Income Tax Appellate Tribunal - Mumbai
Fashlink International P. Ltd, Mumbai vs Assessee on 22 November, 2012
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई Ûयायपीठ 'एफ ' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL " F " BENCH, MUMBAI
सव[ौी एच.एल. कावा[ अÚय¢ एवं नरे Ûि कुमार ǒबãलैáया, लेखा सदःय के सम¢
BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI N.K. BILLAIYA, AM
आयकर अपील सं./I.T.A. No. 7940/Mum/2010
( िनधा[रण वष[ / Assessment Year : 2006-07
M/s. Fashlink International बनाम/
बनाम The ITO 9(1)-4,
Pvt. Ltd., Vs. Aayakar Bhavan,
301, Shalaka, Plot No. 32, Mumbai-400 020
Juhu Road,
Santacruz (W),
Mumbai-400 054
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACF 1227D
(अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent)
अपीलाथȸ ओर से/ Appellant by: Shri A.B. Advani
ू×यथȸ कȧ ओर से/Respondent by : Shri Omprakash Meera
सुनवाई कȧ तारȣख / Date of Hearing : 22.11.2012
घोषणा कȧ तारȣख /Date of Pronouncement : 27.11.2012
आदे श / O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the assessee is directed against the order of the Ld. CIT(A)-19, Mumbai dt.3.9.2010 pertaining to A.Y. 2006-07.
2. The assessee has raised two substantive grounds. Ground No. 1 relates to disallowance of remuneration paid to the Managing Director amounting to Rs. 3,40,000/- and ground No. 2 relates to disallowance of rent paid to the Managing Director of the company amounting to Rs. 60,000/-.
2 ITA No. 7940/Mum/20103. The assessee filed return of income on 18.10.2006 declaring total income at Rs. 11,74,815/-. The said return was selected for scrutiny assessment and notice u/s. 143(2) alongwith notice u/s. 142(1) were issued and served upon the assessee. The assessee company is a partner in M/s. Karnani Builders & Developers having 20% of share of profit. The Assessing Officer observed that the assessee has shown following income:
a) 20% share of profit in partnership firm claimed exempt u/s. 10(2A) - Rs. 9,62,555/-
b) Interest on bank deposits - Rs. 2,313/-
c) Interest on capital in partnership firm - Rs. 18,79,084/-
d) Interest on loans - Rs. 6,91,330/-
e) Interest on income tax refund = Rs. 2,221/-
The assessee also claimed certain expenses , inter alia , Director's remuneration of Rs. 3,40,000/- and rent for office premises at Rs.
60,000/-.
4. The AO raised query seeking justification and the nexus of expenses claimed vis-à-vis income of the assessee.
5. The assessee filed a detailed reply dt. 14.11.2008. The AO did not accept the contention of the assessee for the following reasons:
1.It is seen that assessee company has paid salary to Director of Rs. 3,40,000/- during the year in connection with earning the interest income of Rs.18,79,084/- from partnership firm M/s. Karnani Builders & Developers wherein the assessee's is a partner and holding 20% share. Assessee had earned the share of profit from the above firm at Rs.9,62,555/- which was claimed as exempt u/s 10(2A) of the I.T. Act.3 ITA No. 7940/Mum/2010
2. The interest income from partnership firm and share of profit is earned as per the terms of partnership deed. The income earned by the assessee company is automatic. There was no nexus of performing duties by the director to earn the interest income as well as share of profit, was furnished.
3.Further it is to bring on record that he assessee company has earned interest income from partnership firm in the previous year relevant to A.Yrs. 2004-05 & 2005-06, however, no remuneration / salary to director was paid in the corresponding previous year. No comparative justification was furnished by the assessee company as to under which circumstances, it was compelled to pay the remuneration in the current assessment year. It was not the case that if the remuneration is not paid to the director, the earning of interest income becomes "doubtful" in the hands of the assessee company. In view of the above, the contentions / claims made in this respect by the assessee company are rejected and treated as an tax evading techniques in the garb of payment u/s.40A(2)(b) of the I.T.Act.
4. The only way Director can take the money from the company is only in the form of Dividend which is possible when the assessee company declares the dividend and pay the tax on Distributed Profits of Domestic Companies u/s 115-0 of the I.T.Act, 1961 @ 15% plus surcharge which is done in the earlier A.Yrs. 2004-05 & 2005-06, wherein the assessee company has paid the tax on Distribution profits and paid to the shareholders in the form of dividend and not in the form of salary/remuneration.
5.Further vide notice u/s 142(1), the assessee was asked to furnish the copy of rental agreement for rent paid of Rs.
60,000/- to Mr. Anup Shyam Karnani, director of the assessee company. However, no agreement is provided. The said amount of Rs.60,000/- is shown as outstanding. On verification of the earlier record, it was revealed that no such rent was paid in any previous year even though the nature of income / business was similar to that of current year. This clearly indicates that the provision for rent is not wholly & exclusively for the business purpose but for reducing the tax liability. Further more, the assessee has failed to furnish the supporting evidence of rent payment, justification for allowability of rent as business expenses.
6.The contention of the assessee that due to the efforts of the directors, there was increase in interest income from Rs.19,76,749/- to Rs.25,74,938/-, is not acceptable. The increase in interest was due to investment made in partnership firm and 4 ITA No. 7940/Mum/2010 as per the clauses of the partnership deed, the company is bound to receive interest even without the efforts of the directors.
Considering the above facts, the remuneration paid to the director of Rs. 3,40,000/- and rent paid to Mr. Anup Shyam Kàrnani, director of the assessee company of Rs. 60,000/- totaling to Rs.4,00,000/-- is not allowed u/s 37(1) of the I.T.Act, 1961 as the above expenditure is not wholly and exclusively for the business purpose. Penalty proceedings u/s.271(1)(c) are initiated separately for making wrong claim of expenses which are not wholly and exclusively for the purpose of business on account of 40A(2)(b) payments."
6. Aggrieved by the finding of the AO, the assessee preferred an appeal before the Ld. CIT(A) but without any success. The Ld. CIT(A) was of the opinion that there is no nexus between the performance of the duties by the Director and the earning of the company. The Ld. CIT(A) further observed that the assessee company has not been able to point out any exceptional circumstances leading to the payment of salary to the Director and accordingly confirmed the disallowance of salary paid to Director at Rs. 3,40,000/-.
6. On payment of rent of Rs. 60,000/-, the Ld. CIT(A) observed that the assessee has not furnished any rent agreement nor such rent payment was claimed in earlier years. As the assessee had failed to substantiate its claim, the Ld. CIT(A) confirmed the disallowance of rent of Rs. 60,000/-.
7. Aggrieved by the finding of the Ld. CIT(A), assessee is before us. The Ld. Counsel for the assessee submitted that the AO has not given any basis for disallowance of salary paid to the Director nor any cogent materials have been brought on records to show that remuneration paid to Director is excessive and not comparable with the market rate. Thus, the AO has grossly erred in invoking provisions of Sec. 40A(2)(b). Similar is the position for the disallowance of rent of Rs. 60,000/-.
5 ITA No. 7940/Mum/20108. Per contra, the Ld. Departmental Representative strongly relied on the findings of the lower authorities.
9. We have considered the rival submissions and perused the orders of the lower authorities. Undoubtedly, the remuneration paid to the Director has been disallowed by invoking provisions of Sec. 40A(2)(b). A perusal of the said section suggests that if the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
10. In the instant case, the AO has not brought any comparable case on record. The disallowance has been made for the simple reason that the Director of the company has not given any services for earning of the company. We find that the assessee-company is a partner in a firm M/s. Karnani Builders & Developers. The assessee company being a legal person cannot attend the day to day affair of the partnership firm therefore it requires a natural person to perform such duties for which it assigned the work to the director of the company. As the Director was looking after the interest of the company, the company decided to suitably remunerate the Director for which it paid a remuneration of Rs. 3,40,000/-. We also find that the said Director has returned a net taxable income of Rs. 27,16,354/- as per the computation of income of the Director exhibited at page-12 of the Paper Book which means that the Director is also taxed at the maximum rate of tax i.e. 30% which rate is 6 ITA No. 7940/Mum/2010 also applicable to a corporate assessee i.e. the appellant in our case. The allegation of the AO that this arrangement is only to evade tax does not hold good because both the parties are subject to tax at the same rate.
11. Considering all these facts in totality, we do not find any reason to disallow the claim of remuneration of Rs. 3,40,000/-. Finding of the Ld. CIT(A) are reversed. The AO is directed to allow the claim of remuneration of Rs. 3,40,000/-. Ground No. 1 is allowed.
12. Ground No. 2 relates to disallowance of rent of Rs. 60,000/- paid to the same Director i.e. ShriAnup Shyam Karnani. The Ld. CIT(A) confirmed the addition on the ground that no rent agreement was furnished and no such rent payment was claimed in earlier years. The Ld. Counsel for the assessee drew our attention to page-1A of the Paper Book and submitted that it is a certified true copy of the Board Resolution by which the Board has resolved to pay rent of Rs. 60,000/- for utilizing the office premises of the Director. We find that the same rent has been included by the Director in his return of income and as mentioned hereinabove, both the company and the Director are taxed at the same rate, there cannot be any tax benefit to the assessee-company as envisaged by the Revenue authority. It is also not the case of the Revenue authorities that the assessee-company has not used the premises taken on rent from the Director.
13. Considering all these facts in totality and as no comparables are brought on record to show that payment of rent is unreasonable or excessive, we do not find any reason to sustain the addition, findings of the Ld. CIT(A) are reversed. The AO is directed to allow the claim of deduction of rent at Rs. 60,000/-.
7 ITA No. 7940/Mum/201014. In the result, the appeal filed by the assessee is allowed.
पǐरणामतः िनधा[ǐरती कȧ अपीलɅ ःवीकृ त Order pronounced in the open court on 27.11.2012 .
आदे श कȧ धोषणा खुले Ûयायालय मɅ Ǒदनांकः 27.11.2012 को कȧ गई ।
Sd/- Sd/
(H.L. KARWA) (N.K. BILLAIYA)
अÚय¢ /PRESIDENT लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai; Ǒदनांक Dated 27.11.2012
व.िन.स./ RJ , Sr. PS
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)-
4. आयकर आयुƠ / CIT
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड[ फाईल / Guard file.
आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai