TMI Blog2015 (4) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord that how and in what manner salary paid to the directors was excessive or not comparable with the market rates. In the instant case, the Assessing Officer estimated the salary on the basis of the salary paid for the assessment year 2006-07 and increased the salary for the year under consideration to 50 per cent. of the preceding year. However, he had not considered this vital fact that new facilities were provided by the assessee-company in the year under consideration and the directors were required to devote more time in comparison to the earlier years. In our opinion, the estimate made by the Assessing Officer was without any basis. Similarly, the learned Commissioner of Income-tax (Appeals) without appreciating the facts of the case in right perspective considered the salary of ₹ 10 lakhs and ₹ 8 lakhs to Dr.Sunil Chugh and Dr. Kalpana Chugh respectively as reasonable but he had not assigned any basis for the same. In the instant case, it is noticed that Dr. Sheel Acharya who was visiting the assessee-company only for four hours had been paid a sum of ₹ 8.81 lakhs and if the working of the directors is to be considered for at least 12 hrs a day the remun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assessing Officer to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. - ITA Nos.26 & 27/Jodh/2012, ITA Nos.28 & 29/Jodh/2012 - - - Dated:- 5-4-2013 - SHRI HARI OM MARATHA AND SHRI N.K. SAINI, JJ. For the Appellant : Shri G.K. Gargieya Shri Dinesh Singhal For the Respondent : Shri G.R. Kokani ORDER These cross-appeals by the assessee and the Department are directed against the common order dated October 12, 2011 of the learned Commissioner of Income-tax (Appeals), Central, Jaipur for the assessment years 2007-08 and 2008-09. Since the issues involved are common and the appeals were heard together, so these are being disposed of by this consolidated order for the sake of convenience. 2.1. First, we will deal with the assessee's appeal in I. T. A. No. 26/Jodh/2012 and the Revenue's appeal in I. T. A. No. 28/Jodh/2012. Following grounds have been raised in these appeals. I. T. A. No. 26/Jodh/2012 (assessee) 1. The various additions and disallowances made in the order under section 143(3)/250 dated No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessee to explain the increase in the salary expenses. In response to that assessee vide letter dated November 24, 2009 submitted as under : You had pointed out that during the year under review the salary has gone up from ₹ 29,72,146 to ₹ 73,97,357. In this regard we would like to submit that during the year salary includes ₹ 18,00,000 paid to Dr. Kalpana Chugh. Last year her salary was debited to the director's remuneration. During the year 2005-06, the assessee-company has started heart care unit, dialysis room, new operation theatre, heart lung machine, laser camera for MRI machine and also intensive care unit. New staff was recruited for the same in the year 2005-06. During the year 2005-06, salary for one-two months was incurred but in 2006-07 expenses for the whole year was incurred. There was increase in various functions in different field therefore company has recruited new staff. Therefore, there is increase in salary expenses. Further in the year 2005-06 investigation fees paid to doctors was debited to investigation charges but during the year 2006-07 the most of the doctors were on monthly salary basis and is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under - Dr. Sunil Chugh is MBBS and MD. He completed his M.D. in the year 1983 joined Government services in the year 1984. In the year 1994, he joined Kalpana Nursing Home P. Ltd. Dr. Sunil Chugh was appointed as the director of the company with effect from 1994. Dr.Chugh is a physician and looks after the day-to-day administra tion, financial accounts, banking, purchase of equipment, medicines, etc. and is experienced in this line for last 24 years and has devoted whole time in managing and administrating the business of the assessee-company. Dr. Kalpana Chugh is MBBS and M.D. She completed M.D. in the year 1985 started a private clinic of her own. In the year 1994, she joined Kalpana Nursing Home P. Ltd. Dr. Kalpana Chugh was appointed as the director of the company with effect from 1994. Dr.Chugh is gynaecologist and looks after the housekeeping, general administration of the hospital. M/s. Kalpana Nursing Home is a multi-speciality Hospital. The Gynae Department is being looked after by Dr. Kalpana Chugh only. There is no other doctor to assist her. There are no full-time doctors in the hospital and most of the doctors are on call basis or case to case basis. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t during the year under review, the company has paid a sum of ₹ 6.97 lakhs to Dr. Sheel Acharya who visits the company only for 4 hours in a day. Due to increase in the profits, the turnover and good performance of the company over the period the directors need to be rewarded. Since the company had sufficient profits, the remuneration was increased during the year. 4.3. The Assessing Officer however, did not find merit in the submissions of the assessee by observing as under : 1. The services of Dr. Sunil Chugh and Dr. Kalpana Chugh (wife of the director) to the assessee-company are covered under section 40A(2)(b) of the Income-tax Act, 1961. Thus considering the relation with the assessee-company, these are subject to scrutiny. Section 40A(2)(b) reads as under : '40A. Expenses or payments not deductible in certain circum stances.- (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 the opin ion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to justify that the salary paid to the wife of the director was not unreasonable having regard to the legitimate business needs and that the benefit derived by them was in consequence of services rendered by Dr. Kalpana Chugh. The company should have been shown to have received substantial benefits against the payment of the salary in dispute. (6) There was no special technical or other proficiency which was acquired by Dr. Kalpana Chugh during the financial year 2005-06 and 2006-07 which can justify the unusual increase in the salary. (7) It is relevant to mention that statements of Dr. Kalpana Chugh was recorded under section 131 on November 24, 2009. In her statement, she has categorically denied that she has acquired any special degree or skill during the financial years 2005-06 and 2006-07, the statements shows that there was no change in the responsibilities of Dr. Kalpana Chugh. There was no addition to the duties and responsibilities of the directors during the accounting periods. On the contrary, the services which she was provided as director of the company during the financial year 2005-06, were also discontinued during the financial year 2006-07. Thus there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier remuneration of Shri Sunil Chugh of ₹ 2,61,000, the same appears to be reasonable and the assessee cannot justify the sharp increase in salary/ remuneration of the director and director's wife from ₹ 2.4 lakhs to ₹ 18 lakhs. To conclude, the assessee-company is not in a position to justify the unusual increase in the salary of the director Shri Sunil Chugh and direc tor's wife Dr. Kalpana Chugh. However, considering the totality of the facts and the submissions of the assessee, the increase in the salary is restricted to 50 per cent. of the salary/ remuneration paid in the preceding year and remaining is disallowed. Detailed working of which is as under : Particulars Financial year 2006-07 Salary 2005-06 Salary after 50% increase Salary Disallowances Rs. Rs. Rs. Rs. Dr. Sunil Chugh 2,61,000 3,91,500 18,00,000 14,08,500 Dr. Kalpana Chugh 2,40,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emium for Keyman Insurance Policy was paid. It was contended that in any case Dr. Sunil Chugh and Dr. Kalpana Chugh had also paid tax at 33 per cent. and tax rate in the hands of the assessee-company was also the same, thereby the payment of salary being revenue neutral, disallowance may kindly be deleted. 4.7. The learned Commissioner of Income-tax (Appeals) after considering the submissions of the assessee observed that in the assessment years 2004-05 to 2006-07, Dr. Sunil Chug was getting salary amounting to ₹ 2.61 lakhs per annum and Dr. Kalpana Chugh was getting salary ₹ 1.80 lakhs per annum in the assessment year 2004-05 and thereafter ₹ 2.40 lakhs in next two years. He further observed that the salary payment had been suddenly increased to the phenomenal amount of ₹ 18 lakhs each in the assessment year 2007-08 and in the assessment year 2008-09, there was further increase to ₹ 30 lakhs each in the assessment year 2008-09 and it was quite clear that both directors had not acquired any new professional degree to justify the sharp increase in the salary and their working hours had also not increased which were earlier there in the period relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chine and intensive care unit, was of the view that it would be requiring more responsibility and more supervision by Dr. Sunil Chugh and Dr. Kalpana Chugh thereby increasing the workload as compared to earlier years. He therefore, by considering the nature of services and time devoted by the directors and market conditions considered that salary of ₹ 12 lakhs and ₹ 10 lakhs respectively for Dr. Sunil Chugh and Dr. Kalpana Chugh as reasonable in the financial year 2007-08 relevant to the assessment year 2008-09, whereas salary of ₹ 10 lakhs and ₹ 8 lakhs respectively as reasonable in the financial year 2006-07 relevant to the assessment year 2007-08. Accordingly disallowance to the extent of ₹ 18 lakhs was confirmed and balance disallowance of ₹ 10,48,500 was deleted. 4.8. Now both parties are in appeal. 4.9. Learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee-company is one of the most reputed nursing home and super speciality diagnosis and treatment centre situated in the heart of city since 1994. It was further stated that Dr. Sunil Chugh is M.D. of 1984 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the maximum marginal rate of taxation, so it cannot be said that it was a case of diversion of the assessee's profit in favour of the directors. Reliance was placed on the following case laws. 1. CIT v. V. S. Dempo and Co. P. Ltd. [2011] 336 ITR 209 (Bom) ; 2. CIT v. Indo Saudi Services (Travel) P. Ltd. [2009] 310 ITR 306 (Bom) ; 3. Abbas Wazir P. Ltd. v. CIT [2004] 265 ITR 77 (All) ; 4. CIT v. Walchand and Co. P. Ltd. [1967] 65 ITR 381 (SC) ; 5. Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC) ; 6. S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) ; 7. CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi) ; and 8. CIT v. Bharti Televenture Ltd. [2011] 331 ITR 502 (Delhi). 4.10. In his rival submissions, the Departmental representative strongly supported the order of the Assessing Officer and further submitted that the learned Commissioner of Income-tax (Appeals) was not justified in reducing the addition made by the Assessing Officer. It was also submitted that there was decrease in the profit of the assessee if keyman insurance, dividend and the profit on the asset is reduced from the profit shown by the assessee in the books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the year under consideration to 50 per cent. of the preceding year. However, he had not considered this vital fact that new facilities were provided by the assessee-company in the year under consideration and the directors were required to devote more time in comparison to the earlier years. In our opinion, the estimate made by the Assessing Officer was without any basis. Similarly, the learned Commissioner of Income-tax (Appeals) without appreciating the facts of the case in right perspective considered the salary of ₹ 10 lakhs and ₹ 8 lakhs to Dr.Sunil Chugh and Dr. Kalpana Chugh respectively as reasonable but he had not assigned any basis for the same. In the instant case, it is noticed that Dr. Sheel Acharya who was visiting the assessee-company only for four hours had been paid a sum of ₹ 8.81 lakhs and if the working of the directors is to be considered for at least 12 hrs a day the remuneration on that basis would have been at ₹ 26.43 lakhs (Rs. 8.81 lakhs x 3) and even if this fact is to be considered that Dr. Sheel Acharya was having a super specialised degree while the directors were having specialised degrees then it cannot be said that the sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th . . . The assessee had invested ₹ 35 lakhs in Birla Sunlife Tax relief 96 fund for capital appreciation in the year 2007. There is a lock in period of 3 years. The said units cannot be redeemed before period of 3 years. The same was redeemed in the year 2010 and loss on sale of mutual fund was considered in the total income as capital loss. As the same was considered as part of the total income, the provision of section 14A does not apply to the same. During the year under review the assessee had invested a sum of ₹ 145 lakhs in mutual fund. Out of said, mutual fund amounting to ₹ 84.73 lakhs was redeemed during the year and the same was considered in the total income. The assessee has received dividend income on the same. The balance long-term funds ₹ 67.27 lakhs was shown as investment and whatever capital gain or loss incurred was considered in the total income of the subsequent years. As the said capital loss was considered as part of the total income under this Act, the interest shall not be disallowed under section 14A of the Income-tax Act, 1961. The investment was done as the fund were idle and to earn income. Therefore, the interest expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is in appeal. 6.7. Learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that surplus funds were available with the assessee which were invested in the mutual funds. Therefore, no disallowance was called for. 6.8. In his rival submissions, the Departmental representative supported the orders of the authorities below and further submitted that the assessee admitted that borrowed money was lying idle, therefore, it was invested in the mutual funds which itself proves that the assessee diverted the borrowed funds in making the investment in mutual funds. Therefore, interest was rightly disallowed. 6.9. We have considered the submissions of both parties and carefully gone through the materials available on record. In the instant case, the disallowance has been made by the Assessing Officer by observing that the assessee diverted the borrowed funds. On the contrary, the claim of the assessee is that surplus funds were available which were invested in the mutual funds. The learned Commissioner of Income-tax (Appeals) confirmed the disallowance made by the Assessing Officer observing that dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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