Delhi High Court
Sigma Corporation India Ltd. vs Dcit on 15 February, 2017
Author: S. Ravindra Bhat
Bench: S. Ravindra Bhat, Najmi Waziri
$~53
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgement delivered on:15th February, 2017
+ ITA 795/2016 & CM No.41578/2016
SIGMA CORPORATION INDIA LTD. ..... Appellant
Through: Mr. Aseem Chawla and Mr. Manu K.
Giri, Advocates.
Versus
DCIT ..... Respondent
Through: Mr. Dileep Shivpuri, Mr. Sanjay
Kumar and Mr. Vikrant A.
Maheshwari, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
S. RAVINDRA BHAT (Oral):-
CM No.41578/2016
1. For the reasons stated in the application, the delay of 11 days in re-
filing the appeal is condoned. The appeal is taken on record.
2. The application stands disposed off.
ITA 795/2016
3. The question of law which arises for consideration is as follows:-
"Did the ITAT fall into error in restoring the disallowance of
50% of `48 lakhs paid to the appellant/assessee employee for
the relevant assessment year validly under Section 40A(2)(b)
of the Income Tax Act, 1961?"
ITA 795/2016 Page 1 of 8
4. The Assessing Officer (AO) had, for Assessment Year 2009-10,
disallowed 50% of the payments made on account of professional
remuneration to Mr. Preetpal Singh from the assessee's claims. The AO had
required details of the remuneration and the nature of services provided by
Mr. Preetpal Singh. The AO felt that the assessee had not adequately
addressed the concerns with respect to the time spent for its work, having
regard to the qualifications and expertise of the said expert, and therefore,
disallowed 50% of the claimed expenditure i.e. `48 lakhs. The
Commissioner of Income Tax (Appeals) [CIT(A)] after analysing Section
40A(2) of the Income Tax Act, 1961 (hereinafter to be referred as 'the Act')
discussed the submissions of the parties and then on the basis of the analysis
of previous Tribunals' rulings as well as that of the High Courts, concluded
that in the circumstances it could not be said that the expenditure was
excessive. The CIT (A)'s reasoning is as follows:-
"Ground No.I :-is in respect of disallowance of 50% of
remuneration amounting to Rs.24 lakhs u/s 40A(2)(b). The
Payment was made to Sh Preetpal Singh a related party. Sh
Preetpal Singh was a Bachelor of Engineering from USA and
MBA in Marketing and Finance.
Before discussing the matter further, I shall quote Section
40A(2)(a):-''Where the assessee incurs any expenditure in
respect of which payment has been or is to be made to any
person referred to in clause (b) of this sub-section, and the
Income-tax Officer is of 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
therefrom, so much of the expenditure as is so considered by
him to be excessive or unreasonable shall not be allowed as a
ITA 795/2016 Page 2 of 8
deduction."
In view therefore the AO should have been of the view
that the expenditure was excessive and unreasonable having
regard to the Fair Market Value of the goods services or
facilities for which the payments was made or legitimate needs
of the business or profession of the appellant or the benefit
derived. However nowhere has the AO given any such finding.
The AO has not made any attempt to find out the salary which
would have been payable to a person with similar
qualifications. The AO has nowhere discussed the legitimate
needs of the business and profession and why the payment was
not justified.
On the other hand the appellant on being asked to justify
salary of four lakhs per months to Sh Preetpal Singh has
furnished copy of a letter from Swastik Outsourcing which
states:-
'We have been in touch with at least eight organization
for discussing your CV as advised by you. Please note general
consensus is that based on your qualifications and experience
we can get you an yearly package of around Rs. 48 to Rs. 60
lakhs alongwith perks.
If you agree on this package please let us know to enable
us to discuss your credentials with top management of few
companies. Please note though your base office may be NCR,
Delhi but your work area may extend to USA. Europe and
certain parts of China but not to Russia, Australia and Middle
East as agreed earlier."
The appellant has also given reason to justify the benefit
to the business from employing Sh. Preetpal Singh. The
appellant states that Sh Preetpal Singh was a highly qualified
person and was engaged to establish the software process
infrastructure and boost the market reach of the company. The
appellant has quoted various case laws which support the
ITA 795/2016 Page 3 of 8
contentions of the appellant.
In my view the salary paid to Sh Preetpal Singh appears
to be in line with the market salary paid to a person of his
qualification. The salary of Rs. 4 lakhs to Sh.Preetpal Singh
appears reasonable. In view of his qualification which are an
engineering degree and MBA degree. The letter from the
placement agency reaffirms this aspect. The addition of Rs 24
lakhs is therefore deleted."
5. In the appeal by the Revenue, the ITAT took note of the Tribunal's
decision in Deputy Commissioner of Income Tax Vs. Spark Hotels (P.)
Ltd. [2012] 22 taxmann.com 257 (Delhi) and concluded that disallowance
to the tune of 50% made by the AO in respect of `48 lakhs paid to Mr.
Preetpal Singh was warranted and based on a rational principal.
6. Learned counsel for the assessee relies upon the ruling of this Court in
Commissioner of Income Tax Vs. Modi Revlon (P.) Ltd. [2012] 26
taxmann.com133 (Delhi) and the previous decision in Hive
Communication (P.) Ltd. Vs. Commissioner of Income Tax [2011] 26
taxmann.com 287 (Delhi). Learned counsel for the Revenue, on the other
hand, urged that the findings of the ITAT are based upon sound reasons and
that the mere inability of the AO to make any comparison cannot invalidate
the disallowance.
7. Section 40A(2) of the Act reads as follows:-
"40A Expenses or payments not deductible in certain
circumstances.
(1)....................
(2) (a) Where the assessee incurs any expenditure in respect of
which payment has been or is to be made to any person
referred to in clause (b) of this sub-section, and the Assessing
Officer is of opinion that such expenditure is excessive or
ITA 795/2016 Page 4 of 8
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
therefrom, so much of the expenditure as is so considered by
him to be excessive or unreasonable shall not be allowed as a
deduction."
8. In Hive Communication's case (supra), this Court took note of the
CBDT Circular dated 06.07.1968, which clarified what is meant by
"reasonable expenditure" in the context of the AO's discretion under Section
40A. The CBDT had stated that whenever an AO proposes disallowance, he
has to examine the matter in a fair and reasonable manner and what should
be borne in mind is that the provision is intended to check evasion of tax
through excessive or unreasonable payments to relatives and associate
concerns, and should not be so applied as to "cause hardship in bona fide
cases". Hive (supra) also considered the effect of the Allahabad High
Court's decision in Abbas Wazir (P.) Ltd. Vs. Commissioner of Income
Tax [2004] 265 ITR 77 and the Madras High Court's ruling in CIT Vs.
Computer Graphics Ltd. [2006] 285 ITR 84. The Court also relied upon the
Calcutta High Court's ruling in CIT Vs. Edward Keventer (P.) Ld. [1972]
86 ITR 370. In Edward Keventer's case (supra), the Court had stated that
the reasonableness or otherwise of the expenditure should take into account
firstly the legitimate business needs of the assessee or the company,
secondly, benefits derived by or accruing to the company, and that while
doing so, the view point of the company or concern having regard to prudent
business practices, should prevail. This decision was affirmed by the
Supreme Court in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149.
ITA 795/2016 Page 5 of 8
Pertinently, the Calcutta High Court in Edward Kevender (P.) Ltd. (supra)
summarised the position as follows:-
"13..................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 a reasonable and
honest person in business."
9. Likewise in Modi Revlon's case (supra), the Court additionally also
took note of S.A. Builders Vs. Commissioner of Income Tax [2007] 289
ITR 26, where the Supreme Court had said that the Revenue ought not to
place itself in the arm chair of businessman in dealing with such matters.
Modi Revlon (supra) further emphasised that:-
"25. This Court notices that in order to determine whether the
payment is not sustainable, the AO has to first return a finding
that the payment made is excessive, under Section 40-A (2) of
the Income Tax Act. If it is found to be so, then the AO has to
determine what constitutes the fair market value of the services
rendered and disallow the difference between what is claimed
and what is such value determined (as fair market value).
Apart from the fact that no such exercise was undertaken by
the AO, the Court sees that the assessment order went off into
a tangent, in following a method that was clearly inapplicable.
The annual cap of `30 lakh payable to managerial personnel
applied to public limited companies, and not those such as the
assessee. This aspect was noticed by the CIT (A) who set aside
ITA 795/2016 Page 6 of 8
the disallowance. The Tribunal upheld that finding. Such view
(of admissibility of similar consultancy charges) is supported
by several decisions, which have been noticed in the detailed
order of the CIT (A). This Court finds no valid grounds to
interfere with those findings, which are both sound and
reasonable."
10. Having regard to the above position, this Court is of the opinion that
the ITAT in the present case overlooked the materials that were to be taken
into account, i.e. reasonableness of the expenditure having regard to the
prudent business practice from a fair and reasonable point of view. The
AO's order nowhere seeks to benchmark the expertise of Mr. Preetpal Singh
with any other consultant and proceeds on an assumption that he could not
have performed multiple tasks for more than one concern. In this Court's
opinion, such a stereotyped notion can hardly be justified in today's business
world where consultants perform different tasks, not only for one concern
but for several business entities. A common example would be that of an
accountant or a legal professional, who necessarily has to multi task and are
recipients or retainers of payments from many concerns having regard to
their special expertise. Likewise in other fields i.e. journalism, the medical
profession etc. more than one entity may engage or retain a single
professional on the basis of his experience, learning and expertise, unless
there is a deeper scrutiny that involves comparable analysis of like situations
(a highly difficult task), additions made under Section 40A(2) would be
suspect.
11. In the circumstances, this Court is of the opinion that the ITAT's
conclusions were not justified. The impugned order is accordingly set aside.
The CIT (A)'s order is restored. The question of law is answered in favour
ITA 795/2016 Page 7 of 8
of the appellant/assessee and against the Revenue. The appeal is allowed in
the above terms.
S. RAVINDRA BHAT, J.
NAJMI WAZIRI, J. FEBRUARY 15, 2017 sb ITA 795/2016 Page 8 of 8