TMI Blog2017 (5) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure was excessive or unreasonable. We further note that the AO in the assessment order as well as Ld. CIT(A) in enhancement notice, erred in deciding the amount of salary and bonus of Mr. Abhinav Kumar, as the reasonableness of the remuneration has to be considered from the point of view of a Company and it was not open to the Assessing Officers as well as Ld. CIT(A) to adopt a subjective standard with regard to the proper remuneration which should be paid to its Directors. - Decided in favour of assessee. - ITA No. 2412/DEL/2013 - - - Dated:- 19-5-2017 - SHRI H.S. SIDHU, JUDICIAL MEMBER, AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Sh. Ved Jain, Adv. Ms. Rano Jain, Adv. For The Department : S h. N.K. Bansal, Sr. DR ORDER PER H.S. SIDHU, JM Assessee has filed the Appeal against the Order dated 23.2.2013 passed by the Ld. Commissioner of Income Tax (Appeals)-XI, New Delhi pertaining to assessment year 2009-10 2. The grounds raised by the assessee read as under:- 1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding such a big remuneration to be paid to Sh. Abhinav Kumar. The assessee submitted resolution for remuneration to Directors as Annexure A-2 to submission dated 7.7.2011. On perusal of the resolution it was noticed by the AO that in the meeting of Board of Directors held on 1.7.2008 Sh. Abhinav Kumar was designated as Executive Director and will be paid a salary of ₹ 5 lacs per month w.e.f. 1.7.2008 alongwith some perquisites and allowance. As per the decision of the Board total salary of Sh. Abhinav Kumar as Executive Director for the year under consideration comes to ₹ 45 lacs only (5 lacs x 9). The assessee has not given details of perquisites/allowances/expenses incurred on Sh. Abhivan Kumar, therefore, it was not possible for the AO to calculate the exact amount of such expenses. AO noted that however any such perquisites/ allowance should not exceeds 50% of the total salary. Accordingly, a further amount of ₹ 22,50,000/- may be allowed as perquisites paid to Sh. Abhinav Kumar by the assessee. AO further noted that with reference to remuneration payment to a Director into account, the assessee has made an excess payment of ₹ 27,50,000/- to Sh. Abhiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 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. 5- Further it is submitted that, to appreciate the efforts of Mr. Abhinav Kumar and for above mentioned reasons the Bonus was decided by the Board of Directors of the assessee company (Copy of Board resolution Pb. Pg.69), within the provisions of the Companies Act 1956 read with Income Tax Act 1961, which was reasonable and justified. Further, Section 40 A (2)(a) of Income Tax Act 1961 cannot be invoked and have no application unless it is first concluded that the expenditure was excessive or unreasonable. 6- Further it is submitted that, Ld AO in the assessment order as well as Hon'ble CIT(A) in enhancement notice, erred in deciding the amount of salary and bonus of Mr. Abhinav Kumar, as the reasonableness of the remuneration has to be considered from the point of view of a Company and it was not open to the Assessing Officers as well as CIT(A) to adopt a subjective standard with regard to the proper remuneration which should be paid to its directors, Reliance in this regard place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (AII).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 deductibility of the expenditure should be considered from the point of view of the businessman and not from the point of view of any outsider, including the Assessing Officer. A disallowance can be made on the ground that the payment is not for commercial expediency, but not on the ground that in the opinion of the Assessing Officer it is unreasonably high. The test in every case is that of any prudent businessmen. We respectfully agree with the aforesaid view. In our opinion, whenever a claim is made by the assessee before the Incometax Officer for allowing an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 point of the company itself and must be viewed from the point of view of a prudent businessman. 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 ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 given by the Ld. first appellate authority. As such, we are of the considered opinion that the amount of bonus paid to the directors is fully deductible u/s 36(1 )(ii) of the Act and the impugned order does not merit any interference on this count. This ground is not allowed. III. Hon'ble Mumbai Tribunal in the case of Gargi Huttenes Albertus (P) Ltd. Versus Addl. CIT [ITA No. 1822/Mum/2009 Dated 18-01-2010] held as under; In circular nO.6-P of 1968 dated 6th July, 1968, the CBOT has explained in paragraph 74 that while invoking the provisions of the section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. We are in agreement with the observations made by the Tribunal as well as the ratio laid down by the coordinate Bench of this Court in the case of (1) Commissioner of Income Tax-I vs Enviro Control Associated (P) Ltd., as reported at (2014) 43 Taxmann.com 291 (Gujarat); (2) Commissioner of Income Tax- III vs Ashok J Patel, as reported at (2014) 43 Taxmann. com 227 (Gujarat) and (3) Commissioner Of Income Tax vs Indo Saudi Services (Travel) P. Ltd. as reported as (2009) 310 ITR 306 (Bom). 15 It is pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further enhanced by ₹ 61,25,000/-, which does not need any interference on our part. In view of the above, he requested that the Ld. CIT(A) s order may be upheld and appeal of the assessee may be dismissed accordingly. 8. We have heard both the parties and perused the relevant records available with us, especially the orders passed by the revenue authorities alongwith the Written Synopsis filed by the assessee s counsel as well as the case laws cited by him therein, as aforesaid. 9. The issue involved in the present appeal is relating to enhancing the income by ₹ 61,25,000/- of the assessee by making disallowance of an amount of ₹ 88,75,000/- on account of salary and bonus paid to the Director. We find that this expenditure was claimed by the assessee company on 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. We further note that 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 Association of the company. Further the said action done was ..... 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 be paid to its Directors. This view is fortified by the following decisions: I. Judgments of Hon'ble Caluctta High Court in the case of Sonar Airotech Pvt. Limited Versus Commissioner Of Income-Tax [1993] 204 ITR 304 (Cal) the Hon'ble Court observed as under; It is by now well-settled that the Tribunal cannot adopt a subjective standard of reasonableness of the increase in remuneration and disallow a part of the increase in the directors' remuneration on the ground that it is unreasonably large. The reasonableness of the remuneration has to be considered 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 Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the aforesaid view. In our opinion, whenever a claim is made by the assessee before the Incometax Officer for allowing an expenditure as a legitimate business expenditure, the approach of the Income-tax Officer (or other Income-tax authority) has to be that he has to look at the matter from the view point of a prudent businessman, and not from his own view point, and then ascertain whether the said expenditure has been incurred for the purpose of commercial expediency or not. In other words, the Income-tax Officer must try to put himself in the shoes of a prudent businessman and try to look at the matter from that point of view. Even while invoking the provisions of Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 reasonable and honest person in business. The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in Cil Vs. Edward Keventer (Private) Ltd. (1978) 1151TR 149 (SC). VI. Similar view is held by the Madras HighCourt in Cl'F Vs. Computer Graphics Ltd. (2006) 285 ITR 84. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom). 12. We note that the scope of Section 40A (2) as explained by CBDT in Circular No. 6P, dated 6thJuly, 1968. The CBDT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m/2009 Dated 18-01-2010] held as under; In circular nO.6-P of 1968 dated 6th July, 1968, the CBOT has explained in paragraph 74 that while invoking the provisions of the section the Assessing Officer is expected to exercise his judgment in a reasonable and fair manner and that it should be borne in mind that the section is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in the manner which will cause hardship in bonafide cases. The details filed by the assessee also show that Gargi Industries is a company with a turnover of ₹ 21.68 crores and a taxable income of ₹ 1, 16,67,9901- for the assessment year 2005-06 and is also assessed to tax. The assessee itself has declared a total income of ₹ 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14) 43 Taxmann. com 227 (Gujarat) and (3) Commissioner Of Income Tax vs Indo Saudi Services (Travel) P. Ltd. as reported as (2009) 310 ITR 306 (Bom). 15 It is pertinent to note that so far as the Circular dated 6.7. 1968 is concerned, it makes clear that the provisions under Section 40A (2) and particularly with regard to the transaction between the relatives and associates is concerned, the same shall be treated as bona fide case unless the officer finds it that one of them is trying to evade payment of tax. 16 Considering the overall facts of the case and the ratio laid down by the Hon'ble Apex Court, we are of the opinion that the appeals are meritless and the same deserve to be dismissed and accordingly dismissed. 14. We further note that the view adopted by the AO that, assessee company given the bonus to a single Director, cannot be a ground for disallowing the claim because in the case of Commissioner Of Income-Tax, Bombay Versus Walchand And Company Pvt. Limited [1967] 65 ITR 381 (SC) the Hon'ble Supreme Court accorded the view taken by Hon'ble High Court of Bombay as under:- The High Court on a careful consideration has pointed out that the work ..... X X X X Extracts X X X X X X X X Extracts X X X X
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