Income Tax Appellate Tribunal - Ahmedabad
Unity Dychem Pvt.Ltd.,, Baroda vs Department Of Income Tax on 12 February, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C" AHMEDABAD
Before Shri, A. Mohan Alankamony, Accountant Member and
Shri Kul Bharat, Judicial Member
IT A No.1738/ Ahd/2010 &
C.O. No.187/ Ahd/2010
(a/o ITA No. 1738/Ahd/2010)
Assessment Year:2007-08
Asstt. Commissioner of V/s. Unit y Dyechem Pvt. Ltd.,
Income-tax, Circle-3, 3 r d Golana Road, At:
Floor, Aaykar Bhavan Sokhada, Ta: Khambhat,
Race Course Circle, Dist. Anand
Baroda
Unity Dyechem Pvt. Ltd. V/s. ACIT, Circle-3,
Golana Road, Sokhada 3 r d Floor, Aayakar
Tal. Kham bhat, Anand Bhavan, Race Course
[PAN No. AAACU 5068R] Circle, Baroda
अपीलाथȸ /Appellant .. ू×यथȸ/Respondent
आवेदक कȧ ओर से/By Assessee Shri N.C. Amin, AR
राजःव कȧ ओर से/By Revenue Shri D.K. Singh, SR-DR
सुनवाई कȧ तारȣख/Date of Hearing 09-01-2013
घोषणा कȧ तारȣख/Date of Pronouncement 24-01-2013
आदे श/O R D E R
PER Kul Bharat, Judicial Member:-
The Revenue and assessee both have filed appeal and Cross Objection (CO) challenging the order of Commissioner of Income-tax (Appeals)-I, Baroda ('CIT(A)' for short) dated 12-02-2010 pertaining to assessment year (AY) 2007-08.
First we take up Revenue's appeal in ITA No.1738/Ahd/2010.
ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 2
2. The Revenue has raised the following grounds of appeal:-
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in deleting the addition of Rs.24,693/- paid for obtaining ISO certificate. The ld. CIT(A) erred in treating the expenditure as revenue in nature on the ground that the fixed capital of the assessee was not enhanced in any manner, but did not appreciate the fact that the certification is valid for 3 years and the positive image of the assessee's products was created for the smooth conduct of business.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in deleting the addition of Rs.18.00 lacs made on account of disallowance of excess remuneration to directors. The assessee, a capital incentive industry, had failed to justify the increase of almost 89% in the commission expense whereas sales has increased only 34.51% and that as to the role of the directors for the increase of production of the company."
3. Briefly stated facts are that the assessee-company is engaged in the business of manufacturing and trading of dyes and intermediates. The case of assessee was selected for scrutiny assessment and the assessment u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') was framed thereby the Assessing Officer made various disallowances i.e. expenses towards service charges paid for obtaining ISO certificate, claim of interest expenses, disallowance of subsidy amount, disallowance of excess claim of director's remuneration and disallowance of foreign traveling expenses. Against these, assessee filed appeal before Ld. CIT(A) who after considering the submissions of the assessee partly allowed the appeal thereby the expenditure towards certification of ISO was to be deleted and the interest income remuneration to the Directors and expenditure on foreign travel was directed to be deleted.
4. Against this, Revenue has field present appeal before the Tribunal.
5. First ground is with regard to deletion of addition of Rs.24,693/- paid for obtaining of ISO certificate. Ld. SR-DR for the Revenue strongly supported the ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08 ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 3 order of Assessing Officer and submitted that the expenses incurred in obtaining ISO certificate is of capital in nature. On the contrary, Ld. counsel for the assessee submitted that this issue is covered in favour of assessee by the decision of Hon'ble Karnataka High Court rendered in the case of CIT And Another v. Infosys Technologies Ltd. (No.1) (2012) 349 ITR 582 (Karn).
6. We have heard the rival submissions and perused the materials available on record and the case law cited by Ld. counsel for the assessee. We find that this issue is squarely covered in favour of assessee by the decision of Hon'ble Karnataka High Court rendered in the case of Infosys Technologies Ltd.(No.1) (supra) and in the light of decision rendered in the case of ACIT v. Tirupati Micro Tech (P) Ltd. 111 TTJ 149 we do not find any infirmity into the order passed by Ld. CIT(A). Hence, same is hereby upheld. This ground of Revenue's appeal is dismissed.
7. Next issue is with regard to disallowance of excess remuneration paid to Directors of Rs.18 lakhs. Ld. SR-DR for the Revenue submitted that there is sudden huge increase into the remuneration of the Directors without any justification. He submitted that assessee had suddenly hiked the remuneration of Directors from Rs.3 lakh to Rs.9 lakh. He submitted that Assessing Officer has rightly rejected the submissions of the assessee that the increase in Director's remuneration was due in turnover of 3.60 to Rs.4.36 crores. He submitted that it is clear finding by the Assessing Officer that the assessee being the capital intensive industry Director could do wholly. He further submitted that chemist was not given any hike. Under these circumstances, the action of the AO was justified. Ld. DR submitted that the burden of proof is on the assessee to produce the evidence in support of necessity to pay remuneration in excess. He submitted that assessee has failed to furnish the evidence demonstrating the reason for such excessive increase in ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08 ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 4 remuneration. On the contrary, Ld. counsel for the assessee submitted that there is no attempt by the Assessing Officer to demonstrate that expenditure is excessive or unreasonable having regard to the fair market value to the services rendered by the Directors. He placed reliance on the CBDT Circular NO. 6-C dated 06-07-1968. In support of the contention that no disallowance is to be made in respect of payment to sister concern where there is no attempt to evade tax and AO not being able to show as to how 0.5% higher commission paid by assessee concern which was also being assessed at higher rate and resulted in tax evasion. He also placed reliance on the judgment of Hon'ble Bombay High Court rendered in the case of CIT v. V.S. Depo &Co. Pvt. Ltd. (2010) 37(1) ITCL 43 (Bom). In support of the contention that mere making of payment to a relative will not automatically call for disallowance u/s 40A(2)(b) as the Assessing Officer has to prove that the payment so made was excessive o unreasonable having regard to the fair market value for the goods, services or such facilities for which the payment is made; or such expenditure is excessive or unreasonable having regard to the legitimate needs of the business or profession of the assessee for which the payment is made; and such expenditure is excessive or unreasonable having regard to the benefit derived by or accruing to him therefrom for which the payment is made. Ld. counsel for the assessee submitted that Directors are highly technical person in touch with foreign technician for development of business and they are engaged in the highly specialized business for manufacturing of dyes and pigments. Ld. counsel for the assessee submitted that the AO failed to appreciate that Directors are highly technical and they have been looking after rather most of the affairs of the assessee-company as except the chemist and no employee has been appointed
8. We have heard the rival submissions and perused the materials available on record. We find that the objection of Assessing Officer is that assessee's business is capital intensive where the Directors could do nothing ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08 ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 5 increase production. The AO also was of the view that chemist who was looking after the production was not given any hike in salary. The AO has observed that one of the Director is 1982 born son of other Director. He submitted that had the Director being not related party he would not given the hike. We find that before Ld. CIT(A) it was submitted by assessee that Directors of the assessee-company are performing following duties:-
"1) Borrowing finance from relatives, friends, bank, institution with their personal capacity in the market
2) The share capital was only Rs.25 lacs and business of the appellant is running crores of rupees. The most of the technical and other work is being attended by the directors personally. Only one chemist was engaged since and paid salary of Rs.5,000 p.m. clearing and forwarding work is done by directors personally, who is working in laboratory and other misc. work and for starting plant, mfg. of goods, various processors, batches, supervision of plant, quality control, checking of damage of raw materials, finished goods etc.
3) No manager, salesman, labour officer and only three staff members and all the works are mostly attended by full time directors who are rendering 12 hours service as they are residing in the vicinity of the company.
4) Packing, forwarding, transport service, advertisement, pollution control work, sales, after sales service, collection work, insurance of goods, plant, machinery, maintenance of plant and machinery etc., is attended by the directors.
5) The Directors are not getting any types of perks like accommodation, HRA, pension contribution, superannuation contribution, LTC club fees, vacation allowance etc., Except director remuneration nothing sort of any amount of perks is granted by the company to the directors."
We find that Ld. CIT(A) has accepted the explanation of the assessee without making any attempt to consider the objection of the Assessing Officer. In this view of the matter this issue is remitted back to the file of Ld. CIT(A) to decide ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08 ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 6 afresh and pass a speaking order considering all the objections of the Assessing Officer. This ground of Revenue's appeal is allowed for statistical purposes as indicated above.
9. In the result, Revenue's appeal is partly allowed.
Coming to assessee's CO.
10. The assessee has raised the following grounds:-
"1. That the grounds raised in Sr. No.1 is decided by the Learned CIT(A) Baroda after considering the decision of Hon. ITAT Jodhpur Bench and the Hon/. ITAT has relied on the decision of Hon. Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT reported in 124 IR Page-1 and therefore this ground raised by the department deserves o be rejected.
2. That the appellant has submitted its written submissions in detail and at length, from time to time and considering it in proper perspective the learned CIT(A) has allowed this ground which is wholly justified considering facts and evidences lying on record the ground raised by the department requires to be dismissed.
3. That the ground raised by the Department is somewhat different than the facts and materials on which the deduction was allowed by the learned CIT(A) and therefore the irrelevant ground raise by the department deserves to be rejected."
11. At the outset Ld. counsel for the assessee submitted that CO has been filed to support the order of Ld. CIT(A). Since we have partly allowed the appeal of Revenue for statistical purposes and remitted one issue relating to the remuneration paid to the Directors to the file of Ld. CIT(A), the CO is also accordingly has now become infructuous and same is dismissed as infructuous.
ITA No.1738/Ahd/2010 & CO 187/Ahd/2010 A.Y 07-08ACIT Cir-3 A'bd v. Unity Dyechem Pvt. Ltd. Page 7
12. In the result, assessee's CO is dismissed.
13. In combined result, Revenue's appeal is partly allowed for statistical purposes and that of assessee's CO is dismissed as infructuous.
Order pronounced in Open Court on the date mentioned hereinabove at caption page.
Sd/- Sd/- (A.Mohan Alankamony) (Kul Bharat) (Accountant Member) (Judicial Member) Ahmedabad, *Dkp Ǒदनांकः- 24/01/2013 अहमदाबाद ।
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
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