Income Tax Appellate Tribunal - Chennai
Object Frontier Software P. Ltd., ... vs Department Of Income Tax on 19 March, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'B' BENCH, CHENNAI.
Before Dr. O.K. Narayanan, Vice-President &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. No. 1888/Mds/2010
Assessment Year: 2004-05
The Deputy Commissioner of M/s. Object Frontier Software P. Ltd.,
Income Tax, Vs. 7, 1st Floor, Wellington Estate,
Company Circle V(1), 53, Ethiraj Salai, Egmore, Chennai 8.
Chennai.
[PAN: AAACO3373P]
(Appellant) (Respondent)
Revenue by : Shri G. Nandha Kumar, JCIT
Assessee by : Shri S. Sridhar, Advocate
Date of Hearing : 19.03.2012
Date of pronouncement : 27.03.2012
ORDER
PER Challa Nagendra Prasad, Judicial Member
This is an appeal filed by the Department against the order of the CIT(A) V, Chennai dated 20.08.2010 in ITA No.594/2006-07 relevant to the assessment year 2004-05. Shri G. Nandha Kumar, JCIT represented on behalf of the Revenue and Shri S. Sridhar, Advocate represented on behalf of the assessee.
2. The Department has raised five grounds of which, ground No. 1 and 5 are general in nature and requires no adjudication by us. 2 I.T.A. No.1888
No.1888/M/ 1888/M/10 /M/10
3. Ground Nos. 2.1, 2.2 and 2.3 relates to disallowances of `.14.00 lakhs and `.2,42,000/- out of salaries to employees, which was allowed by the CIT(A).
4. The Assessing Officer while completing the assessment disallowed `.14.00 lakhs out of salary expenditure of `.1,08,54,446/- as excessive and not incurred for the purpose of business. The Assessing Officer noticed that the assessee has claimed expenditure towards salary at `.1,08,54,446/- during this assessment year as against `.74,08,865/- incurred in the preceding assessment year and therefore held that excess expenditure was incurred by way of salaries during this assessment year.
5. The Assessing Officer also disallowed salary of `.2,42,000/- paid to one Mr. James Walter on the ground that Mr. James Walter was a director of US company M/s. Object Frontier INC (USA) and could not drawn salary by him in Indian company and since no explanation was filed by the assessee as to how the salary paid to Mr. James Walter is allowable under section 37 of the Act, the Assessing Officer disallowed the same.
6. The ld. DR supported the order of the Assessing Officer and submitted that the Assessing Officer is correct in making the said disallowances.
7. The ld. Counsel for the assessee submitted that during the year under consideration, there was increase in employees from 36 to 93. It is submitted 3 I.T.A. No.1888 No.1888/M/ 1888/M/10 /M/10 that the Branch office was opened at Bangalore during this assessment year and there was increase in salary expenditure in this assessment year as compared to the preceding assessment year. He also submitted that the TDS was made from the salary payments, payment of salary was not in dispute and therefore, there is no justification for disallowance. He further submitted that the Assessing Officer was not correct in disallowing the expenditure of `.14.00 lakhs out of salaries paid on the ground that the business obtained from the assessee from Bangalore customers during the assessment year is only `.1,06,236/-.
8. We have heard both the parties and find that the CIT(A) considered this issue at para 7 of his order, which reads as under:
"7. I have considered the submissions and arguments of the representative. It appears from the assessment order, the disallowance of `. 14,00,000/- under the head salary has been attributed to the increase in the said expenditure as compared to the earlier accounting year. On a perusal of the assessment order it is observed that the appellants have explained the reason for the increase in the salary expenditure as compared to the previous year. The assessing officer has also been provided with the full particulars of the salary by the appellants and the officer has not brought on record any instance of salary not support by documentary evidence. Just because the revenue generated from the new branch is only 1,06,236 in the last three months of the Financial Year cannot be a ground to disallow the salary expenditure. The Assessing Officer cannot step into the shoes of the businessman and, necessarily, investment has to be made in a business to reap benefits later on. That being the case and also considering the principle laid down by courts with regard to the allowability of genuine business expenditure in the judgments relied upon by the appellants, I hold the disallowance of `. 14,00,000/- is uncalled for and I accordingly direct him to delete the disallowance."4 I.T.A. No.1888
No.1888/M/ 1888/M/10 /M/10
9. The ld. DR could not able to controvert the findings of the CIT(A) and we find no justifiable reason to interfere with the order of the CIT(A). Therefore, we dismiss the ground of appeal of the Revenue on this issue and confirm the order of the ld. CIT(A).
10. With regard to ground No. 3, regarding disallowance of salary paid to Mr. James Walter, the CIT(A) has observed in paras 8 and 9, which reads as under:
"8. Regarding the disallowance of salary of `. 2,42,400/- to Mr. James Walter the representative vehemently argued that the payment of salary constituted genuine business expenditure and had nexus to the business activity. It was submitted that the tax was deducted at source on the salary paid to Mr. James Walter, who has been working as Chief Executive Officer of the company with effect from 01.10.2003. Form No.16 was also issued to the payee which itself proves the bonafide of the payment. A perusal of the assessment order also indicates that the assessing officer has not disputed the fact of payment of salary. He has only indicated that the payment of salary to James Walter could not be considered as a allowable business expenditure as Mr. James Walter happened to be director of the US company and he cannot be paid salary in India. It has been pointed at the time of hearing before me that the said Mr. James Walter was the CEO of the appellants company and the appellants were exporting their services to Object Frontier INC (USA) and Mr. James Walter happened to be a director of the US company. Due to the exigencies of the business requirements of the appellants company, he was appointed as a CEO. It has also submitted that the fact of being a director in US company cannot stand in the way 5 I.T.A. No.1888 No.1888/M/ 1888/M/10 /M/10 of allowability of salary paid to an employee so long as such person renders services to the company and the company pay salary for such employment.
9. Considering the fact that the assessing officer has not disputed the fact of rendering of services by Mr. James Walter and also considering the fact that salary was paid and the tax was deducted at source for the payment of salary by the appellants, I hold the view that the salary paid to Mr. James Walter does not warrant any disallowance in the light of ratio of judgments cited by the appellants."
11. We find no justifiable reason to interfere with the order of the CIT(A), therefore, we dismiss the ground of appeal of the Revenue on this issue and confirm the order of the ld. CIT(A).
12. The last issue in ground No. 4 relates to deletion of addition of `.3.85 lakhs made under section 68. The Assessing Officer added `.3.85 lakhs as unexplained cash credits representing loans raised by the assessee from various persons. As the assessee did not produce loan confirmation letters, the Assessing Officer treated the same as unexplained cash credits under section 68 of the Act.
13. The ld. DR submitted that the CIT(A) deleted the addition made under section 68 without giving any reasonable opportunity to the Assessing Officer to examine the evidences produced by the assessee before the 6 I.T.A. No.1888 No.1888/M/ 1888/M/10 /M/10 CIT(A) and therefore, is in violation of Rule 46A of the Act. On merits, he supported the order of the Assessing Officer.
14. The ld. AR of the assessee relied on the order of the CIT(A) and submitted that all the particulars of loans were furnished before the Assessing Officer and therefore submitted that the CIT(A) is justified in deleting the addition made under section 68 of the Act.
15. We have heard both the sides, perused the orders of lower authorities and material available on record. The CIT(A) deleted the addition on the ground that the loans were received by the assessee through account payee cheques and repayments were made through account payee cheques only along with interest. The CIT(A) admitted the evidences filed by the assessee in the form of account copies of loan creditors, copies of the discharged pro- notes, copies of relevant bank statements evidencing the receipt of the loan and repayment of loan and interest, etc. The CIT(A) also observed that the TDS on interest was also made by the assessee and was remitted to the Government account.
16. In our considered view, the CIT(A) should have called for a remand report before adjudicating the issue on merits as details which were filed before the CIT(A) were not filed before the Assessing Officer at the time of completion of assessment. Therefore, we feel that this matter should go 7 I.T.A. No.1888 No.1888/M/ 1888/M/10 /M/10 back to the file of the Assessing Officer for examining the issue afresh in accordance with law after giving adequate opportunity to the assessee. Therefore, we set aside the order of CIT(A) on this issue and direct the Assessing Officer to examine the issue afresh. This ground of appeal of the Revenue is allowed for statistical purpose.
17. In the result, the appeal of the Department is partly allowed.
Order pronounced in the open Court on 27.03.2012.
Sd/- Sd/- (Dr. O.K. NARAYANAN) (CHALLA NAGENDRA PRASAD) VICE-PRESIDENT JUDICIAL MEMBER Chennai, Dated, the 27.03.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.