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TMI Blog2017 (5) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of an amount of Rs. 88,75,000/- on account of remuneration paid to the director as against Rs. 27,50,000/- made by the Assessing Officer. 4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in making disallowance of Rs. 88,75,000/- on account of salary and bonus paid to the director. 5. That the disallowance has been made despite the assessee bringing all material and evidences on record and ignoring the spirit of the provision of Section 40A(2). 6. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in making the said disallowance on the basis of some material collected at the back of the assessee without giving assessee an opportunity to rebut the same in violation of statutory provision of Section 142(3) of the Act. 7. That the appellant craves leave to add, amend or alter any of the grounds of appeal. 3. The brief facts of the case are that the assessee filed return of income declaring total income of Rs. 1,76,06,878/- on 30.9.2009 and the same was processed u/s. 143(1) of the I.T. Act1, 1961 at returned income. The assessee's case was selected for scrutiny assessment thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance of Rs. 27,50,000/- and the income was further enhanced by Rs. 61,25,000/- thus totaling disallowance amounting to Rs. 88,75,000/-. 5. Aggrieved with the aforesaid order of the Ld. CIT(A), assessee is in appeal before the Tribunal. 6. Ld. Counsel of the assessee in support of his contention has filed the Written Synopsis. For the sake of convenience, we are reproducing the same as under: "1- This is an appeal preferred by assessee against the order dated 28-02-2013 passed by learned Commissioner of Income Tax (Appeal)-XI, whereby Ld. CIT(A) enhanced the income of the assessee by making disallowance of an amount of Rs. 88,75,000/-- on account of remuneration paid to the director as against Rs. 27,50,000/-- made by the Assessing Officer. 2- At the very outsets this is submitted that, expenditure claimed by the assessee company on the account of payment of the salary as well as bonus to the Executive Director of the assessee company is not in violation of any prevailing provisions of the Income tax Act 1961. 3- Further, the bonus was declared by the Board of Directors by resolution passed in a meeting, as per power vested to the Board under the Articles of Assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the point of view of a businessman and it was not open to the Tribunal to adopt a subjective standard with regard to the proper remuneration which should be paid to its directors. It has been observed in Newtone Studios Ltd. v. CIT [1955] 28 ITR 378 (Mad), that the Income-tax Officer should not take an armchair view of the management of the company and decide in his opinion what was the reasonable remuneration for a director and disallow such part of the remuneration as he considered excessive or unreasonable. What applies to the Income-tax Officer equally applies to the appellate authorities including the Appellate Tribunal. It has been held in Patiala Biscuit Manufacturers P. Ltd. v. CIT [1976] 103 ITR 208 (P& H), that appeals are in continuation of the original proceedings and, therefore, the opinion formed by the Tribunal on the matter coming up in appeal before it is subject to the same restraint as fetters the subjectivity of the Assessing Officer's judgment. " II. In the case of Extrusion Process Pvt. Limited Versus Commissioner Of Income-Tax, Bombay [1979] 1191TR 287 (80m). "The reasonableness of the remuneration has to be considered from the point of view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 40A(2) of the Act, the reasonableness of the expenditure for the purpose of business has to be judged from the point of view of a businessman and not that of the revenue. The approach has to be that of a prudent businessman and the reasonableness must be looked into from businessman point of view. A businessman may make an expenditure, which he is under no legal obligation to make, but if he does so as a measure of commercial expediency, it must be allowed under section 37 of the Income-tax Act as a legitimate business expenditure. XXX XXXXX XXX XXXXX XXX XXXXX XXX XXXXX In the present case the assessee has contended that it has increased the salary of the directors because the sales had gone up as mentioned in paragraph 8 of the order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has considered the matter in great detail and has noticed the increase in the sales in the relevant assessment year and has observed that such good performance was the result of very good and serious work by the directors, In the order of the Tribunal no good reason has been given why the claim of the assessee has been partly disallowed. In our opinion, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom). 7- Further it is submitted that, the scope of Section 40A (2) as explained by CBDT in Circular No. 6P, dated 6thJuly, 1968. The CBOT clarified that while examining the reasonableness of expenditure the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. 8- Further it is the matter of facts the in present case assessee company and Mr. Ashwani Kumar falls within same rate of tax ie. 30%. Further the deduction claimed by the assessee company on the expenditure in the head of remuneration of Executive Director Mr. Abhinav Kumar is duly disclosed by him in his return for the AY 2009-10, (ITR of Mr. Abhinav Kumar Pb. Pg.88) therefore it cannot be said as colorable device for tax evasion. Hence the disallowance is bad in law. Reliance is this regard placed upon the following judgments; I. In the case of Mis Holtec Consulting Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a total income of Rs. 8,31,43,0951-. It cannot therefore be suggested that the assessee was indulging in unfair means to shift its profits to another entity. Both the assessee and Gargi Industries are in the maximum tax bracket and there can be no tax advantage. In these circumstances, we see no merit in the disallowance which is hereby deleted. Ground no. 1 is thus allowed." IV. In the Case of CIT vs. Indo Saudi Services (Travel) P. Ltd. 310 ITR 306 (Bom) where the assessee was a general sales agent of a foreign airline S. For the A. Ys. 1991-92 and 1992-93 the Assessing Officer found that the incentive commission paid by the assessee to the sister concern was half percent more than that paid to other sub-agents. Relying on the provisions of section 40A(2) of the Income-tax Act, 1961, the Assessing Officer disallowed the excess commission paid to the sister concern at the rate of half percent. The Tribunal deleted the additions. On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: "i) Under the CBOT Circular No. 6-P, dated 0610711968, it is stated that no disallowance is to be made uls. 40A(2) in respect of the payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company given the bonus to a single Director, cannot be a ground for disallowing the claim. Reliance in this regard is placed upon In the case of Commissioner Of Income-Tax, Bombay Versus Walchand And Company Pvt. Limited [1967] 65 ITR 381 (SC) therein Hon'ble Supreme Court accorded the view taken by Hon'ble High Court of Bombay; "The High Court on a careful consideration has pointed out that the work of the assessee has increased considerably and has become more strenuous by reason of the prosperity of the managed companies and it would be reasonable and natural to infer that "the strain on both the directors and the top executives had increased justifying increase in their remuneration ". In their view the fact that additional remuneration was not sanctioned in favour of other executive officers is by itself not a ground for regarding the expenditure incurred as otherwise than wholly and exclusively laid out or expended for the purpose of the business. We agree with the High Court that the order of the Tribunal disallowing the claim for allowance of the whole of the additional remuneration was not supported by any evidence. The appeals therefore fail and are dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y members shall be entitled to leave travel allowance once in a year. - Medical expenses: Reimbursement of medical expenses of the Director and his dependent family members. 10. We find force in the contention of the Ld. Counsel of the assessee that after the appointment of Mr. Abhinav Kumar, due to his tremendous efforts and business generating capability the turnover of the company in the A Y in question grew by more than 18 times as compare to last FY. Further the total receipts of the assessee company rose from Rs. 42.81 Lacs in FY 2007- 08 to 831.73 Lacs in FY 2008-09. Further the personnel expenses reduced from 34.71 % of the total turnover in FY 2007-08 to 19.37% the provisions of section. Therefore, to appreciate the efforts of Mr. Abhinav Kumar, Director of the Company and for above mentioned reasons the Bonus was decided by the Board of Directors of the assessee company vide Resolution dated 16.3.2009 at Rs. 50,00,000/- lacs, which within the provisions of the Companies Act 1956 read with Income Tax Act 1961, which was reasonable and justified. We find considerable cogency in submission of the Ld. Counsel of the assessee that Section 40A(2)(a) of Income Tax Act 1961 can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jective standard with regard to the proper remuneration which should have been paid to the managing director. In our view, the Tribunal was clearly in error in holding that only a part of the increased remuneration for the assessment year in question should be allowed. " III. In the case of Hive Communication Pvt. Ltd. Versus Commissioner Of Income Tax [2013] 353 ITR 200 (Del). Hon'ble Delhi High Court Decided the question in favour of the assessee and in the negative holding that the Tribunal was not correct in law in upholding disallowance of Rs. 13.20 lacs out of remuneration paid to Mr. Sushil Pandit (director) by invoking the provisions of Section 40A(2) of the Act. IV. Hon'ble Allahabad High Court in Abbas Wazir (P) Ltd. Vs. CIT (2004) 265 ITR 77 (ALL).wherein the High Court held as under: "In Newtone Studios Ltd. v. CiT [1955J 28 ITR 378 (Mad), it was observed that the remuneration paid to a director should not be rejected by the Assessing Officer on any subjective standard of reasonableness, and that so long as the reality of the payment was not challenged and no allegation was made that the payment was dictated by other than business considerations, the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l lost sight of the correct legal principles (mentioned above) for determining whether to allow the expenditure or not. We reiterate that it is not for the income-tax authorities to determine what would be commercially expedient, and that is the function of the company or the firm. The incometax authorities cannot ordinarily interfere in such matters. It is not for the Income-tax Officer to decide what would be the correct salary of the directors or other officers of the company, unless on the face of it the salary fixed is so exorbitant and absurd, that it can clearly be said to be fictitious and aimed at tax evasion. V. In CIT Vs. Edward Keventer (Private) Ltd. (1972) 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 & 796/DELl2011 dated 25-01-2012] this Hon'ble Tribunal held as under; "17.4 .................We also find that assessee has paid taxes at maximum marginal rate. Both the Directors have admitted the payment of commission received and offered the same in their income tax returns and had paid at a maximum marginal rate. This clearly establishes the fact that there has been no tax avoidance motive behind the payment of commission to the directors by the assessee company. We further find that the case law referred by the Id. counsel of the asses!i.ee are also germane and support the case of the assessee. 17.5 In the background of the aforesaid discussions and precedents, in our considered opinion, the payment of commission was justified and not disallowable u/s 36(1 )(ii) of the IT Act." II. This Hon'ble Tribunal in the case of Dy CIT vs Agarwal Metal Works Ltd [I.T.A.No.-593/DeI/2012 Dated 11-10-2013 ITAT Delhi] held as under; "The Ld. CIT (A) has recorded a categorical finding that these directors had paid tax on the aforesaid bonus along with salary on the maximum marginal rate and as such there was no loss to the revenue. The Id. DR could not refute this finding giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where there is no attempt to evade tax. ii) The learned Advocate appearing for the appellant was not in a position to point out how the assessee evaded payment of tax by the alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal. iii) In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-tax (Appeals) was wrong in disallowing half percent commission to the sister concern" v. Recently Hon'ble Gujarat High Court In the Case Pro CIT Vs Gujarat Gas Financial Services Ltd. [ITA No. 428 & 431 of 2015 Dated 07-07-2015] held as under; "13. As has been found by us in the preceding para of this judgment that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge is paid to the respondent company at a unreasonable rate to evade income tax. Even the learned Counsel Mr. Bhatt for the revenue does not dispute this fact. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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