Income Tax Appellate Tribunal - Delhi
Second Leasing Pvt. Ltd., New Delhi vs Dcit, New Delhi on 19 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "G", NEW DELHI
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 2412/DEL/2013
AY. 2009-10
M/S SECOND LEASING PVT. LTD., DCIT, CIRCLE-8(1),
FLAT NO. N, SAGAR APARTMENT, VS. NEW DELHI
6, TILAK MARG,
NEW DELHI - 11 001
(PAN: AABCS6609R)
(APPELLANT) (RESPONDENT)
Assessee by : Sh. Ved Jain, Adv. & Ms. Rano
Jain, Adv.
Department by : Sh. N.K. Bansal, Sr. DR
ORDER
PER H.S. SIDHU, JM
Assessee has filed the Appeal against the Order dated 23.2.2013 passed by the Ld. Commissioner of Income Tax (Appeals)--XI, New Delhi pertaining to assessment year 2009-10
2. The grounds raised by the assessee read as under:-
1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of Rs. 27,50,OO0/- made by the AO on account of remuneration paid to the director.
3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in enhancing the income of the assessee by making disallowance of an amount of Rs.88,75,000/- on account of remuneration paid to the director as against Rs.27,50,000/- made by the Assessing Officer.
4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in making disallowance of Rs.88,75,000/- on account of salary and bonus paid to the director.
5. That the disallowance has been made despite the assessee bringing all material and evidences on record and ignoring the spirit of the provision of Section 40A(2).
6. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in making the said disallowance on the basis of some material collected at the back of the assessee without giving assessee an opportunity to rebut 2 the same in violation of statutory provision of Section 142(3) of the Act.
7. That the appellant craves leave to add, amend or alter any of the grounds of appeal.
3. The brief facts of the case are that the assessee filed return of income declaring total income of Rs. 1,76,06,878/- on 30.9.2009 and the same was processed u/s. 143(1) of the I.T. Act1, 1961 at returned income. The assessee's case was selected for scrutiny assessment through CASS. Notice u/s. 143(2) of the I.T. Act, 1961 was issued on 23.8.2010 by the AO, fixing the case for 6.9.2010. Another notice u/s. 142(1) of the I.T. Act and questionnaire were issued to the assessee on 31.1.2011 which was duly served through the speed post, fixing the case for 01.3.2011. The AO asked the assessee to provide details of expenses/payments covered u/s. 40A(2)(b) of the Act. In response to the query the assessee submitted vide letter dated 13.4.2011 that the Director remuneration of Rs. 95,00,000/- paid to Sh. Abhinav Kumar is covered u/s. 40A(2)(b). Since it was a new expense debited to the profit and loss account and there was no such expense in the last year, the assessee was further asked to give copy of Board Resolution deciding such a big remuneration to be paid to Sh. Abhinav Kumar. The assessee submitted resolution for remuneration to Directors as Annexure A-2 to submission dated 7.7.2011. On perusal of the 3 resolution it was noticed by the AO that in the meeting of Board of Directors held on 1.7.2008 Sh. Abhinav Kumar was designated as "Executive Director"
and will be paid a salary of Rs. 5 lacs per month w.e.f. 1.7.2008 alongwith some perquisites and allowance. As per the decision of the Board total salary of Sh. Abhinav Kumar as Executive Director for the year under consideration comes to Rs. 45 lacs only (5 lacs x 9). The assessee has not given details of perquisites/allowances/expenses incurred on Sh. Abhivan Kumar, therefore, it was not possible for the AO to calculate the exact amount of such expenses. AO noted that however any such perquisites/ allowance should not exceeds 50% of the total salary. Accordingly, a further amount of Rs. 22,50,000/- may be allowed as perquisites paid to Sh. Abhinav Kumar by the assessee. AO further noted that with reference to remuneration payment to a Director into account, the assessee has made an excess payment of Rs. 27,50,000/- to Sh. Abhivan Kumar. Accordingly, an amount of Rs. 27,50,000/- was disallowed u/s. 40A(2)(b) of the Act and added back to the total income of the assessee and completed the assessment at Rs. 2,05,20,282/- vide his order dated 29.10.2011 passed u/s. 143(3) of the I.T. Act, 1961.
4. Against the assessment order dated 29.10.2011, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 23.2.2013 has dismissed the appeal of the assessee by confirming the disallowance of 4 Rs. 27,50,000/- and the income was further enhanced by Rs. 61,25,000/- thus totaling disallowance amounting to Rs. 88,75,000/-.
5. Aggrieved with the aforesaid order of the Ld. CIT(A), assessee is in appeal before the Tribunal.
6. Ld. Counsel of the assessee in support of his contention has filed the Written Synopsis. For the sake of convenience, we are reproducing the same as under:
"1- This is an appeal preferred by assessee against the order dated 28-02-2013 passed by learned Commissioner of Income Tax (Appeal)-XI, whereby Ld. CIT(A) enhanced the income of the assessee by making disallowance of an amount of RS.88,75,000/-- on account of remuneration paid to the director as against RS.27,50,000/-- made by the Assessing Officer. 2- At the very outsets this is submitted that, expenditure claimed by the assessee company on the account of payment of the salary as well as bonus to the Executive Director of the assessee company is not in violation of any prevailing provisions of the Income tax Act 1961.
3- Further, the bonus was declared by the Board of Directors by resolution passed in a meeting, as per power vested to the 5 Board under the Articles of Association of the company. Further the said action done was within the provisions of the Companies Ac 1956 and there was no violation of any prevalent law of land. 4- Further it is submitted that Ld AO as well as CIT (A) are ignoring the matter of fact that, Mr. Abhinav Kumar was appointed as Executive Director of the assessee company on dated 01-07-2008. His remuneration was fixed by the Board Resolution (Pb. Pg. 68). After the appointment of Mr. Abhinav Kumar, due to his tremendous efforts and business generating capability the turnover of the company in the A Y in question grew by more than 18 times as compare to last FY. Further the total receipts of the assessee company rose from Rs. 42.81 Lacs in FY 2007-08 to 831.73 Lacs in FY 2008-09. Further the personnel expenses reduced from 34.71 % of the total turnover in FY 2007-08 to 19.37% the provisions of section. 5- Further it is submitted that, to appreciate the efforts of Mr. Abhinav Kumar and for above mentioned reasons the Bonus was decided by the Board of Directors of the assessee company (Copy of Board resolution Pb. Pg.69), within the provisions of the Companies Act 1956 read with Income Tax Act 1961, which was reasonable and justified. Further, Section 40 A (2)(a) of Income 6 Tax Act 1961 cannot be invoked and have no application unless it is first concluded that the expenditure was excessive or unreasonable.
6- Further it is submitted that, Ld AO in the assessment order as well as Hon'ble CIT(A) in enhancement notice, erred in deciding the amount of salary and bonus of Mr. Abhinav Kumar, as the reasonableness of the remuneration has to be considered from the point of view of a Company and it was not open to the Assessing Officers as well as CIT(A) to adopt a subjective standard with regard to the proper remuneration which should be paid to its directors, Reliance in this regard placed upon the following I. Judgments of Hon'ble Caluctta High Court in the case of Sonar Airotech Pvt. Limited Versus Commissioner Of Income-Tax [1993] 204 ITR 304 (Cal) the Hon'ble Court observed as under; "It is by now well-settled that the Tribunal cannot adopt a subjective standard of reasonableness of the increase in remuneration and disallow a part of the increase in the directors' remuneration on the ground that it is unreasonably large. The reasonableness of the remuneration has to be considered from the point of view of a businessman and it was not open to the 7 Tribunal to adopt a subjective standard with regard to the proper remuneration which should be paid to its directors. It has been observed in Newtone Studios Ltd. v. CIT [1955] 28 ITR 378 (Mad), that the Income-tax Officer should not take an armchair view of the management of the company and decide in his opinion what was the reasonable remuneration for a director and disallow such part of the remuneration as he considered excessive or unreasonable. What applies to the Income-tax Officer equally applies to the appellate authorities including the Appellate Tribunal. It has been held in Patiala Biscuit Manufacturers P. Ltd. v. CIT [1976] 103 ITR 208 (P& H), that appeals are in continuation of the original proceedings and, therefore, the opinion formed by the Tribunal on the matter coming up in appeal before it is subject to the same restraint as fetters the subjectivity of the Assessing Officer's judgment. "
II. In the case of Extrusion Process Pvt. Limited Versus Commissioner Of Income-Tax, Bombay [1979] 1191TR 287 (80m).
"The reasonableness of the remuneration has to be considered from the point of view of the businessman and, in our view, it was not open to the Tribunal to adopt a subjective standard with 8 regard to the proper remuneration which should have been paid to the managing director. In our view, the Tribunal was clearly in error in holding that only a part of the increased remuneration for the assessment year in question should be allowed. "
III. In the case of Hive Communication Pvt. Ltd. Versus Commissioner Of Income Tax [2013] 353 ITR 200 (Del). Hon'ble Delhi High Court Decided the question in favour of the assessee and in the negative holding that the Tribunal was not correct in law in upholding disallowance of Rs. 13.20 lacs out of remuneration paid to Mr. Sushil Pandit (director) by invoking the provisions of Section 40A(2) of the Act. IV. Hon'ble Allahabad High Court in Abbas Wazir (P) Ltd. Vs. CIT (2004) 265 ITR 77 (AII).wherein the High Court held as under:
"In Newtone Studios Ltd. v. CiT [1955J 28 ITR 378 (Mad), it was observed that the remuneration paid to a director should not be rejected by the Assessing Officer on any subjective standard of reasonableness, and that so long as the reality of the payment was not challenged and no allegation was made that the payment was dictated by other than business considerations, the 9 deductibility of the expenditure should be considered from the point of view of the businessman and not from the point of view of any outsider, including the Assessing Officer. A disallowance can be made on the ground that the payment is not for commercial expediency, but not on the ground that in the opinion of the Assessing Officer it is unreasonably high. The test in every case is that of any prudent businessmen. We respectfully agree with the aforesaid view. In our opinion, whenever a claim is made by the assessee before the Income- tax Officer for allowing an expenditure as a legitimate business expenditure, the approach of the Income-tax Officer (or other Income-tax authority) has to be that he has to look at the matter from the view point of a prudent businessman, and not from his own view point, and then ascertain whether the said expenditure has been incurred for the purpose of commercial expediency or not. In other words, the Income-tax Officer must try to put himself in the shoes of a prudent businessman and try to look at the matter from that point of view. Even while invoking the provisions of Section 40A(2) of the Act, the reasonableness of the expenditure for the purpose of business has to be judged from the point of view of a businessman and not that of the revenue. The approach has to be that of a 10 prudent businessman and the reasonableness must be looked into from businessman point of view.
A businessman may make an expenditure, which he is under no legal obligation to make, but if he does so as a measure of commercial expediency, it must be allowed under section 37 of the Income-tax Act as a legitimate business expenditure.
XXX XXXXX XXX XXXXX XXX XXXXX XXX XXXXX In the present case the assessee has contended that it has increased the salary of the directors because the sales had gone up as mentioned in paragraph 8 of the order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has considered the matter in great detail and has noticed the increase in the sales in the relevant assessment year and has observed that such good performance was the result of very good and serious work by the directors, In the order of the Tribunal no good reason has been given why the claim of the assessee has been partly disallowed. In our opinion, there was no good ground for making such disallowance. It seems that the Tribunal lost sight of the correct legal principles (mentioned above) for determining whether to allow the 11 expenditure or not. We reiterate that it is not for the income-tax authorities to determine what would be commercially expedient, and that is the function of the company or the firm. The income- tax authorities cannot ordinarily interfere in such matters. It is not for the Income-tax Officer to decide what would be the correct salary of the directors or other officers of the company, unless on the face of it the salary fixed is so exorbitant and absurd, that it can clearly be said to be fictitious and aimed at tax evasion.
V. In CIT Vs. Edward Keventer (Private) Ltd. (1972) 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the 12 company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of reasonable and honest person in business. "
The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in Cil Vs. Edward Keventer (Private) Ltd. (1978) 1151TR 149 (SC).
VI. Similar view is held by the Madras HighCourt in Cl'F Vs. Computer Graphics Ltd. (2006) 285 ITR 84. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom).
7- Further it is submitted that, the scope of Section 40A (2) as explained by CBDT in Circular No. 6P, dated 6thJuly, 1968. The CBOT clarified that while examining the reasonableness of 13 expenditure the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases.
8- Further it is the matter of facts the in present case assessee company and Mr. Ashwani Kumar falls within same rate of tax ie. 30%. Further the deduction claimed by the assessee company on the expenditure in the head of remuneration of Executive Director Mr. Abhinav Kumar is duly disclosed by him in his return for the AY 2009-10, (ITR of Mr. Abhinav Kumar Pb. Pg.88) therefore it cannot be said as colorable device for tax evasion. Hence the disallowance is bad in law. Reliance is this regard placed upon the following judgments;
I. In the case of Mis Holtec Consulting Pvt. Ltd., Versus DCIT [ITA Nos. 3878/Del/2010 & 796/DELl2011 dated 25-01-2012] this Hon'ble Tribunal held as under;
"17.4 .................We also find that assessee has paid taxes at maximum marginal rate. Both the Directors have admitted the payment of commission received and offered the same in their 14 income tax returns and had paid at a maximum marginal rate. This clearly establishes the fact that there has been no tax avoidance motive behind the payment of commission to the directors by the assessee company. We further find that the case law referred by the Id. counsel of the asses!i.ee are also germane and support the case of the assessee.
17.5 In the background of the aforesaid discussions and precedents, in our considered opinion, the payment of commission was justified and not disallowable u/s 36(1 )(ii) of the IT Act. "
II. This Hon'ble Tribunal in the case of Dy CIT vs Agarwal Metal Works Ltd [I.T.A .No.-593/DeI/2012 Dated 11-10-2013 ITAT Delhi] held as under;
"The Ld. CIT (A) has recorded a categorical finding that these directors had paid tax on the aforesaid bonus along with salary on the maximum marginal rate and as such there was no loss to the revenue. The Id. DR could not refute this finding given by the Ld. first appellate authority. As such, we are of the considered opinion that the amount of bonus paid to the directors is fully deductible u/s 36(1 )(ii) of the Act and the 15 impugned order does not merit any interference on this count. This ground is not allowed."
III. Hon'ble Mumbai Tribunal in the case of Gargi Huttenes Albertus (P) Ltd. Versus Addl. CIT [ITA No. 1822/Mum/2009 Dated 18-01-2010] held as under;
"In circular nO.6-P of 1968 dated 6th July, 1968, the CBOT has explained in paragraph 74 that while invoking the provisions of the section the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner and that it should be borne in mind that the section is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in the manner which will cause hardship in bonafide cases. The details filed by the assessee also show that Gargi Industries is a company with a turnover of Rs. 21.68 crores and a taxable income of Rs.1, 16,67,9901- for the assessment year 2005-06 and is also assessed to tax. The assessee itself has declared a total income of RS.8,31,43,0951-. It cannot therefore be suggested that the assessee was indulging in unfair means to shift its profits to another entity. Both the assessee and Gargi Industries are in the maximum tax bracket and there can be no tax advantage. In 16 these circumstances, we see no merit in the disallowance which is hereby deleted. Ground no. 1 is thus allowed."
IV. In the Case of CIT vs. Indo Saudi Services (Travel) P. Ltd. 310 ITR 306 (Bom) where the assessee was a general sales agent of a foreign airline S. For the A. Ys. 1991-92 and 1992-93 the Assessing Officer found that the incentive commission paid by the assessee to the sister concern was half percent more than that paid to other sub-agents. Relying on the provisions of section 40A(2) of the Income-tax Act, 1961, the Assessing Officer disallowed the excess commission paid to the sister concern at the rate of half percent. The Tribunal deleted the additions.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
"i) Under the CBOT Circular No. 6-P, dated 0610711968, it is stated that no disallowance is to be made uls. 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.
ii) The learned Advocate appearing for the appellant was not in a position to point out how the assessee evaded payment of tax by 17 the alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal.
iii) In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-tax (Appeals) was wrong in disallowing half percent commission to the sister concern"
v. Recently Hon'ble Gujarat High Court In the Case Pro CIT Vs Gujarat Gas Financial Services Ltd. [ITA No. 428 & 431 of 2015 Dated 07-07-2015] held as under;
"13. As has been found by us in the preceding para of this judgment that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge is paid to the respondent company at a unreasonable rate to evade income tax. Even the learned Counsel Mr. Bhatt for the revenue does not dispute this fact.
14. We are in agreement with the observations made by the Tribunal as well as the ratio laid down by the coordinate Bench 18 of this Court in the case of (1) Commissioner of Income Tax-I vs Enviro Control Associated (P) Ltd., as reported at (2014) 43 Taxmann.com 291 (Gujarat); (2) Commissioner of Income Tax- III vs Ashok J Patel, as reported at (2014) 43 Taxmann. com 227 (Gujarat) and (3) Commissioner Of Income Tax vs Indo Saudi Services (Travel) P. Ltd. as reported as (2009) 310 ITR 306 (Bom).
15 It is pertinent to note that so far as the Circular dated 6.7. 1968 is concerned, it makes clear that the provisions under Section 40A (2) and particularly with regard to the transaction between the relatives and associates is concerned, the same shall be treated as bona fide case unless the officer finds it that one of them is trying to evade payment of tax.
16 Considering the overall facts of the case and the ratio laid down by the Hon'ble Apex Court, we are of the opinion that the appeals are meritless and the same deserve to be dismissed and accordingly dismissed."
9- Further this is submitted that, the contention of Ld AO that, assessee company given the bonus to a single Director, cannot be a ground for disallowing the claim. Reliance in this regard is placed upon In the case of Commissioner Of Income-Tax, 19 Bombay Versus Walchand And Company Pvt. Limited [1967] 65 ITR 381 (SC) therein Hon'ble Supreme Court accorded the view taken by Hon'ble High Court of Bombay;
"The High Court on a careful consideration has pointed out that the work of the assessee has increased considerably and has become more strenuous by reason of the prosperity of the managed companies and it would be reasonable and natural to infer that "the strain on both the directors and the top executives had increased justifying increase in their remuneration ". In their view the fact that additional remuneration was not sanctioned in favour of other executive officers is by itself not a ground for regarding the expenditure incurred as otherwise than wholly and exclusively laid out or expended for the purpose of the business. We agree with the High Court that the order of the Tribunal disallowing the claim for allowance of the whole of the additional remuneration was not supported by any evidence.
The appeals therefore fail and are dismissed with costs."
7. On the other hand Ld. DR relied upon the order of the Ld. CIT(A) and stated that the AO disallowed Rs. 27,50,000/- in the assessment order. But this figure was determined without any basis, hence, the total disallowance 20 was rightly determined by the Ld. CIT(A) at Rs. 88,75,000/- (i.e. Rs. 95,00,000 - Rs. 6,25,000) and accordingly enhancement notice was issued to the assessee and after considering the reply from the assessee, the disallowance of Rs. 27,50,000/- was confirmed and the income was further enhanced by Rs. 61,25,000/-, which does not need any interference on our part. In view of the above, he requested that the Ld. CIT(A)'s order may be upheld and appeal of the assessee may be dismissed accordingly.
8. We have heard both the parties and perused the relevant records available with us, especially the orders passed by the revenue authorities alongwith the Written Synopsis filed by the assessee's counsel as well as the case laws cited by him therein, as aforesaid.
9. The issue involved in the present appeal is relating to enhancing the income by Rs. 61,25,000/- of the assessee by making disallowance of an amount of Rs. 88,75,000/- on account of salary and bonus paid to the Director. We find that this expenditure was claimed by the assessee company on account of payment of the salary as well as bonus to the Executive Director of the assessee company is not in violation of any prevailing provisions of the Income tax Act, 1961. We further note that the bonus was declared by the Board of Directors by Resolution passed in a meeting, as per power vested to the Board under the Articles of Association of the company. Further the said action done was within the provisions of 21 the Companies Ac 1956 and there was no violation of any prevalent law of land. It was also observed that the lower authorities ignored the matter that, Mr. Abhinav Kumar was appointed as Executive Director of the assessee company on dated 01-07-2008. His remuneration was fixed by the Board as under:-
- Salary : Rs. 5,00,000/- per month.
- Perquisites : In addition to the salary, he shall also be
entitled to perquisites such as rent free accommodation, provision of car and telephone at residence, etc.
- Incentive and bonus : On the basis of performance, from time to time, to be determined by the Board.
- Leave Travel Allowance: The Director and his dependent family members shall be entitled to leave travel allowance once in a year.
- Medical expenses: Reimbursement of medical expenses of the Director and his dependent family members.
10. We find force in the contention of the Ld. Counsel of the assessee that after the appointment of Mr. Abhinav Kumar, due to his tremendous efforts and business generating capability the turnover of the company in the A Y in 22 question grew by more than 18 times as compare to last FY. Further the total receipts of the assessee company rose from Rs. 42.81 Lacs in FY 2007- 08 to 831.73 Lacs in FY 2008-09. Further the personnel expenses reduced from 34.71 % of the total turnover in FY 2007-08 to 19.37% the provisions of section. Therefore, to appreciate the efforts of Mr. Abhinav Kumar, Director of the Company and for above mentioned reasons the Bonus was decided by the Board of Directors of the assessee company vide Resolution dated 16.3.2009 at Rs. 50,00,000/- lacs, which within the provisions of the Companies Act 1956 read with Income Tax Act 1961, which was reasonable and justified. We find considerable cogency in submission of the Ld. Counsel of the assessee that Section 40A(2)(a) of Income Tax Act 1961 cannot be invoked and have no application unless it is first concluded that the expenditure was excessive or unreasonable.
11. We further note that the AO in the assessment order as well as Ld. CIT(A) in enhancement notice, erred in deciding the amount of salary and bonus of Mr. Abhinav Kumar, as the reasonableness of the remuneration has to be considered from the point of view of a Company and it was not open to the Assessing Officers as well as Ld. CIT(A) to adopt a subjective standard with regard to the proper remuneration which should be paid to its Directors. This view is fortified by the following decisions: 23
I. Judgments of Hon'ble Caluctta High Court in the case of Sonar Airotech Pvt. Limited Versus Commissioner Of Income-Tax [1993] 204 ITR 304 (Cal) the Hon'ble Court observed as under;
"It is by now well-settled that the Tribunal cannot adopt a subjective standard of reasonableness of the increase in remuneration and disallow a part of the increase in the directors' remuneration on the ground that it is unreasonably large. The reasonableness of the remuneration has to be considered from the point of view of a businessman and it was not open to the Tribunal to adopt a subjective standard with regard to the proper remuneration which should be paid to its directors. It has been observed in Newtone Studios Ltd. v. CIT [1955] 28 ITR 378 (Mad), that the Income-tax Officer should not take an armchair view of the management of the company and decide in his opinion what was the reasonable remuneration for a director and disallow such part of the remuneration as he considered excessive or unreasonable. What applies to the Income-tax Officer equally applies to the appellate authorities including the Appellate Tribunal. It has been held in Patiala Biscuit Manufacturers P. Ltd. v. CIT [1976] 103 ITR 208 (P& H), that 24 appeals are in continuation of the original proceedings and, therefore, the opinion formed by the Tribunal on the matter coming up in appeal before it is subject to the same restraint as fetters the subjectivity of the Assessing Officer's judgment. "
II. In the case of Extrusion Process Pvt. Limited Versus Commissioner Of Income-Tax, Bombay [1979] 119 1TR 287 (Bom).
"The reasonableness of the remuneration has to be considered from the point of view of the businessman and, in our view, it was not open to the Tribunal to adopt a subjective standard with regard to the proper remuneration which should have been paid to the managing director. In our view, the Tribunal was clearly in error in holding that only a part of the increased remuneration for the assessment year in question should be allowed. "
III. In the case of Hive Communication Pvt. Ltd. Versus Commissioner Of Income Tax [2013] 353 ITR 200 (Del). Hon'ble Delhi High Court Decided the question in favour of the assessee and in the negative holding that the Tribunal was not correct in law in upholding disallowance of Rs. 13.20 lacs out of remuneration paid to Mr. Sushil Pandit (director) by invoking the provisions of Section 40A(2) of the Act.
25 IV. Hon'ble Allahabad High Court in Abbas Wazir (P) Ltd. Vs. CIT (2004) 265 ITR 77 (ALL).wherein the High Court held as under:
"In Newtone Studios Ltd. v. CiT [1955J 28 ITR 378 (Mad), it was observed that the remuneration paid to a director should not be rejected by the Assessing Officer on any subjective standard of reasonableness, and that so long as the reality of the payment was not challenged and no allegation was made that the payment was dictated by other than business considerations, the deductibility of the expenditure should be considered from the point of view of the businessman and not from the point of view of any outsider, including the Assessing Officer. A disallowance can be made on the ground that the payment is not for commercial expediency, but not on the ground that in the opinion of the Assessing Officer it is unreasonably high. The test in every case is that of any prudent businessmen. We respectfully agree with the aforesaid view. In our opinion, whenever a claim is made by the assessee before the Income- tax Officer for allowing an expenditure as a legitimate business expenditure, the approach of the Income-tax Officer (or other Income-tax authority) has to be that he has to look at the matter from the view point of a prudent businessman, and not 26 from his own view point, and then ascertain whether the said expenditure has been incurred for the purpose of commercial expediency or not. In other words, the Income-tax Officer must try to put himself in the shoes of a prudent businessman and try to look at the matter from that point of view. Even while invoking the provisions of Section 40A(2) of the Act, the reasonableness of the expenditure for the purpose of business has to be judged from the point of view of a businessman and not that of the revenue. The approach has to be that of a prudent businessman and the reasonableness must be looked into from businessman point of view.
A businessman may make an expenditure, which he is under no legal obligation to make, but if he does so as a measure of commercial expediency, it must be allowed under section 37 of the Income-tax Act as a legitimate business expenditure.
XXX XXXXX XXX XXXXX XXX XXXXX XXX XXXXX In the present case the assessee has contended that it has increased the salary of the directors because the sales had gone up as mentioned in paragraph 8 of the order of the Commissioner of Income-tax (Appeals). The Commissioner of 27 Income-tax (Appeals) has considered the matter in great detail and has noticed the increase in the sales in the relevant assessment year and has observed that such good performance was the result of very good and serious work by the directors, In the order of the Tribunal no good reason has been given why the claim of the assessee has been partly disallowed. In our opinion, there was no good ground for making such disallowance. It seems that the Tribunal lost sight of the correct legal principles (mentioned above) for determining whether to allow the expenditure or not. We reiterate that it is not for the income-tax authorities to determine what would be commercially expedient, and that is the function of the company or the firm. The income- tax authorities cannot ordinarily interfere in such matters. It is not for the Income-tax Officer to decide what would be the correct salary of the directors or other officers of the company, unless on the face of it the salary fixed is so exorbitant and absurd, that it can clearly be said to be fictitious and aimed at tax evasion.
V. In CIT Vs. Edward Keventer (Private) Ltd. (1972) 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two 28 limitations in the matter of exercise of the power. The section enjoins the Assessing officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of reasonable and honest person in business. " 29
The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in Cil Vs. Edward Keventer (Private) Ltd. (1978) 1151TR 149 (SC).
VI. Similar view is held by the Madras HighCourt in Cl'F Vs. Computer Graphics Ltd. (2006) 285 ITR 84. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom).
12. We note that the scope of Section 40A (2) as explained by CBDT in Circular No. 6P, dated 6thJuly, 1968. The CBDT clarified that while examining the reasonableness of expenditure the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases.
13. On perusing the ITR of Sh. Abhinav Kumar at page no. 88 of the Paper Book, it is established that in the present case assessee company and Mr. Abhinav Kumar falls within same rate of tax i.e. 30%. Further the deduction claimed by the assessee company on the expenditure in the head of remuneration of Executive Director Mr. Abhinav Kumar is duly disclosed by him in his return for the AY 2009-10, therefore it cannot be said as colorable 30 device for tax evasion. Hence the disallowance in dispute is bad in law and deserve to be deleted. This view is also fortified by the following judgments:-
I. In the case of M/s Holtec Consulting Pvt. Ltd., Versus DCIT [ITA Nos. 3878/Del/2010 & 796/DELl2011 dated 25-01-2012] this Hon'ble Tribunal held as under;
"17.4 .................We also find that assessee has paid taxes at maximum marginal rate. Both the Directors have admitted the payment of commission received and offered the same in their income tax returns and had paid at a maximum marginal rate. This clearly establishes the fact that there has been no tax avoidance motive behind the payment of commission to the directors by the assessee company. We further find that the case law referred by the Id. counsel of the asses!i.ee are also germane and support the case of the assessee.
17.5 In the background of the aforesaid discussions and precedents, in our considered opinion, the payment of commission was justified and not disallowable u/s 36(1 )(ii) of the IT Act."
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II. This Hon'ble Tribunal in the case of Dy CIT vs Agarwal Metal Works Ltd [I.T.A .No.-593/DeI/2012 Dated 11-10-2013 ITAT Delhi] held as under;
"The Ld. CIT (A) has recorded a categorical finding that these directors had paid tax on the aforesaid bonus along with salary on the maximum marginal rate and as such there was no loss to the revenue. The Id. DR could not refute this finding given by the Ld. first appellate authority. As such, we are of the considered opinion that the amount of bonus paid to the directors is fully deductible u/s 36(1 )(ii) of the Act and the impugned order does not merit any interference on this count. This ground is not allowed."
III. Hon'ble Mumbai Tribunal in the case of Gargi Huttenes Albertus (P) Ltd. Versus Addl. CIT [ITA No. 1822/Mum/2009 Dated 18-01-2010] held as under;
"In circular nO.6-P of 1968 dated 6th July, 1968, the CBOT has explained in paragraph 74 that while invoking the provisions of the section the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner and that it should be borne in mind that the section is meant to check evasion of tax through excessive or unreasonable payments to relatives and 32 associate concerns and should not be applied in the manner which will cause hardship in bonafide cases. The details filed by the assessee also show that Gargi Industries is a company with a turnover of Rs. 21.68 crores and a taxable income of Rs.1, 16,67,9901- for the assessment year 2005-06 and is also assessed to tax. The assessee itself has declared a total income of RS.8,31,43,0951-. It cannot therefore be suggested that the assessee was indulging in unfair means to shift its profits to another entity. Both the assessee and Gargi Industries are in the maximum tax bracket and there can be no tax advantage. In these circumstances, we see no merit in the disallowance which is hereby deleted. Ground no. 1 is thus allowed."
IV. In the Case of CIT vs. Indo Saudi Services (Travel) P. Ltd. 310 ITR 306 (Bom) where the assessee was a general sales agent of a foreign airline S. For the A. Ys. 1991-92 and 1992-93 the Assessing Officer found that the incentive commission paid by the assessee to the sister concern was half percent more than that paid to other sub-agents. Relying on the provisions of section 40A(2) of the Income-tax Act, 1961, the Assessing Officer disallowed the excess commission paid to the sister concern at the rate of half percent. The Tribunal deleted the additions.
33 On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
"i) Under the CBDT Circular No. 6-P, dated 0610711968, it is stated that no disallowance is to be made uls. 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.
ii) The learned Advocate appearing for the appellant was not in a position to point out how the assessee evaded payment of tax by the alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal.
iii) In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-tax (Appeals) was wrong in disallowing half percent commission to the sister concern"
v. Recently Hon'ble Gujarat High Court In the Case Pro CIT Vs Gujarat Gas Financial Services Ltd. [ITA No. 428 & 431 of 2015 Dated 07-07-2015] held as under;
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"13. As has been found by us in the preceding para of this judgment that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge is paid to the respondent company at a unreasonable rate to evade income tax. Even the learned Counsel Mr. Bhatt for the revenue does not dispute this fact.
14. We are in agreement with the observations made by the Tribunal as well as the ratio laid down by the coordinate Bench of this Court in the case of (1) Commissioner of Income Tax-I vs Enviro Control Associated (P) Ltd., as reported at (2014) 43 Taxmann.com 291 (Gujarat); (2) Commissioner of Income Tax- III vs Ashok J Patel, as reported at (2014) 43 Taxmann. com 227 (Gujarat) and (3) Commissioner Of Income Tax vs Indo Saudi Services (Travel) P. Ltd. as reported as (2009) 310 ITR 306 (Bom).
15 It is pertinent to note that so far as the Circular dated 6.7. 1968 is concerned, it makes clear that the provisions under Section 40A (2) and particularly with regard to the transaction between the relatives and associates is concerned, the same 35 shall be treated as bona fide case unless the officer finds it that one of them is trying to evade payment of tax.
16 Considering the overall facts of the case and the ratio laid down by the Hon'ble Apex Court, we are of the opinion that the appeals are meritless and the same deserve to be dismissed and accordingly dismissed."
14. We further note that the view adopted by the AO that, assessee company given the bonus to a single Director, cannot be a ground for disallowing the claim because in the case of Commissioner Of Income-Tax, Bombay Versus Walchand And Company Pvt. Limited [1967] 65 ITR 381 (SC) the Hon'ble Supreme Court accorded the view taken by Hon'ble High Court of Bombay as under:-
"The High Court on a careful consideration has pointed out that the work of the assessee has increased considerably and has become more strenuous by reason of the prosperity of the managed companies and it would be reasonable and natural to infer that "the strain on both the directors and the top executives had increased justifying increase in their remuneration". In their view the fact that additional remuneration was not sanctioned in favour of other executive officers is by itself not a ground for regarding the expenditure incurred as otherwise than wholly and exclusively laid out or expended for the purpose of the business. We agree with the High Court that the order of the Tribunal disallowing the claim 36 for allowance of the whole of the additional remuneration was not supported by any evidence.
The appeals therefore fail and are dismissed with costs."
15. In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, we delete the addition in dispute and cancel the orders of the revenue authorities and accordingly, ground raised by the Assessee stand allowed.
16. In the result, the Appeal filed by the Assessee stands allowed.
Order pronounced in the Open Court on 19/05/2017.
Sd/- Sd/-
[PRASHANT MAHARISHI] [H.S. SIDHU]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date: 19/05/2017
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT TRUE COPY By Order,
Assistant Registrar,
ITAT, Delhi Benches
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