Income Tax Appellate Tribunal - Mumbai
Meen Been Elastomers P. Ltd, Mumbai vs Assessee on 6 June, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'J' MUMBAI
BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER &
SHRI R.S.PADVEKAR, JUDICIAL MEMBER.
I.T.A.NO.6612/Mum/2009 - A.Y 2005-06
Meen Been Elastomers Pvt. Ltd., Vs. Asst. Commissioner of I.T.,
56/58, 1st floor, Dadajee Dackjee Circle 6 (3),
Bldg. Caribdas Street, Mumbai.
Mumbai 400 003.
PAN: AADCM 7401 K
AND
I.T.A.NO.368 /Mum/2010 - A.Y 2005-06
Asst. Commissioner of I.T., Vs. Meen Been Elastomers Pvt. Ltd.,
Circle 6 (3), Mumbai.
Mumbai
(Appellant) (Respondent)
Assessee by : Shri I.P.Rathi.
Revenue by : Smt. Kusum Ingle.
ORDER
Per T.R.SOOD, AM:
These are cross appeals by the assessee and Revenue. One ground is common, therefore, these appeals were heard together and are being disposed of by this common order.
3. I.T.A.No.6612/M/09 [assessee's appeal]: In this appeal the assessee has raised the following two grounds:
1. That the Learned Commissioner of Income Tax [Appeals] has erred in confirming the disallowance u/s.40A(2) at `.6,83,988/- out of interest paid on unsecured loans.
2. That the Learned Commissioner of Income Tax [Appeals] has erred in confirming the disallowance u/s.40A(2) at `.24,20,000/- out of director's remuneration of `.51,20,000/-.2
4. The revenue has also raised ground No.2 in respect of issue raised by the assessee in ground No.1 by challenging the part relief given by the CIT[A] by holding that 15% interest is reasonable.
5. Ground No.1: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee had paid total interest of `.32,55,681/- out of which interest amounting to `.30,93,366/- was paid to the relatives. It was further noticed that to all related parties interest was paid @ 18% except for Surendra Elastomers Pvt. Ltd. to whom interest @ 12% was paid. It was further noticed that assessee was getting money from non related parties @ 12% and, therefore, interest paid to relatives @ 18% was held to be excessive and, accordingly, interest amounting to `.6,63,988/- was disallowed being excessive in view of Sec.40A(2)(a).
6. Before the CIT[A] it was mainly submitted that interest was paid @ 12% to Surendra Elastomers Pvt. Ltd. because with them assessee was having a running account. Interest @ 15% was paid to some other parties because loans were of smaller amounts and for shorter period. To many other parties interest was paid @ 18%. The ld. CIT[A] after considering the submissions held that 15% interest is reasonable and accordingly allowed part relief vide paras 8.3 and 8.4 which are as under:
"8.3 I have considered the submissions. The appellants explanation with respect to payment of interest at 12% and 15% is acceptable. As regards other payments, the appellant has not proved that the bank lending rates in the relevant period was higher than 18%. It has not, in other words, proved the contention of the AO that the bank rate during the period was 12%, wrong. The appellant has not also given any justification of higher interest paid to related parties. Considering incidental expenses such as processing fees, security or collateral, 3 margin money, time factor, involved in bank loans, the rate of private party loans could be pegged at 15%.
8.4 In view of the above, the AO is directed to restrict the disallowance of interest amount paid over and above the reasonable rate of 15% u/s.40A2(b)."
7. Before us, Ld. Counsel of the assessee reiterated the submissions made before the CIT[A] and further submitted that even to other parties interest was paid @ 15% and 18% and he filed a list of parties to whom interest has been paid.
8. On the other hand, ld. DR submitted that to one related party when interest has been paid at 12% and then the other party should also have been paid interest @ 12% only and, therefore, action of the AO was justified.
9. After considering the rival submissions we find from the details of interest paid to related and other parties as under:
Interest paid to Relatives:
Sr.No. Name Interest Amt. Rate of
Interest
1 Ravindra Parekh 635037.00 18%
2 Indra Prakeh 336363.00 18%
3 Surendra Parekh 614515.00 18%
4 Minu Parekh 159901.00 18%
5 Sukanraj J. Parekh HUF 64237.00 18%
6 Surendra Elastomers P. Ltd. 1041397.00 12%
7 S RI Impex Ltd 241913.00 18%
Paid to Others:
Sr.No. Name Interest Amt. Rate of
Interest
1 Jagruti Shrimankar 58500.00 18%
2 Shailesh Shrimankar 36000.00 18%
3 M R Gemawat 33750.00 15%
4 Ritika Bhandari 15000.00 15%
5 Sneh Bhandari 15000.00 15%
6 G.M.Textiles 4068.00 18%
Total Interest Paid 3255681.00
4
From the above, it is clear that interest has been paid to Surendra Elastomers Pvt. Ltd. @ 12% because with them assessee had a running account, otherwise all parties have been paid interest @ 18%.
But at the same time, interest had been paid to non relatives also. In many cases interest @ 18% has been paid and 15% has been paid where loans are very small. Therefore, considering all the facts we are of the view that interest should have been allowed at 16%.
Accordingly, we set aside the order of the ld. CIT[A] and direct the AO to allow interest @ 16% even to relatives. Thus ground No.1 of the assessee is partly allowed and ground No.2 of the Revenue's appeal is dismissed.
10. Ground No.2: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee has paid salary to Directors at `.9 lacs to Shri Ravindra S. Parekh, `.14.10 lacs to Shri Indra S. Parekh and `.28.10 lakhs to Shri Surendra S.Parekh. The assessee was asked to justify this salary. It was stated that all the three directors were running their own businesses and were earning from their proprietary business as per details below:
Name of Person & Turnover (Cr) Income shown
Prop. Concern (lacs)
1. Ravindra S. Parekh 2.22 19.56
Prop.Meen Been Elastomers
2. India S. Parekh 2.37 6.53
Prop. Parekh Polymers 2.12
Parekh Corporation
3. Surendra S. Parekh 1.98 4.42
Prop. Surendra Sales Corporation
Total Turnover 8.69
Since after closing the business they have started this company and with the efforts of the directors the turnover of the company reached 5 about `.47 crores and income of `.1.4/1.5 crores and, accordingly, payment of salary was justified. The AO after considering the reply, was of the view that salary should be allowed only to the extent of profits earned by the individual director from their proprietary concerns and accordingly restricted the salary of each director and found excessive salary of `.7.57 lacs in the case of Shri Indrakumar S. Parekh, [` `.14.10- `.6.53], `.23.68 lacs to Shri Surendra S.Parekh [` `.28.10 - `.4.42 ] and added a sum of `.31.25 lacs as excessive salary and disallowed the same u/s.40A(2)(a).
11. Before the ld. CIT[A] the submissions made before the AO were reiterated. The ld. CIT[A] after examining the issue observed that the addition was purely of adhoc nature. However, he observed that though Shri Ravindra S. Parekh was paid the salary of `.9 lakhs who had the highest income from proprietary business, the other two directors were paid a sum of `.14.10 lacs and `.28.10 lacs for which no good reason was given. Accordingly, he held that salary of `.9 lakhs to each of the director was justified and, accordingly, restricted the addition to `.24 lacs. (` `.51 -` `.27].
12. Before us, Ld. Counsel of the assessee submitted that there cannot be any comparison of directors salary with the market rate. Further almost similar salary in future has been held to be allowable by the Department by passing an assessment order u/s.143(3). He argued that following the principle of consistency, even for this year salary should have been allowed fully.
6
13. On the other hand, ld. DR strongly supported the order of the AO and also submitted that if salary was paid as per the income of proprietary business, then it was definitely higher in the case of Shri Indra S. Parekh and Shri Surendra S.Parekh.
14. After considering the rival submissions, we basically agree that it is very difficult to compare the services rendered by the directors because same is not comparable with the services of equivalent professionals available in the market. However, at the same time there has to be some justification for the payment of salary. It is noted that in later years the salary has been paid as under:
Name of the A.Y A.Y A.Y A.Y
Director 2005-06 2006-07 2007-08 2008-09
Ravindra S. Parekh 9 18 23 60
Indra S. Parekh 14.10 18 30 60
Surendra S.Parekh 28.10 18 24 60
Total 51.20 54 78 180
The above salaries have been allowed in assessment order passed u/s.143(3) and even copy of such order has been placed on record. In our view when such salaries have been allowed in the later year in scrutiny assessment, there is no reason not to allow these salaries in the present year. However, at the same time it is to be noted that in the case of Shri Surendra S. Parekh salary has been paid at `.28.10 lacs in this year, whereas he has been paid salary only of `.18 lacs and `.24 lacs in A.Yrs. 2006-07 and 2007-08. Therefore, there is no justification of salary paid at `.28.10 lacs. Considering assessee's own figure of salary of `.18 lacs to Shri Surendra S. Parekh, we hold that in his case salary of `.18 lacs only is justified. In the case of Shri Ravindra 7 S. Parekh salary has been paid at `.9 lakhs in this year, whereas in A.Yrs. 2006-07 and 2007-08 it was paid at `.18 lacs and `.24 lacs and, therefore, same is justified. Similarly, salary paid to Shri Indrakumar S. Parekh in A.Y 2006-07 is higher than the present salary and the same is justified. Thus, in our view, assessee has paid excessive salary of only `.10.10 lacs in the case of Shri Surendra S. Parekh [` `.28.10 -
`.18]. Therefore, we set aside the order of the ld. CIT[A] and direct the AO to make disallowance of only `.10.10 lacs on account of assessee's salary.
15. In the result, assessee's appeal is partly allowed.
16. I.T.A.No.368/M/10 [Revenue's appeal]: In the Revenue's appeal following two grounds have been raised:
1. On Deletion of Disallowance of Trade Compensation amounting to `.2,20,00,000/-.
i) The Ld. CIT[A] did not consider all the facts and circumstances relating to Trade Compensation, highlighted in the Remand Report, which has been reproduced in para 6.3 of CIT[A]'s order.
2. This ground has already been adjudicated by us while dealing with ground No.1 of assessee's appeal.
17. Ground No.1: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee has debited a sum of `.2.20,00,000/- as trade compensation. The assessee was asked to give details of this trade compensation by giving names of the persons to whom this compensation was paid, proof of payment, nature of services rendered with confirmation from the parties to whom payment was made etc. Despite various opportunities given on 10-12-2007, 8 20-12-2007 and 28-12-2007 no details were furnished and, therefore, this amount was disallowed.
18. Before the CIT[A] detailed information was submitted and it was pointed out that since the director was bedridden when the information was required to be furnished before the AO, therefore same could not be furnished before him. Accordingly, ld. CIT[A] sent the information to the AO and sought a remand report. The AO sent his report vide letter dated 6-6-2009 and objected to the claim of the assessee because after the information received from the assessee, AO made enquiries with the payee M/s Paras Petrofills Ltd. and, according to the AO that party had not accounted for this income. Many other objections were raised by the AO. After considering the submissions, ld. CIT[A] allowed the relief to the assessee vide paras 6.5 to 6.10 which are as under:
"6.5 I have considered the submissions. At para 7 of the written agreement, it is clearly stated that if either party reneges on the contract than it will be responsible to compensate the other party by paying the differential amount, as per market condition. The bill dated 04-08.2004 mentions delivery to be made within 3 months which would be end November, 2004. As per the price list from YNFX - yarns and fibres exchange, the price was as follows:
August 2004 November 2004
US$/ton `./ton US$/ton `./ton
Caprolactum 1900 87970 2350 106336
6.6 The agreed price was `.89.50/kg or `.89500/ton. The appellant
had made the deal when the international price was `.87,970 per ton expecting that there would be a margin of profit. The price graph in the YNFX document shows a spurt in prices in September 2004. The appellant has given a calculation according to which, if it supplied the material to the appellant, it would have suffered a loss of `.2.6 crores. Therefore, it agreed to pay a compensation of `.2.20 crores also as per the agreement [para 6 of the MOU].
6.7 The appellant has provided evidence of payment made to Paras, the accounts shown no other transactions with Paras in subsequent years. Therefore, the AO's presumption that the payments could relate 9 to subsequent transactions is not correct. The payments are made by cheque. Paras Petrofills Ltd. has filed a copy of the ledger account of the appellant which shows it as a debtor for `.2.20 crores as on 31-03- 2005. The payments received from the appellant in subsequent years have been adjusted against this debt. The bank statement of Paras [in Citibank], copy of which has been filed shows receipt and encashment of the appellant's cheques.
6.8 The justification given by the AO for the addition is two fold:
that the payments could be made for other transactions in the subsequent years and that there was no legally binding agreement on stamp paper. Ti cannot be assumed on the appellant to sign a legally binding agreement. It is a business deal which perhaps has to be honored to continue doing business in the market. The other party has entered into a contract and would obviously take action if the appellant does not fulfill its commitment. As stated above, the appellant knew if it honors the agreement, it would suffer a higher loss. There was thus reason to settle the issue.
6.9 As regards the payments made, these would obviously be in relation to this transaction since there is no evidence that the appellant had any other transaction with the same party.
6.10 In the above facts and circumstances, it can be said that the appellant has proved the genuineness and the business exigency of the transaction. The disallowance of `.2,20,00,000/- is therefore deleted."
19. Before us, ld. DR submitted that before the AO no details were filed regarding payment of trade compensation despite of four opportunities given on 6-10-07, 10-12-07, 20-12-07 and 28-12-07. This only shows that assessee did not have any evidence to prove the transaction. Later on some details were filed before the CIT[A] and the CIT[A] had sought the remand report, which has been extracted by the CIT[A] at page-5 of his order. He carried us through the contents of the remand report and submitted that AO had conducted detailed investigation and it has emerged that the other party i.e. Paras Petrofills Ltd. has not shown this amount in their receipt. The AO had particularly asked for all the documents pertaining to the transaction but nothing was filed even during the remand report. He argued that 10 CIT[A] has mainly given the relief on the basis that it is not necessary that an agreement for this transaction should be on a stamp paper and there was definitely some difference in the rates by the time supply was to be made. Even before the CIT[A] there was no evidence why assessee could not meet its commitment. Even the MOU, copy of which has been filed at pages 2 & 3 of the paper book, does not specify the amount of compensation and how the same has been reached at the sum of `.2.20 crores, is not clear. There is no correspondence between the assessee and the other party that why assessee was not able to supply the contracted material or when dispute was raised how this amount of `.2.20 crores was arrived at. All these factors clearly show that it is only an accommodation entry.
20. The Bench after going through the paper book asked the Ld. Counsel of the assessee whether he has any other material apart from the MOU to prove the transaction. It was specifically asked whether assessee can prove when it entered into a contract for the supply of various chemicals to M/s Paras Petrofills Ltd, whether in turn assessee placed order with the international parties. How those parties failed to supply the material and whether any steps were taken for failure to supply or whether any efforts were made to recoup the claim from other parties. The Ld. Counsel of the assessee sought one day's time to file the relevant evidence and, therefore, case was adjourned from 3/3/2011 to 4/3/2011. On 4/3/2011 Ld. Counsel of the assessee submitted that there is no evidence for placing the orders with the international parties. There is also no evidence how the compensation 11 was settled with M/s Paras Petrofills Ltd. as the whole issue of trade compensation was settled through telephonic conversation. He further strongly supported the order of the CIT[A]. He also referred to pages 2 and 3 of the paper book, and submitted that MOU was entered between the assessee company and M/s Paras Petrofills Ltd for supply of certain chemicals at specified rates. As per clause 7 if the assessee failed to procure the same or the party failed to take the delivery, then parties were required to settle the matter with mutual discussion and would be responsible for making the payment by way of difference as compensation. He then referred to pages 5 to 7 of the paper book which are copies of rates charged for various chemicals, which show that rates had increased from that of contracted rates. Then he referred to page 9 of the paper book, and pointed out that as per new rate the compensation worked out to `.2,66,43,300/- and the same was ultimately settled at `.2.20 crores. Therefore, same was justified.
21. We have considered the rival submissions carefully and are unable to agree with the submissions of the Ld. Counsel of the assessee. First of all, no details were filed before the AO regarding trade compensation despite various opportunities. When details were filed before the CIT[A], same were sent to the AO for his remand report. AO made enquiries and issued a letter u/s.133[6] to M/s Paras Petrofills Ltd. calling for other details. The assessee was also directed to file all documents pertaining to the transaction. From the details filed by M/s Paras Petrofills Ltd. it was gathered that though they have stated that the sum of `.2,20,00,000/- was included while calculating 12 the tax liability, but perusal of the records for A.Y 2005-06 show that nowhere income of `.220 lakhs formed part of the taxable income. The credit side of the P & L A/c. shows turnover of `.131,62,14,084/-. Other income of `.1,35,31,994/- and decrease in stock of `.3,83,12,047. note 10 of Schedule -15 of the accounts states that "Turnover include excise duty on sales, processing income and commission income but is not a part of the turnover. Further, Schedule-9 of the Other income also does not include the amount of `.220 lakhs on account of trade compensation. Therefore, it can be safely concluded that M/s Paras Petrofills Ltd. has not offered the amount of `.2.20 crores as income for A.Y 2005-06. AO further raised objection that this agreement was not on a stamp paper. He also observed that entries for the compensation were recorded on 31-3- 2005 but no payment was made during the year and payments have been made in A.Yrs. 2005-06 to 2007-08. He concluded his remand report vide para 4.1.4 which is as under:
4.1.4 In the light of the above facts, it is established that the payment of trade compensation amounting to `.220 lakhs is a bogus liability created by the assessee in its books to reduce the taxable profits for the year. Firstly, there is no concrete evidence that the said amount has been offered for taxation as income by Paras Petrofils. Secondly, the contractual agreement dated 2nd August, 2004 is not registered document and hence has no legal sanctity. It is a mere afterthought executed to create an impression of genuineness for the above transaction. Further, the payments made in several instalments to Paras Petrofils in the subsequent years may pertain to any other transactions entered into between the assessee and Paras Petrofils."
Thus, AO has clearly objected to the claim as he was of the view that this was a bogus claim. we further find that assessee entered into an 13 MOU with M/s Paras Petrofills Ltd. on 2-8-2004 by which M/s Paras Petrofills Ltd. agreed to place the order for the following material:
• CAPROLACTUM 35,00,000/- 1,000Tons @ `.89.25 per Kg. • NAPHTHALENE FLAKES (PTA)- 1,550 Tons @ `.37.50 per Kg.
• CRUDE NAPHTHALENE - 2,250 Tons @ `.34.00 per Kg.
As per clause 7 it was agreed as under:
" 7) It is decided that if PARTY A fails to procure and supply the specified quantity of the material or if PARTY B fails to take the delivery of the material, either of the parties will settle the matter with mutual discussion and will be responsible to make the payment by way of difference amount as per the market condition as a compensation."
We fail to understand that even if a firm commitment for supply of material was made by the assessee company involving huge quantity and the total order was in the range of approximately `.9 crores, then why assessee has not placed any order. Even if assuming that assessee placed order telephonically as stated by the Ld. Counsel of the assessee, then why the other party did not supply the material. There is not an iota of evidence to prove that any action was taken against the third party because of which assessee was required to pay such huge compensation to the buyers of the material. Why the other party refused to any compensation is not supported by any documentary evidence. If no order was placed with the third party, then how assessee could enter into a contract for supply of material is not clear. Even no correspondence with the buyers i.e. M/s Paras Petrofills Ltd. is there, then how they made a claim for compensation? What negotiations were undertaken? Nothing is supported by any evidence. Simply because assessee had entered into an MOU to supply the material and rates have increased and assessee agreed to pay the 14 compensation for the same is not believable story, particularly when the amount involved is `.2.20 crores. Then the amount was not paid immediately after the understanding for payment of compensation. All these factors clearly show that this is a make believe story which cannot be accepted. The ld. CIT[A] has totally misdirected himself by observing that there is no need to have a stamp paper agreement, but he has failed to see that there was no other evidence to support the claim. The ld. CIT[A] has simply observed that since rates have changed and payment of trade compensation was a business decision, it cannot be justified. Because even if the rates have changed, there has to be some kind of negotiation with the buyers or the other party from whom the assessee tried to procure the material. In the light of this discussion, we are of the view that this is a bogus transaction and, accordingly, we set aside the order of the ld. CIT[A] on this point and restore that of the AO.
22. In the result, Revenue's appeal is partly allowed.
23. In sum cross appeals by the assessee and Revenue are partly allowed.
Order pronounced in the open Court on this day of 23/3/2011.
Sd/- Sd/-
(R.S.PADVEKAR) (T.R.SOOD)
Judicial Member Accountant Member
Mumbai: 23/3/2011.
P/-*