Income Tax Appellate Tribunal - Pune
M/S. Freewill Infrastructure Pvt. ... vs Joint Commissioner Of Income-Tax,, on 1 March, 2017
आयकर अपील
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
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, लेखा सद य के सम&
BEFORE MS. SUSHMA CHOWLA, JM AND
SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.724/PUN/2014
नधा(रण वष( / Assessment Year : 2010-11
M/s. Freewill Infrastructure Pvt. Ltd. .......... अपीलाथ /
Office No.6, Phase No.II, Premier Plaza,
Appellant
CITS No.45, Mumbai Pune Road,
Chinchwad.
PAN No.AAACF8863F.
बनाम v/s
Jt.Commissioner of Income Tax, .......... यथ /
Range - 9, Pune. Respondent
अपीलाथ क ओर से / Appellant by : Shri Nikhil Pathak
यथ क ओर से / Respondent by : Shri Suhas Kulkarni.
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 31.01.2017 Date of Pronouncement: 01.03.2017
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
This appeal filed by the assessee is emanating out of the order of Commissioner of Income Tax (A) - V, Pune dt.11.02.2014 for the assessment year 2010-11.
2. The relevant facts as culled out from the material on record are as under :-
2ITA No.724/PUN/2014
AY.No.2010-11 2.1 Assessee is a company stated to be engaged in the business of trading in sports accessories and goods. Assessee electronically filed its return of income for A.Y. 2010-11 on 28.09.2010 declaring total income at Rs.80,26,610/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) vide order dt.08.01.2013 and total income was determined at Rs.1,08,18,242/-. Aggrieved by the order of AO assessee carried the matter before ld. CIT(A), who vide order dt.11.02.2014( in appeal No.PN/CIT(A)-V/Jt.CIT, Rg-9/322/12-13) dismissed the appeal of the assessee. Aggrieved by the order of ld. CIT(A) assessee is now in appeal before us and has raised the following grounds:
"1. The learned CIT(A) erred in confirming the addition of Rs.19,51,632/- made by the learned A.O. in respect of disallowance of purchases made from five parties without appreciating that the addition was not warranted on facts of the case.
2. The learned CIT(A) erred in holding that the assessee was not able to give' the correct addresses of the five parties and the notices issued by the A.O. u/s 133(6) to these parties on the addresses given by the appellant were received back unserved and hence, the assessee was not able to prove the genuineness of the purchases made from the above parties and therefore, the said purchases were to be disallowed in this year.
3. The learned CIT(A) failed to appreciate that the assessee had duly furnished the copies of purchase bills, contact numbers and PAN nos. of the above five parties and therefore, there was no reason to hold that purchases made from these parties were bogus merely because the summons issued by the A.O on the addresses given by the assessee were returned unserved and hence, the addition is not f justified.
4. The ld. CIT(A) erred in not appreciating that the purchases made from the above parties were genuine and all the payments to these parties were made through account payee cheques and hence, the addition made by the learned A.O. was not warranted at all.
5. The learned CIT(A) ought to have appreciated that the assessee had stopped transacting with the above parties and 3 ITA No.724/PUN/2014 AY.No.2010-11 hence, the assessee was not aware of the present addresses of these parties and therefore, the addition made by the learned A.O. without pointing out any other defects regarding the purchase, sales and consumption shown by the assessee was not justified on facts of the case.
6. The learned CIT(A) erred in upholding the addition u/s 40A(2)(b) of Rs.8,40,000/- made in respect of disallowance of 50% of salary paid to Mrs. Divya Kharbanda, wife of the director without appreciating that the said addition was not warranted on facts of the case.
7. The learned CIT(A) erred in holding that the salary of Rs. 16,80,000/- paid to Mrs. Divya Kharbanda was in excess of the salary paid to other employees doing similar work and therefore, the disallowance of Rs.8.40 lacs made by the learned A.O. u/s 40A(2)(b) was justified on facts of the case.
8. The learned CIT(A) failed to appreciate that Mrs. Kharbanda was in charge of the entire operations of the assessee company in the Northern India region including overall administration of the company and various other functions and hence, the salary of Rs.16.80 lacs paid to her was quite reasonable considering the services rendered by her and therefore, the addition made was not justified on facts of the case.
9. The learned CIT(A) ought to have appreciated that the income of Mrs. Kharbanda was taxable at maximum marginal tax rate and therefore, there was no loss of revenue and hence, the addition made by the learned A.O. u/s 40A(2)(b) is not warranted at all.
10. Without prejudice to the above ground, the assessee submits that the addition of Rs.8.40 lacs made by the learned A.O. is very high and the same may be restricted to a reasonable amount."
3. Before us, at the outset, Ld.A.R. submitted that though assessee has raised various grounds but ground Nos.1 to 5 are with respect to addition of Rs.19,51,632/- on account of disallowance of purchases and ground Nos.6 to 10 are with respect to the addition made u/s 40A(2)(b) of the Act. He therefore submitted that only these two issues needs adjudication.
4. First issue is with respect to addition of Rs.19,51,632/- on account of disallowance of purchases.
4ITA No.724/PUN/2014
AY.No.2010-11 4.1 During the course of assessment proceedings AO noticed that assessee had made purchases from various parties. With respect to the 5 parties listed at page 2 of assessment order the aggregate purchases made from them amounted to Rs.19,51,632/-. AO had issued notices u/s 133(6) and called for the details about the sales made by them to assessee like confirmations, income tax particulars etc. AO noticed that notices were returned unserved and assessee had only filed confirmation on its own letter head. The assessee was asked to produce the parties. Since the assessee could not produce the parties, the purchases aggregating to Rs.19,51,632/- made by assessee from 5 parties were held by AO to be non-genuine and thus disallowed. Aggrieved by the order of AO, assessee carried the matter before ld. CIT(A), who confirmed the additions by holding as under :
"9. I have carefully considered the facts of the case as well as reply of the appellant. In this case, the appellant has failed to file independent confirmations as well as present addresses of those parties to enable the Assessing Officer to verify the purchases made from those parties, despite providing sufficient opportunity by the Assessing Officer. Though the appellant claims that once confirmations were filed by it, the onus was discharged and it was for the Assessing Officer to make further verification. This contention of the appellant is not acceptable in view of the fact that after the confirmation filed by the appellant on its letter head which was dated 24.08.2010, the Assessing Officer made further enquiries and notices u/s, 133(6) of Income-tax Act issued were received back unserved in respect of the above parties, This being so, the onus again shifted on the appellant to produce the parties and file present addresses of those parties so that necessary verification could be carried out. The appellant has not been able to discharge this onus. The appellant has relied upon the decision of Hon'ble Bombay High Court in the case of CIT- 1, Mumbai Vs. Nikunj Eximp Enterprises Pvt. Ltd., for the proposition that addition cannot be made even if purchases are found to be bogus. I have gone through the order of Hon'ble Bombay High Court and it is seen that the appeal filed by the Revenue has been dismissed on the 5 ITA No.724/PUN/2014 AY.No.2010-11 ground that no question of law arises as Tribunal's order was based on proper reasoning taken into account all the facts before concluding that purchases of Rs. 1.33 crores was not bogus. Since the appeal filed by the Revenue was dismissed on the ground that no substantial question of law arises the appellant cannot derive any support from the above judgment of Hon'ble Bombay High Court, as the Assessing Officer has held that the purchases are not genuine on the basis of enquiries conducted. The appellant has not been able to furnish the details regarding address of the parties as well as confirmation even during the course of appellate proceedings. This being so, I do not find any merit in the submissions of the appellant. Accordingly, disallowance of Rs.19,51,632/- is upheld and the ground is dismissed."
5. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.
6. Before us, Ld.A.R. reiterated the submissions made before AO and ld. CIT(A) and submitted that the purchases cannot be disallowed and the addition made by AO and confirmed by Ld. CIT(A) be set aside. Ld. D.R. on the other hand supported the order of lower authorities and submitted that assessee has not furnished the details about the purchases either before the lower authorities nor has submitted those details before the Tribunal. In such circumstances, the order of ld. CIT(A) needs to be upheld. He thus supported the order of Ld. CIT(A).
7. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to the addition made on account of bogus purchases. It is an undisputed fact that assessee had made purchases aggregately to Rs.19,51,632/- from 5 parties, (the details of which are listed at page 2 of the Assessment Order), the notices sent u/s 133(6) by the 6 ITA No.724/PUN/2014 AY.No.2010-11 AO to the aforesaid 5 parties calling for various details were returned unserved and the assessee was therefore asked to produce the parties or provide alternative addresses. AO has noted that despite various opportunities, the assessee did not produce the parties for verification nor has produced any details to support the purchases made. Ld. CIT(A) has also noted that assessee was not able to furnish details regarding the address of the parties as well as confirmations even during the Appellate Proceedings. Before us also assessee has not been able to furnish any evidence with respect to purchases. In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, the ground of the assessee is dismissed.
8. Second ground is with respect to disallowance u/s 40A(2)(b) of the Act.
8.1 On perusing the details of salary expenses, AO noticed that assessee has paid salary amounting to Rs.16,80,000/- to Mrs. Divya Kharbanda w/o. Rajesh Kharbanda, Director of the assessee company. The assessee was asked to justify the salary payment to which the assessee inter-alia submitted that she is a whole-time employee of the company and in-charge of entire operations of North India and is which is based in Jalandhar. It was further submitted that she represents the management of the company. The submission of the assessee was found not acceptable to AO inview of the fact that the other employees of the assessee having similar designations were paid salary of Rs.2,50,000/- to Rs.3,00,000/- per 7 ITA No.724/PUN/2014 AY.No.2010-11 annum, as against the salary of Rs.16,80,000/- paid to Mrs. Divya Kharbanda, no documents were furnished by assessee to establish that the salary paid to Mrs. Divya Karbanda was commensurate with the services rendered by her. AO therefore concluded that the salary paid was excessive and disproportionate and accordingly disallowed 50% of salary amounting to Rs.8,40,000/-. Aggrieved by the order of AO, assessee carried the matter before ld. CIT(A), who upheld the order of AO by holding as under :
"13. I have carefully considered the facts of the case as well as reply of the appellant. In this case it is seen that the appellant company has wrongly mentioned the disallowance amount at Rs.15 lacs though in actual disallowance is only Rs.8,40,000/-. As far as the merit of the issue is concerned, it is seen that the appellant has simply given statements before the Assessing Officer that Mrs. Divya Kharbanda was handling the affairs of entire North India based in Jalandhar. However, no documentary evidence in this regard could be filed by the appellant either during the course of assessment proceedings or during the course of appellate proceedings. Further, on the facts of the case, it is seen that the Assessing Officer has been quite liberal in computing the disallowance as he has allowed 8,40,000/- compared to Rs.2.5 to 3 lacs p.a. received by other employees doing similar work. The appellant's grievance regarding executives functioning in similar capacity in other institutions gets addressed by the fact that Assessing Officer has allowed Rs. 8,40,000/- to Mrs. Divya Kharbanda. Considering the totality of facts, it is held that the Assessing Officer has been quite reasonable in computing the disallowance and therefore, I do not find any necessity in interfering the order of the Assessing Officer. Accordingly, the disallowance of Rs.8,40,000/- is upheld and Ground NO.3 is dismissed."
9. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.
10. Before us, Ld.A.R. reiterated the submissions made before AO and ld. CIT(A) and further submitted that Mrs. Divya Karbhanda 8 ITA No.724/PUN/2014 AY.No.2010-11 has been drawing similar salary for past more than three years and there has been no sudden increase in the salary paid and the same salary was drawn by her since F.Y. 2007-08. It was further submitted that Mrs. Divya Kharbanda is a regular tax payer and the amount of salary has been disclosed by her in her return of income and that Mrs.Divya and the assessee are covered under maximum marginal rate of tax and therefore it cannot be said that it was a case of diversion of assessee's profits in favour of Mrs. Divya. He further submitted that it is not a case where AO has held that no services have been rendered by Mrs. Divya Kharbanda to assessee as he has not disallowed the entire expenses. He submitted that it is a settled law that AO cannot direct the assessee to conduct his business in a particular manner and it is for the assessee to decide how to conduct his business. He further placed reliance on the decision in the case of CIT Vs. Indo Saudi Services reported in (2009) 310 ITR 306 (Bom). Ld. D.R. on the other hand supported the order of AO and ld. CIT(A).
11. We have heard the rival submissions and perused the material on record and the issue in the present case is with respect to disallowance of salary expenses u/s 40A(2)(b) of the Act. It is an undisputed fact that assessee has paid salary of Rs.16,80,000/- to Mrs. Diviya Kharbanda who is a person specified u/s 40A(2)(b) of the Act. In terms of Sec.40A(2)(a) of the Act, the onus is on the AO to form an opinion that the expenditure claimed as excessive / unreasonable having regard to the fair market value for which the payment is made. This opinion of the AO of the expenditure being 9 ITA No.724/PUN/2014 AY.No.2010-11 excessive / unreasonable cannot be arbitrary but must be on the basis of determining the fair market value for which the payment is made. The opinion of the AO should be formed objectively from the point of view of a prudent businessman and after taking into account all relevant circumstances and should not be, influenced by immaterial considerations. If the AO was of the opinion that the payment for which deduction is claimed is excessive / unreasonable then in that case it is for the AO to assess the fair market price and give comparative instances for payment for similar services. The AO has to prove that the transaction is sham or not bonafide or the value of goods and services are not in consonance with the fair market value. In the present case out of total salary of Rs.16,80,000/-, AO has disallowed 50% of the salary holding to be excessive and disproportionate. Before us, it is assessee's submission that Mrs. Divya Kharbanda has been paid similar salary in earlier years and she has been drawing same salary since F.Y. 2007-08 and also in subsequent years and in none of the earlier or subsequent years the disallowance on account of salary being excessive has been made by the Revenue authorities. It is further submitted that the assessee and Mrs. Divya Kharbanda fall in the maximum marginal rate of taxation and therefore by paying higher salary there has been evasion of tax. The aforesaid submissions of the assessee has not been controverted by Revenue by placing any contrary material on record. We further find that Hon'ble Bombay High Court in the case of CIT Vs. Indo Saudi Services (Travel) P. Ltd (2009) 310 ITR 306 (Bom) after considering the CBDT Circular No.6-P, Dt. 6th July, 1968 has held that no disallowance of expense 10 ITA No.724/PUN/2014 AY.No.2010-11 can be made when the person to whom the payment is made is also assessed at higher rate and there is no evasion of tax. Considering the aforesaid facts and relying on the aforesaid decision of Hon'ble Bombay High Court, we are of the view that in the present case, no disallowance of expenses u/s 40A(2)(b) is called for and therefore direct its deletion. Thus, this ground is allowed.
12. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 1st day of March, 2017.
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 1st March, 2017.
Yamini
आदे श क* + त,ल-प अ.े-षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. Commissioner of Income Tax-(A)- 6, Pune.
4. Commissioner of Income Tax, V, Pune..
5. #वभागीय &त&न'ध, आयकर अपील य अ'धकरण, "ए" / DR, ITAT, "A" Pune;
6. गाड. फाईल / Guard file.
आदे शानस ु ार/ BY ORDER,स //त ् // True Copy // सहायक रिज45ार/ Assistant Registrar, आयकर अपील य अ'धकरण ,पुणे / ITAT, Pune.