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2015 (12) TMI 297 - ITAT MUMBAI

2015 (12) TMI 297 - ITAT MUMBAI - [2015] 44 ITR (Trib) 236 (ITAT [Mum]) - Disallowance of incentive paid to directors u/s 40A(2)(a) - Held that:- All the directors are in charge of the entire operations of the assessee company and the financial/operational results of the company are growing every year. Hence, on that count alone, the salary and incentive paid to the directors could be justified and could not be found fault with, without bringing the fair market value of services. In our view, th .....

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udi Services (Travel) (P) Ltd (2008 (8) TMI 208 - BOMBAY HIGH COURT) squarely applies to the facts of the instant case. Hence, on this count the disallowance made u/s 40A(2)(a) is liable to the deleted in all the three years. In view of the foregoing discussions, we are of the view that there is no justification on the part of Ld CIT(A) in confirming the disallowance made u/s 40A(2)(a) of the Act. - Decided in favour of assessee.

Disallowance of depreciation - Held that:- Hon’ble Guja .....

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the purpose of business of the assessee company. In the case of Basti Sugar Mills Co. Ltd (2002 (5) TMI 27 - DELHI High Court), the Hon’ble Delhi High Court approved the decision of the Tribunal in holding that, since vehicle is a movable asset, the registration as required in the case of transfer of immovable property is not a condition precedent for legal ownership. In the instant case, the funds for purchase of vehicles have been provided by the assessee company and they have been shown as a .....

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nt years 2008-09 to 2010-11 challenging the orders passed by Ld CIT(A)-8, Mumbai. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience. 2. In all the three years, the assessee is aggrieved by the decision of Ld CIT(A) rendered on the following issues:- (a) Disallowance of incentive paid to directors. (b) Disallowance of depreciation. 3. The assessee company is in the business of provi .....

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, the Assessing officer noticed that the identical payments made in assessment year 2007-08 had been disallowed u/s 40A(2)(a) of the Act and the same was also confirmed by Ld CIT(A). Hence the assessing officer disallowed the above said claim in AY 2008-09 and by following the said order, the AO disallowed the identical claims made in assessment years 2009-10 and 2010-11 also. The Ld CIT(A) also confirmed the said disallowances in all the three assessment years by following his order passed for .....

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so confirmed the said disallowance in all the three years under consideration. It is pertinent to note that the Tribunal also confirmed the disallowance of depreciation made in AY 2007-08. 5. We shall take up the first issue relating to disallowance made u/s 40A(2)(a) of the Act. In assessment year 2008-09, the assessee paid incentives to its three directors aggregating to ₹ 45.00 lakhs. Since the identical incentive payments made to the directors in the immediately preceding year was disa .....

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directors are not employees but rather body of employers and they run the business in the name of the company who in turn are entitled to the profits of the company. The payment made to them is not the liability incurred by the assessee company which it was required to meet wholly and exclusively for the purposes of business. The Hon CIT(A) has held that when there was no payment in earlier three years, then the need for payment of incentive to the three directors was not necessitated by the le .....

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I.T. Act. A careful perusal of the observations made by the AO would show that the assessing officer has discussed about the necessity of paying incentive to the directors. He has further assumed that the assessee company and the directors are one and the same and he has entertained the said presumption without bringing any material to lift the corporate veil. On the contrary, after making above said observations, he has assessed the income of the assessee company in its hands only, meaning the .....

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ection, and the Assessing 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 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. 7. The Hon ble Kolkatta Special bench of ITAT had an occasion .....

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nion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facility for which the payment is made. 90. All the above conditions must be satisfied so as to apply the provisions of Section 40A(2)(a). So far as the facts of the case under consideration before us are that there is no dispute that the assessee has incurred the expenditure and the payment has been made to a person referred to in Clause (b). The only dispute is whether the p .....

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year. 8. We have noticed earlier that the assessing officer has not examined the claim of the assessee in terms of the mandatory conditions prescribed u/s 40A(2)(a) of the Act. The Ld CIT(A) has also confirmed the disallowance made in all these three years by following his order for AY 2007-08. 9. In the instant case, there is no dispute that the directors of the assessee fall in the category of related persons prescribed in sec. 40A(2)(b) of the Act. Hence the payments made to them can be exami .....

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ating to AY 2008-09 in order to justify the payment of incentives to the directors. As regards to your query why incentives paid to directors should not be disallowed we submit as under : The Assessee is a Private Limited Company (hereinafter referred to as the Company) engaged in the business of assisting students in overseas education and providing guidance for higher education in various countries such as UK, Australia, Canada, New Zealand and U.SA. As the Company is engaged in service sector .....

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s to prove the actual rendering of services is enclosed for your perusal (Annexure I). All the directors are whole time directors of the Company and devote their time only to the business of the Company. This can be evident from their return of Income as they do not have any other Income except the remuneration and incentive received from the Company. Incentives & remuneration paid to the directors are reflected in their individual return as a salary only and no expenses is claimed out of in .....

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year ended 31 March 2007 and the net profit to ₹ 6,33,71,196 for the year ended 31 March 2008 which is approximately 35% more than the net profit of ₹ 4,69,70,264 earned for the year ended 31 March 2007. It is pertinent to note that the directors dedicated efforts to develop the business has led to consistent growth in the gross receipts as well as net profits of the Company. To compensate the directors for their remarkable contributions towards the growth of the Company during the y .....

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earnings by taking very less salary compared to what is prevalent in market with only intuition to strengthen the company's financial position. It was thought prudent to pay incentives to all staff including directors over and above salary/remuneration/bonus when company got better cash flow & liquidity & became financially stable. The Company's Accounts of last 4 years itself speaks of the director's efforts and achievement to qualify for the reward in form of incentives. We .....

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competition in the market the Companies pay adequate remuneration in the form of salary, commission and incentives to managerial personnel who are responsible for business development in the competitive market. In the present case the Company has remunerated the directors in the form of salary and incentives for developing the business as well as operating the day to day affairs of the business. Considering the nature of services rendered by the directors, high demand for managerial personnel a .....

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on payment of tax by the Company by alleged payment of higher incentives to its directors. Further jurisdictional Bombay High Court in case of CIT V/s INDO SAUDI SERVICES (TRAVEL) (P.) LTD. 310 ITR 306) (Bom) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. The Tribunal was correct in coming to the conclusion that t .....

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directors are also paying tax at a same higher rate the decision of Bombay High Court is totally applicable to our case and thus no disallowance is called for . The Madras High Court in case of CIT V/s NEPC India Ltd. (2008) 303 ITE 271 (Mad) held that : What Section 40A(2)(a) contemplates is that there should be some material available before the Assessing Officer for invoking Section 40A(2)(a) to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentione .....

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wer than the remuneration paid to managerial personnel across the industry in various sectors handling responsibilities and having job profile similar to the directors of Assessee company. Therefore, based on the above facts and the judicial decisions the remuneration in inclusive of incentive paid to directors is reasonable justified and not excessive. Note on nature of services rendered by the Directors : There are three Directors in the company Ms. Assan H Sukhwani, Mr. Sushil A Sukhwani and .....

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s education studies. 3. Coordination with bankers for student loan and their foreign exchange requirements. 4. Continuous interactions and email correspondence with various universities for seats available in various courses, status of offer and admission, list of students registered. Annexure No. 1 5. Many universities visit their office-for conducting interviews for which they advertise in the newspaper, invite students to visit their office to meet the foreign university faculties & inter .....

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lves with the university campuses, living arrangements for the students to give proper information to the interested students. Annexure no.3 7. Organizing training for the ounsellors & other staff members with the universities and organize their trips for familiarization of university campuses & other arrangements. Annexure no.4 8. Organizing Education fairs in different cities and arranging students interview with-the universities for their spot admissions and getting waiver of applicat .....

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rsities, in different Countries. During the year they had put up stalls at HR College, N.M College, Rizvi College; Sophia College Kaledoscope 07, Atharva College, SIES, SNDT College, Bhavan's College, R.D. National College, Mumbai St. Xaviers College, Sydnem College, Datta Meghe Tech Festival; Saboo Sidddik College of Engineering at their annual festivals. 10. They organize pre departure seminars at all cities before students leave country to join the course at overseas universities. These p .....

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ry the mobile, SIM card for overseas countries, Insurance companies to give them Travel insurance and medical insurance while living there, Airlines who offers them concessional tickets and extra baggage without excess baggage charges. During the year Citi Bank, Centurion Bank of Punjab, Matrix Cellular Services participated in their pre departure programs. Annexure no.6 11. They themselves do the media jobs such as designing & releasing the ads in the news paper, print their color brochures .....

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led by them before making payments to staff, suppliers and vendors. Annexure no.9 15. They recruit staff by releasing advertisement in the news papers or with tie up with recruitment & placement agencies. They conduct interviews for selecting suitable candidates for the jobs. Annexure no.10. 16. All the banking operations and signing of all cheques are done by them only. Annexure 11. 17: All universities billing for students enrolled is done by them. Annexure no.12 . They have not appointed .....

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of convenience, we extract below the same:- JOB PROFILE OF DIRECTOS AND OTHERS OF EDWISE CONSULTANTS PVT.LTD. ASAN SUKHWANI • Assan Sukhwani is Diploma holder in Electronic Engineering and had opportunity to work with Tata Institute of Fundamental Research for 2 years and at London for 2 year. He has extensive experience in Electronics goods for household and industry, computer training, watch assembling industry and overseas education recruitment. He has total work experience in India and .....

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lated matters. •Furniture, Fixtures & Air conditioning for HO & Branches •Travelling to branches for supervising and overseeing for smooth functioning. SUSHIL SUKHWANI •He has graduated from University of Mumbai and has done his Masters in Business Administration from Australia with high grades. He managed 3 Aptech Computer training centers with high enrolments and collections. Simultaneously, he started overseas education consultancy to enroll students for universities ov .....

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ftware to function students enquiries and enrollment and data online. •Website designing and maintenance. •Internet marketing through google. •Telemarketing like BPO centre. •Assisting students for education loan from the banks •Updating himself with visa requirements for various countries and assisting students to ensure issuance of visa to students with above 95% success. AJAY SUKHWANI • He has graduated from University of Mumbai and has done his Masters in busine .....

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providing proper and update info to the students of the branches •He is incharge of database and collects database at HO & branches from the schools; colleges and other educational institutions. •He organizes and arranges interviews of universities whenever universities international officers and their faculties are visiting India to conduct one to one interviews of students for their selection. •He assist students to get bank loans and help them with full procedure to get the .....

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& Business Development Manager, Finance Manager, Administrative Manager. 12. Thus we notice that all the three directors are fully in charge of all the operations and further they possess required qualification and experience to carry out all the operations. The Ld A.R submitted that the operations of the company has consistently grown up under the management of the directors and in support of the same, he brought to our notice following facts. Edwise Consultants Pvt Ltd. Income tax assessm .....

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d Ahmedabad Vizag Coimbatore Cochin Hyderabad Kolkata Delhi Chennai Malad, Mumbai Surat Thane The above said facts relating to the growth of the company, in our view, vindicate the claim of the assessee that all the company has grown under the leadership of all the three directors. 13. Under section 40A(2)(a) of the Act, the assessing officer is required to find out as to whether the payment made to the persons referred to in section 40A(2)(b) is excessive or unreasonable having regard to the fa .....

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carry out its business operations relating to educational consultacy and the said need was fulfilled by the three directors. Hence the payment made to them was for legitimate business needs of the assessee company. The financial and operational results listed out in the paragraph 12 (supra) shows that the assessee company has derived benefit from the payment made to the directors. 15. The next important question that arises is as to whether the payments so made were excessive or unreasonable ha .....

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re entitled to the profits of the company. It is well settled principle that a limited company is a legal person and it is a separate and distinct entity, different from its share holders. The directors are the persons selected from amongst the share holders to run the business of the company. Under the Income tax Act as well as under the Common law, a company is considered as a body corporate with perpetual succession and it can hold the properties on its own. Further it can sue any person and .....

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of the company. The directors are entitled to receive remuneration for the services rendered by them to the company and the share holders can expect only dividend on the shares held by them. Hence the observations of the AO that the directors are entitled to the profits of the company are incorrect. 16. The AO has also observed that the payment made to the directors is not the liability incurred by the assessee company which it was required to meet wholly and exclusively for the purpose of busin .....

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ces rendered. 17. We notice that the assessing officer did not examine the aspect of fair market value of services at all. He has simply disallowed the incentive payments for the reason that similar payment was disallowed in assessment year 2007-08. In the case of ITC Ltd (supra), the Special bench of Kolkatta ITAT has held as under:- …. In this regard, the revenue rightly submitted that whether the payment was excessive or unreasonable was to be examined in each year and merely because i .....

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ecision rendered by the co-ordinate bench in assessee s own case in AY 2007-08. We have gone through the said order of the Tribunal and we notice that the Tribunal has noticed that two of the directors have been given only incentive of ₹ 10.00 lakhs each and they have not been paid salary. Only one of the directors was paid both salary of ₹ 3.60 lakhs and incentive of ₹ 10.00 lakhs. Hence the Tribunal has restricted the amount to be allowed in respect of the other two directors .....

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ribunal in earlier years under the facts prevailing in that year does not have binding effect. In AY 2007-08, the Tribunal expressed the view that two of the directors, who have not been paid incentive, have not received any salary and they have received salary and professional income from other companies. However, in the years under consideration, all the three directors have been paid salary and they have received remuneration mainly from the assessee company only. This fact also distinguishes .....

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ents made to the directors. At this juncture, it is pertinent to refer to the binding decision rendered by the Hon ble jurisdictional Bombay High Court in the case of CIT Vs. Indo Saudi Services (Travel) (P) Ltd (2009)(310 ITR 306), wherein the Hon ble Bombay High Court referred to the Circular issued by CBDT with regard to sec. 40A(2)(a) as under:- Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of payments ma .....

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Ltd (336 ITR 209) also. The Hon ble Punjab & Haryana High Court has also expressed similar view in the case of CIT Vs. Siya Ram Garg (HUF) (2011)(237 CTR 321). 21. We notice that in the instant cases also, identical position is obtaining, i.e., the directors are also paying tax at higher rate in all the three years under consideration. The Total income declared by the three directors is tabulated below, for the sake of convenience:- Name AY-2008-09 AY-2009-10 AY-2010-11 a. Assan H Sukhawani .....

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on ble Bombay High Court in the case of Indo Saudi Services (Travel) (P) Ltd (supra) squarely applies to the facts of the instant case. Hence, on this count also, the disallowance made u/s 40A(2)(a) is liable to the deleted in all the three years. 22. In view of the foregoing discussions, we are of the view that there is no justification on the part of Ld CIT(A) in confirming the disallowance made u/s 40A(2)(a) of the Act. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in .....

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les have been accounted as the assets of the assessee company only. He further submitted that the registration is only a formality and the same would not disentitle the assessee from claiming depreciation, even if it is registered in the name of its directors. In this regard, he placed reliance on the following case law:- (a) Poddar cements Ltd (226 ITR 625) (b) ITO Vs. Electro Ferro Alloys Ltd (2012)(13 ITR (Tri) 594 (c) CIT Vs. Aravali Finlease Ltd (2012)9341 ITR 282)(Guj) (d) CIT Vs. Basti Su .....

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