure has not been incurred in connection with the issue of shares or to enable the assessee to increase its capital base. It is submitted the aforesaid expenditure had been incurred by the assessee to obtain services not in connection with the issue of share subscription.
v. The learned CIT(A) in his order in para 3.6 has however observed, the claim is not a straightforward claim. The appellant submits with respect, the aforesaid findings are entirely misconceived and are erroneous being based on no valid basis. The learned CIT(A) in his order in para 3.15 has held that the assessee has failed to establish the amount was payable by it being its liability, despite the fact that the assessee had so confirmed to the payee (Pg. 127). It is most respectfully submitted that the conclusion of the learned CIT(A) that the assessee has no liability to incur expenditure is based on misconceived facts. The learned CIT(A) in para 3.7 has held that on the perusal of the copy of agreement (Pg. 129 – 211) in his opinion showed that through the said agreement the appellant had issued 0.001% of cumulative mandatorily convertible preference shares to BIPEF Vatika Holdings Ltd. a company incorporated in Mauritius. He held such preference shares are mandatorily convertible into equity shares as per the formula given at 4.2 of Schedule – 2 of the agreement on 31.12.2010 or on happening of certain events as listed at 4.1 of the agreement. In his conclusion, the earliest specific date for conversion into equity shares is 31.12.2010 unless it precedes any other event listed therein. He has noted that the investor company is BIPEF Vatika Holdings Ltd. has agreed to subscribe to 1,22,903 preference shares and 2,41,822 equity shares in all aggregating to Rs. 600 crores. He has thus held the appellant has raised capital through the said transaction. He thereafter extracted a Page | 10 communication dated 22.11.2007 (Pg. 127) addressed by the assessee to M/s Baer Capital Partner International Ltd. to draw an inference that the assessee had no liability in respect thereof. It is most respectfully submitted that such a conclusion is completely misconceived and erroneous. The learned CIT(A) has overlooked that M/s Baer Capital Partner International Ltd. had raised an invoice on 21.02.2008 for having rendered services, which was in connection of the transaction, amounted about 600 crores raised under share subscription agreement and shareholder agreement dated 22.11.2007. The appellant submits that the conclusion of the learned CIT(A) that there was no liability of the assessee is apparently erroneous. His further finding in para 3.12 that ” the AR has not filed any copy of agreement between appellant and Baer Capital Partners International Ltd. giving the terms and conditions of taking their services in the form of “Placement Services” for which it has been claimed fees are being paid” is highly misconceived. In fact, there was no such written agreement as has been assumed by the CIT(A). On the contrary, the assessee had approached M/s Baer Capital Partners International Ltd. and others who were involved in their activities of arranging of loans and other finances when M/s Baer Capital Partners International Ltd. had agreed to arrange finances for it either by loan/debentures.
vi. The learned CIT(A) has thus it is submitted failed to comprehend that it was for the services rendered by M/s Baer Capital Partners International Ltd. who had arranged the transaction, it had incurred a liability to pay 2% as placement fee. The finding of the learned CIT(A) that preference shares were being subscribed by BIPEF Vatika Holdings Ltd. and not by any general public does not make any difference since the transaction is between the assessee company and M/s B1PEF Vatika Holdings Ltd. which is a separate and independent company in which assessee has no interest whatsoever.
vii. It is submitted that it appears to the appellant that the learned CIT(A) may have suspected that B1PEF Vatika Holdings Ltd. is a related concern of the assessee, which in fact is wholly misconceived. It is submitted the services rendered by M/s Baer Capital Partners International Ltd. was to arrange the transaction to provide finances. However M/s BIPEF Vatika Holdings Ltd. agreed to acquire preference shares and equity shares instead of providing finances as loan. Thus, the expenditure has not been incurred in connection with issue of shares and would not be covered u/s 35D of the Act. The finding and conclusion of the learned C1T(A) that it is not known what kind of services have been rendered is by ignoring Page | 11 the entire chain of events which establishes that it was based on an effort made by M/s Baer Capital Partner International Ltd. UAE. In fact, M/s B1PEF Vatika Holdings Ltd. had agreed to acquire shares of the company. It is obvious there had to be an independent agency who would be required to introduce and make efforts for arranging finances. In such circumstances, the appellant submits the findings and conclusion of the learned CIT(A) that the expenditure incurred is a capital expenditure and has been incurred in connection with the issue of share capital i.e. shares is unjustified. The learned CIT(A) has failed to appreciate that section 35D of the Act had been inserted by the Taxation Laws Amendment Act 1970 w.e.f. 01.04.1971 to provide an expenditure incurred to be allowed despite the fact it may be a capital expenditure to be allowed in ten equal installments. The assessee thus only by way of abundant precaution and to avoid an avoidable litigation claimed such an expenditure to be amortized, since rate of tax remained the same. In any case and without prejudice, it is submitted that the expenditure incurred and claimed be allowed u/s 37(1) of the Act as it is undisputedly an expenditure incurred for obtaining services in the field of arranging finances and not in connection with the issue of share capital.
viii. The appellant submits that the expenditure incurred aforesaid is not “in connection” with the issue of share capital The expression used is „in connection with‟ and is not in relation to. In the instant case it is evident fact that assessee company has not incurred the said expenditure in connection with the issue of the share capital instead as stated above had been incurred in the course of business for seeking assistance of institution who would be able to arrange for finances. The mere fact the said financer instead of advancing the loan agreed to provide the finances on the terms that it would participate into capital of the company could not lead to a conclusion that the expenditure had been incurred in connection with issue of share capital. The assessee company inspite of the fact had claimed the expenditure by amortizing the same does not per-se means that expenditure incurred was a capital expenditure and was incurred in connection with the issue of share capital. ix. It is submitted that the learned CIT(A) in his order at page 25-
26 has referred to subscription of share holders agreement dated 22.11.2007. The aforesaid agreement has been placed at pages 129-205 of PB. The said agreement is supported by letter agreement) (pages 206-209 of PB) alongwith amended agreement appearing at pages 212-219 of PB. It is submitted that if the agreements are perused, it would be seen that BIPEF Page | 12 Vatika Holdings Ltd. has been identified as investor as is evident from page 206 of PB, i.e. Letter Agreement. It is submitted that if Letter Agreement is carefully read, it would be seen that BIPEF Vatika Holdings Ltd. Had made investment with the company to whom shares have been issued. It is submitted that amount paid to M/s Baer Capital Partner International Ltd. Is not incurred in connection with the issue of share capital but had been incurred by way of placement fee and was amortized as Deferred Revenue Expenditure by applying section 35D of the Act.
13. On the merits of the claim of allowability of Rs 22472631/-, he submitted that :-
i. Now coming to the next disallowance made by the learned AO of Rs. 2,24,72,631/-, it is at the outset submitted that the finding of the CIT(A) that on the perusal of the agreement between appellant and M/s WDC Ventures Ltd. Mauritius, shows the appellant had raised Rs. 200 crores by way of issue of debentures and had paid to the company an upfront fee of Rs. 2.24 crores cannot be held allowable is based on mis-appreciation of evidence and misapplication of law. ii. In para 3.21 he has noted that the assessee had entered into an agreement with M/s WDC Ventures Ltd. and is dated 31.10.2007 (see page 245-322 of PB). He has observed in his order in para 3.22 that the said agreement is titled “Investment Cum Shareholders Agreement”. In his opinion, the same is made for subscription to equity share and Compulsorily Fully Convertible Debentures. Debentures were named as Wachovia CCD. Such debentures were fully convertible at par in tranches starting from 24th month of the date of issue. It is stated by him that agreement itself provides that existing shareholders should pay to the WDC Ventures Ltd. 1% of subscription amount as upfront fee (see para 3.23 Pg. 30) before the amount is subscribed by said investor. Thus he concluded that payment has been made towards compulsorily fully convertible debentures and that the agreement is where an investor is subscribing to CCD giving a call option to the existing shareholders to buy out the said CCDs at a predetermined price and as such the said upfront fee of 1% is payable by the existing shareholder and not by the assessee. He has thus concluded that the said sum which has been paid is not a liability of the assessee but was the liability of the existing shareholder. It is Page | 13 respectfully submitted that he has erred in so concluding for the reasons stated below:
iii. At the outset it is submitted the AO had not disputed the genuineness of the claim of expenditure or of incurring of expenditure. He has found the expenditure incurred is justifiable expenditure. However in his opinion assessee did not deduct the tax at source as provided u/s 194J of the Act and hence disallowed the same. It is submitted the said sum of expenditure had been incurred towards the payment made as upfront fee paid to M/s WDC Venture, a tax resident of Mauritius.
iv. It is the contention of the assessee that on the aforesaid sum paid to M/s WDC Venture, the assessee was not required to deduct tax at source in view of Article 22 of DTAA between India and Mauritius.
v. It is further submitted that the amount of Rs. 2,24,72,631/-
comprises of service tax @ 12.36% of Rs. 24,72,069/- on which it is obvious no tax was required to be deducted at source in view of the circular No. 275 of Central Board of Direct Taxes dated 13.01.2014. For the sake of convenience, aforesaid circular is reproduced hereunder: “The Board had issued a Circular No.4/2008 dated 28- 04-2008 wherein it was clarified that tax is to be deducted at source under section 194-1 of the Income- tax Act, 1961 (hereafter referred to as ‘the Act’), on the amount of rent paid/payable without including the service tax component. Representations/letters has been received seeking clarification whether such principle can be extended to other provisions of the Act also.
2. Attention of CBDT has also been drawn to the judgment of the Hon’ble Rajasthan High Court dated 1-7- 2013, in the case of CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure [2013] 37 taxmann.com 154 (Rajasthan) , holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Act.
3. The matter has been examined afresh. In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable Page | 14 to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.
4. This circular may be brought to the notice of all officer for compliance. ”
vi. Further, the Hon’ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. C/T [2010] 327 ITR 456 wherein the Hon’ble Apex Court has decided that there was no obligation for withholding tax on any person making payment to a non-resident, if the payment made to non- resident is not chargeable under the provisions of the I.T. Act.
vii. It is further stated that there was no justification not to have allowed the deduction of the said sum of Rs. 24,72,069/- which represented service tax. In respect of remaining sum of Rs. 2,00,00,562/-, it being other income was not subjected to tax in India in view of Article 22 of DTAA between India and Mauritius which reads as under: “Other income
1. Subject to the provisions of paragraph 2 of this Article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this convention, shall be taxable only in that Contracting State.
2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right of property in respect of which the income is paid is of Article 7 of Article 14, as the case may be, shall apply”
viii. It is further submitted that the learned CIT(A) has misconstrued the agreement. He has failed to appreciate that the expenditure had been incurred by way of upfront fee paid to M/s WDC Ventures, Mauritius to whom debentures were issued by the assessee company. In such circumstances, to hold that the liability was not of the assessee company but was of the shareholder is on Page | 15 misreading and misinterpreted the agreement. It is well- settled rule of law the debentures are loan instruments. Thus, where a loan is obtained by issue of debentures such expenditure incurred is business expenditure. In fact he has mis-construed clause (t) which reads as under: “payment of upfront participating fee by the Existing Shareholders to Wachovia of 1% (net of all applicable taxes) of Wachovia‟s commitments being a total amount of Rs. 20 Million (Rs. twenty million only)”
ix. The close scrutiny of the said clause merely provides that though the liability will be of the assessee company who has raised the funds. However such a liability will be shared by the existing shareholders to Wachovia of 1% of net of all applicable taxes of Wachovia‟s commitments. It is thus respectfully submitted the conclusion of the learned CIT(A) that it was not a liability of the assessee is entirely misplaced and thus it is prayed that the said additions sustained by the CIT(A) be directed to be deleted as such.
x. The assessee seeks to rely upon the case of Apex Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT reported in 225 ITR 802, wherein it has been held that merely because revenue expenditure is to be amortized does not seized to be an expenditure and can be allowed accordingly. Apart there from it is submitted that there is no concept of deferred revenue expenditure as has been consistently held by the High Court of Delhi that there is no concept of deferred revenue expenditure in the income tax.
(i) CIT vs. Citi Financial Consumer Fin. Ltd., 335 ITR 29 (Del.) (SLP dismissed on 21.11.2011)
(ii) CIT vs. Bharat Aluminium Co. Ltd., 303 ITR 256 (Del.)
(iii) CIT vs. Gujarat Guardian Ltd., 222 CTR 526 (Del.)
(iv) CIT vs. Jai Parabolic Springs Ltd., 306 ITR 42 (Del.)
(v) CIT vs. Diamond Products Ltd., 177 Taxman 331 (Del.)
(vi) CIT vs. Info Vergix Technologies Ltd., 323 ITR 52 (Del.)
(vii) CIT vs. Munjal Showa ltd., 329 ITR 449 (Del.)
(viii) CIT vs. Industrial Finances Corpn. of India Ltd., 185 Taxman 296 (Del.) Page | 16
(ix) CIT vs. Denso India Ltd., 318 ITR 140 (Del.)
(x) CIT vs. Oswal Agro Mills Ltd., ITA No. 2/2002 dated 04.08.2015
(xi) Naraingarh Sugar Mills Ltd. vs. CIT, 204 Taxman 90 (Del.)(Mag)
(xii) CIT vs. Panacea Biotech Ltd., ITA No. 24/2012 dated 17.01.2012 xi. The invoice is dated 21.02.2008 and the payment has been made in respect of the said sum before the end of the financial year. (see page 238) 14. The learned senior DR vehemently contested the claim of the learned senior counsel. She submitted that the learned CIT has given a clear- cut direction to the learned assessing officer to allow the claim of the assessee after proper verification. She submitted that accordingly the learned CIT – A has directed the learned assessing officer that if the expenditure is allowable to the assessee in accordance with the provisions of the income tax act then he should allow it. She submitted that otherwise the learned CIT – A would have allowed the claim of the assessee. She further stated that the learned CIT – A has not examined the claim of the assessee with respect to its allowability within the four corners of the provisions of the income tax act. Therefore, she submitted that there is no error in the action of the learned AO to test the allowability of that expenditure under the various provisions of the income tax act. She submitted that as the assessee has not deducted tax at source on the payment made by it outside India the learned assessing officer was as such duty-bound to examine the claim of the assessee with respect to allowability u/s 37 (1) of the act vis-a-vis deduction of tax at source on such payment u/s 195 of the income tax act. Therefore, she submitted that the claim of the learned senior counsel that order passed by the learned assessing officer is a nullity in law and without authority is devoid of any merit. She referred to para number 3.4 of the order of the learned CIT – A who dealt with this issue and supported it.
15. She further referred to the order of the learned CIT with respect to the disallowance of INR 2 6966400/- u/s 35D of the act and submitted Page | 17 that such expenditure related to the raising of the capital of the appellant company and therefore it is a capital expenditure. She vehemently supported para number 3.19 of the order of the learned CIT – A and submitted that learned CIT – A has confirmed the disallowances on several fronts. She submitted that the assessee has not submitted the agreement and therefore assessee failed to justify the payment. Further, the services rendered if at all is in respect of raising of the capital and therefore it is a capital expenditure. Further, the learned CIT – A has also held that no services have been rendered and therefore the claim of the assessee is not allowable. She therefore submitted that over and above of the non-deduction of tax at source the learned CIT – A has held that the sum is not at all allowable as expenditure. Hence, she submitted that There is no infirmity in the order of learned CIT – A. She also submitted that CIT
– A is empowered to uphold disallowance on any other count also then mentioned by the learned assessing officer.
16. With respect to the disallowance of the claim of Rs. 22472631/- , she extensively referred to the order of the learned CIT – A and submitted that there is no infirmity in the order of the learned CIT – A in upholding the disallowance made by the learned assessing officer.
17. The learned senior counsel in rejoinder submitted that there is a difference between proper verification and verification. He further submitted that the services have been rendered outside India and no tax is required to be deducted on the above sum at all. He therefore submitted that the order of the learned CIT – A in upholding the disallowance is unsustainable in law. He also submitted that that the order of the learned assessing officer in exceeding is jurisdiction is also devoid of any merit and deserves to be quashed. He submitted a chart with respect to the claim of the expenditure of Rs. 26966400/- stating that for assessment year 2008 – 09 the issue is in dispute. For assessment year 2009 – 10, the issue is in dispute as the matter is pending before the coordinate bench. However for assessment year 2000 – 2011 till 2012 – 13 the deduction has been allowed by the learned assessing officer and also not disturbed by the learned CIT – A Page | 18 or any other authority and therefore now same cannot be disputed. He further submitted that that assessee in the alternative had claimed before the learned CIT – A for assessment year 2008 – 09 that the entire expenditure be allowed u/s 37 of the income tax act for the assessment year 2008- 2009 itself.
18. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also considered all the judicial precedents cited before us by the rival parties. We will deal with them , if found relevant, at the appropriate places. The 3 issues that arises before us is (1) whether the order passed by the learned assessing officer is sustainable in law with respect to examination of the claim of the assessee, (2) whether the expenditure of INR 2 6966400/- being 1/5 of INR 1 34831985/- claimed under section 35D of the income tax act is allowable to the assessee or not (3) whether the revenue is correct in disallowing the claim of Rs. 22472631/-.
19. On the first issue whether the ld AO was empowered to examine the claim of the allowability of expenses from all the angles, the ld CIT (A) held in para no 3.4 of his order as under :-
“3.4 I have perused the order of my predecessor and I do not agree with the AR. At para 3.6 of the order CIT(A) has clearly directed the AO to allow such claims “after proper verification”, in my view, “Proper Verification” would mean ascertaining whether the expenditure is at all eligible for deduction from the profits and whether all the provisions of the Act have been complied with for allowing such expenditure. Therefore, I find no merit in the AR‟s submission in this regard and the same is rejected.”
20. It is necessary to look at the direction of the learned CIT appeal before deciding this issue. The learned assessing officer has reproduced it at para number v of his order at page number 1 which is as under:-
” …. With respect to the objections of the assessing officer that since the return was filed beyond the period stated in notice Page | 19 u/s 142 (1) of the income tax act, 1961, the return filed cannot be presumed to have been filed in response to notice u/s 142 (1) of the income tax act, 1961. In my opinion, the assessing officer has rightly treated the return of income as an invalid return of income and therefore no interference is being made to the said order of the assessing officer.
With respect to the contentions of the appellant, that each of the claims made in the revised return of income legal claims and as such or to have been considered while framing the impugned assessment order. I am in agreement with the appellant company, that, such claim of INR 1 36933237/- should have been considered by the assessing officer in its order of assessment. The arguments of the appellant in this regards are exhaustive, convincing and are prime facie forceful, such as excessive disallowance u/s 40 (a) (i a) of the income tax act, 1961 in the original return of income of INR 3 1717125/-, expenditure on upfront fee paid subscription for debenture to be allowed as revenue expenditure Rs, 22472631/-, expenditure on placement fee to be allowed u/s 35D of the income tax, 1961, INR 2 6966400/-, claims u/s 24 against the rental receipts, amounting to INR 3 6224744/-, service tax payable INR 1 9177377/- incorrectly added back in the original return of income and relief of INR 3 750000/- on account of wrong claim u/s 80 G of the income tax act, 1961 which is fact is eligible at the rate of hundred percent u/s 35AC of the income tax act, 1961. In any case, the assessee on the facts and circumstances of the case and on the basis of law applicable is duty-bound to make a correct assessment of the income and admissible expenditures should be allowed. I, therefore direct the assessing officer to allow such claims of INR 1 36933237/- after proper verification.”
21. Therefore, it is apparent that the learned CIT Appeal has not verified the claim of the assessee but has merely sent back the claim of the assessee back to the assessing officer to properly verify the same and Page | 20 allow it. Meaning thereby if the claim of the assessee is falling within the four corners of the provisions of the income tax act then after proper verification the learned assessing officer should allow such claims. Therefore , if the claim of the assessee is tenable as per the income tax act then the learned assessing officer should allow it and if the claim of the assessee is not allowable according to the provisions of the income tax act, then, naturally the learned AO should not allow the same. According to us, this is the direction of the learned CIT appeal. Our view further get support from the fact that there is no finding in the order of the learned CIT – A that these expenditure are allowable. He has merely held that the claim of the assessee is prime facie forceful. He has not held it to be allowable. Further this observation is also with respect to the total claim of INR 136933237/- . Further, the learned assessing officer himself verified the total claim and out of it most of the claim of the assessee has been accepted after verification but has dismissed two claims out of six for the reasons given in the assessment order. Therefore, it is not proper to interpret the order of the learned CIT – A in the manner in which learned senior counsel proposes to read.
22. Further the argument of the learned senior counsel that the order is passed in part is also not correct because of the reason that there are certain directions by the learned CIT – A for further examination which can already be concluded after giving the proper opportunity of hearing to the assessee after the assessee submits the proper details. Further certain directions of the learned CIT – A are very specific and direct by giving a reason for deleting the disallowance made by the learned assessing officer, which can immediately be given appeal effect to by learned assessing officer. Therefore, it cannot be said that the learned assessing officer has made any error in passing appeal effect order in consequence of two different directions of different nature.
23. Further, it is argued before us that, if by the direction of the learned CIT – A, revenue is aggrieved then there should have filed an appeal before the coordinate bench. Having not filed the appeal, the revenue Page | 21 now cannot say that the order of the CIT – A is incorrect in directing the assessing officer to allow the claim of the assessee. This argument cannot hold water for the simple reason that the learned CIT – A has directed the assessing officer to allow the claim of the assessee after proper verification. This criteria also applies to the assessee for the reason that if the assessee is aggrieved, even belatedly, with the direction of the learned CIT – A, it could have also filed an appeal before coordinate bench. This is also not been done by the assessee. Therefore, this argument deserves to be rejected at the threshold itself.
24. In view of this, we do not find any infirmity in the order of the learned assessing officer in examining the claim of the assessee and then allow the same is directed by the learned CIT appeal.
25. Now we come to the disallowance of Rs. 26966400/- relating to expenditure on placement fee paid claimed as deduction u/s 35D of the act but not claimed in the original return of income as the same was capitalized by debiting to securities premium account. Alternatively assessee has claimed the whole of the expenditure is deductible u/s 37 (1) of the income tax act. Even otherwise, u/s 35D also this is the first year of claim. The assessee submitted that this deduction is on account of placement fees paid to M/s Baer capital partners International Ltd, Dubai as per the provisions of section 35D of the income tax act. It was further stated that according to the double taxation avoidance agreement with United Arab Emirates the payment of placement fee made to that party is not covered by any specific article but is covered by article 22 of other income. It was further stated that article 22 of the agreement any item of income of a resident of a contracting state wherever arising which are not expressly dealt with by any of the article of the agreement shall be taxable only in that contracting state and accordingly no tax is required to be deducted on the sum. The learned assessing officer did not agree with the argument of the assessee and held that as assessee has failed to deduct tax at source under section 195 of the income tax act the above expenditure cannot be allowed and hence he disallowed Page | 22 the same for the reason of non-deduction of tax at source. The matter
was agitated before the learned CIT – A. On the issue of disallowance
of Rs. 26966400/- being 1/5th of the expenses u/s 35D of the act ,
the ld CIT (A) has dealt with this issue as under:-

“A) Disallowance of Rs. 2.69.66400 being 1/5 of Rs. 13.48.31.985/- claimed as deduction u/s 35D 3.6 I find that the claim is not a straightforward claim. Further, there is no necessity of going into the issue of whether any tax was deductable at source on the above payment. 3.7 The above claim relates to payment made to M/s Baer Capital Partners Ltd, a company with address in Dubai. In connection with the above expenditure. The AR has provided copy of agreement between the following parties:-
1. B1PEF Vatika Holdings Limited
2. Vatika Limited
3. Anil Bhalla
4. Gautam Bhalla
5. Gaurav Bhalla
6. Everlast Projects Private Limited 3.8 The title of the agreement is “Subscription and Shareholder‟s Agreements”. Through this agreement, the appellant company has issued 0.001% cumulative mandatorily convertible Preference Shares of Rs. 10 -each to BIPEF Vatika Holdings Ltd. a company incorporated in Mauritius. These preference shares are mandatorily convertible into equity shares as per the formula given at 4.2 of Schedule-2 to the agreement, on 31.12.2010 or on happening of certain events as listed at 4.1 of Schedule-2 of the agreement. Thus the earliest specific date mentioned at 4.1 of the Schedule-2 for conversion into equity shares is 31 December 2010 (if no other events listed there happen). The investor company, that is BIPEF Vatika Holdings Ltd., has agreed to subscribe to 1,22,903 preference shares and 2,41,822 equity shares in all aggregating to Rs. 600 Crores. 3.9 Thus the agreement shows that the appellant has raised capital through the said transaction. The AR has filed photocopy of letter at page 127 of the paper book, issued by the appellant to M/s Baer Capital Partners International Ltd., UAE wherein it is stated as under:-
Baer Capital Partners International Ltd.
Page | 23 Dubai International Financing Centre
Level-05, Gate Precinct Building 4
P.O. Box 506 508, Dubai, United Arab Emirates
Dear Sir,
This refers to the Subscription and Shareholders Agreement (the “Agreement”) dated_22nd November, 2007 between BIPEF Vatika
Limited, Anil Bhalla, Gaurav Bhalla, Gautam Bhalla and Everlast
Projects Pvt. Ltd.
We confirm that subject to applicable laws we will pay you or
your nominees a upfront/placement fee equal to 2% of the
Transaction Amount defined in the Agreement within 15 days of
the Second Additional Closing Date as per the Agreement, for
structuring and arranging the said Transaction Amount.
Best Regards,
For Vatika Limited
(Anil Bhalla)
Managing Director
3.10 On the basis of the above letter of 22 November 2007, the
appellant has- claimed that 2% of the total amount raised
through “Subscription and Shareholder‟s Agreement” was
payable to said entity as an upfront/placement fee. The last line
of the said letter mentions that the payment was as per the
agreement for structuring and arranging the said transaction
amount.
3.11 The AR has also enclosed photocopy of invoice for Rs.
11,99,99,987 being placement fees of Rs. 2% of the transaction
amount of Rs. 599,99,99,329.10/- raised under the share
Subscription and Shareholders Agreement dated 22 November,
2007.
3.12 It is noted that the AR has not filed any copy of agreement
between appellant and Baer Capital Partners International Ltd.
giving the terms and conditions of taking their services in the
form of “Placement Services” for which, it has been claimed, fees
are being paid.
3.13 It is further noted that the preferential shares are being
subscribed by company by the name BIPEF Vatika Holdings Ltd.
and not by any general public. The “Subscription and
Shareholders Agreement” is between the appellant, its promoters
and the said investor company. Hence it is not known what kind,
of services have been rendered by Baer Capital’ Partners Page | 24 International Ltd. to the appellant. The place of rendering
services is also not known in the absence of any agreement
produced during the appeal proceedings.
3.14 It is apparent that the investor company has invested in
the capital of the appellant on certain terms and conditions. The
kind of services rendered by Baer Capital Partners International
Ltd. to the appellant or to the investing company are not
ascertainable from the details submitted during the assessment
proceedings/It is also not clear whether the services were
rendered to the appellant or to the investor or partly to each one
of the parties to the agreement (i.e. promoters included). In fact
the clause No. 28 of the agreement on page 30 states that the
appellant would settle the expenses of the investor company
directly with the service providers up to a limit of USD 1,70,000
(which works out to Rs. 79.73 Lakhs @ Rs. 46.90 per USD)
However, the appellant has paid Rs. 13.98 crores and not Rs.
79.73 Lakhs. The said clause is reproduced below:-
The Company acknowledges that the Investor has incurred costs
during its business, operational, strategic, accounting, financial
and legal due diligence and for other deal completion and out-of-
pocket costs and expenses, including closing documentation. The
Company undertakes to settle these expenses with the service
providers directly up to a limit of USD 170,000.
3.15 Thus I do not consider that the assessee has been able to
establish that any amount was payable by way of liability of the
company in this regard. Further it is also not known what was
the liability of investor company to the Baer Capital Partners
International Ltd. To what extent other promoters were required
to contribute to such expenditure, if at all payable, is also not
known.
3.16 It is further noted that expenditure, if incurred, relates to
raising of capital of the appellant company. The same, is a capital
expenditure and has nothing to do with the profits of the
company. It has been held by Hon‟ble Supreme Court, in the case
of Brookbond India Ltd. (22.5 ITR 798), that amount paid by the
company for raising capital is capital expenditure and not
deductable from the profits.
3.17 Hence the above amount of Rs. 2.69 Crores being l/5th of
Rs. 13.98 Crores amount paid to M/s Baer Capital Partners
International Ltd. cannot be allowed as revenue expenditure. –
3.18 As regards allowing the same as a deduction u/s 35D, it
is noted that section 35D is also not applicable for this kind of Page | 25 payment. Any: payment made towards raising the capital of a company from private source is outside the purview of section 35D. It is only the expenditure in connection with the issue for public subscription of shares or Debentures of a company that is covered by section 35D(2)(c)(iv) of the Act. Thus it is evident that the amount claimed as expenditure incurred is otherwise also not deductable u/s 35D.
3.19 To sum up in respect of the above payment made Baer Capital Partners International Ltd. it has not been established that certain service were actually rendered to the appellant company in the absence of the copy of agreement between the appellant and Baer Capital Partners International Ltd. Mere letter from the assessee to Baer Capital Partners International Ltd. or its invoice does not give any details of the kind of service rendered, the responsibilities Undertaken by each parties, the place of rendering of service and also the terms of the agreement. Further since the subscription and shareholder agreement is involving not only the appellant but also certain other players, there sire no evidences to clearly establish that it was the liability of the appellant company alone and not that of the other promoter‟s shareholders. The expenditure even if proved to be an actual expenditure of the company, is not an allowable expenditure as the same is in the nature of the capital expenditure. The expenditure is also not related to any public issue. The share capital has been increased through subscription by a single entity located in Mauritius. Thus the provisions of Section 35D are also hot applicable in the appellant‟s case. Considering these factors, the expenditure does not qualify for any deduction from the profits of the company. Therefore the action of the AO in this regard is upheld, though for different reasons.”
26. To support the claim of the allowability of the expenditure, the learned senior counsel has referred to the page number 127 of the paper book which is a letter dated 22/11/2007 by the assessee to Baer capital partners International Ltd, Dubai referring to the subscription and shareholder agreement dated 22/11/2007 between BIPEF vatika Holdings Ltd and vatika Ltd confirming that assessee will pay upfront or placement fee equal to 2% of the transactions amount as defined in the agreement within the 15 days of the 2nd additional closing date as per the agreement for structuring and arranging the said transaction Page | 26 amount. Further at page number 128 the invoice number BCP – 001/2008 is placed before Rs. 119999987/- having the narration that being the placement fee of 2% of the transaction amount of INR 5999999329.10 raised under the share subscription and shareholders agreement dated 22/11/2007. Page number 129 is the shareholders agreement dated 22/11/2007 wherein BIPEF vatika Holdings Ltd invested the above amount of INR 5 999999329.10 in the assessee company.
27. However the learned CIT – A categorically held that that assessee has not produce the agreement between the assessee and the recipient of the above fee to identify that what kind of services provided to the assessee and where. The assessee flatly submitted that there is no such agreement. Therefore, the only evidence that is available is of the recipient, which is placed at page number 128 of the paper book. The narration of the bill has already been extracted by us above. Merely there is a shareholder in subscription agreement it is not possible to link it that such services have been rendered by the recipient of the above his. In fact even before us the learned senior counsel did not show any evidence that what kind of services have been rendered by the recipient of the above fees. It is also interesting to note that the day on the shareholders agreement executive that is on 22/11/2007, the letter dated 22/11/2007 which is placed at page number 127 of the paper book addressed to the recipient of the above fee i.e. Baer capital partners International Ltd where the assessee says that it will pay an upfront placement fee equal to 2% of the transaction amount to that company. Further, on 21/02/2008, Baer capital partners have raised the bill of Rs. 119999987/-. On careful reading of subscription and shareholding agreement dated 22/11/2007 which is executed between the investor resident of Mauritius and the assessee resident of India. The agreement consists of 40 different classes as well as eight schedules and annexure starting from A-G. However in the whole agreement there is no reference of any of the consultant, advisor et cetera about their role and responsibility, indemnity and non-disclosure. Therefore, it is Page | 27 apparent that the assessee has failed to establish that what kind of services has been rendered by bear capital partners Ltd to the assessee. There is no answer from the invoice, the letter of the assessee as well as the subscription and shareholders agreement that who identified the investors, what is the methodology for identification of investors and the manner in which the investor, invest the assessee and the consultant who facilitated the above deal. Further, it has been categorically stated by the learned senior counsel that there is no agreement between the assessee and the bear capital partners. In view of this what kind of services have been rendered have not been shown. Maybe there is no formal agreement, but of course, there would be Mandate letter and the roles and responsibilities fixed between the parties for the funds raised by the assessee. Therefore we do not find any infirmity in the order of the learned CIT – A that assessee has failed to show what kind of services have been rendered. We are production of the letter of the assessee and the bill/invoice of the party does not give any evidence that services have been rendered.
28. It is also interesting to load that learned senior counsel submitted that though there is no agreement between the assessee and bear capital partners International Ltd but has submitted that that assessee had approached M/s bear capital partners International Ltd and also others who were involved in their activities of arranging of loans and other finances when bear capital partners International Ltd had agreed to arrange finances for it either by loan or debentures. To substantiate this argument, neither any agreement with any of the others was produced before us. No evidence or details with respect to involvement of any other consultants were also shown. It was also not shown that what is the role and responsibility of the bear capital partners. In view of this, we do not find any force in this argument.
29. The learned CIT – A has held that bear capital partners as stated by the assessee has arranged for the transaction where a company has invested INR 6,000,000,000 in the assessee company. The argument of the learned CIT – A that that the shares were subscribed BIPF vatika Holdings Ltd and not by public, the payment of fee, in absence Page | 28 of evidence of any services rendered, is not justified. The argument of the learned senior counsel is that it does not make any difference whether one company are general public makes investment as both a separate and independent company and in which assessee has no interest whatsoever. We fully agree that whether the investment is made by one company or by general public does not make any difference provided assessee proves that services have been rendered by the recipient of the fees. In the present case the assessee has not proved that what kind of services have been rendered by the Baer capital partners. Neither the letter dated 22/11/2000 70 the invoice shows that how and through what process the investment has been secured and the role of the person to whom the fees is paid. The assessee has had many places has stated that it is a chain of events wherein referred to have been made by bear capital Partner International Ltd. However, the assessee except stating so could not describe what those chain of events are and what is the role and responsibility of bear capital Partner International Ltd in the whole transaction where the funds to the extent of INR 6,000,000,000 have been raised by assessee company.
30. In any way, the transaction is for issue of 0.001% of cumulative mandatorily convertible preference shares by the assessee to VIP vatika Holdings Ltd, Mauritius. Such preference shares are mandatorily convertible into equity shares as per the formula. There is no option to redeem those shares but only to convert them into equity shares. The BIPEF vatika Holdings Ltd has agreed to subscribe to 122903 preference shares and 241822 equity shares in all aggregating to INR 6,000,000,000. Thus, the amount of fees paid by the assessee even otherwise is for raising the capital of the assessee company.
31. Further the assessee has submitted that that 1/5 of the total expenditure firstly claimed in assessment year 2008 – 09 is disallowed u/s 143 (3) of the act in the impugned assessment order passed in pursuance to the direction of the learned CIT – A. He submitted that for subsequent years the claim of the assessee has not been disputed.

Page | 29 This argument has been carefully considered however, it is noted that in the subsequent years only 1/5 of the expenditure has been claimed by the assessee u/s 35D of the income tax act which has been allowed without examination by the AO. Undisputedly, this is the 1st year of the examination whether the expenditure incurred by the assessee is allowable u/s 37 (1) of the income tax act as claimed by the assessee or assessee is entitled to staggered deduction under section 35D of the act. Therefore, not disallowing the above sum in the subsequent year, does not help the case of the assessee. Even otherwise it is an established judicial precedent that claim of deduction u/s 35D is required to be tested in the year in which the expenditure have been incurred fast and not in subsequent 4 years. In subsequent years, the revenue cannot question the validity, justification, or admissibility of such claim.
32. Whether the tax is required to be deducted or not for the allowability of the expenditure would come into picture later on when the expenditure are found to be deductible as a business expenditure as per the normal provisions of the income tax act. The moment the expenditure is found to be allowable according to the normal provisions of the income tax then only it is required to be seen that whether the assessee has deducted tax at source on such payment or not. Therefore, the threshold of the withholding tax will only come later on when the expenditures are found otherwise allowable as per the provisions of the income tax act. The heading of section 40 says that amounts not deductible stating that notwithstanding anything to the contrary in section 30238, the following amounts shall not be deducted in computing the income chargeable under the head profits and gains of business or profession and thereafter it list 1 of the expenditure which is paid to non-resident not eligible for deduction if no tax is deducted thereon. Therefore, any claim of expenditure 1st has to cross the threshold of provisions of section 30 – 38 of the income tax act. If the claim of the expenditure fails that threshold then whether taxes deducted by the assessee or not is immaterial.
Page | 30
33. In view of the above facts we do not find any infirmity in the order of the learned CIT – A in upholding the disallowance made by the learned assessing officer of Rs. to 6966400/- being 1/5 of the aggregate expenditure of INR 1 34831985/- being a fee paid to Messer‟s Baer capital partners International Ltd as placement fee for raising Rs. 600,00,00,000 of preference and equity capital.
34. The next claim of the assessee is with respect to the expenditure on upfront fee paid to Messer‟s WDC venture for subscription of debentures not claimed in the original return of income as the same was capitalized by debiting to securities premium account. The assessee was asked to justify the claim of deduction and requisite details of tax deduction at source as it is paid to a Mauritius company. The assessee submitted that as per double taxation avoidance, agreement with Mauritius the payment of upfront fee is not covered by any specific article of the agreement but is covered by article 22 and as the income is chargeable to tax in Mauritius there is no requirement of tax deduction at source. The learned AO rejected the contention of the assessee holding that according to section 195 of the income tax act the tax should have been deducted by the assessee disallowed the above claim. The assessee preferred appeal before the learned CIT – A who dealt with the whole issue as under :-

“Disallowance of the Claim of Rs. 2.24.72.631/- 3.20 The appellant had claimed the above amount as one of the deductions, which it failed, to claim in the original return filed. The same was claimed in a revised return, which was treated as invalid by the AO as even the original, return was not filed within time permitted u/s 139(1). CIT(A) has directed the AO to allow the claim after proper verification. The AD did not allow the claim on the ground that the appellant has not made TDS on the said payment. As in the case of payment dealt with at „A‟ above, even in tire case of present payment, there is no necessity of going into the issue of making TDS on this payment. The AR has provided a copy of the agreement between appellant and M/s WDC Ventures Ltd., Mauritius to claim that the appellant has raised Rs. 200 Crores of Debentures and had paid to that company an upfront fee of Rs. 2.24 Crores and that the same is liable as revenue expenditure. Page | 31 3.21 I have considered the said agreement submitted at page
245 to 322 of the paper book. The agreement is dated 31.-
10.2007 and is between the following parties:-
1) M/s WDC Ventures Ltd.
2) Vatika Ltd. (the appellant company)
3) The Eve‟rlast Projects Pvt. Ltd. (existing shareholder)
4) Anil Bhalla (existing shareholder)
5) Gaurav Bhalla (existing shareholder)
6) Gautam Bhalla (existing shareholder)
7) Kanchan Bhalla (existing shareholder)
3.22 It is noted’ that this agreement is titled “Investment Cum
Shareholders Agreement”. The same is made for subscription to
equity share and Compulsorily Fully-Convertible Debentures
(given the name Wachovia CCD) in all amounting to Rs; 200
Crores. As per clause 1.1.18 of page 8 of the agreement these
Debentures (given the name as Wachovia CCD) are fully
convertible at par in tranches starting from 24th month of the
date of issue.
3.23 As far as the payment of upfront fee, it is observed that the
agreement itself provides that the existing shareholders (and not
the appellant company) should pay to the M/s WDC Ventures
Ltd. 1% of the subscription amount as upfront fee before the
amount is subscribed by the said investor. The said clause of the
agreement is reproduced below-
“Page No. 19
(t) Payment of upfront participating fee by the Existing
Shareholders to Wachovia of 1% (net of all applicable Taxes) of
Wachovia‟s commitments being a total amount of Rs. 20 Million
(Rs. Twenty million only). ”
3.24 From the above it is evident that the payment has been
made towards. It is also seen that the existing shareholders have
been given the-right to call upon M/s WDC Ventures Ltd. to
transfer by way of sale, the said CCD‟s at the predetermined “option price” in accordance to clause 16.2 of the agreement
available at page 45 and 46 of the agreement. Thus it is an
agreement wherein an investor is subscribing to Compulsorily
convertible -Debentures giving a call option to the existing
shareholders to buy out the said CCDs at a predetermined price.
As per the agreement the said 1% upfront fee is payable by the Page | 32 existing shareholders and not by the assessee. In view of this I do not find any merit in the claim of the appellant. 3.25 Further in the case of fully convertible Debentures which are being subscribed not through public issue, the said expenditure cannot be covered by provisions of section 35D of I.T. Act also. The expenditure even otherwise is capital in nature being expenditure in the form of raising capital. The liability was also clearly defined in tire agreement itself to be that of existing shareholders and not of the company. The claim is therefore not allowable. The action of the AO is therefore upheld though on a different reasoning.”
35. From the above order of the learned CIT – A it is apparent that the disallowance has been made for the reason that as per the provisions of the agreement the payment of the upfront fee is payable by the existing shareholders and not by the appellant company. Therefore as it is not the liability of the expenditure has not been incurred by the assessee but same is the liability of the existing shareholders, the disallowance was confirmed. The claim of the assessee is that appellant had raised 200,00,00,000 by way of issue of debentures and has paid an upfront fee of Rs. to 24,00,000. According to the assessee the disallowance has been made on misconception and Miss appreciation of the evidences and misapplication of the law. He submitted that the debentures are loan instruments and when the loan is obtained by the issue of debentures such expenditure incurred is business expenditure. He therefore submitted that clause (P) has been misconstrued. He further relied upon the decision of the honourable Supreme Court in case of Madras industrial investment Corp Ltd vs Commissioner of income tax 225 ITR 802. He otherwise also claimed that no tax is required to be deducted on this payment and the genuineness of the payment has not been doubted.
36. We have carefully considered the rival contention and also perused the evidence produced before the. At page number 245 of the paper book the assessee has produced investment, shareholders agreement between WDC ventures Ltd and vatika Ltd and several projects private limited dated 31/10/2007. The WDC venture limited is a company based in Mauritius which is engaged in the business of making Page | 33 investment in various forms in real estate projects. As the assessee
company is engaged in the business of development of realistic
projects the Mauritius company agreed to subscribe to the
compulsory clear convertible debentures and equity shares in the
assessee company. The debentures as stated in clause number
1.1.48 and are defined as INR 1000 per convertible debentures
payable towards the issue and allotment of each Wachovia CCD
aggregating to INR 2000 million only. The assessee is subscribed and
paid-up capital as on that date was only INR 107,300,000. The
relevant clause for payment of the upfront fees is mentioned at clause
number 5 (t) which provides that the payment of upfront participating
fee by the existing shareholders to Wachovia of 1% (net of all
applicable taxes) of Wachovia‟s commitments being a total amount of
INR 20,000,000 (INR 20,000,000 only). Therefore naturally the
liability for payment of the existing shareholders to Wachovia rest on
the existing shareholders. Now on reading of the agreement it is
necessary to find out who those existing shareholders were and how
they are defined in the agreement. On reading of the preamble of the
agreement which is executed between WDC ventures Ltd and vatika
Ltd, everlasting projects private limited, Mr. Anil Bhalla,, Gaurav
Bhalla, Gautam Bhalla and Kanchan Bhalla. Further after mention
of the parties it is recorded that Mr. Anil Bhala, Gautam
Bhalla,Gaurav Bhalla , Kanchan Bhalla and Everlast Projects are the
existing shareholders. Therefore the party number 3 – 7 of the
agreement are specifically defined as existing shareholders. The
assessee is defined as company. The liability of the payment of
upfront fee did not devolve on the assessee company but on the
existing shareholders. In fact it is an agreement between these
parties which specifically provides that the liability for payment of
upfront fees rest on the existing shareholders. Therefore it is for them
only to understand and give the reasons that why it has been agreed
so that the upfront fee payment is the liability of the existing
shareholders and not the company. Further in the whole of the
written submission as extracted above made by assessee, there is no Page | 34 answer that for what reasons the liability agreed by the parties was on the existing shareholders but has been debited in the books of the assessee company. As it is an agreement by the investor, the appellant investee company and the existing shareholder of the appellant company by which all of them have agreed that upfront fee payment is required to be paid by the existing shareholders and not by the assessee company, we do not find any infirmity in the order of the learned CIT – A in holding that that the assessee has not incurred any expenditure as there is no liability devolve in on the appellant and hence same is not deductible in the hands of the assessee.
37. In view of this all the grounds of the appeal which are devolving around the disallowance of Rs. for 9439031/- of the about to expenditure of the consultation placement fees paid as well as of the upfront fee are dismissed.
38. Accordingly ITA number 6476/del/2013 filed by the assessee for assessment year 2008 – 09 is dismissed.
39. ITA number 1512/del/2014 for assessment year 2008 – 09 is filed by the assessee against the order of the learned CIT (Appeals) – XXXI , New Delhi dated 31/12/2013 wherein the penalty of INR 9 507003/- levied by the learned deputy Commissioner of income tax, central circle – 20, New Delhi for her order dated 28/03/2013 u/s 271 (1) © The of the income tax act 1961 was confirmed. The assessee has raised the following grounds of appeal in ITA No. 1512/Del/2014:- “1. That the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the penalty imposed u/s 271 (1) (c) of the Income Tax Act, 1961 of Rs. 95,07,003/- without appreciating the order levying the penalty was barred by limitation, as the order was made beyond six months after the disposal of appeal by Commissioner of Income Tax (Appeals).
2. That the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the penalty imposed u/s 271 (1) (c) of the Income Tax Act, 1961 on the assessee company of Rs 95,07,003/-, in respect of an addition made by assessing officer and sustained on appeal by the Commissioner of Income Tax (Appeals) of Rs. 2,79,70,000/-which addition made and sustained was wholly untenable in law.
Page | 35 3 That the learned Commissioner of Income Tax (Appeals) has failed to comprehend that the declared income was higher than the income assessed and it was not a case, wherein income assessed was less and thus the mere fact an addition was made to the income returned was insufficient to hold that the provisions of section 271 (1) (c) of the Income Tax Act, 1961 were attracted and the assessee could be visited with the penalty of Rs. 95,07,003/-.
4 That the learned Commissioner of Income Tax (Appeals) has failed to comprehend the distinction in two classes of cases, one where the income returned is loss and income assessed is also loss and the second where the income assessed is lower than the income returned
5. That the learned Commissioner of Income Tax (Appeals) has erred in holding that the penalty is leviable under Explanation 2 to section 271 (1) (c) of the Income Tax Act, 1961 which explanation has no application.
6 That the learned Commissioner of Income Tax (Appeals) has erroneously held in para 4.14 of its order that, page 4 of Annexure A2 shows that, the assessee had bought back the space sold to K. L. Verma at Rs 17,500/-. The aforesaid finding is highly misconceived There was absolutely no basis or material to hold that the assessee had bought back the space sold @ 17,500/-.
7. That the learned Commissioner of Income Tax (Appeals) has failed to comprehend that the assessee is engaged in the development of Real Estate and is not engaged in the purchase and sale of Real Estate. That the assumption of learned Commissioner of Income Tax (Appeals) that the assessee had allotted the space in the year 2002 and W had bought back is completely misconceived. The mutilated and dumb document (the basis of such a finding) alone could not have been regarded as any material or basis for upholding the levy of penalty.
8. That the learned Commissioner of Income Tax (Appeals) having found that the addition had been made on the basis of mutilated and dumb document ought to have held that there was no valid basis to make the addition and in any case on the basis of such an evidence and without even examining Verma’s no penalty u/s 271 (1)(c) of the Income Tax Act, 1961 could have been sustained.
It is thus prayed that the penalty sustained of Rs. 95,07.003/- be directed to be deleted.”

40. The briefly stated the fact shows that a survey u/s 133A of the income tax act was carried out on the assessee company on 4/2/2010 and certain incriminating documents were found and impounded during Page | 36 survey. The assessing officer has made the addition of INR 2 7970000/- in the assessment order with respect to certain incriminating documents relating to transactions of Shri KL Verma group. Where there is a mention of buyback of four units of the residential and commercial properties. The assessing officer did not found the explanation of the assessee convincing and found that the commercial space sold to Mr. KL Verma family were brought back after paying an amount of INR 2 7970000 which was neither recorded in the books of account nor is otherwise admissible as expenditure for being capital in nature. Therefore the addition was made towards unexplained capital expenditure not recorded in the books of accounts and the penalty proceedings u/s 271 (1) © was initiated for concealment and furnishing inaccurate particulars of income The assessee challenged the same before the learned CIT A who confirmed the addition. The assessee challenged the same before the coordinate bench and therefore requested the learned AO to keep the penalty proceedings in abeyance till the disposal of the 2nd May appeal before the coordinate bench. However the assessee did not submit anything on the merits of the penalty. Therefore the learned assessing officer held that disallowance on account expenditure of the capital nature is squarely covered under the explanation to section 271 (1) © held that the assessee has concealed the particulars of his income to the tune of INR 2 7970000/- towards unexplained capital expenditure not recorded in the books of account. Therefore the penalty of INR 9 507000/- was levied.
41. Assessee challenged the same before the learned CIT – A who confirmed the same as per para number 4 of his order. Therefore assessee is in appeal before us.
42. the learned authorised representative, the learned senior counsel, submitted that ITA number 2183/del/2012 and ITA number 2978/del/2012 for assessment year 2008 – 09 decided by the coordinate bench as per order dated 20/07/2018 has dealt with the whole issue at para number 37 with respect to the addition contested by the assessee. He further referred to para number 42 of that order Page | 37 and held that the whole addition on which the penalty has been levied has been deleted. He therefore submitted that there is no question of levy of the penalty on the same now.
43. The learned DR vehemently supported the orders of the lower authorities.
44. We have carefully considered the rival contention and perused the order of the coordinate bench for assessment year 2008 – 09 in ITA number 2183/del/2012 in ITA number 2978/del/2012 decided by the coordinate bench as per order dated 20/07/2018 wherein the impugned addition of INR 2 7970000/- made by the learned assessing officer and sustained by the learned CIT – A has been deleted by the coordinate bench. The penalty has been levied by the learned assessing officer and confirmed by the learned CIT – A on the above addition. As the addition itself does not survive, the penalty u/s 271 (1) © levied by the learned assessing officer and confirmed by the learned CIT – A also does not survive. Therefore all the grounds of the appeal of the assessee against the levy and confirmation of the penalty u/s 271 (1) © of the act are allowed.
45. In view of this appeal of the assessee in ITA number 1512/del/2014 for assessment year 2008 – 09 is allowed.
46. Accordingly both the appeals of the assessee for assessment year 2008 – 09 are disposed of by this order.
Order pronounced in the open court on 14/08/2019.

-Sd/- -Sd/- (BEENA A PILLAI) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 14/08/2019
A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Page | 38

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