Income Tax Appellate Tribunal - Bangalore
Swadeshi Internationals, Bangalore vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No. 703/Bang/2009
Assessment year : 2005-06
The Assistant Commissioner of
Income-tax,
Circle 10(1),
Bangalore. : APPELLANT
Vs.
M/s. Swadeshi Internationals,
No.731, Krishna Nagar
Industrial Layout,
Hosur Main Road,
Bangalore - 560 029. : RESPONDENT
C.O. No.47/Bang/2009
(in ITA No. 703/Bang/2009)
Assessment year : 2005-06
M/s. Swadeshi Internationals,
No.731, Krishna Nagar
Industrial Layout,
Hosur Main Road,
Bangalore - 560 029. : CROSS OBJECTOR
Vs.
The Assistant Commissioner of
Income-tax,
Circle 10(1),
Bangalore. : RESPONDENT
ITA No.703/B/09
& CO 47/B/09
Page 2 of 16
Revenue by : Smt. Swati S. Patil
Assessee by : Shri V. Srinivasan
ORDER
Per A. Mohan Alankamony, Accountant Member
These are two appeals - (i) one by the Revenue and (ii) another [Cross Objections] by the assessee trust - both are directed against the order of the Ld. CIT(A)-V, Bangalore in ITA No:48/2/AC 10(1)/CIT(A)-V/08-09 dated: 4.5.2009 for the assessment year 2005-06. I. ITA NO: 703/-09 - [By the Revenue]:
2. The Revenue has raised four grounds of appeal. However, on a perusal, ground No: 1 being general and no specific issue involved, it has become non-consequential. In the remaining grounds, the substance of the issue is confined to -
(i) the CIT(A) was erroneous in deleting the remunerations paid to Sunit Gupta and Smt. Simi Gupta;
- holding that the provisions of s.40A(2)(b) were not applicable;
&
- in earlier years no such remuneration was paid and no details/documents produced in support of its claim. II. Cross Objection No: 47/09 - [By the assessee]:
3. The assessee has raised six grounds of cross objections.
Ground Nos.1 and 6 being general and no specific issues involved, they are dismissed as non-consequential. In the remaining grounds, the grievance of the assessee is that :
ITA No.703/B/09
& CO 47/B/09 Page 3 of 16
(i) The authorities below were not justified in disallowing Rs.6.94 lakhs from out of foreign travel expenses; &
(ii) The assessee itself denies liable to be charged interest u/s 234B & 234D of the Act.
Common Order:
4. As the issues raised by the either party are pertaining to the same assessment year, both the appeals were heard, considered together and disposed off in this common order for the sake of convenience and cohesion.
Brief:
5. The assessee - a private trust ( 'the assessee' in short) carries on the business of manufacture and export of furnishings. During the course of assessment proceedings, the AO found that the assessee had paid remuneration to its trustees, namely, Sunit Gupta and Smt. Simi Gupta, totaling to Rs.1.69 crores for services rendered to the trust in pursuance of clause 6(s) of Indenture of Trust dt.16.10.83. 5.1. Brushing aside the assessee's contentions, the AO had disallowed the same on the reasoning that -
(i) the trust had not paid remuneration to trustees in the past;
- the indenture stated that the trustees should be entitled to such remuneration for services rendered to the trust as the Board may deem fit;
- the resolution was signed by a trustee and not by the Board of trustees and, hence not a valid resolution;
ITA No.703/B/09
& CO 47/B/09 Page 4 of 16
- there was no reason to pay such huge remuneration and there was no justification for payment of substantial portion of the profit of the business as remuneration to the trustees;
- both the husband and wife apportioned the profits; the remuneration was exorbitant because the trustees have not drawn salary earlier; the authorization of payment of remuneration was self-serving document; and thus restricted it to Rs.12 lakhs to Sunil Gupta and Rs.6 lakhs to Mrs.Simi Gupta; &
- the balance of Rs.1.51 crores was added to the income of the assessee by invoking the provisions of s.40A(2)(b) of the Act. 5.2. With regard to the claim of Rs.13.88 lakhs being foreign travel expenses incurred by the Managing Trustee, the AO was of the view that since the immigration passes do not specify that the trips undertaken only for business purposes, there was a possibility of business trips coupled with pleasure trips, he had disallowed 50% of such a claim.
6. Aggrieved, the assessee had approached the CIT(A) for redressal. After giving due weight-age to the assessee's well-netted contentions backed with a number of judicial precedents in favour of it, the Ld. CIT(A) has observed thus -
"7.........................The only ground on which the AO did not allow the entire remuneration claimed by the appellant is that the same was high and claimed for the first time. It is seen that the provisions of s.40A(2)(b) of the Act are not applicable at all and that the AO failed to appreciate that the trustees had offered the said remuneration to tax for the assessment year 2006-07 on receipt of the same in accordance with the method of accounting followed by them. In the present case, no disallowance is called for on the ground that such remuneration was not given in the past or that the same is very high because the payment of remuneration was due to commercial expediency and having regard to the nature of services rendered by the trustees to develop the business. It is a fact that the appellant trust could derive ITA No.703/B/09 & CO 47/B/09 Page 5 of 16 such high income solely on the efforts of these trustees and there is no material other than mire suspicion and surmise in the possession of the AO for holding the claim of remuneration is excessive and unreasonable. It is a fact that the remuneration received was disclosed in the respective individual return of income for the AY 06-
07..................................The said remuneration was disclosed in their returns of income. Sunit Gupta paid tax of Rs.4290611/- and Mrs. Simi Gupta paid tax of Rs.2750960/- accordingly. The returns were accepted by the ACIT, C 10(1) and this fact has been acknowledged by the AO in his remand report. The AO has not brought any material on record to show that the remuneration paid was bogus. He has not come to any logical conclusion or has any cogent reason to justify the disallowance of the claim of the appellant as excessive and unreasonable as per provision of section 40 A(2)(b). In view of this, I do not agree with the view of the AO. If the action of the AO is to be confirmed the same will amount to double taxation in the hands of the appellant...................."
7. Disillusioned with the stand of the Ld. CIT(A), the Revenue has come up with the present appeal.
7.1. The Ld. D R had stoutly defended the action of the AO in disallowing the remuneration paid to the trustees and also justified in invoking the provisions of section 40A(2)(b) of the Act, but, at the same time, she was not impressed upon the stand of the CIT(A) in reversing the addition made by the AO on this score. The submissions of the Ld. D R are summarized as under:
(i) the original trust deed was executed by Mrs.W.M.Barclay on 16.10.83 and D.N.Gupta and Sunit Gupta were appointed as the trustees who also formed the Board of trustees;
- in the Supplementary deed executed on 1.12.83, D.N.Gupta and Sunit Gupta were the trustees who constituted the members of the Board of trustees;
- the third deed which was executed on 1.12.86 was only a deed of assignment wherein one the beneficiaries - Mrs. Asha Gupta w/o D.N.Gupta assigned 10% out of 20% of her beneficial interest to Mrs. Simi Narula - known as Simi Gupta for a consideration of Rs.1 lakh;
ITA No.703/B/09
& CO 47/B/09 Page 6 of 16
- In the P&L account, remuneration of Rs.1.69 crores was debited out of which Simi Gupta and Sunil Gupta were paid remuneration of rs.67.91 lakhs and Rs.1.01 crores respectively and the balance of Rs.82.51 lakhs were apportioned among the beneficiaries which had not been shown in any of the statement of account filed by the assessee;
- The said remuneration was paid as per Resolution passed on 20.8.04
- unsigned true copy of resolution was furnished;
- The remuneration was paid as per clause 6(s) of the Indenture of Trust deed dt.16.10.83 which reads:
"Clause 6(s): the member of Board of trustees shall be entitled to such remuneration for services rendered to the Trust as the Board may deem fit from time to time and such remuneration shall be treated as expenditure in determining the profit or losses."
- thus, the Board of trustees alone were entitled to receive remuneration, namely, D.N.Gupta and Sunit Gupta and NOT Mrs. Simi Gupta who was only an assignee of the beneficiary;
- payment of the remuneration to an assignee of the beneficiary was beyond the powers of the Board of trustees;
- though the remuneration of Rs.1.69 crores was debited to P & L account for the period relevant to the AY 2005-06, there was loss to the revenue in not filing the ROI and consequential payment of tax;
- out of total profits of Rs.2.52 crores, Rs.1.01 crore was paid as remuneration to Sunit Gupta and Rs.67.921 lakhs to an assignee of the beneficiary - Smt. Simi Gupta who was not a trustee. Thus, the salary paid works out to 67.29% of the profits of trust wherein the provisions of s.40A(2)(b) of the Act are hit, as the trustee (Sunit Gupta) is son of another trustee and Smt. Simi Gupta was the daughter-in-law of D.N.Gupta; &
- the assessee trust has to prove that the payment made was not excessive or unreasonable which it had failed to do so. 7.2. On the other hand, the Ld. A R vehemently reiterated more or less what has been contented before the first appellate authority. In furtherance, the submissions made by him are summarized as under:
(i) remuneration was paid to the trustees of the trust for the first time during the existence of the trust considering the services rendered by the said trustees in the development of the business of the trust and the said remuneration to the trustees of the appellant trust was also permissible in terms of clause 6(s) of the trust deed; ITA No.703/B/09
& CO 47/B/09 Page 7 of 16
(ii) the AO considered the remuneration paid to the trustees as excessive and unreasonable in terms of s.40A(2)(b) of the Act and restricted the remuneration payable to Sunit Gupta and Mrs.Simi Gupta at Rs.12 lakhs and Rs.6 lakhs respectively;
(iii) the Board of trustees of the assessee trust had resolved to pay the remuneration to the trustees for the reason that they had rendered exceptional service in the development of the business of the trust over the years and substantial profits were achieved by the assessee trust due to the efforts of these trustees
- considering these facts, the Board of trustees took a business decision to pay remuneration to the trustees of the assessee trust for the year under appeal and had passed resolution authorizing the said payment;
- the remuneration to the trustees for the first time does not mean that the remuneration paid was excessive or unreasonable. The reasonability of the expenses must be tested, considering the businessmen yardsticks and view points and there cannot be a subjective opinion of the AO in this regard;
- with regard to the observation that the resolution was passed by one of the trustees, in fact the Board of Trustees consisted of various trustees and they had passed the resolution in the meeting of the Board and there can be no doubt in this regard;
- the accounts of assessee trust were accepted and adopted by the Board of Trustees and, therefore, the payment of remuneration was also accepted being in accordance with the Board's resolutions and the trust deed;
- furnishing of the unsigned extracts of the resolutions passed by the Board of Trustees were due to oversight;
- the AO had allowed the remuneration of Rs.18 lakhs and there can be no doubt about the allowability of the remuneration;
- the trustees had, in fact, filed their returns for the AY 2006-07 and had shown the receipt of the remuneration and paid taxes at the highest rates, thus, there was no loss of revenue in respect of remuneration paid to the trustees;
- the AO's observation that the trustees have paid the taxes for the next AY and that therefore the same cannot be allowed as deduction in the hands of the assessee, it was contested that the trustees had paid the tax on the remuneration received by them in the year in which the same as assessable in accordance with the method of accounting and, therefore, there was no basis for such observation of the AO;
- applicability of the provisions of s.40A(2)(b) of the Act, it was contented that the trustees cannot be considered as relatives within ITA No.703/B/09 & CO 47/B/09 Page 8 of 16 the meaning of sub-clause (b) and therefore the provisions of s.40A(2)(b) of the Act were not attracted;
- with regard to applicability of s.40A(2)(b) of the Act, the AO must prove 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 he business or profession of he 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. However, no efforts were made by the AO in this direction;
- How the AO considered Rs.18 lakhs could be reasonable as the market value of the services rendered by the trustees?
- Neither the AO had considered the nature of services rendered by the trustees nor made reference to any comparative case for arriving at such a conclusion;
- The trustees have offered the remuneration to tax in their hands and, thus no avoidance of tax by payments of the remuneration to the trustees and in fact the remuneration had also suffered tax at the highest rates and, thus, no advantage was secured by the assessee trust.
- Reliance is placed on the following case laws:
(a) Voltamp Transformers 129 ITR 105 (Guj); &
(b) Shar-Lee Filtorites Pvt. Ltd. v. ACIT (2008)-TIOL-500-ITAT-
DEL.
8. We have duly considered the rival submissions, perused the relevant records and also the legal precedents on which the ld. AR had placed stout reliance.
8.1. On a close scrutiny of the impugned assessment order, we find that the AO had, in fact, analyzed the issue at length and also after due deliberations had opined that "However, the remuneration that is provided is for services rendered by the trustees." After much deliberations, he had arrived at a conclusion that "Hence, a total sum of Rs.1800000/- ITA No.703/B/09
& CO 47/B/09 Page 9 of 16 towards remuneration for ser vices rendered in respect of both the Trustees is allowed in the current assessment year."
8.2. Further, it is pertinent to mention here that during the course of hearing before this Bench, the Revenue had not objected to the stand of the AO, but, was opposed to the finding of the CIT(A) in directing the AO to delete the entire addition.
8.3. Thus, the focal point before us is confined to "Whether there was a justification for payment of substantial portion of the profits of the business as remuneration to them?
8.4. It was posed by the AO that all the earlier years, no remuneration was provided and suddenly why there was payment of substantial amounts as remuneration? As rightly highlighted by the Ld. A R, the remuneration was paid to Sunit Gupta and Smt. Simi Gupta for the first time during the existence of the trust, considering the services rendered by them in the development of the business of the trust and, in fact, the AO had allowed the remuneration paid, of course, restricting the same to Rs.18 lakhs. The Board of trustees must have resolved to pay a higher remuneration to Sunit Gupta and Mrs. Simi Gupta to reward them suitably for the services rendered in the development of the business of the assessee trust over the years.
ITA No.703/B/09
& CO 47/B/09 Page 10 of 16 8.5. On an identical issue, the Hon'ble highest judiciary of the land in the case of S.A. Builders v. CIT (A) And Another reported in 288 ITR 1 had agreed with the view taken by the Delhi H.C reported in 254 ITR 377 that "the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income-tax authorities must put themselves in the shoes of the assessee how a prudent businessman would act. The authorities must not look at the matter from their own view point, but, that of a prudent businessman......."
With due respects, we concur with the ruling of the Hon'ble Supreme Court that the Board of Directors of a Company or a trust, as the case may be, are the best judges to gauge and decide how much is reasonable expenditure to be incurred having regard to the circumstances of the case and that the Revenue, in our considered view, cannot sit on the judgment on it.
8.6. With regard to the payment of remuneration of such a proportion, according to the AO, is violative of the provisions of s.40(A)(2)(b) of the Act. However, the Ld.CIT (A) had taken an opposite view that of the AO by drawing strength from various judicial pronouncements, notably, the jurisdictional Hon'ble High Court in the case of DCIT v. Microtex Separators Ltd reported in 293 ITR 451, wherein, the Hon'ble Court, after deliberating the issue at length, has ruled that - ITA No.703/B/09
& CO 47/B/09 Page 11 of 16 ".............. So long as there is no intention to evade tax and so long as the commission is not shocking, the said commission has to be accepted particularly in the light of the wordings of section 40A(2) of the Act. It is not the quantum alone that governs in such cases. Fair market value of the goods, services, legitimate needs of the business or profession of the assessee, would be the guiding factor in terms of section 40A(2) of the Act. In the case on hand, though the Assessing Officer has chosen to give 5 per cent., the Commissioner himself has chosen to increase the same to 6 per cent and only 4 per cent is disallowed. Even that 4 per cent is not absolute and it is after deductions in terms of the agreement. Taking into consideration the long standing relationship and also taking into consideration the reputation of the brand and the agent and also taking into consideration that there is no intention to avoid tax, the Tribunal rightly in our view has chosen to accept the case of the assessee with regard to 4 per cent commission. We, therefore, do not find any unreasonableness in the given circumstances. In fact this Bench recently has chosen to consider some what a similar case in Recon Machine Tools P. Ltd. v. CIT [2006] (Karn); [2006] ILR 2006 Karn 2459 and thereafter this court has chosen to hold that reduction from 5 per cent to 2 per cent is an arbitrary reduction. An overall view of the matter would compel us to confirm the order of the Tribunal in the given circumstances".
8.7. In an overall consideration of the facts and circumstances of the issue as analyzed above and also drawing strength from the judicial precedents cited supra, we are of the firm view that the Ld. CIT (A) is justified in his endeavour in reversing the finding of the AO on this score. It is ordered accordingly. .
II. Let us now deal with the grievance of the assessee raised in its Cross Objections:
9. During the year under dispute, the Managing Trustee - Sunit Gupta - had visited several countries, according to the assessee, for soliciting business and, accordingly, travel expenses to the tune of Rs.13.88 lakhs were claimed. However, the AO, after scrutinizing some of the copies of visas which did not specify the trips for 'business', was of the view that since the business consists of export of textiles, garments, the ITA No.703/B/09 & CO 47/B/09 Page 12 of 16 possibility of combining the business with pleasure trips cannot be ruled out. Accordingly, he had restricted the expenditure to the extent of 50% of total claim.
9.1. When the assessee trust took up the issue with the Ld.CIT (A) for relief, the CIT(A), drawing strength from judicial precedents - as set out in his impugned order - concurred with the view of the AO on this count.
10. Aggrieved, the assessee trust has come up with the present appeal by way of a cross objection. The contention of the assessee was that it carries on the business of export of furnishings and most of the customers were in abroad. For the purposes of meeting the business obligations of the assessee and for the promotion of the business of exports, the Managing trustee had to travel world-wide and incur expenses on such travels. However, the AO had resorted to restrict the expenditure to 50% on a sole ground that it was personal in nature because some of the visas issued were visitor's visa and not business visas. It was contended by the assessee that the expenses were incurred wholly and exclusively for the purposes of business and that the AO had not cited a single occasion [with proof] wherein the Managing trustee had clubbed his business tour with pleasure trip and, therefore, pleaded that the same is to be allowed in full.
ITA No.703/B/09
& CO 47/B/09 Page 13 of 16 10.1. The Ld. D R present was of the view that the authorities below were justified in restricting the expenditure which requires no interference and, hence, pleaded for sustaining the same.
11. We have duly considered the rival submissions and also perused the relevant records. It is a fact that the assessee was in the business of export of furnishings and most of its customers were in foreign countries. To explore the possibilities and to spread its business of exports in various countries, its Managing Trustee had to undertake business trips in those countries, while doing so, he must have traveled under business visa, tourist visa and so on so forth depending upon the immigration restrictions which were being insisted upon by different countries. This cannot be a valid reason to disallow the expenses as claimed. As a matter of fact, the AO had not brought on record any documentary evidence to contradict the assessee's claim. The AO's reasoning that "there is a possibility that the business is combined with pleasure trips" which clearly exhibits that it was merely a presumption that the Managing Trustee could have undertaken such foreign jaunts combined with pleasure trips. A presumption, in our considered view, cannot be a well founded reasoning to restrict the expenditure claimed by the assessee. 11.1. We have also duly considered the case laws on which the CIT(A) had placed reliance to justify the stand of the AO. In brief, we shall analyze the same:
ITA No.703/B/09
& CO 47/B/09 Page 14 of 16
(i) CIT v. Dr.B.V.Raman (1966) 59 ITR 20 (Mys): It was ruled by the Hon'ble Mysore High Court that no deduction is however, allowable when the purpose of the tour is not business; incidental advance is of no use.
With respects, we would like to point out that in that case the purpose of tour was not for business and, thus, the Hon'ble Court ruled that no deduction was allowable. However, in the case on hand, the Mg.Trustee had under taken foreign tours for the sole purpose of business only. The AO had not brought on record any proof to contradict it. Hence, in our view, this ruling has of no help to the Revenue.
(ii) In Tirupati Trading Co. v. CIT (2000) 242 ITR 13 (Cal) - no details were furnished before the ITO as to whom the partners of the firm had contacted abroad for the purpose of sales promotion, but, evidence on record showed that tour was for business purposes as per the permissions of RBI - matter remanded In the case on hand, the foreign travels undertaken by the Mg. trustee was not in dispute. The AO had not contradicted the assessee's assertion with any proof. This ruling doesn't fit to the issue before us.
(iii) Shahibag Entrepreneurs (P) Ltd. v. CIT (1994) 210 ITR 998 (Guj) the issue before the Gujarat H.C was expenditure claimed on foreign tour of directors in connection with setting up new projects abroad in collaboration with foreigners which ventures were not part and parcel of existing units, was entitled to deduction.
The issue before us is on the different footing and not applicable to the facts of the case cited supra since the Mg.Trustee of the assessee had gone abroad with a possibility of exploring the existing business fortunes and nothing else.
ITA No.703/B/09
& CO 47/B/09 Page 15 of 16
(iv) Maclean (Inspector of Taxes) v. Trembath (1957) 31 ITR 364 (CD);
(v) CIT v. Tiam House Ltd. (2000) 243 ITR 695 (Mad); &
(vi) CIT v. Bhor Industries (P) Ltd (2006) 202 CTR 549 (Bom) In the above cited cases, the issues were either the wife of the Director accompanied him on a foreign trip or the expenditure claimed by the assessee on the medical treatment, travel and stay of the employee, his wife etc. These case laws quoted by the Ld. CIT(A) have no relevance to the issue before us and, thus, not applicable.
11.2. Neither the AO nor the first appellate authority had established with any documentary evidence to justify that the claim of the assessee was excessive or not connected with the business expediency. In such a situation, we are not inclined to toe with their findings. Accordingly, we are of the firm view that the authorities below were not justified in disallowing 50% of expenditure claimed on foreign travel. It is ordered accordingly.
12. The other grievance of the assessee is charging of interest u/s 234B and 234D of the Act. Charging of interest u/s 234B of the Act is mandatory and consequential in nature and, thus, is dismissed as not maintainable.
With regard to charging of interest u/s 234D of the Act, levy of interest u/s 234D is a purely legal ground and is chargeable following the order of the ITA No.703/B/09 & CO 47/B/09 Page 16 of 16 Special Bench in ITO v. Ekta Promoters P. Ltd. (2008) 113 ITD 719-ITAT Delhi E Special Bench. It is ordered accordingly.
13. In the result,
(i) the Revenue's appeal is dismissed.
(ii) the assessee's cross objection (appeal) is partly allowed.
Pronounced in the open court on this 26th day of February, 2010.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 26th February, 2010.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1)
By order
Assistant Registrar
ITAT, Bangalore.